-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DauphgVDIz4KBUrIDMEt8x4EMxf8yjzvWGlSBKGvCSUjVHpogofjFEL6gwNxnjiy ios35SDR7YCxAgws/c/pBA== 0000950131-98-004819.txt : 19980814 0000950131-98-004819.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950131-98-004819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: CSX SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CHICAGO NBD CORP CENTRAL INDEX KEY: 0000070040 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 381984850 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07127 FILM NUMBER: 98686684 BUSINESS ADDRESS: STREET 1: ONE FIRST NATIONAL PLAZA CITY: CHICAGO STATE: IL ZIP: 60670 BUSINESS PHONE: 3127324000 MAIL ADDRESS: STREET 1: ONE FIRST NATIONAL PLAZA CITY: CHICAGO STATE: IL ZIP: 60670 FORMER COMPANY: FORMER CONFORMED NAME: NBD BANCORP INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL DETROIT CORP DATE OF NAME CHANGE: 19810522 10-Q 1 FORM 10-Q First Chicago NBD Corporation and Subsidiaries Financial Supplement and Form 10-Q Contents Page - -------------------------------------------------------------------------------- Five-Quarter Summary of Selected Financial Information 1 Business Segments 2 Earnings Analysis 7 Liquidity Risk Management 12 Market Risk Management 13 Credit Risk Management 16 Derivative Financial Instruments 20 Technology Risk -- Year 2000 Compliance Issues 21 Capital Management 22 Consolidated Financial Statements 25 Notes to Consolidated Financial Statements 29 Selected Statistical Information 33 Form 10-Q 39
- ------------------------------------------------------------------------------------------------------------------------------------ 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 NBD Corporation and Subsidiaries - ------------------------------------------------------------------------------------------------------------------------------------ June 30 March 31 December 31 September 30 June 30 (Dollars in millions, except per-share data) 1998 1998 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Quarterly Income Statement Summary Net interest income.......................... $ 884 $ 861 $ 872 $ 899 $ 925 Tax-equivalent adjustment.................... 14 17 16 22 26 --------- -------- -------- -------- ---------- Net interest income--tax-equivalent basis... 898 878 888 921 951 Provision for credit losses.................. 206 179 167 191 180 Noninterest income........................... 842 739 727 701 644 Operating expense............................ 911 848 872 835 825 Net income................................... 408 383 382 385 378 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share Basic....................................... $ 1.41 $ 1.32 $ 1.30 $ 1.28 $ 1.22 Diluted..................................... 1.38 1.30 1.28 1.26 1.20 - ------------------------------------------------------------------------------------------------------------------------------------ Financial Performance Ratios Return on assets............................. 1.40% 1.38% 1.38% 1.40% 1.40% Return on common stockholders' equity........ 20.1 19.9 19.5 19.1 18.1 Return on stockholders' equity............... 19.8 19.5 19.1 18.7 17.7 Net interest margin Reported.................................... 3.61 3.67 3.71 3.88 4.12 Adjusted.................................... 4.14 4.25 4.27 4.47 4.70 Operating efficiency ratio................... 52.4 52.4 54.0 51.5 51.7 - ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Information (at Quarter-End) Assets....................................... $ 119,781 $114,804 $114,096 $113,306 $ 112,595 Loans........................................ 72,563 69,590 68,724 67,822 67,510 Deposits..................................... 69,528 68,170 68,489 67,565 68,018 Long-term debt (1)........................... 10,591 10,294 10,088 9,906 9,016 Common stockholders' equity.................. 8,124 7,816 7,770 7,792 8,181 Stockholders' equity......................... 8,314 8,006 7,960 8,082 8,471 - ------------------------------------------------------------------------------------------------------------------------------------ Average Balance Sheet Information Assets....................................... $ 116,577 $112,914 $109,976 $108,950 $ 108,292 Loans........................................ 69,748 67,773 66,859 66,782 66,301 Earning assets............................... 99,742 96,988 95,009 94,104 92,625 Deposits..................................... 67,723 66,346 66,416 64,859 64,586 Common stockholders' equity.................. 8,059 7,781 7,709 7,893 8,279 Stockholders' equity......................... 8,249 7,971 7,951 8,183 8,569 - ------------------------------------------------------------------------------------------------------------------------------------ Capital Data Common-equity-to-assets ratio................ 6.8% 6.8% 6.8% 6.9% 7.3% Regulatory leverage ratio (1)(2)............. 7.6 7.6 7.8 8.2 8.6 Risk-based capital (1)(2) Tier 1 capital ratio........................ 7.7 7.8 7.9 8.1 8.6 Total capital ratio......................... 11.1 11.4 11.7 11.9 12.4 - ------------------------------------------------------------------------------------------------------------------------------------ Common Share and Stockholder Data For the Quarter Ended Market price High........................................ $101.0000 $91.6250 $85.8750 $78.8125 $ 65.6250 Low......................................... 86.3750 71.0625 67.1250 60.7500 50.5000 At quarter-end.............................. 88.6250 88.1250 83.5000 75.2500 60.5000 Book value (at quarter-end).................. 28.23 27.21 26.87 26.62 27.08 Dividends declared per common share.......... 0.44 0.44 0.44 0.40 0.40 Dividend payout ratio........................ 31.9% 33.8% 34.4% 31.7% 33.3% Average number of shares (in millions)....... 287.4 288.1 290.3 296.8 306.8 Average number of shares, assuming full dilution (in millions)................. 292.6 293.0 295.2 301.6 310.9 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes trust preferred capital securities. (2) December 1997 and subsequent ratios include the activities of FCCM. 1 BUSINESS SEGMENTS Financial results are reported by major business lines, principally structured around the customer segments served: Regional Banking, Corporate Banking, Corporate Investments, and Credit Card.
- ----------------------------------------------------------------------------------------------------------------- Three Months Ended June 30 Regional Corp. Banking Other Banking and Corp. Inv. Credit Card Activities (Dollars in millions, ------------------- ----------------- ---------------- -------------- except where noted) 1998 1997 1998 1997 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Net income....................... $ 167 $ 193 $ 171 $ 120 $ 70 $ 67 $ - $ (2) Return on equity................. 19% 21% 24% 17% 20% 20% N/M N/M Average assets (presecuritized) (in billions)................... $39.5 $40.7 $66.9 $58.5 $17.6 $17.2 $ 0.7 $ 0.4 Average common equity (in billions)................... 3.5 3.6 2.8 2.8 1.4 1.3 0.4 0.6 - ----------------------------------------------------------------------------------------------------------------- N/M - Not meaningful.
- ----------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 Regional Corp. Banking Other Banking and Corp.Inv. Credit Card Activities (Dollars in millions, ----------------- -------------- ------------- ------------- except where noted) 1998 1997 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Net income....................... $ 348 $ 357 $ 302 $ 272 $ 141 $ 140 $ - $ (11) Return on equity................. 20% 20% 22% 20% 21% 21% N/M N/M Average assets (presecuritized) (in billions)................... $39.0 $39.9 $65.7 $57.8 $17.7 $17.4 $ 0.7 $ 0.4 Average common equity (in billions)................... 3.5 3.6 2.8 2.8 1.4 1.3 0.2 0.7 - ----------------------------------------------------------------------------------------------------------------- N/M - Not meaningful.
Earnings Contribution by Business Lines* For the Six Months Ended June 30 [Pie Charts appear here] 1998 1997 Regional Banking 44% 47% Corporate Banking and Corporate Investments 38% 35% Credit Card 18% 18% *Excludes the Impact of Other Activities 2 To facilitate analysis of trends, Credit Card results are presented before the securitization of credit card receivables ("presecuritized"). For more information, see the discussion of net interest income beginning on page 8 as well as the reconciliation of reported to presecuritized results on page 34. Business segment results are derived from the internal profitability reporting systems and reflect full allocation of all institutional and overhead items. These systems use a detailed funds transfer methodology and a capital allocation based on risk elements. The method for assigning capital to business units can be found in the "Capital Management" section, beginning on page 22. Revenues and costs for investment management and insurance products are aligned with customers and, therefore, are reported within the appropriate business segments. Certain corporate revenues and expenses, generally unusual or one-time in nature, are included in "Other Activities."
Regional Banking - ------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Net interest income--tax-equivalent basis................ $ 535 $ 561 $1,069 $1,105 Provision for credit losses.............................. 29 25 48 59 Noninterest income....................................... 253 221 494 418 Noninterest expense...................................... 492 445 955 889 Net income............................................... 167 193 348 357 Return on equity......................................... 19% 21% 20% 20% Operating efficiency ratio............................... 62% 57% 61% 58% Average loans (in billions).............................. $34.8 $36.0 $ 34.9 $ 35.8 Average assets (in billions)............................. 39.5 40.7 39.0 39.9 Average common equity (in billions)...................... 3.5 3.6 3.5 3.6 - ------------------------------------------------------------------------------------------------------------------
Regional Banking serves four specific customer markets: general consumers, private banking and investments clients, small businesses, and middle market companies. These markets are grouped as Retail and Middle Market for financial reporting. Regional Banking contributed 44% of the Corporation's first half earnings, with net income of $348 million, and achieved a 20% return on equity.
Retail Banking - ---------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------- Net interest income--tax-equivalent basis................ $ 305 $ 327 $ 612 $ 642 Provision for credit losses.............................. 11 23 31 45 Noninterest income....................................... 197 163 378 303 Noninterest expense...................................... 356 317 692 639 Net income............................................... 85 93 166 161 Return on equity......................................... 21% 21% 20% 19% Operating efficiency ratio............................... 71% 65% 70% 68% Average loans (in billions).............................. $15.3 $18.0 $15.7 $17.9 Average assets (in billions)............................. 17.9 21.4 18.0 20.7 Average common equity (in billions)...................... 1.6 1.7 1.6 1.7 - ----------------------------------------------------------------------------------------------------------
3 Net income for the Retail Banking segment was $85 million for the second quarter of 1998, with a healthy 21% return on equity. For the first six months, net income was $166 million, up slightly from that of the year-ago period. Noninterest income rose more than 20% for both periods, reflecting strong fee income growth, including investment management fees and service charges. In addition, improved credit quality substantially lowered provision expense. Noninterest expense increases, particularly in the second quarter, were due to the funding of important technology and infrastructure investments and to compensation related to fee-generating activities. Lower spread income and asset levels were primarily due to mortgage loan sales.
Middle Market Banking - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Net interest income--tax-equivalent basis........ $ 230 $ 234 $ 457 $ 463 Provision for credit losses...................... 18 2 17 14 Noninterest income............................... 56 58 116 115 Noninterest expense.............................. 135 128 263 250 Net income....................................... 82 100 182 196 Return on equity................................. 17% 21% 19% 20% Operating efficiency ratio....................... 47% 44% 46% 43% Average loans (in billions)...................... $19.5 $18.0 $19.2 $17.9 Average assets (in billions)..................... 21.6 19.3 21.0 19.2 Average common equity (in billions).............. 1.9 1.9 1.9 1.9 - -------------------------------------------------------------------------------------------------------------------------
Net income for the Middle Market segment was $182 million in the first six months, for a return on equity of 19%. Despite higher loan volume, spread income was lower due to compressed margins. Increased provision expense in the second quarter also contributed to the decline in earnings.
Corporate Banking and Corporate Investments - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Net interest income--tax-equivalent basis........ $ 171 $ 167 $ 337 $ 333 Provision for credit losses...................... 35 1 58 - Noninterest income............................... 348 229 618 504 Noninterest expense.............................. 243 220 473 427 Net income....................................... 171 120 302 272 Return on equity................................. 24% 17% 22% 20% Operating efficiency ratio....................... 47% 56% 50% 51% Average loans (in billions)...................... $25.9 $21.3 $24.7 $20.9 Average assets (in billions)..................... 66.9 58.5 65.7 57.8 Average common equity (in billions).............. 2.8 2.8 2.8 2.8 - -------------------------------------------------------------------------------------------------------------------------
Large corporations, institutions and governments are the principal customers of Corporate Banking, which provides credit instruments, cash management services, capital markets products and other services. Corporate Investments represents a variety of functions and businesses, including the investment account, funding, venture capital, leveraged leasing and tax-advantaged products. Together, these business lines are analogous to the "global banking" or "wholesale banking" businesses of other major U.S. banking companies. Their net income for the first half of 1998 was $302 million, representing 38% of total earnings, and return on equity was 22%. 4
Corporate Banking - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Net interest income--tax-equivalent basis........ $ 140 $ 137 $ 274 $ 275 Provision for credit losses...................... 34 1 57 - Noninterest income............................... 212 148 405 328 Noninterest expense.............................. 230 209 448 404 Net income....................................... 54 52 108 130 Return on equity................................. 11% 10% 11% 12% Operating efficiency ratio....................... 66% 73% 66% 67% Average loans (in billions)...................... $22.0 $19.7 $21.6 $19.4 Average assets (in billions)..................... 43.5 39.9 43.5 40.1 Average common equity (in billions).............. 2.1 2.1 2.1 2.1 - -------------------------------------------------------------------------------------------------------------------------
Corporate Banking posted net income of $54 million for the second quarter and $108 million for the first six months. Revenue growth was impressive-- approximately 25% for the quarter and 13% for the first half. Continued improvement in trading results and strength in syndications, capital raising, and cash management products contributed to the favorable revenue trends. Increased provision for credit losses, primarily due to charge-offs related to a limited number of Asian credits, and technology expenses offset the higher revenue.
