-----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, bav3qqTESxptXmTndyMd+9y8ljtltvt8FUiIk8mBSbHScbV4U8V4ArTPEXnUd7ol dohCKcbGfvDSihD5g+8Oaw== 0000950131-95-002191.txt : 19950814 0000950131-95-002191.hdr.sgml : 19950814 ACCESSION NUMBER: 0000950131-95-002191 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: CSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CHICAGO CORP CENTRAL INDEX KEY: 0000036161 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [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: 95561693 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 7 LIQUIDITY RISK MANAGEMENT 13 MARKET RISK MANAGEMENT 14 CREDIT RISK MANAGEMENT 20 DERIVATIVE FINANCIAL INSTRUMENTS 23 CAPITAL MANAGEMENT 25 CONSOLIDATED FINANCIAL STATEMENTS 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 SELECTED STATISTICAL INFORMATION 35 FORM 10-Q 43
- ------------------------------------------------------------------------------------------------------------------------- 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) 1995 1995 1994 1994 1994 - ------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA FOR THE QUARTER Net interest income.............................................. $ 355.6 $ 373.6 $ 333.2 $ 334.4 $ 332.8 Tax-equivalent adjustment........................................ 9.8 6.1 7.0 6.4 5.9 ------- ------- ------- ------- ------- Net interest income--tax-equivalent basis........................ 365.4 379.7 340.2 340.8 338.7 Provision for credit losses...................................... 70.0 65.0 76.0 55.0 43.0 Noninterest income............................................... 487.7 470.1 488.8 455.1 428.8 Noninterest expense.............................................. 487.7 478.1 482.1 491.4 460.6 Net income....................................................... 187.4 195.1 173.4 153.8 168.7 - ------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Net income - Primary............................................. $ 1.95 $ 2.03 $ 1.76 $ 1.54 $ 1.71 Net income - Fully diluted....................................... 1.90 1.98 1.72 1.51 1.67 - ------------------------------------------------------------------------------------------------------------------------- AT QUARTER-END Assets........................................................... $75,328 $72,378 $65,900 $65,747 $64,089 Loans............................................................ 26,517 27,018 25,947 23,817 23,680 Deposits......................................................... 33,764 32,191 31,666 29,670 28,577 Long-term debt................................................... 2,271 2,272 2,271 2,272 2,269 Common stockholders' equity...................................... 4,160 4,057 3,922 3,930 3,763 Stockholders' equity............................................. 4,771 4,668 4,533 4,541 4,524 - ------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Assets........................................................... $76,076 $69,852 $68,539 $66,050 $60,490 Loans............................................................ 26,145 26,034 24,335 23,484 22,940 Earning assets................................................... 60,772 59,220 56,328 54,226 50,464 Deposits......................................................... 33,962 31,488 29,933 29,409 29,009 Common stockholders' equity...................................... 4,102 3,978 3,931 3,815 3,663 Stockholders' equity............................................. 4,713 4,589 4,542 4,426 4,424 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Return on stockholders' equity................................... 16.0% 17.2% 15.1% 13.8% 15.3% Return on common stockholders' equity............................ 17.4 18.9 16.5 15.0 16.5 Return on assets................................................. 0.99 1.13 1.00 0.92 1.12 - ------------------------------------------------------------------------------------------------------------------------- CAPITAL DATA (1) Common-equity-to-assets.......................................... 6.1% 6.2% 6.6% 6.6% 6.5% Regulatory leverage ratio (2).................................... 7.0 7.7 7.5 7.8 8.0 Risk-based capital (2) Tier 1 ratio................................................... 8.8 8.6 8.8 9.2 8.9 Total capital ratio............................................ 13.1 13.0 13.4 13.9 13.8 Tier 1 capital................................................. $ 4,567 $ 4,460 $ 4,325 $ 4,319 $ 4,148 Total capital.................................................. 6,783 6,736 6,566 6,561 6,424 - ------------------------------------------------------------------------------------------------------------------------- COMMON SHARE AND STOCKHOLDER DATA FOR THE QUARTER ENDED Market price..................................................... $59 7/8 $50 1/8 $47 3/4 $45 7/8 $48 1/8 Book value....................................................... 46.37 45.16 43.65 42.79 43.40 Dividends declared per common share.............................. 0.55 0.55 0.55 0.50 0.50 Common dividends................................................. 50 49 50 46 43 Preferred dividends (3).......................................... 10 10 10 10 18 Dividend payout ratio............................................ 28.2% 27.1% 31.3% 32.5% 29.2% Average number of common and common-equivalent shares (in millions)........................................... 91.2 91.0 92.9 93.4 88.0 Average number of shares, assuming full dilution (in millions)... 95.1 94.8 96.7 97.1 91.8 - 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(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
- -------------------------------------------------------------------------------------------------------- Business Segments - -------------------------------------------------------------------------------------------------------- Three Months Ended June 30 Consumer Corporate Other First Chicago Banking Banking Activities(1) Corporation (Dollars in millions, -------------- -------------- ------------- -------------- except where noted) 1995 1994 1995 1994 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------- Net income.......................... $ 91 $ 79 $ 64 $ 72 $ 33 $ 18 $ 188 $ 169 Return on common equity............. 31% 36% 10% 13% N/M N/M 17% 17% Average assets (presecuritized) (in billions)..................... $18.6 $15.0 $63.2 $49.2 $1.2 $1.4 $83.0 $65.6 Average common equity (in billions)........................ 1.2 0.8 2.4 1.9 0.5 1.0 4.1 3.7 - --------------------------------------------------------------------------------------------------------
Six Months Ended June 30 Consumer Corporate Other First Chicago Banking Banking Activities(1) Corporation (Dollars in millions, -------------- -------------- ------------- -------------- except where noted) 1995 1994 1995 1994 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------- Net income....................... $ 183 $ 168 $ 145 $ 95 $ 55 $100 $ 383 $ 363 Return on common equity.......... 32% 40% 12% 8% N/M N/M 18% 18% Average assets (presecuritized) (in billions).................. $18.1 $15.2 $60.2 $49.4 $1.1 $1.4 $79.4 $66.0 Average common equity (in billions)..................... 1.1 0.8 2.3 1.9 0.6 0.9 4.0 3.6 - --------------------------------------------------------------------------------------------------------
(1) Includes results from the accelerated asset disposition portfolio, the venture capital group, certain investment management activities and other special corporate items. N/M - Not meaningful. Financial results are aligned by customer segment--Consumer and Corporate--and by major businesses within these categories. The results are derived from the internal profitability reporting system and reflect the allocation of all institutional and overhead items. This system uses a detailed funds transfer methodology and a common equity allocation based on risk elements. To facilitate analysis of trends, Consumer Banking results are presented before securitization of credit card receivables ("presecuritized"). See the discussions of net interest income beginning on page 8 and a reconciliation of reported to presecuritized results on page 36. 2
- ----------------------------------------------------------------------------------- CONSUMER BANKING* - ----------------------------------------------------------------------------------- Three Months Ended June 30 Credit Card Community Banking (Dollars in millions, -------------- ----------------- except where noted) 1995 1994 (1) 1995 1994 - ----------------------------------------------------------------------------------- Net interest income-tax-equivalent basis.. $ 255 $ 223 $101 $ 88 Provision for credit losses............... 136 114 6 7 Noninterest income........................ 123 107 53 47 Noninterest expense....................... 123 100 122 117 Net income................................ $ 75 $ 71 $ 16 $ 8 Return on common equity................... 42% 53% 13% 8% Efficiency ratio (2)...................... 32% 30% 79% 87% Average assets (in billions).............. $12.4 $10.1 $6.2 $4.9 Average loans (in billions)............... 12.4 10.1 5.2 4.3 Average common equity (in billions)....... 0.7 0.5 0.5 0.3 - -----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------- Six Months Ended June 30 Credit Card Community Banking (Dollars in millions, -------------- ----------------- except where noted) 1995 1994 (1) 1995 1994 - ----------------------------------------------------------------------------------- Net interest income-tax-equivalent basis.. $ 498 $ 456 $204 $166 Provision for credit losses............... 251 208 9 11 Noninterest income........................ 234 203 102 94 Noninterest expense....................... 240 197 242 231 Net income................................ $ 149 $ 156 $ 34 $ 12 Return on common equity................... 44% 61% 14% 6% Efficiency ratio (2)...................... 33% 30% 79% 89% Average assets (in billions).............. $12.0 $10.0 $6.1 $5.2 Average loans (in billions)............... 12.1 10.0 5.1 4.3 Average common equity (in billions)....... 0.7 0.5 0.4 0.3 - -----------------------------------------------------------------------------------
* Contribution from $0.8 billion in Chicago area credit card receivables is split equally between Credit Card and Community Banking. (1) Starting in 1995, Mileage Plus payments reduce associated revenues. For comparison purposes, 1994 credit card revenue and expense totals have been adjusted by $18 million for the second quarter and $33 million for the first six months to reflect this change. (2) Noninterest expense as a percentage of total revenue (net interest income and noninterest income). CONSUMER BANKING First Chicago serves local consumers and small businesses through more than 80 retail banking branches. Nationally, it reaches consumers through First Card, which is one of the largest issuers of bank credit cards in the U.S. For the first half of 1995, Consumer Banking contributed $183 million in earnings, or about half of the Corporation's total. Earnings from this segment were up 9 percent from the first six months of 1994. CREDIT CARD This business segment continued to be the largest single contributor to the Corporation's earnings. Net income was $75 million for the second quarter and $149 million year-to-date. Return on equity for the first six months of 1995 exceeded 44 percent. Total average managed credit card receivables (including the Chicago card accounts) for the second quarter increased 21 percent from 1994. Revenue growth was more modest primarily due to pricing compression. Provision for credit losses increased in line with the receivables growth. The significant rise in expenses reflects the costs of major solicitation initiatives in 1995. 3 COMMUNITY BANKING For the first half of 1995, Community Banking's earnings more than doubled, reaching $34 million for a 14 percent return on common equity. This compares with $12 million and 6 percent, respectively, a year ago. Improved spread income was the main reason for the increased profitability. The addition of consumer business from Lake Shore Bancorp., Inc. at midyear 1994 was a key factor in this favorable comparison. Better operating efficiency was also an important contributor to earnings growth.
- -------------------------------------------------------------------------------------- CORPORATE BANKING - -------------------------------------------------------------------------------------- Three Months Ended June 30 Corporate and Middle Market Institutional Banking Banking (ANC) (Dollars in millions, --------------------- ------------------ except where noted) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------- Net interest income-tax-equivalent basis.. $ 90 $ 99 $ 73 $ 59 Provision for credit losses............... - (21) 7 7 Noninterest income........................ 170 140 17 22 Noninterest expense....................... 193 172 49 46 Net income................................ $ 43 $ 54 $ 21 $ 18 Return on common equity................... 8% 12% 16% 21% Efficiency ratio (1)...................... 74% 72% 54% 56% Average assets (in billions).............. $57.1 $43.7 $ 6.1 $ 5.5 Average loans (in billions)............... 10.4 9.6 5.0 4.0 Average common equity (in billions)....... 1.9 1.6 0.5 0.3 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Six Months Ended June 30 Corporate and Middle Market Institutional Banking Banking (ANC) (Dollars in millions, --------------------- ------------------ except where noted) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------- Net interest income-tax-equivalent basis.. $ 232 $ 196 $ 146 $ 116 Provision for credit losses............... 4 (22) 12 13 Noninterest income........................ 306 233 35 43 Noninterest expense....................... 381 348 96 92 Net income................................ $ 100 $ 61 $ 45 $ 34 Return on common equity................... 10% 6% 18% 20% Efficiency ratio (1)...................... 71% 81% 53% 58% Average assets (in billions).............. $54.1 $43.9 $ 6.1 $ 5.5 Average loans (in billions)............... 10.4 9.4 4.9 4.0 Average common equity (in billions)....... 1.8 1.6 0.5 0.3 - --------------------------------------------------------------------------------------
(1) Noninterest expense as a percentage of total revenue (net interest income and noninterest income). CORPORATE BANKING The Corporation is the leading provider of banking services to large corporations, governments, institutions and investors in Chicago and the Midwest. It is also among the top U.S. banking companies serving national and international customers. The large corporate banking business is conducted in Corporate and Institutional Banking. The Corporation, through its American National Corporation subsidiary, is the leader in Chicagoland's middle market banking business. Corporate Banking businesses earned $64 million in the second quarter of 1995 and $145 million in the first half. 4 CORPORATE AND INSTITUTIONAL BANKING Profitability in Corporate and Institutional Banking for the second quarter declined from a year ago when results were bolstered by $32 million in interest income and recoveries related to Brazilian debt. For the six months, net income increased significantly--from $61 million to $100 million--as trading activities rebounded from a weak performance in 1994.
