-----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, EpTghPt2skjtWoIglel2Cy3v1yjcpcDBmYGTLTvns3gKYZGjBTzCEbbINaHDiKss holrvp2dTINArexsODJICQ== 0000950131-97-002081.txt : 19970328 0000950131-97-002081.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950131-97-002081 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: CSX SROS: NYSE SROS: PSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07127 FILM NUMBER: 97564264 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-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1996 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 Depositary Shares, each representing one-twenty-fifth of a share of 8.45% Cumulative Preferred Stock, Series E ($625 stated value), no par value New York Stock Exchange Depositary Shares, each representing one-hundredth of a share of 5 3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 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: TITLE OF CLASS - -------------- 8.45% Cumulative Preferred Stock, Series E ($625 stated value) 5 3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 stated value)
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. [X] The aggregate market value of voting stock held by nonaffiliates of the Corporation at December 31, 1996, was approximately $17,342,000,000 (based on the average price of such stock on February 28, 1997). At December 31, 1996, the Corporation had 313,473,520 shares of its Common Stock, $1.00 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE CORPORATION'S DEFINITIVE PROXY STATEMENT DATED MARCH 28, 1997, 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........................ 5 Supervision and Regulation................................... 6 Financial Review............................................. 12 Item 2. Properties................................................... 86 Item 3. Legal Proceedings............................................ 87 Item 4. Submission of Matters to a Vote of Security Holders.......... 87 Executive Officers of the Registrant..................................... 87 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................................... 87 Item 6. Selected Financial Data...................................... 88 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 88 Item 8. Financial Statements and Supplementary Data.................. 88 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 88 PART III Item 10. Directors and Executive Officers of the Registrant........... 88 Item 11. Executive Compensation....................................... 88 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 88 Item 13. Certain Relationships and Related Transactions............... 88 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 89
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 (Indiana) ("NBD Indiana"), NBD Bank (Florida) ("NBD Florida") and several other bank subsidiaries. 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, on an ongoing basis, evaluates its existing business operations and organizational structures, and routinely explores opportunities to acquire financial institutions and other financial services-related businesses and assets. In addition, the Corporation occasionally sells assets, or exits businesses or markets determined not to be consistent with the Corporation's overall business strategy. During 1996, the Corporation acquired Barrington Bancorp, Inc. ("Barrington"), a one-thrift holding company with assets of approximately $68 million; Barrington's thrift subsidiary was merged into FNBC. In addition, the Corporation merged NBD Bank (Illinois) with and into FNBC and consolidated its retail and middle market banking operations with those of FNBC and ANB. Also in 1996, the Corporation announced its intention to exit the stand-alone domestic institutional custody and master trust businesses and discontinued its emerging markets activities. The Corporation engages primarily in three lines of business--Regional Banking, which includes retail banking and middle market banking; Corporate and Institutional Banking and Corporate Investments; and Credit Card. Each of these businesses is conducted through the Corporation's bank and nonbank subsidiaries, as described below. Regional Banking Retail Banking Retail banking is conducted primarily through FNBC, NBD Michigan, NBD Indiana and NBD Florida by providing traditional retail banking products and services to consumers and small businesses. Products and services offered include demand, savings and time deposit accounts; cash management 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. The Corporation offers an array of additional financial products to its retail 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, 1996, the Pegasus Funds ranked among the largest bank-managed fund families in the country, with over $13 billion in assets. 2 The Corporation's primary retail banking markets are metropolitan Chicago and the states of Michigan and Indiana. The Corporation enjoys a leading market share in each of these geographic markets, serving approximately 3,000,000 households through over 650 bank branches, more than 1,300 automatic teller machines ("ATMs"), 24-hour telephone support, and online banking services available through personal computers. Additionally, retail 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. ATM services are provided to retail banking clients through two regional shared networks in which the Corporation has an ownership interest, CASH STATION and Magic Line, and through the CIRRUS system, a national shared ATM network. Pursuant to a contract with MasterCard, the Corporation operates the computerized transaction routing switch for CIRRUS. The Corporation also operates a similar routing switch for Magic Line. Middle Market Banking Middle market banking is conducted primarily through ANB, NBD Michigan and NBD Indiana, and serves midsized business enterprises located predominantly in the Midwest. The Corporation seeks to position itself as the lead financial services provider to its middle market customers by offering a broad array of targeted products including traditional lending arrangements, asset-based lending, 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 & Institutional Banking and Corporate Investments Corporate & Institutional Banking Corporate & Institutional 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 foreign customers. The Corporation's principal focus in this area is the delivery of corporate financial services, including the extension of credit, to commercial, financial and governmental customers. Corporate & Institutional Banking serves the manufacturing, wholesaling, retailing, commodities, banking, finance, insurance, transportation, securities, real estate, mortgage banking, communications, utilities, and petroleum and mining industries, as well as municipalities and health, education and service organizations. Customers include large and midsized corporations. The Corporation offers capital-raising products to its corporate and institutional clients, 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. 3 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 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 & Institutional Banking offers a wide range of administrative and trust and investment advisory services to corporations, municipalities and charitable organizations. Each of FNBC, NBD Michigan, NBD Indiana and ANB act as trustee of corporate, pension, profit-sharing and other employee-benefit trusts, and act 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 clearance services. 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 comprise growth equity investments, tax-advantaged investments, value-oriented investments, and funding and liquidity investments. Growth equity investment activities include 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. Value-oriented investment activities include positions in the distressed and value investment markets, such as: loans, letters of credit, trade claims and securities of distressed companies; 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 line of VISA and MasterCard accounts are the primary Credit Card products, other products include check-accessed lines of credit and certificates of deposit. 4 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; and Uniondale (Long Island), New York. A processing center in Springfield, Missouri, is currently under construction. At December 31, 1996, Credit Card managed approximately $18.5 billion in card-related receivables. Financial and Risk Policy The Corporation's Risk Management Committee determines the desired risk profile of the Corporation, allocates resources, including risk capacity against expected return, to the lines of business, approves major investment programs that are consistent with strategic priorities and risk appetite, and makes capital management decisions to appropriately fund the Corporation's portfolio of investments. 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 Credit Risk Committees, which are responsible for approving credit exposures within authorities granted; the Investment Risk Management Committee, which is responsible for approving trading and investment/sale decisions for the Corporation's own account, managing the Corporation's liquidity, monitoring and adjusting structural interest rate risk, and overseeing market-related trading activities; the Fiduciary Risk Committee, which is responsible for approving the processes and mechanisms designed to mitigate fiduciary risks; the Operating Risk Committee, which is responsible for approving the processes and mechanisms designed to mitigate operating risks; and the Review Committee, which is responsible for providing strategic direction and senior management oversight for the risk management process. EMPLOYEES As of December 31, 1996, the Corporation and its subsidiaries had 33,414 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 banks, savings banks, savings and loan associations, finance companies, credit unions, mutual funds, securities brokers, 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 Board of Governors of the Federal Reserve System (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 1996 contributed to the decision of the Federal Reserve Board to hold short-term interest rates stable. 5 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 may have on its business and earnings. SUPERVISION AND REGULATION General Bank holding companies, banks and financial institutions generally are highly regulated, with numerous federal and state laws and regulations governing their activities. 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. Federal law prohibits the Corporation and certain of its subsidiaries from borrowing from the Banks without the prior approval of the respective Bank's Board of Directors and 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 where 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, 1997, the Banks could 6 have declared additional dividends of approximately $0.9 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, subject to certain exceptions, generally prohibits the Banks from entering into certain tie-in arrangements in connection with extensions of credit or providing property or services. Legislation may be 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. There can be no assurance that any such legislation or regulation will not place additional limitations or restrictions on the Corporation's or any Bank's operations. 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, 1996, the Corporation's consolidated Tier I capital and total capital ratios were 9.2% and 13.3%, 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, 1996, was 9.3%. 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, 1996. 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. 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. 7 A major feature of FDICIA is the comprehensive directions it gives federal banking regulators to promptly direct or require the correction of problems at inadequately capitalized banks in the 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 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. 8 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 assessment rate schedule, effective January 1, 1997, 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 revises 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. Commencing 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. States may elect to prohibit interstate bank mergers or may elect to permit early interstate bank mergers by adopting, prior to June 1, 1997, legislation that expressly so provides, and that applies 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 9 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. In addition, there may be new banking legislation enacted or introduced in the current Congress related to bank holding companies and their powers; the likelihood of passage and effect, if any, of such legislation on the Corporation and the Banks cannot be predicted. 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. Certain organizational units within FNBC, NBD Michigan, ANB and NBD Indiana are registered with the Commission as municipal securities dealers. These units are subject to the applicable rules and regulations of the Commission and the Municipal Securities Rulemaking Board with respect to transactions in municipal securities performed in a municipal securities dealer capacity. FNBC, NBD Michigan and NBD Indiana also are regulated government securities brokers and dealers under the Government Securities Act, and are subject to regulations issued thereunder in connection with the conduct of their United States government securities business. In addition, First Chicago NBD Investment Services, Inc. ("FCNIS"), which provides investment products and brokerage services for 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"). FCNIS was formed as the result of the merger in 1996 of First Chicago Investment Services, Inc. with NBD Securities, Inc., and the resulting entity's later merger with NBD Brokerage Services, Inc. FCNIS provides products and services to clients of FNBC, ANB, NBD Michigan, and NBD Indiana. 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 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. 10 FCNIMC and ANB Investment Management and Trust Company ("ANBIMC"), a subsidiary of FCNIMC, provide investment advisory, management and administrative services to a variety of clients. FCNIMC and ANBIMC are registered with the Commission as investment advisers and, as such, are 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.......................................................... 18 Risk Management............................................................ 24 Liquidity Risk Management.................................................. 24 Market Risk Management..................................................... 26 Credit Risk Management..................................................... 30 Derivative Financial Instruments........................................... 35 Capital Management......................................................... 37 Consolidated Financial Statements.......................................... 41 Notes to Consolidated Financial Statements................................. 45 Report of Management on Responsibility for Financial Reporting............. 73 Report of Independent Public Accountants................................... 75 Selected Statistical Information........................................... 76
12 Selected Financial Data
(DOLLARS IN MILLIONS, EXCEPT PER 1996 1995 1994 1993 1992 SHARE DATA) -------- -------- -------- ------- ------- SUMMARY OF INCOME Net interest income.............. $3,620 $3,208 $2,956 $2,784 $2,692 Provision for credit losses...... 735 510 276 390 653 Provision for assets held for accelerated disposition (1)..... -- -- -- -- 625 Noninterest income............... 2,548 2,591 2,393 2,769 2,018 Merger-related charges........... -- 267 -- -- 76 FDIC special assessment.......... 18 -- -- -- -- Operating expense................ 3,253 3,268 3,220 3,161 3,084 Income before cumulative effect of changes in accounting principles...................... 1,436 1,150 1,221 1,290 224 Net income....................... 1,436 1,150 1,221 1,290 394 EARNINGS PER SHARE Primary Income before cumulative effect of changes in accounting principles.................... $4.39 $3.45 $3.62 $3.91 $0.60 Net income..................... 4.39 3.45 3.62 3.91 1.17 Fully diluted Income before cumulative effect of changes in accounting principles.................... 4.32 3.41 3.58 3.79 0.60 Net income..................... 4.32 3.41 3.58 3.79 1.17 PERIOD-END BALANCES Total assets..................... $104,619 $122,002 $112,763 $93,140 $90,011 Long-term debt................... 8,454 8,163 7,246 5,250 4,175 Total stockholders' equity....... 9,007 8,450 7,809 7,499 6,323 COMMON SHARE DATA Dividends declared............... $ 1.48 $ 1.35 $ 1.23 $ 1.08 $ 1.04 Book value, year-end............. 27.31 25.25 22.60 21.25 18.27 Market price, year-end........... 53 3/4 39 1/2 27 3/8 29 3/4 32 3/4 CAPITAL RATIOS (2) Common equity-to-assets ratio.... 8.2% 6.9% 6.8% 7.6% 6.5% Regulatory leverage ratio........ 9.3 6.9 7.3 7.8 6.6 Risk-based capital Tier 1 ratio................... 9.2 7.8 8.6 9.0 7.4 Total capital ratio............ 13.3 11.8 13.0 13.6 11.3
- -------- (1) Of the total provision, $491 million relates to loans and $134 million relates to other real estate held for accelerated disposition. (2) Net of investment in FCCM. 13 Business Segments OVERVIEW Financial results are reported by major business segments, principally structured around the customer markets served: Credit Card, Regional Banking, and Corporate & Institutional Banking and Corporate Investments. EARNINGS CONTRIBUTION BY BUSINESS LINES Pie Chart 1996 1995* 1994 Credit Card 24% 23% 29% Regional 41% 38% 32% Corporate & Institutional/ Corporate Investments 34% 38% 35% Other 1% 1% 4% *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 an equity allocation based on risk elements. Information for prior years has been adjusted 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. See the discussion of net interest income and noninterest income on pages 19 and 20, respectively, as well as the reconciliation of reported to presecuritized results on page 77. Revenues and costs for investment management and insurance products are also aligned with customers and, therefore, are reported within the appropriate business segment. Certain corporate revenues and expenses, generally unusual or one-time in nature, are included in "Other Activities." 14 REGIONAL BANKING
1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ------ Net interest income--tax-equivalent basis............... $2,078 $2,008 $1,787 Provision for credit losses............................. 116 97 75 Noninterest income...................................... 748 649 594 Noninterest expense..................................... 1,771 1,725 1,677 Net income.............................................. 591 514 390 Return on equity........................................ 16% 17% 15% Efficiency ratio........................................ 63% 65% 70% Average loans (in billions)............................. $33.9 $31.3 $26.4 Average assets (in billions)............................ 38.1 36.0 30.0 Average common equity (in billions)..................... 3.5 3.0 2.5
More than 40% of the Corporation's earnings in 1996 were generated by Regional Banking, where the Corporation is the leading banking company in the three-state region of Illinois, Indiana and Michigan. This business segment encompasses retail banking and investment management activities for consumers as well as a host of financial services for small businesses and middle market companies. Transactions are conducted through branch and electronic banking networks. Additionally, ANB provides services specifically tailored to Chicagoland's middle market. Net income was $591 million for the year, up 15% from 1995. Return on equity was slightly above 16%. Loan volume in Regional Banking averaged just under $34 billion for 1996, up 8% from 1995.