Corporate Investments - -------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------- Net interest income--tax-equivalent basis........ $ 31 $ 30 $ 63 $ 58 Provision for credit losses...................... 1 - 1 - Noninterest income............................... 136 81 213 176 Noninterest expense.............................. 13 11 25 23 Net income....................................... 117 68 194 142 Return on equity................................. 59% 42% 51% 45% Operating efficiency ratio....................... N/M N/M N/M N/M Average loans (in billions)...................... $ 3.9 $ 1.6 $ 3.1 $ 1.5 Average assets (in billions)..................... 23.4 18.6 22.2 17.7 Average common equity (in billions).............. 0.7 0.7 0.7 0.7 - --------------------------------------------------------------------------------------------------------
N/M-Not meaningful. Corporate Investments generated net income of $194 million and return on equity of 51% for the first half of 1998. Higher leasing and securities gains, primarily in the second quarter, were key drivers of the strong revenue performance. In addition, the lower tax rate for this segment reflects the impact of tax-advantaged investments. 5
Credit Card - -------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended (Presecuritized) June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------- Net interest income--tax-equivalent basis........ $ 354 $ 398 $ 706 $ 783 Provision for credit losses...................... 292 327 575 645 Noninterest income............................... 218 188 414 382 Noninterest expense.............................. 167 151 317 293 Net income....................................... 70 67 141 140 Return on equity................................. 20% 20% 21% 21% Operating efficiency ratio....................... 29% 26% 28% 25% Average loans (in billions)...................... $17.0 $17.2 $17.3 $17.4 Average common equity (in billions).............. 1.4 1.3 1.4 1.3 - --------------------------------------------------------------------------------------------------------
The Corporation reaches customers nationally through its Credit Card business, known as First Card, which is one of the largest issuers of bank credit cards in the U.S. Net income of $141 million for the first half of 1998 was approximately one-fifth of the corporate total. Return on equity remained at 21%. Credit quality improved, with the net charge-off rate declining to 6.9% for the second quarter from 7.6% a year ago. Fee income climbed with growth in interchange fees. Lower spread income, due to increased volumes of introductory rate products and higher solicitation costs, offset these favorable items.
Other Activities - -------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except where noted) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------- Net income (loss)................................ $ - $ (2) $ - $(11) Average assets (in billions)..................... 0.7 0.4 0.7 0.4 - --------------------------------------------------------------------------------------------------------
Net income from Other Activities includes unallocated revenue and expense as well as earnings associated with capital not required by specific business units. 6 EARNINGS ANALYSIS Summary The Corporation reported record earnings of $1.38 per share for the second quarter of 1998. Net income was $408 million, compared with $378 million, or $1.20 per share, for the year-ago quarter. Return on common stockholders' equity was 20.1%, compared with 18.1% a year ago. Earnings for the first six months of 1998 were $791 million, or $2.68 per share, up from $758 million, or $2.37 per share, a year ago.
- ------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except per-share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------ Net interest income--tax-equivalent basis........... $ 898 $ 951 $1,776 $1,858 Provision for credit losses......................... 206 180 385 367 Noninterest income.................................. 842 644 1,581 1,323 Operating expense................................... 911 825 1,759 1,625 Net income.......................................... 408 378 791 758 Earnings Per Share Basic............................................. $ 1.41 $ 1.22 $ 2.73 $ 2.41 Average shares (in millions)...................... 287.4 306.8 287.8 309.4 Assuming full dilution............................ $ 1.38 $ 1.20 $ 2.68 $ 2.37 Average shares (in millions)...................... 292.6 310.9 292.8 315.9 Return on assets.................................... 1.40% 1.40% 1.39% 1.43% Return on common stockholders' equity............... 20.1 18.1 20.0 17.9 - ------------------------------------------------------------------------------------------------------------
Second-quarter 1998 highlights were: . Adjusted fee-based revenue rose 19% from a year ago, reflecting increases from all of the Corporation's business lines. Credit card fee revenue was up significantly from a year ago, a result of pricing changes included in recent marketing initiatives. . Market-driven revenues were $145 million, above the targeted range of $80 million to $100 million per quarter. Combined trading profits reached $52 million, the best quarterly result in more than two years. Equity and investment securities gains totaled $93 million. . The Corporation's operating efficiency ratio for the quarter was 52.4%, reflecting continued expense discipline despite increasing project and technology-driven expenditures. . The provision for credit losses on a managed receivables basis was $359 million, compared with $327 million in the first quarter and $351 million for the year-ago quarter. Improvements in Credit Card were offset by higher charge-offs associated with Asian exposure. 7 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 margin measures how efficiently the Corporation uses its earning assets and its underlying capital. In order to analyze fundamental trends in net interest margin, it is useful to adjust for securitization of credit card receivables and the activities of First Chicago Capital Markets, Inc. (FCCM). When credit card receivables are sold in securitization transactions, the net interest income related to these high-yield assets is replaced by fee revenue, net of related credit losses. The average level of securitized receivables was $8.1 billion for the second quarter of 1998, compared with $8.5 billion for the second quarter of 1997. FCCM is the Corporation's wholly owned subsidiary engaged in permissible investment banking activities. Because its capital requirements 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. The Corporation's net interest margin trends can be better analyzed if these earning assets and related margins are excluded. For the second quarter and first six months of 1998, both adjusted net interest income and the related net interest margin were below those of a year ago. Reduced spreads in both the Credit Card and Regional Banking businesses contributed to these declines. Another contributing factor to the year-to-date comparisons was the effect of the Corporation's share repurchase plan. In addition, the increase in the average volume of thinly priced earning assets, including commercial loans and other short-term assets, contributed to the decline in net interest margin. The following charts illustrate trends in net interest income on a tax- equivalent ("TEA") basis, and in net interest margin, both reported and adjusted, over the past five quarters.
Net Interest Income-TEA In Millions 2Q97 3Q97 4Q97 1Q98 2Q98 ---- ---- ---- ---- ---- Reported $ 951 $ 921 $ 888 $ 878 $ 898 Adjusted $1,135 $1,103 $1,068 $1,052 $1,058
Net Interest Margin 2Q97 3Q97 4Q97 1Q98 2Q98 ---- ---- ---- ---- ---- Reported 4.12% 3.88% 3.71% 3.67% 3.61% Adjusted 4.70% 4.47% 4.27% 4.25% 4.14%
8 Provision for Credit Losses Details of the Corporation's credit risk management and performance during the quarter ended June 30, 1998, are presented in the Credit Risk Management section, beginning on page 16. Noninterest Income The following table provides a breakdown of the components of noninterest income for both the second quarter and first six months of 1998 compared with a year ago. In order to provide a more meaningful trend analysis, credit card fee revenue and total noninterest income exclude the amount of net fee revenue (spread income less credit costs) associated with securitized credit card receivables.
- ------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Percent Six Months Ended Percent June 30 Increase June 30 Increase (Dollars in millions) 1998 1997 (Decrease) 1998 1997 (Decrease) - ------------------------------------------------------------------------------------------------------------------------------- Combined trading profits......................... $ 52 $ 36 44% $ 98 $ 64 53% Equity securities gains.......................... 87 46 89 145 100 45 Investment securities gains...................... 6 4 50 16 29 (45) ---- ---- ------ ------ Market-driven revenue........................... 145 86 69 259 193 34 Credit card fee revenue (1)...................... 223 191 17 427 390 9 Fiduciary and investment management fees......... 108 99 9 214 204 5 Deposit fees (includes deficient balance fees)... 123 112 10 231 221 5 Other fee-based income........................... 160 115 39 303 219 38 ---- ---- ------ ------ Adjusted fee-based revenue...................... 614 517 19 1,175 1,034 14 Other income..................................... 72 25 N/M 106 45 N/M ---- ---- ------ ------ Adjusted noninterest income..................... $831 $628 32 $1,540 $1,272 21 ==== ==== ====== ====== - -------------------------------------------------------------------------------------------------------------------------------
(1) Net fee revenue related to the securitized receivables, which is excluded here, totaled $11 million and $16 million for the second quarters of 1998 and 1997, respectively, and $41 million and $51 million for the six months ended 1998 and 1997, respectively. Combined trading activities generated gains of $52 million for the second quarter of 1998, compared with gains of $36 million for the year-ago quarter. This is the best quarterly result in more than two years. Trading gains were $98 million for the first six months of 1998, compared with $64 million a year ago. Derivative and foreign-exchange trading activities contributed to the majority of the increase for both periods. Equity securities gains were $87 million for the second quarter of 1998, compared with $46 million for the second quarter of 1997. Equity securities gains increased $45 million for the first six months of 1998 from the year-ago period. Second quarter 1998 results included a $65 million gain on the sale of a single investment in the Corporation's venture capital portfolio. Adjusted credit card fee revenue was $223 million for the second quarter of 1998, up 17% from $191 million for the year-earlier period, and reflected pricing changes included in recent marketing initiatives. Other fee-based income increased significantly for both the second quarter and first six months of 1998. Strong results from loan syndication activities, cash management and consumer banking activities contributed to this solid performance. Other income in the 1998 second quarter included gains of $35 million related to the sale of leasing assets and certain retail banking facilities. 9 The following chart presents market-driven revenue and the major components of fee-based revenue for the past five quarters. Fee-based revenue continues to be a significant contributor to overall profitability, with some seasonal effects associated with credit card fee revenue. Credit card fee revenue and total noninterest income have been adjusted to exclude net fee revenue associated with securitized credit card receivables. [GRAPH APPEARS HERE]
Noninterest Income In Millions 2Q97 3Q97 4Q97 1Q98 2Q98 Market-Driven Revenue 86 68 45 114 145 Adjusted Credit Card Fees 191 198 207 204 223 Serv. Chgs. & Commissions 227 235 261 251 283 Fiduciary & Inv. Mgmt. Fees 99 102 101 106 108 Other Revenue 25 63 90 34 72 Total 628 666 704 709 831
Operating Expense Operating expense was $911 million for the second quarter of 1998, up 10% percent from $825 million in the year-earlier period. For the first six months of 1998, the year-over-year percentage increase was 8%.
- -------------------------------------------------------------------------------------------------------- Operating Expense Three Months Ended Percent Six Months Ended Percent June 30 Increase June 30 Increase (Dollars in millions) 1998 1997 (Decrease) 1998 1997 (Decrease) - -------------------------------------------------------------------------------------------------------- Salaries and employee benefits Salaries.......................... $399 $354 13% $ 761 $ 704 8% Employee benefits................. 78 72 8 156 147 6 ---- ---- ------ ------ Total salaries and benefits..... $477 $426 12 $ 917 $ 851 8 ---- ---- ------ ------ Other operating expense Net premises and equipment expense $117 $115 2% $ 232 $ 235 (1)% Purchased services................ 92 75 23 169 138 22 Marketing and public relations.... 40 34 18 67 58 16 Amortization of intangible assets. 11 18 (39) 23 36 (36) Telephone......................... 24 24 - 49 47 4 Freight and postage............... 23 19 21 47 42 12 Travel and entertainment.......... 12 14 (14) 24 26 (8) Stationery and supplies........... 16 14 14 31 26 19 Software expense.................. 14 11 27 27 20 35 Other............................. 85 75 13 173 146 18 ---- ---- ------ ------ Total other operating expense... $434 $399 9 $ 842 $ 774 9 ---- ---- ------ ------ Total operating expense......... $911 $825 10% $1,759 $1,625 8% ==== ==== ====== ====== - --------------------------------------------------------------------------------------------------------
10 Several factors contributed to the year-over-year increase in operating expense for the second quarter and first six months of 1998: . Continued project work related to the Corporation's Year 2000 compliance efforts as well as system integration and business reengineering initiatives. . Increased marketing costs in the Credit Card business. . Higher compensation expense, including bonuses and commissions related to increased fee generation, primarily in the retail and investment management businesses. Intangible amortization expense declined in both the second quarter and first six months of 1998 as certain credit card customer lists became fully amortized. Despite the increase in operating expense, the operating efficiency ratio for the first six months of 1998 remained at 52.4%. Overall operating expense levels and operating efficiency ratios are reflected in the following charts. [GRAPHS APPEAR HERE]
Operating Expense In Millions 2Q97 3Q97 4Q97 1Q98 2Q98 Salaries & Benefits $426 $440 $457 $440 $477 Other Operating $399 $395 $415 $408 $434 Total $825 $835 $872 $848 $911
Operating Efficiency (1) 2Q97 3Q97 4Q97 1Q98 2Q98 51.7% 51.5% 54.0% 52.4% 52.4%
(1) Operating expense as a percentage of total revenue. Applicable Income Taxes The Corporation's income tax expense and related effective tax rate are shown in the table below.
