-----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, CfHp0KbaHyw5dB4G4wV+eu1TRYZm4LEzusPnJsIB/A140CUs6RtjsOjx+HOhqeWd bjGbj6dO4ejn1im/FkYC7A== 0000950131-98-002065.txt : 19980330 0000950131-98-002065.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950131-98-002065 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K SEC ACT: SEC FILE NUMBER: 001-07127 FILM NUMBER: 98576151 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-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 INCLUDING ZIP CODE) Registrant's telephone number, including area code: (312) 732-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ----------------------- Common Stock, $1.00 par value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Preferred Stock with Cumulative and Adjustable Dividends, Series B ($100 stated value), no par value New York Stock Exchange Preferred Stock with Cumulative and Adjustable Dividends, Series C ($100 stated value), no par value New York Stock Exchange 7 1/2% Preferred Purchase Units New York Stock Exchange 7 1/4% Subordinated Debentures Due 2004 New York Stock Exchange 8.10% Subordinated Notes Due 2002 New York Stock Exchange 8 1/2% Notes Due June 1, 1998 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None. 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the Corporation at December 31, 1997, was approximately $22,410,000,000 (based on the average price of such stock on February 27, 1998). At December 31, 1997, the Corporation had 289,137,449 shares of its Common Stock, $1.00 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE CORPORATION'S DEFINITIVE PROXY STATEMENT DATED MARCH 27, 1998, ARE INCORPORATED BY REFERENCE INTO PART III HEREOF. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FIRST CHICAGO NBD CORPORATION FORM 10-K INDEX
PAGE ---- PART I Item 1. Business..................................................... 2 Description of Business...................................... 2 Employees.................................................... 5 Competition.................................................. 5 Monetary Policy and Economic Controls........................ 6 Supervision and Regulation................................... 6 Financial Review............................................. 12 Item 2. Properties................................................... 85 Item 3. Legal Proceedings............................................ 85 Item 4. Submission of Matters to a Vote of Security Holders.......... 85 Executive Officers of the Registrant..................................... 85 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................................... 86 Item 6. Selected Financial Data...................................... 86 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 86 Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 86 Item 8. Financial Statements and Supplementary Data.................. 86 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 86 PART III Item 10. Directors and Executive Officers of the Registrant........... 86 Item 11. Executive Compensation....................................... 86 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 87 Item 13. Certain Relationships and Related Transactions............... 87 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 87
1 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS General First Chicago NBD Corporation (the "Corporation"), incorporated in Delaware in 1972, is a multibank holding company registered under the Bank Holding Company Act of 1956 (the "BHC Act"). The Corporation is the surviving corporation resulting from the merger (the "Merger"), effective December 1, 1995, of First Chicago Corporation ("FCC"), a Delaware corporation and registered bank holding company, with and into NBD Bancorp, Inc. ("NBD"), also a Delaware corporation and registered bank holding company. Through its bank subsidiaries, the Corporation provides consumer and corporate banking products and services. The Corporation's lead bank subsidiary is The First National Bank of Chicago ("FNBC"). The Corporation also is the parent corporation of NBD Bank (Michigan) ("NBD Michigan"), American National Bank and Trust Company of Chicago ("ANB"), FCC National Bank ("FCCNB"), NBD Bank, National Association (Indianapolis, Indiana) ("NBD Indiana"), NBD Bank (Elkhart, Indiana) ("NBD Elkhart") and NBD Bank (Florida) ("NBD Florida"). In addition, the Corporation directly or indirectly owns various nonbank companies engaged in businesses related to banking and finance. The Corporation also directly or indirectly raises funds principally to finance the operations of its nonbank subsidiaries. A substantial portion of the Corporation's annual income typically has been derived from dividends from its subsidiaries and from interest on loans, some of which are subordinated, to its subsidiaries. The Corporation continually evaluates its business operations and organizational structures, and routinely explores opportunities to (i) acquire financial institutions and other financial services-related businesses and assets, and (ii) enter into strategic alliances to expand the scope of its services and its customer base. In addition, the Corporation occasionally sells assets, or exits businesses or markets determined not to be consistent with its overall business strategy. During 1997, the Corporation completed its previously announced exit from the stand-alone domestic institutional custody and master trust businesses. In December 1997, it sold ANB Investment Management and Trust Company, a subsidiary engaged primarily in institutional passive investment management activities. Also in 1997, the Corporation announced its intention to purchase Roney & Co., L.L.C., a regional full- service investment firm. That transaction is expected to be completed during the first half of 1998. The Corporation also announced strategic alliances with Tokio Marine and Fire Insurance Company Ltd., Robert W. Baird & Co. and The Hartford Financial Services Group. The Corporation engages primarily in four lines of business--Regional Banking, Corporate Banking, Corporate Investments, and Credit Card. Each of these businesses is conducted through the Corporation's bank and nonbank subsidiaries, as described below. Regional Banking The Corporation's Regional Banking business comprises four key customer segments: the general consumer market, private banking and investments, small business banking and middle market banking. The Corporation's customer base in these four segments is located primarily in metropolitan Chicago and the states of Michigan and Indiana. General Consumer Market Consumer banking products and services include demand, savings and time deposit accounts; installment loans and related services; lines of credit and other open-end credit products; mortgage banking; electronic banking; safekeeping; nondeposit investment products and related services, including mutual funds, annuities and discount brokerage services; and trust and investment services. Trust and investment services include financial planning, estate planning, retirement planning, tax counseling, custody services and fiduciary services, including acting as executor, administrator and personal representative of estates. Consumer banking services are provided primarily through FNBC, NBD Michigan, NBD Indiana, NBD Elkhart and NBD Florida. 2 The Corporation offers an array of additional financial products to its customers, including property and casualty insurance, and credit life and other life insurance products. The Corporation also offers a proprietary mutual fund family--the Pegasus Funds; First Chicago NBD Investment Management Company ("FCNIMC"), a subsidiary of FNBC, is the investment advisor to these funds. The Pegasus Funds comprise a variety of mutual funds covering a wide range of investment objectives. As of December 31, 1997, the Pegasus Funds ranked among the largest bank-managed fund families in the country, with approximately $16 billion in assets. The Corporation enjoys a leading market share in each of its geographic markets, serving approximately 3,000,000 households through more than 650 bank branches, approximately 1,400 automatic teller machines ("ATMs"), 24-hour telephone support, and online banking services available through personal computers. Additionally, consumer banking is available nationally through "direct banking," which offers 24-hour telephone support, nationwide debit card access at ATMs and merchants, and online banking services. Private Banking and Investments Private banking and investments provides specialized credit, banking, trust, investment management and estate planning services to high net worth individuals, their families and their businesses. Such services include financial planning, tax counseling, custody services and investment advisory services. Private Banking and Investments provides services primarily through FNBC, NBD Michigan, NBD Indiana, NBD Elkhart and NBD Florida. Small Business Banking In addition to such traditional banking products and services as demand deposit accounts, installment loans and lines of credit, the Corporation offers products and services tailored to the needs of small businesses. Such products and services include small business loans, equipment leasing, cash management accounts, payroll direct deposit, retirement plans, and merchant services, such as processing of credit card sales transactions and check verification services. Small business banking is conducted primarily through FNBC, NBD Michigan, NBD Indiana, NBD Elkhart and NBD Florida. The Corporation also offers its small business customers a complete line of business insurance products, including property, business interruption, commercial liability and workers' compensation insurance. Middle Market Banking Middle market banking serves midsized business enterprises located predominately in the Midwest, and is conducted primarily through ANB, NBD Michigan and NBD Indiana. The Corporation offers its middle market customers a broad array of targeted products, including traditional lending arrangements, asset-based lending, and commercial real estate and lease financing. Corporate finance products and services offered include merger and acquisition advisory services, financial advisory services, interest rate protection products and mezzanine debt capabilities. In addition, the Corporation offers a full range of cash management, international, investment management, corporate trust and employee benefit products to its middle market customers. For business owners and key executives, the Corporation offers personal banking, trust, insurance, investment, loan, deposit and estate planning services. The Corporation enjoys leading market positions in middle market banking in each of its major geographic markets. Corporate Banking Corporate Banking encompasses the broad range of commercial and investment banking products and services that FNBC, NBD Michigan and NBD Indiana, along with other subsidiaries, provide to domestic and 3 foreign customers. The Corporation's principal focus in this area is the delivery of corporate financial services, including the extension of credit, to large and midsized corporations, financial institutions, governmental entities and nonprofit organizations. The Corporation offers its corporate and institutional clients capital- raising products, including loans, private placements of debt securities, merger and acquisition advisory services, highly leveraged transaction financing, asset sales and distributions, asset securitizations and loan syndications. In the global financial marketplace, the Corporation engages in investment and trading activities in U.S. government, municipal, corporate fixed-income and federal agency securities. The Corporation also provides to its corporate and institutional clients a wide range of risk management products, such as foreign exchange, futures, foreign exchange options, interest rate options, and interest rate and currency swaps. First Chicago Capital Markets, Inc. ("FCCM"), one of the Corporation's subsidiaries, is a primary government bond dealer and is principally responsible for activities in the securities of states, municipalities, other governmental entities and certain corporate entities, including trading, sales, underwriting, research, and maintenance of an active secondary market with national sales distribution. In July 1997, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") approved the Corporation's application to engage, through FCCM, in the underwriting and dealing of equity securities. In addition, the Corporation, through a number of its subsidiaries, develops, markets and delivers cash management, operating, clearing and other noncredit products and services, both overseas and domestically. These include money transfer, collection, disbursement, documentary, remittance, trade finance and international securities clearing services. Corporate Banking offers a wide range of administrative and trust and investment advisory services to its customers. Each of FNBC, NBD Michigan, NBD Indiana and ANB acts as trustee of corporate, pension, profit-sharing and other employee- benefit trusts, and acts as registrar, fiscal and paying agent for business entities. In addition, First Chicago Trust Company of New York ("FCTC"), a New York state-chartered trust company ranking among the largest stock transfer agents in the United States, provides custody, special agency, stock transfer, and securities issuing, paying and clearing services. Through the recently announced joint venture with Boston EquiServe Limited Partnership, FCTC and Boston EquiServe will form EquiServe, creating the largest shareholder servicer in the United States. Corporate Investments Corporate Investments encompasses mostly noncustomer-oriented activities that are conducted primarily through the Corporation's nonbank subsidiaries, including First Chicago Investment Corporation, First Chicago Equity Corporation, First Chicago Leasing Corporation, First Chicago Capital Corporation and First Chicago Financial Corporation, which raises funds to help finance these activities. The activities of Corporate Investments include growth equity investments, tax-advantaged investments, value-oriented investments, and funding and liquidity investments. Growth equity investment activities include providing various forms of equity funding for acquisitions, management buyouts and growing businesses; funding for these activities is provided by First Chicago Investment Corporation. First Chicago Equity Corporation, a small business investment company licensed under the Small Business Investment Act of 1958, offers equity funding for small business ventures. Tax-advantaged investment activities include advising on and investing in leases for commercial aircraft and major industrial and power production facilities and equipment. Investments are also made in alternative energy programs and affordable housing projects qualifying for tax credits under Section 29 and Section 42, respectively, of the Internal Revenue Code of 1986. Primary support for these activities is provided by First Chicago Leasing Corporation. 4 Value-oriented investment activities include taking positions in the distressed and value investment markets, such as loans, letters of credit, trade claims and securities of distressed companies. In addition, such activities include investing in: securities of companies whose debt trades below full face value of the claim; below-investment-grade tranches of commercial mortgage-backed securities; and fixed-income securities, publicly traded debt (including subordinated debt), equities, options and other securities. Support for the majority of these activities is provided by First Chicago Capital Corporation. Funding and liquidity investment activities provide funding to meet the incremental financing needs of the Corporation's bank subsidiaries by placing deposits and making investments in the wholesale money markets to provide a diversified funding base. These liquid investments include Fed funds and interest-bearing deposits. In addition, investments are generally made in short- to medium-term municipal, government and agency securities that provide increased liquidity and satisfy various collateral requirements. Credit Card Credit Card has primary responsibility for developing and marketing credit card products and related services to individuals nationwide using direct response, telemarketing and other techniques that do not require a local physical presence. While the Corporation's proprietary First Card VISA and MasterCard accounts are the primary Credit Card products, other products include check-accessed lines of credit, credit life insurance and related products and services. The majority of the Corporation's credit card accounts are owned and administered by FCCNB, a Delaware-based national banking association. FCCNB ranks among the largest issuers of bank credit cards in the United States. The Corporation's Credit Card operations centers are located in Wilmington, Delaware; Elgin, Illinois; Indianapolis, Indiana; Troy, Michigan; Springfield, Missouri; and Uniondale (Long Island), New York. At December 31, 1997, Credit Card managed approximately $18.3 billion in card-related receivables. Financial and Risk Policy The Corporation's Risk Management Committee selects the appropriate risk and return profile for the Corporation and approves and evaluates policies and strategies that determine the allocation of capital. The Risk Management Committee includes, among others, the Chairman and Chief Executive Officer, the Vice Chairmen, the Chief Risk Management Officer and the Chief Financial Officer. The Risk Management Committee is supported by: the Corporate Credit Policy Committee, which is responsible for reviewing and approving policies governing credit exposure for all lines of business, delegating approval authorities and reviewing portfolio performance; the Market and Investment Risk Management Policy Committee, which is responsible for reviewing and approving policies for trading, investment and capital markets activities, whether on behalf of clients or the Corporation, reviewing and approving policies relating to the Corporation's own asset and liability management and capital allocation, and reviewing performance measures, internal procedures and policy exceptions; and the Operating Risk Policy Committee, which is responsible for reviewing and approving policies governing activities that generate material operating, fiduciary and compliance risk, and reviewing performance measures, internal procedures and policy exceptions. EMPLOYEES As of December 31, 1997, the Corporation and its subsidiaries had 33,962 employees on a full-time-equivalent basis. COMPETITION All of the Corporation's principal business activities are highly competitive. The Corporation's subsidiaries, including the bank subsidiaries (the "Banks"), compete actively with other financial services providers offering a wide array of financial products and services. The Corporation's competitors include other national and state 5 banks, savings banks, savings and loan associations, finance companies, credit unions, mutual funds, securities brokers and dealers, mortgage bankers, leasing companies, insurance companies, other domestic and foreign financial institutions, and various nonfinancial intermediaries. MONETARY POLICY AND ECONOMIC CONTROLS The earnings of the Banks, and therefore the earnings of the Corporation, are affected by the policies of regulatory authorities, including the Federal Reserve Board. An important function of the Federal Reserve Board is to promote orderly economic growth by influencing interest rates and the supply of money and credit. Among the methods that have been used to achieve this objective are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, interest rates on loans and securities, and rates paid for deposits. The Federal Reserve Board's monetary policies strongly influence the behavior of interest rates and can have a significant effect on the operating results of commercial banks. Continued tame price inflation in 1997 contributed to the decision of the Federal Reserve Board to hold short-term interest rates within a narrow range. The effects of the various Federal Reserve Board policies on the future business and earnings of the Corporation cannot be predicted. Other economic controls also have affected the Corporation's operations in the past. The Corporation cannot predict the nature or extent of any effects that possible future governmental controls or legislation might have on its business and earnings. SUPERVISION AND REGULATION General The activities of bank holding companies, banks and financial institutions are extensively regulated at both the federal and state levels. As a bank holding company, the Corporation is subject to regulation under the BHC Act and to examination and supervision by the Federal Reserve Board. Under the BHC Act, the Corporation is prohibited, with certain exceptions, from acquiring or retaining direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company, and from engaging in activities other than those of banking or of managing or controlling banks, other than companies engaged in activities that the Federal Reserve Board determines to be so closely related to the business of banking as to be a proper incident thereto. The acquisition of direct or indirect ownership or control of a bank or bank holding company by the Corporation also is subject to certain restrictions under the BHC Act and applicable state laws. The Corporation is a legal entity separate and distinct from the Banks and the Corporation's other subsidiaries. The Banks are subject to certain restrictions imposed by federal laws on any extensions of credit to the Corporation or, with certain exceptions, other affiliates; on investments in stock or other securities of the Corporation; on the taking of such securities as collateral for loans; and on the terms of transactions between the Banks and other subsidiaries. The Corporation and its subsidiaries also are subject to certain restrictions with respect to engaging in the issuance, flotation, underwriting, public sale or distribution of securities. The national bank subsidiaries of the Corporation, including FNBC, ANB, FCCNB and NBD Indiana, are supervised, examined and regulated by the Office of the Comptroller of the Currency (the "Comptroller") under the National Bank Act. Since national banks also are members of the Federal Reserve System and their deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"), they also are subject to the applicable provisions of the Federal Reserve Act, the Federal Deposit Insurance Act and, in certain respects, to state laws applicable to financial institutions. NBD Michigan and the other state-chartered bank subsidiaries of the Corporation are, in general, subject to the same or similar restrictions and regulations, but with more extensive regulation and examination by state banking departments, the Federal Reserve Board for state banks that are members of the Federal Reserve System, and the FDIC for state banks that are not members of the Federal Reserve System. In addition, the Banks' operations in other countries are subject to various restrictions imposed by the laws of those countries. 6 Federal law prohibits the Corporation and certain of its subsidiaries from borrowing from the Banks unless such loans are secured by United States Treasury securities or other specified obligations. Further, such loans and investments by any of the Banks to the Corporation or any other affiliate are limited to 10% of the respective Bank's capital and surplus, and as to the Corporation and all such affiliates to an aggregate 20% of the respective Bank's capital and surplus. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each Bank and to commit resources to support such Bank in circumstances in which it might not do so absent that policy. In addition, any capital loans by the Corporation to any of the Banks would be subordinate in right of payment to deposits and to certain other indebtedness of such Bank. Additionally, there are certain federal and state regulatory limitations on the payment of dividends to the Corporation by the Banks. Dividend payments by national banks are limited to the lesser of (i) the level of undivided profits and (ii) absent regulatory approval, an amount not in excess of net income for the current year combined with retained net income for the preceding two years. As of January 1, 1998, the Banks could have declared additional dividends of approximately $1.1 billion without the approval of bank regulatory agencies. The payment of dividends by any Bank also may be affected by other factors, such as the maintenance of adequate capital for that Bank. Banking regulatory agencies have the authority to prohibit the banking organizations they supervise from paying dividends if, in the regulator's opinion, the payment of dividends would, in light of the bank's financial condition, constitute an unsafe or unsound practice. The BHC Act prohibits, with certain exceptions, the Banks from entering into certain tie-in arrangements in connection with extensions of credit or providing property or services. Legislation may be proposed or enacted, or regulations imposed, in the United States or its political subdivisions, or in any other jurisdiction in which the Corporation does business, to further regulate banking and financial services. The likelihood of passage and the effect of such legislation or regulations on the Corporation and the Banks cannot be predicted. Capital Adequacy The Federal Reserve Board has adopted risk-based capital guidelines that require bank holding companies to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) of 8%. At least half of total capital must be composed of common stockholders' equity, minority interest, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less disallowed intangibles and other adjustments ("Tier I capital"). The remainder ("Tier II capital") may consist of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan loss reserves. At December 31, 1997, the Corporation's consolidated Tier I capital and total capital ratios were 7.9% and 11.7%, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier I capital to total average assets (the "leverage ratio") of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The Corporation's leverage ratio at December 31, 1997, was 7.8%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a "tangible Tier I capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. Each of the Banks is subject to similar risk-based and leverage capital requirements adopted by the applicable federal bank regulatory agency. Each of the Banks was in compliance with the applicable minimum capital requirements as of December 31, 1997. Neither the Corporation nor any of the Banks has been advised by any federal bank regulatory agency of any specific minimum leverage ratio requirement applicable to it. 7 Failure to meet capital requirements could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business, which are described below under "FDICIA and FIRREA." FDICIA and FIRREA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") significantly expanded the regulatory and enforcement powers of federal banking regulators, in particular the FDIC, and has important consequences for the Corporation, the Banks and other depository institutions located in the United States. A major feature of FDICIA is the comprehensive directions it gives federal banking regulators to direct or require the correction of problems at inadequately capitalized banks promptly, and in a manner that is least costly to the federal deposit insurance funds. The degree of corrective regulatory involvement in the operations and management of banks and their holding companies is, under FDICIA, largely determined by the actual or anticipated capital positions of the subject institutions. FDICIA established five tiers of capital measurement for regulatory purposes ranging from "well-capitalized" to "critically undercapitalized." Under regulations adopted by the federal banking agencies, a depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below such measure, and critically undercapitalized if its tangible equity is not greater than 2% of total tangible assets. A depository institution may be deemed to be in a capitalization category lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. FDICIA requires banking regulators to take increasingly strong corrective steps, based on the capital tier of any subject bank, to cause such bank to achieve and maintain capital adequacy. Even if a bank is adequately capitalized, however, the banking regulators are authorized to apply corrective measures if the bank is determined to be in an unsafe or unsound condition or engaging in an unsafe or unsound activity. Depending on the level of capital of an insured depository institution, the banking regulatory agencies' corrective powers can include: requiring a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to reduce total assets; requiring the institution to issue additional stock (including voting stock) or to be acquired; placing restrictions on transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election for the institution's board of directors; requiring that certain senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; prohibiting the institution's parent holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution. If the insured depository institution is undercapitalized, the parent holding company is required to guarantee that the institution will comply with any capital restoration plan submitted to, and approved by, the appropriate federal banking agency in an amount equal to the lesser of (i) 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with the capital restoration plan. If such parent holding company guarantee is not obtained, the capital restoration plan may not be accepted by the banking regulators. As a result, such institution would be subject to the more severe restrictions imposed on significantly undercapitalized institutions. Further, the failure of such a depository institution to submit an acceptable capital plan is grounds for the appointment of a conservator or receiver. FDICIA also contains a number of other provisions affecting depository institutions, including additional reporting and independent auditing requirements, the establishment of safety and soundness standards, the system of risk-based assessments described below under "FDIC Insurance," a review of accounting standards, and 8 supplemental disclosures and limits on the ability of all but well-capitalized depository institutions to acquire brokered deposits. Since FDICIA was enacted, Congress has enacted the Riegle Community Development and Regulatory Improvement Act of 1994, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 and other legislation, which contain a number of specific provisions easing to some extent the regulatory burden on banks and bank holding companies, including some FDICIA-imposed requirements, and which are intended to make the bank regulatory system more efficient. Where required, federal banking regulators are taking actions to implement these provisions. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), among other things, provides generally that, upon the default of any bank of a multi-unit holding company, the FDIC may assess an affiliated insured depository institution for the estimated losses incurred by the FDIC. Specifically, FIRREA provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of a default. "Default" is defined generally as the appointment of a conservator or receiver. "In danger of a default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. All of the Banks are FDIC-insured depository institutions. FDIC Insurance The Banks are subject to FDIC deposit insurance assessments. Under the FDIC's risk-based assessment system, the assessment rate is based on classification of a depository institution in one of nine risk assessment categories. Such classification is based upon the institution's capital level and upon certain supervisory evaluations of the institution by its primary regulator. The current assessment rate schedule creates a spread in assessment rates ranging from 0.27% per annum on the amount of domestic deposits for banks classified as weakest by the FDIC down to no annual assessment for banks classified as strongest by the FDIC. Interstate Banking and Branching The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") significantly revised prior laws applicable to interstate acquisitions of banks and bank holding companies and the branching powers of national banks. Prior to the Riegle-Neal Act, the Federal Reserve Board was not permitted to approve an application to acquire shares of a bank located outside the state in which the operations of the applicant's bank subsidiaries were principally conducted unless the acquisition was specifically authorized by a statute of the acquired bank's state. The Federal Reserve Board is now authorized to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of a bank located in another state without regard to whether such transaction is prohibited under the laws of such state. The Federal Reserve Board may not, however, approve such an application if, following the acquisition, the applicant would control either (l) more than 10% of all insured depository institution deposits in the United States or (2) under certain circumstances, 30% or more of all insured depository institution deposits in any state where either the applicant or the acquired bank is located. The 30% limit on aggregate deposits that may be controlled by an applicant can be adjusted by the states on a nondiscriminatory basis. The Riegle-Neal Act also revised the laws applicable to mergers between insured banks located in different states. Before passage of the Riegle-Neal Act, such mergers generally were not authorized. As of June l, 1997, however, adequately capitalized and adequately managed insured banks in different states may merge without regard to whether the merger is authorized under the laws of any state. Under the Riegle-Neal Act, states could have prohibited interstate bank mergers by adopting, prior to June 1, 1997, legislation to "opt out" of the 9 provision, to be applied on equal terms to all out-of-state banks. The Riegle- Neal Act provides that an interstate merger involving the acquisition of a bank branch (as distinguished from an entire bank) or the de novo establishment of a bank branch in another state may be approved only if the law of the host state expressly permits such action. Generally an interstate merger may not be approved if, following the merger, the resulting bank (and all insured depository institutions that are affiliates of the resulting bank) would control (1) more than 10% of all insured depository institution deposits in the United States or (2) under certain circumstances, 30% or more of all insured depository institution deposits in any state where the resulting bank will be located. The 30% limit on aggregate deposits that may be controlled by the resulting bank can be adjusted by the states on a nondiscriminatory basis. The laws of the host state regarding community reinvestment, consumer protection, fair lending and the establishment of intrastate branches will apply to any branch of an out-of-state bank unless, in the case of an out-of- state branch of a national bank, such host state laws are preempted by federal law or the Comptroller determines that application of such laws would have a discriminatory effect on the national bank. The Riegle-Neal Act contains a number of other provisions related to banks and bank holding companies, including: authorization of interstate branching by foreign banks; additional branch closing notice requirements for interstate banks proposing to close a branch in a low- or moderate-income area; amendments to the Community Reinvestment Act of 1977 to require separate written evaluations of an insured depository institution for each state in which it maintains branches; a prohibition on interstate banks maintaining out-of-state deposit production offices; and authorization for a bank subsidiary of a bank holding company to receive deposits, renew time deposits, close and service loans, and receive payments on loans as agent for a depository institution affiliate of such bank. The extent to and terms on which full interstate branching and certain other actions authorized under the Riegle-Neal Act are implemented will depend on the actions of entities other than the Corporation and the Banks, including the legislatures of the various states. Further developments by state and federal authorities, including legislation, with respect to matters covered by the Riegle-Neal Act reasonably can be anticipated to occur in the future. Other FNBC, NBD Michigan, NBD Indiana and ANB are registered with the Comptroller or the Securities and Exchange Commission (the "Commission") as transfer agents and are subject to the rules and regulations of the Commission and/or the Comptroller with respect to their activities as transfer agents. FCTC is registered as a transfer agent with the Commission and also is subject to regulation by the New York State Banking Department and the Federal Reserve Board. FCCM is registered with the Commission as a municipal securities dealer and is regulated by the Commission and the Municipal Securities Rulemaking Board. FCCM also is subject to the rules and regulations governing U.S. government securities transactions under the Government Securities Act. Certain organizational units within FNBC, NBD Michigan, ANB and NBD Indiana also act, to a limited extent, as municipal and U.S. government securities dealers and are subject to the same regulations. First Chicago NBD Investment Services, Inc. ("FCNIS"), which provides investment products and brokerage services to individuals and small businesses, is registered as a broker-dealer with the Commission and is a member of the National Association of Securities Dealers ("NASD"). The brokerage activities of FCNIS are subject to the applicable rules and regulations of the Commission and the NASD. FCCM also is registered as a broker-dealer with the Commission and is a member of the NASD. The securities distribution and trading activities of FCCM are subject to the applicable rules and regulations of the Federal Reserve Board, the Commission and the NASD. First Chicago Futures, Inc. ("FCFI"), a subsidiary of FNBC that conducts a commodities and securities brokerage business, is registered with the Commission as a broker-dealer and with the Commodity Futures Trading Commission ("CFTC") as a futures commission merchant, and is a member of the National Futures 10 Association ("NFA") and the NASD. FCFI is subject to the applicable rules and regulations of the Commission, the CFTC, the NFA, the NASD, and certain commodities and securities exchanges of which FCFI is a member with respect to its activities as a futures commission merchant and broker-dealer. FCNIMC provides investment advisory, management and administrative services to a variety of clients. FCNIMC is registered with the Commission as an investment adviser and, as such, is subject to the Investment Advisers Act of 1940. In addition, as an adviser to regulated investment companies, FCNIMC also may be subject to certain provisions of the Investment Company Act of 1940. The Corporation's insurance services and products are marketed through various bank and nonbank subsidiaries, each of which is licensed and regulated by applicable state insurance regulatory agencies. Similarly, certain of the Corporation's mortgage banking activities are subject to various federal and state licensing and/or regulatory requirements. 11 FINANCIAL REVIEW INDEX TO FINANCIAL REVIEW
PAGE ---- Selected Financial Data.................................................... 13 Business Segments.......................................................... 14 Earnings Analysis.......................................................... 17 Risk Management............................................................ 22 Liquidity Risk Management.................................................. 22 Market Risk Management..................................................... 24 Credit Risk Management..................................................... 28 Derivative Financial Instruments........................................... 34 Year 2000 Compliance....................................................... 36 Capital Management......................................................... 36 Consolidated Financial Statements.......................................... 41 Notes to Consolidated Financial Statements................................. 45 Report of Management on Responsibility for Financial Reporting............. 71 Report of Independent Public Accountants................................... 73 Selected Statistical Information........................................... 74
12 Selected Financial Data
(DOLLARS IN MILLIONS, EXCEPT 1997 1996 1995 1994 1993 PER SHARE DATA) -------- -------- -------- -------- ------- SUMMARY OF INCOME Net interest income.......... $ 3,572 $ 3,620 $ 3,208 $ 2,956 $ 2,784 Provision for credit losses.. 725 735 510 276 390 Noninterest income........... 2,751 2,548 2,591 2,393 2,769 Merger-related charges....... -- -- 267 -- -- FDIC special assessment...... -- 18 -- -- -- Operating expense............ 3,332 3,253 3,268 3,220 3,161 Net income................... 1,525 1,436 1,150 1,221 1,290 EARNINGS PER SHARE Basic........................ $ 4.99 $ 4.44 $ 3.48 $ 3.65 $ 3.94 Diluted...................... 4.90 4.33 3.41 3.58 3.79 FINANCIAL PERFORMANCE RATIOS Return on assets............. 1.41% 1.28% 0.94% 1.13% 1.33% Return on common stockholders' equity........ 18.6 17.0 14.3 16.6 19.9 Net interest margin Reported................... 3.95 3.83 3.14 3.29 3.41 Adjusted................... 4.54 4.44 3.89 4.02 4.04 Operating efficiency ratio... 51.9 51.9 55.4 59.2 55.8 PERIOD-END BALANCES Total assets................. $114,096 $104,619 $122,002 $112,763 $93,140 Long-term debt (1)........... 10,088 8,454 8,163 7,246 5,250 Total stockholders equity.... 7,960 9,007 8,450 7,809 7,499 COMMON SHARE DATA Dividends declared........... $ 1.64 $ 1.48 $ 1.35 $ 1.23 $ 1.08 Book value, year-end......... 26.87 27.31 25.25 22.60 21.25 Market price, year-end....... 83.50 53.75 39.50 27.38 29.75 CAPITAL RATIOS Common equity-to-assets ratio....................... 6.8% 8.2% 6.5% 6.4% 7.2% Regulatory leverage ratio (2)......................... 7.8 9.3 6.9 7.3 7.8 Risk-based capital (2) Tier 1 ratio............... 7.9 9.2 7.8 8.6 9.0 Total capital ratio........ 11.7 13.3 11.8 13.0 13.6
- -------- (1) Includes trust preferred capital securities. (2) 1997 ratios include activities of FCCM. For prior periods, ratios were calculated net of the investment in FCCM. 13 Business Segments OVERVIEW Financial results are reported by major business segments, principally structured around the customer markets served: Regional Banking, Corporate Banking, Corporate Investments and Credit Card. Corporate Banking and Corporate Investments are grouped together for financial reporting purposes. EARNINGS CONTRIBUTION BY BUSINESS SEGMENTS Pie Chart
1995* 1996 1997 Credit Card 23% 24% 19% Regional Banking 40% 43% 47% Corporate Banking/ Corporate Investments 36% 32% 33% Other 1% 1% 1%
*Operating Earnings 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. During 1997, the method for assigning capital to business units was revised. The "Capital Management" section, beginning on page 36, provides the conceptual framework. The net result of this allocation change was an increase in capital for Credit Card and a reduction to Corporate Banking's allocation. Results for prior years have been adjusted for the enhanced capital methodology and other changes in order to achieve consistency for comparison purposes. Credit Card results are presented before the securitization of credit card receivables ("presecuritized") to facilitate analysis of trends. For more information, see the discussion of net interest income, beginning on page 18, and noninterest income on page 19, as well as the reconciliation of reported to presecuritized results on page 75. 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." 14 REGIONAL BANKING
1997 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ------ Net interest income--tax-equivalent basis............... $2,213 $2,125 $2,051 Provision for credit losses............................. 105 119 102 Noninterest income...................................... 911 769 663 Noninterest expense..................................... 1,876 1,796 1,751 Net income.............................................. 711 616 531 Return on equity........................................ 20% 17% 17% Operating efficiency ratio.............................. 60 62 64 Average loans (in billions)............................. $ 35.7 $ 34.7 $ 31.9 Average assets (in billions)............................ 39.6 38.9 36.6 Average common equity (in billions)..................... 3.6 3.5 3.0
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, and together contributed 47% of the Corporation's 1997 earnings. Net income for Regional Banking rose 15% to $711 million for the year, and return on equity reached 20%.