MIDDLE RETAIL MARKET -------------- ------------ 1996 1995 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ----- ----- Net interest income--tax-equivalent basis......... $1,308 $1,273 $ 770 $ 735 Provision for credit losses....................... 83 51 33 46 Noninterest income................................ 567 492 181 157 Noninterest expense............................... 1,328 1,306 443 419 Net income........................................ 292 249 299 265 Return on equity.................................. 16% 16% 17% 17% Efficiency ratio.................................. 71% 74% 47% 47% Average loans (in billions)....................... $19.0 $17.5 $14.9 $13.8 Average assets (in billions)...................... 21.6 20.5 16.5 15.5 Average common equity (in billions)............... 1.8 1.5 1.7 1.5
- -------- The retail and middle market breakdowns are not available for 1994. The retail banking segment of Regional Banking produced net income of $292 million for a return on equity of 16%. Earnings increased 17% from 1995, driven by a 6% increase in total revenue and expense growth of less than 2%. The provision for credit losses in the retail segment rose $32 million, reflecting some deterioration in consumer credit quality. Middle market earnings in 1996 were $299 million, up 13% from 1995. Return on equity was 17%. Total revenue increased about 7%, mostly in loan spread and deposit and trust fees. Credit quality improved year-over-year as the provision dropped by $13 million. Operating efficiency remained excellent, at 47%. 15 CORPORATE & INSTITUTIONAL BANKING AND CORPORATE INVESTMENTS
1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ----- ------ ----- Net interest income--tax-equivalent basis................. $809 $817 $748 Provision for credit losses............................... 37 41 (22) Noninterest income........................................ 905 1,015 851 Noninterest expense....................................... 933 992 933 Net income................................................ 481 510 424 Return on equity.......................................... 13% 14% 11% Efficiency ratio.......................................... 54% 54% 58% Average assets (in billions).............................. $64.5 $78.9 $71.8 Average common equity (in billions)....................... 3.6 3.6 3.6
The Corporation manages its corporate and institutional activities in two distinct business segments: Corporate & Institutional Banking, which includes customer-based businesses; and Corporate Investments, which comprises activities such as venture capital, leveraged leasing, funding and arbitrage, and the fixed income investment account. Together these two segments earned $481 million in 1996, for a 13% return on equity. Despite operating expense reductions in both segments, combined results were below the levels reported in 1995 due to a shortfall in revenues generated by trading businesses.
CORPORATE & INSTITUTIONAL CORPORATE BANKING INVESTMENTS -------------- ------------ 1996 1995 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ----- ----- Net interest income--tax-equivalent basis......... $714 $700 $ 95 $117 Provision for credit losses....................... 37 41 -- -- Noninterest income................................ 606 718 299 297 Noninterest expense............................... 880 930 53 62 Net income........................................ 264 278 217 232 Return on equity.................................. 8% 9% 48% 32% Efficiency ratio.................................. 67% 66% N/M N/M Average loans (in billions)....................... $ 20.1 $ 19.3 $ 1.2 $ 1.3 Average assets (in billions)...................... 45.6 54.7 18.9 24.2 Average common equity (in billions)............... 3.1 2.9 0.5 0.7
- -------- N/M--Not meaningful Detailed breakdowns for Corporate & Institutional Banking and Corporate Investments are not available for 1994. CORPORATE & INSTITUTIONAL BANKING Corporate & Institutional Banking provides sophisticated products and services to large corporations, governments, institutions and investors both nationally and internationally. Specific areas of expertise include: traditional credit products, syndications, corporate finance, cash management, trade finance, stock transfer, corporate trust, trading and the derivatives business. The Corporation is the leading provider of these products and services in the Midwest. Corporate & Institutional Banking earned $264 million in 1996, down about 5% from 1995. Disappointing results from the foreign exchange and interest rate derivatives businesses offset the gains in other areas. Expenses were down 5% in 1996 as a result of merger synergies, lower trading-related incentive compensation and disciplined expense management. In addition, the provision for credit losses was 10% lower in 1996, reflecting excellent loan quality and overall favorable economic conditions. 16 Return on equity for the segment was 8% in 1996, well below the 15% hurdle rate targeted for this business. Corporate & Institutional Banking is focused on increasing returns through maximizing profitability of products and customer relationships, improving trading results and reducing the amount of risk capital required to support the business. CORPORATE INVESTMENTS In 1996, Corporate Investments made a significant contribution to earnings, generating $217 million, or 15%, of consolidated net income. Return on equity was 48%. Strong equity securities gains--$232 million--drove this exceptional performance. Lower asset and capital levels in 1996 reflected a substantial decline in investment securities as part of the Corporation's asset reduction strategy. The nature of Corporate Investments implies that it will be a more variable component of earnings going forward than the other business lines. However, because of the Corporation's expertise in this high-return area, continued significant earnings contributions are expected. CREDIT CARD (PRESECURITIZED)
1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ------ Net interest income--tax-equivalent basis............... $1,495 $1,175 $1,007 Provision for credit losses............................. 1,029 708 476 Noninterest income...................................... 651 560 491 Noninterest expense..................................... 558 541 459 Net income.............................................. 347 302 350 Return on equity........................................ 32% 36% 54% Efficiency ratio........................................ 26% 31% 31% Average loans (in billions)............................. $17.4 $14.2 $11.4 Average common equity (in billions)..................... 1.1 0.8 0.6
Among the largest bankcard issuers in the United States, Credit Card contributed about one-quarter of the Corporation's earnings in 1996. For the year, net income was $347 million and return on equity was a superior 32%. Earnings in 1996 were 15% higher than in 1995, as average managed credit card receivables grew 23% to $17.4 billion. At year-end 1996, receivables were $18.5 billion. Consistent with this growth, common equity allocated to Credit Card increased by about $300 million. Net interest income rose $320 million, or 27%, in 1996 due to higher average receivables volume. Likewise, fee income improved by $91 million, or 16%, due in part to changes in fee pricing. Expenses increased a modest 3% as new account solicitations declined from 1995's record level. Credit Card's operating efficiency remained excellent in 1996, at 26%. Credit Card is managed to achieve a superior return relative to risk over time. In 1996, rapid deterioration in this business line's credit quality partially offset the positive revenue and expense trends. The provision for credit losses grew to $1,029 million, up $321 million from 1995. The average net charge-off rate in the managed portfolio reached 5.8% for 1996, compared with 4.0% for 1995 and 3.5% for 1994. This substantial rise reflected the increasing rate of personal bankruptcy filings. Although the Corporation expects the charge-off rate to continue rising in the near term, the level and timing of the peak rate is uncertain. 17 OTHER ACTIVITIES
1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ---- ----- ---- Total revenue................................................. $31 $ 14 $139 Noninterest expense........................................... 9 277 79 Net income (loss)............................................. 17 (176) 57 Average assets (in billions).................................. -- 0.4 0.1
Results for 1996 include a $7 million gain from the sale of Ohio branch operations. Merger-related charges totaled $267 million in 1995, of which $225 million was related to direct merger and restructuring costs. The remaining one-time charges of $42 million were for the conformance of accounting practices between the merged companies. Investment securities losses of $19 million in 1995 are also included in Other Activities. Earnings for 1994 included gains of $46 million from the sale of assets held in the accelerated disposition portfolio and a $35 million gain from the sale of an interest in an investment management business. Noninterest expense in 1994 included a charge of $25 million related to the depreciation of personal computer equipment and $19 million of other general corporate costs. Earnings Analysis SUMMARY Net income for 1996 was $1.436 billion, or $4.32 per share, compared with $1.150 billion, or $3.41 per share, in 1995 and $1.221 billion, or $3.58 per share, in 1994. Operating earnings for 1996, which excluded the after-tax effect of the one- time 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 and fourth-quarter 1995 investment securities losses, were $1.341 billion, or $3.99 per share.
1996 1995 1994 (IN MILLIONS, EXCEPT PER SHARE DATA) ------ ------ ------ Net income.............................................. $1,436 $1,150 $1,221 Fully diluted earnings per share........................ 4.32 3.41 3.58 Return on common equity................................. 17.0% 14.3% 16.6% Return on assets........................................ 1.28 0.94 1.13
The Corporation's 1996 results reflected the following highlights: . Net interest income grew 12% and net interest margin improved 69 basis points to 3.83% as a result of loan growth in the credit card and regional banking businesses as well as the effects of the targeted asset reduction program. . Adjusted fee revenue increased 10%, reflecting growth in both credit card and other product-based revenue. . Market-driven revenue was down 24%, principally due to disappointing trading results; Corporate Investment activities turned in a strong performance. . Commercial credit quality remained strong as nonperforming assets declined 27% to $290 million at year-end. . Credit Card earned an attractive return on equity of 32%. The net charge-off rate for credit card receivables increased to 5.8% for the year, up from 4.0% in 1995 and 3.5% in 1994. 18 . Operating expense was slightly below the 1995 level. . Merger-related initiatives were successfully completed, including targeted earning asset reductions, key business integration efforts and revenue enhancements. In addition, in the fourth quarter the Corporation announced a common stock repurchase program totaling 40 million shares to be executed over a 2-3 year period. Under this program, 7.3 million shares were purchased during the fourth quarter at an average price of $53.93. 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 its underlying capital. In order to analyze fundamental trends in net interest margin, it is useful to adjust for securitization of credit card receivables and the activities of FCCM.