- ------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------- Income before income taxes.............. $ 609 $ 564 $1,182 $1,132 Applicable income taxes................. 201 186 391 374 Effective tax rate...................... 33.0% 33.0% 33.1% 33.0% - -------------------------------------------------------------------------------------
Tax expense included benefits from tax-exempt income and general business tax credits partially offset by the effect of nondeductible expenses, including goodwill. 11 LIQUIDITY RISK MANAGEMENT Liquidity risk management encompasses the ability to meet all current and future financial obligations in a timely manner. The Corporation considers strong capital ratios, credit quality and core earnings as essential to retaining high credit ratings and, consequently, cost-effective access to market liquidity. The Statement of Cash Flows, on page 28, presents data on cash and cash equivalents provided and used in operating, investing and financing activities. The Corporation's ability to attract wholesale funds on a regular basis and at a competitive cost is fostered by strong ratings from the major credit rating agencies. As of June 30, 1998, the parent company and the major banking subsidiaries had the following long- and short-term debt ratings.
- ------------------------------------------------------------------------------------------------------------------------ Long-Term Debt Short-Term Debt - ------------------------------------------------------------------------------------------------------------------------ S&P Moody's S&P Moody's - ------------------------------------------------------------------------------------------------------------------------ First Chicago NBD Corporation (parent)................... A+ A1 A-1 P-1 The Principal Banks...................................... AA- Aa3 A-1+ P-1 - ------------------------------------------------------------------------------------------------------------------------
A large customer deposit base is one of the significant strengths of the Corporation's liquidity position. The Corporation has established a 35% limit on the use of wholesale purchased funds for funding core assets. As of June 30, 1998, its major banking subsidiaries collectively funded 75% of core assets with core liabilities, accessing the wholesale market for only 25% of core asset funding needs. By limiting dependence on the wholesale market, the risk of a disruption to the lending business from an adverse liquidity event is minimized. The following table shows the total funding source mix for the periods indicated.
- ----------------------------------------------------------------------------------------------------------------------- Deposits and Other Purchased Funds At period end June 30 March 31 December 31 September 30 June 30 (In millions) 1998 1998 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------------------- Domestic offices Demand................................ $ 17,038 $ 16,440 $ 16,069 $ 16,548 $ 17,142 Savings............................... 21,432 21,681 21,437 21,097 21,154 Time Under $100,000...................... 9,263 9,378 9,507 9,610 9,775 $100,000 and over................... 5,993 5,972 5,671 5,517 5,205 Foreign offices.......................... 15,802 14,699 15,805 14,793 14,742 -------- -------- -------- -------- -------- Total deposits.................. 69,528 68,170 68,489 67,565 68,018 - ----------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities under repurchase agreements............. 9,869 10,176 9,271 9,650 10,053 Commercial paper......................... 1,253 1,342 1,089 1,344 876 Other short-term borrowings.............. 11,419 9,116 8,621 9,389 8,972 Long-term debt (1)....................... 10,591 10,294 10,088 9,906 9,016 -------- -------- -------- -------- -------- Total other purchased funds..... 33,132 30,928 29,069 30,289 28,917 -------- -------- -------- -------- -------- TOTAL $102,660 $ 99,098 $ 97,558 $ 97,854 $ 96,935 ======== ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------------
(1) Includes trust preferred capital securities. 12 MARKET RISK MANAGEMENT Overview Market risk arises from changes in interest rates, exchange rates, equity prices and commodity prices. The Corporation has risk management policies to monitor and limit exposure to market risk. Through its trading activities, the Corporation strives to take advantage of profit opportunities available in interest rate and exchange rate movements. In asset and liability management activities, policies are in place that are designed to minimize structural interest rate and foreign-exchange 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 takes 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 equity index and commodity options. Trading activities are primarily customer-oriented, and trading positions are established as necessary for customers. In order to accommodate customer demand, an inventory in capital markets instruments is carried, and access to market liquidity is maintained by making bid-offer prices to other market makers. Although these two activities constitute proprietary trading business, they are essential to providing customers with capital markets products at competitive prices. Many trading positions are kept open for brief periods of time, often less than one day. Other trading positions are held for longer periods, and these positions are valued at prevailing market rates on a present value basis. Realized and unrealized gains and losses on these positions are included in noninterest income as combined trading profits. The Corporation manages its market risk through a value-at-risk measurement and control system, and through dollar limits imposed on trading desks and individual dealers. Value-at-risk is intended to measure the maximum amount of potential loss in a particular position, given a specified confidence level over a given period of time. The overall market risk that any business can assume, as measured by value-at-risk, is approved by the Risk Management Committee of the Board of Directors. Value-at-risk limits and exposures are monitored in each significant trading portfolio on a daily basis. The following table shows the value-at-risk at June 30, 1998, for trading activities and other activities, primarily certain investment securities classified as available-for-sale, that are monitored like trading risk. Value-At-Risk
June 30, 1998 (In millions) Individual market risks Interest rate...................................................................................... $26 Exchange rate...................................................................................... 2 Equity price....................................................................................... 3 Commodity price.................................................................................... - Risk reduction (due to diversification)............................................................ (3) --- Aggregate portfolio market risk..................................................................... $28 ===
Trading revenue, which totaled $84 million for the second quarter of 1998 and $58 million for the year-ago period, includes trading profits and net interest income. The value-at-risk calculation measures potential losses in fair value and is based on a methodology that uses a one-day holding period and a 99.87% confidence level. Value-at-risk is calculated using various statistical models and techniques for cash and derivative positions, including options. Through the use of observed statistical correlations, the Corporation has made attempts to recognize offsets across different trading portfolios. However, the reported value-at-risk remains somewhat overstated because not all offsets and correlations are fully considered in the calculation. 13 Structural Interest Rate Risk Management Interest rate risk exposure from the Corporation's non-trading activities is actively managed, with the goal of minimizing the impact of interest rate volatility on current earnings and on the market value of equity. The measurement tools used to monitor the overall interest rate risk exposure of both the on- and off-balance-sheet positions include static gap analysis, earnings sensitivity modeling and market value sensitivity (value-at-risk) analysis. Static gap analysis is a representation of the net difference between the amount of assets, liabilities, equity and off-balance-sheet instruments repricing within a cumulative calendar period. Earnings simulation analysis and value-at- risk are more dynamic measures designed to capture the interest rate risk of the embedded option positions that cannot be measured through static gap analysis. The embedded options include interest rate, prepayment and early withdrawal options, lagged interest rate changes, administered interest rate products, and certain off-balance-sheet sensitivities. These positions are complex risk positions that are difficult to offset completely and, thus, represent the primary risk of loss to the Corporation. Earnings sensitivity analysis measures the estimated change to pretax earnings of various interest rate movements. The Corporation is modeled as an ongoing business, including assumptions on anticipated changes in balance sheet mix, planned growth, asset sales and/or asset securitizations. The base case scenario is established using current market interest rates. The comparative scenarios assume an immediate parallel shock of the current yield curve in increments of (plus/minus) 100 basis point and (plus/minus) 200 basis point rate movements. The comparative interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Estimated earnings for each scenario are calculated over a forward-looking 12- month horizon. For residential mortgage whole loans and mortgage-backed securities, the earnings simulation modeling captures the changing prepayment behavior under changing interest rate environments. Industry estimates are used to dynamically model the prepayment speeds of the various coupon segments of the portfolio. Additionally, the model measures the impact of interest rate caps and floors on adjustable-rate mortgage products. Management assumptions regarding the level of interest rate or balance changes on indeterminate maturity deposit products (passbook savings, money market, NOW and demand deposits) for a given level of market rate changes have been developed through a combination of historical analysis and future expected pricing behavior. Interest rate caps and floors on all products are included to the extent that they are exercised in the 12-month simulation period. Sensitivity of service fee income to market interest rate levels, such as those related to securitized credit card receivables, cash management products and mortgage servicing, is included as well. Interest rate risk in trading activities and other activities, primarily certain investment securities classified as available-for-sale, is managed principally as trading risk. The Corporation's policy is to limit the change in annual pretax earnings to $100 million from an immediate parallel change in interest rates of 200 basis points. As of June 30, 1998, the estimated earnings sensitivity profile was as follows:
- -------------------------------------------------------------------------------------------- Immediate Change in Rates ------------------------------------------ (In millions) +200 bp -200 bp - -------------------------------------------------------------------------------------------- Pretax earnings change........................... $31 $(19) - --------------------------------------------------------------------------------------------
While the earnings sensitivity analysis includes management's best estimate of interest rate and balance sheet reaction to various market rate movements, the actual behavior will likely differ from that projected. Recalibration of the assumptions and adjustments to the modeling techniques are made as needed to improve the accuracy of the risk measurement results. Interpretation of the results must also consider that the actual movements of the market interest rates can include changes in the shape of the yield curve and changes in the basis relationship between various market rates, neither of which is captured in the sensitivity measure. Finally, for some embedded option positions, the risk exposure occurs at a time period beyond the 12 months captured in the earnings sensitivity analysis. Management utilizes the value-at-risk technique to measure these longer-term risk positions. 14 Access to the derivatives market is an important element in maintaining the Corporation's interest rate risk position within policy guidelines. In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to repricing or maturity characteristics. Using off-balance-sheet instruments, principally interest rate swaps (asset and liability management ["ALM"] derivatives), the interest rate sensitivity of specific on-balance-sheet transactions, as well as pools of assets or liabilities, is adjusted to maintain the desired interest rate risk profile. At June 30, 1998, the notional value of ALM interest rate swaps totaled $8.488 billion, including $4.737 billion against specific transactions and $3.751 billion against specific pools of assets or liabilities.
Asset and Liability Management Derivatives--Notional Principal - ------------------------------------------------------------------------------------------------------ June 30, 1998 Receive Fixed Pay Fixed Basis (In millions) Pay Floating Receive Floating Swaps Total - ------------------------------------------------------------------------------------------------------ Specific Pool Specific Pool Pool -------- ---- -------- ---- ---- Swaps associated with: Loans................................ $ - $ 461 $ 70 $ - $ - $ 531 Investment securities................ - - 203 - - 203 Deposits............................. 20 2,488 - - - 2,508 Funds borrowed (including long-term debt).................... 4,069 - 375 100 702 5,246 ------ ------ ---- ---- ---- ------ Total............................ $4,089 $2,949 $648 $100 $702 $8,488 ====== ====== ==== ==== ===== ====== Other ALM Contracts (1)....................................................................... $2,161 ====== - ------------------------------------------------------------------------------------------------------
(1) Primarily reflects the use of forward contracts. Swaps used to adjust the interest rate sensitivity of specific transactions will not need to be replaced at maturity 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 overall risk position as they mature and may need to be reissued to maintain the same interest rate risk profile. These swaps could create modest earnings sensitivity to changes in interest rates. Substantially all ALM interest rate swaps are standard swap contracts. Contractual maturities and weighted average pay and receive rates for the ALM swap position at June 30, 1998, are summarized below. The variable interest rates--which generally are the prime rate, federal funds rate or the one-month, three-month and six-month London interbank offered rates ("LIBOR") in effect on the date of repricing--are assumed to remain constant. However, the variable interest rates will change and consequently will affect the related weighted average information presented in the table.
- -------------------------------------------------------------------------------------------- Asset and Liability Management Swaps--Maturities and Rates (Dollars in millions) 1998 1999 2000 2001 2002 Thereafter Total - -------------------------------------------------------------------------------------------- Receive fixed/pay floating swaps Notional amount....... $ 867 $2,127 $ 779 $1,210 $ 386 $1,669 $7,038 Weighted average Receive rate........ 6.21% 5.99% 6.17% 6.68% 7.56% 6.62% 6.39% Pay rate............ 5.78% 5.78% 5.80% 5.80% 5.83% 5.80% 5.79% Pay fixed/receive floating swaps Notional amount....... $ 50 $ 87 $ 241 $ 37 $ 291 $ 42 $ 748 Weighted average Receive rate........ 5.84% 5.81% 5.72% 5.81% 5.77% 5.78% 5.76% Pay rate............ 8.15% 7.91% 6.56% 7.46% 6.48% 7.34% 6.88% Basis swaps Notional amount......... $ 150 $ 355 $ 197 $ - $ - $ - $ 702 Weighted average Receive rate.......... 5.79% 5.79% 5.78% - - - 5.79% Pay rate.............. 5.78% 5.77% 5.78% - - - 5.77% - -------------------------------------------------------------------------------------------- Total notional amount..... $1,067 $2,569 $1,217 $1,247 $ 677 $1,711 $8,488 - --------------------------------------------------------------------------------------------
15 Foreign Exchange Risk Management Whenever possible, foreign currency-denominated assets are funded with liability instruments denominated in the same currency. If a liability denominated in the same currency is not immediately available or desired, a forward foreign exchange contract is used to fully hedge the risk due to cross-currency funding. To minimize the earnings and capital impact of translation gains or losses measured on an after-tax basis, the Corporation uses forward foreign exchange contracts to hedge the exposure created by investments in overseas branches and subsidiaries. CREDIT RISK MANAGEMENT The Corporation has developed policies and procedures to manage the level and composition of risk in its credit portfolio. The objective of this process is to quantify and manage credit risk on a portfolio basis as well as to reduce the risk of a loss resulting from a customer's failure to perform according to the terms of a transaction.