RETAIL MIDDLE MARKET ---------------------- ------------------- (DOLLARS IN MILLIONS, EXCEPT WHERE 1997 1996 1995 1997 1996 1995 NOTED) ------ ------ ------ ----- ----- ----- Net interest income--tax- equivalent basis................. $1,281 $1,217 $1,175 $ 932 $ 908 $ 876 Provision for credit losses....... 79 73 51 26 46 51 Noninterest income................ 680 556 492 231 213 171 Noninterest expense............... 1,362 1,293 1,249 514 503 502 Net income........................ 318 259 226 393 357 305 Return on equity.................. 18% 15% 15% 21% 19% 19% Operating efficiency ratio........ 69 73 75 44 45 48 Average loans (in billions)....... $ 17.6 $ 17.2 $ 15.7 $18.1 $17.5 $16.2 Average assets (in billions)...... 19.7 19.5 18.7 19.9 19.4 17.9 Average common equity (in billions)........................ 1.8 1.7 1.5 1.8 1.8 1.5
Earnings in the Retail Banking segment grew 23% for the year. Spread income rose 5%, from a combination of higher deposits and related spreads, as well as from modest loan growth. Restructured fee schedules and asset sales also contributed to the overall revenue improvement. Operating efficiency trends continued to be favorable, and provision levels increased slightly. Middle Market's return on equity for 1997 was 21%, and its net income was 10% higher than a year earlier. A lower provision for credit losses coupled with continued substantial increases in noninterest income drove this performance. Loans and total spread income grew a modest 3% each. CORPORATE BANKING AND CORPORATE INVESTMENTS
1997 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ----- ----- ----- Net interest income--tax-equivalent basis.................. $ 675 $ 740 $ 758 Provision for credit losses................................ 23 34 35 Noninterest income......................................... 963 920 990 Noninterest expense........................................ 882 909 966 Net income................................................. 499 465 477 Return on equity........................................... 18% 14% 13% Operating efficiency ratio................................. 54 55 55 Average assets (in billions)............................... $59.1 $63.7 $78.4 Average common equity (in billions)........................ 2.8 3.3 3.4
15 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 contribution to the Corporation's earnings was nearly $500 million for 1997, or about 33% of total net income; return on equity rose to 18%.
CORPORATE CORPORATE BANKING INVESTMENTS ------------------- ---------------- (DOLLARS IN MILLIONS, EXCEPT WHERE 1997 1996 1995 1997 1996 1995 NOTED) ----- ----- ----- ---- ---- ---- Net interest income--tax-equivalent basis.................................. $ 577 $ 640 $ 641 $ 98 $100 $117 Provision for credit losses............. 23 34 35 -- -- -- Noninterest income...................... 669 620 692 294 300 298 Noninterest expense..................... 833 856 904 49 53 62 Net income.............................. 253 244 244 246 221 233 Return on equity........................ 12% 8% 8% 39% 41% 33% Operating efficiency ratio.............. 67 68 68 N/M N/M N/M Average loans (in billions)............. $20.0 $19.2 $18.7 $1.5 $1.2 $1.4 Average assets (in billions)............ 40.3 44.8 54.1 18.8 18.9 24.3 Average common equity (in billions)..... 2.2 2.7 2.7 0.6 0.6 0.7
- -------- N/M--Not meaningful. Corporate Banking posted 1997 net income of $253 million, for a return on equity of 12%. These results exclude a loss of $48 million from a segregated derivatives trading portfolio that is being managed separately from ongoing customer and other proprietary trading positions. Corporate Banking's profitability continues to progress toward the 15% return on equity target. This is being achieved through an intense focus on customer returns and efficient capital allocation, as well as growth in fee- based activities and ongoing expense management discipline. Market-driven revenue increased substantially in 1997, yet remains an area of potential further improvement. Corporate Investments contributed $246 million of net income and earned a 39% return on equity for 1997. Leasing income and securities gains continued to provide the vast majority of revenue for Corporate Investments. Additionally, the lower tax rate for this business segment reflects the effects of tax-advantaged investments. CREDIT CARD
(PRESECURITIZED) 1997 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ------ Net interest income--tax-equivalent basis............... $1,535 $1,500 $1,174 Provision for credit losses............................. 1,244 1,029 708 Noninterest income...................................... 752 651 560 Noninterest expense..................................... 567 558 541 Net income.............................................. 295 350 301 Return on equity........................................ 22% 31% 37% Operating efficiency ratio.............................. 25 26 31 Average loans (in billions)............................. $ 17.4 $ 17.6 $ 14.3 Average common equity (in billions)..................... 1.3 1.1 0.8
The Corporation's Credit Card business earned $295 million for 1997, or about 19% of total net income. Although earnings were down from a year ago, profitability for this business remained strong. Its return on equity was 22%. Credit losses continued to increase in 1997. Driven by rising personal bankruptcies, provision for credit losses increased more than 20%, or $215 million. Likewise, the net charge-off rate increased to 7.2% from 5.8% a year earlier. The trend throughout the year, however, did indicate signs of stabilization in the last two quarters. As a result of this weak credit environment, the capital assigned to Credit Card increased to $1.3 billion for the year. 16 Average loans were relatively flat for the year at $17.4 billion. At the same time, industry pricing remained competitive, which led to only a slight improvement in spread income. Fee income increased 15% for the year as an array of new pricing initiatives took effect. Operating expenses were well controlled, growing less than 2%. Credit Card's return on equity is targeted in the 20-25% range over the long term, making it one of the Corporation's most attractive businesses. OTHER ACTIVITIES
1997 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ---- ---- ----- Total revenue.................................................. $ 12 $ 12 $ 42 Noninterest expense............................................ 7 8 277 Net income (loss).............................................. 20 5 (159) Average assets (in billions)................................... 0.4 0.2 0.4
For 1997, net income of $20 million was recorded as Other Activities. Included in this result was a $48 million loss from a segregated portion of the derivatives trading portfolio. Offsetting this was a gain of $45 million from the sale of an investment management business as well as other asset sales gains. Furthermore, various corporate tax credits are reflected in this category for 1997. The 1995 loss represents primarily merger-related charges. Earnings Analysis SUMMARY The Corporation reported net income for 1997 of $1.525 billion, or $4.90 per share, compared with $1.436 billion, or $4.33 per share, for 1996 and $1.150 billion, or $3.41 per share, for 1995. Operating earnings for 1996, which excluded the after-tax effect of a special FDIC assessment, were $1.447 billion, or $4.36 per share. Operating earnings for 1995, which excluded the after-tax effect of the merger-related charges, were $1.341 billion, or $3.99 per share.
1997 1996 1995 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) ------- ------- ------- Net interest income--tax-equivalent basis........... $3,667 $3,722 $3,311 Provision for credit losses......................... 725 735 510 Noninterest income.................................. 2,751 2,548 2,591 Operating expense................................... 3,332 3,253 3,268 Net income.......................................... 1,525 1,436 1,150 Common Share Data Basic earnings per share.......................... $ 4.99 $ 4.44 $ 3.48 Average shares outstanding (in thousands)......... 301,421 316,765 320,049 Diluted earnings per share........................ $ 4.90 $ 4.33 $ 3.41 Average shares outstanding assuming full dilution (in thousands)................................... 306,977 326,731 329,598 Return on assets.................................... 1.41% 1.28% 0.94% Return on common stockholders' equity............... 18.6 17.0 14.3 Net interest margin Reported.......................................... 3.95 3.83 3.14 Adjusted (1)...................................... 4.54 4.44 3.89 Operating efficiency ratio.......................... 51.9 51.9 55.4
- -------- (1) Adjusted for securitization of credit card receivables and the activities of FCCM. 17 The Corporation's 1997 results reflect the following highlights: . Fee-based revenue, adjusted for the effects of credit card securitization, rose 13% over 1996. Strong results in loan syndications, cash management, and investment management and deposit products, as well as continued growth in credit card fees, contributed to the increase. . Market-driven revenue was marked by substantial securities gains and well below average trading results. . Commercial credit quality was excellent; nonperforming assets and net charge-offs in the commercial portfolio remained at historically low levels. . Escalating personal bankruptcies caused a drop in Credit Card profitability. The net charge-off rate for credit card receivables increased to 7.2% for the year, up from 5.8% in 1996. . Operating efficiency remained just under 52% for the year, an excellent performance despite increased expenses related to technology and reengineering initiatives. Key 1997 initiatives were century date compliance, enhancing retail delivery efficiency, and other technology- based infrastructure projects. As of year end, 39.4 million shares of the Corporation's common stock had been repurchased, essentially completing the 40-million-share common stock repurchase program announced in the fourth quarter of 1996. In the fourth quarter of 1997, the Corporation announced an additional 12-million-share repurchase program. 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 derivatives used to manage interest rate risk. Net interest margin measures how efficiently the Corporation uses its earning assets and 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 FCCM.
1997 1996 1995 (DOLLARS IN MILLIONS) ------- ------- -------- Reported Net interest income--tax-equivalent basis......... $ 3,667 $ 3,722 $ 3,311 Average earning assets............................ 92,792 97,274 105,306 Net interest margin............................... 3.95% 3.83% 3.14% Adjusted Net interest income--tax-equivalent basis......... $ 4,407 $ 4,377 $ 3,956 Average earning assets............................ 97,119 98,652 101,793 Net interest margin............................... 4.54% 4.44% 3.89%
When credit card receivables are sold in securitization transactions, the Corporation's earnings are unchanged. However, the net interest income related to these high-yield assets is replaced by increased servicing fees, net of related credit losses. The average levels of securitized receivables were $8.5 billion in 1997, $7.7 billion in 1996 and $7.2 billion in 1995. FCCM is the Corporation's wholly owned subsidiary engaged in permissible investment banking activities. Since 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. Net interest margin trends can be better analyzed if these earning assets and related margins are excluded. Adjusted net interest income for 1997 was slightly above that of a year ago. The effect of modest loan growth was partially offset by the impact of the stock repurchase program. Adjusted net interest margin for 1997 was 4.54%, compared with 4.44% for 1996. This increase reflected a more favorable mix of earning assets, including a significant reduction in low-margin assets. 18 Adjusted net interest income for 1996 increased by $421 million, or 11%, from that of 1995. Adjusted net interest margin improved to 4.44%, compared with 3.89% for 1995. Loan growth in both the Credit Card and Regional Banking businesses, coupled with the previously disclosed reduction of $25 billion of targeted low-margin assets, accounted for this improvement. NONINTEREST INCOME In order to provide more meaningful trend analysis, credit card fee revenue and total noninterest income in the following table have been adjusted to exclude the effect of credit card securitizations. Credit card fee revenue excludes the net credit card servicing revenue (spread income less credit costs) associated with securitized credit card receivables.
PERCENT INCREASE (DECREASE) ------------------- 1997 1996 1995 1996-1997 1995-1996 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Combined trading profits............. $ 81 $ 58 $ 210 40% (72)% Equity securities gains.............. 182 255 253 (29) 1 Investment securities gains (losses). 43 27 (16) 59 N/M ------ ------ ------ Market-driven revenue.............. 306 340 447 (10) (24) Gain on sale of loans................ 58 26 7 N/M N/M Gain on sale of investment management business............................ 45 -- -- N/M -- Accelerated disposition portfolio gains............................... 2 6 37 (67) (84) ------ ------ ------ Adjusted market-driven revenue..... 411 372 491 10 (24) Credit card fee revenue (1).......... 795 694 579 15 20 Fiduciary and investment management fees................................ 407 400 404 2 (1) Service charges on deposits.......... 460 414 382 11 8 Other service charges and commissions......................... 476 389 353 22 10 ------ ------ ------ Adjusted fee-based revenue......... 2,138 1,897 1,718 13 10 Other................................ 93 59 60 58 (2) ------ ------ ------ Adjusted noninterest income.......... $2,642 $2,328 $2,269 13 3 ====== ====== ======
- -------- (1)Net credit card servicing revenue totaled $109 million in 1997, $220 million in 1996, and $322 million in 1995. N/M--Not meaningful. Combined trading profits totaled $81 million for 1997, compared with $58 million for 1996 and $210 million for 1995. The trading performance for 1997 was disappointing. Derivative trading results were negatively affected by losses recognized in specific portfolio positions, as well as by a volatile interest rate environment. Foreign exchange trading, on the other hand, experienced better results, benefiting from the volatility in foreign currency markets. The following table provides additional details on total revenue from trading businesses, including both trading profits and net interest income generated from these activities. TRADING REVENUE
1997 1996 1995 (IN MILLIONS) ---- ---- ---- Foreign exchange and derivatives................................ $ 72 $ 63 $ 83 Fixed income and derivatives.................................... 11 48 106 Emerging markets................................................ -- 6 6 Other trading................................................... 89 58 97 ---- ---- ---- Total....................................................... $172 $175 $292 ==== ==== ====
Equity securities gains were $182 million for 1997, compared with $255 million for 1996 and $253 million for 1995. Investment securities gains totaled $43 million for 1997, compared with gains of $27 million for 1996 and losses of $16 million for 1995. 19 Credit card fee revenue was $795 million in 1997, up 15% from 1996. The increase was due to both higher transaction volume and pricing changes instituted during 1996 to mitigate rising credit costs. Fiduciary and investment management fees include revenue generated by traditional trust products and services, investment management activities, and the shareholder services business. These fees increased slightly in 1997, compared with a modest decrease in 1996. In 1996, the Corporation decided to exit its stand-alone global custody and master trust businesses; the exit was completed in the second quarter of 1997. Revenues from these activities totaled approximately $11 million for 1997 and $54 million for 1996. Revenues from the shareholder services business increased to $98 million for 1997 from $88 million for 1996 and $82 million for 1995. Growth in the shareholder services business continues to be constrained by industry consolidation and price competition. In February 1998, the Corporation announced an agreement under which its shareholder services business will combine with that of Boston EquiServe Limited Partnership, creating the nation's largest corporate shareholder services provider. As a result, the Corporation will recognize only its proportionate share of the new entity's net earnings rather than consolidating the results of its prior shareholder services business on a line-by-line basis. Service charges on deposits increased to $460 million for 1997 from $414 million for 1996. Higher retail deposit and cash management fees contributed to this growth. The higher deposit fees reflected the restructuring of deposit-based product offerings, while the increase in cash management fees resulted from more extensive cross-selling of these products across the Corporation's customer base. Other service charges and commissions increased 22% from a year ago. Increased transaction flow in the loan syndication management business, higher levels of fees from the sale of investment management products in the retail banking network, and the introduction of ATM fees for noncustomer transaction activity contributed to this excellent performance. Additionally, in 1997 the Corporation recognized a gain of $45 million on the sale of its institutional passive investment management business, gains of $58 million related to the sale of loans, and gains of $15 million related to the sale of nonstrategic retail banking facilities. PROVISION FOR CREDIT LOSSES Details of the Corporation's credit risk management and performance are presented in the "Credit Risk Management" section, beginning on page 28. NONINTEREST EXPENSE Operating expense was $3.332 billion for 1997, up $79 million from that of a year ago. Expenses increased particularly in the fourth quarter due to higher expenditures related primarily to technology and reengineering initiatives. These include century date compliance, enhancing retail delivery efficiencies, and other technology-based infrastructure projects that are expected to be completed or implemented in 1998. The operating efficiency ratio for 1997 was slightly under 52%. This compares favorably with the ratios of the previous two years and reflects a continuing focus on expense management. Operating expense for 1996 remained relatively flat from 1995 as merger savings were channeled into investments in technology and used to fund growth in selected business areas. SALARIES AND BENEFITS
PERCENT INCREASE (DECREASE) ------------------- 1997 1996 1995 1996-1997 1995-1996 (DOLLARS IN MILLIONS) ------- ------- ------- --------- --------- Salaries........................... $ 1,455 $ 1,423 $ 1,420 2% --% Employee benefits.................. 293 284 272 3 4 ------- ------- ------- Total.......................... $ 1,748 $ 1,707 $ 1,692 2 1 ======= ======= ======= Average full-time-equivalent employees......................... 33,815 34,115 35,352 (1) (3) ======= ======= =======
20 Total employee costs grew by $41 million, or 2%, in 1997, following an increase of $15 million, or 1%, between 1995 and 1996. Salary costs increased from a year ago as annual salary increases and higher performance-based incentives were partially offset by the effect of reduced staff levels. OTHER NONINTEREST EXPENSE
PERCENT INCREASE (DECREASE) ------------------- 1997 1996 1995 1996-1997 1995-1996 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Occupancy expense of premises, net.... $ 252 $ 259 $ 252 (3)% 3% Equipment rentals, depreciation and maintenance.......................... 210 227 225 (7) 1 Marketing and public relations........ 130 120 161 8 (25) FDIC insurance expense................ 8 4 58 100 (93) Amortization of intangible assets..... 60 79 88 (24) (10) Telephone............................. 95 88 80 8 10 Freight and postage................... 85 87 78 (2) 12 Travel and entertainment.............. 55 55 50 -- 10 Stationery and supplies............... 54 48 45 13 7 Operating and other taxes............. 31 30 29 3 3 Other................................. 604 549 510 10 8 ------ ------ ------ Operating expense................. 1,584 1,546 1,576 2 (2) Merger-related charges................ -- -- 267 N/M N/M FDIC special assessment............... -- 18 -- N/M N/M ------ ------ ------ Total............................. $1,584 $1,564 $1,843 1 (15) ====== ====== ======
- -------- N/M--Not meaningful. The changes in marketing costs over the past three years are generally due to the level of credit card solicitation costs. Costs in 1995 supported a significant solicitation program that produced a record 3.4 million credit card accounts. FDIC insurance expense for 1996, excluding a special one-time assessment of $18 million related to the recapitalization of the Savings Association Insurance Fund ("SAIF"), totaled $4 million. The decline from 1995 resulted from a substantial reduction in the insurance rate for Bank Insurance Fund deposits. However, a good portion of this expense savings was passed on to business customers in the form of fee reductions. Intangible amortization expense declined in both periods as certain identified intangible assets became fully amortized. Merger-related charges in 1995 totaled $267 million, of which $225 million was related to direct merger and related restructuring costs. Other charges of $42 million were for the one-time conformance of accounting practices. (See Note 3 beginning on page 49 for more details.) Other operating expenses increased for 1997 primarily related to technology and reengineering initiatives. Expenses to support these initiatives include software, consulting and an array of outside service costs. APPLICABLE INCOME TAXES The following table shows the Corporation's income before income taxes, applicable income taxes, and effective tax rate for each of the past three years.
1997 1996 1995 (DOLLARS IN MILLIONS) ------ ------ ------ Income before income taxes.............................. $2,266 $2,162 $1,754 Applicable income taxes................................. 741 726 604 Effective tax rates..................................... 32.7% 33.6% 34.4%
21 Tax expense for all three years included benefits for tax-exempt income and general business tax credits offset by the effect of nondeductible expenses, including goodwill. An increasing level of transaction activity in tax advantaged products generates returns in the form of reduced income tax expense. Such transaction activity has reduced the overall effective tax rate for the years shown in the above table. Risk Management The Corporation's various business activities generate liquidity, market and credit risks: . Liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely manner. . Market risk is the possibility that changes in future market rates or prices will make the Corporation's positions less valuable. . Credit risk is the possibility of loss from a customer's failure to perform according to the terms of a transaction. Compensation for assuming these risks is reflected in interest income, combined trading profits and fee income. In addition, these risks are factored into the allocation of capital to support various business activities, as discussed in the "Capital Management" section, beginning on page 36. The Corporation is a party to transactions involving financial instruments that create risks that may or may not be reflected on a traditional balance sheet. These financial instruments can be subdivided into three categories: . Cash financial instruments, which are generally characterized as on- balance-sheet transactions, and include loans, bonds, stocks and deposits. . Credit-related financial instruments, which include such instruments as commitments to extend credit and standby letters of credit. . Derivative financial instruments, which include such instruments as interest rate, foreign exchange, equity price and commodity price contracts, including forwards, swaps and options. The Corporation's risk management policies are intended to monitor and limit exposure to liquidity, market and credit risks that arise from each of these types of financial instruments. Liquidity Risk Management Liquidity risk management encompasses the Corporation's ability to meet all present and future financial obligations in a timely manner. The Consolidated Statement of Cash Flows, on page 44, presents data on cash and cash equivalents provided by and used in operating, investing and financing activities. 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 Corporation believes its management policies and guidelines will ensure adequate levels of liquidity to fund anticipated needs of on- and off-balance- sheet items. In addition, a contingency funding plan identifies actions to be taken in response to an adverse liquidity event. The objectives of liquidity management policies are to maintain: . strong credit ratings and capital ratios; . adequate liquid assets; . liability diversification among instruments, maturities and customers; and . a continuously strong presence both in the wholesale purchased funds market and in the retail deposit market. 22 Strong credit ratings foster the ability to attract wholesale funds on a regular basis and at a competitive cost. The Corporation's principal Banks (referred to collectively as the "Principal Banks"), comprising ANB, FNBC, FCCNB, NBD Indiana and NBD Michigan, all have identical credit ratings. The short-term debt ratings for the parent cover commercial paper issuances. The long- and short-term debt ratings for the Principal Banks cover bank note issuances.
SHORT-TERM LONG-TERM DEBT DEBT CREDIT RATINGS --------------- ------------ S&P MOODY'S S&P MOODY'S DECEMBER 31, 1997 --------------- ---- ------- First Chicago NBD Corporation (parent)............. A+ A1 A-1 P-1 The Principal Banks................................ AA- Aa3 A-1+ P-1
Liquid assets are maintained in the form of federal funds sold, deposit placements and selected investment securities to meet any immediate cash flow obligations. Note 6, beginning on page 51, provides a detailed breakdown of the investment portfolio. The Corporation segments its balance sheet into liquid assets, core assets and non-core assets for liquidity management purposes. Liabilities are grouped as core liabilities, wholesale purchased funds and non-core liabilities. Core assets and liabilities consist primarily of customer-driven lending and deposit-taking activities. The large retail customer deposit base (the principal component of core liabilities) is one of the significant sources of liquidity. Through its various banking entities, the Corporation maintains direct access to local retail deposit markets and uses a network of brokers for gathering retail deposits on a national basis. Core liabilities also include subordinated debt and equity. As part of the monthly liquidity measurement process, the funding of core assets with core liabilities is monitored. As of December 31, 1997, 76% of core assets were funded with core liabilities, while the wholesale market provided only 24% of core asset funding. The Corporation has established a 35% limit on the use of wholesale purchased funds for funding core assets. By limiting dependence on the wholesale market, the risk of a disruption to the lending business from an adverse liquidity event is minimized. Access to a variety of funding markets and customers in the retail and wholesale sectors is vital both to liquidity management and to cost minimization. A reliable, diversified mix of funding from the wholesale market is created by active participation in global capital markets. Internal guidelines are used to manage the product mix and customer concentration of wholesale funding. In addition, as part of the normal liquidity management process, the Corporation securitizes and sells assets such as credit card receivables. Securitization is an important funding vehicle that both diversifies funding sources and raises large amounts of term funding in a cost-effective manner. 23 DEPOSITS AND OTHER PURCHASED FUNDS
1997 1996 1995 1994 1993 DECEMBER 31 (IN MILLIONS) ------- ------- -------- ------- ------- Domestic offices Demand........................... $16,069 $15,702 $ 15,234 $14,378 $14,852 Savings.......................... 21,437 21,722 20,180 20,088 21,154 Time Under $100,000................. 9,507 9,851 9,972 8,720 8,310 $100,000 and over.............. 5,671 5,143 5,947 4,484 4,089 Foreign offices.................... 15,805 11,251 17,773 17,225 9,602 ------- ------- -------- ------- ------- Total deposits............... 68,489 63,669 69,106 64,895 58,007 Federal funds purchased and securities under repurchase agreements........................ 9,271 7,859 15,711 16,919 11,038 Commercial paper................... 1,089 762 288 206 323 Other short-term borrowings........ 8,621 6,810 9,514 8,216 6,506 Long-term debt (1)................. 10,088 8,454 8,163 7,246 5,250 ------- ------- -------- ------- ------- Total other purchased funds.. 29,069 23,885 33,676 32,587 23,117 ------- ------- -------- ------- ------- Total........................ $97,558 $87,554 $102,782 $97,482 $81,124 ======= ======= ======== ======= =======
- -------- (1)Includes trust preferred capital securities. 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 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. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 18, beginning on page 65. 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. The Corporation's 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. 24 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 the Corporation could lose 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 exposure are monitored in each significant trading portfolio on a daily basis. The following table shows the value-at-risk at year-end for trading activities and other activities, primarily certain investment securities classified as available-for-sale, that are managed principally as trading risk. VALUE-AT-RISK
DECEMBER 31, 1997 (IN MILLIONS) Individual market risks Interest rate............................................................ $25 Exchange rate............................................................ 6 Equity price............................................................. 3 Commodity price.......................................................... 1 Risk reduction (due to diversification).................................. (2) --- Aggregate portfolio market risk............................................ $33 ===
Trading revenue totaled $172 million for 1997, $175 million for 1996, and $292 million for 1995. Trading revenue includes trading profits and net interest income. The value-at-risk calculation measures potential losses in fair value and is based on a methodology which 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 significant progress in recognizing offsets across different trading portfolios. However, the reported value-at-risk remains somewhat overstated because all offsets and correlations are not fully considered in the calculation. At December 31, 1997, approximately 71% of primary market risk exposures were related to interest rate risk, while exchange rate, equity price and commodity price risks accounted for 17%, 9% and 3%, respectively. Approximately 50% of interest rate risk was generated by U.S. Treasury securities and mortgage-backed securities. Interest rate derivatives accounted for 21% of the total exposure. About 11% of the risk was generated by U.S. corporate securities, and 5% of the risk was generated by U.S. municipal securities. The remaining interest rate risk was derived from money market, foreign exchange and various other trading activities. Within the category of exchange rate risk, 91% of the risk was generated by foreign exchange spot, forward and option trading. The remaining risk was largely from cross-currency derivatives trading activities. Equity price risk was primarily generated by equity derivatives trading activities in Chicago, Tokyo and London. Commodity price risk was generated by the Corporation's commodity derivatives desk in Chicago, which specializes in those products eligible for bank trading under regulatory requirements. At December 31, 1997, market risk exposures were 21% higher than at year-end 1996. The Corporation's holdings in U.S. Treasury securities, mortgage-backed securities, and foreign exchange positions were the 25 principal factors behind the increased exposure in 1997, which was somewhat offset by reduced exposure in derivatives contracts. 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 represent the primary risk of loss to the Corporation as they are complex risk positions that are difficult to offset completely. Earnings sensitivity analysis measures the estimated change to pretax earnings of various interest rate movements. The Corporation is modeled as an on-going 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 or minus 100 basis point and plus or 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. At year-end, the Corporation had the following estimated earnings sensitivity profile.
IMMEDIATE CHANGE IN RATES --------------- +200 BP -200 BP DECEMBER 31, 1997 (IN MILLIONS) ------- ------- Annual pretax earnings change................................... $32 $(16)
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 26 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. 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 year-end 1997, the notional value of ALM interest rate swaps totaled $9.288 billion, including $5.189 billion against specific transactions and $4.099 billion against specific pools of assets or liabilities. ASSET AND LIABILITY MANAGEMENT DERIVATIVES--NOTIONAL PRINCIPAL
RECEIVE FIXED PAY FIXED PAY FLOATING RECEIVE FLOATING BASIS SWAPS --------------- ------------------ ----------- DECEMBER 31, 1997 (IN SPECIFIC POOL SPECIFIC POOL POOL TOTAL MILLIONS) -------- ------ ---------- ------- ----------- ------ Swaps associated with: Loans.................. $ -- $ 451 $ 98 $ -- $ -- $ 549 Investment securities.. -- -- 203 -- -- 203 Securitized credit card receivables........... -- 83 -- -- -- 83 Deposits............... 50 2,450 -- -- -- 2,500 Funds borrowed (including long-term debt)................. 4,588 -- 250 75 1,040 5,953 ------ ------ -------- ------- ------ ------ Total................ $4,638 $2,984 $ 551 $ 75 $1,040 $9,288 ====== ====== ======== ======= ====== ====== Other ALM Contracts (1)................................................ $ 250 ======
- -------- (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. 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 would affect the related weighted average information presented in the table. 27 ASSET AND LIABILITY MANAGEMENT SWAPS--MATURITIES AND RATES
DECEMBER 31, 1997 (DOLLARS IN 1998 1999 2000 2001 2002 THEREAFTER TOTAL MILLIONS) ------ ---- ---- ---- ---- ---------- ------ Receive fixed/pay floating swaps Notional amount............... $3,435 $649 $781 $779 $381 $1,597 $7,622 Weighted average Receive rate................ 6.16% 6.24% 6.17% 7.15% 7.59% 6.68% 6.45% Pay rate.................... 5.99 6.06 5.95 5.98 6.03 5.97 5.99 Pay fixed/receive floating swaps Notional amount............... $ 62 $ 88 $116 $ 33 $291 $ 36 $ 626 Weighted average Receive rate................ 6.03% 5.97% 5.91% 5.99% 5.99% 5.99% 5.98% Pay rate.................... 7.93 7.89 7.67 7.64 6.48 7.51 7.16 Basis swaps Notional amount............... $1,015 $ 25 -- -- -- -- $1,040 Weighted average Receive rate................ 5.85% 5.87% -- -- -- -- 5.85% Pay rate.................... 5.86 5.96 -- -- -- -- 5.87 ------ ---- ---- ---- ---- ------ ------ Total notional amount..... $4,512 $762 $897 $812 $672 $1,633 $9,288 ====== ==== ==== ==== ==== ====== ======
FOREIGN EXCHANGE RISK MANAGEMENT Wherever 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 credit risk management 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. Customer transactions create credit exposure that is reported both on and off the balance sheet. On-balance-sheet credit exposure includes such items as loans. Off-balance-sheet credit exposure includes unfunded credit commitments and other credit-related financial instruments. Credit exposures resulting from derivative financial instruments are reported both on and off the balance sheet as explained beginning on page 35. 28 SELECTED STATISTICAL INFORMATION
1997 1996 1995 1994 1993 (DOLLARS IN MILLIONS) ------- ------- ------- ------- ------- At year-end Loans outstanding............... $68,724 $66,414 $64,434 $55,176 $48,654 Nonperforming loans............. 311 262 363 294 485 Other real estate, net.......... 15 28 34 57 87 Nonperforming assets............ 326 290 397 351 572 Allowance for credit losses..... 1,408 1,407 1,338 1,158 1,106 Nonperforming assets/loans outstanding and other real estate, net.................... 0.5% 0.4% 0.6% 0.6% 1.2% Allowance for credit losses/loans outstanding....... 2.0 2.1 2.1 2.1 2.3 Allowance for credit losses/nonperforming loans..... 453 537 369 394 228 For the year Average loans................... $66,286 $64,949 $58,944 $50,083 $47,110 Net charge-offs................. 724 670 264 192 296 Net charge-offs/average loans... 1.1% 1.0% 0.4% 0.4% 0.6%
For analytical purposes, the Corporation's portfolio is divided into commercial (domestic and foreign) and consumer (credit card and other consumer) segments. LOAN COMPOSITION
1997 1996 1995 1994 1993 DECEMBER 31 (IN MILLIONS) ------- ------- ------- ------- ------- Commercial risk Domestic Commercial............................ $28,939 $27,718 $25,551 $22,546 $19,310 Real estate Construction......................... 1,380 1,057 1,151 1,074 1,105 Other................................ 5,324 5,103 6,103 5,903 5,613 Lease financing....................... 2,144 1,820 1,588 1,381 1,295 Foreign................................ 4,515 3,656 3,726 3,305 3,083 ------- ------- ------- ------- ------- Total commercial.................... 42,302 39,354 38,119 34,209 30,406 ------- ------- ------- ------- ------- Consumer risk Credit cards.......................... 9,693 9,601 9,649 6,980 6,393 Secured by real estate (1)............ 8,911 9,406 8,933 7,025 6,088 Automotive (2)........................ 4,040 4,423 4,477 3,994 3,241 Other................................. 3,778 3,630 3,256 2,968 2,526 ------- ------- ------- ------- ------- Total consumer...................... 26,422 27,060 26,315 20,967 18,248 ------- ------- ------- ------- ------- Total............................... $68,724 $66,414 $64,434 $55,176 $48,654 ======= ======= ======= ======= =======
- -------- (1) Includes home-equity loans. (2) Includes auto-lease receivables. 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 various on- and off-balance-sheet financial instruments. The level of the allowance reflects management's formal review and analysis of potential credit losses, as well 29 as prevailing economic conditions. Each quarter, the adequacy of the allowance for credit losses is evaluated and reported to the Risk Management Committee of the Corporation's Board of Directors. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
1997 1996 1995 1994 1993 (IN MILLIONS) ------ ------ ------ ------ ------ Balance, beginning of year............... $1,407 $1,338 $1,158 $1,106 $1,041 Provision for credit losses.............. 725 735 510 276 390 Charge-offs Commercial Domestic Commercial............................ 124 114 70 68 122 Real estate........................... 10 20 25 41 99 Lease financing....................... 5 7 2 3 6 Foreign................................ -- 2 1 9 47 Consumer Credit card............................ 658 567 241 193 165 Other.................................. 119 105 70 50 46 ------ ------ ------ ------ ------ Total charge-offs.................... 916 815 409 364 485 Recoveries Commercial Domestic Commercial............................ 63 45 59 55 81 Real estate........................... 21 20 16 15 9 Lease financing....................... 1 1 2 1 2 Foreign................................ 12 15 9 44 17 Consumer Credit card............................ 55 33 33 32 57 Other.................................. 40 31 26 25 23 ------ ------ ------ ------ ------ Total recoveries..................... 192 145 145 172 189 Net charge-offs.......................... 724 670 264 192 296 Transfers related to securitized receivables............................. -- 4 (75) (49) (29) Other (1)................................ -- -- 9 17 -- ------ ------ ------ ------ ------ Balance, end of year..................... $1,408 $1,407 $1,338 $1,158 $1,106 ====== ====== ====== ====== ======
- -------- (1) Primarily acquisitions. 30 NONPERFORMING ASSETS At December 31, 1997, nonperforming assets totaled $326 million, compared with $290 million at year-end 1996 and $397 million at year-end 1995. Nonperforming assets at December 31, 1997, included $311 million of nonaccrual loans and $15 million of other real estate owned. The following charts illustrate the level of nonperforming assets for the past five years. (BAR GRAPH) NONPERFORMING ASSETS--PERIOD END $ MILLIONS
1993 1994 1995 1996 1997 $572 $351 $397 $290 $326 OREO $ 87 $ 57 $ 34 $ 28 $ 15 Loans $485 $294 $363 $262 $311
(BAR GRAPH) NONPERFORMING ASSETS AS A PERCENTAGE OF LOANS AND OTHER REAL ESTATE--PERIOD END
1993 1994 1995 1996 1997 1.2% 0.6% 0.6% 0.4% 0.5%
Nonaccrual loans at year-end 1997 included $25 million of foreign loans (primarily in Asia), compared with $5 million of foreign loans at year-end 1996. In addition, the Corporation had a $36 million standby letter of credit at year-end 1997 to a borrower experiencing financial difficulties. The standby letter of credit was funded and placed on nonaccrual in January 1998. The following table shows a breakout of nonperforming loans for the past five years.