1996 1995 1994 (DOLLARS IN MILLIONS) ------- -------- ------- Reported Net interest income--tax-equivalent basis......... $ 3,722 $ 3,311 $ 3,043 Average earning assets............................ 97,274 105,306 92,598 Net interest margin............................... 3.83% 3.14% 3.29% Adjusted Net interest income--tax-equivalent basis......... $ 4,377 $ 3,956 $ 3,579 Average earning assets............................ 98,652 101,793 88,969 Net interest margin............................... 4.44% 3.89% 4.02%
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 $7.7 billion in 1996, $7.2 billion in 1995, and $5.5 billion in 1994. FCCM is the Corporation's wholly owned subsidiary engaged in permissible investment banking activities. Because capital requirements for FCCM are risk- exposure driven rather than based on asset levels, FCCM can generate substantial volumes of relatively riskless, thin-spread earning assets that require little additional capital. The Corporation's net interest margin trends can be better analyzed if these earning assets and related margins are excluded. Adjusted net interest income increased by $421 million, or 11%, in 1996. In addition, adjusted net interest margin improved to 4.44% compared with 3.89% in 1995. Loan growth in both the credit card and regional banking businesses, coupled with the Corporation's successful efforts in reducing $25 billion of targeted low-margin assets, accounted for this improved performance. Adjusted net interest income in 1995 was up $377 million, or 11%, while adjusted net interest margin was 3.89%, down slightly from 4.02% in 1994. The 1995 growth in dollar spread income was principally driven by a 14% increase in adjusted average earning assets. Percentage spreads, on the other hand, were down principally due to a less profitable earning asset mix, reflecting the growth in thinly priced assets, including trading assets and loans to large corporate banking customers. 19 NONINTEREST INCOME Credit card fee revenue and total noninterest income have been adjusted to exclude the effect of credit card securitizations to provide a more meaningful trend analysis. Credit card fee revenue in the following table excludes the amount of net servicing revenue (spread income less credit costs) associated with securitized credit card receivables.
PERCENT INCREASE (DECREASE) ------------------- 1996 1995 1994 1995-1996 1994-1995 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Combined trading profits............ $ 58 $ 210 $ 86 (72)% 144% Equity securities gains............. 255 253 229 1 10 Investment securities gains (losses)........................... 27 (16) (1) N/M N/M ------ ------ ------ Market-driven revenue.............. 340 447 314 (24) 42 Credit card fee revenue (1)......... 694 579 574 20 1 Fiduciary and investment management fees............................... 400 404 377 (1) 7 Service charges on deposits......... 414 382 372 8 3 Other service charges and commissions........................ 389 353 316 10 12 ------ ------ ------ Adjusted fee-based revenue......... 1,897 1,718 1,639 10 5 Gain on sale of loans............... 8 7 6 14 17 Accelerated disposition portfolio gains.............................. 6 37 46 (84) (20) Gain on sale of investment advisory business........................... -- -- 35 -- N/M Other............................... 77 60 56 28 7 ------ ------ ------ Adjusted noninterest income....... $2,328 $2,269 $2,096 3 8 ====== ====== ======
- -------- (1) Net credit card servicing revenue totaled $220 million in 1996, $322 million in 1995 and $297 million in 1994. N/M--Not Meaningful Combined trading profits totaled $58 million in 1996, compared with $210 million in 1995 and $86 million in 1994. Disappointing results from the foreign exchange and interest rate derivative trading businesses accounted for much of the 1996 decline. These trading businesses contributed to the improved 1995 results as increased customer demand and market volatility provided additional profit opportunities. The following table provides additional details on revenue from the Corporation's various trading businesses, including both trading profits and net interest income generated from these activities. TRADING REVENUE
1996 1995 1994 (IN MILLIONS) ---- ---- ---- Foreign exchange and derivatives................................ $ 63 $ 83 $ 56 Fixed income and derivatives.................................... 48 106 74 Emerging markets................................................ 6 6 (49) Other trading................................................... 58 97 79 ---- ---- ---- Total....................................................... $175 $292 $160 ==== ==== ====
Equity securities gains, principally from Corporate Investment activities, were $255 million during 1996, compared with $253 million in 1995 and $229 million in 1994. Investment securities gains totaled $27 million in 1996, compared with losses of $16 million in 1995 and $1 million in 1994. Beginning in the fourth quarter of 1995, the investment securities portfolio was reduced through sales and maturities as part of the Corporation's asset reduction program. From June 30, 1995, to December 31, 1996, the investment securities portfolio was reduced by $6.5 billion. 20 Credit card fee revenue was $694 million in 1996, up 20% from 1995. The increase was due to both higher transaction volume and pricing changes instituted during 1996 to mitigate rising credit costs. Adjusted for the reclassification of Mileage Plus payments, the growth in credit card fee revenue in 1995 was 15%. Fiduciary and investment management fees include revenue generated by the Corporation's traditional trust products and services, investment management activities, and the shareholder services business. Fees generated from these activities decreased slightly in 1996, compared with a modest increase in 1995. In 1996, the Corporation decided to exit its stand-alone global custody and master trust businesses; the exit should be substantially completed by the second quarter of 1997. Revenues from these activities in 1996 totaled approximately $54 million. Revenues from the shareholder services business increased to $88 million in 1996 from $82 million in 1995 and $81 million in 1994. Revenue growth in the shareholder services business continues to be hampered by industry consolidation and price competition. Net gains from the active management of assets held in the accelerated disposition portfolio were $6 million in 1996, compared with $37 million in 1995 and $46 million in 1994. In the first quarter of 1996, the sale of the Corporation's Ohio branch network to Fifth Third Bancorp generated a $6.9 million gain, which is included in other noninterest income. 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 30. NONINTEREST EXPENSE Operating expense in 1996 was $15 million below that of a year ago. Merger savings were channeled into investments in technology and used to fund growth in selected business activities. Overall 1995 expense growth, adjusted for the reclassification of Mileage Plus payments, was limited to 4% despite higher employee costs, increased equipment costs and investment in core business growth. SALARIES AND BENEFITS
PERCENT INCREASE (DECREASE) ------------------- 1996 1995 1994 1995-1996 1994-1995 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Salaries.............................. $1,423 $1,420 $1,325 -% 7% Employee benefits..................... 284 272 277 4 (2) ------ ------ ------ Total................................. $1,707 $1,692 $1,602 1 6 ====== ====== ====== Average full-time-equivalent employees............................ 34,115 35,352 35,642 (3) (1) ====== ====== ======
Total employee costs grew by only $15 million, or 1%, in 1996, following an increase of $90 million, or 6%, between 1994 and 1995. Salary costs increased only slightly from a year ago as annual salary increases and higher performance-based incentive accruals were partially offset by reduced staff levels. Employee benefit costs increased $12 million in 1996 due mainly to higher pension expense. The 6% increase in 1995 reflected staff increases in certain business units as well as higher performance-based incentive costs. 21 OTHER NONINTEREST EXPENSE
PERCENT INCREASE (DECREASE) ------------------- 1996 1995 1994 1995-1996 1994-1995 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Occupancy expense of premises, net.... $ 259 $ 252 $ 244 3% 3% Equipment rentals, depreciation and maintenance.......................... 227 225 245 1 (8) Marketing and public relations........ 120 161 128 (25) 26 FDIC insurance expense................ 4 58 105 (93) (45) Amortization of intangible assets..... 79 88 93 (10) (5) Telephone............................. 88 80 67 10 19 Freight and postage................... 87 78 68 12 15 Travel and entertainment.............. 55 50 47 10 6 Stationery and supplies............... 48 45 39 7 15 Operating and other taxes............. 30 29 31 3 (6) Other................................. 549 510 551 8 (7) ------ ------ ------ Operating expense.................... 1,546 1,576 1,618 (2) (3) Merger-related charges................ -- 267 -- N/M N/M FDIC special assessment............... 18 -- -- N/M N/M ------ ------ ------ Total............................. $1,564 $1,843 $1,618 (15) 14 ====== ====== ======
Equipment expense increased 1% in 1996 to $227 million. A special charge of $25 million was taken in 1994 to reflect the reduction in the estimated useful life of existing personal computer equipment. The changes in marketing costs over the past several years generally reflect the level of credit card solicitation costs. Increased costs in 1995 supported a significant solicitation program that produced a record 3.4 million credit card accounts. FDIC insurance expense, excluding a one-time special assessment in 1996 of $18 million related to the recapitalization of the Savings Association Insurance Fund (SAIF), totaled $4 million in 1996. 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 core deposit intangibles 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 related to the one-time conformance of accounting practices. (See Note 3 on page 49 for more details.) 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.
1996 1995 1994 (DOLLARS IN MILLIONS) ------ ------ ------ Income before income taxes.............................. $2,162 $1,754 $1,853 Applicable income taxes................................. 726 604 632 Effective tax rates..................................... 33.6% 34.4% 34.1%
Tax expense for 1996 and 1995 included benefits for tax-exempt income and general business tax credits offset by the effect of nondeductible expenses, including goodwill. 22 Tax expense in 1994 included a one-time tax benefit related to the implementation of final Internal Revenue Service ("IRS") bad debt recapture regulations as well as the effects of several favorable tax rulings. MERGER-RELATED INITIATIVES The Corporation successfully completed its merger-related initiatives in 1996, including targeted asset reductions, key business integration efforts to generate cost savings of $200 million, and revenue enhancements of $50 million from cross-sales of products to an expanded customer base. The Corporation completed its $25 billion asset reduction program by September 30, 1996, well ahead of schedule. The following table shows the components of the $25 billion decline using average assets for the first half of 1995 as a baseline. ASSET REDUCTION INITIATIVE
AVERAGE AVERAGE INCREASE 4TH QTR. 1996 1ST HALF 1995 (DECREASE) (IN MILLIONS) ------------- ------------- --------- Loans.................................... $ 65,494 $ 56,927 $ 8,567 Targeted items Deposit placements..................... 5,664 9,715 (4,051) Federal funds sold..................... 739 1,846 (1,107) Trading assets......................... 8,888 20,659 (11,771) Investment securities.................. 5,311 14,507 (9,196) -------- -------- -------- Subtotal............................. 20,602 46,727 (26,125) Other assets (1)......................... 16,591 16,830 (239) -------- -------- -------- Total assets......................... $102,687 $120,484 $(17,797) ======== ======== ========
- -------- (1) Includes approximately $1.8 billion of investment securities required in conjunction with the Corporation's government-related cash management and payment services. The Corporation has made the decisions necessary to effectively integrate its business activities, including organization and staffing changes to facilitate their implementation. At year-end 1996, staff reductions of over 2,000 had been identified, with severance payments already initiated for approximately 1,800 of such positions. The remaining identified staff reductions will occur as integration decisions are fully implemented. Staff level reductions have more than exceeded the Corporation's initially established goals. The Corporation has realized incremental fee revenue as a result of its wider array of product offerings to an expanded customer base. This has been particularly evident in increased cash management fee revenue and net interest income despite targeted asset reductions. In addition, due to an upgrade in its credit ratings, the Corporation has generated additional business with new customers. The Corporation established a reserve for direct merger and restructuring- related charges totaling $225 million at the time of the merger. The table below details the components of the reserve at year-end 1996 and 1995. MERGER RESERVE
DECEMBER 31, DECEMBER 31, 1996 1995 (IN MILLIONS) ------------ ------------ Personnel............................................. $ 42 $ 92 Facilities & Equipment................................ 71 94 Other................................................. 5 14 ---- ---- Total................................................ $118 $200 ==== ====
23 At this time, the Corporation anticipates full usage of the merger reserve based on the projected cost of identified business actions. Such costs (i.e. severance payments, lease payments) will be absorbed by the merger reserve as incurred based on existing contractual arrangements. 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 the failure of a customer 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 37. 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, generally characterized as on-balance-sheet transactions, include loans, bonds, stocks and deposits. . Credit-related financial instruments include such instruments as commitments to extend credit and standby letters of credit. . Derivative financial instruments include such instruments as interest rate, foreign exchange, commodity price and equity 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 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, thereby, cost-effective access to market liquidity. The Corporation believes its prudent 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. 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 ratings. The short- term debt ratings for 24 the parent cover commercial paper issuances. The long- and short-term debt ratings for the Principal Banks cover bank note issuances.