- ---------------------------------------------------------------------------------------------------------- Selected Statistical Information June 30 March 31 December 31 September 30 June 30 (Dollars in millions) 1998 1998 1997 1997 1997 - ---------------------------------------------------------------------------------------------------------- At period-end Loans outstanding............................. $72,563 $69,590 $68,724 $67,822 $67,510 Nonperforming loans........................... 293 352 311 330 329 Other real estate, net........................ 13 12 15 15 14 Nonperforming assets.......................... 306 364 326 345 343 Allowance for credit losses................... 1,408 1,408 1,408 1,408 1,408 Nonperforming assets/loans outstanding and other real estate, net................... 0.4% 0.5% 0.5% 0.5% 0.5% Allowance for credit losses/loans outstanding.................................. 1.9 2.0 2.0 2.1 2.1 Allowance for credit losses/nonperforming loans........................................ 481 400 453 427 428 For the quarter ended Average loans................................. $69,748 $67,773 $66,859 $66,782 $66,301 Net charge-offs............................... 206 179 167 191 180 Net charge-offs/average loans................. 1.2% 1.1% 1.0% 1.1% 1.1% - ----------------------------------------------------------------------------------------------------------
For analytical purposes, the Corporation's portfolio is divided into commercial (domestic and foreign) and consumer (credit card and other consumer) segments.
- ------------------------------------------------------------------------------------------------------------------------------ June 30 March 31 December 31 September 30 June 30 Loan Composition (In millions) 1998 1998 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------ Commercial risk Domestic Commercial......................... $31,638 $30,020 $28,939 $27,685 $27,851 Real estate Construction..................... 1,480 1,402 1,380 1,292 1,272 Other............................ 5,315 5,257 5,324 5,269 5,309 Lease financing.................... 2,204 2,192 2,144 2,003 1,954 Foreign.............................. 4,971 5,060 4,515 4,168 4,362 ------- ------- ------- ------- ------- Total commercial............... 45,608 43,931 42,302 40,417 40,748 ------- ------- ------- ------- ------- Consumer risk Credit cards......................... 9,246 8,952 9,693 9,720 9,031 Secured by real estate (1)........... 10,363 9,192 8,911 9,715 9,698 Automotive (2)....................... 3,558 3,814 4,040 4,203 4,306 Other................................ 3,788 3,701 3,778 3,767 3,727 ------- ------- ------- ------- ------- Total consumer................. 26,955 25,659 26,422 27,405 26,762 ------- ------- ------- ------- ------- Total.......................... $72,563 $69,590 $68,724 $67,822 $67,510 ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------------
(1) Includes home equity loans. (2) Includes auto-lease receivables. 16 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 inherent in on- and off-balance-sheet credit exposure attributable to various financial instruments. The amount of the allowance is based on formal review and analysis of potential credit losses, as well as on prevailing economic conditions.
- ------------------------------------------------------------------------------------------------------------------------ Allowance for Credit Losses June 30 March 31 December 31 September 30 June 30 (In millions) 1998 1998 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------------------ Balance, beginning of quarter...... $1,408 $1,408 $1,408 $1,408 $1,408 - ------------------------------------------------------------------------------------------------------------------------ Provision for credit losses........ 206 179 167 191 180 - ------------------------------------------------------------------------------------------------------------------------ Charge-offs Commercial Domestic Commercial................... 32 30 31 39 33 Real estate.................. 2 1 1 3 4 Lease financing.............. 2 2 1 2 - Foreign........................ 30 10 - - - Consumer Credit card.................... 162 160 161 159 170 Other.......................... 24 30 32 29 27 ------ ------ ------ ------ ------ Total charge-offs............ 252 233 226 232 234 - ------------------------------------------------------------------------------------------------------------------------ Recoveries Commercial Domestic Commercial................... 8 15 23 9 21 Real estate.................. 3 4 4 7 6 Lease financing.............. 1 - - - 1 Foreign........................ - - 9 1 - Consumer Credit card (1)................ 24 25 14 15 15 Other.......................... 10 10 9 9 11 ------ ------ ------ ------ ------ Total recoveries............. 46 54 59 41 54 - ------------------------------------------------------------------------------------------------------------------------ Net charge-offs.................... 206 179 167 191 180 ------ ------ ------ ------ ------ Balance, end of quarter............ $1,408 $1,408 $1,408 $1,408 $1,408 ====== ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------------
(1) Includes amounts related to the sale of recovery rights for both the first and second quarter of 1998. Second quarter 1998 results include $5 million, and first quarter 1998 includes $12 million of such sales. 17 Nonperforming Assets Nonperforming assets at June 30, 1998, were $306 million, or 0.4% of total loans and other real estate, compared with $326 million, or 0.5% at December 31, 1997. The following charts illustrate the trends in this area for the periods indicated. Nonperforming Assets-Period End (IN MILLIONS) [Bar Chart Appears Here] 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 .Loans $329 $330 $311 $352 $293 .OREO $ 14 $ 15 $ 15 $ 12 $ 13 .Total $343 $345 $326 $364 $306 Nonperforming Assets as a Percentage of Loans and Other Real Estate-Period End [Bar Chart Appears Here] 6/30/97 0.5% 9/30/97 0.5% 12/31/97 0.5% 3/31/98 0.5% 6/30/98 0.4% Consumer Risk Management
- ----------------------------------------------------------------------------------------------------- Consumer Loans June 30 March 31 December 31 September 30 June 30 (In millions) 1998 1998 1997 1997 1997 - ----------------------------------------------------------------------------------------------------- Credit card loans............................ $ 9,246 $ 8,952 $ 9,693 $ 9,720 $ 9,031 Securitized credit card receivables.......... 7,914 8,264 8,639 7,847 8,221 ------- ------- ------- ------- ------- Total managed credit card receivables..... 17,160 17,216 18,332 17,567 17,252 Other consumer loans Secured by real estate (1).................. 10,363 9,192 8,911 9,715 9,698 Automotive (2).............................. 3,558 3,814 4,040 4,203 4,306 Other....................................... 3,788 3,701 3,778 3,767 3,727 ------- ------ ------- ------- ------- Other consumer loans...................... 17,709 16,707 16,729 17,685 17,731 ------- ------- ------- ------- ------ Total managed consumer loans................ $34,869 $33,923 $35,061 $35,252 $34,983 ======= ======= ======= ======= ======= - -----------------------------------------------------------------------------------------------------
(1) Includes home equity loans. (2) Includes auto-lease receivables. Consumer risk management focuses on the credit card segment separately from other parts of the portfolio. For the credit card segment, loss potential is tested using statistically expected levels of losses based on delinquencies and on the source, age and other characteristics of the portfolio. For the other segments of the consumer portfolio, reserve factors are based on historical loss rates. Credit card receivables represent the most significant risk element in the consumer portfolio. The net charge-off rate for credit card receivables was 6.9% for the second quarter of 1998, down from 7.6% for the year-ago quarter but up seasonally from 6.7% for the first quarter of 1998. The Corporation continues to aggressively manage its credit and collection policies in this business. 18
- --------------------------------------------------------------------------------------------------------------------------------- Credit Card Receivables Three Months Ended June 30 March 31 December 31 September 30 June 30 (Dollars in millions) 1998 1998 1997 1997 1997 - --------------------------------------------------------------------------------------------------------------------------------- Average balances: Credit card loans............................ $ 8,992 $ 9,081 $ 8,894 $ 9,147 $ 8,613 Securitized credit card receivables.......... 8,136 8,501 8,505 8,092 8,460 ------- ------- ------- ------- ------- Total average managed credit card receivables............................ $17,128 $17,582 $17,399 $17,239 $17,073 ======= ======= ======= ======= ======= Total net charge-offs (including securitizations)........................... $ 292 $ 283 $ 308 $ 293 $ 326 ======= ======= ======= ======= ======= Net charge-offs/average total managed receivables (1)............................ 6.9% 6.7% 7.1% 6.8% 7.6% ======= ======= ======= ======= ======= Credit Card Delinquency Rate-- Managed Receivables-Period End 30 or more days.......................... 3.7% 4.1% 4.3% 4.5% 4.3% 90 or more days.......................... 1.5 1.8 1.7 1.8 1.7 - ---------------------------------------------------------------------------------------------------------------------------------
(1) June 30, 1998, and March 31, 1998, excludes $5 million and $12 million, respectively, from the sale of recovery rights related to charged-off accounts. Credit card receivables generally are charged off no later than 180 days past due, or earlier in the event of bankruptcy. Commercial Risk Management The commercial risk portfolio includes all domestic and foreign commercial credit exposure. Credit exposure includes the credit risks associated with both on- and off-balance-sheet financial instruments. Commercial loans totaled $45.6 billion at June 30, 1998, up 8% from December 31, 1997, and up 12% from June 30, 1997. In the commercial portfolio, credit quality is rated according to defined levels of credit risk. The lower categories of credit risk are generally equivalent to the four bank regulatory classifications: Special Mention, Substandard, Doubtful and Loss. These categories define levels of credit deterioration at which it may be increasingly difficult for the Corporation to be fully paid without restructuring the credit. Each quarter, the Corporation conducts a review of significant lower-rated credit or country exposures. Potential losses are identified during this review, and reserves are adjusted accordingly. During the second quarter, net charge-offs in the commercial portfolio were $54 million, a portion of which was due to Asian-related exposure. Nonperforming commercial assets totaled $306 million at June 30, 1998, compared with $343 million a year ago and $326 million at year-end 1997. Commercial Real Estate Commercial real estate loans include loans secured by real estate as well as certain loans that are real estate-related. A loan is categorized as real estate-related when 80% or more of the borrower's revenues are derived from real estate activities and the loan is not collateralized by cash or marketable securities. Commercial real estate loans totaled $6.8 billion at June 30, 1998, compared with $6.6 billion a year ago and $6.7 billion at year-end 1997. During the second quarter, net recoveries in the commercial real estate portfolio were $1 million. Nonperforming commercial real estate assets, including other real estate, totaled $72 million at June 30, 1998, compared with $85 million a year ago and $77 million at year-end 1997. 19 Foreign Outstandings The table below presents a breakout of foreign outstandings for June 30, 1998, and December 31, 1997, where such outstandings exceed 1.0% of total assets. The amounts have been prepared using the Federal Financial Institutions Examination Council's reporting guidelines. Under these guidelines, local country claims, which include both local and nonlocal currency activity, are reported net of local country liabilities. Included in claims are loans, balances with banks, acceptances, securities, equity investments, current credit exposure under derivative contracts - net of master netting agreements, accrued interest, and other monetary assets.