- ---------------------------------------------------------------------------- TOTAL REVENUE Three Months Ended Six Months Ended June 30 June 30 (In millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------- Trading........................... $ 38 $ 42 $113 $ 44 Servicing......................... 111 92 214 186 Lending........................... 46 59 94 102 Financing......................... 46 31 83 69 Other............................. 19 15 34 28 ---- ---- ---- ---- Total.......................... $260 $239 $538 $429 ==== ==== ==== ==== - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- TRADING REVENUE Three Months Ended Six Months Ended June 30 June 30 (In millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------- Foreign exchange and derivatives.. $(6) $12 $ 24 $ 16 Fixed income and derivatives...... 13 20 33 34 Emerging markets.................. 7 (1) 6 (51) Funding and arbitrage............. 11 8 20 19 Other trading..................... 13 3 30 26 --- --- ---- ---- Total.......................... $38 $42 $113 $ 44 === === ==== ==== - ----------------------------------------------------------------------------
Revenue from trading activities (trading profits and related net interest income) was $38 million in the second quarter of 1995 and $113 million for the first half. This substantial improvement from the first six months of 1994 was concentrated in the emerging markets segment, which posted modest gains compared with a loss of $51 million a year earlier. Servicing revenue posted healthy increases in both the quarter and year-to-date periods, largely from cash management operations. Revenue from financing activities reflected $21 million in equity gains for the first six months of 1995, compared with $15 million in 1994's first half. Average loans and leases in Corporate and Institutional Banking for the first half of 1995 increased more than 10 percent from a year earlier to $10.4 billion. Year-to-date expense growth was due in part to higher incentive compensation resulting from the improved trading performance. MIDDLE MARKET BANKING (AMERICAN NATIONAL CORPORATION) On a line-of-business basis, American National Corporation's net income was $45 million for the first six months of 1995, and return on equity was 18 percent. Net income for 1994 year-to-date was $34 million. This year-over-year increase reflects favorable interest rate spreads and higher average loan volume (up $900 million) due, in part, to the addition of assets from Lake Shore Bancorp., Inc. in the second half of 1994. 5 The 1995 results also reflect the transfer of American National's investment management subsidiary to The First National Bank of Chicago on December 31, 1994. The decline in noninterest income is a result of this move. OTHER ACTIVITIES The venture capital portfolio contributed gains of $34 million in the second quarter and $77 million for the first half of 1995, compared with $121 million in 1994's first half. For the first six months of 1995, net income from venture capital was $42 million for a return on equity of 30 percent. Net gains from the management of assets held for accelerated disposition totaled $25 million in the second quarter of 1995, and $33 million for the first six months. First-quarter 1994 results included a gain of $35 million from the sale of an interest in an investment management business. No significant corporate expenses were included in other activities in 1995. Special charges of $43 million were incurred in the first half of 1994, including equipment costs of $24 million related to the reduction in estimated useful life of certain personal computer equipment and other expenses of $19 million related to litigation and other corporate activities. STAFFING LEVELS Staff levels for each business segment as well as corporate support functions were as follows. In the business segment financials, the expenses related to support areas are reflected in the appropriate consumer or corporate business.
- -------------------------------------------------------------------------------------- Average Full-Time-Equivalent 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. Staff 1995 1995 1994 1994 1994 - -------------------------------------------------------------------------------------- Corporate and Institutional............ 6,216 6,276 6,342 6,402 6,340 Community Banking...................... 4,040 4,071 4,283 4,694 4,609 Credit Card............................ 3,329 3,212 3,007 2,922 2,821 Middle Market.......................... 2,109 2,084 2,156 2,143 2,069 Corporate Support/Other (1)............ 1,644 1,661 1,482 1,566 1,527 ------ ------ ------ ------ ------ First Chicago Corporation............ 17,338 17,304 17,270 17,727 17,366 ====== ====== ====== ====== ====== - --------------------------------------------------------------------------------------
(1) Increased staffing in the first quarter of 1995 represents the shifting of certain support services from Community Banking and the transfer of the investment management business from Middle Market Banking. 6 EARNINGS ANALYSIS SUMMARY The Corporation reported net income of $187.4 million, or $1.90 per share, for the second quarter of 1995, up from $168.7 million, or $1.67 per share, in the second quarter of 1994. Excluding the results from the Corporation's venture capital operations, net income was $170.5 million, or $1.74 per share, compared with $172.3 million, or $1.73 per share, a year ago.
- ------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended (Dollars in millions, June 30 June 30 except per share data) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------ Net interest income--tax-equivalent basis...... $365.4 $338.7 $745.1 $674.2 Provision for credit losses.................... 70.0 43.0 135.0 93.0 Noninterest income............................. 487.7 428.8 957.8 930.7 Noninterest expense............................ 487.7 460.6 965.8 945.1 Net income..................................... 187.4 168.7 382.5 362.5 Common Share Data PRIMARY Net income................................... $ 1.95 $ 1.71 $ 3.98 $ 3.76 Average common and common-equivalent shares (in millions)............................... 91.2 88.0 91.1 87.9 FULLY DILUTED Net income................................... $ 1.90 $ 1.67 $ 3.88 $ 3.67 Average shares, assuming full dilution (in millions)............................... 95.1 91.8 95.0 91.7 Return on assets............................... 0.99% 1.12% 1.06% 1.20% Return on common stockholders' equity.......... 17.4 16.5 18.1 18.3 - ------------------------------------------------------------------------------------------
Net income for the 1995 second quarter was up 11 percent from a year ago. Quarterly performance highlights included: Average managed credit card receivables increased 21 percent to $12.7 billion, generating increased spread and fee revenues. Average loans in the Corporation's middle market business increased 23 percent to $5.0 billion; part of this increase can be attributed to the acquisition of Lake Shore Bancorp., Inc., completed in July 1994. Market-driven revenues, which include combined trading profits and equity securities gains, were $75 million, up 83 percent from a year ago. The provision for credit losses was $70 million, up from $43 million a year ago. Growth in credit card receivables accounted for part of the increase. In addition, the year ago provision was favorably affected by Brazilian debt recoveries. Return on common stockholders' equity was 17 percent, marking the eleventh consecutive quarter in which the Corporation has achieved at least a 15 percent return. Capital ratios at quarter-end remain considerably above the regulatory "well-capitalized" guidelines. 7 The Corporation repurchased approximately 650,000 shares of its common stock during the second quarter of 1995. In July 1995, the Board of Directors authorized an increase in the current common stock buyback program from 7 million to 12 million shares. The purpose of this program is to repurchase shares to meet obligations under the Corporation's employee benefit plans and to manage the overall capital position of the Corporation. As of June 30, 1995, 5.9 million shares had been repurchased under the program. The Corporation's quarterly common stock dividend, next payable on October 1, 1995, was increased 9 percent in July 1995, to 60 cents per share from 55 cents per share. On July 11, 1995, the Corporation and NBD Bancorp, Inc. signed a definitive agreement providing for a merger of equals. For more information on this agreement, see Note 8 on page 34. 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 Ended Six Months Ended June 30 June 30 (Dollars in millions) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------- Net interest income--tax-equivalent basis.. $ 365.4 $ 338.7 $ 745.1 $ 674.2 Average earning assets..................... $60,772 $50,464 $59,996 $49,976 Net interest margin........................ 2.41% 2.69% 2.50% 2.72% - --------------------------------------------------------------------------------------
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). 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 $6.9 billion in the second quarter of 1995, compared with $5.1 billion in the second quarter of 1994. The effect of credit card securitization transactions on the Corporation's financial statements is summarized on page 36. 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. 8 The following table reflects the elements of net interest margin adjusted for credit card securitizations and the activities of FCCM.
- --------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions) 1995 1994 1995 1994 - --------------------------------------------------------------------------- Adjusted net interest income-- tax equivalent basis............ $ 528.6 $ 463.7 $1,042.3 $ 918.9 Adjusted average earnings assets.. $56,985 $47,382 $ 55,376 $47,193 Adjusted net interest margin...... 3.72% 3.93% 3.80% 3.93% - ----------------------------------------------------------------------------
On an adjusted basis, net interest margin for the second quarter of 1995 was 3.72 percent. This compares with 3.93 percent in the year ago quarter, which included a 12-basis-point positive effect from the Brazilian debt restructuring. The decline in adjusted net interest margin was due primarily to reduced credit card spreads resulting from competitive pricing pressures. An increase in the average volume of lower-margin trading and arbitrage assets also contributed to the lower net interest margin. PROVISION FOR CREDIT LOSSES The provision for credit losses was $70 million, which included $62 million for the consumer portfolios and $8 million for commercial credits. In the year ago quarter, the provision was $43 million, which included $57 million for the consumer portfolios and a negative provision of $14 million for commercial credits. This negative provision reflected the effect of $18 million in Brazilian debt recoveries. 9 The change in the allowance for credit losses is presented in the following table.
- --------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions) 1995 1994 1995 1994 - --------------------------------------------------------------------------------------- Allowance for credit losses --beginning of period...................... $ 754 $ 710 $ 723 $ 683 Provision for credit losses.................. 70 43 135 93 Net charge-offs.............................. (45) (34) (89) (67) Other, transfers related to securitized receivables................................. (90) (38) (80) (28) ----- ------ ----- ----- Net change in allowance for credit losses.... (65) (29) (34) (2) ----- ------ ----- ----- Allowance for credit losses -- end of period........................... $ 689 $ 681 $ 689 $ 681 ===== ====== ===== ===== -- as a percentage of loans outstanding.... 2.6% 2.9% 2.6% 2.9% -- as a percentage of nonperforming loans.. 538% 454% 538% 454% - ---------------------------------------------------------------------------------------
Details of the Corporation's credit risk management and performance during the six months ended June 30, 1995, are presented in the Credit Risk Management section, beginning on page 20. 10 NONINTEREST INCOME The following table provides a breakdown of the components of noninterest income for the second quarter and the first six months of 1995 as compared to a year ago.
- ------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30 June 30 (In millions) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------ Combined trading account profits.......... $ 15.8 $ 36.7 $ 66.2 $ 12.0 Equity securities gains................... 59.6 3.9 114.5 138.1 Investment securities gains............... - 0.6 - 1.1 ------ ------ ------ ------ Market-driven revenue................... 75.4 41.2 180.7 151.2 Credit card fee revenue................... 213.6 193.9 404.8 376.2 Service charges and commissions........... 115.5 104.2 223.4 205.5 Fiduciary and investment management fees.. 49.3 49.3 100.9 101.7 Net gains from accelerated disposition portfolio activities.................... 24.8 21.5 32.5 31.5 Other..................................... 9.1 18.7 15.5 64.6 ------ ------ ------ ------ Total................................... $487.7 $428.8 $957.8 $930.7 ====== ====== ====== ====== - ------------------------------------------------------------------------------------
Market-driven revenues for the second quarter of 1995 increased to $75.4 million from $41.2 million for the same period in 1994. Combined trading activities generated profits of $15.8 million, compared with $36.7 million a year ago. The decrease was due in part to lower customer demand in both the foreign exchange and derivative trading businesses. For more information, see the line-of-business discussion related to trading results, on page 5. Equity securities gains totaled $59.6 million, compared with $3.9 million a year ago. The following table presents a breakdown of securities gains from venture capital, corporate finance and debt restructuring activities.
- ------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30 June 30 (In millions) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------ Venture capital........................... $33.9 $2.4 $ 77.1 $121.0 Corporate finance......................... 25.6 1.5 37.3 16.6 Debt restructuring........................ 0.1 - 0.1 0.5 ----- ---- ------ ------ Total equity securities gains........... $59.6 $3.9 $114.5 $138.1 ===== ==== ====== ====== - ------------------------------------------------------------------------------------
Approximately 65 percent of the venture capital securities gains in the first six months of 1994 were related to the Corporation's investment in NEXTEL Communications, Inc. For additional information on the Corporation's venture capital activities, see page 19. The Corporation renewed its agreement with United Airlines during the first quarter of 1995, extending their partnership in First Card's successful Mileage Plus credit card program. The new agreement was established as a revenue- sharing arrangement. As a result, beginning in 1995 payments to United Airlines reduce credit card fee revenue rather than increase operating expenses. 11 Adjusted for the effects of credit card securitization and the change in the recognition of Mileage Plus payments, credit card fee revenue for the second quarter of 1995 was up 24 percent from the year ago period. This increase reflects both continued growth in credit card receivables and increased transaction volume. Service charges and commissions in the second quarter of 1995 rose 11 percent from the year-earlier period to $115.5 million due primarily to growth in both deposit and syndication management fees. Gains from transactions related to assets in the accelerated disposition portfolio totaled $24.8 million in the second quarter of 1995, compared with $21.5 million a year ago. 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. NONINTEREST EXPENSE Operating expenses were $487.7 million for the second quarter of 1995, compared with $460.6 million a year ago. Adjusted for the change in recognition of Mileage Plus payments discussed on page 11, operating expense was up 10 percent from a year ago.