LONG-TERM SHORT-TERM DEBT DEBT CREDIT RATINGS ----------- ------------ S&P MOODY'S S&P MOODY'S DECEMBER 31, 1996 --- ------- ---- ------- 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 50, 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, 1996, 78% of core assets were funded with core liabilities. The wholesale market provided only 22% 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 Corporation's 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. DEPOSITS AND OTHER PURCHASED FUNDS
1996 1995 1994 1993 1992 DECEMBER 31 (IN MILLIONS) ------- -------- ------- ------- ------- Domestic offices Demand............................... $15,702 $ 15,234 $14,378 $14,852 $14,247 Savings.............................. 21,722 20,180 20,088 21,154 20,929 Time Under $100,000..................... 9,851 9,972 8,720 8,310 9,779 $100,000 and over.................. 5,143 5,947 4,484 4,089 5,688 Foreign offices........................ 11,251 17,773 17,225 9,602 10,098 ------- -------- ------- ------- ------- Total deposits................... 63,669 69,106 64,895 58,007 60,741 Federal funds purchased and securities under repurchase agreements........... 7,859 15,711 16,919 11,038 10,591 Commercial paper....................... 762 288 206 323 357 Other short-term borrowings............ 6,810 9,514 8,216 6,506 3,808 Long-term debt......................... 8,454 8,163 7,246 5,250 4,175 ------- -------- ------- ------- ------- Total other purchased funds...... 23,885 33,676 32,587 23,117 18,931 ------- -------- ------- ------- ------- Total............................ $87,554 $102,782 $97,482 $81,124 $79,672 ======= ======== ======= ======= =======
25 Market Risk Management OVERVIEW Market risk arises from changes in interest rates, exchange rates, commodity prices and equity 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 17, beginning on page 66. 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 commodity and equity index 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. Value at risk is intended to measure the maximum amount the Corporation could lose, given a specified confidence level, over a given period of time. The overall market risk that any business can assume is approved by the Risk Management Committee of the Board of Directors, which utilizes a risk point system in managing the Corporation's value at risk. Risk points measure the market risk (potential overnight loss) in a capital markets product. Products that have more inherent price volatility are assigned more risk points. 26 Value at risk is monitored in each significant trading portfolio on a daily basis. The following charts show the average, maximum and minimum daily value at risk for 1994, 1995 and 1996, and the actual trading revenue for each year.
Daily Value at Risk Trading Revenue* Bar Graph Bar Graph $ Millions $ Millions 1994 1995 1996 1994 1995 1996 Average $45 $32 $28 $160 $292 $175 Maximum $66 $45 $38 Minimum $34 $24 $21 *Includes trading profits and net interest income.
Value at risk is estimated using statistical models calibrated at a three- standard-deviation confidence interval. The Corporation has made significant progress in recognizing offsets and correlations across different trading portfolios. This has contributed to a decline in daily value at risk from 1995 to 1996. However, the Corporation's reported value at risk remains somewhat overstated because all offsets and correlations are not fully considered in the calculation. The Corporation is continuing its progress toward a fully consolidated view of market risk. STRUCTURAL INTEREST RATE RISK MANAGEMENT Movements in interest rates can create fluctuations in the Corporation's income and economic value due to an imbalance in the repricing or maturity of asset, liability and off-balance-sheet positions. Interest rate risk exposure is actively managed with the goal of minimizing the impact of interest rate volatility on current earnings and on the market value of equity. In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to repricing or maturity characteristics. Access to the derivatives market is an important element in maintaining the Corporation's interest rate risk position within policy guidelines. Using off-balance-sheet instruments, principally interest rate swaps (asset and liability management or "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 1996, the notional value of ALM interest rate swaps totaled $9.6 billion, including $4.7 billion against specific transactions and $4.9 billion against specific pools of assets or liabilities. 27 ASSET AND LIABILITY MANAGEMENT SWAPS--NOTIONAL PRINCIPAL
RECEIVE FIXED PAY FIXED BASIS PAY FLOATING RECEIVE FLOATING SWAPS DECEMBER 31, 1996 --------------- ------------------- ----- SPECIFIC POOL SPECIFIC POOL POOL TOTAL (IN MILLIONS) -------- ------ ---------- -------- ----- ------ Swaps associated with: Loans....................... $ -- $ 982 $ 46 $ -- $ -- $1,028 Investment securities....... -- -- 240 -- -- 240 Securitized credit card receivables................ -- 500 -- -- -- 500 Deposits.................... 50 2,991 -- -- -- 3,041 Funds borrowed (including long-term debt)............ 4,329 -- -- 125 340 4,794 ------ ------ -------- -------- ---- ------ Total..................... $4,379 $4,473 $ 286 $ 125 $340 $9,603 ====== ====== ======== ======== ==== ======
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 one-month, three-month and six-month LIBOR rates 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. ASSET AND LIABILITY MANAGEMENT SWAPS--MATURITIES AND RATES
1997 1998 1999 2000 2001 THEREAFTER TOTAL (DOLLARS IN MILLIONS) ------ ------ ---- ---- ---- ---------- ------ Receive fixed/pay floating swaps Notional amount........ $4,102 $1,112 $629 $330 $761 $1,919 $8,853 Weighted average Receive rate......... 5.97% 6.24% 6.23% 5.76% 7.17% 6.87% 6.31% Pay rate............. 5.66% 5.74% 5.62% 5.67% 5.66% 5.70% 5.68% Pay fixed/receive floating swaps Notional amount........ $ 97 $ 57 $ 83 $110 $ 25 $ 38 $ 410 Weighted average Receive rate......... 5.63% 5.67% 5.68% 5.68% 5.70% 5.70% 5.67% Pay rate............. 7.22% 8.07% 7.99% 7.74% 8.01% 8.01% 7.75% Basis swaps Notional amount........ $ 50 $ 265 $ 25 -- -- -- $ 340 Weighted average Receive rate......... 5.59% 5.76% 5.69% -- -- -- 5.73% Pay rate............. 5.58% 5.62% 5.58% -- -- -- 5.61% ------ ------ ---- ---- ---- ------ ------ Total notional amount............ $4,249 $1,434 $737 $440 $786 $1,957 $9,603 ====== ====== ==== ==== ==== ====== ======
The Corporation uses a variety of measurement tools to monitor and control the overall interest rate risk exposure of both the on- and off-balance-sheet positions, including the ALM derivatives. For each measurement tool, the level of interest rate risk created by the assets, liabilities, equity and off- balance-sheet positions are a function primarily of their contractual interest rate repricing dates and contractual maturity (including principal amortization) dates. Modifications to the interest rate risk measure are made where there are historical differences between contractual and actual payment flows. These modifications are designed to capture principal prepayments on loans and early withdrawals of deposits. Additionally, assumptions are made on the measurement of the interest rate risk of indeterminate maturity assets, liabilities and equity. Finally, income volatility from positions such as 28 credit card securitizations, mortgage servicing and cash management service products, which subject servicing fee revenue to interest rate risk, are included in one or more of the risk measures. Static gap analysis is one of the tools used for interest rate risk measurement. The net difference between the amount of assets, liabilities, equity and off-balance-sheet instruments repricing within a cumulative calendar period is typically referred to as the "rate sensitivity position." Interest rate risks in trading and overseas balance sheet positions are assumed to be matched and are managed principally as trading risks. The Corporation's policy is to limit the cumulative one-year gap position, including ALM derivatives, to within 4% of total assets. The following table details the Corporation's static gap position. As of December 31, 1996, the cumulative one-year gap position was 1.0% of total assets. INTEREST RATE SENSITIVITY
0-90 91-180 181-365 1-5 BEYOND DECEMBER 31, 1996 DAYS DAYS DAYS YEARS 5 YEARS TOTAL (DOLLARS IN MILLIONS) ------- ------- ------- ------- ------- -------- Loans................... $46,716 $ 3,401 $ 4,092 $12,955 $ 2,799 $ 69,963 Investment securities... 400 454 856 3,830 1,387 6,927 Other earning assets.... 19,219 101 107 115 -- 19,542 Nonearning assets....... 14,149 77 145 1,226 1,478 17,075 ------- ------- ------- ------- ------- -------- Total assets........ $80,484 $ 4,033 $ 5,200 $18,126 $ 5,664 $113,507 ======= ======= ======= ======= ======= ======== Deposits................ $28,597 $ 3,868 $ 5,067 $14,309 $ 984 $ 52,825 Other interest-bearing liabilities............ 34,575 3,102 1,896 2,306 3,352 45,231 Noninterest-bearing liabilities............ 5,773 -- 19 15 637 6,444 Equity.................. 405 368 528 3,425 4,281 9,007 ------- ------- ------- ------- ------- -------- Total liabilities and equity......... $69,350 $ 7,338 $ 7,510 $20,055 $ 9,254 $113,507 ======= ======= ======= ======= ======= ======== Balance sheet sensitivity gap........ $11,134 $(3,305) $(2,310) $(1,929) $(3,590) -- Cumulative gap as a % of total assets........... 9.8% 6.9% 4.9% 3.2% -- -- Effect of off-balance- sheet ALM derivative transactions: Specific transactions. (4,650) 1,696 690 478 1,786 -- Specific asset or liability pools...... (2,969) 154 642 2,079 94 -- ------- ------- ------- ------- ------- -------- Interest rate sensitivity gap........ $ 3,515 $(1,455) $ (978) $ 628 $(1,710) -- ======= ======= ======= ======= ======= ======== Cumulative gap.......... $ 3,515 $ 2,060 $ 1,082 $ 1,710 -- -- Cumulative gap as a % of total assets........... 3.1% 1.8% 1.0% 1.5% -- --
Static gap analysis does not fully capture the impact of embedded options, lagged interest rate changes, administered interest rate products, or certain off-balance-sheet sensitivities to interest rate movements. Therefore, this tool cannot be used in isolation to determine the level of interest rate risk exposure in more complex banking institutions. The Corporation performs an earnings simulation analysis and a value-at-risk measure to identify more dynamic interest rate risk exposures, including embedded option positions. The earnings simulation analysis estimates the effect that specific interest rate changes would have on 12 months of pretax earnings. This exercise includes 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. These assumptions 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. Additionally, changes in prepayment behavior of the residential mortgage portfolio in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. Sensitivity of fee income to market interest rate levels, such as those related to securitized credit card receivables, cash management service products and mortgage servicing, are included as well. Finally, the impact of planned growth and anticipated new business activities is factored into the simulation model. 29 The Corporation's policy is to limit the change in annual pretax earnings to $100 million from an immediate parallel change in interest rates of 200 basis points. As of December 31, 1996, the Corporation had the following estimated earnings sensitivity profile.