- ------------------------------------------------------------------------------------------------------------------------------------ Cross-Border Claims ------------------------------------------- Total Cross Governments Net Local Border & Net & Official Country Local Country (In millions) Banks Institutions Other Claims Claims - ---------------------------------------------------------------------------------------------------------------------------------- Japan (1)....... June 30, 1998 $2,317 $ - $465 $ - $2,782 Dec. 31, 1997 4,225 - 386 - 4,611 France.......... June 30, 1998 1,775 233 164 - 2,172 Dec. 31, 1997 1,137 231 249 - 1,617 Germany (2)..... June 30, 1998 926 305 120 - 1,351 Dec. 31, 1997 * * * * * Korea (3)....... June 30, 1998 * * * * * Dec. 31, 1997 570 10 685 256 1,521 - ----------------------------------------------------------------------------------------------------------------------------------
(1) At June 30, 1998, and December 31, 1997, net local country claims were reduced by local country liabilities of $132 million and $83 million, respectively. (2) At June 30, 1998, net local country claims were reduced by local country liabilities of $121 million. (3) At December 31, 1997, net local country claims were reduced by local country liabilities of $31 million. * Represents less than 1% of total assets. At June 30, 1998, the only countries for which cross-border and net local country claims totaled between 0.75% and 1.0% of total assets were the United Kingdom and Korea. Such outstandings totaled $1.958 billion. At December 31, 1997, the only country for which cross-border and net local country claims totaled between 0.75% and 1.0% of total assets was the Netherlands. Such outstandings totaled $1.114 billion. DERIVATIVE FINANCIAL INSTRUMENTS The Corporation uses a variety of derivative financial instruments in its trading, asset and liability management, and Corporate Investment activities. These instruments include interest rate, currency, equity and commodity swaps, forwards, spot, futures, options, caps, floors, forward rate agreements, and other conditional or exchange contracts, and include both exchange-traded and over-the-counter contracts. The Corporation uses interest rate derivative financial instruments to reduce structural interest rate risk and the volatility of net interest margin. The net interest margin reflects the effective use of these derivatives. Without their use, net interest income would have been lower by $5 million for the second quarter of 1998 and by $10 million for the second quarter of 1997. Credit exposure from derivative financial instruments arises from the risk of a customer default on the derivative contract. The amount of loss created by the default is the replacement cost or current fair value of the defaulted contract. The Corporation utilizes master netting agreements whenever possible to reduce its credit exposure from customer default. These agreements allow the netting of contracts with unrealized losses against contracts with unrealized gains to the same customer, in the event of a customer default. 20 The table below shows the impact of these master netting agreements at June 30, 1998, and December 31, 1997:
- ------------------------------------------------------------------------------------------------------------- June 30 December 31 (In millions) 1998 1997 - ------------------------------------------------------------------------------------------------------------- Gross replacement cost................................................... $14,905 $14,675 Less: Adjustment due to master netting agreements....................... 10,572 10,035 ------- ------- Current credit exposure.................................................. 4,333 4,640 Less: Unrecognized net gains due to nontrading activity................. 83 93 ------- ------- Balance sheet exposure................................................... $ 4,250 $ 4,547 ======= ======= - -------------------------------------------------------------------------------------------------------------
The $4.3 billion of total current credit exposure at June 30, 1998, represents the total loss that the Corporation would have suffered had every counterparty been in default on that date. This amount is reduced by any unrealized and unrecognized gains on derivatives used in asset and liability management activities to arrive at the balance sheet exposure. Since a derivative's replacement cost, measured by its fair value, is subject to change over the contract's life, the Corporation's evaluation of credit risk incorporates potential increases to the contract's fair value. Potential exposure is calculated with a statistical model that estimates changes over time in exchange rates, interest rates and other relevant factors using a 95% confidence level. This potential credit exposure is calculated on a portfolio basis, incorporating master netting agreements as well as any natural offsets that exist between contracts within the customer's portfolio. In total, the potential credit exposure was approximately $8.0 billion higher than the current exposure at June 30, 1998, and $6.9 billion higher at December 31, 1997. YEAR 2000 COMPLIANCE ISSUES The Corporation has established an overall plan to address systems-related Year 2000 issues. The plan calls for either system modification to, or replacement of, nearly 800 existing business system applications. The cost of the Year 2000 compliance program is estimated at $125 million, of which approximately $79 million was incurred by June 30, 1998. Such costs are charged to expense as incurred. The Corporation currently anticipates that substantially all of the remaining systems remediation, including testing and returning applications to production, will be completed by the end of 1998. Testing of internal and external systems interfaces started in mid 1998 and will continue into 1999. A contingency plan has been established for critical business system applications to mitigate potential problems/delays associated with either new system replacements or established vendor delivery dates. The Corporation, however, continues to bear some risk related to the Year 2000 issue and could be adversely affected if other entities (e.g., vendors and customers) not affiliated with the Corporation do not appropriately address their Year 2000 compliance issues. The Corporation is working extensively with outside entities to ensure that their systems will be Year 2000 compliant. 21 CAPITAL MANAGEMENT
- -------------------------------------------------------------------------------------------------------------------------------- Selected Capital Ratios June 30 March 31 December 31 September 30 June 30 Corporate 1998 1998 1997 1997 1997 Guideline - -------------------------------------------------------------------------------------------------------------------------------- Common equity/total assets............ 6.8% 6.8% 6.8% 6.9% 7.3% N/A Tangible common equity ratio.......... 6.4 6.5 6.5 6.5 6.9 N/A Stockholders' equity/total assets..... 6.9 7.0 7.0 7.1 7.5 N/A Risk-based capital ratios (1)(2) Tier 1............................ 7.7 7.8 7.9 8.1 8.6 7-8% Total............................. 11.1 11.4 11.7 11.9 12.4 11-12% Regulatory leverage ratio (1)(2)...... 7.6 7.6 7.8 8.2 8.6 5.5-7% Double leverage ratio (2)............. 116 117 117 118 111 less than or equal to 120% Dividend payout ratio................. 31.9 33.8 34.4 31.7 33.3 30-40% - --------------------------------------------------------------------------------------------------------------------------------
(1) December 1997 and subsequent ratios include activities of FCCM. (2) Includes trust preferred capital securities. 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. Management believes that capital is the foundation of a cohesive risk management framework because it links return with risk. Capital adequacy objectives have been developed for the Corporation and its major banking subsidiaries to meet these needs and also to maintain a well- capitalized regulatory position. Economic Capital An economic capital framework is used to allocate capital to lines of business, products and customers based on the level and type of risk inherent in the activities. Return on economic capital is a key decision-making tool for managing risk-taking activities, as well as for ensuring that capital is efficiently and profitably employed. Capital is allocated for two types of risk: portfolio and business. Portfolio risk capital covers the potential for loss of value arising from credit, market and investment risks. The amount of such capital is calculated to absorb losses to a desired level of statistical confidence. Business risk capital is determined by identifying publicly traded companies with activities comparable with the Corporation's, where possible, and applying their capital structures to the business units. This approach incorporates hard-to-quantify risks such as event, technology and operating margin risks. The Corporation has established a Tier 1 capital target necessary to provide management flexibility while maintaining an adequate capital base for its overall risk profile, as measured by the economic capital framework. The long- term target for the Tier 1 ratio is 7% to 8%. This ratio, currently managed to average 8% over the course of a year, is used for line of business capital allocations. Excess capital, defined as common equity above that required for the 8% Tier 1 target, is available for investments and acquisitions. If attractive long-term opportunities are not available over time in core businesses, management intends to return excess capital to stockholders, typically by way of stock repurchase programs and/or dividend increases. Other Capital Activities On April 10, 1998, the Corporation rescinded its stock repurchase program due to the pending merger with BANC ONE CORPORATION. Regulatory Capital The Corporation endeavors to maintain regulatory capital ratios, including those of the major banking subsidiaries, in excess of the well-capitalized guidelines. To ensure that this goal is met, target ranges of 7% to 8% have been established for Tier 1 capital and 11% to 12% for total risk-based capital. The Corporation's risk-based capital ratios for Tier 1 and total capital exceeded the regulatory well-capitalized guidelines of 6% and 10%, respectively. 22 Tier 1 and Total Capital Ratios--Period End [BAR GRAPH APPEARS HERE]
6/30/97 12/30/97 6/30/98 ------- -------- ------- Tier 1.......................... 8.6% 7.9% 7.7% Total........................... 12.4% 11.7% 11.1% Regulatory Guidelines (Tier 1).. 6.0% 6.0% 6.0% Regulatory Guidelines (Total)... 10.0% 10.0% 10.0%
The following table shows the components of the Corporation's regulatory risk- based capital and risk-weighted assets for the periods indicated.
- ----------------------------------------------------------------------------------- June 30 December 31 June 30 (In millions) 1998 1997 1997 - ----------------------------------------------------------------------------------- Regulatory Risk-Based Capital Tier 1 capital................................ $ 8,848 $ 8,541 $ 8,930 Tier 2 capital and other adjustments.......... 3,930 4,118 4,009 -------- -------- -------- Total capital................................ $ 12,778 $ 12,659 $ 12,939 ======== ======== ======== Total risk-weighted assets.................... $114,772 $108,583 $104,095 ======== ======== ======== - -----------------------------------------------------------------------------------
Included in Tier 1 capital are trust preferred capital securities totaling $996 million for each of the periods shown above.
- ---------------------------------------------------------------------------------- Intangible Assets June 30 December 31 June 30 (In millions) 1998 1997 1997 - ---------------------------------------------------------------------------------- Goodwill...................................... $ 401 $ 365 $ 381 Other nonqualifying intangibles............... 2 3 3 ----- ----- ----- Subtotal..................................... 403 368 384 Qualifying intangibles........................ 72 64 52 ----- ----- ----- Total intangibles............................ $ 475 $ 432 $ 436 ===== ===== ===== - ----------------------------------------------------------------------------------
Tier 1 and total capital have been reduced by goodwill and other nonqualifying intangible assets, which totaled $403 million at June 30, 1998, $368 million at December 31, 1997, and $384 million at June 30, 1997. 23 The Corporation's major banking subsidiaries exceed the regulatory well- capitalized guidelines as shown in the following tables. Major banking subsidiaries include: The First National Bank of Chicago (FNBC), NBD Bank (Michigan), FCC National Bank (FCCNB), American National Bank and Trust Company of Chicago (ANB), and NBD Bank, N.A. (Indiana). By maintaining well-capitalized regulatory status, these banks benefit from lower FDIC deposit premiums.
- ------------------------------------------------------------------------------------------------------------ NBD NBD FNBC Michigan FCCNB ANB Indiana - ------------------------------------------------------------------------------------------------------------ June 30, 1998 Risk-based capital ratios Tier 1 capital................... 7.6% 8.1% 12.7% 8.2% 8.7% Total capital.................... 11.2 11.7 15.2 11.2 11.7 Regulatory leverage ratio........... 7.5 8.0 13.3 8.9 8.0 - ------------------------------------------------------------------------------------------------------------ NBD NBD FNBC Michigan FCCNB ANB Indiana - ------------------------------------------------------------------------------------------------------------ December 31, 1997 Risk-based capital ratios Tier 1 capital................... 7.7% 9.0% 11.6% 8.5% 8.4% Total capital.................... 11.0 13.5 14.3 11.7 11.3 Regulatory leverage ratio........... 7.6 8.9 12.6 9.3 7.8 - ------------------------------------------------------------------------------------------------------------ NBD NBD FNBC Michigan FCCNB ANB Indiana - ------------------------------------------------------------------------------------------------------------ June 30, 1997 Risk-based capital ratios Tier 1 capital.................... 7.6% 9.9% 11.7% 8.4% 9.8% Total capital..................... 11.3 14.3 14.5 11.6 11.1 Regulatory leverage ratio........... 7.4 10.0 12.2 9.2 9.0 - ------------------------------------------------------------------------------------------------------------
Amendments to the risk-based capital requirements, incorporating market risk, became effective January 1, 1998. Under the new market risk requirements, capital is allocated to support the amount of market risk related to ongoing trading activities. The June 30, 1998, capital ratios for the Corporation and FNBC have been prepared using the new market risk rules. The other banking units were not subject to the market risk rules, due to their limited trading activities. 24
First Chicago NBD Corporation and Subsidiaries Consolidated Balance Sheet - --------------------------------------------------------------------------------------------------------------------------- June 30 December 31 June 30 (Dollars in millions) 1998 1997 1997 - --------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks..................................................... $ 8,049 $ 7,223 $ 7,969 Interest-bearing due from banks............................................. 5,588 6,904 7,705 Federal funds sold and securities under resale agreements................... 7,982 8,501 8,185 Trading assets.............................................................. 4,128 4,198 4,752 Derivative product assets................................................... 4,250 4,547 3,761 Securities available for sale............................................... 12,604 9,330 8,265 Loans (net of unearned income--$937, $961 and $954, respectively)........... 72,563 68,724 67,510 Less allowance for credit losses......................................... (1,408) (1,408) (1,408) ------------ ------------ ------------ Loans, net............................................................... 71,155 67,316 66,102 Premises and equipment...................................................... 1,448 1,439 1,407 Customers' acceptance liability............................................. 366 708 661 Other assets................................................................ 4,211 3,930 3,788 ------------ ------------ ------------ Total assets.......................................................... $ 119,781 $ 114,096 $ 112,595 ============ ============ ============ - --------------------------------------------------------------------------------------------------------------------------- Liabilities Deposits Demand................................................................... $ 17,038 $ 16,069 $ 17,142 Savings.................................................................. 21,432 21,437 21,154 Time..................................................................... 15,256 15,178 14,980 Foreign offices.......................................................... 15,802 15,805 14,742 ------------ ------------ ------------ Total deposits........................................................ 69,528 68,489 68,018 Federal funds purchased and securities under repurchase agreements.......... 9,869 9,271 10,053 Other short-term borrowings................................................. 12,672 9,710 9,848 Long-term debt.............................................................. 9,595 9,092 8,020 Guaranteed preferred beneficial interest in the Corporation's junior 996 996 996 subordinated debt.......................................................... Acceptances outstanding..................................................... 366 708 661 Derivative product liabilities.............................................. 4,307 4,616 3,844 Other liabilities........................................................... 4,134 3,254 2,684 ------------ ------------ ------------ Total liabilities..................................................... 111,467 106,136 104,124 - --------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock............................................................. 190 190 290 Common stock--$1 par value.................................................. 320 320 320 June 30, 1998 Dec. 31, 1997 June 30, 1997 ------------- ------------- ------------- Number of shares authorized....... 750,000,000 750,000,000 750,000,000 Number of shares issued........... 319,508,976 319,509,114 319,509,163 Number of shares outstanding...... 287,743,039 289,137,449 302,064,635 Surplus..................................................................... 1,948 1,966 1,985 Retained earnings........................................................... 7,977 7,446 6,933 Accumulated other adjustments to stockholders' equity....................... 66 55 24 Deferred compensation....................................................... (112) (79) (87) Treasury stock at cost--31,765,937; 30,371,665; and 17,444,528 shares, (2,075) (1,938) (994) respectively............................................................... ------------ ------------ ------------ Stockholders' equity.................................................. 8,314 7,960 8,471 ------------ ------------ ------------ Total liabilities and stockholders' equity............................ $ 119,781 $ 114,096 $ 112,595 ============ ============ ============ - ---------------------------------------------------------------------------------------------------------------------------