- --------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (In millions) 1995 1994 1995 1994 - --------------------------------------------------------------------------------- Salaries and benefits................ $229.4 $212.9 $461.2 $420.3 Occupancy expense of premises, net... 37.9 35.7 74.3 70.5 Equipment rentals, depreciation and maintenance......................... 32.4 32.3 63.8 85.6 Amortization of intangible assets.... 15.3 17.0 30.6 35.2 Deposit insurance expense............ 10.7 10.8 21.3 21.5 Other................................ 162.0 151.9 314.6 312.0 ------ ------ ------ ------ Total.......................... $487.7 $460.6 $965.8 $945.1 ====== ====== ====== ====== - ---------------------------------------------------------------------------------
In the second quarter of 1995, total salaries and benefits increased 8 percent from a year ago. The increase was due to normal salary increases and higher staff levels in selected business areas as well as increased incentive compensation expense accruals. Equipment costs in the second quarter of 1995 were essentially unchanged from a year ago. A special charge of $24.5 million was recorded in the first quarter of 1994 reflecting the reduced estimated useful life of certain personal computer equipment. Beginning in the first quarter of 1994, most purchases of personal computer equipment were expensed. Purchases of such equipment prior to that time were capitalized and depreciated. Adjusted for the change in the classification of Mileage Plus payments, much of the increase in other operating expense was related to the Corporation's continued investment in the credit card business. 12
APPLICABLE INCOME TAXES - ------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions) 1995 1994 1995 1994 - ------------------------------------------------------------------- Income before income taxes.. $285.6 $258.0 $586.2 $556.0 Applicable income taxes..... 98.2 89.3 203.7 193.5 Effective tax rate.......... 34.4% 34.6% 34.7% 34.8% - -------------------------------------------------------------------
The effective tax rate in the second quarter of 1995 included benefits from the favorable effect of tax-exempt income and the effect of a decrease in the effective state income tax rate. The effective tax rate in the second quarter of 1994 reflected the effect of a favorable tax ruling. Tax expense for the first six months of 1995 also included general business tax credits and tax- exempt income from a one-time corporate banking transaction. Tax expense for the first six months of 1994 included a one-time tax benefit for the first quarter implementation of the final I.R.S. bad debt recapture regulations. LIQUIDITY RISK MANAGEMENT Liquidity is the ability to meet all present and future financial obligations in a timely manner. The Corporation has established policies and procedures designed to cover balance sheet assets and liabilities as well as off-balance- sheet items that are potential sources and uses of liquidity. The Statement of Cash Flows, on page 31, presents data on cash and cash equivalents provided and used by the Corporation in its operating, investing and financing activities. ASSET LIQUIDITY The Corporation believes that asset liquidity is the most effective way to manage overall liquidity. One measure of 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. The Corporation continued to maintain an average liquid asset ratio well in excess of its 12 percent minimum guideline in the second quarter of 1995. The Corporation's investment securities portfolio includes U.S. government, municipal and other debt securities as well as equity investments. The debt securities portfolio is used primarily to meet collateral requirements for certain customer deposits. The equity securities portfolio, while representing a secondary source of liquidity, generally is not readily saleable due to the form or size of the underlying equity interest. See page 35 for a detailed breakdown of the investment securities portfolio. The Corporation continues to use credit card securitization as an effective tool for increasing liquidity and diversifying funding sources. Securitized credit cards totaled $8.0 billion at June 30, 1995, compared with $6.1 billion at year- end 1994 and $5.6 billion at June 30, 1994. LIABILITY LIQUIDITY The Corporation has developed direct access to both the retail and wholesale markets as a means of achieving a diversified source of funding. This diversification of funding sources among instruments, maturities and depositors is intended to balance the expense of gathering funds with the maintenance of flexibility in funding options. 13 The following table shows the Corporation's mix of funding sources. DEPOSITS AND OTHER PURCHASED FUNDS
- -------------------------------------------------------------------------------- June 30 March 31 Dec. 31 Sept. 30 June 30 (In millions) 1995 1995 1994 1994 1994 - -------------------------------------------------------------------------------- Domestic offices Demand......................... $ 6,941 $ 6,791 $ 7,647 $ 7,217 $ 7,009 Savings........................ 7,442 7,564 7,448 7,426 7,401 Time Under $100,000............... 2,528 2,529 2,548 2,480 2,260 $100,000 and over............ 3,153 3,265 2,601 2,122 2,061 Foreign offices Banks in foreign countries..... 3,495 3,819 4,836 4,009 3,482 Foreign governments and official institutions........ 1,489 1,387 1,469 1,498 1,355 Other time and savings......... 8,521 6,731 4,847 4,384 4,700 Other demand................... 195 105 270 534 309 ------- ------- ------- ------- ------- Total deposits.......... 33,764 32,191 31,666 29,670 28,577 - -------------------------------------------------------------------------------- Federal funds purchased and securities under repurchase agreements..................... 15,710 14,595 13,026 12,303 12,208 Commercial paper................. 494 690 147 307 103 Other funds borrowed............. 7,312 7,445 7,518 8,752 7,948 Long-term debt................... 2,271 2,272 2,271 2,272 2,269 ------- ------- ------- ------- ------- Total other purchased funds.. 25,787 25,002 22,962 23,634 22,528 ------- ------- ------- ------- ------- Total........................ $59,551 $57,193 $54,628 $53,304 $51,105 ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------
MARKET RISK MANAGEMENT Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Corporation maintains risk management policies that monitor and limit exposure to market risk. Through its trading activities, it strives to take advantage of profit opportunities available in interest and exchange rate movements. In asset and liability management activities, the Corporation attempts to minimize structural interest rate risk. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. TRADING ACTIVITIES The Corporation maintains active trading positions in a variety of markets and instruments, including U.S. government, municipal and money market securities. It also maintains positions in derivative products associated with these markets and instruments, such as interest rate and currency swaps, and commodity and equity index options. The Corporation has adopted policies designed to strictly monitor trading positions at all times. The overall market risk that any business unit can assume is approved by a committee of the Board of Directors through a risk point limit. Risk points represent the Corporation's estimate of the amount of potential overnight loss in a capital markets product. Products that have more inherent price volatility incur more risk points. A business unit will use up more of its risk point limit if it trades in the more volatile products. The risk point system, therefore, is the means by which the Corporation manages its value at risk. 14 The Corporation monitors value at risk in each of its significant trading portfolios on a daily basis. The following tables show average, maximum and minimum daily value at risk for the second quarter of 1995 as well as for the preceding four quarters, and the actual trading revenue for each quarter (in millions).
- -------------------------------------------------------------------- Daily Value at Risk June 30 March 31 Dec. 31 Sept. 30 June 30 1995 1995 1994 1994 1994 - -------------------------------------------------------------------- Average.............. $ 34 $ 31 $ 42 $ 44 $ 41 Maximum.............. 45 44 47 53 46 Minimum.............. 27 24 38 36 34 - -------------------------------------------------------------------- - -------------------------------------------------------------------- June 30 March 31 Dec. 31 Sept. 30 June 30 Quarter Ended 1995 1995 1994 1994 1994 - -------------------------------------------------------------------- Trading revenue* $ 38 $ 75 $ 30 $ 56 $ 42 - --------------------------------------------------------------------
*Includes trading profits and related net interest income. Value at risk is estimated using statistical models calibrated at a three- standard-deviation confidence interval, which means that the actual daily result should exceed the value at risk one day out of each two hundred. The value at risk shown represents portfolio aggregates and overstates the Corporation's value at risk because it only partially considers offsets and correlations across different trading portfolios. The Corporation is continuing its progress toward a consolidated view of market risk. STRUCTURAL INTEREST RATE RISK MANAGEMENT The Corporation actively manages its asset and liability positions with the goal of minimizing the impact on earnings of interest rate market volatility. Conservative management of its asset and liability positions has allowed the Corporation to maintain a relatively consistent adjusted net interest margin despite a sharp rise in short-term interest rates. As a result of this neutral interest rate risk profile, it is estimated that an immediate change in rates of 100 basis points would affect annual pretax earnings by approximately $11 million.
- ----------------------------------------------------------------------------------- Quarter Ended June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1995 1995 1994 1994 1994 - ----------------------------------------------------------------------------------- Adjusted net interest income- tax-equivalent basis........... $528.6 $513.7 $486.5 $485.5 $463.7 - ----------------------------------------------------------------------------------- Adjusted net interest margin.... 3.72% 3.87% 3.74% 3.85% 3.93% - -----------------------------------------------------------------------------------
15 Net interest income can fluctuate with movements in the interest rate market due to an imbalance in the repricing or maturity of the Corporation's assets and liabilities. Whenever possible, assets are matched with liabilities of similar repricing characteristics. However, the loans and deposits generated through the Corporation's ordinary business activity do not naturally create offsetting positions with respect to repricing or maturity. For assets having indefinite maturities or repricing sensitivities, liability pools based on such assets' estimated maturities and repricing characteristics may be used to match the interest rate risk. Finally, asset and liability positions that are not appropriately offset with either specific on-balance-sheet transactions or with liability pools are offset through off-balance-sheet derivative positions (asset and liability management [ALM] derivatives). Traditional gap analysis is one of a variety of measurement tools used to monitor and control the Corporation's interest rate risk position. Gap analysis measures the difference between the volume of assets and liabilities maturing or repricing in a given future time period. Certain assumptions are made for those assets or liabilities whose expected prepayment or withdrawal behavior may not be reflected by their maturity dates. Credit card securitizations, which subject credit card servicing fee revenue to interest rate risk, also are included in the gap analysis measure. In addition to static gap analysis, the Corporation identifies the more dynamic interest rate risk exposures of its businesses through duration of equity measures and stress testing of earnings simulation. The following table shows the "managerial" interest rate gap analysis as of June 30, 1995, used to identify the Corporation's exposure from domestic asset and liability positions. Interest rate risks in trading and overseas earning asset and liability positions are excluded from the gap analysis and managed principally as trading risks. A positive cumulative one-year gap position indicates more assets than liabilities are expected to reprice over the next 12- month period. Such a position implies that, assuming no management action, the Corporation's net interest income would be positively affected by rising interest rates and negatively affected by falling rates. 16
- ------------------------------------------------------------------------------------------------ INTEREST RATE SENSITIVITY - ------------------------------------------------------------------------------------------------ June 30, 1995 0-90 91-180 181-365 1-5 Beyond (Dollars in millions) days days days years 5 years Total - ------------------------------------------------------------------------------------------------ Loans................................ $22,825 $ 1,467 $ 1,258 $2,046 $ 5,136 $32,732 Investment securities................ 385 359 114 1,723 271 2,852 Other earning assets................. 22,911 108 66 7 274 23,366 Nonearning assets.................... 6,239 7 -- 148 427 6,821 ------- ------- -------- ------ ------- ------- Total domestic assets............. $52,360 $ 1,941 $ 1,438 $3,924 $ 6,108 $65,771 - ------------------------------------------------------------------------------------------------ Deposits............................. $13,409 $ 1,899 $ 1,178 $1,205 $ 4,102 $21,793 Other interest-bearing liabilities... 27,460 405 1,216 3,260 1,516 33,857 Noninterest-bearing liabilities...... 4,284 5 -- 177 884 5,350 Equity............................... 311 -- -- 100 4,360 4,771 ------- ------- -------- ------ ------- ------- Total domestic liabilities and equity...................... $45,464 $ 2,309 $ 2,394 $4,742 $10,862 $65,771 - ------------------------------------------------------------------------------------------------ Balance sheet sensitivity gap........ $ 6,896 $ (368) $ (956) $ (818) $(4,754) -- - ------------------------------------------------------------------------------------------------ Cumulative gap as % of domestic assets.................... 10.5% 9.9% 8.5% 7.2% -- -- - ------------------------------------------------------------------------------------------------ Effect of off-balance-sheet ALM derivative transactions: Specific transactions.............. $(3,268) $ 140 $ 1,035 $ 895 $ 1,198 -- Specific asset or liability pools.. (3,261) 263 855 2,061 82 -- - ------------------------------------------------------------------------------------------------ Interest rate sensitivity gap........ $ 367 $ 35 $ 934 $2,138 $(3,474) -- - ------------------------------------------------------------------------------------------------ Cumulative gap....................... $ 367 $ 402 $ 1,336 $3,474 -- -- - ------------------------------------------------------------------------------------------------ Cumulative gap as % of domestic assets.................... 0.6% 0.6% 2.0% 5.3% -- -- - ------------------------------------------------------------------------------------------------
Access to the derivatives market is an important element in the Corporation's ability to maintain its gap position within policy guidelines. As of June 30, 1995, the Corporation had a total of $7.5 billion in ALM interest rate swaps, including $2.5 billion of ALM interest rate swaps against specific transactions and $5.0 billion against specific pools of assets or liabilities. Swaps used to adjust the interest rate sensitivity of specific transactions will not need to be replaced as they mature since the corresponding asset or liability will mature along with the swap. However, swaps against the asset and liability pools will have an impact on the Corporation's risk position as they mature and, assuming no change to the underlying pool's characteristics, will need to be reissued to maintain the same neutral interest rate risk profile. These swaps could create a modest sensitivity of earnings due to changes in interest rates. Growth in the volume of stable retail liabilities and declines in the volume of longer-term fixed rate assets over the last few years have made it necessary to increase the use of swaps associated with specific pools of assets or liabilities to balance the Corporation's repricing risk. The following table summarizes the interest rate swaps used by the Corporation for asset and liability management purposes. 17
ASSET AND LIABILITY MANAGEMENT SWAPS - --------------------------------------------------------------------------------------------------------- June 30, 1995 Receive Fixed Pay Fixed Basis (Notional amounts in millions) Pay Floating Receive Floating Swaps Total - --------------------------------------------------------------------------------------------------------- Swaps associated with: Specific Pool Specific Pool Pool -------- ------ -------- ---- ---- Loans........................... $ - $1,067 $29 $ - $ - $1,096 Securitized credit card receivables.................... - 1,025 - - - 1,025 Deposits........................ 465 2,700 - - - 3,165 Other funds borrowed............ 791 - - - 150 941 Long-term debt.................. 1,238 - - - - 1,238 ------ ------ --- --- ---- ------ Total......................... $2,494 $4,792 $29 $ - $150 $7,465 ====== ====== === === ==== ====== - ---------------------------------------------------------------------------------------------------------
For most of its asset and liability management swaps, the Corporation receives a fixed rate and pays a floating rate of interest. Substantially all interest rate swaps used by the Corporation for asset and liability management purposes are standard interest rate swap contracts. The following table summarizes the contractual maturities and weighted average pay and receive rates for the asset and liability management swap position at June 30, 1995. The variable interest rates, which generally are the three-month and six-month LIBOR rates in effect on the date of repricing, have been assumed to remain constant. However, the variable interest rates will change with changes in interest rates and would affect the related weighted average information presented below.