1997 1996 1995 1994 1993 DECEMBER 31 (DOLLARS IN MILLIONS) ---- ---- ---- ---- ---- Nonaccrual loans................................. $311 $262 $344 $267 $478 Accrual renegotiated loans....................... -- -- 19 27 7 ---- ---- ---- ---- ---- Total nonperforming loans.................... $311 $262 $363 $294 $485 ==== ==== ==== ==== ==== Nonperforming loans Domestic....................................... $286 $257 $360 $284 $421 Foreign........................................ 25 5 3 10 64 ---- ---- ---- ---- ---- Total nonperforming loans.................... $311 $262 $363 $294 $485 ==== ==== ==== ==== ==== Nonperforming loans/loans outstanding............ 0.5% 0.4% 0.6% 0.5% 1.0% ==== ==== ==== ==== ====
CONSUMER RISK MANAGEMENT Consumer loans consist of credit card receivables as well as home mortgage loans, automobile financing and other forms of consumer installment credit. The consumer loan portfolio decreased during the year to $26.4 billion at year-end 1997. Including securitized credit card receivables, the consumer portfolio decreased $0.9 billion, or 2%, to $35.1 billion at December 31, 1997. 31 CONSUMER LOANS
1997 1996 1995 1994 1993 DECEMBER 31 (IN MILLIONS) ------- ------- ------- ------- ------- Credit card loans...................... $ 9,693 $ 9,601 $ 9,649 $ 6,980 $ 6,393 Securitized credit card receivables.... 8,639 8,888 7,877 6,117 4,958 ------- ------- ------- ------- ------- Total managed credit card receivables...................... 18,332 18,489 17,526 13,097 11,351 Other consumer loans Secured by real estate (1)........... 8,911 9,406 8,933 7,025 6,088 Automotive (2)....................... 4,040 4,423 4,477 3,994 3,241 Other................................ 3,778 3,630 3,256 2,968 2,526 ------- ------- ------- ------- ------- Other consumer loans............... 16,729 17,459 16,666 13,987 11,855 ------- ------- ------- ------- ------- Total............................ $35,061 $35,948 $34,192 $27,084 $23,206 ======= ======= ======= ======= =======
- -------- (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 portfolio, loss potential is tested using expected levels of losses based on delinquencies and on the source, age and other risk characteristics of the portfolio. For the other segments of the consumer portfolio, reserve factors are based on historical loss rates, trends and other relevant risk factors. Managed credit card receivables (i.e., those held in the portfolio and those sold to investors through securitization) were $18.3 billion at December 31, 1997, down 1% from year-end 1996. Average managed credit card receivables were $17.3 billion for 1997, down 1% from 1996. Credit card receivables represent the most significant risk element in the consumer portfolio. The credit card charge-off rate of 7.2% in 1997 represented a significant increase from prior years. During the last two quarters of 1997, the credit card charge-off rate stabilized. In addition, 1997 delinquency rates stabilized. CREDIT CARD RECEIVABLES
1997 1996 1995 1994 1993 (DOLLARS IN MILLIONS) ------- ------- ------- ------- ------ Average balances Credit card loans................. $ 8,833 $ 9,774 $ 7,006 $ 5,904 $4,772 Securitized credit card receivables...................... 8,466 7,672 7,179 5,538 4,839 ------- ------- ------- ------- ------ Total average managed credit card receivables............... $17,299 $17,446 $14,185 $11,442 $9,611 ======= ======= ======= ======= ====== Total net charge-offs (including securitizations)................... $ 1,246 $ 1,019 $ 572 $ 403 $ 342 ======= ======= ======= ======= ====== Net charge-offs/average total managed receivables................ 7.2% 5.8% 4.0% 3.5% 3.6% Credit card delinquency rate 30 or more days................... 4.3 4.5 3.6 3.0 3.0 90 or more days................... 1.7 1.8 1.3 1.1 1.0
In the near term, credit card losses are expected to remain at elevated levels throughout the industry as consumer debt service burdens remain high, competition for creditworthy customers remains intense, and national bankruptcy filings continue to climb. Management continues to review credit limits, close high-risk unprofitable accounts, tighten new account solicitation criteria, monitor authorization criteria, and review policies and procedures for delinquency management and collections. 32 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 increased 7% from $39.4 billion at December 31, 1996, to $42.3 billion at December 31, 1997. Nonperforming commercial assets increased $36 million to $326 million at year-end 1997, from $290 million at December 31, 1996. Commercial net charge-offs were $42 million in 1997, compared with $62 million in 1996 and $12 million in 1995. In the commercial portfolio, credit quality is rated according to defined levels of credit risk. The lower categories of credit risk are 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 repaid without restructuring the credit. Each quarter, the Corporation conducts an asset-by-asset review of significant lower-rated credit or country exposure. Potential losses are identified during this review, and reserves are adjusted accordingly. COMMERCIAL REAL ESTATE Commercial real estate consists primarily of 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. At December 31, 1997, commercial real estate loans totaled $6.7 billion, or 16% of commercial loans, compared with $6.2 billion, or 16% of commercial loans, at December 31, 1996. During 1997, net recoveries in the commercial real estate portfolio segment were $11 million, compared with less than $1 million in 1996. Nonperforming commercial real estate assets, including other real estate, totaled $77 million, or 1.1% of related assets, at December 31, 1997, compared with $128 million, or 2.1% of related assets, at December 31, 1996. FOREIGN OUTSTANDINGS The table below presents a breakout of foreign outstandings for the past two years, where such outstandings exceeded 1.0% of total assets. The amounts have been prepared using the Federal Financial Institutions Examination Council's reporting guidelines, which were revised in 1997. Under the revised guidelines, local country claims, which include both local and nonlocal currency activity, are reported net of local country liabilities. The 1996 amounts have been restated to conform to the revised guidelines. Included in claims for both periods are loans, balances with banks, acceptances, securities, equity investments, accrued interest and other monetary assets. For 1997, cross-border claims include the current credit exposure on derivative contracts, which is net of master netting agreements. This current credit exposure totaled $641 million for Japan, $181 million for France and $189 million for Korea. Current credit exposure on derivative contracts is not included in the reported 1996 amounts.
CROSS-BORDER CLAIMS ------------------------- TOTAL CROSS GOVERNMENTS NET LOCAL BORDER & NET & OFFICIAL COUNTRY LOCAL COUNTRY DECEMBER 31 BANKS INSTITUTIONS OTHER CLAIMS CLAIMS (IN MILLIONS) ----------- ------ ------------ ----- --------- ------------- Japan (1)........ 1997 $4,225 $ -- $386 $ -- $4,611 1996 3,782 -- 22 -- 3,804 France........... 1997 1,137 231 249 -- 1,617 1996 * * * * * Korea (2)........ 1997 570 10 685 256 1,521 1996 660 -- 487 183 1,330
- -------- (1) At year-end 1997 and 1996, net local country claims were reduced by local country liabilities of $83 million and $161 million, respectively. (2) At year-end 1997 and 1996, net local country claims were reduced by local country liabilities of $31 million and $29 million, respectively. *Represents less than 1% of total assets 33 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 and included $79 million of current credit exposure on derivative contracts. At December 31, 1996, there were no countries for which cross-border and net local country claims totaled between 0.75% and 1.0% of total assets. At December 31, 1995, the Corporation's foreign outstandings (presented as cross-border and nonlocal currency claims) to Japan ($6.329 billion), the United Kingdom ($1.368 billion) and France ($1.264 billion) each exceeded 1.0% of total assets. At that date, the only country for which cross-border and nonlocal currency claims totaled between 0.75% to 1.0% of total assets was Korea ($1.023 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. See Note 16, beginning on page 62, for a discussion of the nature and terms of derivative financial instruments. NOTIONAL PRINCIPAL OR CONTRACTUAL AMOUNTS OF DERIVATIVE FINANCIAL INSTRUMENTS The following tables represent the gross notional principal or contractual amounts of outstanding derivative financial instruments used in certain activities. These amounts indicate the volume of transaction activity, and they do not represent the market or credit risk associated with these instruments. In addition, such volumes do not reflect the netting of offsetting transactions.
ASSET AND LIABILITY CORPORATE TRADING MANAGEMENT INVESTMENTS TOTAL DECEMBER 31, 1997 (IN BILLIONS) -------- ---------- ----------- -------- Interest rate contracts............... $ 817.9 $ 9.5 $ -- $ 827.4 Foreign exchange contracts............ 422.5 1.6 -- 424.1 Equity contracts...................... 12.3 -- 0.1 12.4 Commodity contracts................... 2.7 -- -- 2.7 -------- ----- ---- -------- Total............................. $1,255.4 $11.1 $0.1 $1,266.6 ======== ===== ==== ======== DECEMBER 31, 1996 (IN BILLIONS) Interest rate contracts............... $ 644.1 $ 9.6 $ -- $ 653.7 Foreign exchange contracts............ 375.4 1.7 -- 377.1 Equity contracts...................... 8.6 -- 0.2 8.8 Commodity contracts................... 3.4 -- -- 3.4 -------- ----- ---- -------- Total............................. $1,031.5 $11.3 $0.2 $1,043.0 ======== ===== ==== ========
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS 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. 34 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. 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. INCOME RESULTING FROM DERIVATIVE FINANCIAL INSTRUMENTS A discussion of the Corporation's income from derivatives used in trading activities is included in the "Trading Revenue" table on page 19. The Corporation uses interest rate derivative financial instruments to reduce structural interest rate risk and the volatility of net interest margin. Net interest margin reflects the effective use of these derivatives. Without their use, net interest income would have been lower by $26 million in 1997 and $33 million in 1996, and higher by $12 million in 1995. CREDIT EXPOSURE RESULTING FROM DERIVATIVE FINANCIAL INSTRUMENTS The Corporation maintains risk management policies that monitor and limit exposure to credit risks. For a further discussion of credit risks, see the "Credit Risk Management" section, beginning on page 28. 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. The table below shows the impact of these master netting agreements.
1997 1996 DECEMBER 31 (IN MILLIONS) -------- ------- Gross replacement cost........................................ $ 14,675 $14,933 Less: Adjustment due to master netting agreements........... (10,035) (9,876) -------- ------- Current credit exposure....................................... 4,640 5,057 Less: Unrecognized net gains due to nontrading activity..... (93) (83) -------- ------- Balance sheet exposure........................................ $ 4,547 $ 4,974 ======== =======
35 Current credit exposure represents the total loss that the Corporation would have suffered had every counterparty been in default on those dates. These amounts are reduced by the 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 interest rates, exchange 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 $6.9 billion higher than the current credit exposure at December 31, 1997, and $6.3 billion higher at December 31, 1996. Year 2000 Compliance The Corporation has established an overall plan to address systems-related Year 2000 issues. The plan calls for either modification to, or replacement of, approximately 700 existing business system applications. Management's best estimate of the cost of this Year 2000 compliance program related to system modifications is approximately $100 million, of which approximately $45 million was incurred by December 31, 1997. Such costs are charged to expense as incurred. The Corporation currently anticipates that substantially all of the remaining work under this program, including the testing of critical systems, will be completed by the end of 1998. A contingency plan has been established for critical business system applications to mitigate potential delays or other problems 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 also could be adversely affected if other entities (e.g., vendors or customers) not affiliated with the Corporation do not appropriately address their own Year 2000 compliance issues. Capital Management SELECTED CAPITAL RATIOS
CORPORATE 1997 1996 1995 1994 1993 GUIDELINE DECEMBER 31 ---- ---- ---- ---- ---- --------- Common equity/total assets.............. 6.8% 8.2% 6.5% 6.4% 7.2% N/A Tangible common equity ratio............ 6.5 7.8 6.1 6.0 6.7 N/A Stockholders' equity/total assets....... 7.0 8.6 6.9 6.9 8.1 N/A Risk-based capital ratios (1)(2) Tier 1................................ 7.9 9.2 7.8 8.6 9.0 7-8% Total................................. 11.7 13.3 11.8 13.0 13.6 11-12% Leverage ratio (1)(2)................... 7.8 9.3 6.9 7.3 7.8 5.5-7.0% Double leverage ratio (1)............... 117 105 115 113 108 120%* Dividend payout ratio................... 33 34 40 34 28 30-40%
- -------- (1) Includes trust preferred capital securities. (2) 1997 ratios include activities of FCCM. For prior periods, ratios were calculated net of the investment in FCCM. N/A--Not applicable. * Less than or equal to. 36 Capital represents the stockholders' investment on which the Corporation strives to generate attractive returns. It is the foundation of a cohesive risk management framework and links return with risk. Capital supports business growth and provides protection to depositors and creditors. Key capital management objectives are to: . generate attractive returns to enhance shareholder value; . maintain a capital base commensurate with overall risk profile; . maintain strong capital ratios relative to peers; and . meet or exceed all regulatory guidelines. In conjunction with the annual financial planning process, a capital plan is established to ensure that the Corporation and all of its subsidiaries have capital structures consistent with prudent management principles and regulatory requirements. ECONOMIC CAPITAL In the normal course of business, the Corporation assumes several types of risk: credit, liquidity, structural interest rate, market and business. An economic capital framework has been constructed to determine the total capital the Corporation needs to support these risks and to allocate this capital to business segments, products and customers based on the amount and type of risk inherent in the activity. Return on economic capital is a key decision-making tool used for managing risk-taking activities, and for ensuring that capital is efficiently and profitably employed. The Corporation's economic capital framework was revised in the first quarter of 1997, as referenced in the "Business Segments" section beginning on page 14. Enhancements to the framework were made to provide a more current and complete assessment of the risks inherent in the Corporation's business activities. Capital is allocated for two types of risk: portfolio and business. Portfolio risk capital is designed to cover the potential loss of value arising from credit, market and investment risks. The amount of such capital is calculated to absorb unexpected losses to a desired level of statistical confidence. The potential for loss is based on the analysis of historical loss experience and market expectations. Business risk capital is designed to incorporate hard-to-quantify risks such as event and technology risks, and operating leverage. It is determined by first examining the capital structures of publicly traded companies engaged in activities comparable to the Corporation, where possible. Secondly, the volatility of a business' operating margin (excluding credit losses and market-related activities) is also used in the assessment of business risk capital. 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 capital ratio is 7% to 8%. This ratio is currently managed to 8%, which is used for line-of-business capital allocations. Excess capital, defined as common equity above that required for the 8% Tier 1 capital ratio target, is available for core business investment and acquisitions. If attractive long-term opportunities are not available over time in core businesses, management intends to return any excess capital to stockholders, typically by way of stock repurchase programs and/or dividend increases. During 1997, this excess amount averaged $70 million, compared with $171 million in 1996. The repurchase of common shares in 1997 was used to keep excess capital to a minimum. REGULATORY CAPITAL The Corporation aims to maintain regulatory capital ratios, including those of the Principal Banks, 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. Both targets exceed the respective well-capitalized guidelines of 6% and 10%. The Tier 1 and total capital ratios for the past three years have exceeded or been at the upper end of the target ranges. 37 In January 1997, a wholly owned consolidated trust subsidiary of the Corporation issued in the aggregate $250 million of preferred securities, bringing the total issued on behalf of the Corporation to $1 billion. These "Trust Preferred Capital Securities" are tax-advantaged issues that qualify for Tier 1 capital treatment. TIER 1 AND TOTAL CAPITAL RATIOS--PERIOD END Bar Graph
1995 1996 1997 Tier 1 7.8% 9.2% 7.9% Total 11.8% 13.3% 11.7% Regulatory Guidelines Tier 1 6% 6% 6% Total 10% 10% 10%
The components of the Corporation's regulatory risk-based capital and risk- weighted assets are shown below:
1997 1996 1995 DECEMBER 31 (IN MILLIONS) -------- -------- ------- Regulatory Risk-Based Capital Tier 1 capital........................................ $ 8,541 $ 9,186 $ 7,750 Tier 2 capital........................................ 4,118 4,146 4,017 -------- -------- ------- Total capital..................................... $ 12,659 $ 13,332 $11,767 ======== ======== ======= Regulatory Risk-Weighted Assets Balance sheet risk-weighted assets.................... $ 76,700 $ 71,177 $71,040 Off-balance-sheet risk-weighted assets................ 31,883 29,078 28,403 -------- -------- ------- Total risk-weighted assets............................ $108,583 $100,255 $99,443 ======== ======== =======
In arriving at Tier 1 and total capital, such amounts are reduced by goodwill and other nonqualifying intangible assets as shown below. INTANGIBLE ASSETS
1997 1996 1995 DECEMBER 31 (IN MILLIONS) ---- ---- ---- Goodwill......................................................... $365 $397 $446 Other nonqualifying intangibles.................................. 3 3 12 ---- ---- ---- Subtotal..................................................... 368 400 458 Qualifying intangibles........................................... 64 69 94 ---- ---- ---- Total intangibles............................................ $432 $469 $552 ==== ==== ====
38 The Principal Banks have exceeded the well-capitalized guidelines for the past three years, as shown in the following tables. By maintaining regulatory well-capitalized status, these banks benefit from lower FDIC deposit premiums.
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 Leverage ratio............................. 7.6 8.9 12.6 9.3 7.8 DECEMBER 31, 1996 Risk-Based Capital Ratios Tier 1 capital........................... 7.8% 9.3% 10.6% 8.7% 9.7% Total capital............................ 11.2 13.5 13.5 11.5 11.0 Leverage ratio............................. 7.6 9.6 10.6 9.4 8.9 DECEMBER 31, 1995 Risk-Based Capital Ratios Tier 1 capital........................... 7.6% 7.6% 10.0% 9.2% 10.3% Total capital............................ 11.3 10.9 12.1 11.5 11.5 Leverage ratio............................. 5.9 7.4 11.7 9.2 7.9
Amendments to the risk-based capital requirements, incorporating market risk, became effective January 1, 1998. Under the new market risk requirements, capital will be allocated to support the amount of market risk related to the Corporation's ongoing trading activities. The market risk rules apply only to institutions with significant trading activities. Currently, the Corporation and FNBC will be subject to the new rules. Had the rules been in effect at December 31, 1997, the Corporation's Tier 1 and Total risk-based capital ratios would have been 7.8% and 11.6%, respectively, and FNBC's Tier 1 and Total risk-based capital ratios would have been 7.6% and 10.8%, respectively. DIVIDENDS The Corporation's common dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain an adequate capital level and alternative investment opportunities. The Corporation is currently targeting a common dividend payout ratio in the range of 30% to 40% of operating earnings over time. In November 1997, the Corporation increased its quarterly common dividend to $0.44 per share. This represented a 10% increase over the previous $0.40 per share dividend rate. COMMON STOCK DIVIDENDS DECLARED (PER SHARE)
Bar Graph 1995 1996 1997 $1.35 $1.48 $1.64
39 STOCK REPURCHASE PROGRAM AND OTHER CAPITAL ACTIVITIES The repurchase of shares is an integral part of capital management used to enhance shareholder value. The Corporation's stock repurchase program, announced in October 1996, authorized the repurchase of up to 40 million shares of common stock. Under this authorization, the Corporation repurchased 7.3 million shares of common stock at an average price of $53.93 per share in 1996 and an additional 32.1 million shares at an average price of $64.61 per share during 1997. At December 31, 1997, 0.6 million shares remained available for repurchase under this program. In November 1997, the Board of Directors authorized the purchase of up to an additional 12 million shares of the Corporation's common stock upon completion of the October 1996 40-million-share stock repurchase program. In October 1997, the Board of Directors authorized the redemption on November 17, 1997, of all shares outstanding of its 8.45% Cumulative Preferred Stock, Series E, and the corresponding redemption of the related depositary shares, each representing a one-twenty-fifth interest in a share of the Series E Preferred Stock. The redemption price was $25.27 per depositary share, which included accrued and unpaid dividends of $0.27 per depositary share. In February 1997, the Corporation authorized the redemption on April 1, 1997, of all shares outstanding of its 5 3/4% Cumulative Convertible Preferred Stock, Series B, and the corresponding redemption of the related depositary shares, each representing a one-hundredth interest in a share of the Convertible Preferred Stock. The redemption price was approximately $52.44 per depositary share, which included accrued and unpaid dividends of approximately $0.72 per depositary share. Essentially all of the Series B Preferred Stock was converted to shares of the Corporation's common stock prior to the redemption date. DOUBLE LEVERAGE Double leverage is the extent to which the Corporation's debt is used to finance investments in subsidiaries. Presently, the Corporation intends to limit its double leverage ratio to no more than 120% at any time. On December 31, 1997, double leverage was 117%, compared with 105% at year-end 1996. Trust Preferred Capital Securities of $996 million at year-end 1997 and $748 million at year-end 1996 are included in capital for purposes of this calculation. 40 CONSOLIDATED BALANCE SHEET FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1997 1996 DECEMBER 31 (DOLLARS IN MILLIONS) -------- -------- ASSETS Cash and due from banks.................................... $ 7,223 $ 7,823 Interest-bearing due from banks............................ 6,904 5,474 Federal funds sold and securities under resale agreements.. 8,501 4,197 Trading assets............................................. 4,198 4,812 Derivative product assets.................................. 4,547 4,974 Investment securities...................................... 9,330 7,178 Loans (net of unearned income--$961 in 1997 and $764 in 1996)..................................................... 68,724 66,414 Less allowance for credit losses......................... (1,408) (1,407) -------- -------- Loans, net............................................... 67,316 65,007 Premises and equipment..................................... 1,439 1,415 Customers' acceptance liability............................ 708 577 Other assets............................................... 3,930 3,162 -------- -------- Total assets........................................... $114,096 $104,619 ======== ======== LIABILITIES Deposits Demand................................................... $ 16,069 $ 15,702 Savings.................................................. 21,437 21,722 Time..................................................... 15,178 14,994 Foreign offices.......................................... 15,805 11,251 -------- -------- Total deposits......................................... 68,489 63,669 Federal funds purchased and securities under repurchase agreements................................................ 9,271 7,859 Other short-term borrowings................................ 9,710 7,572 Long-term debt............................................. 9,092 7,706 Guaranteed preferred beneficial interest in the Corporation's junior subordinated debt.................... 996 748 Acceptances outstanding.................................... 708 577 Derivative product liabilities............................. 4,616 4,753 Other liabilities.......................................... 3,254 2,728 -------- -------- Total liabilities...................................... 106,136 95,612 STOCKHOLDERS' EQUITY Preferred stock--without par value, authorized 10,000,000 shares Shares Outstanding 1997 1996 ----------- ----------- Series B ($100 stated value)..... 1,191,000 1,191,000 119 119 Series C ($100 stated value)..... 713,800 713,800 71 71 Series E ($625 stated value)..... -- 160,000 -- 100 Convertible Series B ($5,000 stated value)................... -- 30,786 -- 154 Common stock--$1 par value......... 320 320 Number of shares authorized...... 750,000,000 750,000,000 Number of shares issued.......... 319,509,114 319,509,189 Number of shares outstanding..... 289,137,449 313,473,520 Surplus.................................................... 1,966 2,149 Retained earnings.......................................... 7,446 6,433 Fair value adjustment on investment securities available- for-sale.................................................. 49 38 Deferred compensation...................................... (79) (58) Accumulated translation adjustment......................... 6 7 Treasury stock at cost, 30,371,665 shares in 1997 and 6,035,669 shares in 1996.................................. (1,938) (326) -------- -------- Stockholders' equity..................................... 7,960 9,007 -------- -------- Total liabilities and stockholders' equity............. $114,096 $104,619 ======== ========
The accompanying notes are an integral part of this balance sheet. 41 CONSOLIDATED INCOME STATEMENT FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1997 1996 1995 FOR THE YEAR (IN MILLIONS, EXCEPT PER-SHARE DATA) ------ ------ ------ INTEREST INCOME Loans, including fees...................................... $5,849 $5,745 $5,260 Bank balances.............................................. 451 463 620 Federal funds sold and securities under resale agreements.. 304 510 922 Trading assets............................................. 277 394 467 Investment securities--taxable............................. 369 364 694 Investment securities--tax-exempt.......................... 97 93 127 ------ ------ ------ Total.................................................. 7,347 7,569 8,090 INTEREST EXPENSE Deposits................................................... 2,178 2,175 2,581 Federal funds purchased and securities under repurchase agreements................................................ 498 671 1,192 Other short-term borrowings................................ 480 552 538 Long-term debt............................................. 619 551 571 ------ ------ ------ Total.................................................. 3,775 3,949 4,882 ------ ------ ------ NET INTEREST INCOME........................................ 3,572 3,620 3,208 Provision for credit losses................................ 725 735 510 ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES...... 2,847 2,885 2,698 NONINTEREST INCOME Combined trading profits................................... 81 58 210 Equity securities gains.................................... 182 255 253 Investment securities gains (losses)....................... 43 27 (16) ------ ------ ------ Market-driven revenue.................................... 306 340 447 Credit card fee revenue.................................... 904 914 901 Fiduciary and investment management fees................... 407 400 404 Service charges and commissions............................ 936 803 735 ------ ------ ------ Fee-based revenue........................................ 2,247 2,117 2,040 Other income............................................... 198 91 104 ------ ------ ------ Total.................................................. 2,751 2,548 2,591 NONINTEREST EXPENSE Salaries and employee benefits............................. 1,748 1,707 1,692 Occupancy expense of premises, net......................... 252 259 252 Equipment rentals, depreciation and maintenance............ 210 227 225 Amortization of intangible assets.......................... 60 79 88 Other...................................................... 1,062 981 1,011 ------ ------ ------ Operating Expense........................................ 3,332 3,253 3,268 Merger-related charges..................................... -- -- 267 FDIC special assessment.................................... -- 18 -- ------ ------ ------ Total.................................................. 3,332 3,271 3,535 ------ ------ ------ INCOME BEFORE INCOME TAXES................................. 2,266 2,162 1,754 Applicable income taxes.................................... 741 726 604 ------ ------ ------ NET INCOME................................................. $1,525 $1,436 $1,150 ====== ====== ====== NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY..... $1,504 $1,405 $1,113 ====== ====== ====== EARNINGS PER SHARE BASIC.................................................... $ 4.99 $ 4.44 $ 3.48 DILUTED.................................................. $ 4.90 $ 4.33 $ 3.41
The accompanying notes are an integral part of this statement. 42 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1997 1996 1995 FOR THE YEAR (IN MILLIONS) ------- ------ ------ PREFERRED STOCK Balance, beginning of period.......................... $ 444 $ 489 $ 611 Conversion of preferred stock......................... (154) (45) (1) Redemption of preferred stock......................... (100) -- (121) ------- ------ ------ Balance, end of period................................ 190 444 489 ------- ------ ------ COMMON STOCK Balance, beginning of period.......................... 320 319 329 Issuance of stock..................................... -- 1 1 Cancellation of shares held in treasury............... -- -- (11) ------- ------ ------ Balance, end of period................................ 320 320 319 ------- ------ ------ SURPLUS Balance, beginning of period.......................... 2,149 2,185 2,555 Issuance of common stock.............................. -- 4 14 Issuance of treasury stock............................ (100) (84) (21) Conversion of preferred stock......................... (138) (18) -- Acquisition of subsidiaries........................... -- 17 (3) Cancellation of shares held in treasury............... -- -- (369) Other................................................. 55 45 9 ------- ------ ------ Balance, end of period................................ 1,966 2,149 2,185 ------- ------ ------ RETAINED EARNINGS Balance, beginning of period.......................... 6,433 5,497 4,808 Net income............................................ 1,525 1,436 1,150 Cash dividends declared on common stock............... (491) (469) (424) Cash dividends declared on preferred stock............ (21) (31) (37) ------- ------ ------ Balance, end of period................................ 7,446 6,433 5,497 ------- ------ ------ FAIR VALUE ADJUSTMENT ON INVESTMENT SECURITIES AVAILABLE-FOR-SALE Balance, beginning of period.......................... 38 112 (158) Unrealized gain on securities transferred from held- to-maturity to available-for-sale on November 17, 1995 (net of taxes of $55)........................... -- -- 101 Change in fair value (net of taxes of $6 in 1997, $(41) in 1996, and $99 in 1995)...................... 11 (74) 169 ------- ------ ------ Balance, end of period................................ 49 38 112 ------- ------ ------ DEFERRED COMPENSATION Balance, beginning of period.......................... (58) (39) (33) Awards granted........................................ (42) (32) (18) Amortization of deferred compensation................. 50 26 21 Other................................................. (29) (13) (9) ------- ------ ------ Balance, end of period................................ (79) (58) (39) ------- ------ ------ ACCUMULATED TRANSLATION ADJUSTMENT Balance, beginning of period.......................... 7 8 7 Translation gain (loss), net of taxes................. (1) (1) 1 ------- ------ ------ Balance, end of period................................ 6 7 8 ------- ------ ------ TREASURY STOCK Balance, beginning of period.......................... (326) (121) (310) Purchase of common stock.............................. (2,045) (412) (513) Acquisition of subsidiaries........................... -- -- 262 Cancellation of shares held in treasury............... -- -- 380 Conversion of preferred stock......................... 292 62 1 Issuance of stock..................................... 141 145 59 ------- ------ ------ Balance, end of period................................ (1,938) (326) (121) ------- ------ ------ Total Stockholders' Equity, end of period........... $ 7,960 $9,007 $8,450 ======= ====== ======
The accompanying notes are an integral part of this statement. 43 CONSOLIDATED STATEMENT OF CASH FLOWS FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1997 1996 1995 FOR THE YEAR (IN MILLIONS) -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................ $ 1,525 $ 1,436 $ 1,150 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.................... 234 255 274 Provision for credit losses...................... 725 735 510 Equity securities gains.......................... (182) (255) (253) Net (increase) decrease in net derivative product balances................................ 290 (231) 296 Net (increase) decrease in trading assets........ 538 3,331 (2,766) Net (increase) decrease in loans held for sale... 273 11 (243) Net (increase) decrease in accrued income receivable...................................... (4) 133 (131) Net increase (decrease) in accrued expenses payable......................................... 277 (17) (178) Net (increase) decrease in other assets.......... (705) (91) 174 Merger-related charges........................... -- -- 267 Other noncash adjustments........................ (243) 5 (106) -------- -------- -------- Total adjustments.............................. 1,203 3,876 (2,156) Net cash provided by (used in) operating activities....................................... 2,728 5,312 (1,006) CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in federal funds sold and securities under resale agreements............... (4,304) 7,501 2,003 Purchase of investment securities--available-for- sale............................................. (13,518) (4,626) (4,340) Purchase of debt investment securities--held-to- maturity......................................... -- -- (119) Purchase of equity securities--fair value......... (142) (138) (385) Proceeds from maturities of debt securities-- available-for-sale............................... 1,272 2,248 3,652 Proceeds from maturities of debt securities--held- to-maturity...................................... -- -- 1,042 Proceeds from sales of investment securities-- available-for-sale............................... 10,168 4,340 5,564 Proceeds from sales of equity securities--fair value............................................ 308 425 1,051 Credit card receivables securitized............... 1,143 2,286 2,286 Net (increase) in loans........................... (4,554) (5,291) (10,815) Loan recoveries................................... 192 145 142 Net proceeds from sales of assets held for accelerated disposition.......................... 3 26 59 Purchases of premises and equipment............... (270) (286) (382) Proceeds from sales of premises and equipment..... 67 79 74 Net cash and cash equivalents due to mergers, acquisitions and dispositions.................... (90) (245) 116 -------- -------- -------- Net cash provided by (used in) investing activities....................................... (9,725) 6,464 (52) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits............... 5,005 (4,936) 2,616 Net increase (decrease) in federal funds purchased and securities under repurchase agreements....... 1,409 (7,852) (1,208) Net increase (decrease) in other short-term borrowings....................................... 2,138 (2,230) 1,574 Proceeds from issuance of long-term debt.......... 17,575 2,519 2,163 Redemption and repayment of long-term debt........ (15,853) (2,230) (1,262) Net increase (decrease) in other liabilities...... 335 (384) 103 Dividends paid.................................... (516) (488) (447) Proceeds from issuance of common and treasury stock............................................ -- 59 23 Purchase of treasury stock........................ (2,074) (412) (513) Payment for redemption of preferred stock......... (100) -- (121) -------- -------- -------- Net cash provided by (used in) financing activities....................................... 7,919 (15,954) 2,928 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS...................................... (92) (63) 119 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 830 (4,241) 1,989 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.... 13,297 17,538 15,549 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 14,127 $ 13,297 $ 17,538 ======== ======== ======== OTHER CASH FLOW DISCLOSURES Interest paid.................................... $ 3,791 $ 4,055 $ 4,666 State and federal income taxes paid.............. 576 663 808