IMMEDIATE CHANGE IN RATES -------------------------- +200 BP -200 BP (IN MILLIONS) ------------ ------------- Pretax earnings change...................... $23 $(10)
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 on a selective basis 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 and derivative financial instruments. 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 on page 36. SELECTED STATISTICAL INFORMATION
1996 1995 1994 1993 1992 (DOLLARS IN MILLIONS) ------- ------- ------- ------- ------- At year-end Loans outstanding............... $66,414 $64,434 $55,176 $48,654 $47,836 Nonperforming loans............. 262 363 294 485 717 Other real estate, net.......... 28 34 57 87 81 Nonperforming assets............ 290 397 351 572 798 Allowance for credit losses..... 1,407 1,338 1,158 1,106 1,041 Nonperforming assets/loans outstanding and other real estate, net.................... 0.4% 0.6% 0.6% 1.2% 1.7% Allowance for credit losses/loans outstanding....... 2.1 2.1 2.1 2.3 2.2 Allowance for credit losses/nonperforming loans..... 537 369 394 228 145 For the year Average loans................... $64,949 $58,944 $50,083 $47,110 $49,042 Net charge-offs................. 670 264 192 296 572 Net charge-offs/average loans... 1.0% 0.4% 0.4% 0.6% 1.2%
30 For analytical purposes, the Corporation's portfolio is divided into commercial (domestic and foreign) and consumer (credit card and other consumer) segments. LOAN COMPOSITION
1996 1995 1994 1993 1992 DECEMBER 31 (IN MILLIONS) ------- ------- ------- ------- ------- Commercial risk Domestic Commercial......................... $27,718 $25,551 $22,546 $19,310 $19,944 Real estate Construction..................... 1,057 1,151 1,074 1,105 1,323 Other............................ 5,103 6,103 5,903 5,613 5,869 Lease financing.................... 1,820 1,588 1,381 1,295 1,312 Foreign.............................. 3,656 3,726 3,305 3,083 3,176 ------- ------- ------- ------- ------- Total commercial............... 39,354 38,119 34,209 30,406 31,624 ------- ------- ------- ------- ------- Consumer risk Credit cards......................... 9,601 9,649 6,980 6,393 4,829 Secured by real estate(1)............ 9,406 8,933 7,025 6,088 6,163 Automotive........................... 4,423 4,477 3,994 3,241 2,911 Other................................ 3,630 3,256 2,968 2,526 2,309 ------- ------- ------- ------- ------- Total consumer................. 27,060 26,315 20,967 18,248 16,212 ------- ------- ------- ------- ------- Total.......................... $66,414 $64,434 $55,176 $48,654 $47,836 ======= ======= ======= ======= =======
- -------- (1) Includes home-equity loans. 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 as prevailing economic conditions. Each quarter, the adequacy of the allowance for credit losses is evaluated and reported to a committee of the Board of Directors. 31 ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
1996 1995 1994 1993 1992 (IN MILLIONS) ------ ------ ------ ------ ------ Balance, beginning of year.............. $1,338 $1,158 $1,106 $1,041 $1,136 Provision for credit losses............. 735 510 276 390 653 Provision for loans held for accelerated disposition............................ -- -- -- -- 491 Charge-offs Commercial Domestic Commercial........................... 114 70 68 122 253 Real estate.......................... 20 25 41 99 149 Lease financing...................... 7 2 3 6 6 Foreign (1)........................... 2 1 9 47 78 Consumer Credit card........................... 567 241 193 165 180 Other................................. 105 70 50 46 52 ------ ------ ------ ------ ------ Total charge-offs................... 815 409 364 485 718 Recoveries Commercial Domestic Commercial........................... 45 59 55 81 39 Real estate.......................... 20 16 15 9 6 Lease financing...................... 1 2 1 2 5 Foreign............................... 15 9 44 17 22 Consumer Credit card........................... 33 33 32 57 52 Other................................. 31 26 25 23 22 ------ ------ ------ ------ ------ Total recoveries.................... 145 145 172 189 146 Net charge-offs......................... 670 264 192 296 572 Charge-offs of loans upon transfer to accelerated disposition portfolio...... -- -- -- -- 636 Transfers related to securitized receivables............................ 4 (75) (49) (29) (42) Other (2)............................... -- 9 17 -- 11 ------ ------ ------ ------ ------ Balance, end of year.................... $1,407 $1,338 $1,158 $1,106 $1,041 ====== ====== ====== ====== ======
- -------- (1) 1992 amounts include $12 million defined as commercial real estate. (2) Primarily acquisitions. 32 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 increased slightly during the year to $27.1 billion at year-end 1996. Including securitized credit card receivables, the consumer portfolio increased $1.8 billion, or 5%, to $35.9 billion at December 31, 1996. CONSUMER LOANS
1996 1995 1994 1993 1992 DECEMBER 31 (IN MILLIONS) ------- ------- ------- ------- ------- Credit card loans...................... $ 9,601 $ 9,649 $ 6,980 $ 6,393 $ 4,829 Securitized credit card receivables.... 8,888 7,877 6,117 4,958 4,500 ------- ------- ------- ------- ------- Total managed credit card receivables......................... 18,489 17,526 13,097 11,351 9,329 Other consumer loans Secured by real estate (1)............ 9,406 8,933 7,025 6,088 6,163 Automotive............................ 4,423 4,477 3,994 3,241 2,911 Other................................. 3,630 3,256 2,968 2,526 2,309 ------- ------- ------- ------- ------- Other consumer loans................. 17,459 16,666 13,987 11,855 11,383 ------- ------- ------- ------- ------- Total.............................. $35,948 $34,192 $27,084 $23,206 $20,712 ======= ======= ======= ======= =======
- -------- (1) Includes home-equity loans. Consumer risk management focuses on the credit card segment separately from other parts of the portfolio. For both the on-balance-sheet and the securitized credit card portfolios, loss potential is tested using statistically expected levels of losses based on delinquencies and on the source, age and other risk characteristics of each 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 $18.5 billion at December 31, 1996, up 5% from 1995. Average managed credit card receivables grew to $17.4 billion in 1996, up 23% from 1995. Credit card receivables represent the most significant risk element in the consumer portfolio. The credit card charge-off rate of 5.8% in 1996 represents a significant increase from prior years. In addition, the portfolio experienced an increase in delinquency rates as presented in the following table. CREDIT CARD RECEIVABLES
1996 1995 1994 1993 1992 (DOLLARS IN MILLIONS) ------- ------- ------- ------ ------ Average balances: Credit card loans.................. $ 9,774 $ 7,006 $ 5,904 $4,772 $4,155 Securitized credit card receivables....................... 7,672 7,179 5,538 4,839 3,918 ------- ------- ------- ------ ------ Total average managed credit card receivables..................... $17,446 $14,185 $11,442 $9,611 $8,073 ======= ======= ======= ====== ====== Total net charge-offs (including securitizations).................... $1,019 $572 $403 $342 $333 ======= ======= ======= ====== ====== Net charge-offs/average total managed receivables......................... 5.8% 4.0% 3.5% 3.6% 4.1% Credit Card Delinquency Rate 30 or more days.................... 4.5 3.6 3.0 3.0 3.1 90 or more days.................... 1.8 1.3 1.1 1.0 1.0
Credit card receivables are generally charged off no later than 180 days past due, or earlier in the event of bankruptcy. Current levels of unemployment and personal bankruptcy filings make reductions in the charge-off rate unlikely in the near term. Consumer debt service burden and defaults have increased as a result of the 33 growing consumer debt levels coupled with stagnant real wage growth. In response to these trends, credit management policies and practices have been tightened. 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 3% from $38.1 billion at December 31, 1995, to $39.4 billion at December 31, 1996. Commercial net charge-offs were $62 million in 1996, up from the relatively low levels of $12 million in 1995 and $6 million in 1994. At the same time, the level of nonperforming commercial assets declined $107 million to $290 million at year-end 1996, representing 0.4% of total loans and other real estate. 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. (BAR GRAPH) NONPERFORMING ASSETS-PERIOD END $ MILLIONS
1992 1993 1994 1995 1996 $798 $572 $351 $397 $290 OREO $81 $87 $57 $34 $28 Loans $717 $485 $294 $363 $262
(BAR GRAPH) NONPERFORMING ASSETS AS A PERCENTAGE OF LOANS AND OTHER REAL ESTATE - PERIOD END
1992 1993 1994 1995 1996 1.7% 1.2% 0.6% 0.6% 0.4%
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, 1996, commercial real estate loans totaled $6.2 billion, or 16% of commercial loans, compared with $7.3 billion, or 19% of commercial loans, at December 31, 1995. During 1996, net charge-offs in the commercial real estate portfolio segment were under $1 million, compared with $9 million in 1995. 34 Nonperforming commercial real estate assets, including other real estate, totaled $128 million, or 2.1% of related assets, at December 31, 1996, compared with $125 million, or 1.7% of related assets, at December 31, 1995. 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, commodity and equity swaps, forwards, futures, options, caps, floors, forward rate agreements, and other conditional or exchange contracts, and include both exchange-traded and over- the-counter contracts. See Note 15, beginning on page 63, 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 do not represent the market or credit risk associated with these instruments, but instead indicate the volume of the transactions. The amounts greatly exceed the associated credit risk of these instruments and do not reflect the netting of offsetting transactions.