- --------------------------------------------------------------------------------------------------------- (Dollars in millions) 1995 1996 1997 1998 1999 Thereafter Total - --------------------------------------------------------------------------------------------------------- Receive fixed swaps Notional amount........ $1,115 $2,558 $1,764 $ 432 $ 109 $1,308 $7,286 Weighted average: Receive rate........ 5.57% 6.95% 6.43% 6.59% 8.13% 7.25% 6.66% Pay rate............ 6.24% 6.29% 6.33% 6.35% 6.75% 6.42% 6.32% Pay fixed swaps Notional amount........ $ - $ 19 $ - $ - $ - $ 10 $ 29 Weighted average: Receive rate........ - 6.27% - - - 6.15% 6.23% Pay rate............ - 7.21% - - - 5.06% 6.47% Basis swaps Notional amount........ $ 100 $ 50 $ - $ - $ - $ - $ 150 Weighted average: Receive rate........ 6.06% 6.41% - - - - 6.18% Pay rate............ 6.28% 5.96% - - - - 6.17% - --------------------------------------------------------------------------------------------------------- Total notional amount...... $1,215 $2,627 $1,764 $ 432 $ 109 $1,318 $7,465 - ---------------------------------------------------------------------------------------------------------
18 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. Net income attributable to the venture capital business--revenues less the portfolio's funding costs and other expenses--was $16.9 million, or $0.16 per share, for the 1995 second quarter, compared with a net loss of $3.6 million, or $0.06 per share, a year ago.
Venture Capital Portfolio - ------------------------------------------------------------------------------ June 30, 1995 Investments Investments (In millions) Held Directly Held Indirectly Total - ------------------------------------------------------------------------------ Publicly traded equity investments Gross value...................... $435 $395 $ 830 Discount......................... (18) (97) (115) ---- ---- ------ Fair value.................... $417 $298 715 ==== ==== Investments in private companies.... 782 ------ Total............................... $1,497 ====== - ------------------------------------------------------------------------------
Fair value accounting is used for this portfolio, which has significantly increased the volatility of the Corporation's reported earnings. However, the Corporation has instituted a program intended to reduce volatility relative to expected returns through the use of equity derivatives, including options, and the sale of investments. As an 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, 1995, 72 percent of the Corporation's $715 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 on the portfolio for the first six months of 1995.
Venture Capital Portfolio Activity - -------------------------------------------------------------------------- Publicly Traded Private (In millions) Companies Companies Total - -------------------------------------------------------------------------- Fair value--December 31, 1994............. $ 848 $731 $1,579 Additional investments.................... 46 72 118 Appreciation recorded as equity securities gains (1)..................... 96 19 115 Sales proceeds (1)........................ (109) (66) (175) Other (2)................................. (166) 26 (140) ----- ---- ------ Fair value--June 30, 1995 (3)............. $ 715 $782 $1,497 ===== ==== ====== Unrealized appreciation at June 30, 1995.. $ 529 $ 13 $ 542 ===== ==== ====== - --------------------------------------------------------------------------
(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 $163 million related to hedging instruments used to reduce the earnings volatility of the venture capital portfolio. In addition to the $1.5 billion of investments in the venture capital portfolio, unfunded commitments totaled $122 million at June 30, 1995. 19 CREDIT RISK MANAGEMENT
Summary - ------------------------------------------------------------------------------------- Selected Statistical Information June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1995 1995 1994 1994 1994 - ------------------------------------------------------------------------------------- At period-end: Loans outstanding............... $26,517 $27,018 $25,947 $23,817 $23,680 Nonperforming loans............. 128 122 130 154 150 Other real estate, net.......... 8 8 28 23 31 Nonperforming assets............ 136 130 158 177 181 Allowance for credit losses..... 689 754 723 683 681 Nonperforming assets/loans outstanding and other real estate, net............... 0.5% 0.5% 0.6% 0.7% 0.8% Allowance for credit losses/ nonperforming loans............ 538 618 556 444 454 For the quarter ended: Average loans outstanding....... $26,145 $26,034 $24,335 $23,484 $22,940 Net charge-offs................. 45 44 46 38 34 Net charge-offs/average loans... 0.7% 0.7% 0.7% 0.6% 0.6% - -------------------------------------------------------------------------------------
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) 1995 1995 1994 1994 1994 - --------------------------------------------------------------------------- Commercial Risk Domestic office Commercial.............. $ 8,506 $ 8,814 $ 7,806 $ 7,488 $ 7,148 Commercial real estate.. 2,449 2,560 2,496 2,391 2,390 Other................... 4,120 3,624 3,896 3,572 3,657 ------- ------- ------- ------- ------- Total domestic........ 15,075 14,998 14,198 13,451 13,195 Foreign office............ 2,138 1,866 1,832 2,020 2,153 ------- ------- ------- ------- ------- Total commercial.. 17,213 16,864 16,030 15,471 15,348 ------- ------- ------- ------- ------- Consumer Risk Credit cards.............. 5,505 6,463 6,337 5,000 5,356 Secured by real estate Mortgage................ 1,711 1,662 1,581 1,552 1,425 Home equity............. 815 815 832 836 803 Other..................... 1,273 1,214 1,167 958 748 ------- ------- ------- ------- ------- Total consumer.... 9,304 10,154 9,917 8,346 8,332 ------- ------- ------- ------- ------- Total............. $26,517 $27,018 $25,947 $23,817 $23,680 ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------
20 ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is maintained at a level that in management's judgment is adequate to provide for estimated probable credit losses resulting from on-balance-sheet credit exposure for financial instruments such as loans and derivatives, and off-balance-sheet credit exposure for credit-related and derivative financial instruments. The amount of the allowance is based on management's formal review and analysis of potential credit losses, as well as prevailing economic conditions. 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, 1995 June 30, 1995 ----------------------------- ----------------------------- (Dollars in millions) Commercial Consumer Total Commercial Consumer Total - --------------------------------------------------------------------------------- ----------------------------- Balance--beginning of period...................... $529 $225 $754 $516 $207 $723 Provision for credit losses....................... 8 62 70 15 120 135 Net (charge-offs)/recoveries...................... -- (45) (45) 6 (95) (89) Other: - - Transfers related to securitized receivables.... -- (90) (90) -- (80) (80) ---- ---- ---- ---- ---- ---- Balance--end of period............................ $537 $152 $689 $537 $152 $689 ==== ==== ==== ==== ==== ==== Allowance as a percentage of loans outstanding.... 3.1% 1.6% 2.6% 3.1% 1.6% 2.6% Allowance as a percentage of nonperforming loans.. 420% -- 538% 420% -- 538% - ------------------------------------------------------------------------------------------------------------------
A reserve is maintained for securitized credit card receivables that is not included in the allowance for credit losses. This reserve totaled $319 million at June 30, 1995, compared with $255 million at year-end 1994 and $234 million a year ago. 21 NONPERFORMING ASSETS The following table shows the trend in nonperforming assets, including the breakdown by significant portfolio segment.
- ----------------------------------------------------------------------------------------- Nonperforming Assets June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1995 1995 1994 1994 1994 - ----------------------------------------------------------------------------------------- Nonaccrual loans...................... $ 124 $ 118 $ 126 $ 150 $ 146 Accrual renegotiated loans............ 4 4 4 4 4 ----- ----- ----- ----- ----- Total nonperforming loans........ $ 128 $ 122 $ 130 $ 154 $ 150 ===== ===== ===== ===== ===== Nonperforming Loans Commercial real estate.............. $ 55 $ 84 $ 68 $ 79 $ 72 Troubled-country debtor............. 1 1 1 1 1 Other............................... 72 37 61 74 77 ----- ----- ----- ----- ----- Total nonperforming loans........ 128 122 130 154 150 ----- ----- ----- ----- ----- Other real estate, net................ 8 8 28 23 31 ----- ----- ----- ----- ----- Total nonperforming assets....... $ 136 $ 130 $ 158 $ 177 $ 181 ===== ===== ===== ===== ===== Nonperforming assets as a percentage of loans outstanding and other real estate, net.................... 0.5% 0.5% 0.6% 0.7% 0.8% - -----------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing interest amounted to $63 million at June 30, 1995, compared with $89 million at December 31, 1994, and $54 million at June 30, 1994. 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. Consumer loans totaled $9.3 billion at June 30, 1995, up 12 percent from $8.3 billion a year ago. Including securitized credit card receivables, these loans totaled $17.3 billion at June 30, 1995, up 24 percent from a year ago. Total managed credit card receivables (i.e. those held in the portfolio and those sold to investors through securitization) were $13.5 billion at June 30, 1995, up 23 percent from a year earlier.