25
First Chicago NBD Corporation and Subsidiaries Consolidated Income Statement - ------------------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30 June 30 (In millions, except per-share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Interest Income Loans, including fees..................................................... $1,501 $1,484 $2,961 $2,885 Bank balances............................................................. 85 114 186 210 Federal funds sold and securities under resale agreements................. 99 77 188 142 Trading assets............................................................ 68 67 139 136 Securities available for sale--taxable.................................... 133 89 253 167 Securities available for sale--tax-exempt................................. 25 29 48 54 ------ ------ ------ ------ Total................................................................ 1,911 1,860 3,775 3,594 - ------------------------------------------------------------------------------------------------------------------------------ Interest Expense Deposits.................................................................. 562 544 1,120 1,043 Federal funds purchased and securities under repurchase agreements........ 141 124 283 238 Other short-term borrowings............................................... 154 121 285 223 Long-term debt............................................................ 170 146 342 289 ------ ------ ------ ------ Total................................................................ 1,027 935 2,030 1,793 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Income....................................................... 884 925 1,745 1,801 Provision for credit losses............................................... 206 180 385 367 ------ ------ ------ ------ Net Interest Income After Provision for Credit Losses..................... 678 745 1,360 1,434 - ------------------------------------------------------------------------------------------------------------------------------ Noninterest Income Combined trading profits.................................................. 52 36 98 64 Equity securities gains................................................... 87 46 145 100 Investment securities gains............................................... 6 4 16 29 ------ ------ ------ ------ Market-driven revenue................................................ 145 86 259 193 ------ ------ ------ ------ Credit card fee revenue................................................... 234 207 468 441 Fiduciary and investment management fees.................................. 108 99 214 204 Service charges and commissions........................................... 283 227 534 440 ------ ------ ------ ------ Fee-based revenue.................................................... 625 533 1,216 1,085 ------ ------ ------ ------ Other income.............................................................. 72 25 106 45 ------ ------ ------ ------ Total................................................................ 842 644 1,581 1,323 - ------------------------------------------------------------------------------------------------------------------------------ Noninterest Expense Salaries and employee benefits............................................ 477 426 917 851 Net premises and equipment expense........................................ 117 115 232 235 Other..................................................................... 317 284 610 539 ------ ------ ------ ------ Total................................................................ 911 825 1,759 1,625 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes................................................ 609 564 1,182 1,132 Applicable income taxes................................................... 201 186 391 374 ------ ------ ------ ------ Net Income................................................................ $ 408 $ 378 $ 791 $ 758 ====== ====== ====== ====== Net Income Attributable to Common Stockholders' Equity.................... $ 404 $ 373 $ 785 $ 746 ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share Basic................................................................ $1.41 $1.22 $2.73 $2.41 Diluted.............................................................. $1.38 $1.20 $2.68 $2.37 - ------------------------------------------------------------------------------------------------------------------------------
26
First Chicago NBD Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity - ------------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30 (In millions) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Preferred Stock Balance, beginning of period......................................................... $ 190 $ 444 Conversion of preferred stock........................................................ - (154) ------- ------- Balance, end of period............................................................... 190 290 ------- ------- Common Stock Balance, beginning of period......................................................... 320 320 Issuance of stock.................................................................... - - ------- ------- Balance, end of period............................................................... 320 320 ------- ------- Capital Surplus Balance, beginning of period......................................................... 1,966 2,149 Issuance of treasury stock........................................................... (48) (55) Conversion of preferred stock........................................................ - (138) Other................................................................................ 30 29 ------- ------- Balance, end of period............................................................... 1,948 1,985 ------- ------- Retained Earnings Balance, beginning of period......................................................... 7,446 6,433 Net income........................................................................... 791 758 Cash dividends declared on common stock.............................................. (254) (246) Cash dividends declared on preferred stock........................................... (6) (12) ------- ------- Balance, end of period............................................................... 7,977 6,933 ------- ------- Accumulated Other Adjustments To Stockholders' Equity Fair Value Adjustment on Securities Available for Sale Balance, beginning of period......................................................... 49 38 Change in fair value (net of taxes) and other........................................ 11 (20) ------- ------- Balance, end of period............................................................... 60 18 ------- ------- Accumulated Translation Adjustment Balance, beginning of period......................................................... 6 7 Translation gain (loss), net of taxes................................................ - (1) ------- ------- Balance, end of period............................................................... 6 6 ------- ------- Total Accumulated Other Adjustments To Stockholders' Equity............................. 66 24 ------- ------- Deferred Compensation Balance, beginning of period......................................................... (79) (58) Awards granted, net.................................................................. (56) (42) Amortization of deferred compensation................................................ 29 19 Other................................................................................ (6) (6) ------- ------- Balance, end of period............................................................... (112) (87) ------- ------- Treasury Stock Balance, beginning of period......................................................... (1,938) (326) Purchase of common stock............................................................. (229) (1,056) Conversion of preferred stock........................................................ - 292 Issuance of stock.................................................................... 92 96 ------- ------- Balance, end of period............................................................... (2,075) (994) ------- ------- Total Stockholders' Equity, end of period............................................... $ 8,314 $ 8,471 ======= ======= Total Net Income and Accumulated Other Adjustments To Stockholders' Equity.............. $ 802 $ 737 ======= ======= - ------------------------------------------------------------------------------------------------------------------------
27
First Chicago NBD Corporation and Subsidiaries Consolidated Statement of Cash Flows - -------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 (In millions) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income................................................................................. $ 791 $ 758 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........................................................... 95 123 Provision for credit losses............................................................. 385 367 Equity securities gains................................................................. (145) (100) Net (increase) decrease in net derivative product balances.............................. (12) 304 Net (increase) decrease in trading assets............................................... 4 (16) Net (increase) decrease in loans held for sale.......................................... (146) 60 Net (increase) decrease in accrued income receivable.................................... 17 (36) Net increase (decrease) in accrued expenses payable..................................... 823 (50) Net (increase) decrease in other assets................................................. 50 (471) Other noncash adjustments............................................................... (34) (36) -------- ------- Total adjustments....................................................................... 1,037 145 Net cash provided by operating activities.................................................. 1,828 903 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Net (increase) decrease in federal funds sold and securities under resale agreements....... 519 (3,988) Purchase of investment securities--available-for-sale...................................... (10,026) (5,220) Purchase of equity securities--fair value.................................................. (1,165) (51) Proceeds from maturities of debt securities--available-for-sale............................ 995 639 Proceeds from sales of investment securities--available-for-sale........................... 5,945 3,478 Proceeds from sales of equity securities--fair value....................................... 1,174 126 Net (increase) in loans.................................................................... (4,362) (1,600) Loan recoveries............................................................................ 101 92 Net proceeds from sales of assets held for accelerated disposition......................... - 1 Purchases of premises and equipment........................................................ (121) (88) Proceeds from sales of premises and equipment.............................................. 72 9 Net cash and cash equivalents due to acquisitions and dispositions......................... (27) - -------- ------- Net cash (used in) investing activities.................................................... (6,895) (6,602) - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net increase in deposits................................................................... 799 4,367 Net increase in federal funds purchased and securities under repurchase agreements.............................................................................. 597 2,193 Net increase in other short-term borrowings................................................ 2,962 2,276 Proceeds from issuance of long-term debt................................................... 9,908 5,578 Repayment of long-term debt................................................................ (9,411) (4,922) Net (decrease) in other liabilities........................................................ (194) (47) Dividends paid............................................................................. (271) (265) Repurchase of common stock................................................................. (229) (1,056) -------- ------- Net cash provided by financing activities.................................................. 4,161 8,124 - -------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents............................... 416 (48) - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents....................................... (490) 2,377 Cash and cash equivalents at beginning of period........................................... 14,127 13,297 -------- ------- Cash and cash equivalents at end of period................................................. $ 13,637 $15,674 ======== ======= - --------------------------------------------------------------------------------------------------------------------------
For purposes of this statement, cash and cash equivalents consist of cash and due from banks, whether interest-bearing or not. In the first quarter of 1997, $154 million of the Corporation's 53/4% Cumulative Convertible Preferred Stock, Series B, was converted into common stock; such issuance was redeemed in April 1997. 28 Notes to Consolidated Financial Statements Note 1 - ------ The consolidated financial statements for the Corporation, including its subsidiaries, have been prepared in conformity with generally accepted accounting principles. Such preparation requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 investment security 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 - ------ In December 1997, the Corporation adopted SFAS No. 128 "Earnings Per Share," as required, and all prior periods presented were restated. Basic EPS is computed by dividing income available to common stockholders by the average number of common shares outstanding for the period. The Statement also requires presentation of EPS assuming full dilution. The diluted EPS calculation includes net shares that may be issued under the Employee Stock Purchase and Savings Plan, outstanding stock options, and common shares that would result from the conversion of convertible preferred stock. In the diluted calculation, income available to common stockholders is not reduced by preferred stock dividend requirements related to convertible preferred stock, since such dividends would not be paid if the preferred stock were converted to common stock.
- --------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (Dollars in millions, except per-share data) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------- Basic Net income................................................... $ 408 $ 378 $ 791 $ 758 Preferred stock dividends.................................... (4) (5) (6) (12) -------- -------- -------- -------- Net income attributable to common stockholders' equity....... $ 404 $ 373 $ 785 $ 746 ======== ======== ======== ======== Diluted Net income................................................... $ 408 $ 378 $ 791 $ 758 Preferred stock dividends, excluding convertible Series B, where applicable............................................ (4) (5) (6) (10) -------- -------- -------- -------- Diluted income available to common stockholders.............. $ 404 $ 373 $ 785 $ 748 ======== ======== ======== ======== (In thousands) Average shares outstanding.................................... 287,444 306,754 287,783 309,425 Dilutive Shares Employee Stock Purchase and Savings Plan..................... 1,401 788 1,335 784 Stock options................................................ 3,736 3,387 3,703 3,532 Convertible preferred stock.................................. - - - 2,118 Average shares outstanding assuming full dilution............. 292,581 310,929 292,821 315,859 ======== ======== ======== ======== Basic........................................................ $ 1.41 $ 1.22 $ 2.73 $ 2.41 ======== ======== ======== ======== Diluted...................................................... $ 1.38 $ 1.20 $ 2.68 $ 2.37 ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------
29 Note 3 - ------ At June 30, 1998, credit card receivables aggregated $9.2 billion. These receivables are available for sale through credit card securitization programs. Note 4 - ------ The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," on January 1, 1998. The Statement defines comprehensive income as including net income and certain other items that affect stockholders' equity. The other items include "fair value adjustment on investment securities available for sale" and "accumulated translation adjustment," which are reported in "Accumulated other adjustments to stockholders' equity" on the Corporation's Consolidated Balance Sheet. The Corporation has elected to disclose these items in its Consolidated Statement of Stockholders' Equity. Since the Statement solely relates to display and disclosure requirements, it has no effect on the Corporation's financial results. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes new accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those derivatives at fair value. The accounting for the gains or losses resulting from changes in the value of those derivatives will depend on the intended use of the derivative and whether it qualifies for hedge accounting. This Statement will significantly change the accounting treatment for derivatives the Corporation uses in its asset and liability management activities. The Corporation is required to adopt this Statement on January 1, 2000. The Corporation is in the process of evaluating the impact of this new Statement. Note 5 - ------ The carrying values and estimated fair values of financial instruments as of June 30, 1998, have not materially changed on a relative basis from the carrying values and estimated fair values of financial instruments disclosed as of December 31, 1997, in the Corporation's Annual Report. Note 6 - ------ Nonperforming loans are generally identified as "impaired loans". The recorded investment in loans considered impaired was $293 million and $329 million at June 30, 1998, and June 30, 1997, respectively. The required allowance for credit losses related to these loans was $57 million and $46 million at June 30, 1998, and June 30, 1997, respectively. Substantially all of the impaired loans on both dates required the establishment of an allocated reserve. The following table summarizes additional information related to impaired loans.