ASSET AND LIABILITY CORPORATE DECEMBER 31, 1996 TRADING MANAGEMENT INVESTMENTS TOTAL (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 ======== ===== ==== ======== ASSET AND LIABILITY CORPORATE DECEMBER 31, 1995 TRADING MANAGEMENT INVESTMENTS TOTAL (IN BILLIONS) -------- ---------- ----------- -------- Interest rate contracts................ $415.4 $ 9.7 $ -- $425.1 Foreign exchange contracts............. 378.8 1.8 -- 380.6 Equity contracts....................... 7.9 -- 0.1 8.0 Commodity contracts.................... 1.0 -- -- 1.0 -------- ----- ---- -------- Total.............................. $803.1 $11.5 $0.1 $814.7 ======== ===== ==== ========
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments used in trading activities are valued at prevailing market rates on a present-value basis. 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 term of the derivative financial instrument. Income or expense on most derivative financial instruments used to manage interest rate exposure is recorded on an accrual basis, as an adjustment to the yield of the related exposures over the periods covered by the contracts. The income recognition treatment of the related exposure, generally assets or liabilities carried at historical cost, is 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 underlying interest rate exposure position over the remaining periods originally covered by the terminated swap. If all or part of an underlying position is terminated, e.g., an underlying asset is sold or prepaid, the related pro rata portion of any unrecognized gain or loss on the swap is recognized in income at that time, as part of the gain or loss on the termination, sale or prepayment. 35 In general, purchased option, cap and floor contracts are reported in derivative product assets, and written option, cap and floor contracts are reported in derivative product liabilities. For other derivative financial instruments, an unrealized gain is reported in derivative product assets and an unrealized loss is reported in derivative product liabilities. 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 The Corporation's income from derivatives used in trading activities is included in the "Trading Revenue" table on page 20. 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 $33 million in 1996, higher by $12 million in 1995, and lower by $48 million in 1994. The sale of fixed- and floating-rate credit card receivables as securities to investors subjects servicing revenue to interest rate risk. Therefore, interest rate derivatives, whose terms match those of the credit card securitizations, are used to reduce this volatility. Without the use of these instruments, credit card fee revenue would have been reduced by $9 million in 1996, $6 million in 1995 and $39 million in 1994. 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 30. 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 at December 31, 1996: DECEMBER 31, 1996 (IN MILLIONS) Gross replacement cost................................................. $14,933 Less: Adjustment due to master netting agreements.................... (9,876) ------- Current credit exposure................................................ 5,057 Less: Unrecognized net gains due to nontrading activity.............. (83) ------- Balance sheet exposure................................................. $ 4,974 =======
The $5.057 billion of total current credit exposure represents the total loss that the Corporation would have suffered had every counterparty been in default on that date. This amount is reduced by $83 million related to the unrealized and unrecognized gains on derivatives used to manage interest rate exposures to arrive at the balance sheet exposure. Since a derivative's replacement cost, measured by its fair value, is subject to change over the contract's life, the Corporation's evaluation of credit risk incorporates potential increases to the contract's fair value. Potential exposure is calculated with a statistical model that estimates changes over time in exchange rates, interest rates and other relevant factors using a 95% confidence level. This potential credit exposure is calculated on a portfolio basis incorporating master netting agreements as well as any natural offsets that exist between 36 contracts within the customer's portfolio. In total, the potential credit exposure was approximately $6.3 billion higher than the current credit exposure at December 31, 1996. Capital Management SELECTED CAPITAL RATIOS
CORPORATE 1996 1995 1994 1993 1992 GUIDELINE DECEMBER 31 ---- ---- ---- ---- ---- --------- Common equity/total assets (1).......... 8.2% 6.9% 6.8% 7.6% 6.5% N/A Tangible common equity ratio (1)........ 7.8 6.4 6.3 6.9 5.7 N/A Stockholders' equity/total assets....... 8.6 6.9 6.9 8.1 7.0 N/A Risk-based capital ratios (1) (2) Tier 1................................ 9.2 7.8 8.6 9.0 7.4 7-8% Total................................. 13.3 11.8 13.0 13.6 11.3 11-12% Leverage ratio (1) (2).................. 9.3 6.9 7.3 7.8 6.6 5.5-7.0% Double leverage ratio (2)............... 105 115 113 108 112 120%* Dividend payout ratio................... 34 39 34 28 89 30-40%
- -------- (1) Net of investment in FCCM. (2) Includes trust preferred capital securities. N/A--Not Applicable * less than or equal to Capital represents the stockholders' investment on which the Corporation strives to generate attractive returns. It is the foundation of a cohesive risk management framework that 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 operating/fiduciary. To integrate the individual processes monitoring these risks, an economic capital framework has been constructed to allocate capital to business segments, products and customers based on the amount and type of risk inherent in the activity. Return on economic capital is a key decision- making tool for managing risk-taking activities, as well as for ensuring that capital is efficiently and profitably employed. A financial instrument or business activity attracts economic capital based on its potential for loss of value over a particular time period. The allocated amount is designed to cover unexpected losses to a desired level of statistical significance. Credit and operating loss experiences form the basis for assessing the volatility of these risks. Volatility of interest and exchange rates and commodity and equity prices is used to determine the capital for market risk. Total economic capital will vary proportionately with the level and riskiness of the Corporation's businesses and products. 37 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 and in relation to its peers. The long-term target for the Tier 1 ratio is 7% to 8%; this ratio is currently being managed to the high end of the range. Line of business activities determine the Corporation's risk profile and hence the total level of capital. Allocations of capital to lines of business, which are used in performance measurement, equaled the 8% target. Excess capital, defined as common equity above that required for the 8% Tier 1 target, is available for core business investment and acquisitions. During 1996, this excess amount averaged $171 million, compared with $327 million in 1995. 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. REGULATORY CAPITAL The Corporation aims to maintain regulatory capital ratios, including those of its principal banking subsidiaries, in excess of the well-capitalized guidelines. To ensure 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 reached or exceeded the upper end of the target ranges. The lower year-end 1995 ratios reflect the impact of merger-related charges. Tier 1 and Total Capital Ratios-Period End Bar Graph
1994 1995 1996 Tier 1 8.6% 7.8% 9.2% Total 13.0% 11.8% 13.3% Regulatory Guidelines Tier 1 6% 6% 6% Total 10% 10% 10%
In the fourth quarter of 1996, two wholly owned consolidated trust subsidiaries of the Corporation issued, in the aggregate, $750 million of preferred securities. These "Trust Preferred Capital Securities" are tax- advantaged issues that qualify for Tier 1 capital treatment. In January 1997, an additional $250 million of Trust Preferred Capital Securities were issued. During 1996, the Corporation increased Tier 2 capital through the issuance of $300 million in subordinated debt. 38 The components of the Corporation's regulatory risk-based capital and risk- weighted assets are shown below:
1996 1995 1994 DECEMBER 31 (IN MILLIONS) -------- ------- ------- Regulatory Risk-Based Capital Tier 1 capital......................................... $ 9,186 $ 7,750 $ 7,489 Tier 2 capital......................................... 4,146 4,017 3,806 -------- ------- ------- Total capital...................................... $13,332 $11,767 $11,295 ======== ======= ======= Regulatory Risk-Weighted Assets Balance sheet risk-weighted assets..................... $ 71,177 $71,040 $62,778 Off-balance-sheet risk-weighted assets................. 29,078 28,403 23,852 -------- ------- ------- Total risk-weighted assets......................... $100,255 $99,443 $86,630 ======== ======= =======
In arriving at Tier 1 and total capital, such amounts are reduced by goodwill and other nonqualifying intangible assets as shown below. INTANGIBLE ASSETS
1996 1995 1994 DECEMBER 31 (IN MILLIONS) ---- ---- ---- Goodwill......................................................... $397 $446 $326 Other nonqualifying intangibles.................................. 3 12 19 ---- ---- ---- Subtotal..................................................... 400 458 345 Qualifying intangibles........................................... 69 94 142 ---- ---- ---- Total intangibles............................................ $469 $552 $487 ==== ==== ====
The Principal Banks have exceeded the well-capitalized guidelines for the past three years, as shown in the following tables.
NBD NBD FNBC MICHIGAN FCCNB ANB INDIANA 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
NBD NBD FNBC MICHIGAN FCCNB ANB INDIANA 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
NBD NBD FNBC MICHIGAN FCCNB ANB INDIANA DECEMBER 31, 1994 ---- -------- ----- ---- ------- Risk-Based Capital Ratios Tier 1 capital............................. 8.1% 7.5% 12.1% 9.5% 12.4% Total capital.............................. 12.5 11.1 15.0 12.0 13.7 Leverage ratio............................... 6.3 6.1 14.4 9.1 8.9
By maintaining regulatory well-capitalized status, these banks benefit from lower FDIC deposit premiums. In September 1996, federal bank regulators amended risk-based capital requirements to incorporate a measure for market risk inherent in the trading portfolio. Under the new market risk requirements, capital will 39 be allocated to support the amount of market risk that relates to the Corporation's trading activities. The market risk rules are not effective until 1998. It is currently estimated that the new rules will not significantly affect the risk-based capital ratios of the Corporation or the Principal Banks. 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. On November 8, 1996, the Corporation increased its quarterly common dividend to $0.40 per share. This represented an 11% increase from the previous $0.36 per share common dividend rate.
Common Stock Dividends Declared Bar Graph 1994 1995 1996 $1.23 $1.35 $1.48
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, authorizes 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. At December 31, 1996, 32.7 million shares remain available for repurchase under this program. On February 14, 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. As of December 31, 1996, there were 3,078,688 depositary shares of Series B outstanding. DOUBLE LEVERAGE Double leverage is the extent to which parent debt is used to finance equity investments in subsidiaries. Presently, the Corporation intends to limit its double leverage ratio to no more than 120% at any time. On December 31, 1996, double leverage was 105%, compared with 115% at year-end 1995. Trust Preferred Capital Securities of $748 million are included in capital for purposes of this calculation. 40 CONSOLIDATED BALANCE SHEET FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1996 1995 DECEMBER 31 (DOLLARS IN MILLIONS) -------- -------- ASSETS Cash and due from banks.................................... $ 7,823 $ 7,297 Interest-bearing due from banks............................ 5,474 10,241 Federal funds sold and securities under resale agreements.. 4,197 11,698 Trading assets............................................. 4,812 8,150 Derivative product assets.................................. 4,974 6,713 Investment securities...................................... 7,178 9,449 Loans (net of unearned income--$764 in 1996 and $610 in 1995)..................................................... 66,414 64,434 Less allowance for credit losses......................... (1,407) (1,338) -------- -------- Loans, net............................................... 65,007 63,096 Premises and equipment..................................... 1,415 1,423 Customers' acceptance liability............................ 577 729 Other assets............................................... 3,162 3,206 -------- -------- Total assets........................................... $104,619 $122,002 ======== ======== LIABILITIES Deposits Demand................................................... $ 15,702 $ 15,234 Savings.................................................. 21,722 20,180 Time..................................................... 14,994 15,919 Foreign offices.......................................... 11,251 17,773 -------- -------- Total deposits......................................... 63,669 69,106 Federal funds purchased and securities under repurchase agreements................................................ 7,859 15,711 Other short-term borrowings................................ 7,572 9,802 Long-term debt............................................. 8,454 8,163 Acceptances outstanding.................................... 577 729 Derivative product liabilities............................. 4,753 6,723 Other liabilities.......................................... 2,728 3,318 -------- -------- Total liabilities...................................... 95,612 113,552 STOCKHOLDERS' EQUITY Preferred stock--without par value, authorized 10,000,000 shares SHARES OUTSTANDING: 1996 1995 - ------------------- ----------- ----------- 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)..... 160,000 160,000 100 100 Convertible Series B ($5,000 stated value).................... 30,786 39,774 154 199 1996 1995 ----------- ----------- Common stock--$1 par value................................. 320 319 Number of shares authorized...... 750,000,000 750,000,000 Number of shares issued.......... 319,509,189 318,535,798 Number of shares outstanding..... 313,473,520 315,241,109 Surplus.................................................... 2,149 2,185 Retained earnings.......................................... 6,433 5,497 Fair value adjustment on investment securities available- for-sale................................................... 38 112 Deferred compensation...................................... (58) (39) Accumulated translation adjustment......................... 7 8 Treasury stock at cost, 6,035,669 shares in 1996 and 3,294,689 shares in 1995................................... (326) (121) -------- -------- Stockholders' equity..................................... 9,007 8,450 -------- -------- Total liabilities and stockholders' equity............. $104,619 $122,002 ======== ========
The accompanying notes are an integral part of this balance sheet. 41 CONSOLIDATED INCOME STATEMENT FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1996 1995 1994 FOR THE YEAR (IN MILLIONS, EXCEPT PER SHARE DATA) ------ ------ ------ INTEREST INCOME Loans, including fees..................................... $5,745 $5,260 $4,000 Bank balances............................................. 463 620 395 Federal funds sold and securities under resale agreements. 510 922 624 Trading assets............................................ 394 467 284 Investment securities--taxable............................ 364 694 716 Investment securities--tax-exempt......................... 93 127 117 ------ ------ ------ Total................................................. 7,569 8,090 6,136 INTEREST EXPENSE Deposits.................................................. 2,175 2,581 1,653 Federal funds purchased and securities under repurchase agreements............................................... 671 1,192 704 Other short-term borrowings............................... 552 538 378 Long-term debt............................................ 551 571 445 ------ ------ ------ Total................................................. 3,949 4,882 3,180 ------ ------ ------ NET INTEREST INCOME 3,620 3,208 2,956 Provision for credit losses............................... 735 510 276 ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES..... 2,885 2,698 2,680 NONINTEREST INCOME Combined trading profits.................................. 58 210 86 Equity securities gains................................... 255 253 229 Investment securities gains (losses)...................... 27 (16) (1) ------ ------ ------ Market-driven revenue................................... 340 447 314 Credit card fee revenue................................... 914 901 871 Fiduciary and investment management fees.................. 400 404 377 Service charges and commissions........................... 803 735 688 ------ ------ ------ Fee-based revenue....................................... 2,117 2,040 1,936 Other income.............................................. 91 104 143 ------ ------ ------ Total................................................. 2,548 2,591 2,393 NONINTEREST EXPENSE Salaries and employee benefits............................ 1,707 1,692 1,602 Occupancy expense of premises, net........................ 259 252 244 Equipment rentals, depreciation and maintenance........... 227 225 245 FDIC insurance expense.................................... 4 58 105 Amortization of intangible assets......................... 79 88 93 Other..................................................... 977 953 931 ------ ------ ------ Operating Expense....................................... 3,253 3,268 3,220 Merger-related charges.................................... -- 267 -- FDIC special assessment................................... 18 -- -- ------ ------ ------ Total................................................. 3,271 3,535 3,220 ------ ------ ------ INCOME BEFORE INCOME TAXES................................ 2,162 1,754 1,853 Applicable income taxes................................... 726 604 632 ------ ------ ------ NET INCOME................................................ $1,436 $1,150 $1,221 ====== ====== ====== NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY.... $1,405 $1,113 $1,169 ====== ====== ====== EARNINGS PER SHARE NET INCOME--PRIMARY..................................... $4.39 $3.45 $3.62 NET INCOME--FULLY DILUTED............................... $4.32 $3.41 $3.58