- ---------------------------------------------------------------------------------------- Consumer Loans June 30 March 31 Dec. 31 Sept. 30 June 30 (In millions) 1995 1995 1994 1994 1994 - ---------------------------------------------------------------------------------------- Credit card loans........................ $ 5,505 $ 6,463 $ 6,337 $ 5,000 $ 5,356 Securitized credit card receivables...... 7,986 5,867 6,117 6,367 5,617 ------- ------- ------- ------- ------- Total managed credit card receivables.. 13,491 12,330 12,454 11,367 10,973 Other consumer loans..................... 3,799 3,691 3,580 3,346 2,976 ------- ------- ------- ------- ------- Total............................... $17,290 $16,021 $16,034 $14,713 $13,949 ======= ======= ======= ======= ======= - ----------------------------------------------------------------------------------------
Average managed credit card receivables for the second quarter of 1995 grew 21 percent from the year-earlier quarter and 10 percent from the fourth quarter of 1994. 22
- -------------------------------------------------------------------------------------------- Average Credit Card Receivables For the Quarter Ended June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1995 1995 1994 1994 1994 - -------------------------------------------------------------------------------------------- Credit card loans........................ $ 5,812 $ 6,098 $ 5,304 $ 5,067 $ 5,435 Securitized credit card receivables...... 6,896 6,027 6,273 5,925 5,106 ------- ------- ------- ------- ------- Total managed credit card receivables.. $12,708 $12,125 $11,577 $10,992 $10,541 ======= ======= ======= ======= ======= Total net charge-offs (including securitizations)............ $ 128 $ 118 $ 107 $ 96 $ 100 ======= ======= ======= ======= ======= Net charge-offs/average total receivables............................ 4.0% 3.9% 3.7% 3.5% 3.8% ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------------------
The net charge-off rate for the total average managed credit card portfolio was 4.0 percent in the second quarter of 1995, compared with 3.8 percent a year ago. The increase was due, in part, to certain strategies used by the Corporation to increase the cardholder base. Current levels of unemployment and personal bankruptcy filings make reductions in the charge-off rate unlikely in the near term. COMMERCIAL RISK MANAGEMENT Commercial loans totaled $17.2 billion at June 30, 1995, up 7.4 percent from December 31, 1994, and 12 percent from June 30, 1994. During the second quarter, charge-offs net of recoveries were zero in the commercial portfolio. The provision for credit losses related to the commercial portfolio was $8 million, and the quarter-end reserve of $537 million represented 3.1 percent of total commercial loans and 420 percent of nonperforming loans. DERIVATIVE FINANCIAL INSTRUMENTS The Corporation enters into a variety of derivative financial instruments in its trading, asset and liability management, and venture capital activities. These instruments include interest rate, currency, commodity and equity swaps, forwards, futures, options, caps, floors, forward rate agreements, and other conditional or exchange contracts, and include both exchange-traded and over- the-counter contracts. A discussion of the Corporation's income from derivatives used in trading and venture capital activities is presented on pages 5 and 19, respectively. The Corporation uses interest rate derivative financial instruments to reduce structural interest rate risk and the volatility of net interest margin. The consistency of the Corporation's net interest margin reflects the effective use of these derivatives. Without their use, net interest income would have been higher by $7.6 million in the second quarter of 1995, and by $13.3 million in the first six months of 1995; net interest income in the second quarter and first six months of 1994 would have declined by $29.4 million and $66.2 million, respectively. 23 The sale of fixed- and floating-rate credit card receivables as securities to investors subjects the Corporation's servicing revenue to interest rate risk. The Corporation uses interest rate derivatives to reduce the volatility of the servicing income on credit card securitizations. Without the use of these instruments, credit card fee revenue would have been reduced by $1.6 million in the second quarter of 1995, and by $4.5 million in the first six months of 1995. Credit card fee revenue in the second quarter and first six months of 1994 would also have been reduced by $11.4 million and $25.0 million, respectively. The terms of these derivatives match the terms of the credit card securitizations. Deferred gains and losses on the early termination of interest rate swaps used to manage interest rate risk totaled a net deferred gain of $28.7 million as of June 30, 1995. A significant portion of these deferred gains was related to securitized credit card receivables. This amount is scheduled to be amortized into income in the following periods: $10.9 million in the remainder of 1995, $18.3 million in 1996, $1.2 million in 1997, $(0.3) million in 1998, and $(1.4) million thereafter. The Corporation's credit exposure resulting from derivative financial instruments is represented by their fair value amounts, increased by an estimate of maximum adverse position exposure. The incremental amount of credit exposure for potential adverse movement is calculated by using a statistical model that estimates changes over time in exchange rates, interest rates and other relevant factors. Credit exposure amounts fluctuate as a function of maturity, interest rates, foreign exchange rates, commodity prices and equity prices. Gross credit exposure may be overstated because it does not consider collateral and other security or the offsetting of losses with the same counterparties based on legally enforceable termination and netting rights. A reconciliation between gross credit exposure and balance sheet exposure is presented in the following table.
- ---------------------------------------------------------------------- June 30, 1995 (In billions) - ---------------------------------------------------------------------- Gross credit exposure resulting from derivative financial instruments................................................... $19.1 Less additional exposure based on estimate of maximum adverse position exposure............................................ 5.5 ----- Gross fair value exposure...................................... $13.6 ===== - ---------------------------------------------------------------------- Gross fair value exposure...................................... $13.6 Less netting adjustments due to master netting agreements...... 4.6 Less unrecognized net gain due to non-trading activities....... 0.1 ----- Balance sheet exposure......................................... $ 8.9 ===== - ----------------------------------------------------------------------
At December 31, 1994, the gross credit exposure and the gross fair value exposure resulting from derivative financial instruments were $12.3 billion and $6.9 billion, respectively. At March 31, 1995, the gross credit exposure was $19.7 billion and the gross fair value exposure was $13.4 billion. The increase in exposure during the first quarter of 1995 was primarily a result of increases in unrealized gains on derivative financial instruments due to more volatile currency markets. In the first six months of 1995, net charge-offs associated with derivative financial instruments were $617,000. 24
CAPITAL MANAGEMENT Selected Capital Ratios - ----------------------------------------------------------------------------------------------------------------- June 30 March 31 Dec. 31 Sept. 30 June 30 Corporate Quarter Ended 1995 1995 1994 1994 1994 Guideline - ----------------------------------------------------------------------------------------------------------------- Common equity/total assets (1)........ 6.1% 6.2% 6.6% 6.6% 6.5% N/A Tangible common equity ratio (1)...... 5.8 5.8 6.2 6.2 6.1 N/A Stockholders' equity/total assets..... 6.3 6.4 6.9 6.9 7.1 N/A Risk-based capital ratios (1)(2) Tier 1............................. 8.8 8.6 8.8 9.2 8.9 7-8% Total.............................. 13.1 13.0 13.4 13.9 13.8 11-12 Leverage ratio (1)(2)................. 7.0 7.7 7.5 7.8 8.0 N/A Double leverage ratio................. 115.8 115.4 116.5 114.0 110.0 115-125 Dividend payout ratio................. 28 27 29 32 29 30-35 - -----------------------------------------------------------------------------------------------------------------
(1) Net of investment in First Chicago Capital Markets, Inc. (2) June 30, 1994, excludes $150 million of Preferred Stock, Series D, that was redeemed on July 1, 1994. N/A - Not Applicable. Capital represents the stockholders' investment on which the Corporation strives to generate attractive returns. It supports business growth and provides protection to depositors and creditors. Banking is a risk-taking activity, and management believes that capital is the foundation of a cohesive risk management framework in which the Corporation's risks and returns come together. Capital adequacy objectives have been developed for the Corporation and its principal banking subsidiaries to meet these needs and also to maintain a well-capitalized regulatory position. ECONOMIC CAPITAL In the normal course of business, the Corporation takes on several types of risk: credit, liquidity, structural interest rate, market and operating/ fiduciary. An economic capital framework has been constructed to allocate capital to business segments, products and customers based on the amount and type of risk inherent in the activity. Once economic capital is allotted, returns can be computed to determine if the activity earns an adequate return on risks taken. This process forms a key decision-making tool for managing risk- taking activities as well as ensuring that capital is profitably employed. The Corporation has established a capital level that it believes is necessary to provide flexibility while maintaining an adequate base for its risk profile and in relation to its peers. This target, or intermediary capital, is expressed in terms of Tier 1 capital and ranges from 7 percent to 8 percent. The Corporation's average common equity during the second quarter of 1995 and the previous four quarters exceeded its economic capital -- that needed for current business risks -- and was more than sufficient to meet its intermediary capital goals. This amount in excess of intermediary capital averaged about $300 million during the first six months of 1995 and is available for investments and acquisitions in the Corporation's core businesses. If attractive long-term opportunities are not available over time, any excess capital will be returned to stockholders, typically via stock repurchase programs and/or dividend increases. Inherent in capital management is the ability of the Corporation to generate acceptable returns on stockholders' capital. Even with excess capital, the Corporation has been able to earn attractive returns on equity. Over the last 11 quarters, the return on average common stockholders' equity has been equal to or greater than 15 percent. 25 STOCK REPURCHASE PROGRAM AND OTHER CAPITAL ACTIVITIES The repurchase of shares is another technique used to manage capital and enhance stockholder value. During the second quarter of 1995, the Corporation repurchased approximately 650,000 shares of common stock at an average price of $56.83 per share. In July 1995, the Board of Directors authorized an increase in the current common stock buyback program from 7 million to 12 million shares. This program is designed to meet projected requirements of the Corporation's employee benefit plans and to manage the Corporation's overall capital position. As of June 30, 1995, 5.9 million shares had been repurchased under the program. On July 1, 1994, the Corporation redeemed its $150 million issue of Preferred Stock, Series D, at a $4.5 million, or 3 percent, premium. This action reduced future annual dividend requirements by $15 million. In July 1995, the Corporation announced that on August 31, 1995, its $121 million issue of Preferred Stock, Series A, would be redeemed at its stated value of $50 per share. At a minimum, this action will reduce future annual dividend requirements by $8.4 million. In July 1995, the Corporation announced a 9 percent increase in the quarterly common stock dividend to 60 cents per share from 55 cents per share, first payable on October 1, 1995, to stockholders of record on September 8, 1995. REGULATORY CAPITAL The Corporation endeavors to maintain regulatory capital ratios, including those of its principal banking subsidiaries, in excess of the well-capitalized guidelines. To assure meeting this goal, and the intermediary capital target discussed earlier in the Economic Capital section, the Corporation has established target ranges of 7 percent to 8 percent for Tier 1 capital and 11 percent to 12 percent for total risk-based capital. As shown in the table on page 25, the Corporation's risk-based capital ratios for Tier 1 and total capital exceeded the regulatory well-capitalized guidelines of 6 percent and 10 percent, respectively. 26 The following tables show the components of the Corporation's regulatory risk- based capital and risk-weighted assets.
Regulatory Capital - ------------------------------------------------------------------------------------ June 30 Dec. 31 June 30 (In millions) 1995 1994 1994 - ------------------------------------------------------------------------------------ Tier 1 capital Common stockholders' equity.............. $4,160 $3,922 $3,763 Preferred stock (1)...................... 611 611 611(1) Less 50% of investment in First Chicago Capital Markets, Inc........... (124) (128) (129) Less disallowed intangibles and other adjustments...................... (80) (80) (97) ------ ------ ------ Tier 1 capital......................... $4,567 $4,325 $4,148 Tier 2 capital Allowance for credit losses (2).......... 646 616 585 Qualifying long-term debt................ 1,694 1,753 1,820 Less 50% of investment in First Chicago Capital Markets, Inc.......... (124) (128) (129) ------ ------ ------ Tier 2 capital......................... 2,216 2,241 2,276 ------ ------ ------ Total capital................ $6,783 $6,566 $6,424 ====== ====== ====== - ------------------------------------------------------------------------------------
(1) Excludes $150 million of Preferred Stock, Series D redeemed on July 1, 1994. (2) Limited to 1.25% of risk-weighted assets.
Regulatory Risk-Weighted Assets* - ------------------------------------------------------------------------------------ June 30 Dec. 31 June 30 (In billions) 1995 1994 1994 - ------------------------------------------------------------------------------------ Balance-sheet risk-weighted assets....... $33.6 $33.0 $30.2 Off-balance-sheet risk-weighted assets.................................. 18.1 16.2 16.5 ----- ----- ----- Total risk-weighted assets............... $51.7 $49.2 $46.7 ===== ===== ===== - ------------------------------------------------------------------------------------
* Based on Federal Reserve Board definitions. The Corporation's banking subsidiaries -- The First National Bank of Chicago (FNBC), FCC National Bank (FCCNB), and American National Bank and Trust Company of Chicago (ANB) -- exceeded the regulatory well-capitalized guidelines as shown in the following table.