- -------- Loans transferred to other real estate were $7 million, $25 million and $18 million in 1997, 1996 and 1995, respectively. The accompanying notes are an integral part of this statement. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES On December 1, 1995, FCC merged with and into NBD, with the combined company renamed First Chicago NBD Corporation. The merger was accounted for as a pooling of interests, and accordingly, the financial statements prior to the merger have been restated to reflect the consolidated results of the combined company. 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. Certain financial statement reclassifications have been made to prior years' information to conform with the current year's financial statement presentation. (A) PRINCIPLES OF CONSOLIDATION The Corporation's consolidated financial statements include the accounts of the Corporation (the "Parent Company") and all subsidiaries that are more than 50% owned by the Corporation. All significant intercompany accounts and transactions have been eliminated. (B) TRADING ACTIVITIES Trading assets and liabilities are carried at fair value. Realized and unrealized gains and losses related to trading activities are reflected in noninterest income as combined trading profits. Combined trading profits include interest rate, exchange rate, equity price, and commodity price trading results from both cash and derivative financial instruments. More information on the Corporation's trading revenue is shown in the "Trading Revenue" table on page 19. (C) INVESTMENT SECURITIES Debt and equity investment securities classified as available-for-sale are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in the fair value adjustment on investment securities available-for-sale in stockholders' equity. Realized gains and losses and other than temporary impairments related to these securities are determined using the specific identification method and are reported in noninterest income as investment securities gains (losses) or equity securities gains, as appropriate. The Corporation carries investments of its venture capital subsidiaries at fair value. Changes in the fair value of such investments are recognized in noninterest income as equity securities gains. The fair value of publicly traded investments takes into account their quoted market prices with adjustments made for market liquidity or sale restrictions. For investments that are not publicly traded, management has made estimates of fair value that consider the investees' financial results, conditions and prospects, and the values of comparable public companies. (D) LOANS Loans are generally reported at the principal amount outstanding, net of unearned income. Loans held for sale are valued at the lower of cost or fair value, with unrealized losses as well as realized gains or losses included in other noninterest income. Loan origination and commitment fees generally are deferred and amortized as interest income over the life of the related loan. Other credit-related fees, such as syndication management fees, commercial letters of credit fees, and fees on unused, available lines of credit, are recorded as service charges and commissions in noninterest income when earned. Loans, including lease financing receivables, are considered nonperforming when placed on nonaccrual status, or when renegotiated at terms that represent an economic concession to the borrower. Nonperforming loans are generally identified as impaired loans. 45 A commercial loan is placed on nonaccrual status when the collection of contractual principal or interest is deemed doubtful by management or becomes 90 days or more past due, and the loan is not well-secured and in the process of collection. Accrued but uncollected interest is reversed and charged against interest income when the commercial loan is placed on nonaccrual status. Interest payments on a partially charged-off commercial loan are applied to the remaining principal balance until the balance is fully recovered. Once principal is recovered, cash payments received are recorded as recoveries to the extent of prior charge-offs, and then as interest income. A charge-off on a commercial loan is recorded in the reporting period in which either an event occurs that confirms the existence of a loss or it is determined that a loan or a portion of a loan is uncollectible. Consumer loans are generally not placed on nonaccrual status but are typically charged off after reaching certain delinquency periods that range from approximately 120 to 180 days past due, or earlier in the event of notification of bankruptcy. The timing and amount of the charge-off will depend on the type of consumer loan and any related collateral. Accrued but uncollected interest on a consumer loan typically is reversed against interest income when the loan is charged off. An economic concession on a renegotiated loan may represent forgiveness of principal and/or interest or a below-market interest rate offered to the borrower to maximize recovery of the loan. Generally, this occurs when the borrower's cash flow is insufficient to service the loan under its original terms. Subject to the above nonaccrual policy, interest on these loans is accrued at the reduced rates. (E) CREDIT CARD SECURITIZATIONS The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," on January 1, 1997. This new Statement establishes criteria based on legal control to determine whether a transfer of a financial asset is a sale or a secured borrowing. A sale is recognized when the Corporation relinquishes control over a financial asset and is compensated for such asset. The difference between the net proceeds received and the carrying amount of the financial asset(s) being sold or securitized is recognized as a gain or loss on sale. The Corporation actively packages and sells credit card receivables as securities to investors. Based on the immaterial level of net interest cash flows related to such transactions, as well as the short average life of receivables sold, the Corporation does not record a gain or loss at the time of the securitization but recognizes excess interest on an accrual basis. Net interest cash flows include finance charges and late payment fees, net of charge-offs and the interest paid to certificateholders. Cash flows attributable to cardholder relationships (e.g., annual fees) or enhancement fee revenues (e.g., return payment fees) are recognized when earned as credit card fee revenue. Transaction costs are generally deferred and amortized as a reduction to credit card fee revenue over the terms of the related securitizations. (F) 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. The allowance for credit losses attributable to off-balance-sheet credit exposure is not material. The amount of the allowance is based on formal review and analysis of potential credit losses, as well as prevailing economic conditions. (G) PREMISES AND EQUIPMENT Premises and equipment are carried at amortized cost. Depreciation is charged to noninterest expense over the estimated useful lives of the assets on either a straight-line or an accelerated depreciation basis. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Maintenance, repairs and minor alterations are expensed as incurred. Gains and losses on disposition are reflected in other noninterest income. 46 (H) OTHER REAL ESTATE Other real estate includes primarily assets that have been received in satisfaction of debt. Other real estate is initially recorded and subsequently carried at the lower of cost or fair value less estimated selling costs. Any valuation adjustments required at the date of transfer are charged to the allowance for credit losses. Operating results from other real estate are recorded in other noninterest expense. (I) INTANGIBLE ASSETS Intangible assets are included in other assets. Goodwill, representing the cost of investments in subsidiaries and affiliated companies in excess of the fair value of net assets acquired, is amortized on a straight-line basis over periods ranging from 10 to 25 years. Other intangible assets, such as customer lists, core deposits and credit card relationships, are amortized using various methods over the periods benefited. (J) DERIVATIVE FINANCIAL INSTRUMENTS For a discussion of the Corporation's accounting policies for derivative financial instruments, see the "Derivative Financial Instruments" section, beginning on page 34. (K) FOREIGN CURRENCY TRANSLATION If a foreign installation's functional currency is the U.S. dollar, then its local currency financial statements are remeasured to U.S. dollars. Remeasurement effects and the results of related hedging transactions are included in other noninterest income. If a foreign installation's functional currency is its local currency, then its local currency financial statements are translated into U.S. dollars. Translation adjustments, related hedging results and applicable income taxes are included in accumulated translation adjustment within stockholders' equity. (L) MORTGAGE SERVICING RIGHTS The Corporation capitalizes originated mortgage servicing rights in accordance with SFAS No. 125. Such rights are carried at the lower of cost or market value on the consolidated balance sheet. The mortgage servicing rights portfolio is stratified by both product type and interest rate band for purposes of evaluating carrying value. The initial capitalization of originated mortgage servicing rights, in 1996, did not have a material effect on the Corporation's financial results. (M) STOCK-BASED COMPENSATION In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation." Under the provisions of this Statement, the Corporation elected to retain its current method of measuring and recognizing costs related to employee stock compensation plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and to disclose the pro forma effect of applying the fair value method contained in SFAS No. 123. Accordingly, no compensation costs are charged against income for stock options awarded under the Corporation's Stock Performance Plan or stock purchase rights offered under its Employee Stock Purchase and Savings Plan. In addition, the unamortized cost of performance and restricted shares awarded continues to be included in deferred compensation, a separate component of stockholders' equity. Information on the Corporation's stock-based compensation plans is included in Note 13(d), beginning on page 58. (N) CASH FLOW REPORTING The Corporation uses the indirect method, which reports cash flows from operating activities by adjusting net income to reconcile to net cash flows from operating activities. Cash and cash equivalents consist of cash and due from banks, whether interest-bearing or not. Net reporting of cash transactions has been used when the balance sheet items consist predominantly of maturities of three months or less, or where otherwise permitted. Other items are reported on a gross basis. 47 In 1997 and 1996, $154 million and $45 million, respectively, of the Corporation's 5 3/4% Cumulative Convertible Preferred Stock, Series B, were converted into common stock. See Note 12, on page 56, for more details. In 1995, a noncash transfer of $7.2 billion attributable to reclassifying debt investment securities from held-to-maturity to available-for-sale was made. The decision to reclassify was made in conjunction with the Financial Accounting Standards Board's ("FASB") issuance of an implementation guide. (O) RECENTLY ISSUED ACCOUNTING STANDARDS Certain provisions of SFAS No. 125 became effective and were adopted on January 1, 1998. The Corporation does not expect that this adoption will have a material effect on its financial position or results of operations. In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which became effective January 1, 1998. The Statement distinguishes comprehensive income between net income and other comprehensive income, which includes items such as "fair value adjustment on investment securities available for sale" and "accumulated translation adjustment." The Statement requires that all components of comprehensive income and a total amount for comprehensive income be displayed in either the income statement, a separate statement of comprehensive income, or the statement of stockholders' equity. Since this Statement solely relates to disclosure requirements, it will have no effect on the Corporation's financial results. In 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which becomes effective for the Corporation's 1998 Annual Report. The Statement establishes the "management approach" for identifying and reporting operating segments for interim and annual reporting purposes. The management approach identifies operating segments based on the information management uses to evaluate performance and allocate resources to its operating segments. The Statement also requires certain disclosures pertaining to products and services, geographic areas, and major customers. The Statement is not expected to have a significant impact on the Corporation's current business segment disclosures. 48 NOTE 2--EARNINGS PER SHARE In 1997, the Corporation adopted SFAS No. 128, "Earnings Per Share." As required, all prior periods presented were restated. The Statement replaces primary earnings per share ("EPS") with earnings per common share ("Basic EPS"). 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 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.
1997 1996 1995 (IN MILLIONS) ------- ------- ------- Basic Net income........................................ $ 1,525 $ 1,436 $ 1,150 Preferred stock dividends......................... (21) (31) (37) ------- ------- ------- Net income attributable to common stockholders' equity........................................... $ 1,504 $ 1,405 $ 1,113 ======= ======= ======= Diluted Net income........................................ $ 1,525 $ 1,436 $ 1,150 Preferred stock dividends, excluding convertible Series B, where applicable....................... (19) (20) (26) ------- ------- ------- Diluted income available to common stockholders... $ 1,506 $ 1,416 $ 1,124 ======= ======= ======= 1997 1996 1995 (IN THOUSANDS) ------- ------- ------- Average shares outstanding.......................... 301,421 316,765 320,049 Dilutive shares: Employee Stock Purchase and Savings Plan.......... 1,003 467 205 Stock options..................................... 3,503 3,011 2,603 Convertible preferred stock....................... 1,050 6,488 6,741 ------- ------- ------- Average shares outstanding assuming full dilution... 306,977 326,731 329,598 ======= ======= ======= Earnings Per Share Basic............................................. $ 4.99 $ 4.44 $ 3.48 ======= ======= ======= Diluted........................................... $ 4.90 $ 4.33 $ 3.41 ======= ======= =======
NOTE 3--MERGER-RELATED CHARGES In 1995, merger-related charges were $267 million and included direct merger and restructuring-related charges totaling $225 million, as well as the effect of conforming a number of accounting practices between FCC and NBD, which totaled $42 million. The effect of conforming these practices was not material to the Corporation's financial statements. At December 31, 1997, the merger-related reserve was $7 million, which is primarily associated with personnel-related costs. This remaining reserve has been identified with specific personnel actions and will be paid over the remaining severance period. The following table provides details on the merger-related reserve as of December 31, 1996 and 1995.
1996 1995 DECEMBER 31 (IN MILLIONS) ---- ---- Personnel............................................................ $ 42 $ 92 Facilities and equipment............................................. 71 94 Other................................................................ 5 14 ---- ---- $118 $200 ==== ====
49 Personnel-related costs primarily reflect the costs of employee severance packages. Facilities costs consist of lease termination costs and facilities- related exit costs arising from the consolidation of duplicate headquarters and operational facilities. Equipment costs consist of computer equipment and software write-offs due to duplication or incompatibility. NOTE 4--ACQUISITIONS In July 1995, the Corporation consummated its merger with Deerbank Corporation, a $766 million thrift holding company located in Deerfield, Illinois. The merger was accounted for as a purchase. The purchase price of $106 million was funded by the issuance of 3.3 million shares of the Corporation's common stock. In January 1995, the Corporation consummated its merger with AmeriFed Financial Corp., a thrift holding company located in Joliet, Illinois, with total assets of $910 million. The purchase price of $148 million was funded by the issuance of 5.2 million shares of the Corporation's common stock. The merger was accounted for as a purchase. NOTE 5--BUSINESS SEGMENTS The Corporation is engaged primarily in the banking business, which is divided into three business segments and one segment that captures all other activities. For information regarding the Corporation's business segments, as defined by management, see the "Business Segments--Overview" section on page 14 and the tables on pages 15 to 17. The table below covers the approximate consolidated financial data attributable to domestic and foreign operations for the three years ended December 31, 1997.
INCOME BEFORE NET TOTAL REVENUES (1) EXPENSES (2) INCOME TAXES INCOME ASSETS (IN MILLIONS) ------------ ------------ ------------- ------ -------- 1997 DOMESTIC OPERATIONS... $ 9,040 $6,823 $2,217 $1,489 $ 99,227 FOREIGN OPERATIONS (3).................. 1,058 1,009 49 36 14,869 ------- ------ ------ ------ -------- CONSOLIDATED.......... $10,098 $7,832 $2,266 $1,525 $114,096 ======= ====== ====== ====== ======== 1996 Domestic operations... $ 9,020 $6,919 $2,101 $1,391 $ 90,070 Foreign operations (3).................. 1,097 1,036 61 45 14,549 ------- ------ ------ ------ -------- Consolidated.......... $10,117 $7,955 $2,162 $1,436 $104,619 ======= ====== ====== ====== ======== 1995 Domestic operations... $ 9,277 $7,590 $1,687 $1,099 $100,601 Foreign operations (3).................. 1,404 1,337 67 51 21,401 ------- ------ ------ ------ -------- Consolidated.......... $10,681 $8,927 $1,754 $1,150 $122,002 ======= ====== ====== ====== ========
- -------- (1) Includes interest income and noninterest income. (2) Includes interest expense, provision for credit losses and noninterest expense. (3) No foreign region accounted for more than 10% of consolidated net income. Internally developed allocation procedures are used to segregate assets, related revenues, and expenses shown in the preceding table into domestic and foreign components. Such allocations typically are subjective, given that many of the resources employed by the Corporation and global markets are common to both domestic and foreign activities. The principal internal allocation procedures include allocating corporate overhead based on individual activities, expenses based on the geographic area benefited, assets and revenues based on the domicile of the customer, and capital (excluding that invested in foreign subsidiaries) to domestic operations. 50 NOTE 6--INVESTMENT SECURITIES The following is a summary of the Corporation's available-for-sale investment securities portfolio. Aside from those investments accounted for at fair value in accordance with specialized industry practice, the remaining investments in the portfolio are classified as available-for-sale.
GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE DECEMBER 31, 1997 (IN AMORTIZED COST GAINS LOSSES (BOOK VALUE) MILLIONS) -------------- ---------------- ---------------- ------------ U.S. Treasury........... $3,014 $ 23 $-- $3,037 U.S. government agencies Mortgage-backed securities........... 1,719 17 -- 1,736 Collateralized mortgage obligations. 186 -- -- 186 Other................. 866 12 -- 878 States and political subdivisions........... 733 34 -- 767 Other debt securities... 1,542 -- 4 1,538 Equity securities (1)(2)................. 1,076 156 44 1,188 ------ ---- --- ------ Total............... $9,136 $242 $48 $9,330 ====== ==== === ====== DECEMBER 31, 1996 (IN MILLIONS) U.S. Treasury........... $2,878 $ 18 $ 6 $2,890 U.S. government agencies Mortgage-backed securities........... 1,603 23 18 1,608 Collateralized mortgage obligations. 40 -- 1 39 Other................. 60 1 -- 61 States and political subdivisions........... 1,150 59 1 1,208 Other debt securities... 256 3 -- 259 Equity securities (1)(2)................. 1,004 180 71 1,113 ------ ---- --- ------ Total............... $6,991 $284 $97 $7,178 ====== ==== === ======
- -------- (1) 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. (2) Includes investments accounted for at fair value, in keeping with specialized industry practice. The following is a summary of the proceeds from the sale of available-for- sale investment securities and the related gross realized gains and losses.
GROSS REALIZED GROSS REALIZED PROCEEDS GAINS LOSSES (IN MILLIONS) -------- -------------- -------------- 1997..................................... $10,168 $62 $18 1996..................................... 4,340 65 34 1995..................................... 5,564 45 62
In 1995, the Corporation reclassified all held-to-maturity debt securities as available-for-sale and recorded a $156 million unrealized pretax gain in the fair value adjustment on investment securities available-for-sale in stockholders' equity. Previously, these debt investment securities were carried at amortized cost. The decision to reclassify was made in conjunction with the FASB issuance of an implementation guide. 51 The maturity distribution of debt investment securities is shown below. The distribution of mortgage-backed securities and collateralized mortgage obligations is based on average expected maturities. Actual maturities may differ because issuers may have the right to call or prepay obligations.
AMORTIZED FAIR COST VALUE DECEMBER 31, 1997 (IN MILLIONS) --------- ------ Due in one year or less....................................... $1,820 $1,823 Due after one year through five years......................... 3,807 3,846 Due after five years through ten years........................ 1,507 1,534 Due after ten years........................................... 926 939 ------ ------ $8,060 $8,142 ====== ======
NOTE 7--LOANS Following is a breakdown of loans included in the consolidated balance sheet as of December 31, 1997 and 1996.
1997 1996 (IN MILLIONS) ------- ------- Commercial Domestic Commercial.................................................. $28,939 $27,718 Real estate Construction.............................................. 1,380 1,057 Other..................................................... 5,324 5,103 Lease financing............................................. 2,144 1,820 Foreign....................................................... 4,515 3,656 ------- ------- Total commercial........................................ 42,302 39,354 ======= ======= Consumer Credit cards.................................................. 9,693 9,601 Secured by real estate........................................ 8,911 9,406 Automotive.................................................... 4,040 4,423 Other......................................................... 3,778 3,630 ------- ------- Total consumer.......................................... 26,422 27,060 ------- ------- Total................................................... $68,724 $66,414 ======= =======
The amount of interest shortfall related to nonperforming loans at year-end 1997 was $17 million. The shortfall amount represents the difference between the $29 million of interest contractually due and the $12 million of interest actually received. For 1996, the interest shortfall related to nonperforming loans at year-end was $16 million. The contractual amount of interest due totaled $27 million, and $11 million of interest was actually received. Credit card receivables are available for sale through the Corporation's credit card securitization program. In addition, other loans available for sale at December 31, 1997 and 1996, totaled $818 million and $545 million, respectively. The Corporation has loans outstanding to certain of its directors and executive officers and to partnerships or companies in which a director or executive officer has at least a 10% beneficial interest. At December 31, 1997 and 1996, $639 million and $339 million, respectively, of such loans to related parties were outstanding. 52 An analysis of the activity during 1997 with respect to such loans includes additions of $722 million, and reductions of $422 million. NOTE 8--ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses for the three years ended December 31, 1997, were as follows.
1997 1996 1995 (IN MILLIONS) ------ ------ ------ Balance, beginning of year.............................. $1,407 $1,338 $1,158 Additions (deductions) Charge-offs........................................... (916) (815) (409) Recoveries............................................ 192 145 145 ------ ------ ------ Net charge-offs....................................... (724) (670) (264) Provision for credit losses........................... 725 735 510 Other Acquisitions.......................................... -- -- 9 Transfers related to securitized receivables.......... -- 4 (75) ------ ------ ------ Balance, end of year.................................... $1,408 $1,407 $1,338 ====== ====== ======
A loan is considered impaired when it is probable that all principal and interest amounts due will not be collected in accordance with its contractual terms. Certain loans, such as loans carried at the lower of cost or fair value or small-balance homogeneous loans (e.g., credit card and installment credit) are exempt from impairment determinations. Impairment is recognized to the extent that the recorded investment of an impaired loan or pool of loans exceeds the calculated present value of projected cash flows discounted at the contractual interest rate. Loans having a significant recorded investment are measured on an individual basis, while loans not having a significant recorded investment are grouped and measured on a pool basis. This reserve computation is considered in management's determination of the allowance for credit losses. At December 31, 1997, the recorded investment in impaired loans was $311 million, which required a related allowance for credit losses of $46 million. Substantially all of the $311 million in impaired loans had a related allowance for credit losses. At December 31, 1996, the recorded investment in impaired loans was $262 million, which required a related allowance for credit losses of $39 million. The average recorded investment in impaired loans was approximately $292 million for 1997 and $341 million in 1996. The Corporation recognized interest income associated with impaired loans of $24 million during 1997 and $17 million during 1996. NOTE 9--PLEDGED AND RESTRICTED ASSETS At December 31, 1997, $21.7 billion of assets were pledged to secure government deposits, trust deposits, and borrowings, and for other purposes required by law. The Banks are required to maintain noninterest-bearing cash balances with the Federal Reserve System based on the types and amounts of deposits held. During 1997 and 1996, the average balances maintained to meet this requirement were $1.134 billion and $1.357 billion, respectively. NOTE 10--LONG-TERM DEBT Long-term debt consists of borrowings having an original maturity of greater than one year. Original issue discount and deferred issuance costs are amortized over the terms of the related notes. Long-term debt at December 31, 1997 and 1996, was as follows. 53
1997 1996 (IN MILLIONS) ------ ------ PARENT COMPANY SUBORDINATED DEBT 9% notes due 1999............................................... $ 200 $ 199 9 7/8% notes due 2000........................................... 99 99 9 1/5% notes due 2001........................................... 5 5 9 1/4% notes due 2001........................................... 100 100 10 1/4% notes due 2001.......................................... 100 100 11 1/4% notes due 2001.......................................... 96 96 8 7/8% notes due 2002........................................... 100 100 8 1/10% notes due 2002.......................................... 200 200 8 1/4% notes due 2002........................................... 100 100 7 5/8% notes due 2003........................................... 199 199 6 7/8% notes due 2003........................................... 200 200 Floating rate notes due 2003.................................... 150 149 7 1/4% debentures due 2004...................................... 200 200 Floating rate notes due 2005.................................... 96 96 6 1/8% notes due 2006........................................... 150 149 7% notes due 2006............................................... 149 149 7 1/8% notes due 2007........................................... 199 199 6 3/8% notes due 2009........................................... 198 198 7 1/2% preferred purchase units due 2023........................ 150 150 9 7/8% equity commitment notes due 1999......................... 200 200 SENIOR DEBT 8 1/2% notes due 1998........................................... 100 100 Other Parent Company debt....................................... 3,034 1,475 ------ ------ Total Parent Company.......................................... 6,025 4,463 ------ ------ SUBSIDIARIES Bank notes, various rates and maturities........................ 2,311 2,465 Subordinated 6 1/4% notes due 2003.............................. 200 200 Subordinated 8 1/4% notes due 2024.............................. 250 250 8 3/4% notes due 1997-1999...................................... -- 10 Capitalized lease obligations, various rates and maturities..... 14 13 Other........................................................... 292 305 ------ ------ Total subsidiaries............................................ 3,067 3,243 ------ ------ Total long-term debt.......................................... $9,092 $7,706 ====== ======
(A) PARENT COMPANY LONG-TERM DEBT SUBORDINATED NOTES These notes are subordinated to other indebtedness of the Corporation. The fixed-rate notes have interest rates that range from 6 1/8% to 11 1/4% and maturities that range from 1999 to 2023. The floating rate notes due in 2003 have an interest rate priced at the greater of 4 1/4% or the three-month LIBOR plus 1/8%. The interest rate on this issue on December 31, 1997, was 5 15/16%. The floating rate notes due 2005 may be redeemed, in whole or in part, on any interest payment date at par. Interest payment on the notes is at a rate of 1/4% above the average offered rate quoted in the London interbank market for three-month Eurodollar deposits, but in no event may the rate be less than 5 1/4%. On December 31, 1997, the interest rate was 6 1/4%. 54 Each 7 1/2% preferred purchase unit consists of a 7.40% subordinated debenture due May 10, 2023, in a principal amount of $25 and a related purchase contract paying fees of 0.10% of the principal amount of the debenture per year. The contract requires the purchase on May 10, 2023 (or earlier at the Corporation's election), of one depository share representing a one-fourth interest in a share of 7 1/2% cumulative preferred stock of the Corporation at a purchase price of $25 per depository share. SENIOR DEBT The 8 1/2% notes are unsecured obligations that are not subordinated to any other indebtedness of the Corporation and may not be redeemed prior to their stated maturity. Other Parent Company long-term debt of $3.034 billion includes various notes with a weighted average interest rate of 6.00% and remaining weighted average maturity of 41 months at December 31, 1997. (B) SUBSIDIARIES' LONG-TERM DEBT The bank notes are unsecured and unsubordinated debt obligations of the Banks. At December 31, 1997, the weighted average rate of the bank notes was 6.21%, and remaining weighted average maturity was 14 months. The 6 1/4% subordinated notes due 2003 are unsecured, subordinated to the claims of depositors and other creditors of NBD Michigan, and are not redeemable prior to maturity. The 8 1/4% subordinated notes due 2024 are unsecured, subordinated to the claims of depositors and other creditors of NBD Michigan, and are not redeemable by the bank prior to maturity. Registered holders have a one-time right to redeem the notes at par, in whole or in part, on November 1, 2004. Other long-term debt at December 31, 1997, included $291 million related to the sale and lease back of certain bank properties. The effective interest rate related to this transaction is 8.7%, with expected maturity in 2018. (C) MATURITY OF LONG-TERM DEBT Of the Corporation's $9.092 billion total long-term debt, $1.919 billion, $1.028 billion, $1.195 billion, $841 million and $1.189 billion is scheduled to mature in 1998, 1999, 2000, 2001 and 2002, respectively. NOTE 11--GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S JUNIOR SUBORDINATED DEBT The $996 million of Guaranteed Preferred Beneficial Interest in the Corporation's Junior Subordinated Debt ("Trust Preferred Capital Securities") represents the net proceeds from the issuance of preferred capital securities by First Chicago NBD Institutional Capital A ("the Series A Trust"), First Chicago NBD Institutional Capital B (the "Series B Trust"), and First Chicago NBD Capital I (the "Series I Trust"). Each of the trusts is a statutory business trust organized for the sole purpose of issuing capital securities and investing the proceeds thereof in junior subordinated debentures of the Corporation ("Junior Subordinated Debt"). The preferred capital securities represent preferred individual beneficial interests in the respective trusts and are subject to mandatory redemption upon repayment of the Junior Subordinated Debt. The common securities of each trust are owned by the Corporation. The Corporation's obligations under the Junior Subordinated Debt and other relevant agreements, in aggregate, constitute a full and unconditional guarantee by the Corporation of each respective trust's obligations under the preferred securities issued by such trust. The Series A Trust issued $500 million in aggregate liquidation amount of 7.95% preferred capital securities on December 1, 1996. The sole asset of the Series A Trust is $515 million principal amount of 7.95% Junior Subordinated Debt that will mature on December 1, 2026, and is redeemable prior to maturity at the option of the Corporation on or after December 1, 2006. 55 The Series B Trust issued $250 million in aggregate liquidation amount of 7.75% preferred capital securities on December 1, 1996. The sole asset of the Series B Trust is $258 million principal amount of 7.75% Junior Subordinated Debt that will mature on December 1, 2026, and is redeemable prior to maturity at the option of the Corporation on or after December 1, 2006. The Series I Trust issued $250 million in aggregate liquidation amount of floating rate preferred capital securities in January 1997. The sole asset of the Series I Trust is $258 million principal amount of floating rate Junior Subordinated Debt of the Corporation, bearing interest at an annual rate equal to three-month LIBOR plus 0.55% that will mature on February 1, 2027, and is redeemable at the option of the Corporation on or after February 1, 2007. The Trust Preferred Capital Securities are tax-advantaged issues and qualify as Tier 1 capital. Distributions on these securities are included in interest expense on long-term debt. NOTE 12--PREFERRED STOCK The Corporation is authorized to issue 10,000,000 shares of preferred stock, without par value. The Board of Directors is authorized to fix the particular designations, preferences, rights, qualifications and restrictions for each series of preferred stock issued. All preferred shares rank prior to common shares both as to dividends and liquidation, but have no general voting rights. The dividend rate on each of the cumulative adjustable rate series is based on stated value and adjusted quarterly, based on a formula that considers the interest rates for selected short- and long-term U.S. Treasury securities prevailing at the time the rate is set. The minimum, maximum and current dividend rates for individual series of preferred stock are presented in the following table.
STATED ANNUAL DIVIDEND RATE EARLIEST SHARES VALUE ----------------------- REDEMPTION REDEMPTION OUTSTANDING PER SHARE MAXIMUM MINIMUM CURRENT DATE PRICE (1) DECEMBER 31, 1997 ----------- --------- ------- ------- ------- ---------- ---------- Cumulative Adjustable Rate Series B.............. 1,191,000 $100.00 12.00% 6.00% 6.00% (2) $100.00 Series C.............. 713,800 100.00 12.50 6.50 6.50 (2) 100.00
- -------- (1) Plus accrued and unpaid dividends. (2) Currently redeemable. In February 1997, the Corporation announced it would redeem all shares of its 5 3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 stated value), and the related depositary shares, on April 1, 1997. Each such depositary share was convertible into 1.6876 shares of the Corporation's common stock at the option of the holder and, in 1997, approximately 3.1 million depositary shares were converted into approximately 5.2 million shares of common stock. In total, substantially all of the 4.0 million depositary shares had been converted into 6.7 million common shares. Resultant fractional shares were paid in cash. On April 1, 1997, the Corporation redeemed the remaining shares of the Cumulative Convertible Preferred Stock, Series B, at the price of $51.725 per depositary share plus an accrued and unpaid dividend of $0.71875 per depositary share. All shares of the Corporation's 8.45% Cumulative Preferred Stock, Series E ($625 stated value), and the related depositary shares, were redeemed on November 17, 1997, at the price of $25.27 per depositary share, including accrued and unpaid dividends of $0.27 per depositary share. NOTE 13--EMPLOYEE BENEFITS The Corporation has established common plans covering pension, postretirement and postemployment benefits, employee savings, and stock compensation, all of which replaced predecessor plans effective January 1, 1997. (A) PENSION PLANS The Corporation sponsors pension plans covering substantially all salaried employees. The pension plans are noncontributory, defined benefit cash-balance plans that provide balance accumulations based on years of service and compensation level. The funding policy varies for each plan. Depending on the plan, consideration is given to net periodic pension cost for the year, the minimum funding required by the Employee Retirement Income Security Act of 1974 ("ERISA") and the maximum tax deductible amount based on IRS limits. 56 Plan assets primarily include equity securities and debt securities issued by the U.S. government and its agencies or by corporations. Plan assets include common stock of the Corporation having a fair value of $26 million and $20 million at December 31, 1997 and 1996, respectively. Net periodic pension cost includes the following components for the years ended December 31.
1997 1996 1995 (IN MILLIONS) ---- ----- ----- Service cost-benefits earned during period.................. $ 62 $ 61 $ 45 Interest cost on projected benefit obligation............... 127 110 100 Actual loss (return) on assets.............................. (291) (353) (351) Net amortization and deferral............................... 129 197 206 ---- ----- ----- Net periodic pension cost................................... $ 27 $ 15 $ -- ==== ===== =====
The following table reconciles the aggregated funded status of the plans and amounts recognized in the consolidated balance sheet at December 31.