- ------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended (In millions) June 30 June 30 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Impaired loans average balance........................ $334 $267 $341 $262 Interest income recognized on impaired loans.......... 4 4 9 9 - ------------------------------------------------------------------------------------------------------------------
30 Note 7 - ------ Derivative financial instruments used in trading activities are valued at estimated fair value. Such instruments include swaps, forwards, spot, futures, options, caps, floors and forward rate agreements in the interest rate, foreign exchange, equity and commodity markets. The estimated fair values are based on quoted market prices or pricing and valuation models on a present value basis using current market information. Realized and unrealized gains and losses are included in noninterest income as combined trading profits. Where appropriate, compensation for credit risk and ongoing servicing is deferred and recorded as income over the terms of the derivative financial instruments. Derivative financial instruments used in ALM activities, principally interest rate swaps, are required to meet specific criteria. Such interest rate swaps are designated as ALM derivatives; are linked to and adjust the interest rate sensitivity of a specific asset, liability, firm commitment, or anticipated transaction or a specific pool of transactions with similar risk characteristics; and are effective in reducing the Corporation's structural interest rate risk at inception. Interest rate swaps that do not meet these criteria are designated as derivatives used in trading activities and are accounted for at estimated fair value. Income or expense on most ALM derivatives used to manage interest rate exposure is recorded on an accrual basis, as an adjustment to the yield of the linked exposures over the periods covered by the contracts. This matches the income recognition treatment of that exposure, generally assets or liabilities carried at historical cost, which are recorded on an accrual basis. If an interest rate swap is terminated early, any resulting gain or loss is deferred and amortized as an adjustment of the yield on the linked interest rate exposure position over the remaining periods originally covered by the terminated swap. If all or part of a linked position is terminated, e.g., a linked asset is sold or prepaid, or if the amount of an anticipated transaction is likely to be less than originally expected, the related pro rata portion of any unrecognized gain or loss on the swap is recognized in earnings at that time, and the related pro rata portion of the swap is subsequently accounted for at estimated fair value. Purchased option, cap and floor contracts are reported in derivative product assets, and written option, cap and floor contracts are reported in derivative product liabilities. For other derivative financial instruments, an unrealized gain is reported in derivative product assets, and an unrealized loss is reported in derivative product liabilities. However, fair value amounts recognized for derivative financial instruments executed with the same counterparty under a legally enforceable master netting arrangement are reported on a net basis. Cash flows from derivative financial instruments are reported net as operating activities. Note 8 - ------ The ratio of income to fixed charges for the six months ended June 30, 1998, excluding interest on deposits, was 2.3x, and including interest on deposits, was 1.6x. 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. 31 Note 9 - ------ On April 10, 1998, the Corporation and BANC ONE CORPORATION ("ONE") entered into an Agreement and Plan of Reorganization (as amended, the "Agreement"), pursuant to which, subject to the conditions and upon the terms stated therein, the Corporation and ONE will each merge into a new company, BANK ONE CORPORATION ("BANK ONE") organized to effect the merger (such mergers, collectively, the "Merger"). It is anticipated that the Merger will be accounted for as a pooling-of- interests and that it will be consummated during the second half of 1998, pending necessary approvals of the Corporation's and ONE's respective stockholders, regulatory bodies, and other customary conditions of closing. As a result of the pending Merger, the Corporation's stock repurchase program was rescinded. In accordance with the Agreement, each share of ONE's common stock, without par value, ("ONE Common Stock") outstanding immediately prior to the effective time of the Merger (the "Effective Time") will at the Effective Time be converted into one share of the common stock, with par value $0.01 per share, of BANK ONE ("BANK ONE Common Stock"), and each share of the Corporation's common stock, par value $1.00 per share, ("FCN Common Stock") outstanding immediately prior to the Effective Time will at the Effective Time be converted into the right to receive 1.62 shares of BANK ONE Common Stock. In addition, each share of the Corporation's Preferred Stock with Cumulative and Adjustable Dividends, Series B, and Preferred Stock with Cumulative and Adjustable Dividends, Series C, in each case outstanding immediately prior to the Effective Time, will be converted into the right to receive one share of a series of corresponding preferred stock of BANK ONE with substantially the same terms. The Corporation and ONE have scheduled a special meeting of stockholders for September 15, 1998, at which their respective stockholders are expected to consider and vote on the Merger. Note 10 - ------- The Corporation and certain of its subsidiaries are defendants in various lawsuits, including certain class actions, arising out of the normal course of business, 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, from time to time, normally be engaged in various disagreements with regulators, related primarily 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 consolidated financial statements. 32 First Chicago NBD Corporation and Subsidiaries Selected Statistical Information
- --------------------------------------------------------------------------------------------------------------------------- Securities Available for Sale - --------------------------------------------------------------------------------------------------------------------------- June 30 March 31 December 31 September 30 June 30 (In millions) 1998 1998 1997 1997 1997 - --------------------------------------------------------------------------------------------------------------------------- U.S. Treasury..................................... $ 2,508 $ 3,117 $3,037 $3,069 $3,007 U.S. government agencies Mortgage-backed securities...................... 2,205 2,228 1,736 2,077 1,867 Collateralized mortgage obligations............. 473 279 186 475 296 Other........................................... 1,399 1,353 878 761 439 States and political subdivisions................. 757 757 767 821 896 Other debt securities............................. 4,066 2,622 1,538 768 704 Equity securities (1)............................. 1,196 1,238 1,188 1,054 1,056 ------- ------- ------ ------ ------ Total....................................... $12,604 $11,594 $9,330 $9,025 $8,265 ======= ======= ====== ====== ====== - ----------------------------------------------------------------------------------------------------------------------------
(1) Includes investments accounted for at fair value, in keeping with specialized industry practice. The fair values of certain securities for which market quotations were not available were estimated. In addition, the fair values of certain securities reflect liquidity and other market-related factors.
- ------------------------------------------------------------------------------------------------------------ Securities Available for Sale - ------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Value June 30, 1998 (In millions) Cost Gains Losses (Book Value) - ------------------------------------------------------------------------------------------------------------ U.S. Treasury............................................. $ 2,486 $ 22 $ - $ 2,508 U.S. government agencies Mortgage-backed securities.............................. 2,193 14 2 2,205 Collateralized mortgage obligations..................... 472 1 - 473 Other................................................... 1,392 7 - 1,399 States and political subdivisions......................... 730 28 1 757 Other debt securities..................................... 4,065 4 3 4,066 Equity securities (1)..................................... 1,112 134 50 1,196 ------- ---- --- ------- Total............................................... $12,450 $210 $56 $12,604 ======= ==== === ======= - ------------------------------------------------------------------------------------------------------------
(1) Includes investments accounted for at fair value, in keeping with specialized industry practice. The fair values of certain securities for which market quotations were not available were estimated. In addition, the fair values of certain securities reflect liquidity and other market-related factors. 33 Impact of Credit Card Securitization Credit Card continues to service credit card accounts even after receivables are securitized. Net interest income and certain fee revenue on the securitized portfolio are not recognized; however, these are offset by servicing fees as well as by lower provisions for credit losses. For analytical purposes only, the following table shows income statement line items adjusted for the net impact of securitization of credit card receivables.
- ------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30, 1998 Three Months Ended June 30, 1997 -------------------------------- -------------------------------- Credit Card Credit Card (In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted - ------------------------------------------------------------------------------------------------------------------------ Net interest income-- tax-equivalent basis........ $ 898 $ 164 $ 1,062 $ 951 $ 187 $ 1,138 Provision for credit losses.. 206 153 359 180 171 351 Noninterest income........... 842 (11) 831 644 (16) 628 Noninterest expense.......... 911 - 911 825 - 825 Net income................... 408 - 408 378 - 378 Assets--average.............. $116,577 $8,136 $124,713 $108,292 $8,460 $116,752 --quarter-end.......... 119,781 7,914 127,695 112,595 8,221 120,816 - ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30, 1998 Six Months Ended June 30, 1997 ------------------------------ ------------------------------ Credit Card Credit Card (In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted - ------------------------------------------------------------------------------------------------------------------------ Net interest income-- tax-equivalent basis........ $ 1,776 $ 342 $ 2,118 $ 1,858 $ 384 $ 2,242 Provision for credit losses.. 385 301 686 367 333 700 Noninterest income........... 1,581 (41) 1,540 1,323 (51) 1,272 Noninterest expense.......... 1,759 - 1,759 1,625 - 1,625 Net income................... 791 - 791 758 - 758 Assets--average.............. $114,756 $8,317 $123,073 $106,721 $8,637 $115,358 - ------------------------------------------------------------------------------------------------------------------------
34
First Chicago NBD 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) 1998 1998 1997 1997 1997 - ---------------------------------------------------------------------------------------------------------------- Interest Income Loans, including fees........................................... $1,501 $1,460 $1,473 $1,491 $1,484 Bank balances................................................... 85 101 121 120 114 Federal funds sold and securities under resale agreements....... 99 89 83 79 77 Trading assets.................................................. 68 71 74 67 67 Investment securities--taxable.................................. 133 120 105 97 89 Investment securities--tax-exempt............................... 25 23 16 27 29 ------ ------ ------ ------ ------ Total...................................................... 1,911 1,864 1,872 1,881 1,860 - ---------------------------------------------------------------------------------------------------------------- Interest Expense Deposits........................................................ 562 558 575 560 544 Federal funds purchased and securities under repurchase agreements..................................................... 141 142 126 134 124 Other short-term borrowings..................................... 154 131 132 125 121 Long-term debt.................................................. 170 172 167 163 146 ------ ------ ------ ------ ------ Total...................................................... 1,027 1,003 1,000 982 935 - ---------------------------------------------------------------------------------------------------------------- Net Interest Income............................................. 884 861 872 899 925 Provision for credit losses..................................... 206 179 167 191 180 ------ ------ ------ ------ ------ Net Interest Income After Provision for Credit Losses........... 678 682 705 708 745 - ---------------------------------------------------------------------------------------------------------------- Noninterest Income Combined trading profits (losses)............................... 52 46 (15) 32 36 Equity securities gains......................................... 87 58 54 28 46 Investment securities gains..................................... 6 10 6 8 4 ------ ------ ------ ------ ------ Market-driven revenue........................................ 145 114 45 68 86 ------ ------ ------ ------ ------ Credit card fee revenue......................................... 234 234 230 233 207 Fiduciary and investment management fees........................ 108 106 101 102 99 Service charges and commissions................................. 283 251 261 235 227 ------ ------ ------ ------ ------ Fee-based revenue............................................ 625 591 592 570 533 ------ ------ ------ ------ ------ Other income.................................................... 72 34 90 63 25 ------ ------ ------ ------ ------ Total...................................................... 842 739 727 701 644 - ---------------------------------------------------------------------------------------------------------------- Noninterest Expense Salaries and employee benefits.................................. 477 440 457 440 426 Net premises and equipment expense.............................. 117 115 111 116 115 Other........................................................... 317 293 304 279 284 ------ ------ ------ ------ ------ Total...................................................... 911 848 872 835 825 - ---------------------------------------------------------------------------------------------------------------- Income Before Income Taxes...................................... 609 573 560 574 564 Applicable income taxes......................................... 201 190 178 189 186 ------ ------ ------ ------ ------ Net Income...................................................... $ 408 $ 383 $ 382 $ 385 $ 378 ====== ====== ====== ====== ====== Net Income Attributable to Common Stockholders' Equity.......... $ 404 $ 381 $ 378 $ 380 $ 373 ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------------- Earnings Per Share Basic........................................................ $1.41 $1.32 $1.30 $1.28 $1.22 Diluted...................................................... $1.38 $1.30 $1.28 $1.26 $1.20 - ---------------------------------------------------------------------------------------------------------------- Average number of shares (in millions).......................... 287.4 288.1 290.3 296.8 306.8 Average number of shares, assuming full dilution (in millions).. 292.6 293.0 295.2 301.6 310.9
35 First Chicago NBD Corporation and Subsidiaries Selected Statistical Information