Banking Subsidiaries Regulatory Capital Ratios - --------------------------------------------------------------------------------------------------------------------- June 30, 1995 December 31, 1994 June 30, 1994 ------------------------ ------------------------ ------------------------ FNBC FCCNB ANB FNBC FCCNB ANB FNBC FCCNB ANB - --------------------------------------------------------------------------------------------------------------------- Risk-based capital ratios Tier 1 capital............ 7.9% 15.4% 9.6% 8.1% 12.1% 9.5% 7.8% 13.2% 10.3% Total capital............. 11.9 18.1 12.1 12.5 15.0 12.0 11.8 15.9 13.1 Leverage Ratio............... 5.7 14.6 9.7 6.3 14.4 9.1 6.7 12.8 9.5 - ---------------------------------------------------------------------------------------------------------------------
27
FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------------- June 30 December 31 June 30 - ------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1995 1994 1994 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks--noninterest-bearing........................................ $ 3,646 $ 4,265 $ 3,373 Due from banks--interest-bearing................................................... 9,484 8,066 7,759 Federal funds sold and securities under resale agreements........................... 14,274 13,302 13,674 Trading account assets.............................................................. 7,706 4,967 5,037 Derivative product assets........................................................... 8,909 4,389 6,086 Investment securities (fair values--$2,590, $2,589, and $2,255, respectively)....... 2,583 2,592 2,254 Loans (net of unearned income--$297, $297, and $263, respectively).................. 26,517 25,947 23,680 Allowance for credit losses......................................................... (689) (723) (681) Premises and equipment.............................................................. 697 665 639 Accrued income receivable........................................................... 534 485 444 Customers' acceptance liability..................................................... 534 526 486 Other assets........................................................................ 1,133 1,419 1,338 ------- ------- ------- Total assets..................................................................... $75,328 $65,900 $64,089 ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits Demand............................................................................ $ 6,941 $ 7,647 $ 7,009 Savings........................................................................... 7,442 7,448 7,401 Time.............................................................................. 5,681 5,149 4,321 Foreign offices................................................................... 13,700 11,422 9,846 ------- ------- ------- Total deposits................................................................... 33,764 31,666 28,577 Federal funds purchased and securities under repurchase agreements.................. 15,710 13,026 12,208 Other funds borrowed................................................................ 7,806 7,665 8,051 Long-term debt...................................................................... 2,271 2,271 2,269 Acceptances outstanding............................................................. 534 526 486 Derivative product liabilities...................................................... 8,581 4,097 6,094 Other liabilities................................................................... 1,891 2,116 1,880 ------- ------- ------- Total liabilities................................................................ 70,557 61,367 59,565 - ------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock..................................................................... 611 611 761 Common stock--$5 par value.......................................................... 467 466 434 Number of shares authorized--150,000,000 Number of shares issued--93,430,319; 93,148,134; and 86,824,888, respectively Number of shares outstanding--89,719,497; 89,859,798; and 86,697,805, respectively Surplus............................................................................. 1,712 1,712 1,721 Retained earnings................................................................... 2,169 1,905 1,616 Other adjustments................................................................... -- (4) (2) ------- ------- ------- Total............................................................................ 4,959 4,690 4,530 Less treasury stock at cost--3,710,822; 3,288,336; and 127,083 shares, respectively. 188 157 6 ------- ------- ------- Stockholders' equity............................................................. 4,771 4,533 4,524 ------- ------- ------- Total liabilities and stockholders' equity....................................... $75,328 $65,900 $64,089 ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------------
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FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT - ---------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 - ---------------------------------------------------------------------------------------------------------------------------------- (In millions, except per share data) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans.......................................................... $ 593.4 $470.3 $1,198.3 $ 907.9 Interest on bank balances........................................................... 150.1 82.5 281.7 157.5 Interest on federal funds sold and securities under resale agreements............... 238.7 133.7 479.5 224.7 Interest on trading account assets.................................................. 102.1 56.7 190.8 115.8 Interest on investment securities (including dividends)............................. 22.9 14.6 43.9 30.5 -------- ------ -------- -------- Total..................................................................... 1,107.2 757.8 2,194.2 1,436.4 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits................................................................ 341.7 182.9 635.7 336.8 Interest on federal funds purchased and securities under repurchase agreements...... 231.9 110.0 468.0 191.8 Interest on other funds borrowed.................................................... 132.0 90.8 269.4 162.2 Interest on long-term debt.......................................................... 46.0 41.3 91.9 82.2 -------- ------ -------- -------- Total..................................................................... 751.6 425.0 1,465.0 773.0 - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME................................................................. 355.6 332.8 729.2 663.4 Provision for credit losses......................................................... 70.0 43.0 135.0 93.0 -------- ------ -------- -------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............................... 285.6 289.8 594.2 570.4 - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Combined trading profits............................................................ 15.8 36.7 66.2 12.0 Equity securities gains............................................................. 59.6 3.9 114.5 138.1 Investment securities gains......................................................... - 0.6 - 1.1 -------- ------ -------- -------- Market-driven revenue............................................................. 75.4 41.2 180.7 151.2 Credit card fee revenue............................................................. 213.6 193.9 404.8 376.2 Service charges and commissions..................................................... 115.5 104.2 223.4 205.5 Fiduciary and investment management fees............................................ 49.3 49.3 100.9 101.7 Other income........................................................................ 33.9 40.2 48.0 96.1 -------- ------ -------- -------- Total..................................................................... 487.7 428.8 957.8 930.7 - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits...................................................... 229.4 212.9 461.2 420.3 Occupancy expense of premises, net.................................................. 37.9 35.7 74.3 70.5 Equipment rentals, depreciation and maintenance..................................... 32.4 32.3 63.8 85.6 Other expense....................................................................... 188.0 179.7 366.5 368.7 -------- ------ -------- -------- Total..................................................................... 487.7 460.6 965.8 945.1 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES.......................................................... 285.6 258.0 586.2 556.0 Applicable income taxes............................................................. 98.2 89.3 203.7 193.5 -------- ------ -------- -------- NET INCOME.......................................................................... $ 187.4 $168.7 $ 382.5 $ 362.5 ======== ====== ======== ======== NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY.............................. $ 177.4 $150.4 $ 362.5 $ 330.4 ======== ====== ======== ======== - ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE NET INCOME-PRIMARY................................................................ $ 1.95 $ 1.71 $ 3.98 $ 3.76 NET INCOME-FULLY DILUTED.......................................................... $ 1.90 $ 1.67 $ 3.88 $ 3.67 - ----------------------------------------------------------------------------------------------------------------------------------
29
FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES TO STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 (In millions) 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Stockholders' Equity Balance, beginning of period................................................................ $4,533 $4,264 Net income................................................................................. 383 363 Issuance of common stock................................................................... 13 5 Issuance of treasury stock................................................................. 29 19 Treasury stock purchases................................................................... (73) (16) Other...................................................................................... 5 (2) ------ ------- 4,890 4,633 Cash dividends declared on preferred stock................................................. (20) (32) Cash dividends declared on common stock.................................................... (99) (77) ------ --------- 1995 1994 - -------------------------------------------------------------------------------------------- Rate per common share for period $1.10 $0.90 - -------------------------------------------------------------------------------------------- Balance, end of period...................................................................... $4,771 $4,524 ====== ====== - ----------------------------------------------------------------------------------------------------------------
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FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 (In millions) 1995 1994 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................................................. $ 383 $ 363 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization.............................................................. 82 89 Provision for credit losses................................................................ 135 93 Equity securities gains.................................................................... (115) (138) Net (increase) decrease in net derivative product balances................................. (34) 244 Net (increase) in trading account assets................................................... (2,739) (501) Net (increase) in accrued income receivable................................................ (49) (37) Net decrease in other assets............................................................... 221 226 Interest income from Brazilian debt restructuring.......................................... (1) (14) Other noncash adjustments.................................................................. (40) (125) --------- --------- Total adjustments.......................................................................... (2,540) (163) Net cash provided by (used in) operating activities......................................... (2,157) 200 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) in federal funds sold and securities under resale agreements................. (972) (4,891) Purchase of investment securities--available for sale....................................... (1,228) (548) Purchase of debt investment securities--held to maturity.................................... (97) (100) Purchase of venture capital investments..................................................... (118) (55) Proceeds from maturities of debt securities--available for sale............................. 990 630 Proceeds from maturities of debt securities--held to maturity............................... 98 30 Proceeds from sales of debt securities--available for sale.................................. 167 27 Proceeds from sales of equity securities--available for sale................................ 1 1 Proceeds from sales of venture capital investments.......................................... 326 231 Net (increase) in credit card receivables................................................... (1,556) (677) Credit card receivables securitized......................................................... 2,286 1,000 Net (increase) in loans of bank subsidiaries................................................ (1,402) (1,134) Loans made to customers and purchased from others by nonbank subsidiaries................... (178) (430) Principal collected on and proceeds from sale of loans by nonbank subsidiaries.............. 161 446 Loan recoveries............................................................................. 35 44 Purchases of premises and equipment......................................................... (86) (94) Proceeds from sales of premises and equipment............................................... 27 23 Net cash and cash equivalents due to acquisitions........................................... - (4) --------- --------- Net cash (used in) investing activities..................................................... (1,546) (5,501) - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) in demand and savings deposits............................................... (717) (1,340) Net increase (decrease) in time deposits.................................................... 532 (616) Net increase in deposits in foreign offices................................................. 2,150 2,086 Net increase in federal funds purchased and securities under repurchase agreements.......... 2,684 3,953 Proceeds from other funds borrowed.......................................................... 116,665 116,917 Repayment of other funds borrowed........................................................... (116,528) (114,852) Proceeds from issuance of long-term debt.................................................... 2 202 Repayment of long-term debt................................................................. (2) (7) Net (decrease) in other liabilities......................................................... (267) (31) Dividends paid.............................................................................. (120) (97) Proceeds from issuance of common stock...................................................... 14 5 Payment for purchase of treasury stock...................................................... (73) (16) Proceeds from reissuance of treasury stock.................................................. 15 8 --------- --------- Net cash provided by financing activities................................................... 4,355 6,212 - ------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS................................ 147 268 - ------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS................................................... 799 1,179 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................................ 12,331 9,953 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................................. $ 13,130 $ 11,132 ========= ========= - -------------------------------------------------------------------------------------------------------------------
See Note 6 on page 33. 31 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. Primary earnings per share 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. 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 following table.
- ------------------------------------------------------------------------------- Six Months Ended (In millions) June 30 1995 1994 - ------------------------------------------------------------------------------- PRIMARY Net income................................................. $382.5 $362.5 Preferred stock dividends (1).............................. 20.0 32.1 ------ ------ Net income attributable to common stockholders' equity..................................... $362.5 $330.4 ====== ====== Average number of common and common-equivalent shares................................. 91.1 87.9 ====== ====== FULLY DILUTED Net income................................................. $382.5 $362.5 Preferred stock dividends, excluding convertible Series B (1)................................. 14.3 26.3 ------ ------ Fully diluted net income................................... $368.2 $336.2 ====== ====== Average number of shares, assuming full dilution................................... 95.0 91.7 ====== ====== - -------------------------------------------------------------------------------