1997 1996 (IN MILLIONS) ------- ------- Actuarial present value of the projected benefit obligation, based on employment to date and current salary levels: Vested employees.......................................... $(1,558) $(1,164) Nonvested employees....................................... (15) (376) ------- ------- Accumulated benefit obligation............................ (1,573) (1,540) Additional amounts related to projected salary increases.... (26) (19) ------- ------- Projected benefit obligation................................ (1,599) (1,559) Plan assets (at fair value)................................. 2,116 1,965 ------- ------- Plan assets in excess of projected benefit obligation....... 517 406 Unrecognized net gain due to experience different from assumptions................................................ (204) (91) Unrecognized transition asset............................... (35) (45) Unrecognized prior service cost............................. 112 114 ------- ------- Prepaid pension cost included in the consolidated balance sheet...................................................... $ 390 $ 384 ======= =======
The assumptions used in determining the projected benefit obligation and net periodic pension cost of such plans at December 31 are as follows.
1997 1996 1995 ---- ---- ------- Discount rate.............................................. 7.25% 7.75% 7.25% Salary increase assumption................................. 5.25 5.25 5.25 Expected long-term rate of return on plan assets........... 9.5 9.5 9.0-9.5
(B) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation sponsors postretirement life insurance plans and provides health care benefits for certain retirees and grandfathered employees when they retire. The postretirement life insurance benefit is noncontributory. Retirees and employees eligible for postretirement health care benefits participate on a contributory basis. Net periodic postretirement benefit cost included the following components for the years ended December 31.
1997 1996 1995 (IN MILLIONS) ---- ---- ---- Service cost..................................................... $ 1 $ 2 $ 1 Interest cost.................................................... 6 5 4 Net amortization and deferral.................................... (6) -- 14 --- --- --- Net periodic postretirement benefit cost......................... $ 1 $ 7 $19 === === ===
57 The Corporation funds postretirement benefit costs as claims are incurred. The following table reconciles the plan's funded status and amounts recognized in the consolidated balance sheet at December 31.
1997 1996 (IN MILLIONS) ---- ---- Accumulated postretirement benefit obligation: Retirees......................................................... $(55) $(52) Fully eligible active plan participants.......................... (10) (10) Other active plan participants................................... (14) (14) ---- ---- Total accumulated postretirement benefit obligation................ (79) (76) Plan assets (at market value)...................................... -- -- ---- ---- Accumulated postretirement benefit obligation in excess of plan assets............................................................ (79) (76) Unrecognized net (gain)............................................ (3) (13) Unrecognized prior service cost.................................... 3 4 ---- ---- Accrued postretirement benefit liability recognized in the consolidated balance sheet........................................ $(79) $(85) ==== ====
The assumption used to measure postretirement benefit costs is a 7% annual rate of increase in the per capita cost of covered health care benefits for 1998, trending downward to 5.5% by the year 2000, and remaining at that level thereafter. This assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would have increased the accumulated postretirement benefit obligation as of December 31, 1997, by $3 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by approximately $0.2 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at December 31, 1997, and 7.75% at December 31, 1996. (C) SAVINGS AND INVESTMENT PLAN The Corporation maintains a savings and investment plan for U.S.-based employees meeting certain eligibility requirements. The Savings and Investment Plan requires employer contributions equal to participants' contributions up to 3% of their salary, plus an amount equal to one-half of participants' contributions between 3% and 6% of their salary, subject to certain limitations imposed by the IRS. The plan also allows a supplemental profit-based contribution. Total employer contributions and expense for this plan were $50 million in 1997, $43 million in 1996, and $37 million in 1995. (D) STOCK-BASED COMPENSATION The Corporation utilizes various stock-based awards as part of its overall compensation program through its Stock Performance Plan. In addition, the Corporation provides employees the opportunity to purchase its shares through its Employee Stock Purchase and Savings Plan. The compensation cost that has been charged against income for the Stock Performance Plan was $50 million for 1997, $26 million for 1996 and $21 million for 1995. See Note 1(m) on page 47 for the Corporation's accounting policies relating to stock-based compensation. STOCK PERFORMANCE PLAN Under the Stock Performance Plan, the Corporation may grant to employees various stock-based awards, including performance shares, restricted shares and stock options. The Corporation is authorized to award up to an aggregate of 2% of the outstanding common shares of the Corporation as reported at the prior year end. PERFORMANCE SHARES The Corporation provides performance-based stock awards for its senior managers. The level of performance shares eventually distributed depends on the achievement of specific performance criteria that are 58 set at the grant date. The ultimate expense attributable to these awards is based on the market value of the shares distributed at the end of the defined performance period. The expense associated with such awards is recognized over the defined performance period. RESTRICTED SHARES Restricted shares granted to key officers require them to continue employment for up to four years from the grant date before restrictions on the shares are removed. The market value of the restricted shares as of the date of grant is amortized to compensation expense ratably over the period the shares remain restricted. STOCK OPTIONS The Corporation also awards stock options to both senior managers and key officers. The exercise price of such options is equivalent to the market value of the Corporation's common stock at the award date. Options granted generally vest one-third each year over the three-year period following the grant date and have a maximum term of ten years. Stock options include the right to receive additional options not exceeding the number of options exercised under the original grant if certain criteria are met. The exercise price of an additional option is equal to the fair market value of the common stock on the date the additional option is granted. The vesting period for such additional options is six months. The following tables summarize stock option activity for 1997 and 1996, respectively, and provide details of stock options outstanding at December 31, 1997.
1997 1996 ----------------- ----------------- WTD. AVG. WTD. AVG. EXERCISE EXERCISE SHARES PRICE SHARES PRICE (SHARES IN THOUSANDS) ------ --------- ------ --------- Outstanding at January 1.................... 12,224 $31.59 12,406 $25.23 Granted..................................... 3,095 61.06 4,585 41.38 Exercised................................... (3,616) 29.95 (4,598) 24.19 Forfeited................................... (197) 40.14 (169) 32.22 ------ ------ ------ ------ Outstanding at December 31.................. 11,506 $39.88 12,224 $31.59 ====== ====== Exerciseable at December 31................. 6,682 $33.04 6,595 $28.33 ====== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE (SHARES IN THOUSANDS) --------------------------------- -------------------- NUMBER WTD. AVG. RANGE OF OUTSTANDING WTD. AVG. REMAINING WTD. AVG EXERCISE DEC. 31, EXERCISE CONTRACTUAL NUMBER EXERCISE PRICES 1997 PRICE LIFE EXERCISABLE PRICE -------- ----------- --------- ----------- ----------- -------- $ 6.26--$20.00.......... 727 $16.27 2.6 yrs. 727 $16.27 20.01-- 33.00.......... 3,910 27.30 5.2 3,070 27.05 33.01-- 46.00.......... 3,577 39.86 6.8 2,038 39.37 46.01-- 59.00.......... 770 52.94 5.6 757 53.03 59.01-- 72.00.......... 2,365 61.33 8.5 90 61.00 72.01-- 85.06.......... 157 75.57 5.3 -- -- ------ ------ -------- ----- ------ - ------------------ $ 6.26--$85.06.......... 11,506 $39.88 6.2 yrs. 6,682 $33.04 ====== ====== ======== ===== ======
EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN The Corporation also offers an Employee Stock Purchase and Savings Plan that allows eligible employees to authorize payroll deductions of up to 10% of their annual base earnings for deposit in an interest-bearing savings account for up to two years. Employees then have the option to either withdraw their savings balance in cash or purchase shares of the Corporation's common stock at a price fixed under the plan. The purchase price of the stock for a particular employee is fixed at 95% of the stock's market price on the day that employee becomes eligible to participate in a specific offering under the plan. Under the plan, the Corporation issued 18,006 shares in 1997 at $36.93 per share. The Corporation does not recognize any compensation expense with respect to this plan. 59 PRO FORMA COSTS OF STOCK-BASED COMPENSATION If the Corporation had determined compensation cost for awards under its stock plans based on their fair value at their grant dates consistent with the method set forth in SFAS No. 123, the Corporation's net income would have been $1.510 billion, $1.423 billion and $1.144 billion, for the years ended December 31, 1997, 1996 and 1995, respectively. Basic and diluted earnings per share related to these pro forma net income amounts are $4.94 and $4.86, respectively, for 1997, $4.39 and $4.29, respectively, for 1996 and $3.46 and $3.39, respectively, for 1995. These pro forma net income amounts are not indicative of future pro forma amounts because they do not include expenses related to stock-based compensation awards granted prior to January 1, 1995, which would have been amortized to expense over the vesting period of the award. The following table summarizes stock-based compensation grants and their related weighted average grant-date fair values for the year ended December 31:
1997 1996 ------------------------- ------------------------- NUMBER OF WTD. AVG. GRANT NUMBER OF WTD. AVG. GRANT SHARES DATE FAIR VALUE SHARES DATE FAIR VALUE (SHARES IN THOUSANDS) --------- --------------- --------- --------------- Performance Shares (1)..... 0-354 $60.51 0-462 $40.58 Restricted Shares.......... 503 60.79 601 41.30 Stock Options.............. 3,095 11.95 4,585 6.74 Employee Stock Purchase and Savings Plan (2).......... 47 9.29 2,445 5.78
- -------- (1)Range of potential shares issuable based on performance level achieved. (2)Estimated number of shares employees will purchase under the plan. The grant date fair values of stock options granted under the Stock Performance Plan and employees' purchase rights under the Employee Stock Purchase and Savings Plan were estimated using the Black-Scholes option- pricing model. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options and purchase rights. The following assumptions were used to estimate the grant-date fair value of employees' purchase rights under the Employee Stock Purchase and Savings Plan: dividend yield of 2.54% and 3.70% in 1997 and 1996, respectively; expected volatility of 22.70% and 18.82% in 1997 and 1996, respectively; risk-free interest rate of 5.73% and 6.10% in 1997 and 1996, respectively; and an expected life of 1.3 years and 2.2 years in 1997 and 1996, respectively. The following weighted average assumptions were used to estimate the grant- date fair value of stock option awards under the Stock Performance Plan: dividend yields of 2.61%, 3.46% and 4.24% in 1997, 1996 and 1995 respectively; expected volatility of 19.10%, 18.74% and 17.28% in 1997, 1996 and 1995, respectively; risk-free interest rates of 6.07%, 5.91% and 6.78% in 1997, 1996 and 1995, respectively; and expected lives of 4.7 years, 4.2 years and 3.9 years in 1997, 1996 and 1995, respectively. 60 NOTE 14--INCOME TAXES The components of total applicable income tax expense (benefit) in the consolidated income statement for the years ended December 31, 1997, 1996 and 1995, are as follows.
1997 1996 1995 (IN MILLIONS) ---- ---- ---- Income tax expense (benefit) Current Federal..................................................... $573 $561 $737 Foreign..................................................... 12 17 27 State....................................................... 69 64 84 ---- ---- ---- Total..................................................... 654 642 848 Deferred Federal..................................................... 79 77 (216) State....................................................... 8 7 (28) ---- ---- ---- Total..................................................... 87 84 (244) ---- ---- ---- Applicable income taxes......................................... $741 $726 $604 ==== ==== ====
The tax effects of fair value adjustments on securities available-for-sale, foreign currency translation adjustments, and certain tax benefits related to stock options are recorded directly to stockholders' equity. The net tax expense (benefit) recorded directly in stockholders' equity amounted to $(59) million, $(56) million and $133 million in 1997, 1996 and 1995, respectively. A summary reconciliation of the differences between applicable income taxes and the amounts computed at the applicable regular federal tax rate of 35% is as follows.
1997 1996 1995 (IN MILLIONS) ---- ---- ---- Taxes at statutory federal income tax rate.................... $793 $757 $614 Increase (decrease) in taxes resulting from: Tax-exempt income (net)..................................... (30) (40) (54) State income taxes, net of federal income taxes............. 50 47 37 Other....................................................... (72) (38) 7 ---- ---- ---- Applicable income taxes....................................... $741 $726 $604 ==== ==== ====
A net deferred tax liability is included in other liabilities in the consolidated balance sheet as a result of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their related tax bases. The components of the net deferred tax liability as of December 31, 1997 and 1996, are as follows.
1997 1996 (IN MILLIONS) ------ ------ Deferred tax liabilities Deferred income on lease financing............................. $1,010 $ 867 Appreciation on equity security investments.................... 47 123 Prepaid pension costs.......................................... 110 142 Other.......................................................... 219 215 ------ ------ Gross deferred tax liabilities................................. 1,386 1,347 ------ ------ Deferred tax assets Allowance for credit losses.................................... 516 513 Securitization of credit card receivables...................... 79 81 Depreciation................................................... 34 70 Other.......................................................... 241 300 ------ ------ Gross deferred tax assets...................................... 870 964 Valuation allowance............................................ -- -- ------ ------ Gross deferred tax assets, net of valuation allowance.......... 870 964 ------ ------ Net deferred tax liability....................................... $ 516 $ 383 ====== ======
61 NOTE 15--LEASE COMMITMENTS The Corporation has entered into a number of operating and capitalized lease agreements for premises and equipment. The minimum annual rental commitments under these leases are shown below.
(IN MILLIONS) 1998....................................................................... $ 91 1999....................................................................... 86 2000....................................................................... 75 2001....................................................................... 63 2002....................................................................... 61 2003 and thereafter........................................................ 407 ---- $783 ====
Occupancy expense has been reduced by rental income from premises leased to others in the amount of $63 million in 1997, $32 million in 1996 and $44 million in 1995. NOTE 16--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, the Corporation is a party to financial instruments containing credit and/or market risks that are not required to be reflected in a balance sheet. These financial instruments include credit- related instruments as well as certain derivative instruments. The Corporation's risk management policies monitor and limit exposure to credit, liquidity and market risks. The following disclosures represent the Corporation's credit exposure, assuming that every counterparty to financial instruments with off-balance- sheet credit risk fails to perform completely according to the terms of the contracts, and that the collateral and other security, if any, proves to be of no value to the Corporation. This note does not address the amount of market losses the Corporation would incur if future changes in market prices make financial instruments with off- balance-sheet market risk less valuable or more onerous. The measurement of market risk is meaningful only when all related and offsetting on- and off- balance-sheet transactions are aggregated, and the resulting net positions are identified. (A) COLLATERAL AND OTHER SECURITY ARRANGEMENTS The credit risk of both on- and off-balance-sheet financial instruments varies based on many factors, including the value of collateral held and other security arrangements. To mitigate credit risk, the Corporation generally determines the need for specific covenant, guarantee and collateral requirements on a case-by-case basis, depending on the nature of the financial instrument and the customer's creditworthiness. The Corporation may also receive comfort letters and oral assurances. The amount and type of collateral held to reduce credit risk varies but may include real estate, machinery, equipment, inventory and accounts receivable, as well as cash on deposit, stocks, bonds and other marketable securities that are generally held in the Corporation's possession or at another appropriate custodian or depository. This collateral is valued and inspected on a regular basis to ensure both its existence and adequacy. Additional collateral is requested when appropriate. (B) CREDIT-RELATED FINANCIAL INSTRUMENTS The table below summarizes credit-related financial instruments, including both commitments to extend credit and letters of credit.
1997 1996 DECEMBER 31 (IN BILLIONS) ----- ----- Unused loan commitments (1)........................................ $66.6 $59.1 Unused credit card lines........................................... 76.7 75.8 Unused home-equity lines........................................... 1.7 1.7 Commercial letters of credit....................................... 0.8 0.8 Standby letters of credit and foreign office guarantees............ 8.5 7.5
- -------- (1) Includes unused commercial real estate exposure of $2.1 billion and $1.7 billion at December 31, 1997 and 1996, respectively. 62 Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of unused commitments in the preceding table does not necessarily represent future cash requirements. Loan commitments are agreements to make or acquire a loan or lease as long as the agreed-upon terms (e.g., expiry, covenants or notice) are met. The Corporation's commitments to purchase or extend loans help its customers meet their liquidity needs. Credit card lines allow customers to use a credit card to buy goods or services and to obtain cash advances. However, the Corporation has the right to change or terminate any terms or conditions of the credit card account. Extensions of credit under home-equity lines are secured by residential real estate. Commercial letters of credit are issued or confirmed to ensure payment of customers' payables or receivables in short-term international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended. However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts. Standby letters of credit and foreign office guarantees are issued in connection with agreements made by customers to counterparties. If the customer fails to comply with the agreement, the counterparty may enforce the standby letter of credit or foreign office guarantee as a remedy. Credit risk arises from the possibility that the customer may not be able to repay the Corporation for standby letters of credit or foreign office guarantees. At December 31, 1997 and 1996, standby letters of credit and foreign office guarantees had been issued for the following purposes.
1997 1996 DECEMBER 31 (IN MILLIONS) ------ ------ Financial Tax-exempt obligations.......................................... $3,147 $2,921 Insurance-related............................................... 1,023 804 Other financial................................................. 3,202 2,785 Performance....................................................... 1,160 996 ------ ------ Total (1)..................................................... $8,532 $7,506 ====== ======
- -------- (1) Includes $1,073 million and $818 million participated to other institutions at December 31, 1997, and December 31, 1996, respectively. At December 31, 1997, $6,647 million of standby letters of credit and foreign office guarantees was due to expire within three years and $1,885 million was to expire after three years. (C) DERIVATIVE FINANCIAL INSTRUMENTS The Corporation enters into a variety of derivative financial instruments in its trading, asset and liability management, and corporate investment activities. These instruments offer customers protection from rising or falling interest rates, exchange rates, equity prices and commodity prices. They can either reduce or increase the Corporation's exposure to such changing rates or prices. Following is a brief description of such derivative financial instruments. . Interest rate forward and futures contracts represent commitments either to purchase or sell a financial instrument at a specified future date for a specified price, and may be settled in cash or through delivery. . An interest rate swap is an agreement in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional principal amount with at least one stream based on a specified floating rate index. . Interest rate options are contracts that grant the purchaser, for a premium payment, the right either to purchase or sell a financial instrument at a specified price within a specified period of time or on a specified date from the writer of the option. . Interest rate caps and floors are contracts with notional principal amounts that require the seller, in exchange for a fee, to make payments to the purchaser if a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate on specified future dates. 63 . Forward rate agreements are contracts with notional principal amounts that settle in cash at a specified future date based on the differential between a specified market interest rate and a fixed interest rate. . Foreign exchange contracts represent swap, spot, forward, futures and option contracts to exchange currencies. . Equity price contracts represent swap, forward, futures, cap, floor and option contracts that derive their value from underlying equity prices. . Commodity price contracts represent swap, futures, cap, floor and option contracts that derive their value from underlying commodity prices. The Corporation's objectives and strategies for using derivative financial instruments for structural interest rate risk management and foreign exchange risk management are discussed on pages 26 to 28. Balance sheet exposure for derivative financial instruments includes the amount of recognized gains in the market valuation of those contracts. Those amounts fluctuate as a function of maturity, interest rates, foreign exchange rates, equity prices and commodity prices. The credit risk associated with exchange-traded derivative financial instruments is limited to the relevant clearinghouse. Options written do not expose the Corporation to credit risk, except to the extent of the underlying risk in a financial instrument that the Corporation may be obligated to acquire under certain written put options. Caps and floors written do not expose the Corporation to credit risk. On some derivative financial instruments, the Corporation may have additional risk. This is due to the underlying risk in the financial instruments that the Corporation may be obligated to acquire, or the risk that the Corporation will deliver under a contract but the customer will fail to deliver the countervailing amount. The Corporation believes its credit and settlement procedures minimize these risks. Not all derivative financial instruments have off-balance-sheet market risk. Market risk associated with options purchased and caps and floors purchased is recorded in the balance sheet. The tables on page 34 report the Corporation's gross notional principal or contractual amounts of derivative financial instruments as of December 31, 1997 and December 31, 1996. These instruments include swaps, forwards, spot, futures, options, caps, floors, forward rate agreements, and other conditional and exchange contracts. The amounts do not represent the market or credit risk associated with these contracts, as previously defined, but rather give an indication of the volume of the transactions. NOTE 17--CONCENTRATIONS OF CREDIT RISK The Corporation provides a wide range of financial services, including credit products, to consumers, middle market businesses and large corporate customers. Credit policies and processes emphasize diversification of risk among industries, geographic areas and borrowers. The only significant domestic credit concentrations were consumer, commercial real estate and the U.S. government. Information on consumer and commercial real estate loans is presented in Note 7, beginning on page 52, and information on unused consumer and commercial real estate commitments is presented in Note 16, beginning on page 62. U.S. government risk arises primarily from the holding of government securities and short-term credits collateralized by such securities. Information on foreign outstandings is presented in the "Foreign Outstandings" table on page 33. In addition to the $4.2 billion of outstandings to banks in Japan, the Corporation's credit risk from off- balance-sheet commitments to Japanese banks totaled $476 million at December 31, 1997. In addition to the $3.8 billion of outstandings to banks in Japan at December 31, 1996, current credit exposure on derivative financial instruments and off-balance-sheet commitments to Japanese banks totaled approximately $2.0 billion. 64 NOTE 18--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation is required to disclose the estimated fair value of its financial instruments in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." These disclosures do not attempt to estimate or represent an estimate of the Corporation's fair value as a whole. The Corporation does not plan to dispose of, either through sale or settlement, the majority of its financial instruments at these estimated fair values. Certain limitations are inherent in the methodologies used to estimate fair value. As a result, disclosed fair values may not be the amount realized in a current transaction between willing parties. Specifically, the fair values disclosed represent point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors. Further, quoted market prices may not be realized because the financial instrument may be traded in a market that lacks liquidity; or a fair value derived using a discounted cash flow approach may not be the amount realized because of the subjectivity involved in selecting underlying assumptions, such as projecting cash flows or selecting a discount rate. The fair value amount also may not be realized because it ignores transaction costs and does not include potential tax effects. Additionally, estimated fair values of certain financial instruments ignore intangible value associated with the financial instruments; for example, significant unrecognized value exists that is attributable to credit card relationships and core deposits. The following table summarizes the carrying values and estimated fair values of financial instruments as of December 31, 1997 and 1996.
1997 1996 -------------------- -------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE (IN MILLIONS) -------- ---------- -------- ---------- Financial assets Cash and other short term financial instruments (a)..................... $22,628 $22,628 $17,494 $17,494 Trading assets (a)................... 4,198 4,198 4,812 4,812 Investment securities (a)............ 9,330 9,330 7,178 7,178 Loans (a)(b)......................... 68,724 67,512 66,414 65,052 Allowance for credit losses.......... (1,408) -- (1,407) -- ------- ------- ------- ------- Loans, net........................... 67,316 67,512 65,007 65,052 Derivative product assets Trading purposes (1)(a)............ 4,442 4,442 4,895 4,895 Other than trading purposes (e).... 105 198 79 162 ------- ------- ------- ------- Total derivative product assets.. 4,547 4,640 4,974 5,057 Other financial instruments (a).... 1,490 1,490 1,356 1,356 Financial liabilities Deposits (a)(c)...................... $68,489 $68,541 $63,669 $63,747 Securities sold but not yet purchased (a)................................. 2,215 2,215 1,236 1,236 Other short-term financial instruments (a)..................... 17,474 17,474 14,772 14,772 Long-term debt (2)(a)(d)............. 10,088 10,309 8,454 8,570 Derivative product liabilities Trading purposes (1)(a)............ 4,592 4,592 4,716 4,716 Other than trading purposes (e).... 24 46 37 66 ------- ------- ------- ------- Total derivative product liabilities..................... 4,616 4,638 4,753 4,782
- -------- (1) The estimated average fair values of derivative financial instruments used in trading activities during 1997 were $4.4 billion classified as assets and $4.5 billion classified as liabilities. (2) Includes trust preferred capital securities. Estimated fair values are determined as follows: (A) FINANCIAL INSTRUMENTS WHOSE CARRYING VALUE APPROXIMATES FAIR VALUE A financial instrument's carrying value approximates its fair value when the financial instrument has an immediate or short-term maturity (generally one year or less), or is carried at fair value. Additionally, the carrying value of financial instruments that reprice frequently, such as floating rate debt, approximates fair value. 65 The estimated fair values of debt investment securities, trading securities and securities sold but not yet purchased were generally based on quoted market prices or dealer quotes. See Note 1, beginning on page 45, and Note 6, beginning on page 51, for information on methods for estimating the fair value of equity investment securities. The estimated fair value of derivative product assets and liabilities was based on quoted market prices or pricing and valuation models on a present-value basis using current market information. The majority of commitments to extend credit and letters of credit would result in loans with a market rate of interest if funded. The fair value of these commitments are the fees that would be charged customers to enter into similar agreements with comparable pricing and maturity. The recorded book value of deferred fee income approximates the fair value. (B) LOANS The discounted cash flow method was used to estimate the fair value of certain commercial and consumer installment loans. Discount rates used represent current lending rates for new loans with similar characteristics. The estimated fair value of consumer mortgage loans was based on committed sales prices and a valuation model using current market information. (C) DEPOSITS The fair value of demand and savings deposits with no defined maturity is the amount payable on demand at the report date. The fair value of fixed-rate time deposits is estimated by discounting the future cash flows to be paid, using the current rates at which similar deposits with similar remaining maturities would be issued. (D) LONG-TERM DEBT Quoted market prices or the discounted cash flow method was used to estimate the fair value of the Corporation's fixed-rate long-term debt. Discounting was based on the contractual cash flows and the current rates at which debt with similar terms could be issued. (E) DERIVATIVE PRODUCT ASSETS AND LIABILITIES--OTHER THAN TRADING PURPOSES The estimated fair values of derivative product assets and liabilities used for risk management purposes were based on quoted market prices or pricing and valuation models on a present-value basis using current market information. NOTE 19--CONTINGENCIES 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, 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 these matters will not have a material effect on the consolidated financial statements. 66 NOTE 20--FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEET
1997 1996 DECEMBER 31 (IN MILLIONS) ------- ------- ASSETS Cash and due from banks--bank subsidiaries...................... $ -- $ 3 Interest-bearing due from banks Bank subsidiaries............................................. 778 1,138 Other......................................................... 9 249 Trading assets.................................................. -- 67 Investment securities--available-for-sale....................... 50 46 Loans and receivables--subsidiaries Bank subsidiaries............................................. 2,549 2,044 Nonbank subsidiaries.......................................... 1,696 989 Investment in subsidiaries Bank subsidiaries............................................. 9,423 9,054 Nonbank subsidiaries.......................................... 1,061 1,229 Other assets.................................................... 90 76 ------- ------- Total assets................................................ $15,656 $14,895 ======= ======= LIABILITIES Short-term borrowings Nonbank subsidiaries.......................................... $ 76 $ 76 Other......................................................... 287 224 Long-term debt Nonbank subsidiaries.......................................... 1,027 771 Other......................................................... 6,025 4,463 Other liabilities............................................... 281 354 ------- ------- Total liabilities........................................... 7,696 5,888 Stockholders' equity............................................ 7,960 9,007 ------- ------- Total liabilities and stockholders' equity.................. $15,656 $14,895 ======= =======
67 FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED INCOME STATEMENT
1997 1996 1995 FOR THE YEAR (IN MILLIONS) ------ ------ ------ OPERATING INCOME Dividends Bank subsidiaries...................................... $ 943 $ 957 $ 686 Nonbank subsidiaries................................... 375 94 114 Interest income Bank subsidiaries...................................... 195 159 163 Nonbank subsidiaries................................... 62 53 67 Other.................................................. 44 37 48 Other income Bank subsidiaries...................................... -- -- 8 Nonbank subsidiaries................................... -- -- 1 Other.................................................. 2 5 -- ------ ------ ------ Total................................................ 1,621 1,305 1,087 OPERATING EXPENSE Interest expense Nonbank subsidiaries................................... 85 11 4 Other.................................................. 367 345 367 Merger-related charges................................... -- -- 69 Other expense............................................ 22 39 39 ------ ------ ------ Total................................................ 474 395 479 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES.............................. 1,147 910 608 Applicable income taxes (benefit)........................ (74) (62) (59) INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES............................................ 1,221 972 667 Equity in undistributed net income of subsidiaries Bank subsidiaries...................................... 448 322 418 Nonbank subsidiaries................................... (144) 142 65 ------ ------ ------ NET INCOME............................................... $1,525 $1,436 $1,150 ====== ====== ======
The Parent Company Only Statement of Stockholders' Equity is the same as the Consolidated Statement of Stockholders' Equity (see page 43). 68 FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS
1997 1996 1995 FOR THE YEAR (IN MILLIONS) ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................... $ 1,525 $ 1,436 $ 1,150 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries............... (1,622) (1,515) (1,282) Dividends received from subsidiaries............... 1,318 1,036 800 Depreciation and amortization...................... 10 7 8 Merger-related charges............................. -- -- 69 Net (increase) in trading assets................... (38) -- (74) Net (increase) decrease in accrued income receivable........................................ (15) 4 (2) Net increase (decrease) in accrued expenses payable........................................... (1) (30) (31) Other noncash adjustments.......................... (8) (15) (88) ------- ------- ------- Total adjustments.................................. (356) (513) (600) ------- ------- ------- Net cash provided by operating activities............ 1,169 923 550 CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans to subsidiaries..... (1,198) (176) 35 Net decrease in resale agreements with bank subsidiary.......................................... -- 3 39 Net (increase) decrease in capital investments in subsidiaries........................................ 148 (46) 101 Purchase of investment securities--available-for- sale................................................ (29) (143) (71) Proceeds from maturities of investment securities-- available-for-sale.................................. 27 143 78 Proceeds from sales of investment securities-- available-for-sale.................................. -- 7 48 Sales of premises and equipment...................... -- -- 51 Other, net........................................... -- 9 (1) ------- ------- ------- Net cash provided by (used in) investing activities.. (1,052) (203) 280 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings..... 57 (131) 155 Proceeds from issuance of long-term debt............. 2,465 1,297 772 Redemption and repayment of long-term debt........... (552) (492) (335) Net (decrease) in other liabilities.................. -- -- (86) Dividends paid....................................... (516) (488) (447) Proceeds from issuance of common and treasury stock.. -- 59 23 Purchase of treasury stock........................... (2,074) (412) (513) Payment for redemption of preferred stock............ (100) -- (121) ------- ------- ------- Net cash (used in) financing activities.............. (720) (167) (552) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. (603) 553 278 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 1,390 837 559 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 787 $ 1,390 $ 837 ======= ======= ======= OTHER CASH FLOW DISCLOSURES Interest paid...................................... $ 441 $ 351 $ 364 Income tax (receipt)............................... (58) (56) (53)
Dividends that may be paid by national bank subsidiaries are subject to two statutory limitations. Under the first, dividends cannot exceed the level of undivided profits. In addition, a bank cannot declare a dividend, without regulatory approval, in an amount in excess of its net income for the current year combined with the retained net profits for the preceding two years. State bank subsidiaries may also be subject to limitations on dividend payments. 69 Based on these statutory requirements, the Principal Banks could, in the aggregate, have declared additional dividends of up to approximately $1.1 billion without regulatory approval at January 1, 1998. The payment of dividends by any bank may also be affected by other factors, such as the maintenance of adequate capital. As of December 31, 1997, all of the Principal Banks significantly exceeded the regulatory guidelines for "well-capitalized" status. The Principal Banks are subject to various regulatory capital requirements that require them to maintain minimum ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Refer to the "Capital Management" section beginning on page 36 for the Principal Banks' capital ratios as well as the minimum capital ratios required by regulation. Failure to meet minimum capital requirements results in certain actions by bank regulators that could have a direct material effect on the Principal Banks' financial statements. As of December 31, 1997, management believes that each of the Principal Banks meets all capital adequacy requirements to which it is subject and is correctly categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that categorization that management believes have changed the institution's category. Federal banking law also restricts each bank subsidiary from extending credit to the Corporation in excess of 10% of the subsidiary's capital stock and surplus, as defined. Any such extensions of credit are subject to strict collateral requirements. In connection with issuances of commercial paper, the Corporation has an agreement providing future credit availability (back-up lines of credit) with an affiliated bank. The agreement aggregated $300 million at December 31, 1997. The commitment fee paid under this agreement was .08%. The back-up line of credit, together with overnight money market loans, short-term investments and other sources of liquid assets, exceeded the amount of commercial paper issued at December 31, 1997. 70 REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES To the Stockholders of First Chicago NBD Corporation: FINANCIAL STATEMENTS The management of First Chicago NBD Corporation and its subsidiaries is responsible for the preparation, integrity and objectivity of the financial statements and footnotes contained in this Form 10-K. The financial statements have been prepared in accordance with generally accepted accounting principles and are free from material fraud or error. The other financial information in this Form 10-K is consistent with the financial statements. Where financial information must of necessity be based upon estimates and judgments, they represent the best estimates and judgments of management. The Corporation's financial statements have been audited by Arthur Andersen LLP, independent public accountants, whose appointment is ratified by the stockholders. The independent public accountants' responsibility is to express an opinion on the Corporation's financial statements. As described further in the report that follows, their opinion is based on their audit, which was conducted in accordance with generally accepted auditing standards and is believed by them to provide a reasonable basis for their opinion. Management has made available to Arthur Andersen LLP all of the Corporation's financial records and related data. Furthermore, management believes that all representations made to Arthur Andersen LLP during their audit were valid and appropriate. INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING Management is also responsible for establishing and maintaining the Corporation's internal control structure that provides reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements. Management continually monitors the internal control structure for compliance with established policies and procedures. The Corporation maintains a strong internal auditing program that independently assesses the effectiveness of the internal control structure. The Audit Committee of the Board of Directors, composed entirely of outside Directors, oversees the Corporation's financial reporting process on behalf of the Board of Directors and has responsibility for appointing the independent public accountants for the Corporation. The Audit Committee reviews with the independent public accountants the scope of their audit and audit reports and meets with them on a scheduled basis to review their findings and any action to be taken thereon. In addition, the Audit Committee meets with the internal auditors and with management to review the scope and findings of the internal audit program and any actions to be taken by management. The independent public accountants and the internal auditors meet periodically with the Audit Committee without management's being present. Management also recognizes its responsibility for fostering a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized by and reflected in the Corporation's integrity policies, which address, among other things, the necessity of ensuring open communication within the Corporation; potential conflicts of interest; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. The Corporation maintains a systematic program to assess compliance with these policies. There are inherent limitations in the effectiveness of any internal control structure, including the possibility of human error or the circumvention or overriding of controls. Accordingly, even an effective internal control structure can provide only reasonable assurance with respect to reliability of financial statements and safeguarding of assets. Furthermore, because of changes in conditions, internal control structure effectiveness may vary over time. 71 The Corporation assessed its internal control structure over financial reporting as of December 31, 1997, in relation to the criteria described in the "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Corporation believes that as of December 31, 1997, in all material respects, the Corporation maintained an effective internal control structure over financial reporting. /s/ Verne G. Istock Chicago, Illinois, Verne G. Istock January 15, 1998 Chairman, President and Chief Executive Officer /s/ Robert A. Rosholt Robert A. Rosholt Executive Vice President and Chief Financial Officer 72 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of First Chicago NBD Corporation: We have audited the accompanying consolidated balance sheets of First Chicago NBD Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of First Chicago NBD Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Chicago NBD Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Chicago, Illinois, /s/ Arthur Andersen LLP January 15, 1998 73 SELECTED STATISTICAL INFORMATION FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES
1997 1996 1995 DECEMBER 31 (IN MILLIONS) ------ ------ ------ Debt securities Available-for-sale U.S. government and federal agencies................... $5,837 $4,598 $6,840 States and political subdivisions...................... 767 1,208 1,462 Other bonds, notes and debentures...................... 1,538 259 94 ------ ------ ------ Total debt securities................................ 8,142 6,065 8,396 Equity securities (1)...................................... 1,188 1,113 1,053 ------ ------ ------ Total................................................ $9,330 $7,178 $9,449 ====== ====== ======
- -------- (1) Includes Federal Reserve stock. MATURITY OF DEBT INVESTMENT SECURITIES As of December 31, 1997, debt investment securities had the following maturity and yield characteristics.