- ---------------------------------------------------------------------------------------------------------------------------- Average Balances/Net Interest Margin/Rates - ---------------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1998 March 31, 1998 - ---------------------------------------------------------------------------------------------------------------------------- (Income and rates on tax-equivalent basis) Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------- Assets Interest-bearing due from banks............................. $ 5,875 $ 85 5.82% $ 6,690 $ 101 6.13% Federal funds sold and securities under resale agreements... 7,694 99 5.15 7,077 89 5.13 Trading assets.............................................. 4,741 68 5.73 5,286 71 5.48 Securities available for sale U.S. government and federal agencies....................... 6,468 104 6.50 6,273 102 6.56 States and political subdivisions.......................... 736 14 7.95 730 16 8.68 Other...................................................... 4,480 49 4.39 3,159 38 4.80 -------- ------ ---- --------- ------ ---- Total securities available for sale..................... 11,684 167 5.78 10,162 156 6.16 Loans (1)(2) Domestic offices........................................... 64,898 1,425 8.93 63,303 1,391 9.04 Foreign offices............................................ 4,850 81 6.68 4,470 73 6.64 -------- ------ ---- --------- ------ ---- Total loans............................................. 69,748 1,506 8.78 67,773 1,464 8.88 -------- ------ ---- --------- ------ ---- Total earning assets (3)................................ 99,742 1,925 7.74 96,988 1,881 7.86 Cash and due from banks..................................... 7,314 6,653 Allowance for credit losses................................. (1,397) (1,402) Other assets................................................ 10,918 10,675 -------- --------- Total assets............................................ $116,577 $ 112,914 ======== ========= - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits--interest-bearing Savings.................................................... $ 9,534 $ 48 2.02% $ 9,393 $ 49 2.12% Money market............................................... 11,816 98 3.32 12,062 103 3.47 Time....................................................... 15,375 216 5.63 15,108 212 5.68 Foreign offices............................................ 15,234 200 5.26 15,144 194 5.20 -------- ------ ---- -------- ------ ---- Total deposits--interest-bearing........................ 51,959 562 4.34 51,707 558 4.38 Federal funds purchased and securities under repurchase agreements...................................... 10,791 141 5.25 10,816 142 5.34 Other short-term borrowings................................. 11,694 154 5.29 9,869 131 5.37 Long-term debt (4).......................................... 10,443 170 6.53 10,368 172 6.72 -------- ------ ---- -------- ------ ---- Total interest-bearing liabilities...................... 84,887 1,027 4.85 82,760 1,003 4.91 Demand deposits............................................. 15,764 14,639 Other liabilities........................................... 7,677 7,544 Preferred stock............................................. 190 190 Common stockholders' equity................................. 8,059 7,781 -------- -------- Total liabilities and stockholders' equity.............. $116,577 $112,914 ======== ======== - --------------------------------------------------------------------------------------------------------------------------- Interest income/earning assets (3).......................... $ 1,925 7.74% $ 1,881 7.86% Interest expense/earning assets............................. 1,027 4.13 1,003 4.19 -------- ---- -------- ---- Net interest margin......................................... $ 898 3.61% $ 878 3.67% ======== ==== ======== ==== - --------------------------------------------------------------------------------------------------------------------------
(1) Average lease-financing receivables are reduced by related deferred tax liabilities in calculating the average rate. (2) Nonperforming loans are included in average balances used to determine the average rate. (3) Includes tax-equivalent adjustments based on a 35% federal income tax rate. (4) Includes trust preferred capital securities. 36
- ------------------------------------------------------------------------------------------ December 31, 1997 September 30, 1997 June 30, 1997 - ------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------ $ 7,954 $ 121 6.02% $ 7,789 $ 120 6.13% $ 7,754 $ 114 5.90% 6,225 83 5.30 5,984 79 5.24 5,902 76 5.20 4,915 75 6.03 4,976 67 5.34 4,797 67 5.62 5,817 107 7.26 5,589 92 6.50 4,979 82 6.57 796 18 9.04 835 18 8.71 941 21 9.02 2,443 7 1.09 2,149 31 5.81 1,951 36 7.31 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 9,056 132 5.76 8,573 141 6.54 7,871 139 7.05 62,592 1,408 9.06 62,529 1,428 9.18 62,247 1,429 9.33 4,267 69 6.46 4,253 68 6.38 4,054 61 6.06 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 66,859 1,477 8.89 66,782 1,496 9.00 66,301 1,490 9.13 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 95,009 1,888 7.88 94,104 1,903 8.02 92,625 1,886 8.17 6,545 6,398 6,594 (1,402) (1,401) (1,388) 9,824 9,849 10,461 - -------- -------- -------- $109,976 $108,950 $108,292 ======== ======== ======== - ------------------------------------------------------------------------------------------ $ 8,930 $ 52 2.30% $ 9,158 $ 52 2.25% $ 9,429 $ 52 2.22% 12,080 105 3.46 11,715 101 3.43 11,792 101 3.44 15,122 212 5.57 15,154 215 5.63 15,072 210 5.58 15,580 206 5.25 14,616 192 5.21 14,055 181 5.16 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 51,712 575 4.42 50,643 560 4.39 50,348 544 4.33 8,982 126 5.57 9,877 134 5.37 9,393 124 5.32 9,705 132 5.39 9,045 125 5.49 8,749 121 5.54 9,983 167 6.61 9,620 163 6.74 8,853 146 6.61 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 80,382 1,000 4.93 79,185 982 4.92 77,343 935 4.85 14,704 14,216 14,238 6,939 7,366 8,142 242 290 290 7,709 7,893 8,279 - -------- -------- -------- $109,976 $108,950 $108,292 ======== ======== ======== - ------------------------------------------------------------------------------------------ $1,888 7.88% $1,903 8.02% $1,886 8.17% 1,000 4.17 982 4.14 935 4.05 ------ ---- ------ ---- ------ ---- $ 888 3.71% $ 921 3.88% $ 951 4.12% ====== ==== ====== ==== ====== ==== - ------------------------------------------------------------------------------------------
37
First Chicago NBD Corporation and Subsidiaries Selected Statistical Information - --------------------------------------------------------------------------------------------------------------- Average Balances/Net Interest Margin/Rates - --------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1998 June 30, 1997 - --------------------------------------------------------------------------------------------------------------- (Income and rates on tax-equivalent basis) Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------- Assets Interest-bearing due from banks................... $ 6,280 $ 186 5.98% $ 7,240 $ 210 5.84% Federal funds sold and securities under resale agreements....................................... 7,387 188 5.14 5,532 142 5.17 Trading assets.................................... 5,012 139 5.60 4,906 136 5.60 Securities available for sale U.S. government and federal agencies............ 6,371 206 6.53 4,793 153 6.44 States and political subdivisions............... 733 30 8.31 1,020 46 9.09 Other........................................... 3,823 87 4.56 1,764 67 7.70 -------- ------ ---- -------- ------ ---- Total securities available for sale.......... 10,927 323 5.96 7,577 266 7.09 Loans (1)(2) Domestic offices................................ 64,105 2,816 8.99 61,857 2,779 9.18 Foreign offices................................. 4,661 154 6.66 3,885 117 6.10 -------- ------ ---- -------- ------ ---- Total loans.................................. 68,766 2,970 8.83 65,742 2,896 8.99 -------- ------ ---- -------- ------ ---- Total earning assets (3)..................... 98,372 3,806 7.80 90,997 3,650 8.09 Cash and due from banks........................... 6,986 6,575 Allowance for credit losses....................... (1,400) (1,387) Other assets...................................... 10,798 10,536 -------- -------- Total assets................................. $114,756 $106,721 ======== ======== - --------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits--interest-bearing Savings......................................... $ 9,463 $ 97 2.06% $ 9,703 $ 105 2.19% Money market.................................... 11,939 201 3.40 11,609 200 3.48 Time............................................ 15,243 428 5.66 15,050 410 5.50 Foreign offices................................. 15,189 394 5.23 13,082 327 5.04 -------- ------ ---- -------- ------ ---- Total deposits--interest-bearing............. 51,834 1,120 4.36 49,444 1,042 4.25 Federal funds purchased and securities under repurchase agreements............................ 10,804 283 5.29 9,123 238 5.26 Other short-term borrowings....................... 10,787 285 5.33 8,377 223 5.36 Long-term debt (4)................................ 10,405 342 6.63 8,690 289 6.72 -------- ------ ---- -------- ------ ---- Total interest-bearing liabilities........... 83,830 2,030 4.88 75,634 1,792 4.78 Demand deposits................................... 15,204 14,050 Other liabilities................................. 7,611 8,286 Preferred stock................................... 190 354 Common stockholders' equity....................... 7,921 8,397 -------- -------- Total liabilities and stockholders' equity... $114,756 $106,721 ======== ======== - --------------------------------------------------------------------------------------------------------------- Interest income/earning assets (3)................ $3,806 7.80% $3,650 8.09% Interest expense/earning assets................... 2,030 4.16 1,792 3.97 ------ ---- ------ ---- Net interest margin............................... $1,776 3.64% $1,858 4.12% ====== ==== ====== ==== - ---------------------------------------------------------------------------------------------------------------
(1) Average lease-financing receivables are reduced by related deferred tax liabilities in calculating the average rate. (2) Nonperforming loans are included in average balances used to determine the average rate. (3) Includes tax-equivalent adjustments based on a 35% federal income tax rate. (4) Includes trust preferred capital securities. 38 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, 1998 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 1-7127 FIRST CHICAGO NBD CORPORATION - -------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) DELAWARE 38-1984850 - -------------------------------------------------------------------------------- (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, 1998. Class Number of Shares Outstanding - ------------------------- ---------------------------- Common Stock $1 par value 287,934,662 39 Form 10-Q Cross-Reference Index PART I - FINANCIAL INFORMATION ------------------------------
ITEM 1. Financial Statements - ---------------------------- Page ---- Consolidated Balance Sheet -- June 30, 1998 and 1997, and December 31, 1997 25 Consolidated Income Statement -- Six Months Ended June 30, 1998 and 1997 26 Consolidated Statement of Stockholders' Equity -- Six Months Ended June 30, 1998 and 1997 27 Consolidated Statement of Cash Flows -- Six Months Ended June 30, 1998 and 1997 28 Notes to Consolidated Financial Statements 29 Selected Statistical Information 1, 16-19 33-38 ITEM 2. Management's Discussion and Analysis of Financial - --------------------------------------------------------- Condition and Results of Operations 2-24 ----------------------------------- PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings 41 - ------------------------- ITEM 2. Changes in Securities 41 - ----------------------------- ITEM 3. Defaults Upon Senior Securities 41 - --------------------------------------- ITEM 4. Submission of Matters to a Vote of Security Holders 41 - ----------------------------------------------------------- ITEM 5. Other Information 41 - ------------------------- ITEM 6. Exhibits and Reports on Form 8-K 42 - ---------------------------------------- Signatures 43
40 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 - ----------------------------------------------------------- First Chicago NBD Corporation held its Annual Meeting of Stockholders on Friday, May 8, 1998. A total of 245,882,387 shares were present in person or by proxy, or nearly 86% of the total shares outstanding. Stockholders elected the six Class III Director nominees named in the Proxy Statement. Each of the nominees received more than 243.2 million votes, in excess of 98% of the shares voted at the meeting. The particulars are:
For Withheld Terence E. Adderley 243,654,863 2,227,524 James K. Baker 243,600,356 2,282,031 James S. Crown 243,474,746 2,407,641 Thomas H. Jeffs II 243,548,197 2,334,190 Richard A. Manoogian 243,629,405 2,252,982 Richard L. Thomas 243,288,454 2,593,933
Stockholders ratified the appointment of Arthur Andersen LLP as the Company's independent public accountants for 1998. Of the shares present and entitled to vote, 244,691,957 (99.5%) were voted for; 557,482 (0.2%) were voted against; and 632,948 (0.3%) abstained. Stockholders rejected a stockholder proposal concerning the separation of the offices of Chairman and President and the offices of Secretary and Treasurer. Of the shares present and entitled to vote, 38,794,833 (17.4%) were voted for; 179,113,312 (80.2%) were voted against; and 5,313,131 (2.4%) abstained. There were 22,661,111 broker non-votes. ITEM 5. Other Information - ------------------------- None 41 ITEM 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibit 12 Statement re computation of ratio Exhibit 27 Financial Data Schedule (b) The Registrant filed the following Current Reports on Form 8-K during the quarter ended June 30, 1998. Date Item Reported ---- ------------- 4/13/98 The Registrant's earnings for the quarter ended March 31, 1998. 4/14/98 The Registrant's announcement of its planned merger with BANC ONE CORPORATION. 4/21/98 Pro forma financial statements and exhibits related to the Registrant's planned merger with BANC ONE CORPORATION. 5/19/98 Pro forma financial statements, as of March 31, 1998, related to the Registrant's planned merger with BANC ONE CORPORATION. 42 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 NBD CORPORATION ----------------------------- Date August 13, 1998 Verne G. Istock ----------------------------- ----------------------------- Verne G. Istock Principal Executive Officer Date August 13, 1998 William J. Roberts ----------------------------- ----------------------------- William J. Roberts Principal Accounting Officer 43 (Registrant) EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit - -------------- ---------------------- 12 - Statement re computation of ratio 27 - Financial Data Schedule 44 EX-12 2 COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES Exhibit 12 COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES The computation of the ratio of income to fixed charges is set forth in Note 8 of Notes to Consolidated Financial Statements on page 31 of the Form 10-Q. EX-27 3 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-K for the period ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 8,049 5,588 7,982 4,128 12,604 0 0 72,563 1,408 119,781 69,528 22,541 8,441 10,591 0 190 320 7,804 119,781 2,961 301 513 3,775 1,120 2,030 1,745 385 16 1,759 1,182 791 0 0 791 2.73 2.68 3.64 293 235 0 0 1,408 485 100 1,408 0 0 0 Guaranteed Preferred Beneficial Interest in the Corporation's Junior Subordinated Debt of $996 million is included in long term debt. Treasury stock of $2,075 million is included as a reduction of other stockholder's equity. Investment securities gain/losses do not include the Corporation's equity securities gains which totaled $145 million. Other expense includes: salaries and employee benefits of $917 million; net premises and equipment expense of $232 million; and other expenses which totaled $610 million. Primary earnings per share represents Basic earnings per share.
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