(1) 1994 results include $4.5 million of additional preferred dividends representing 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, 1995, credit card receivables aggregated $5.5 billion. These receivables are available for sale at face value through credit card securitization programs. 32 Note 4 - ------ The accelerated asset disposition portfolio was established in September 1992. Nonperforming assets in this portfolio totaled $27 million at June 30, 1995, compared with $37 million at year-end 1994 and $42 million a year ago. Note 5 - ------ Effective January 1, 1995, the Corporation adopted Financial Accounting Standards Board (FASB) Statement (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114 addresses the accounting for a loan when it is probable that all principal and interest amounts due will not be collected in accordance with its contractual terms. The Corporation generally identifies nonperforming loans as "impaired loans." Certain loans, such as loans carried at the lower-of-cost or market or small- balance homogeneous loans (e.g., credit card, installment credit), are exempt from SFAS No. 114 provisions. On a quarterly basis, the Corporation identifies impaired loans and the extent to which such loans are impaired. Impairment is recognized to the extent the recorded investment of an impaired loan or pool of loans exceeds the calculated present value. For non-collateral dependent loans, the calculated present value is measured using a discounted cash flow approach. Loans having a significant recorded investment are measured on an individual basis while loans not having a significant recorded investment are grouped and measured on a pool basis. Collateral dependent loans, primarily real estate, are separately measured for impairment by determining the fair value of the collateral less estimated costs to sell. The allocated reserve associated with impaired loans is considered in management's determination of the Corporation's allowance for credit losses. The adoption of this accounting standard did not have a significant effect on the Corporation's net income or its allowance for credit losses. At June 30, 1995, the recorded investment in loans considered impaired under SFAS No. 114 was $112 million, which required a related allowance for credit losses of $22 million. The Corporation retained its prior method of recognizing interest and applying cash payments received with respect to impaired loans. The average recorded investment in impaired loans for the quarter ended June 30, 1995, was approximately $118 million and $114 million year to date. The Corporation recognized interest income associated with impaired loans of $3 million during the second quarter and $4 million year to date. In accordance with SFAS No. 114, a loan is classified as an in-substance foreclosure when the Corporation has effectively taken possession of the collateral. Loans of $15 million, which no longer qualify as in-substance foreclosures, were reclassified from other assets to loans as of January 1, 1995. Prior reporting periods were not restated since the amounts involved were not material. Note 6 - ------ For purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and due from banks--noninterest-bearing and interest-bearing. Loans of $3.3 million and $11.0 million were transferred to other real estate in the first six months of 1995 and 1994, respectively. Loans of $15 million were reclassified from other assets to loans as of January 1, 1995, as a result of the Corporation's adoption of SFAS No. 114. See Note 5 above for further information. 33 Note 7 - ------ The ratio of income to fixed charges for the six months ended June 30, 1995, excluding interest on deposits was 1.7x, and including interest on deposits was 1.4x. 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. Note 8 - ------ The Corporation and NBD Bancorp, Inc. (NBD) entered into an Agreement and Plan of Merger, dated July 11, 1995, pursuant to which the Corporation will merge with and into NBD. The name of the combined companies will be First Chicago NBD Corporation (FCNBD). It is anticipated that the merger will be accounted for as a pooling-of- interests and that it will be consummated by early 1996, pending approvals of stockholders of the Corporation and NBD, regulatory approvals, and other customary conditions of closing. Pursuant to the merger agreement, at the effective time of the merger, common stockholders of First Chicago will receive 1.81 shares of common stock of FCNBD in exchange for each outstanding share of First Chicago common stock. Each share of common stock of NBD will remain outstanding after the merger and represent one share of FCNBD. At the effective time of the merger, each share of First Chicago's outstanding series of preferred stock will be exchanged for one share of FCNBD preferred stock with terms substantially identical to those of the existing First Chicago preferred stock. In connection with the execution of the merger agreement, First Chicago granted NBD an option to purchase, under certain circumstances, up to 19.9 percent of First Chicago's outstanding shares of common stock. NBD also granted First Chicago an option to purchase, under certain circumstances, up to 19.9 percent of NBD's outstanding shares of common stock. 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. 34
FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION - -------------------------------------------------------------------------------------------------------------- INVESTMENT SECURITIES Investment securities included in the consolidated balance sheet as of June 30, 1995, were as follows. - -------------------------------------------------------------------------------------------------------------- Book Cost Unrealized Unrealized Fair (In millions) Value Basis Gains Losses Value - -------------------------------------------------------------------------------------------------------------- U.S. government and federal agency Held to maturity...................... $ 360 $ 360 $ 3 $ 2 $ 361 Available for sale.................... 469 470 - 1 469 ------ ------ ---- --- ------ Total................................... 829 830 3 3 830 States and political subdivisions Held to maturity...................... 163 163 6 - 169 Available for sale.................... - - - - - ------ ------ ---- --- ------ Total................................... 163 163 6 - 169 Other bonds, notes and debentures Held to maturity...................... 29 29 - - 29 Available for sale.................... 4 4 - - 4 ------ ------ ---- --- ------ Total................................... 33 33 - - 33 Equity securities (1) Venture capital....................... 1,327 948 460 81 1,327 Available for sale (2)................ 231 230 1 - 231 ------ ------ ---- --- ------ Total................................... 1,558 1,178 461 81 1,558 Total investment securities............... $2,583 $2,204 $470 $84 $2,590 ====== ====== ==== === ====== - --------------------------------------------------------------------------------------------------------------
(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. 35
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, 1995 Three Months Ended June 30, 1994 ----------------------------------- ----------------------------------- Credit Card Credit Card (In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted - ---------------------------------------------------------------------------------------------------------------------------- Net interest income-- tax-equivalent basis...................... $ 365 $ 166 $ 531 $ 339 $ 127 $ 466 Provision for credit losses.................................... 70 78 148 43 62 105 Noninterest income.......................... 488 (88) 400 429 (65) 364 Noninterest expense......................... 488 - 488 461 - 461 Net income.................................. 187 - 187 169 - 169 Assets--quarter-end......................... $75,328 $7,986 $83,314 $64,089 $5,617 $69,706 --average............................. 76,076 6,896 82,972 60,490 5,106 65,596 - ----------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1995 Six Months Ended June 30, 1994 ----------------------------------- ----------------------------------- Credit Card Credit Card (In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted - ---------------------------------------------------------------------------------------------------------------------------- Net interest income-- tax-equivalent basis...................... $ 745 $ 304 $ 1,049 $ 674 $ 250 $ 924 Provision for credit losses.................................... 135 140 275 93 118 211 Noninterest income.......................... 958 (164) 794 931 (132) 799 Noninterest expense......................... 966 - 966 945 - 945 Net income.................................. 383 - 383 363 - 363 Assets--quarter-end......................... $75,328 $7,986 $83,314 $64,089 $5,617 $69,706 --average............................. 72,964 6,461 79,425 60,982 4,977 65,959 - ----------------------------------------------------------------------------------------------------------------------------
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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 1995 1995 1994 1994 1994 - ----------------------------------------------------------------------------------------------------------------- Balance, beginning of quarter Commercial.......................................... $ 529 $ 516 $ 520 $ 502 $ 507 Consumer............................................ 225 207 163 179 203 ------- -------- ------ ------- -------- Total balance, beginning of quarter.............. 754 723 683 681 710 - ----------------------------------------------------------------------------------------------------------------- Provision for credit losses Commercial.......................................... 8 7 5 5 (14) Consumer............................................ 62 58 71 50 57 ------- -------- ------ ------- -------- Total provision for credit losses................ 70 65 76 55 43 - ----------------------------------------------------------------------------------------------------------------- Charge-offs Commercial Domestic Commercial........................................ 2 2 6 7 2 Real estate....................................... 3 5 4 4 12 Other............................................. -- -- 1 2 -- Foreign, including TCD............................. -- 1 2 -- -- Consumer Credit card....................................... 50 55 41 39 49 Other............................................. 4 3 3 4 2 ------- -------- ------ ------- -------- Total charge-offs................................ 59 66 57 56 65 - ----------------------------------------------------------------------------------------------------------------- Recoveries Commercial Domestic Commercial........................................ 3 9 3 3 3 Real estate....................................... -- 2 -- -- 1 Other............................................. 2 1 1 -- 1 Foreign, including TCD............................. -- 2 -- 7 18 Consumer Credit card....................................... 8 7 6 7 7 Other............................................. 1 1 1 1 1 ------- -------- ------ ------- -------- Total recoveries................................. 14 22 11 18 31 - ----------------------------------------------------------------------------------------------------------------- Net charge-offs/(recoveries) Commercial.......................................... -- (6) 9 3 (9) Consumer............................................ 45 50 37 35 43 ------- -------- ------ ------- -------- Total net charge-offs/(recoveries)............... 45 44 46 38 34 - ----------------------------------------------------------------------------------------------------------------- Other Commercial.......................................... -- -- -- 16 -- Consumer............................................ (90) 10 10 (31) (38) ------- -------- ------ ------- -------- Total............................................ (90) 10 10 (15) (38) - ----------------------------------------------------------------------------------------------------------------- Balance, end of quarter Commercial.......................................... 537 529 516 520 502 Consumer............................................ 152 225 207 163 179 ------- -------- ------ ------- -------- Total balance, end of quarter.................... $ 689 $ 754 $ 723 $ 683 $ 681 ======= ======== ====== ======= ======== - -----------------------------------------------------------------------------------------------------------------
37
FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION - ---------------------------------------------------------------------------------------------------------------------------- Average Balances/Net Interest Margin/Rates - ---------------------------------------------------------------------------------------------------------------------------- (Three Months Ended) June 30, 1995 March 31, 1995 - ---------------------------------------------------------------------------------------------------------------------------- (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 (1)................. $ 9,449 $ 150.1 6.37% $ 8,602 $ 131.6 6.20% Federal funds sold and securities under resale agreements.......................................... 15,899 238.7 6.02 16,778 240.8 5.82 Trading account assets............................... 6,434 102.8 6.41 5,226 89.3 6.93 Investment securities U.S. government and federal agency................. 1,043 15.5 5.96 758 10.2 5.46 States and political subdivisions.................. 170 4.4 10.38 174 3.9 9.09 Other.............................................. 1,632 7.9 1.94 1,648 8.7 2.14 - ---------------------------------------------------------------------------------------------------------------------------- Total investment securities........................ 2,845 27.8 3.92 2,580 22.8 3.58 Loans (2)(3) Domestic offices................................... 24,368 562.3 9.54 24,276 577.2 9.94 Foreign offices.................................... 1,777 35.3 7.97 1,758 31.4 7.24 - ---------------------------------------------------------------------------------------------------------------------------- Total loans.......................................... 26,145 597.6 9.43 26,034 608.6 9.75 - ---------------------------------------------------------------------------------------------------------------------------- Total earning assets (4)........................... 60,772 1,117.0 7.37 59,220 1,093.1 7.49 Cash and due from banks--noninterest-bearing......... 4,383 3,992 Allowance for credit losses.......................... (720) (731) Other assets......................................... 11,641 7,371 - ---------------------------------------------------------------------------------------------------------------------------- Total assets......................................... $76,076 $69,852 ======= ======= - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits--interest-bearing Savings............................................ $ 8,777 $ 66.9 3.06% $ 7,874 $ 57.3 2.95% Time............................................... 5,744 91.3 6.38 5,607 82.0 5.93 Foreign offices (5)................................ 12,604 183.5 5.84 11,051 154.7 5.68 - ---------------------------------------------------------------------------------------------------------------------------- Total deposits--interest-bearing................. 27,125 341.7 5.05 24,532 294.0 4.86 Federal funds purchased and securities under repurchase agreements............................... 15,420 231.9 6.03 16,383 236.1 5.84 Other funds borrowed................................. 8,962 132.0 5.91 8,564 137.4 6.51 Long-term debt....................................... 2,271 46.0 8.12 2,273 45.9 8.19 - ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities................. 53,778 751.6 5.61 51,752 713.4 5.59 Demand deposits...................................... 6,837 6,956 Other liabilities.................................... 10,748 6,555 Preferred stock...................................... 611 611 Common stockholders' equity.......................... 4,102 3,978 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity....... $76,076 $69,852 ======= ======= Interest income/earning assets....................... $1,117.0 7.37% $1,093.1 7.49% Interest expense/earning assets...................... 751.6 4.96 713.4 4.89 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest margin.................................. $ 365.4 2.41% $ 379.7 2.60% ======== ==== ======== ====
(1) Principally balances in overseas offices. (2) Rates are calculated on average lease-financing receivables balances reduced by deferred liability for taxes. (3) Nonperforming loans are included in average balances used to determine rates. (4) Includes a tax-equivalent adjustment based on a 35% federal income tax rate. The tax-equivalent adjustment for the three months ended June 30, 1995, was $9.8 million, compared with $6.1 million, $7.0 million, $6.4 million and $5.9 million for the three months ended March 31, 1995, December 31, 1994, September 30, 1994, and June 30, 1994, respectively. (5) Includes International Banking Facilities deposit balances in domestic offices and balances of Edge Act and overseas offices. 38
- ------------------------------------------------------------------------------------------ December 31, 1994 September 30, 1994 June 30, 1994 - ------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------ $ 7,823 $106.4 5.40% $ 8,029 $ 97.8 4.83% $ 7,556 $ 82.5 4.38% 16,457 215.2 5.19 15,102 175.3 4.61 13,287 133.7 4.04 5,084 86.5 6.75 5,044 76.6 6.03 4,342 56.9 5.26 795 10.2 5.09 801 9.5 4.71 518 5.6 4.34 186 4.1 8.75 189 4.3 9.03 141 3.2 9.10 1,648 7.8 1.88 1,577 6.5 1.64 1,680 8.6 2.05 - ------------------------------------------------------------------------------------------ 2,629 22.1 3.34 2,567 20.3 3.14 2,339 17.4 2.98 22,669 485.1 8.77 21,776 459.2 8.65 21,166 428.9 8.41 1,666 31.1 7.40 1,708 21.4 4.97 1,774 44.3 10.02 - ------------------------------------------------------------------------------------------ 24,335 516.2 8.67 23,484 480.6 8.37 22,940 473.2 8.54 - ------------------------------------------------------------------------------------------ 56,328 946.4 6.67 54,226 850.6 6.22 50,464 763.7 6.07 4,170 4,073 4,222 (692) (695) (711) 8,733 8,446 6,515 - ------------------------------------------------------------------------------------------ $68,539 $66,050 $60,490 ======= ======= ======= - ------------------------------------------------------------------------------------------ $ 7,794 $ 52.6 2.68% $ 8,174 $ 49.8 2.42% $ 8,018 $ 44.9 2.25% 4,847 57.1 4.67 4,721 46.9 3.94 4,435 34.2 3.09 10,188 129.1 5.03 9,509 107.2 4.47 9,553 103.8 4.36 - ------------------------------------------------------------------------------------------ 22,829 238.8 4.15 22,404 203.9 3.61 22,006 182.9 3.33 14,252 184.8 5.14 13,085 149.6 4.54 11,140 110.0 3.96 9,605 138.2 5.71 8,962 112.8 4.99 8,146 90.8 4.47 2,271 44.4 7.76 2,271 43.5 7.60 2,267 41.3 7.31 - ------------------------------------------------------------------------------------------ 48,957 606.2 4.91 46,722 509.8 4.33 43,559 425.0 3.91 7,104 7,005 7,003 7,936 7,897 5,504 611 611 761 3,931 3,815 3,663 - ------------------------------------------------------------------------------------------ $68,539 $66,050 $60,490 ======= ======= ======= $946.4 6.67% $850.6 6.22% $763.7 6.07% 606.2 4.27 509.8 3.73 425.0 3.38 - ------------------------------------------------------------------------------------------ $340.2 2.40% $340.8 2.49% $338.7 2.69% ====== ==== ====== ==== ====== ====