The accompanying notes are an integral part of this statement. 42 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31 1996 1995 1994 (IN MILLIONS) ------ ------ ------ PREFERRED STOCK Balance, beginning of period............................. $ 489 $ 611 $ 761 Conversion of preferred stock............................ (45) (1) -- Redemption of preferred stock............................ -- (121) (150) ------ ------ ------ Balance, end of period................................... 444 489 611 ------ ------ ------ COMMON STOCK Balance, beginning of period............................. 319 329 318 Issuance of stock........................................ 1 1 -- Acquisition of subsidiaries.............................. -- -- 11 Cancellation of shares held in treasury.................. -- (11) -- ------ ------ ------ Balance, end of period................................... 320 319 329 ------ ------ ------ SURPLUS Balance, beginning of period............................. 2,185 2,555 2,542 Issuance of common stock................................. 4 14 14 Issuance of treasury stock............................... (84) (21) (39) Conversion of preferred stock............................ (18) -- (5) Acquisition of subsidiaries.............................. 17 (3) 39 Cancellation of shares held in treasury.................. -- (369) -- Other.................................................... 45 9 4 ------ ------ ------ Balance, end of period................................... 2,149 2,185 2,555 ------ ------ ------ RETAINED EARNINGS Balance, beginning of period............................. 5,497 4,808 3,924 Net income............................................... 1,436 1,150 1,221 Cash dividends declared on common stock.................. (469) (424) (367) Cash dividends declared on preferred stock............... (31) (37) (47) Acquisition of subsidiaries.............................. -- -- 77 ------ ------ ------ Balance, end of period................................... 6,433 5,497 4,808 ------ ------ ------ FAIR VALUE ADJUSTMENT ON INVESTMENT SECURITIES AVAILABLE- FOR-SALE Balance, beginning of period............................. 112 (158) (6) 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 $(41) in 1996, $99 in 1995 and $(87) in 1994).............................. (74) 169 (148) Acquisition of subsidiaries.............................. -- -- (4) ------ ------ ------ Balance, end of period................................... 38 112 (158) ------ ------ ------ DEFERRED COMPENSATION Balance, beginning of period............................. (39) (33) (30) Awards granted........................................... (32) (18) (28) Amortization of deferred compensation.................... 26 21 21 Other.................................................... (13) (9) 4 ------ ------ ------ Balance, end of period................................... (58) (39) (33) ------ ------ ------ ACCUMULATED TRANSLATION ADJUSTMENT Balance, beginning of period............................. 8 7 3 Translation gain (loss), net of taxes.................... (1) 1 4 ------ ------ ------ Balance, end of period................................... 7 8 7 ------ ------ ------ TREASURY STOCK Balance, beginning of period............................. (121) (310) (13) Purchase of common stock................................. (412) (513) (388) Acquisition of subsidiaries.............................. -- 262 -- Cancellation of shares held in treasury.................. -- 380 -- Conversion of preferred stock............................ 62 1 -- Issuance of stock........................................ 145 59 91 ------ ------ ------ Balance, end of period................................... (326) (121) (310) ------ ------ ------ Total Stockholders' Equity, end of period.............. $9,007 $8,450 $7,809 ====== ====== ======
The accompanying notes are an integral part of this statement. 43 CONSOLIDATED STATEMENT OF CASH FLOWS FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
FOR THE YEAR 1996 1995 1994 (IN MILLIONS) ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................... $ 1,436 $ 1,150 $ 1,221 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization..................... 255 274 277 Provision for credit losses....................... 735 510 279 Equity securities gains........................... (255) (253) (229) Net (increase) decrease in net derivative product balances......................................... (231) 296 (62) Net gains from accelerated disposition portfolio activities....................................... (6) (37) (46) Net (increase) decrease in trading assets......... 3,331 (2,766) (427) Net (increase) decrease in loans held for sale.... 11 (243) 197 Net (increase) decrease in accrued income receiv- able............................................. 133 (131) (143) Net increase (decrease) in accrued expenses pay- able............................................. 65 (153) 102 Net (increase) decrease in other assets........... (91) 174 (212) Interest income from Brazilian debt restructuring. -- (2) (17) Merger-related charges............................ -- 242 -- Other noncash adjustments......................... 11 (67) 70 ------- ------- ------- Total adjustments................................. 3,958 (2,156) (211) Net cash provided by (used in) operating activi- ties.............................................. 5,394 (1,006) 1,010 CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in federal funds sold and securities under resale agreements ............... 7,501 2,003 (4,623) Purchase of investment securities--available-for- sale.............................................. (4,626) (4,340) (6,392) Purchase of debt investment securities--held-to-ma- turity............................................ -- (119) (3,081) Purchase of equity securities--fair value.......... (138) (385) (181) Proceeds from maturities of debt securities--avail- able-for-sale..................................... 2,248 3,652 2,811 Proceeds from maturities of debt securities--held- to-maturity....................................... -- 1,042 2,052 Proceeds from sales of investment securities-- available-for-sale................................ 4,340 5,564 2,164 Proceeds from sales of equity securities--fair val- ue................................................ 425 1,051 333 Credit card receivables securitized................ 2,286 2,286 2,000 Net (increase) in loans............................ (5,291) (10,815) (8,200) Loan recoveries.................................... 145 142 155 Net proceeds from sales of assets held for acceler- ated disposition.................................. 26 59 112 Purchases of premises and equipment................ (286) (382) (370) Proceeds from sales of premises and equipment...... 79 74 107 Net cash and cash equivalents due to mergers, ac- quisitions and dispositions....................... (245) 116 38 ------- ------- ------- Net cash provided by (used in) investing activi- ties.............................................. 6,464 (52) (13,075) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits................ (4,936) 2,616 5,776 Net increase (decrease) in federal funds purchased and securities under repurchase agreements........ (7,852) (1,208) 5,832 Net increase (decrease) in other short-term borrowings........................................ (2,230) 1,574 1,581 Proceeds from issuance of long-term debt........... 2,519 2,163 3,357 Redemption and repayment of long-term debt......... (2,230) (1,262) (1,231) Net increase (decrease) in other liabilities....... (466) 103 2 Dividends paid..................................... (488) (447) (397) Proceeds from issuance of common and treasury stock............................................. 59 23 52 Purchase of treasury stock......................... (412) (513) (397) Payment for redemption of preferred stock.......... -- (121) (150) ------- ------- ------- Net cash provided by (used in) financing activi- ties.............................................. (16,036) 2,928 14,425 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS....................................... (63) 119 109 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS............................................. (4,241) 1,989 2,469 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 17,538 15,549 13,080 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR........... $13,297 $17,538 $15,549 ======= ======= ======= OTHER CASH FLOW DISCLOSURES: Interest paid..................................... $4,055 $4,666 $3,165 State and federal income taxes paid............... 663 808 575
- -------- Loans transferred to other real estate were $25 million, $18 million and $29 million in 1996, 1995 and 1994, 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 more than 50% owned. 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, commodity price, and equity 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 20. (c) Investment Securities In 1995, the Corporation reclassified all held-to-maturity debt securities to 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 Financial Accounting Standards Board's ("FASB") issuance of an implementation guide. 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. 45 (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." 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 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. 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 Securitization The Corporation actively packages and sells credit card receivables as securities to investors. At the time of securitization no gain or loss is recorded since the amount of proceeds received is equal to the par value of the receivables. Transaction costs are deferred and amortized ratably as a reduction of servicing fees over the terms of the related securitizations. The amount of credit card interest income and fee revenue in excess of interest paid to certificate holders, credit losses and other trust expenses is recognized on an accrual basis as servicing fees in credit card fee revenue. Refer to Section (o) of this note for further details. (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. 46 (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. (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 pages 35 and 36. (k) Foreign Currency Translation When the primary operating currency (functional currency) of a foreign installation is the U.S. dollar, its monetary assets and liabilities carried in local currency are remeasured into U.S. dollars at current exchange rates. Its premises and equipment are remeasured at historical exchange rates. Remeasurement effects and the results of related hedging transactions are included in other noninterest income. If the foreign installation's functional currency is its local currency, all assets and liabilities are translated at current exchange rates. Translation adjustments, related hedging results and applicable income taxes are included in accumulated translation adjustment within stockholders' equity. (l) Mortgage Servicing Rights The Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on January 1, 1996. This Statement amended existing accounting rules by requiring originated mortgage servicing rights to be capitalized under certain circumstances. SFAS No. 122 also requires that the Corporation's portfolio be stratified by primary risk characteristics when assessing impairment. The Corporation stratifies its portfolio by both product type and interest rate bands. The statement did not have a material effect on the Corporation's financial results in 1996. Refer to Section (o) of this Note for more details. (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 (the intrinsic value method) related to employee stock compensation plans and to disclose the pro forma effect of applying the fair value method contained in SFAS No. 123. Accordingly, there continue to be no 47 compensation costs 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 12, beginning on page 57. (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. In 1996, $45 million of the Corporation's Cumulative Convertible Preferred Stock was converted into common stock. See Note 11, beginning 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. Refer to Section (c) of this note for more details. (o) Recently Issued Accounting Standards In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which generally became effective on a prospective basis beginning January 1, 1997. In December, 1996, the FASB deferred the effective date of certain provisions, primarily relating to collateral, securities lending and dollar repurchase agreements until January 1, 1998. The 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 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. SFAS No. 125 also supersedes SFAS No. 122 and, in general, applies the accounting for mortgage servicing rights under SFAS No. 122 to servicing rights of all financial assets. In general, the Corporation expects that transactions it recorded as sales under prior accounting standards will continue to receive sales treatment under the new Statement, and does not expect the new Statement to have a significant effect on its financial results. NOTE 2--EARNINGS PER SHARE Earnings per share are presented on both a primary and a fully diluted basis. Primary earnings per share were computed by dividing net income, after deducting dividends on preferred stock, by the average number of common and common-equivalent shares outstanding during the period. Common-equivalent shares consist of net shares issuable under the Employee Stock Purchase and Savings Plan and outstanding stock options. The fully diluted earnings per share calculation also includes common shares that would result from the conversion of convertible preferred stock and convertible notes. Accordingly, net income was not reduced by preferred stock dividend requirements related to convertible preferred stock or the interest expense on the convertible notes.
1996 1995 1994 (IN MILLIONS) ------ ------ ------ Primary Net income........................................... $1,436 $1,150 $1,221 Preferred stock dividends (1)........................ (31) (37) (52) ------ ------ ------ Net income attributable to common stockholders' equity.............................................. $1,405 $1,113 $1,169 ====== ====== ====== Fully diluted Net income........................................... $1,436 $1,150 $1,221 Preferred stock dividends, excluding convertible Series B, where applicable (1)................................ (20) (26) (40) Interest on convertible notes, net of taxes............ -- -- 2 ------ ------ ------ Fully diluted net income............................. $1,416 $1,124 $1,183 ====== ====== ======
48
1996 1995 1994 (IN THOUSANDS) ------- ------- ------- Average shares outstanding............................. 316,765 320,049 319,929 Common stock equivalents............................... 3,478 2,808 2,737 ------- ------- ------- Average number of common and common-equivalent shares (primary).............................................. 320,243 322,857 322,666 Incremental shares related to convertible preferred stock, debentures and other......................... 7,814 7,240 8,145 ------- ------- ------- Average number of shares, assuming full dilution..... 328,057 330,097 330,811 ======= ======= ======= 1996 1995 1994 ------- ------- ------- Earnings Per Share Net income--primary.................................. $4.39 $3.45 $3.62 ======= ======= ======= Net income--fully diluted............................ $4.32 $3.41 $3.58 ======= ======= =======
- -------- (1) 1994 preferred dividends include a $4.5 million, or 3%, premium paid on the redemption of the Corporation's Cumulative Preferred Stock, Series D. 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 is not material to the Corporation's financial statements. The following table provides details on the merger-related reserve as of December 31, 1996, compared with that of a year ago and at consummation of the merger transaction.