BOOK VALUE YIELD (DOLLARS IN MILLIONS) ---------- ----- U.S. government and federal agencies Within one year............................................... $1,330 5.86% After one but within five years............................... 2,413 6.51 After five but within ten years............................... 1,275 7.23 After ten years............................................... 819 7.15 ------ ----- $5,837 6.57% ====== ===== States and political subdivisions (1) Within one year............................................... $ 210 11.17% After one but within five years............................... 360 9.94 After five but within ten years............................... 112 9.03 After ten years............................................... 85 8.43 ------ ----- $ 767 9.99% ====== ===== Other bonds, notes and debentures Within one year............................................... $ 283 3.06% After one but within five years............................... 1,074 5.71 After five but within ten years............................... 147 5.56 After ten years............................................... 34 6.71 ------ ----- $1,538 5.23% ====== =====
- -------- (1) Yields for obligations of states and political subdivisions are calculated on a tax-equivalent basis using a tax rate of 35%. 74 SECURITIZATION OF CREDIT CARD RECEIVABLES Since 1987, the Corporation has actively packaged and sold credit card assets as securities to investors. The securitization of credit card receivables is an effective balance sheet management tool since capital is freed for other uses. In addition, while such securitizations affect net interest income, the provision for credit losses and noninterest income, net income is essentially unaffected. 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. At year-end 1997, $8.6 billion in credit card receivables were securitized, compared with $8.9 billion at year-end 1996. For analytical purposes only, the following table shows income statement line items adjusted for the net impact of securitization of credit card receivables.
1997 1996 --------------------------------- --------------------------------- CREDIT CARD CREDIT CARD REPORTED SECURITIZATIONS ADJUSTED REPORTED SECURITIZATIONS ADJUSTED (IN MILLIONS) -------- --------------- -------- -------- --------------- -------- Net interest income-- tax-equivalent basis... $ 3,667 $ 752 $ 4,419 $ 3,722 $ 667 $ 4,389 Provision for credit losses................. 725 643 1,368 735 447 1,182 Noninterest income...... 2,751 (109) 2,642 2,548 (220) 2,328 Noninterest expense..... 3,332 -- 3,332 3,271 -- 3,271 Net income.............. 1,525 -- 1,525 1,436 -- 1,436 Assets--year-end........ $114,096 $8,639 $122,735 $104,619 $8,888 $113,507 --average......... 108,104 8,466 116,570 112,565 7,672 120,237
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS The following table shows a distribution of the maturity of loans and, for those loans due after one year, a breakdown between those loans that have floating interest rates and those that have predetermined interest rates. The amounts exclude domestic consumer loans and domestic lease financing receivables.
ONE YEAR ONE TO OVER OR LESS FIVE YEARS FIVE YEARS TOTAL DECEMBER 31, 1997 (IN MILLIONS) -------- ---------- ---------- ------- Domestic Commercial............................ $11,593 $12,356 $4,990 $28,939 Real estate........................... 2,365 3,219 1,120 6,704 ------- ------- ------ ------- Total domestic...................... 13,958 15,575 6,110 35,643 Foreign................................. 2,254 1,645 616 4,515 ------- ------- ------ ------- Total............................... $16,212 $17,220 $6,726 $40,158 ======= ======= ====== ======= Loans with floating interest rates............... $12,195 $5,601 $17,796 Loans with predetermined interest rates.......... 5,025 1,125 6,150 ------- ------ ------- Total........................................ $17,220 $6,726 $23,946 ======= ====== =======
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING INTEREST Domestic loans that were 90 days or more past due and still accruing interest totaled $187 million, $268 million, $197 million, $150 million and $121 million at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. 75 ALLOCATED ALLOWANCE FOR CREDIT LOSSES While the allowance for credit losses is available to absorb credit losses in the entire portfolio, the tables below present an estimate of the allowance for credit losses allocated by loan type and the percentage of loans in each category to total loans.
1997 1996 1995 1994 1993 DECEMBER 31 (DOLLARS IN MILLIONS) ------ ------ ------ ------ ------ Commercial Domestic.............................. $ 880 $ 927 $ 929 $ 848 $ 789 Foreign............................... 94 66 57 59 81 Consumer Credit card........................... 353 355 303 215 201 Other................................. 81 59 49 36 35 ------ ------ ------ ------ ------ Total............................... $1,408 $1,407 $1,338 $1,158 $1,106 ====== ====== ====== ====== ====== Percentage of loans to total loans Commercial Domestic.............................. 55% 54% 53% 56% 56% Foreign............................... 7 6 6 6 6 Consumer Credit card........................... 14 14 15 13 13 Other................................. 24 26 26 25 25 ------ ------ ------ ------ ------ Total............................... 100% 100% 100% 100% 100% ====== ====== ====== ====== ======
76 DEPOSITS The following tables show a maturity distribution of domestic time certificates of deposit of $100,000 and over, other domestic time deposits of $100,000 and over, and deposits in foreign offices, predominantly in amounts in excess of $100,000, at December 31, 1997. DOMESTIC TIME CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
AMOUNT PERCENT (DOLLARS IN MILLIONS) ------- ------- Three months or less............................................ $ 2,988 64% Over three months to six months................................. 584 12 Over six months to twelve months................................ 543 12 Over twelve months.............................................. 556 12 ------- --- Total....................................................... $ 4,671 100% ======= ===
DOMESTIC OTHER TIME DEPOSITS OF $100,000 AND OVER
AMOUNT PERCENT (DOLLARS IN MILLIONS) ------- ------- Three months or less............................................ $ 561 56% Over three months to six months................................. 91 9 Over six months to twelve months................................ 134 14 Over twelve months.............................................. 214 21 ------- --- Total....................................................... $ 1,000 100% ======= ===
FOREIGN OFFICES
AMOUNT PERCENT (DOLLARS IN MILLIONS) ------- ------- Three months or less............................................ $15,491 98% Over three months to six months................................. 254 2 Over six months to twelve months................................ 15 -- Over twelve months.............................................. 45 -- ------- --- Total....................................................... $15,805 100% ======= ===
77 SHORT-TERM BORROWINGS Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings for each of the three years ended December 31:
1997 1996 1995 (DOLLARS IN MILLIONS) ------- ------- ------- Federal funds purchased Outstanding at year-end............................ $ 2,449 $ 3,938 $ 3,447 Weighted average rate at year-end.................. 5.49% 5.58% 5.49% Daily average outstanding for the year............. $ 2,774 $ 3,025 $ 3,505 Weighted average rate for the year................. 5.94% 5.68% 6.24% Highest outstanding at any month-end............... $ 3,776 $ 3,938 $ 4,824 Securities under repurchase agreements Outstanding at year-end............................ $ 6,822 $ 3,921 $12,264 Weighted average rate at year-end.................. 5.92% 5.78% 5.79% Daily average outstanding for the year............. $ 6,503 $ 9,699 $16,536 Weighted average rate for the year................. 5.12% 5.15% 5.88% Highest outstanding at any month-end............... $ 8,155 $15,459 $20,439 Bank notes Outstanding at year-end............................ $ 5,418 $ 4,346 $ 7,027 Weighted average rate at year-end.................. 5.82% 5.60% 5.93% Daily average outstanding for the year............. $ 5,766 $ 7,359 $ 5,731 Weighted average rate for the year................. 5.77% 5.62% 5.96% Highest outstanding at any month-end............... $ 6,408 $ 9,102 $ 7,027 Other short-term borrowings Outstanding at year-end............................ $ 4,292 $ 3,226 $ 2,775 Weighted average rate at year-end.................. 5.09% 5.51% 5.45% Daily average outstanding for the year............. $ 3,114 $ 3,250 $ 3,436 Weighted average rate for the year................. 4.74% 4.27% 5.72% Highest outstanding at any month-end............... $ 4,706 $ 4,839 $ 4,212 Total short-term borrowings Outstanding at year-end............................ $18,981 $15,431 $25,513 Weighted average rate at year-end.................. 5.66% 5.62% 5.75% Daily average outstanding for the year............. $18,157 $23,333 $29,208 Weighted average rate for the year................. 5.39% 5.24% 5.92%
COMMON STOCK AND STOCKHOLDER DATA (1) 1997 1996 1995 1994 1993 ------- ------- ------- ------ ------- Market price High for the year............... $85 7/8 $58 7/8 $42 1/2 $ 33 $36 3/8 Low for the year................ 50 1/2 34 3/4 27 3/8 26 3/4 28 5/8 At year-end..................... 83 1/2 53 3/4 39 1/2 27 3/8 29 3/4 Book value (at year-end).......... 26.87 27.31 25.25 22.60 21.25 Dividend payout ratio............. 33% 34% 40% 34% 28%
- -------- (1) There were 35,606 common stockholders of record as of December 31, 1997. 78
1997 1996 1995 1994 1993 FINANCIAL RATIOS ---- ---- ---- ---- ---- Net income as a percentage of: Average stockholders' equity.................. 18.1% 16.4% 13.8% 15.8% 18.5% Average common stockholders' equity........... 18.6 17.0 14.3 16.6 19.9 Average total assets.......................... 1.41 1.28 0.94 1.13 1.33 Average earning assets........................ 1.64 1.48 1.09 1.32 1.52 Stockholders' equity at year-end as a percentage of: Total assets at year-end...................... 7.0 8.6 6.9 6.9 8.1 Total loans at year-end....................... 11.6 13.6 13.1 14.2 15.4 Total deposits at year-end.................... 11.6 14.2 12.2 12.0 12.9 Average stockholders' equity as a percentage of: Average assets................................ 7.8 7.8 6.8 7.2 7.2 Average loans................................. 12.7 13.5 14.1 15.4 14.8 Average deposits.............................. 13.0 13.6 12.4 12.8 11.7 Income to fixed charges: Excluding interest on deposits................ 2.4X 2.2x 1.8x 2.2x 3.0x Including interest on deposits................ 1.6X 1.5x 1.4x 1.6x 1.8x
QUARTERLY DIVIDENDS AND MARKET PRICE SUMMARY
STOCK MARKET DIVIDENDS PRICE RANGE (1) DECLARED ----------------- PER SHARE LOW HIGH --------- ------- --------- 1997 First quarter..................................... $0.40 $51 1/2 $63 5/8 Second quarter.................................... 0.40 50 1/2 65 5/8 Third quarter..................................... 0.40 60 3/4 78 13/16 Fourth quarter.................................... 0.44 67 1/8 85 7/8 ----- Year............................................ $1.64 50 1/2 85 7/8 ===== 1996 First quarter..................................... $0.36 $34 3/4 $44 1/4 Second quarter.................................... 0.36 38 5/8 45 1/2 Third quarter..................................... 0.36 36 5/8 45 1/4 Fourth quarter.................................... 0.40 45 58 7/8 ----- Year............................................ $1.48 34 3/4 58 7/8 =====
- -------- (1) The principal market for the Corporation's common stock is the New York Stock Exchange (the "NYSE"). In addition to the NYSE, the Corporation's common stock is listed on the Chicago Stock Exchange and the Pacific Stock Exchange. 79 CONSOLIDATED SUMMARY OF QUARTERLY FINANCIAL INFORMATION
1997 (IN MILLIONS, EXCEPT PER SHARE DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 DATA) ----------- ------------ ------- -------- Interest income....................... $1,872 $1,881 $1,860 $1,734 Net interest income................... 872 899 925 876 Provision for credit losses........... 167 191 180 187 Noninterest income.................... 727 701 644 679 Noninterest expense................... 872 835 825 800 Net income............................ 382 385 378 380 Earnings per share Basic............................... $ 1.30 $ 1.28 $ 1.22 $ 1.19 Diluted............................. 1.28 1.26 1.20 1.17 1996 (IN MILLIONS, EXCEPT PER SHARE DATA) Interest income....................... $1,747 $1,908 $1,922 $1,992 Net interest income................... 883 942 910 885 Provision for credit losses........... 190 185 185 175 Noninterest income.................... 682 597 643 626 Noninterest expense................... 813 816 814 828 Net income............................ 377 358 361 340 Earnings per share Basic............................... $ 1.17 $ 1.10 $ 1.11 $ 1.05 Diluted............................. 1.14 1.08 1.09 1.03
80 [This Page Intentionally Left Blank] 81 AVERAGE BALANCES/NET INTEREST MARGIN/RATES FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1997 1996 YEAR ENDED DECEMBER 31 -------------------------- -------------------------- (INCOME AND RATES ON TAX- AVERAGE AVERAGE AVERAGE AVERAGE EQUIVALENT BASIS) BALANCE INTEREST RATE BALANCE INTEREST RATE (DOLLARS IN MILLIONS) -------- -------- ------- -------- -------- ------- ASSETS Interest-bearing due from banks (1)................ $ 7,558 $ 451 5.97% $ 7,995 $ 463 5.79% Federal funds sold and securities under resale agreements............... 5,821 304 5.22 9,597 510 5.31 Trading assets............ 4,926 277 5.64 6,990 397 5.68 Investment securities (2) U.S. government and federal agencies........ 5,252 351 6.69 5,165 343 6.64 States and political subdivisions............ 917 83 8.99 1,319 118 8.95 Other.................... 2,032 106 5.19 1,259 72 5.72 -------- ------ ---- -------- ------ ---- Total investment securities............ 8,201 540 6.58 7,743 533 6.88 Loans (3)(4) Domestic offices......... 62,212 5,615 9.15 61,441 5,532 9.12 Foreign offices.......... 4,074 255 6.27 3,508 236 6.73 -------- ------ ---- -------- ------ ---- Total loans............ 66,286 5,870 8.97 64,949 5,768 8.99 -------- ------ ---- -------- ------ ---- Total earning assets (5)................... 92,792 7,442 8.02 97,274 7,671 7.89 Cash and due from banks... 6,523 6,248 Allowance for credit losses................... (1,394) (1,396) Other assets.............. 10,183 10,439 -------- -------- Total assets........... $108,104 $112,565 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits--interest-bearing Savings.................. $ 9,371 $ 209 2.23% $ 10,940 $ 244 2.23% Money market............. 11,754 407 3.46 9,904 364 3.68 Time..................... 15,095 837 5.55 16,008 880 5.50 Foreign offices (6)...... 14,098 725 5.14 13,452 687 5.11 -------- ------ ---- -------- ------ ---- Total deposits-- interest-bearing...... 50,318 2,178 4.33 50,304 2,175 4.32 Federal funds purchased and securities under repurchase agreements.... 9,277 498 5.37 12,724 671 5.27 Other short-term borrowings............... 8,880 480 5.40 10,609 552 5.20 Long-term debt (7)........ 9,251 619 6.69 8,173 551 6.74 -------- ------ ---- -------- ------ ---- Total interest-bearing liabilities........... 77,726 3,775 4.86 81,810 3,949 4.83 Demand deposits........... 14,256 13,724 Other liabilities......... 7,715 8,295 Preferred stock........... 310 483 Common stockholders' equity................... 8,097 8,253 -------- -------- Total liabilities and stockholders' equity.. $108,104 $112,565 ======== ======== Interest income/earning assets (5)............... $7,442 8.02% $7,671 7.89% Interest expense/earning assets................... 3,775 4.07 3,949 4.06 ------ ---- ------ ---- Net interest margin....... $3,667 3.95% $3,722 3.83% ====== ==== ====== ====
- -------- (1) Principally balances in overseas offices. (2) The combined amounts for investment securities available-for-sale and held- to-maturity are based on their respective carrying values. Based on the amortized cost of investment securities available-for-sale, the combined average balance for 1997, 1996 and 1995 would be $8.067 billion, $7.597 billion, and $13.428 billion, respectively, and the average earned rate in 1997, 1996 and 1995 would be 6.69%, 7.02% and 6.65%, respectively. (3) Average lease-financing receivables are reduced by related deferred tax liabilities in calculating the average rate. 82
1995 1994 1993 ------------------------------------------------------ ------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ------- ------- -------- ------- ------- -------- ------- $ 10,011 $ 620 6.19% $ 8,497 $ 395 4.65% $ 8,098 $ 332 4.10% 15,701 922 5.87 14,340 624 4.35 11,740 350 2.98 7,300 469 6.42 4,927 286 5.80 4,876 229 4.70 10,023 681 6.79 11,093 698 6.29 8,973 585 6.52 1,546 141 9.12 1,649 146 8.85 1,757 151 8.59 1,781 71 3.99 1,990 48 2.41 2,054 57 2.78 -------- ------ ---- -------- ------ ---- ------- ------ ---- 13,350 893 6.69 14,732 892 6.05 12,784 793 6.20 55,530 5,043 9.21 47,208 3,832 8.24 44,262 3,441 7.88 3,414 246 7.21 2,894 194 6.70 3,131 211 6.74 -------- ------ ---- -------- ------ ---- ------- ------ ---- 58,944 5,289 9.09 50,102 4,026 8.15 47,393 3,652 7.80 -------- ------ ---- -------- ------ ---- ------- ------ ---- 105,306 8,193 7.78 92,598 6,223 6.72 84,891 5,356 6.31 6,328 6,553 6,171 (1,198) (1,132) (1,062) 11,934 9,827 6,642 -------- -------- ------- $122,370 $107,846 $96,642 ======== ======== ======= $ 11,716 $ 298 2.54% $ 11,815 $ 274 2.32% $11,100 $ 265 2.39% 8,942 369 4.13 9,280 261 2.81 10,163 247 2.43 17,346 1,008 5.81 13,650 570 4.18 14,204 543 3.82 15,821 906 5.73 12,347 548 4.44 10,944 417 3.81 -------- ------ ---- -------- ------ ---- ------- ------ ---- 53,825 2,581 4.80 47,092 1,653 3.51 46,411 1,472 3.17 20,041 1,192 5.95 16,365 704 4.30 13,245 404 3.05 9,167 538 5.87 8,629 378 4.38 7,374 253 3.43 7,941 571 7.19 6,755 445 6.59 4,817 334 6.93 -------- ------ ---- -------- ------ ---- ------- ------ ---- 90,974 4,882 5.37 78,841 3,180 4.03 71,847 2,463 3.43 13,254 13,377 13,078 9,807 7,898 4,730 570 686 794 7,765 7,044 6,193 -------- -------- ------- $122,370 $107,846 $96,642 ======== ======== ======= $8,193 7.78% $6,223 6.72% $5,356 6.31% 4,882 4.64 3,180 3.43 2,463 2.90 ------ ---- ------ ---- ------ ---- $3,311 3.14% $3,043 3.29% $2,893 3.41% ====== ==== ====== ==== ====== ====
- -------- (4) Nonperforming loans are included in average balances used to determine rates. (5) Includes tax-equivalent adjustments based on federal income tax rate of 35%. (6) Includes international banking facilities' deposit balances in domestic offices and balances of Edge Act and overseas offices. (7) Includes trust preferred capital securities. 83 ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table shows the approximate effect on net interest income of volume and rate changes for 1997 and 1996. For purposes of this table, changes that are not due solely to volume or rate changes are allocated to volume.
1997 OVER 1996 1996 OVER 1995 ------------------- -------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL YEAR ENDED DECEMBER 31 (IN MILLIONS) ------ ---- ----- ------ ----- ----- Increase (decrease) in interest income Interest-bearing due from banks....... $ (26) $ 14 $ (12) $(117) $ (40) $(157) Federal funds sold and securities under resale agreements.............. (197) (9) (206) (324) (88) (412) Trading assets........................ (116) (4) (120) (18) (54) (72) Investment securities U.S. government and federal agencies........................... 6 2 8 (323) (15) (338) States and political subdivisions... (36) 1 (35) (20) (3) (23) Other............................... 40 (6) 34 (30) 31 1 Loans Domestic offices.................... 70 13 83 532 (43) 489 Foreign offices..................... 35 (16) 19 6 (16) (10) ----- ----- Total............................... (229) (522) Increase (decrease) in interest expense Deposits Savings............................. (35) -- (35) (17) (37) (54) Money market........................ 64 (21) 43 35 (40) (5) Time................................ (51) 8 (43) (74) (54) (128) Foreign offices..................... 33 5 38 (121) (98) (219) Federal funds purchased and securities under repurchase agreements.......... (185) 12 (173) (386) (135) (521) Other short-term borrowings........... (94) 22 (72) 75 (61) 14 Long-term debt........................ 72 (4) 68 16 (36) (20) ----- ----- Total............................... (174) (933) ----- ----- Increase (decrease) in net interest income................................. $ (55) $ 411 ===== =====
84 ITEM 2. PROPERTIES The Corporation and its subsidiaries occupy more than 800 owned or leased properties within the United States. The Corporation's points of presence, which include ATMs, number more than 1,200 locations within the United States. The Corporation's headquarters are in Chicago, Illinois, at One First National Plaza, a 60-story building located in the center of the Chicago "Loop" business district. This building, which is master-leased by FNBC, has 1,750,000 square feet of space, of which the Corporation occupies approximately 57%; the balance is subleased to other tenants. In addition, the Corporation is consolidating leases from the central Loop business district to the 1,040,000 square-foot office building that the Corporation owns in Chicago's west Loop business district. A number of other leased buildings are used and occupied by the Corporation or its subsidiaries in the Chicago business district and the surrounding metropolitan area. In Michigan, NBD Michigan owns and occupies a 530,000 square-foot main office building in Detroit's central business district. NBD Michigan houses its retail support activities in Troy, Michigan, in an owned 280,000 square- foot office building. NBD Michigan houses various functions in leased or owned properties at locations throughout Michigan, including retail support activities in Troy and data center and check processing operations in Belleville. NBD Michigan owns approximately 143 acres of land in Farmington Hills for possible future facility needs. NBD Indiana leases and occupies 390,000 square feet of space in three buildings in the central business district of Indianapolis: Market Square, One Indianapolis Square and Market Tower. Elsewhere in Indiana, the Corporation owns and partially occupies retail banking centers in Merrillville, Gary, Fort Wayne and Elkhart. The Corporation also occupies owned or leased facilities in 13 other states and the District of Columbia. The Corporation has foreign offices in: Adelaide, Melbourne and Sydney, Australia; Beijing; Buenos Aires; Frankfurt; Hong Kong; London; Mexico City; Seoul; Singapore; Taipei; Tokyo; and Toronto. These offices all are located in leased premises. ITEM 3. LEGAL PROCEEDINGS The information required by this Item is set forth in Note 19 to the Consolidated Financial Statements, on page 66 of this Form 10-K, and is expressly incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Executive Officers of the Registrant
PRESENT POSITION HELD WITH THE CORPORATION AND NAME AND AGE EFFECTIVE DATE FIRST ELECTED TO OFFICE INDICATED - ------------ ------------------------------------------------ Verne G. Istock (57).... Director (10-1-85), Chairman of the Board (5-10-96), Chief Executive Officer (1-1-94) and President (12-1-95) Thomas H. Jeffs II (59). Director and Vice Chairman of the Board (10-1-85) David J. Vitale (51).... Director and Vice Chairman of the Board (12-1-95) John W. Ballantine (52). Executive Vice President (12-1-95) David P. Bolger (40).... Executive Vice President (10-11-96) William H. Elliott III (56)................... Executive Vice President (10-15-96) Sherman I. Goldberg Executive Vice President, General Counsel and Secretary (12-1- (55)................... 95) Philip S. Jones (55).... Executive Vice President (6-15-92) W.G. Jurgensen (46)..... Executive Vice President (12-1-95) Thomas J. McDowell (59). Executive Vice President (1-1-95) Timothy P. Moen (45).... Executive Vice President (12-1-95) Susan S. Moody (44)..... Executive Vice President (1-1-95) Andrew J. Paine, Jr. (60)................... Executive Vice President (10-15-92) Robert A. Rosholt (48).. Executive Vice President and Chief Financial Officer (12-1-95) Willard A. Valpey (54).. Executive Vice President (3-8-96) Walter C. Watkins, Jr. (51)................... Executive Vice President (9-12-97)
85 Excluding Mr. Elliott, each of the executive officers has served as an officer of the Corporation or a subsidiary, or their respective predecessors, for more than five years. Prior to joining the Corporation in 1996, Mr. Elliott held various executive positions with AT&T and its subsidiaries for more than five years. Executive officers of the Corporation serve until the annual meeting of the Board of Directors (May 8, 1998). PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is set forth in this Form 10-K in the "Common Stock and Stockholder Data" table on page 78 and the "Quarterly Dividends and Market Price Summary" table on page 79, and is expressly incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth in this Form 10-K in the "Selected Financial Data" table on page 13 and the "Financial Ratios" table on page 79, and is expressly incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is set forth on pages 13 to 40 of this Form 10-K, and is expressly incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is set forth on pages 24 to 28 of this Form 10-K, and is expressly incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is set forth in this Form 10-K in the "Selected Financial Data" table on page 13, the "Selected Statistical Information" table on page 29, the "Loan Composition" table on page 29, the Consolidated Financial Statements and the Notes thereto on pages 41 to 70, the "Report of Independent Public Accountants" on page 73 and the "Selected Statistical Information" section on pages 74 to 84, and is expressly incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item pertaining to executive officers of the Corporation is set forth on page 85 of this Form 10-K under the heading "Executive Officers of the Registrant," and is expressly incorporated herein by reference. The information required by this Item pertaining to directors of the Corporation and to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," respectively, in the Corporation's definitive proxy statement dated March 27, 1998, and is expressly incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth under the headings "Compensation of Executive Officers," "Director Meeting Attendance and Fee Arrangements" and "Committees of the Board of Directors--Organization, Compensation and Nominating Committee--Committee Interlocks and Insider Participation" in the Corporation's definitive proxy statement dated March 27, 1998, and is expressly incorporated herein by reference. 86 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is set forth under the heading "Beneficial Ownership of the Corporation's Common Stock" in the Corporation's definitive proxy statement dated March 27, 1998, and is expressly incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth under the headings "Committees of the Board of Directors--Organization, Compensation and Nominating Committee--Committee Interlocks and Insider Participation" and "Transactions with Directors, Executive Officers, Stockholders and Associates" in the Corporation's definitive proxy statement dated March 27, 1998, and is expressly incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements:
PAGE ---- Consolidated Balance Sheet--December 31, 1997 and 1996................. 41 Consolidated Income Statement--Three Years Ended December 31, 1997..... 42 Consolidated Statement of Stockholders' Equity--Three Years Ended December 31, 1997..................................................... 43 Consolidated Statement of Cash Flows--Three Years Ended December 31, 1997.................................................................. 44 Notes to Financial Statements.......................................... 45
(2) Financial Statement Schedules. All schedules normally required by Form 10-K are omitted, since either they are not applicable or the required information is shown in the financial statements or the notes thereto. (3) Exhibits. 3(A). Restated Certificate of Incorporation of the Corporation, as amended [Exhibit 3(A) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 3(B). By-Laws of the Corporation, as amended. 4. Instruments defining the rights of security holders, in- cluding indentures.+ 10(A). NBD Bancorp, Inc. Performance Incentive Plan, as amended [Exhibit 10(a) to the Corporation's 1991 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by refer- ence].* 10(B). First Chicago NBD Corporation Plan for Deferring the Pay- ment of Directors' Fees [Exhibit 10(D) to the Corpora- tion's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(C). Form of First Chicago NBD Corporation Executive Estate Plan.* 10(D). First Chicago NBD Corporation Financial Planning Program for Executives [Exhibit 10(D) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(E). Supplemental Disability and Split-Dollar Life Insurance Policies of NBD Indiana, Inc. covering the named executive officers [Exhibit 10(i) to the Corporation's 1992 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(F). Form of First Chicago NBD Corporation Long-Term Disability Restoration Plan [Exhibit 10(F) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(G). First Chicago Corporation Stock Incentive Plan [Exhibit 10(A) to FCC's 1990 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].*
87 10(H). First Chicago Corporation 1983 Stock Option Plan, as amended and restated [Exhibit 28 to FCC's Post-Effective Amendment No. 1 to Form S-8 Registration Statement (File No. 33-15779) incorporated herein by reference].* 10(I). Form of First Chicago NBD Corporation Deferred Compensa- tion Plan.* 10(J). Form of First Chicago NBD Corporation Supplemental Savings and Investment Plan [Exhibit 10(K) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorpo- rated herein by reference].* 10(K). Form of First Chicago NBD Corporation Supplemental Per- sonal Pension Account Plan [Exhibit 10(L) to the Corpora- tion's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(L). Form of Individual Change of Control Employment Agree- ment.* 10(M). Letter dated November 13, 1997, from the Corporation to Scott P. Marks, Jr.* 10(N). Summary of First Chicago NBD Corporation Executive Officer Separation Plan.* 10(O). First Chicago Corporation Trust Agreement (Trust A) [Ex- hibit 10(K) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(P). First Chicago Corporation Trust Agreement (Trust B) [Ex- hibit 10(L) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(Q). NBD Bancorp, Inc. Benefit Protection Trust Agreement [Ex- hibit 10(Q) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by refer- ence].* 10(R). First Chicago NBD Corporation Director Stock Plan [Exhibit 10(X) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(S). First Chicago NBD Corporation Stock Performance Plan [Ex- hibit 10(Y) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(T). First Chicago NBD Corporation Senior Management Annual In- centive Plan [Exhibit 10(Z) to the Corporation's 1995 An- nual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 12. Statements re computation of ratios. 21. Subsidiaries of the Corporation. 23. Consents of experts and counsel. 27. Financial Data Schedule.
(b) The Corporation filed the following Current Reports on Form 8-K during the quarter ended December 31, 1997:
DATE ITEM REPORTED ---- ------------- October 10, 1997 Announcement of the Corporation's redemption, on November 17, 1997, of its 8.45% Cumulative Preferred Stock, Series E. October 14, 1997 The Corporation's earnings for the quarter ended September 30, 1997. November 14, 1997 Announcement of the authorization by the Corporation's Board of Directors to repurchase up to 12 million shares of the Corporation's common stock.