39
FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION - ---------------------------------------------------------------------------------------------------------------------- Average Balances/Net Interest Margin/Rates - ---------------------------------------------------------------------------------------------------------------------- (Six Months Ended June 30) 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- (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 (1)....................... $ 9,025 $ 281.7 6.29% $ 7,765 $ 157.5 4.09% Federal funds sold and securities under resale agreements.. 16,339 479.5 5.92 12,516 224.7 3.62 Trading account assets..................................... 5,830 192.1 6.64 4,507 116.4 5.21 Investment securities U.S. government and federal agency....................... 900 25.7 5.76 655 13.0 4.00 States and political subdivisions........................ 172 8.3 9.73 146 6.5 8.98 Other.................................................... 1,640 16.6 2.04 1,673 15.4 1.86 - ---------------------------------------------------------------------------------------------------------------------- Total investment securities.............................. 2,712 50.6 3.76 2,474 34.9 2.84 Loans (2)(3) Domestic offices......................................... 24,322 1,139.5 9.74 20,904 843.2 8.42 Foreign offices.......................................... 1,768 66.7 7.61 1,810 70.5 7.85 - ---------------------------------------------------------------------------------------------------------------------- Total loans................................................ 26,090 1,206.2 9.59 22,714 913.7 8.37 - ---------------------------------------------------------------------------------------------------------------------- Total earning assets (4)............................... 59,996 2,210.1 7.43 49,976 1,447.2 5.84 Cash and due from banks--noninterest-bearing............... 4,188 4,240 Allowance for credit losses................................ (726) (702) Other assets............................................... 9,506 7,468 - ---------------------------------------------------------------------------------------------------------------------- Total assets............................................... $72,964 $60,982 ======= ======= - ---------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits--interest-bearing Savings.................................................. $ 8,325 $ 124.2 3.01% $ 8,059 $ 86.2 2.16% Time..................................................... 5,676 173.3 6.16 4,592 63.8 2.80 Foreign offices (5)...................................... 11,827 338.2 5.77 9,448 186.8 3.99 - ---------------------------------------------------------------------------------------------------------------------- Total deposits--interest-bearing....................... 25,828 635.7 4.96 22,099 336.8 3.07 Federal funds purchased and securities under repurchase agreements............................................... 15,902 468.0 5.93 10,912 191.8 3.54 Other funds borrowed....................................... 8,763 269.4 6.20 7,709 162.2 4.24 Long-term debt............................................. 2,272 91.9 8.16 2,239 82.2 7.40 - ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities....................... 52,765 1,465.0 5.60 42,959 773.0 3.63 Demand deposits............................................ 6,897 7,089 Other liabilities.......................................... 8,651 6,532 Preferred stock............................................ 611 761 Common stockholders' equity................................ 4,040 3,641 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity............. $72,964 $60,982 ======= ======= Interest income/earning assets............................. $2,210.1 7.43% $1,447.2 5.84% Interest expense/earning assets............................ 1,465.0 4.93 773.0 3.12 - ---------------------------------------------------------------------------------------------------------------------- Net interest margin........................................ $ 745.1 2.50% $ 674.2 2.72% ======== ==== ======== ====
(1) Principally balances in overseas offices. (2) Rates are calculated on average lease-financing receivables balances reduced by deferred liability for taxes. (3) Nonperforming loans are included in average balances used to determine rates. (4) Includes tax-equivalent adjustments of $15.9 and $10.8 million based on a 35% federal income tax rate for the six months ended June 30, 1995 and 1994, respectively. (5) Includes International Banking Facilities deposit balances in domestic offices and balances of Edge Act and overseas offices. 40
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) 1995 1995 1994 1994 1994 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans............................................. $ 593.4 $ 604.9 $ 512.4 $ 476.9 $ 470.3 Interest on bank balances.............................................. 150.1 131.6 106.4 97.8 82.5 Interest on federal funds sold and securities under resale agreements.. 238.7 240.8 215.2 175.3 133.7 Interest on trading account assets..................................... 102.1 88.7 85.9 76.0 56.7 Interest on investment securities (including dividends)................ 22.9 21.0 19.5 18.2 14.6 -------- -------- ------- ------- ------- Total........................................................ 1,107.2 1,087.0 939.4 844.2 757.8 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits................................................... 341.7 294.0 238.8 203.9 182.9 Interest on federal funds purchased and securities under repurchase agreements............................................................ 231.9 236.1 184.8 149.6 110.0 Interest on other funds borrowed....................................... 132.0 137.4 138.2 112.8 90.8 Interest on long-term debt............................................. 46.0 45.9 44.4 43.5 41.3 -------- -------- ------- ------- ------- Total........................................................ 751.6 713.4 606.2 509.8 425.0 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME.................................................... 355.6 373.6 333.2 334.4 332.8 Provision for credit losses............................................ 70.0 65.0 76.0 55.0 43.0 -------- -------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.................. 285.6 308.6 257.2 279.4 289.8 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Combined trading profits............................................... 15.8 50.4 12.1 41.6 36.7 Equity securities gains................................................ 59.6 54.9 70.5 20.0 3.9 Investment securities gains (losses)................................... - - 2.3 (2.2) 0.6 -------- -------- ------- ------- ------- Market-driven revenue............................................. 75.4 105.3 84.9 59.4 41.2 Credit card fee revenue................................................ 213.6 191.2 234.8 221.1 193.9 Service charges and commissions........................................ 115.5 107.9 103.6 112.8 104.2 Fiduciary and investment management fees............................... 49.3 51.6 48.9 48.6 49.3 Other income........................................................... 33.9 14.1 16.6 13.2 40.2 -------- -------- ------- ------- ------- Total........................................................ 487.7 470.1 488.8 455.1 428.8 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits......................................... 229.4 231.8 223.5 225.1 212.9 Occupancy expense of premises, net..................................... 37.9 36.4 34.8 32.0 35.7 Equipment rentals, depreciation and maintenance........................ 32.4 31.4 36.7 35.1 32.3 Other expense.......................................................... 188.0 178.5 187.1 199.2 179.7 -------- -------- ------- ------- ------- Total........................................................ 487.7 478.1 482.1 491.4 460.6 - ------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES............................................. 285.6 300.6 263.9 243.1 258.0 Applicable income taxes.............................................. 98.2 105.5 90.5 89.3 89.3 -------- -------- ------- ------- ------- NET INCOME............................................................. $ 187.4 $ 195.1 $ 173.4 $ 153.8 $ 168.7 ======== ======== ======= ======= ======= NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY................. $ 177.4 $ 185.1 $ 163.3 $ 143.8 $ 150.4 ======== ======== ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Net Income - Primary................................................. $ 1.95 $ 2.03 $ 1.76 $ 1.54 $ 1.71 Net Income - Fully diluted........................................... $ 1.90 $ 1.98 $ 1.72 $ 1.51 $ 1.67 - ------------------------------------------------------------------------------------------------------------------------------- Average number of common and common-equivalent shares (in millions).... 91.2 91.0 92.9 93.4 88.0 Average number of shares, assuming full dilution (in millions)......... 95.1 94.8 96.7 97.1 91.8 Average full-time-equivalent staff..................................... 17,338 17,304 17,270 17,727 17,366 - -------------------------------------------------------------------------------------------------------------------------------
41
FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ (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........................... $ 365.4 $ 379.7 $ 340.2 $ 340.8 $ 338.7 Average earning assets.............................................. 60,772 59,220 56,328 54,226 50,464 Net interest margin................................................. 2.41% 2.60% 2.40% 2.49% 2.69% Adjusted (1) Net interest income--tax-equivalent basis........................... $ 528.6 $ 513.7 $ 486.5 $ 485.5 $ 463.7 Average earning assets.............................................. 56,985 53,766 51,562 50,046 47,382 Net interest margin................................................. 3.72% 3.87% 3.74% 3.85% 3.93% - ------------------------------------------------------------------------------------------------------------------------------------ AT QUARTER-END BALANCE SHEET DATA Assets................................................................ $ 75,328 $ 72,378 $65,900 $65,747 $64,089 Loans................................................................. 26,517 27,018 25,947 23,817 23,680 Deposits.............................................................. 33,764 32,191 31,666 29,670 28,577 Long-term debt........................................................ 2,271 2,272 2,271 2,272 2,269 Common stockholders' equity........................................... 4,160 4,057 3,922 3,930 3,763 Stockholders' equity.................................................. 4,771 4,668 4,533 4,541 4,524 - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL DATA (2) Common equity/assets.................................................. 6.1% 6.2% 6.6% 6.6% 6.5% Regulatory leverage ratio (3)......................................... 7.0 7.7 7.5 7.8 8.0 Risk-based capital (3) Tier 1 capital ratio................................................ 8.8 8.6 8.8 9.2 8.9 Total capital ratio................................................. 13.1 13.0 13.4 13.9 13.8 Tier 1 capital...................................................... $ 4,567 $ 4,460 $ 4,325 $ 4,319 $ 4,148 Total capital....................................................... 6,783 6,736 6,566 6,561 6,424 - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS FOR THE QUARTER ENDED Net income as a percentage of: Average stockholders' equity........................................ 15.9% 17.2% 15.1% 13.8% 15.3% Average common stockholders' equity................................. 17.3 18.9 16.5 15.0 16.5 Average total assets................................................ 0.99 1.13 1.00 0.92 1.12 Average earning assets.............................................. 1.24 1.34 1.22 1.13 1.34 Stockholders' equity as a percentage of: Total assets........................................................ 6.3 6.4 6.9 6.9 7.1 Total loans......................................................... 18.0 17.3 17.5 19.1 19.1 Total deposits...................................................... 14.1 14.5 14.3 15.3 15.8 Average stockholders' equity as a percentage of: Average assets...................................................... 6.2 6.6 6.6 6.7 7.3 Average loans....................................................... 18.0 17.6 18.7 18.8 19.3 Average deposits.................................................... 13.9 14.6 15.2 15.1 15.3 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK DATA FOR THE QUARTER ENDED Market price High................................................................ $ 61 7/8 $ 51 3/8 $50 1/4 $52 1/4 $55 1/2 Low................................................................. 49 15/16 45 42 5/8 45 1/2 46 5/8 At quarter-end...................................................... 59 7/8 50 1/8 47 3/4 45 7/8 48 1/8 Price earnings ratio.................................................. 8.2 7.1 6.8 6.5 5.5 Book value............................................................ $ 46.37 $ 45.16 $ 43.65 $ 42.79 $ 43.40 Market price/book value............................................... 129% 111% 109% 107% 111% Dividends declared on common stock.................................... $ 0.55 $ 0.55 $ 0.55 $ 0.50 $ 0.50 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted to exclude impact of securitization of credit card receivables and the activities of FCCM, the Corporation's capital markets subsidiary. (2) Net of investment in FCCM. (3) June 30, 1994, excludes $150 million of Preferred Stock, Series D, that was redeemed on July 1, 1994. 42 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, 1995 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, 1995. Class Number of Shares Outstanding - ------------------------- ---------------------------- Common Stock $5 par value 89,470,319 43 FORM 10-Q CROSS-REFERENCE INDEX PART I - FINANCIAL INFORMATION ------------------------------
ITEM 1. Financial Statements Page ------ Consolidated Balance Sheet -- June 30, 1995 and 1994, and December 31, 1994 28 Consolidated Income Statement -- Three and Six Months Ended June 30, 1995 and 1994 29 Consolidated Statement of Changes in Stockholders' Equity -- Six Months Ended June 30, 1995 and 1994 30 Consolidated Statement of Cash Flows -- Six Months Ended June 30, 1995 and 1994 31 Notes to Consolidated Financial Statements 32-34 Selected Statistical Information 1, 20-22, 35-42 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1-27 PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings 45 ITEM 2. Changes in Securities 45 ITEM 3. Defaults Upon Senior Securities 45 ITEM 4. Submission of Matters to a Vote of Security Holders 45 ITEM 5. Other Information 45 ITEM 6. Exhibits and Reports on Form 8-K 45 Signatures 46
44 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 - ----------------------------------------------------------- None ITEM 5. Other Information - ------------------------- None ITEM 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibit 12 Statements re computation of ratios Exhibit 27 Financial Data Schedules (b) The Registrant filed the following Current Reports on Form 8-K during the quarter ended June 30, 1995. Date Item Reported ---- ------------- 4/17/95 The Registrant's earnings for the quarter ended March 31, 1995. 45 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 10, 1995 Richard L. Thomas --------------------- ------------------------------ Richard L. Thomas Chairman of the Board Date August 10, 1995 William J. Roberts --------------------- ------------------------------ William J. Roberts Principal Accounting Officer 46 EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit Page - -------------- ---------------------- ---- 12 - Statement re computation of ratios 48 27 - Financial Data Schedules 49 47 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 7 of Notes to Consolidated Financial Statements on page 34 of the Form 10-Q. EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 3,646 9,484 14,274 7,706 704 552 559 26,517 (689) 75,328 33,764 23,516 1,891 2,271 467 0 611 3,693 75,328 1,198 44 761 2,194 636 1,465 729 135 0 966 586 383 0 0 383 3.98 3.88 2.50 124 63 4 0 723 125 36 689 0 0 0 In addition to the investment securities disclosed in this Financial Data Schedule, the Corporation has investment securities in its venture capital business. These securities had a carrying value of $1.3 billion as of June 30, 1995. Treasury stock of $188 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totalled $115 million. Other expenses includes: Salaries and Employee benefit expense of $461 million, Occupancy expense of $74 million, Equipment rentals, depreciation and maintenance expense of $64 million, and other expenses which totalled $367 million. Allowance-Domestic, Allowance-Foreign, and Allowance-Unallocated are only disclosed on an annual basis in the Corporation's 10-K and are therefore not included in this Financial Data Schedule.
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