- -------- + The Corporation hereby agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the Corporation and its consolidated subsidiaries; the total amount of such debt does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. 88 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE CORPORATION HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, THIS 13TH DAY OF FEBRUARY, 1998. First Chicago NBD Corporation (Registrant) /s/ Verne G. Istock By __________________________________ Verne G. Istock Principal Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE CORPORATION AND IN THE CAPACITIES INDICATED, THIS 13TH DAY OF FEBRUARY, 1998. /s/ Terence E. Adderley /s/ William T. McCormick, Jr. - ------------------------------------- ------------------------------------- Terence E. Adderley William T. McCormick, Jr. Director Director /s/ James K. Baker /s/ Andrew J. McKenna - ------------------------------------- ------------------------------------- James K. Baker Andrew J. McKenna Director Director /s/ John H. Bryan /s/ Earl L. Neal - ------------------------------------- ------------------------------------- John H. Bryan Earl L. Neal Director Director /s/ Siegfried Buschmann /s/ James J. O'Connor - ------------------------------------- ------------------------------------- Siegfried Buschmann James J. O'Connor Director Director /s/ James S. Crown /s/ Thomas E. Reilly, Jr. - ------------------------------------- ------------------------------------- James S. Crown Thomas E. Reilly, Jr. Director Director /s/ Maureen A. Fay /s/ John W. Rogers, Jr. - ------------------------------------- ------------------------------------- Maureen A. Fay John W. Rogers, Jr. Director Director /s/ Charles T. Fisher III /s/ Adele Simmons - ------------------------------------- ------------------------------------- Charles T. Fisher III Adele Simmons Director Director /s/ Verne G. Istock /s/ Richard L. Thomas - ------------------------------------- ------------------------------------- Verne G. Istock Richard L. Thomas Director Director /s/ Thomas H. Jeffs II /s/ David J. Vitale - ------------------------------------- ------------------------------------- Thomas H. Jeffs II David J. Vitale Director Director /s/ William G. Lowrie /s/ Robert A. Rosholt - ------------------------------------- ------------------------------------- William G. Lowrie Robert A. Rosholt Director Principal Financial Officer /s/ Richard A. Manoogian /s/ William J. Roberts - ------------------------------------- ------------------------------------- Richard A. Manoogian William J. Roberts Director Principal Accounting Officer 89 EXHIBIT INDEX 3(A). Restated Certificate of Incorporation of the Corporation, as amended [Exhibit 3(A) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 3(B). By-Laws of the Corporation, as amended. 4. Instruments defining the rights of security holders, including indentures.+ 10(A). NBD Bancorp, Inc. Performance Incentive Plan, as amended [Exhibit 10(a) to the Corporation's 1991 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(B). First Chicago NBD Corporation Plan for Deferring the Payment of Directors' Fees [Exhibit 10(D) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(C). Form of First Chicago NBD Corporation Executive Estate Plan.* 10(D). First Chicago NBD Corporation Financial Planning Program for Executives [Exhibit 10(D) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(E). Supplemental Disability and Split-Dollar Life Insurance Policies of NBD Indiana, Inc. covering the named executive officers [Exhibit 10(i) to the Corporation's 1992 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(F). Form of First Chicago NBD Corporation Long-Term Disability Restoration Plan [Exhibit 10(F) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(G). First Chicago Corporation Stock Incentive Plan [Exhibit 10(A) to FCC's 1990 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(H). First Chicago Corporation 1983 Stock Option Plan, as amended and restated [Exhibit 28 to FCC's Post-Effective Amendment No. 1 to Form S-8 Registration Statement (File No. 33-15779) incorporated herein by reference].* 10(I). Form of First Chicago NBD Corporation Deferred Compensation Plan.* 10(J). Form of First Chicago NBD Corporation Supplemental Savings and Investment Plan [Exhibit 10(K) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(K). Form of First Chicago NBD Corporation Supplemental Personal Pension Account Plan [Exhibit 10(L) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(L). Form of Individual Change of Control Employment Agreement.* 10(M). Letter dated November 13, 1997, from the Corporation to Scott P. Marks, Jr.* 10(N). Summary of First Chicago NBD Corporation Executive Officer Separation Plan.* 10(O). First Chicago Corporation Trust Agreement (Trust A) [Exhibit 10(K) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(P). First Chicago Corporation Trust Agreement (Trust B) [Exhibit 10(L) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(Q). NBD Bancorp, Inc. Benefit Protection Trust Agreement [Exhibit 10(Q) to the Corporation's 1996 Annual Report on Form 10-K (File No. 1- 7127) incorporated herein by reference].* 10(R). First Chicago NBD Corporation Director Stock Plan [Exhibit 10(X) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(S). First Chicago NBD Corporation Stock Performance Plan [Exhibit 10(Y) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1- 7127) incorporated herein by reference].* 10(T). First Chicago NBD Corporation Senior Management Annual Incentive Plan [Exhibit 10(Z) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 12. Statements re computation of ratios. 21. Subsidiaries of the Corporation. 23. Consents of experts and counsel. 27. Financial Data Schedule.
- -------- + The Corporation hereby agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the Corporation and its consolidated subsidiaries; the total amount of such debt does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. 1 EX-3.(B) 2 BY-LAWS OF THE CORPORATION, AS AMENDED EXHIBIT 3(B) BY-LAWS As Amended and Restated September 12, 1997 First Chicago NBD Corporation (A Delaware Corporation) - -------------------------------------------------------------------------------- ARTICLE I Offices Section 1. Registered Office. The registered office of the Corporation is located at 1209 Orange Street, Wilmington, Delaware 19801. The Corporation may, by resolution of the Board of Directors, change the location to any other place in Delaware. Section 2. Other Offices. The Corporation may have such other offices, within or without the State of Delaware, as the Board of Directors may from time to time establish. ARTICLE II Meetings of Stockholders Section 1. Annual Meetings. The annual meeting of the stockholders for the election of directors and for the transaction of any other business as may properly come before the meeting shall be held on the second Friday in May of each year or on such other date as from time to time may be designated by the Board of Directors. Section 2. Special Meetings. A special meeting of the stockholders may be called at any time only by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. Section 3. Place of Meetings. The Board of Directors may designate any place, either within or without the State of Delaware, as the place of meeting for any annual meeting or for any special meeting of stockholders. Section 4. Notice of Meetings. Written notice stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by or under the direction of the Secretary, to each stockholder of record entitled to vote at such meeting. Except as otherwise required by statute, the written notice shall be given not less than ten nor more than sixty days before the date of the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. Section 5. Quorum. Except as otherwise required by statute, the presence at any meeting, in person or by proxy, of a majority of the shares then issued and outstanding and entitled to vote shall be necessary and sufficient to constitute a quorum for the transaction of business. The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 6. Voting Lists. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders of record entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of record who is present. Section 7. Adjourned Meetings. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 8. Proxies. Each stockholder of record entitled to vote at a meeting of stockholders may authorize another person or persons (but no more than two) to act for him by proxy, but no such proxy shall be voted or acted upon other than at the meeting specified in the proxy or any adjournment of such meeting. Section 9. Voting Rights. Except as otherwise provided by statute or by the Certificate of Incorporation, and subject to the provisions of Article VI of these By-Laws, each stockholder of record shall at every meeting of the stockholders be entitled to one vote for each share of the capital stock having voting power held by such stockholder. Section 10. Notice of Stockholder Business and Nominations. A. Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders pursuant the procedures set forth in the Certificate of Incorporation. Proposals of other business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this By-Law, who is -2- entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to or mailed, postage prepaid, and received by the Secretary at the principal executive offices of the Corporation at least 60 days but no more than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to director nominations, that information which is required by the Certificate of Incorporation; (b) as to any business, other than the nomination of director candidates, that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. B. Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors of the Corporation may be made at a special meeting of stockholders (a) by the Board of Directors, on behalf of the Board of Directors by any nominating committee appointed by the Board of Directors, or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation entitled to vote for the election of directors at the meeting. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this By-Law shall be -3- delivered to the Secretary at the principal executive offices of the Corporation at least 60 days but no more than 90 days prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. C. General. (1) Only such persons who are nominated in accordance with the procedures set forth in the Certificate of Incorporation and this By- Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Whenever the language of a proposed resolution is included in a written notice of a meeting of stockholders the resolution may be adopted at such meeting with only such clarifying or other amendments as do not enlarge its original purpose without further notice to stockholders not present in person or by proxy. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with the Certificate of Incorporation or this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. Section 11. Required Vote. Except as otherwise required by statute or by the Certificate of Incorporation, in all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall decide any question brought before a meeting of the stockholders at which a quorum is present. Section 12. Elections of Directors. Elections of directors shall be by ballot, and, subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, a plurality of the votes cast thereat shall elect directors. Section 13. Inspectors of Elections; Opening and Closing the Polls. The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have -4- the duties prescribed by law. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. ARTICLE III Board of Directors Section 1. General Powers. The business of the Corporation shall be managed by the Board of Directors, except as otherwise provided by statute or by the Certificate of Incorporation. Section 2. Number. The number of the Directors of the Corporation shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors of the Corporation, except that the minimum number of directors shall be fixed at no less than 15 and the maximum number of directors shall be fixed at no more than 30. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly equal in number as possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1986 annual meeting of stockholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding annual meeting of stockholders beginning in 1987, successors of the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. Section 3. Election and Term of Office. Except as otherwise provided in these By-laws, directors shall be elected at the annual meeting of stockholders. Newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum, or by a sole remaining director. Any director of any class chosen to fill a vacancy in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his or her term expires and until such director's successor shall have been elected and qualified. Section 4. First Meetings. The first meeting of each newly elected Board of Directors shall be held without notice immediately after the annual meeting of the stockholders for the purpose of the organization of the Board, the election of officers, and the transaction of such other business as may properly come before the meeting. Section 5. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such times and at such places, within or without the State of Delaware, as shall from time to time be determined by the Board. Section 6. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President. Such meetings shall be held at such times and at such places, within or without the State of Delaware, as shall be determined by the officer calling the meeting. Notice of any special meeting of directors shall be given to each director at his business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission, or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least two (2) days before such meeting. If by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or courier service company at least twenty-four (24) hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least -5- twelve (12) hours before such meeting. Such notice need not state the purposes of the meeting. Any or all directors may waive notice of any meeting, either before or after the meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except when the director attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 7. Quorum, Required Vote, and Adjournment. The presence, at any meeting, of a majority of the whole Board shall be necessary and sufficient to constitute a quorum for the transaction of business. Except as otherwise required by statute or by the Certificate of Incorporation, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present at the time and place of any meeting may adjourn such meeting from time to time until a quorum be present. Section 8. Consent of Directors in Lieu of Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all the members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 9. Participation in Meetings by Telephone. A member of the Board or any committee thereof may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this section shall constitute presence in person at such meeting. Section 10. Compensation. The Board of Directors may authorize the payment to directors of a fixed fee and expenses for attendance at meetings of the Board or any committee thereof, and annual fees for service as directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV Board Committees Section 1. Designation and Membership. The Board of Directors may designate one or more regular and special committees, consisting of directors, officers or other persons, which shall have and may exercise such powers and functions as the Board may prescribe in the management of the business and affairs of the Corporation; provided, however, that no committee shall have power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval or (b) adopting, amending or repealing any By-Law of the Corporation. Such committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. The Board of Directors may from time to time suspend, alter, continue or terminate any such committee or the powers and functions thereof. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitutes a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 2. Executive Committee. There shall be an Executive Committee, which, during intervals between regular meetings of the Board of Directors and to the extent permitted by law, the Certificate of Incorporation and these By-Laws, shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation. -6- ARTICLE V Officers Section 1. Number, Election, Term of Office and Qualification. The number, titles and duties of the officers shall be determined by the Board of Directors from time to time, subject to the provisions of applicable law, the Certificate of Incorporation, and these By-Laws. Each officer shall be elected in the manner prescribed by the Board of Directors and shall hold office until such officer's successor is elected and qualified or until such officer's death, resignation or removal. The election of officers shall be held annually at the first meeting of the Board of Directors held after each annual meeting of stockholders, subject to the power of the Board of Directors to designate any office at any time and elect any person thereto. The officers shall include a Chairman of the Board and a President, and may include one or more Vice Chairmen of the Board, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers as the Board of Directors may determine. The same person may hold any two or more offices, and in any such case, these By-Laws shall be construed and understood accordingly; provided that the same person may not hold the offices of Chairman of the Board and Secretary or President and Secretary. No officer other than the Chairman of the Board, President or Vice Chairman of the Board need be a director of the Corporation. Section 2. Removal. Any officer or agent may be removed at any time, with or without cause, by the Board of Directors. Section 3. Vacancies. Any vacancy occurring in any office of the Corporation may be filled for the unexpired term in the manner prescribed by these By-Laws for the regular election to such office. Section 4. Chief Executive Officer. The Board of Directors shall designate one of the officers to be the Chief Executive Officer. Subject to the direction and under the supervision of the Board of Directors, the Chief Executive Officer shall have general charge of the business, affairs and property of the Corporation, and control over its officers, agents and employees. Section 5. The Secretary. The Secretary shall keep the minutes of the proceedings of the stockholders and of the Board of Directors in one or more books to be kept for that purpose. The Secretary shall have custody of the seal of the Corporation, and the Secretary, and any Assistant Secretary, shall have authority to cause such seal to be affixed to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or Assistant Secretary. The Secretary shall, in general, perform all duties and have all powers incident to the office of Secretary and shall perform such other duties and have such other powers as may from time to time be assigned to the Secretary by these By-Laws, by the Board of Directors or by the Chief Executive Officer. Section 6. Treasurer. The Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation. The Treasurer shall cause all moneys and other valuable effects to be deposited in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall cause the funds of the Corporation to be disbursed when such disbursements have been duly authorized, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, whenever requested, an account of all transactions conducted by the Treasurer for the Corporation and of the financial condition of the Corporation. The Treasurer shall, in general, perform all duties and have all powers incident to the office of Treasurer and shall perform such other duties and have such other powers as may from time to time be assigned to the Treasurer by these By-Laws, by the Board of Directors or by the Chief Executive Officer. -7- ARTICLE VI Fixing Record Date In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE VII Execution of Documents and Instruments Section 1. Execution of Documents and Instruments Generally. Any officer of the Corporation and such other persons as may be authorized by the Chairman of the Board, the President, or any Vice Chairman of the Board from time to time are severally and respectively authorized to execute documents and to take actions in the Corporation's name in connection with transactions conducted in the ordinary course of the Corporation's business. With respect to all other transactions, all documents, instruments or writings of any nature shall be signed, executed, verified, acknowledged and delivered by such officer or officers or such agent or agents of the Corporation and in such manner as the Board of Directors from time to time may determine. Section 2. Checks, Drafts, Etc. All notes, drafts, acceptances, checks, endorsements, and all evidence of indebtedness of the Corporation whatsoever, shall be signed by such officer or officers or such agent or agents of the Corporation and in such manner as the Board of Directors from time to time may determine. Endorsements for deposit to the credit of the Corporation in any of its duly authorized depositories shall be made in such manner as the Board of Directors from time to time may determine. Section 3. Proxies and Consents. Proxies to vote and written consent with respect to shares of stock of other corporations owned by or standing in the name of the Corporation may be executed and delivered from time to time on behalf of the Corporation by the Chairman, the President, any Vice Chairman, any Vice President, the Secretary or the Treasurer of the Corporation, or by any other person or persons duly authorized by the Board of Directors. ARTICLE VIII Capital Stock Section 1. Stock Certificates. The interest of every holder of stock in the Corporation shall be evidenced by a certificate or certificates signed by, or in the name of the Corporation by the Chairman, President, Vice Chairman or a Vice President, and by the Secretary or an Assistant Secretary of the Corporation certifying the number of shares owned by him in the Corporation and in such form not inconsistent with the Certificate of Incorporation or applicable law as the Board of Directors may from time to time prescribe. If such certificate is countersigned (1) -8- by a transfer agent, whether or not a subsidiary of the Corporation, other than the Corporation or its employee, or (2) by a registrar, whether or not a subsidiary of the Corporation, other than the Corporation or its employee, the signatures of the officers of the Corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 2. Transfer of Stock. Shares of stock of the Corporation shall be transferred on the books of the Corporation only by the holder of record thereof or by his attorney duly authorized in writing, upon surrender to the Corporation of the certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer tax stamps. In that event it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction on its books. Section 3. Rights of Corporation with Respect to Registered Owners. Prior to the surrender to the Corporation of the certificates for shares of stock with a request to record the transfer of such shares, the Corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. Section 4. Transfer Agents and Registrars. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issuance and transfer of certificates for shares of the stock of the Corporation and may appoint transfer agents or registrars or both, and may require all certificates of stock to bear the signature of either or both. Nothing herein shall be construed to prohibit the Corporation or any subsidiary of it from acting as its own transfer agent or registrar at any of its offices. Section 5. Lost, Destroyed and Stolen Certificates. Where the owner of a certificate for shares claims that such certificate has been lost, destroyed or wrongfully taken, the Corporation shall issue a new certificate in place of the original certificate if the owner satisfies such reasonable requirements, including evidence of such loss, destruction, or wrongful taking, as may be imposed by the Corporation, including but without limitation, the delivery to the Corporation of an indemnity bond satisfactory to it. ARTICLE IX INDEMNIFICATION Section 1. Contract Right. The right to indemnification conferred in the Certificate of Incorporation and this By-Law shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, such advances to be paid by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced unless it shall ultimately be determined that such director or officer is entitled to be indemnified under this By-Law or otherwise. Section 2. Submission of Claim. To obtain indemnification under this By-Law, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. In the event the determination of entitlement to indemnification is to be made by Independent Counsel (as hereinafter defined) as set forth in the Certificate of Incorporation, the Independent Counsel shall be selected by the Board of Directors unless there shall have occurred within two years prior to the date of the -9- commencement of the action, suit or proceeding for which indemnification is claimed a "Change of Control" as defined in the Corporation's Stock Performance Plan, in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board of Directors. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. Section 3. Unpaid Claim. If a claim under Section 1 of this By-Law is not paid in full by the Corporation within thirty days after a written claim pursuant to Section 2 of this By-Law has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed. It shall also be a defense if indemnification is not permissible under applicable banking statutes or regulations. The burden of proving any such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 4. Binding Determination. If a determination shall have been made pursuant to Section 2 of this By-Law that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to Section 3 of this By-Law. Section 5. Binding Effect on Corporation. The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to Section 3 of this By-Law that the procedures and presumptions of this By-Law are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this By-Law. Section 6. Non-exclusivity. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this By-Law shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or Disinterested Directors or otherwise. No repeal or modification of this By-Law shall in any way diminish or adversely affect the rights of any director, officer, employee or agent of the Corporation hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. Section 7. Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this By-Law with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. Section 8. Validity. If any provision or provisions of this By-Law shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this By-Law (including, without limitation, each portion of any Section of this By-Law containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this By-Law (including, without limitation, each such portion of any Section of this By-Law containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested -10- by the provision held invalid, illegal or unenforceable. Section 9. Definitions. For purposes of this By-Law: A. "Disinterested Director" means a director of the Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant. B. "Independent Counsel" means a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this By-Law. Section 10. Notice. Any notice, request or other communication required or permitted to be given to the Corporation under this By-Law shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation and shall be effective only upon receipt by the Secretary. ARTICLE X Seal The corporate seal, subject to alteration by the Board of Directors, shall be in the form of a circle and shall bear the name of the Corporation and the year of its incorporation and shall indicate its formation under the laws of the State of Delaware. Such seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE XI Fiscal Year The fiscal year of the Corporation shall be the calendar year except as otherwise provided by the Board of Directors. ARTICLE XII Amendments The By-Laws of the Corporation may be amended or repealed, or new By-Laws not inconsistent with law or any provision of the Certificate of Incorporation, as amended, may be made and adopted by a majority vote of the whole Board of Directors at any regular or special meeting of the Board. -11- EX-10.(C) 3 FIRST CHICAGO NBD CORP. EXECUTIVE ESTATE PLAN EXHIBIT 10(C) DRAFT 4-28-97 FIRST CHICAGO NBD CORPORATION EXECUTIVE ESTATE PLAN Effective January 1, 1997 1. Purpose. The FIRST CHICAGO NBD CORPORATION EXECUTIVE ESTATE PLAN (hereinafter called the "Plan") is established and maintained to provide designated senior officers of the Corporation with competitive death benefit coverage. This document is an amendment and restatement of the NBD Bancorp, Inc. Executive Estate Plan and the First Chicago Corporation Executive Estate Plan. 2. Definitions. (a) Committee means the Organization, Compensation and Nominating Committee of the Board of Directors of First Chicago NBD Corporation. (b) Corporation means First Chicago NBD Corporation or its successor or successors and its 50% or more owned subsidiaries. (c) Disability means disability as defined under the PPAP. (d) Disabled Participant means a Participant who prior to his or her Retirement incurs a Disability while a Participant under the Plan from which he or she has not recovered. (e) Participant means a designated senior officer of the Corporation who becomes and remains a Participant in the Plan as provided in Section 6 of the Plan. (f) PPAP means the First Chicago NBD Corporation Personal Pension Account Plan, as it may be amended from time to time. (g) Retired Participant means a Participant whose employment with the Corporation terminates as the result of Retirement hereunder and who does not subsequently resume such employment. (h) Retirement means the cessation of employment with the Corporation on or after the date a Participant completes fifteen (15) years of vesting service under the PPAP and attains age fifty-five (55). 3. Effective Date and Duration. The Plan shall be effective as of January 1, 1997. The Plan shall continue until it is terminated by the Board of Directors of First Chicago NBD Corporation as provided in Section 12. 4. Administration. The Committee shall be responsible for the general operation and administration of the Plan and shall have the authority to interpret the Plan and to adopt administrative rules and regulations governing its operation. The Committee may delegate the performance of administrative functions to the Secretary of the Committee. 5. Fund. The death benefits payable under the Plan shall be paid out of the general assets of the Corporation. 6. Participation. (a) Designated Officers. Eligibility and participation in the Plan shall be limited to executive officers of the Corporation as designated and selected by the Chief Executive Officer of the Corporation in his sole discretion. The Chief Executive Officer of the Corporation shall individually select and designate each eligible officer for participation, who shall become a Participant as of the date specified by the Committee. In addition, participants under the NBD Bancorp, Inc. Executive Estate Plan ("NBD Plan") who are not executive officers of the Corporation and are employed by the Corporation on January 1, 1997 shall also be eligible. (b) Pre-1997 Retired Participants. Participants under the NBD Plan and the First Chicago Corporation Executive Estate Plan ("FCC Plan") who were "retired participants" as defined under the NBD Plan or the FCC Plan as of December 31, 1996 shall participate as Retired Participants hereunder. (c) Continued Eligibility. A Participant shall remain a Participant only for so long as he continues in the employ of the Corporation or is a Retired Participant or a Disabled Participant; however, the Chief Executive Officer may, in his sole discretion, terminate a Participant's participation at any time for any reason prior to a Participant becoming a Retired Participant or a Disabled Participant. The Committee in its sole discretion may terminate a Participant's participation in the Plan only as provided in Section 11. 2 7. Amount of Pre-Retirement Death Benefit. (a) Death of Participant. Upon the death of a Participant prior to his or her Retirement from the Corporation, the Corporation shall pay to his or her designated beneficiary a death benefit equal to four hundred percent (400%) of the Participant's annual base salary at the time of death. (b) Disabled Participant. If a Disabled Participant dies before attaining age sixty-five (65), the Corporation shall pay to his or her designated beneficiary a benefit equal to four hundred percent (400%) of the Participant's annual base salary determined as of the date of his or her Disability. If a Disabled Participant attains age sixty-five (65), such Participant shall thereupon be deemed to be a Retired Participant as of the Participant's attainment of age 65 and entitled to benefit coverage only in accordance with Section 8, based on the Participant's annual base salary determined as of the date of his or her Disability. If a Disabled Participant recovers from Disability, the Participant shall be deemed to be a Retired Participant as of the date he or she recovers from the Disability if such Participant is at least age fifty-five (55) and has 15 years of vesting service under the PPAP on that date and does not then return to employment with the Corporation. A Disabled Participant who recovers from Disability prior to attaining age 55 with 15 years of vesting service under the PPAP shall no longer be a Participant and shall have no further interest or rights under the Plan, except as may be provided by such person's subsequent participation in the Plan. 8. Amount of Post-Retirement Death Benefit. Upon the death of a Retired Participant (i) during the first twelve (12) months following Retirement, the Corporation shall pay to the Participant's designated beneficiary a death benefit equal to two hundred percent (200%) of the Participant's annual base salary at the time of the Participant's Retirement; (ii) during the second twelve (12) month period following Retirement, the Corporation shall pay to the Participant's designated beneficiary a benefit equal to one hundred seventy-five percent (175%) of the Participant's annual base salary at the time of the Participant's Retirement; (iii) during the third twelve (12) month period following Retirement, the Corporation shall pay to the Participant's designated beneficiary a death benefit equal to one hundred fifty percent (150%) of the Participant's annual base salary at the time of the Participant's Retirement; or (iv) during or subsequent to the thirty-seventh month following Retirement, the Corporation shall pay to the Participant's designated beneficiary a death benefit equal to one hundred percent (100%) of the Participant's annual base salary at the time of the Participant's Retirement plus Twenty-Five Thousand Dollars ($25,000). 9. Additional Benefit. In addition to the death benefit payable under either Section 7 or Section 8, a Participant's designated beneficiary will receive an additional benefit equal to 50% of the death benefit payable under Section 7 or Section 8. 3 10. Beneficiary Designation and Payment. (a) Beneficiary Designation. Each Participant shall complete a beneficiary designation form as prescribed by the Committee designating the beneficiary or beneficiaries to receive the amounts hereunder upon the Participant's death. Unless a Participant has previously made an irrevocable beneficiary designation, a Participant may change his or her beneficiary designation at any time without the consent of any previously designated beneficiary by completing a new beneficiary designation form and delivering such form to the Secretary of the Committee. Such new beneficiary designation shall be effective when the completed form is received by the Secretary of the Committee. (b) Payment. In the event a Participant failed to make a beneficiary designation, the amount payable under Section 7 or Section 8 shall be paid to the Participant's estate. The amount payable under Section 7 or Section 8 shall be paid within sixty (60) days of the receipt by the Secretary of the Committee of a certified copy of the death certificate of the deceased Participant. Any amount not paid within sixty (60) days of such receipt shall bear interest at the rate of interest announced from time to time as the corporate base rate by The First National Bank of Chicago or its successor by merger during the period from the date the payment should have been made to the date it is made. The Corporation shall withhold from such payment any applicable federal, state or local taxes thereon. 11. General. (a) No Right to Employment. Neither the establishment of the Plan nor any provisions of the Plan or modification thereof shall be held or construed as giving any Participant in the Plan the right to be retained in the service of the Corporation and the Corporation expressly reserves the right to discharge any such Participant whenever the interests of the Corporation may so require. (b) Certain Activities. Notwithstanding any other provision in the Plan to the contrary, but subject to Section 11(c), and as determined solely by the Committee, (i) no benefit or coverage shall be provided under the Plan to any Participant, including a Retired Participant or Disabled Participant, who engages in any activity that, in the opinion of the Committee, is competitive with any activity of the Corporation (except that employment at the request of the Corporation with an entity in which the Corporation has, directly or indirectly, a substantial ownership interest, or other employment specifically approved by the Committee, shall not be considered to be an activity that is competitive with any activity of the Corporation) or otherwise acts, either prior to or after termination of employment, in any manner inimical or in any way contrary to the best interests of the Corporation; and (ii) no benefit or coverage under the Plan shall be provided to any Participant, including a Disabled Participant or Retired Participant, if the Participant's employment with the Corporation terminates because of dishonesty, fraud, misappropriation of funds, the commission of a felony, or willful or gross misconduct or willful or gross negligence in the performance of 4 such person's duties, or if during the course of such employment, the Participant engages in, or had engaged in, such conduct. (c) Rights of Participants. Any right of a Participant and his beneficiary hereunder shall be that of an unsecured general creditor of the Corporation, and no Participant or beneficiary shall have any preferred claims on, or any beneficial ownership in, the assets of the Corporation, including any assets in which the Corporation may invest to aid in meeting its obligations under the Plan. (d) No Assignment. To the maximum extent permitted by law, a Participant's or beneficiary's interest and rights shall not be assignable in law or in equity or subject to any manner of alienation, sale, transfer, claims of creditors, pledge, attachment, garnishment, levy, execution, or encumbrances of any kind, except that a Participant shall have the right under Section 10(a) to designate irrevocably a beneficiary to receive the amounts hereunder upon the Participant's death. (e) Incompetent Beneficiary. If the Committee determines that a beneficiary is legally incompetent to receive a distribution hereunder, the Committee may cause any distribution due to such beneficiary to be made to the guardian or other legal representative of such beneficiary, or in the absence of such guardian or other legal representative, to such other person or institution who is otherwise maintaining and has custody of such beneficiary. Such distribution, to the extent made, shall be a valid and complete discharge of liability therefor under the Plan. 12. Amendment, Suspension and Termination. The Board of Directors of First Chicago NBD Corporation reserves the right at any time to amend, suspend or terminate the Plan; provided, however, no such amendment, suspension or termination shall adversely affect the rights hereunder of any Participant in the Plan unless the prior written approval of the Participant so affected is obtained. 13. Governing Law. The Plan and all determinations made and action taken pursuant thereto shall be governed by the laws of the State of Illinois and construed in accordance therewith. 5 EX-10.(I) 4 FIRST CHICAGO NBD CORP. DEFERRED COMPENSATION PLAN EXHIBIT 10(I) FIRST CHICAGO NBD CORPORATION DEFERRED COMPENSATION PLAN Effective January 1, 1997 DRAFT FIRST CHICAGO NBD CORPORATION ----------------------------- DEFERRED COMPENSATION PLAN -------------------------- Effective January 1, 1997 1. Purpose. The purpose of the First Chicago NBD Corporation Deferred Compensation Plan is to permit eligible Employees of First Chicago NBD Corporation and its subsidiaries and affiliates to elect to defer the payment of all or a portion of their Covered Compensation. 2. Definitions. (a) Beneficiary means any person or entity designated by a Participant on a form provided by the Plan Administrator to receive benefits in the event of the death of the Participant. Each designation shall revoke a Participant's previous designations and shall be effective only when filed in writing with the Plan Administrator during the Participant's lifetime. If a Participant fails to designate a Beneficiary in the manner provided above, the Participant's account hereunder shall be distributed to the legal representative or representatives of the Participant's estate. (b) Board means the Board of Directors of the Corporation, excluding any member who is an officer or Employee of the Corporation. (c) Corporation means First Chicago NBD Corporation or its successor or successors and its fifty percent (50%) or more owned subsidiaries. (d) Covered Compensation means ninety percent of the annual cash bonus or fifty percent of the bi-weekly salary earned by a Participant and any other cash compensation designated by the Organization, Compensation and Nominating Committee of the Board as eligible for deferral. (e) Effective Date means the effective date of this Plan, January 1, 1997. (f) Employee means an employee or retiree of the Corporation. (g) Exchange Act means the Securities Exchange Act of 1934, as amended. (h) FCC Plan means the First Chicago Corporation Compensation Deferral Plan as in existence immediately prior to the Effective Date. (i) Investment Funds means those investment alternatives under the Plan which will be used to calculate the periodic investment experience of each Participant's account and shall be the investment alternatives offered under the First Chicago NBD Corporation Savings and Investment Plan or any other investment alternatives designated by the Organization, Compensation and Nominating Committee. (j) NBD Plan means the NBD Bancorp, Inc. deferred compensation program as in existence immediately prior to the Effective Date. (k) Participant means either (a) an Employee who has met the eligibility requirements of Section 3 to participate in the Plan and who has elected to defer all or a portion of Covered Compensation or (b) an individual whose account balance from another deferral plan is transferred to this Plan as described in Section 3. (l) Plan means the First Chicago NBD Corporation Deferred Compensation Plan. This Plan is an amendment and restatement of the NBD Plan and the FCC Plan. 2 (m) Plan Administrator means Corporate Compensation; provided however, the Organization, Compensation and Nominating Committee of the Board shall be the Plan Administrator with respect to any Participant who is an "officer" as defined in Section 16 of the Exchange Act. 3. Eligibility. The Organization, Compensation and Nominating Committee of the Board shall designate the Employees who are eligible to participate in this Plan. In addition, each individual with a balance under the NBD Plan or FCC Plan in effect prior to January 1, 1997 shall participate in this Plan to the extent of any deferred amounts which remain unpaid. Subject to the approval of the Plan Administrator, the Plan may accept the transfer of an individual's account balance or accrued benefit from another deferral plan maintained by the Corporation or an entity acquired by the Corporation at which time the individual will become a Participant to the extent of the transferred balance. Such transferred balance shall be credited to the Participant's account under this Plan and shall become subject to the terms and conditions of this Plan or required by law. 4. Election to Defer Covered Compensation. (a) Initial Election to Defer - Calendar Year Election. Each eligible Employee may file an irrevocable election to defer any portion of Covered Compensation until the January of a future calendar year or years which date must be at least thirteen months after such Covered Compensation would otherwise be paid to the Employee. An Employee's election to defer must be in writing on a form prescribed by the Plan Administrator, must be filed with the Plan Administrator on or before the date prescribed and must defer an amount which is at least equal to 3 the minimum deferral amount as set by the Plan Administrator. The first election to defer filed for a calendar year shall determine how all Covered Compensation deferred during such calendar year will be distributed. (b) Additional Deferral. A Participant may elect on a one time basis with respect to the amount of Covered Compensation deferred during a calendar year to further defer the payment of such Covered Compensation provided such election to defer is made more than 12 months in advance of the payment of such deferred Covered Compensation (in the case of an installment payment, such election must be filed more than 12 months before the first installment is otherwise scheduled to be paid). In case of a Participant who retires before the end of the 12-month period and who is entitled to a distribution under Section 9, the election on file prior to the new 12-month election shall be effective. 5. Participant's Account. (a) The amount of Covered Compensation which has been deferred shall be credited to a memorandum or book entry account maintained on behalf of the Participant. Amounts credited pursuant to this Plan are credited for bookkeeping purposes only, shall not represent either a cash deposit or actual shares or units in any of the Investment Funds, shall not give any Participant any special right in cash or shares held or owned by the Corporation, and shall not give rise to any cause of action by Participants against the Corporation, except at such time as the Participant shall become entitled to receive payment in cash in accordance with the terms of this Plan. The Plan Administrator shall furnish quarterly statements to Participants showing the balances in each of their Investment Funds as of the statement date. (b) Transferred balances which represent benefits from a plan, program 4 or arrangement maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed by the Internal Revenue Code of 1986, as amended ("Code") (including Sections 401(a)(17), 401(k), 402(g) and 415 of the Code) must be accounted for separately and may not be aggregated with other defined amounts. 6. Investment of Participant's Account. A Participant shall elect to have his or her account treated as if invested in one of the Investment Funds. The Participant's account will be adjusted periodically to reflect the investment experience of the Investment Funds which the Participant elected. Each Participant may file an election with the Plan Administrator (in the manner prescribed by the Plan Administrator) to reallocate the investment of his account among the Investment Funds. The frequency, timing and form of investment reallocation directions shall be limited in the same manner as under the First Chicago NBD Corporation Savings and Investment Plan. Any "Officer," as defined under Section 16 of the Exchange Act, may not invest his balance in the First Chicago NBD Corporation common stock alternative. 7. Investment of Participant's Account - Pre-December 1, 1993 Deferred Amounts. Each Participant with amounts deferred under the FCC Plan as in effect prior to December 1, 1993, shall continue to have the periodic investment experience of his account attributable to pre-December 1, 1993 deferrals calculated pursuant to the terms of his income deferral election in effect at the time of his deferral unless such Participant elects to participate in the Investment Funds (in which case such Participant shall become subject to Section 6 and may not elect the Pre-December 1, 1993 deferral option). 5 8. Benefit. A Participant shall be entitled to a distribution of his account balance equal to the amount deferred, adjusted for the investment experience attributable to such deferred amounts had such amounts been invested in the Investment Funds as directed by the Participant. 9. Distribution of Account Balances Pursuant to Participant's Election. A Participant's account shall be distributed in cash only (and in no case in equity securities) and paid to the Participant, at the time or times elected or, if earlier, upon the Participant's retirement after attaining age 55 with 15 complete years of service (complete years of service shall be defined in the same manner as vesting service is defined under the Corporation's Personal Pension Account Plan). A Participant, at the time he files an election to defer, may elect to receive payment in (a) a lump sum payment or (b) a series of substantially equal monthly, quarterly or annual installments over a period of time not exceeding fifteen (15) years (each installment shall be determined by dividing the Participant's remaining balance which is subject to the election by the number of payments remaining). 10. Distribution upon Participant's Death or Termination of Employment. If prior to the distribution of the entire account balance under this Plan, a Participant (a) dies or (b) terminates employment before attaining age 55 with 15 complete years of service (complete years of service shall be defined in the same manner as vesting service is defined under the Corporation's Personal Pension Account Plan), then the remaining account balance will be distributed in cash in the form of a single lump sum payment to either (i) the Beneficiary, in the case of the Participant's death, or (ii) the Participant, in the case of termination of employment. 6 11. Emergency Payments. (a) In the event of an unforeseeable emergency as determined hereunder, the Plan Administrator may authorize the distribution of all or a portion of the Participant's account, without regard to the payment dates provided in paragraph 4, but only if the Plan Administrator determines that such action is necessary to prevent severe financial hardship to the Participant. Such action shall be taken only if a Participant (or his legal representatives or successors) shall sign an application describing fully the circumstances which are deemed to justify the payment, together with an estimate of the amounts necessary to prevent severe financial hardship. Each such application shall be approved by the Plan Administrator, who shall certify that according to the best of his knowledge and belief the statements on the application are true. In the case of a distribution pursuant to this Section 11(a), the Participant may not elect to defer Covered Compensation for 12 months following receipt of the payment. (b) For the purpose of this paragraph 11, the term "unforeseeable emergency" shall mean a severe financial hardship to a Participant or his dependents (as defined in section 152(a) of the Internal Revenue Code of 1986, as amended), loss of a Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances beyond the Participant's control. Hardship payments shall only be made to the extent necessary to satisfy the emergency need, and shall not be made to the extent that the hardship is or may be relieved through other means, including reimbursement or compensation, by insurance or otherwise, or by cessation of deferrals pursuant to this Plan. (c) Upon the request of a Participant, the Plan Administrator may also authorize the distribution of all or a portion of the Participant's account, without regard to the payment dates provided in paragraph 4, provided the portion of the Participant's account from which 7 such distribution is made is first reduced by an amount that shall equal the greater of either (i) 10% of the applicable portion of the Participant's account, (ii) 125% of the interest rate The First National Bank of Chicago announces from time to time as its corporate base rate multiplied by the applicable portion of the Participant's account or (iii) a "substantial penalty" as determined by the Plan Administrator upon advice of counsel so as to assure there is no constructive receipt of Participants' accounts under the Plan. 12. Acceleration of Payment. The Chief Executive Officer of the Corporation may, in his sole discretion, accelerate any payment under this Plan for any Participants who are not "officers" as defined under Section 16 of the Exchange Act. The Organization, Compensation and Nominating Committee of the Board of Directors of the Corporation may, in its sole discretion, accelerate any payment under this Plan for Participants who are "officers" defined under Section 16 of the Exchange Act. 13. Valuation of Account Prior to Distribution. A Participant's distributable account shall be valued as of the first business day of the month of payment. 14. Administration. This Plan shall be administered by the Plan Administrator and its decision on any matter involving the interpretation of the Plan shall be binding on everyone; provided, however, that the Plan Administrator may not take any action with respect to any benefits payable to the Plan Administrator under the Plan unless such action could have been taken even if he were not the Plan Administrator. The Plan Administrator shall have the responsibility, and the full power and authority, to administer the Plan and, within the limits provided by the Plan: 8 (a) To determine, in its sole discretion, all questions arising concerning the construction and interpretation of the Plan and in its administration, including, but not by way of limitation, the determination of the rights of eligibility under the Plan of employees, Participants, and Beneficiaries, and the amount of their respective benefits, and to interpret and remedy, if necessary, ambiguities, inconsistencies, or omissions; (b) To adopt such rules and regulations as it may deem reasonably necessary for the proper and efficient administration of the Plan and consistent with its purpose; (c) To enforce the Plan, in accordance with its terms and with the Plan Administrator's rules and regulations; and (d) To do all other acts, in its judgment necessary or desirable, for the proper and advantageous administration of the Plan. 15. Miscellaneous. 15.1 Prohibition of Alienation. Benefits under the Plan may not be anticipated, alienated, assigned or encumbered and any attempt to do so shall be void; except however, to the extent permitted by applicable law, the Corporation, in its sole discretion, may reduce a Participant's account by any amounts owing by the Participant to the Corporation. 15.2 Litigation by Participants or Other Persons. To the extent permitted by law, if a legal action begun against the Corporation or an Employee or director thereof, or the Board, or any member thereof, by or on behalf of any person results adversely to that person, or if a legal action arises because of conflicting claims to a grant payable to a Participant or Beneficiary, the cost to the Corporation or Employee or director thereof, or the Board or any member thereof, of defending the action will be charged to the extent possible to the sums, if any, that were involved in 9 the action or were payable to, or on account of, the Participant or Beneficiary concerned. 15.3 Indemnification. Any person who is or was a director, officer, or Employee of the Corporation and each member of the Board shall be indemnified and saved harmless by the Corporation from and against any and all liability or claims of liability to which such person may be subjected by reason of any act done or omitted to be done in good faith with respect to the administration of the Plan, including all expenses reasonably incurred in the Participant's defense in the event that the Corporation fails to provide such defense. 15.4 Rights to Employment. Participation in the Plan shall not confer upon any Participant any right with respect to continued employment by the Corporation. 15.5 Expenses. All expenses of administering the Plan shall be borne by the Corporation. 15.6 Other Plans. Nothing contained herein shall prevent the Corporation from establishing or maintaining other plans in which Participants in this Plan may also participate. 15.7 Facility of Payment. When, in the Plan Administrator's opinion, a Participant or Beneficiary is under a legal disability or incapacitated in any way so to be unable to manage the Participant's or Beneficiary's financial affairs, the Plan Administrator may direct that the amount of the Participant's or Beneficiary's payment hereunder be made to the Participant's or Beneficiary's legal representative or to another person for such Participant's or Beneficiary's benefit, or the Plan Administrator may direct that such amount be applied for the benefit of the Participant or Beneficiary in any way the Plan Administrator considers advisable. 15.8 Notices. Any communication, statement or notice addressed to a Participant at the Participant's last post office address shown on his employer's records, will be 10 binding upon the Participant for all purposes of the Plan. Neither the Plan Administrator nor the Corporation shall be obliged to search for or ascertain the whereabouts of any Participant. For purposes of this section 15.8, the term "Participant" includes any person entitled by reason of a Participant's death or legal disability to that Participant's deferred Covered Compensation under the Plan. 15.9 Records. All records held by Corporation Compensation with respect to an Employee shall be binding upon everyone for purposes of the Plan. 16. Amendment and Termination. The Corporation, by a resolution of the Organization, Compensation and Nominating Committee of the Board, may amend or terminate the Plan at any time; provided, however, that, except as may otherwise be required by law, no such amendment to or termination of the Plan shall reduce the benefits to which a Participant (or his Beneficiary) is entitled under the Plan as of the date of such amendment or termination. The Chief Executive Officer or the Head of Human Resources may amend the Plan in any non-material respect. Whether the amendment is material or not shall be determined by Chief Executive Officer or Head of Human Resources in his sole discretion. 17. Financing of Plan Benefits. Any benefits payable to a Participant under the Plan shall be financed from the general assets of his employer, and no Participant, or group of Participants, shall acquire any claim upon any specific asset of an employer solely by reason of his being a Participant in the Plan. This paragraph shall not prohibit the Corporation from transferring assets to a grantor trust for the purpose of providing benefits hereunder, which grantor trust shall remain subject to the claims of creditors. The accounting and recordkeeping of this Plan shall be 11 entirely separate from any other plan. 18. Gender and Number. Words denoting the masculine gender shall include the feminine and neuter genders, the singular shall include the plural and the plural shall include the singular wherever required by the context. 19. Benefits Intended for Select Group of Management or Highly Compensated Employees. This Plan is intended to be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees and shall be interpreted and administered accordingly. 20. Controlling Laws. To the extent not superseded by Federal law, the laws of Illinois, without regard to its laws of conflict, shall be controlling in all matters relating to the Plan. 12 EX-10.(L) 5 INDIVIDUAL CHANGE OF CONTROL EMPLOYMENT AGREEMENT EXHIBIT 10(L) FORM OF INDIVIDUAL CHANGE OF CONTROL EMPLOYMENT AGREEMENT Each of the following individuals is a party to a Change of Control Employment Agreement with the Corporation, the form and terms of which are substantially as attached. John W. Ballantine David P. Bolger William H. Elliott III Sherman I. Goldberg Verne G. Istock Thomas H. Jeffs II Philip S. Jones W. G. Jurgensen Thomas J. McDowell Timothy P. Moen Susan S. Moody Andrew J. Paine, Jr. Robert A. Rosholt Willard A. Valpey David J. Vitale Walter C. Watkins, Jr. CHANGE OF CONTROL EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and between First Chicago NBD Corporation, a Delaware corporation (the "Company"), and [Name of Executive] (the "Executive"), dated the ____ day of _________, 199_. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: l. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"), provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the 2 Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as 3 utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus in cash at least equal to the Executive's average bonus under the Company's annual incentive plans, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Average Bonus"). Each such annual bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the annual bonus is awarded, unless the Executive shall elect to defer the receipt of such annual bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter 4 with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full- time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: 5 (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel 6 on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason: Other Than for Cause. Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: 7 (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (l) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Recent Average Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (l), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (l) two and one-half (2.5) and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Recent Average Bonus; and C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's Retirement Plan immediately prior to the Effective Date), and any excess or supplemental retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for thirty months after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and assuming that the Executive's compensation in each of the three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination. (ii) for thirty months after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until thirty months after the Date of Termination and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his 8 sole discretion; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause: Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent 9 theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f) shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect 10 to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payment, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any 11 payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c) promptly pay to the Company the amount of such refund (together with any interest paid or 12 credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 19. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given 13 by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ------------------- [Name of Executive] [Street Address] [City, State Zip Code] If to the Company: ----------------- First Chicago NBD Corporation One First National Plaza Chicago, IL 60670 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. FIRST CHICAGO NBD CORPORATION By:__________________________ _____________________________ [Name of Executive] 15 EX-10.(M) 6 LETTER FROM THE CORPORATION TO SCOTT P. MARKS, JR. EXHIBIT 10(M) [Letterhead of First Chicago NBD Corporation] Timothy P. Moen Executive Vice President Human Resources November 13, 1997 PERSONAL & CONFIDENTIAL - ----------------------- Mr. Scott P. Marks, Jr. Vice Chairman First Chicago NBD Corporation Dear Scott: This letter agreement will confirm the terms of your separation from First Chicago NBD Corporation ("FCNBD") and all of its subsidiaries and affiliates, including The First National Bank of Chicago ("FNBC") (collectively, "FCN"). Resignation You have voluntarily elected to resign as Vice Chairman of FCNBD and from all offices and directorships you hold with FCNBD and all of its subsidiaries and affiliates, effective at the close of business December 31, 1997 (your "Resignation Date"), and your resignation, effective on that date, is hereby accepted. By the close of business on November 13, 1997, you will submit a letter, substantially in the form attached as Exhibit A, evidencing such resignation. Until your Resignation Date, you will continue to use your best efforts to perform the duties of your current position and to assist in the transition related to your departure. FCNBD's Obligations Though you will not perform any services for FCN after your Resignation Date, subject to the terms of this letter, you will remain on the FNBC payroll at your current base salary rate and be treated as an active employee for salary continuation and most employee benefit purposes (including eligibility for medical, pension and 401(k) plans, life insurance coverage and the employee stock purchase and executive stock incentive plans) for the period through March 31, 1998. From April 1, 1998 through June 30, 1998, you will remain on the FNBC payroll in an unpaid leave status, and will have all of the rights and benefits attendant to that status, including Mr. Scott P. Marks, Jr. November 13, 1997 Page 2 continued eligibility under the medical plan. You will not be eligible for short or long-term disability benefits and you will not earn any additional vacation days after your Resignation Date, though you will be paid for any accrued, unused vacation days outstanding as of your Resignation Date. Effective July 1, 1998, you will be removed from the FNBC payroll, and your employment with FCNBD and all of its affiliates and subsidiaries will terminate for all purposes. You will be eligible for a 1997 incentive bonus, payable in the first quarter of 1998, determined on a "full and fair" basis, comparable to other FCNBD Vice Chairmen. You will not receive any additional stock awards under the FCNBD Stock Performance Plan after your Resignation Date, though you will continue to be treated as an active employee under that plan for as long as you are on the FNBC payroll, in paid or unpaid status. FCNBD will provide you with office space (including telephone), secretarial support and executive parking privileges for the period from your Resignation Date through March 31, 1998. Thereafter, office space, secretarial support and parking will be available to you at the discretion of FCNBD's Chairman. Notwithstanding anything in this letter to the contrary, in the event of your death while you are on the FNBC payroll (in paid or unpaid status), your estate will be paid any remaining salary continuation for the period through March 31, 1998 in a single sum, and your employment will be terminated for all purposes as of the date of death. Your outstanding stock options, restricted shares and performance shares as of that date will become vested and payable in accordance with the plan under which they were granted as if you died while actively employed. To the maximum extent provided under FCNBD's by-laws or Certificate of Incorporation as in effect from time to time, you will be indemnified, defended and held harmless against judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees) incurred by you in the defense of any lawsuit to which you are made a party by reason of the fact that you were an officer, director or employee of FCNBD or any of its subsidiaries or affiliates. FCNBD's obligations hereunder will be null and void if it is discovered that you have engaged in any intentional wrongful act related to your employment with FCNBD or any of its affiliates or subsidiaries. Your Obligations As a condition precedent to FCNBD's obligations hereunder, you will provide FCN with the General Release below. On or before June 30, 1998, you will return to FCNBD all property of FCNBD or any of its subsidiaries or affiliates which is in your possession including, without limitation, reports, files, Mr. Scott P. Marks, Jr. November 13, 1997 Page 3 memoranda, correspondence, door and file keys, identification cards, credit cards, computer access codes, customer and client lists, and other property or materials which you prepared or helped to prepare or to which you had access, and you will not retain any reproductions thereof. You agree to cooperate with FCNBD and any of its counsel in connection with any investigation or litigation relating to any matter in which you were involved during your employment with FCN. You agree to hold in a fiduciary capacity for the benefit of FCNBD all secret or confidential information, knowledge or data relating to FCN and its respective businesses, which you have obtained during your employment with FCN and which has not been publicly disclosed (other than by your acts or the acts of your representatives). You shall not, without the prior written consent of FCNBD or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than to FCNBD and those designated by it. You also agree not make any negative, critical or disparaging remarks to the press or any other third party concerning FCNBD or any of its subsidiaries or affiliates or any of their officers or employees. You further agree not to disclose the terms of this letter agreement to anyone other than members of your immediate family, your attorney in this matter or your accountant or your financial advisor or as otherwise required by law, until the terms have been publicly disclosed. FCNBD agrees not to disclose the terms of this agreement to anyone other than those with a need to know within FCNBD until the terms have been publicly disclosed. A violation of the provisions of this paragraph shall constitute a basis for deferring or withholding any amounts otherwise payable to you under this letter agreement. Miscellaneous From and after the date it is executed, this letter agreement shall supersede any employment, severance or change of control agreement between you and FCNBD or any of its subsidiaries or affiliates. We hereby advise you that you have the right to consult with an attorney before signing this agreement. FCNBD understands and you hereby represent that you have carefully read and fully understand all of the provisions of this agreement and you are voluntarily entering into this agreement. You have a period of 21 days to consider this agreement. If you elect to enter into this agreement prior to the expiration of 21 days, you hereby acknowledge that you do so knowingly and willingly. You may revoke this letter agreement at any time within seven days following the date you sign below, and its terms shall not be effective or enforceable until the revocation period has expired. Mr. Scott P. Marks, Jr. November 13, 1997 Page 4 If you are in agreement with the foregoing terms, please sign the attached copy of this letter and return it to me. If you have any questions, please feel free to call me. Sincerely, /s/ Timothy P. Moen Enclosure ****************************************************************************** GENERAL RELEASE I agree with the foregoing terms of my separation from FCN and acknowledge that the consideration furnished above is in excess of the benefits to which I would otherwise have been entitled, given my voluntary resignation. In consideration of FCNBD's agreement as set forth above, I hereby release, acquit and forever discharge First Chicago NBD Corporation, FNBC and all of their affiliated, predecessor and successor entities and their respective officers, employees, directors and assigns from any and all claims, actions or causes of action in any way related to my employment with FCN or the termination thereof, whether arising from tort, statute or contract, including but not limited to claims arising under the Age Discrimination in Employment Act of 1967, as amended, the Older Workers Benefit Protection Act of 1990, Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Illinois Human Rights Act, The Americans with Disabilities Act of 1990, the City of Chicago Human Rights Ordinance, and the Cook County Human Rights Ordinance, it being my intention and the intention of FCNBD to make this release as broad and as general as the law permits. I fully understand and voluntarily agree to this release. /s/ Scott P. Marks, Jr. November 14, 1997 - ----------------------- ----------------- Scott P. Marks, Jr. Date EXHIBIT A Board of Directors First Chicago NBD Corporation To All Directors: I hereby resign, effective December 31, 1997, from all offices, directorships and positions on committees I hold with First Chicago NBD Corporation and all of its affiliated and subsidiary banks and corporations. Very truly yours, Scott P. Marks, Jr. Dated: November 13, 1997 EX-10.(N) 7 1ST CHICAGO NBD CORP. EXEC. OFFICER SEPARATION PLAN EXHIBIT 10(N) EXECUTIVE OFFICER SEPARATION PLAN Summary of Key Provisions Effective Date: December 1, 1997 Eligibility Executive Vice President and higher level officers of FCNBD with two years' service; provided, that officers who were Executive Vice Presidents or higher as of December 1, 1997 are eligible notwithstanding the service requirement. Trigger Event Any involuntary termination excluding termination for "cause" Initial Notice Date the executive is advised of his or her pending involuntary termination Transition Period 30 calendar day period beginning at initial notice date Separation Pay Election Prior to end of the transition period, executive must elect lump sum payment or salary continuation option Termination Date If lump sum option is elected, the date following the end of the transition period; if salary continuation is elected, twelve months from the end of the transition period or upon obtaining employment and cessation of salary continuation, if earlier Form and Timing of Lump Sum - Payment *If lump sum elected, amount equal to two times annualized base salary plus two times the average annual bonus (based on the prior three awards), paid on termination date (day following transition period); Salary Continuation - *Base salary continues for twelve months following the transition period and a lump sum equal to one year's base paid at termination; *One times average bonus to be paid at the next annual bonus cycle following the initial notice date and an additional one times average bonus paid at termination *In the event the executive is re-employed outside the Corporation and salary continuation ceases, the unpaid balance would be paid at termination as a lump sum Impact on Pension and Benefits (pension, 401(k), medical, dental, life Welfare Benefits and personal accident insurance) continue until the termination date *participation continues through the twelve month salary continuation period if salary continuation is elected (bonus paid at the initial cycle included in the PPAP for that year) or, *all benefit participation ceases at the end of the transition period if lump sum is elected *vacation, disability, sick leave and similar programs are excluded. Stock Awards Under the Awards based on termination date as defined herein, FCNBD Stock with executive receiving vesting or pro ration for Performance Plan each award as if he or she were a retiree under the terms of such award Employee Stock No special provisions, follow plan provisions using Purchase and Savings termination date as defined above; plan permits 90- Plan (ESPSP) day purchase period if job elimination or workforce reduction or if employee meets retiree (55/15) or "rule of 65" Other Executive Plans No special provisions, plan provisions followed based on termination date as defined above EX-12 8 STATEMENTS RE COMPUTATION OF RATIOS EXHIBIT 12 Statements re Computation of Ratios The ratios of income to fixed charges have been computed on the basis of the total enterprise (as defined by the Commission) by dividing income before fixed charges and income taxes by fixed charges. Fixed charges consist of interest expense on all long-term and short-term borrowings, excluding or including interest on deposits as indicated. The computations of other ratios are evident from the information presented in this Form 10-K. EX-21 9 SUBSIDIARIES OF THE CORPORATION EXHIBIT 21 First Chicago NBD Corporation Subsidiaries As of March 1, 1998, the Corporation had the subsidiaries listed below, all of which were wholly-owned except for directors' qualifying shares or as otherwise indicated. The consolidated financial statements of the Corporation include the accounts of all such subsidiaries. Jurisdiction of Names of Corporation and Subsidiaries Organization - ------------------------------------- --------------- First Chicago NBD Corporation Delaware Subsidiaries: American National Bank and Trust Company United States of Chicago ANB Mezzanine Corporation Delaware FCC National Bank United States First Card Services, Inc. Delaware First Chicago Financial Corporation Delaware Subsidiaries: First Chicago Capital Corporation Delaware First Chicago Capital Markets, Inc. Delaware First Chicago Equity Corporation Illinois First Chicago Hedging Services Corporation Delaware First Chicago Investment Corporation Delaware First Chicago Leasing Corporation Delaware First Chicago NBD Insurance Company Arizona First Chicago Trust Company of New York New York The First National Bank of Chicago United States Subsidiaries: First Chicago Building Corporation Illinois First Chicago Delaware Inc. Delaware First Chicago Futures, Inc. Delaware First Chicago Insurance Services, Inc. Illinois First Chicago International United States First Chicago International Finance Corporation United States First Chicago NBD Bank, Canada Canada First Chicago NBD Investment Management Company Delaware First Chicago NBD Investment Services, Inc. Delaware First Chicago National Processing Corporation Delaware First Chicago Neighborhood Development Delaware Corporation National Bank of Detroit-Dearborn United States NBD Bank (Detroit, Michigan) Michigan Subsidiaries: First Chicago NBD Mortgage Company Delaware NBD Equipment Finance, Inc. Delaware NBD Insurance Services, Inc. Michigan NBD Bank (Elkhart, Indiana) Indiana NBD Bank (Venice, Florida) Florida NBD Bank, National Association (Indianapolis, Indiana) United States Subsidiaries: NBD Indiana Properties, Inc. Indiana NBD Leasing, Inc. Indiana NBD Community Development Corporation Michigan NBD Equity Corp. Michigan NBD Insurance Agency, Inc. Michigan NBD Neighborhood Revitalization Corporation Indiana NBD Service Corp. Delaware The names of certain other subsidiaries of the Corporation have been omitted because such subsidiaries, considered in the aggregate, would not constitute a significant subsidiary. 2 EX-23 10 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23 Consent of Independent Public Accountants To First Chicago NBD Corporation: As independent public accountants, we hereby consent to the incorporation of our report dated January 15, 1998, included in this Form 10-K, into the Corporation's previously filed Form S-8 Registration Statement No. 33-62713, Form S-3 Registration Statement No. 33-64755, Form S-8 Registration Statement No. 33-21036, Form S-8 Registration Statement No. 33-48773, Form S-8 Registration Statement No. 33-46906, Form S-8 Registration Statement No. 33- 50300, Form S-8 Registration Statement No. 33-53928, Form S-3 Registration Statement No. 33-60788, Form S-8 Registration Statement No. 33-17494, Form S-8 Registration Statement No. 333-03175, Form S-3 Registration Statement No. 333- 08903, Form S-8 Registration Statement No. 333-05349, Form S-8 Registration Statement No. 333-05347, Form S-8 Registration Statement No. 333-05375, Form S-3 Registration Statement No. 333-15649, Form S-8 Registration Statement No. 333- 16369, Form S-3 Registration Statement No. 333-36587, and Form S-4 Registration Statement No. 333-47029. /s/ Arthur Andersen LLP Chicago, Illinois, March 27, 1998 EX-27.1 11 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-K for the period ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 7,223 6,904 8,501 4,198 9,330 0 0 68,724 1,408 114,096 68,489 18,981 7,870 10,088 320 0 190 7,450 114,096 5,849 466 1,032 7,347 2,178 3,775 3,572 725 43 3,332 2,266 1,525 0 0 1,525 4.99 4.90 3.95 311 187 0 0 1,407 916 192 1,408 1,314 94 0 Guaranteed Preferred Beneficial Interest in the Corporation's Junior Subordinated Debt of $996 million is included in long-term debt. Treasury stock of $1,938 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $182 million. Includes: salaries and employee benefits of $1,748 million; occupancy of $252 million; equipment rentals, depreciation and maintenance of $210 million; amortization of intangible assets of $60 million; and other expenses totaling $1,062 million. EPS-Primary represents basic earnings per share.
EX-27.2 12 RESTATED FINANCIAL DATA SCHEDULE
9 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 7,297 10,241 11,698 8,150 9,449 0 0 64,434 (1,338) 122,002 69,106 25,513 10,041 8,163 319 0 489 7,642 122,002 5,260 821 1,542 8,090 2,581 4,882 3,208 510 (16) 3,535 1,754 1,150 0 0 1,150 3.48 3.41 3.14 344 197 19 0 1,158 409 145 1,338 1,281 57 0 Treasury stock of $121 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $253 million. Includes: salaries and employee benefits of $1,692 mil.; occupancy of $252 mil.; equipment rentals, depreciation and maintenance of $225 mil.; amortization of intangible assets of $88 mil.; merger-related charges of $267 mil.; and other expenses of $1,011 mil. EPS-Primary has been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share.
EX-27.3 13 RESTATED FINANCIAL DATA SCHEDULE
9 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 6,129 8,910 10,684 7,226 8,185 0 0 64,253 (1,383) 115,465 64,243 24,629 9,221 8,011 319 0 489 7,816 115,465 1,412 134 323 1,992 592 1,107 885 175 22 828 508 340 0 0 340 1.05 1.03 3.51 373 218 18 0 1,338 174 29 1,383 0 0 0 Treasury stock of $75 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $49 million. Includes: salaries and employee benefits of $436 million; occupancy of $67 million; equipment rentals, depreciation and maintenance of $55 million; amortization of intangible assets of $18 million; and other expenses totaling $252 million. EPS-Primary has been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share. Allowance-Domestic, Allowance-Foreign, and Allowance-Unallocated are only disclosed on an annual basis in the Corporation's Form 10-K, and are therefore not included in this Financial Data Schedule.
EX-27.4 14 RESTATED FINANCIAL DATA SCHEDULE
9 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 6,898 7,348 9,908 6,688 7,507 0 0 66,431 (1,430) 113,714 64,593 24,127 7,495 7,951 319 0 488 8,020 113,714 2,828 250 609 3,914 1,137 2,119 1,795 360 25 1,642 1,062 701 0 0 701 2.17 2.12 3.62 338 197 18 0 1,383 191 38 1,430 0 0 0 Treasury stock of $76 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $134 million. Includes: salaries and employee benefits of $862 mil.; occupancy of $131 mil.; equipment rentals, depreciation and maintenance of $110 mil.; amortization of intangible assets of $36 mil.; FDIC insurance of $4 mil.; and other expenses totaling $499 mil. EPS-Primary has been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share. Allowance-Domestic, Allowance-Foreign, and Allowance-Unallocated are only disclosed on an annual basis in the Corporation's Form 10-K, and are therefore not included in this Financial Data Schedule.
EX-27.5 15 RESTATED FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-Q for the period ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 7,706 5,695 5,640 5,226 7,140 0 0 66,602 1,447 106,694 63,679 18,023 7,233 7,967 319 0 475 8,293 106,694 4,310 355 834 5,822 1,664 3,085 2,737 545 27 2,458 1,600 1,059 0 0 1,059 3.27 3.20 3.74 309 266 0 0 1,338 583 103 1,447 0 0 0 Treasury stock of $48 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $184 million. Includes: salaries and emp. benefits of $1,281 mil.; occupancy of $195 mil.; equipment rentals, depreciation and maintenance of $166 mil.; amortization of intangible assets of $59 mil.; FDIC insurance of $20 mil.; and other expenses totaling $733 mil. The earnings per share amounts have been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share. Allowance-Domestic, Allowance-Foreign, and Allowance-Unallocated are only disclosed on an annual basis in the Corporation's Form 10-K, and are therefore not included in this Financial Data Schedule.
EX-27.6 16 RESTATED FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-K for the period ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 7,823 5,474 4,197 4,812 7,178 0 0 66,414 1,407 104,619 63,669 15,431 7,481 8,454 320 0 444 8,243 104,619 5,745 457 1,367 7,569 2,175 3,949 3,620 735 27 3,271 2,162 1,436 0 0 1,436 4.44 4.33 3.83 262 268 0 0 1,338 815 145 1,407 1,341 66 0 Treasury stock of $326 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $255 million. Includes: salaries and employee benefits of $1,707 mil.; occupancy of $259 mil.; equipment rentals, depreciation and maintenance of $227 mil.; amortization of intangible assets of $79 mil.; and other expenses totaling $999 mil. The earnings per share amounts have been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share.
EX-27.7 17 RESTATED FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-Q for the period ended March 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 6,800 7,169 6,635 5,192 7,500 0 0 66,536 1,408 109,133 64,927 18,173 8,158 8,514 320 0 290 8,175 109,133 1,401 103 230 1,734 499 858 876 187 25 800 568 568 0 0 380 1.19 1.17 4.11 257 0 0 0 1,407 224 38 1,408 0 0 0 Treasury stock of $403 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $54 million. Includes: salaries and employee benefits of $425 million; occupancy of $66 million; equipment rentals, depreciation and maintenance of $54 million; amortization of intangible assets of $18 million; and other expenses totaling $237 million. EPS-Primary has been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share. Allowance-Domestic, Allowance-Foreign, and Allowance-Unallocated are only disclosed on an annual basis in the Corporation's Form 10-K, and are therefore not included in this Financial Data Schedule.
EX-27.8 18 RESTATED FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-Q for the period ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 7,969 7,705 8,185 4,752 8,265 0 0 67,510 1,408 112,595 68,018 19,901 6,528 9,016 320 0 290 7,861 112,595 2,885 221 488 3,594 1,043 1,793 1,801 367 29 1,625 1,132 1,132 0 0 758 2.41 2.37 4.12 329 0 0 0 1,408 234 54 1,408 0 0 0 Treasury stock of $994 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $100 million. Includes: salaries and employee benefits of $851 million; occupancy of $129 million; equipment rentals, depreciation and maintenance of $106 million; amortization of intangible assets of $36 million; and other expenses totaling $503 million. EPS-Primary has been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share. Allowance-Domestic, Allowance-Foreign, and Allowance-Unallocated are only disclosed on an annual basis in the Corporation's Form 10-K, and are therefore not included in this Financial Data Schedule.
EX-27.9 19 RESTATED FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-Q for the period ended September 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 7,929 7,721 7,671 4,632 9,025 0 0 67,822 1,408 113,306 67,565 20,383 6,676 9,906 320 0 290 7,472 113,306 4,376 345 754 5,475 1,603 2,775 2,700 558 37 2,460 1,706 1,706 0 0 1,143 3.69 3.63 4.04 330 0 0 0 1,408 232 41 1,408 0 0 0 Treasury stock of $1,670 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $128 million. Includes: salaries and employee benefits of $1,291 million; occupancy of $192 million; equipment rentals, depreciation and maintenance of $159 million; amortization of intangible assets of $49 million; and other expenses totaling $769 million. The earnings per share amounts have been restated as a result of the Corporation adopting SFAS No. 128, "Earnings Per Share." EPS-Primary represents basic earnings per share. Items are only disclosed on an annual basis in the Corporation's Form 10-K, and are therefore not included in this Financial Data Schedule.
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