DECEMBER 31, DECEMBER 31, DECEMBER 1, MERGER RESERVE 1996 1995 1995 (IN MILLIONS) ------------ ------------ ----------- Personnel................................. $ 42 $ 92 $ 93 Facilities & Equipment.................... 71 94 95 Other..................................... 5 14 37 ---- ---- ---- $118 $200 $225 ==== ==== ====
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. The remaining reserve has been fully allocated to identified merger-related activities and will be charged with costs as incurred based on existing contractual arrangements. 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. Before the closing, the Corporation repurchased an amount of shares equivalent to the shares issued in the transaction. 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. The Corporation had repurchased 5.0 million of the shares issued before the closing of the merger, and repurchased the remaining shares issued soon after the closing. 49 On July 8, 1994, the Corporation issued approximately 11.6 million shares of its common stock for all of the common stock of Lake Shore Bancorp., Inc. of Chicago, Illinois, with total assets of $1.2 billion and capital of $123 million. The combination was accounted for on a pooling-of-interests basis; however, because the transaction was not considered significant from an accounting perspective, the Corporation did not restate either 1994 or prior- year financial data. NOTE 5--BUSINESS SEGMENTS The Corporation is engaged primarily in the banking business, and with the continuing globalization of financial markets, the distinction between international and domestic activities has become less important. The following table shows approximate consolidated financial data for the three years ended December 31, 1996, attributable to domestic and foreign operations. No foreign geographic region accounted for more than 10% of consolidated results.
INCOME BEFORE NET TOTAL REVENUES(1) EXPENSES(2) INCOME TAXES INCOME ASSETS (IN MILLIONS) ----------- ----------- ------------- ------ -------- 1996 Domestic operations.... $ 9,020 $6,919 $2,101 $1,391 $ 90,070 Foreign operations..... 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..... 1,404 1,337 67 51 21,401 ------- ------ ------ ------ -------- Consolidated........... $10,681 $8,927 $1,754 $1,150 $122,002 ======= ====== ====== ====== ======== 1994 Domestic operations.... $ 7,745 $5,926 $1,819 $1,204 $ 97,372 Foreign operations..... 784 750 34 17 15,391 ------- ------ ------ ------ -------- Consolidated........... $ 8,529 $6,676 $1,853 $1,221 $112,763 ======= ====== ====== ====== ========
- -------- (1) Includes interest income and noninterest income. (2) Includes interest expense, provision for credit losses and noninterest expense. Because many of the resources employed by the Corporation are common to both its foreign and domestic activities, it is difficult to segregate assets, related revenues and expenses into their foreign and domestic components. The amounts in the preceding table are estimated on the basis of internally developed assignment and allocation procedures, which to some extent are subjective. The principal internal allocations used to prepare this information are described below. Corporate overhead is allocated based on individual activities. Expenses are generally allocated to the geographic area benefited. Assets and revenues are generally allocated based on the domicile of the customer. Capital, with the exception of that invested in foreign subsidiaries, is allocated to domestic operations. For information regarding the Corporation's line of business activities, see the "Business Segments--Overview" section on page 14 as well as the tables on pages 15 to 18, which summarize financial results for the Corporation's major business segments and other activities. 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. 50
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE DECEMBER 31, 1996 (IN COST GAINS LOSSES (BOOK VALUE) 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 ====== ==== ==== ====== AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE DECEMBER 31, 1995 (IN COST GAINS LOSSES (BOOK VALUE) MILLIONS) --------- ---------------- ---------------- ------------ U.S. Treasury........... $1,416 $ 8 $ 1 $1,423 U.S. government agencies Mortgage-backed securities........... 4,855 119 20 4,954 Collateralized mortgage obligations. 5 -- -- 5 Other................. 457 1 -- 458 States and political subdivisions........... 1,383 81 2 1,462 Other debt securities... 92 2 -- 94 Equity securities (1)(2)................. 986 152 85 1,053 ------ ---- ---- ------ Total............... $9,194 $363 $108 $9,449 ====== ==== ==== ======
- -------- (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) -------- -------------- -------------- 1996..................................... $4,340 $65 $34 1995..................................... 5,564 45 62 1994..................................... 2,164 14 15
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, 1996 (IN MILLIONS) --------- ------ Due in one year or less....................................... $1,303 $1,313 Due after one year through five years......................... 3,352 3,399 Due after five years through ten years........................ 1,070 1,079 Due after ten years........................................... 262 274 ------ ------ $5,987 $6,065 ====== ======
51 NOTE 7--LOANS Following is a breakdown of loans included in the consolidated balance sheet as of December 31, 1996 and 1995.
1996 1995 (IN MILLIONS) ------- ------- Commercial Domestic Commercial.................................................. $27,718 $25,551 Real estate Construction.............................................. 1,057 1,151 Other..................................................... 5,103 6,103 Lease financing............................................. 1,820 1,588 Foreign....................................................... 3,656 3,726 ------- ------- Total commercial........................................ 39,354 38,119 ------- ------- Consumer Credit cards.................................................. 9,601 9,649 Secured by real estate........................................ 9,406 8,933 Automotive.................................................... 4,423 4,477 Other......................................................... 3,630 3,256 ------- ------- Total consumer.......................................... 27,060 26,315 ------- ------- Total................................................... $66,414 $64,434 ======= =======
The amount of interest shortfall for related nonperforming loans at year-end 1996 was $16 million. The shortfall amount represents the difference between the $27 million of interest contractually due and the $11 million of interest actually recorded. For 1995, the interest shortfall related to nonperforming loans at year-end was $19 million. Contractual amounts due were $32 million and $13 million of interest was actually recorded. 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, 1996 and 1995, totaled $545 million and $556 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, 1996 and 1995, $339 million and $271 million, respectively, of such loans to related parties were outstanding. An analysis of the activity during 1996 with respect to such loans includes additions of $331 million, and reductions of $263 million. NOTE 8--ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses for the three years ended December 31, 1996, were as follows.
1996 1995 1994 (IN MILLIONS) ------ ------ ------ Balance, beginning of year.............................. $1,338 $1,158 $1,106 Additions (deductions) Charge-offs........................................... (815) (409) (364) Recoveries............................................ 145 145 172 ------ ------ ------ Net charge-offs....................................... (670) (264) (192) Provision for credit losses........................... 735 510 276 Other Acquisitions.......................................... -- 9 16 Transfers related to securitized receivables.......... 4 (75) (49) Other................................................. -- -- 1 ------ ------ ------ Balance, end of year.................................... $1,407 $1,338 $1,158 ====== ====== ======
52 Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." SFAS No. 114 addresses the accounting for a loan when it is probable that all principal and interest amounts due will not be collected in accordance with its contractual terms. Certain loans, such as loans carried at the lower of cost or market or small-balance homogeneous loans (e.g., credit card installment credit), are exempt from SFAS No. 114's provisions. On a quarterly basis, the Corporation identifies impaired loans, and impairment is recognized to the extent the recorded investment of an impaired loan or pool of loans exceeds the calculated present value. 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. The allocated reserve associated with impaired loans is considered in management's determination of the 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. Substantially all of the $262 million in impaired loans had a related allowance for credit losses. At December 31, 1995, the recorded investment in impaired loans was $363 million, which required a related allowance for credit losses of $36 million. The average recorded investment in impaired loans was approximately $341 million for 1996 and $302 million in 1995. The Corporation recognized interest income associated with impaired loans of $17 million during 1996 and $15 million during 1995. NOTE 9--PLEDGED AND RESTRICTED ASSETS At December 31, 1996, $17.1 billion of assets were pledged to secure government deposits, trust deposits, borrowings, and for other purposes required by law. The Banks are required to maintain noninterest-bearing cash balances with the Federal Reserve based on the types and amounts of deposits held. During 1996 and 1995, the average balances maintained to meet this requirement were $1.357 billion and $1.374 billion, respectively. 53 NOTE 10--LONG-TERM DEBT Long-term debt consists of borrowings having an original maturity of over one year. Original issue discount and deferred issuance costs are amortized over the terms of the related notes. Long-term debt at December 31, 1996 and 1995, was as follows.
1996 1995 (IN MILLIONS) ------ ------ PARENT COMPANY SUBORDINATED DEBT 9% notes due 1999.............................................. $ 199 $ 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................................... 149 149 7 1/4% debentures due 2004..................................... 200 200 Floating rate notes due 2005................................... 96 96 6 1/8% notes due 2006.......................................... 149 -- 7% notes due 2006.............................................. 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 Floating rate equity contract notes due 1996................... -- 125 SENIOR DEBT 8 1/2% notes due 1998.......................................... 100 100 Other Parent Company debt...................................... 1,475 1,624 ------ ------ Total Parent Company......................................... 4,463 4,439 ------ ------ SUBSIDIARIES Bank notes, various rates and maturities....................... 2,465 2,944 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 10 Capitalized lease obligations, various rates and maturities.... 13 15 Other.......................................................... 305 305 Guaranteed preferred beneficial interest in the Corporation's junior subordinated debt...................................... 748 -- ------ ------ Total subsidiaries........................................... 3,991 3,724 ------ ------ Total long-term debt......................................... $8,454 $8,163 ====== ======
(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 54 2003 have an interest rate priced at the greater of 4 1/4% or the three-month London interbank offered rate (LIBOR) plus 1/8%. The interest rate on this issue on December 31, 1996, was 5 21/32%. 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, 1996, the interest rate was 5 3/4%. 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 depositary 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 depositary share. The equity commitment notes may not be redeemed prior to their stated maturity. The agreements under which these notes were issued require the Corporation, prior to maturity, to issue common stock, perpetual preferred stock or other forms of equity approved by the Federal Reserve Board in an amount equal to the original aggregate principal amount of the notes. As of December 31, 1996, all the equity securities required by the agreements had been issued. 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 $1.475 billion includes various notes with a weighted average interest rate of 6.03% and remaining weighted average maturity of 22 months at December 31, 1996. (B) SUBSIDIARIES' LONG-TERM DEBT The bank notes are unsecured and unsubordinated debt obligations of the Banks. At December 31, 1996, the weighted average rate of the bank notes was 6.06% and remaining weighted average maturity was 12 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, 1996, included $286 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) GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S JUNIOR SUBORDINATED DEBT The $748 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") and First Chicago NBD Institutional Capital B ("the Series B Trust"). The Series A Trust and the Series B Trust are statutory business trusts created in 1996 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 such Trust's obligations under the preferred securities issued by the Trust. 55 The Series A Trust issued $500 million in aggregate liquidation amount of 7.95% preferred capital securities in December 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. The Series B Trust issued $250 million in aggregate liquidation amount of 7.75% preferred capital securities in December 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 Trust Preferred Capital Securities are tax-advantaged issues and qualify as Tier 1 capital. In January 1997, First Chicago NBD Capital I ("the Series I Trust"), a statutory business trust, issued $250 million in aggregate liquidation amount of floating rate preferred capital securities. The sole asset of the Series I Trust is $258 million principal amount of floating rate Junior Subordinated Debt of the Corporation that bears interest at an annual rate equal to three- month LIBOR plus 0.55%, will mature on February 1, 2027, and is redeemable at the option of the Corporation on or after February 1, 2007. All common securities of the Series I Trust are owned by the Corporation. The Corporation's obligations under the Junior Subordinated Debt and the relevant indenture, trust agreement and guarantee, in aggregate, constitute a full and unconditional guarantee by the Corporation of the Series I Trust's obligations under the preferred capital securities issued by such Trust. (D) MATURITY OF LONG-TERM DEBT Of the Corporation's $8.454 billion total long-term debt, $1.941 billion, $1.343 billion, $674 million, $361 million and $545 million is scheduled to mature in 1997, 1998, 1999, 2000 and 2001, respectively. NOTE 11--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 as of December 31, 1996, are presented in the following table.
STATED ANNUAL DIVIDEND RATE EARLIEST SHARES VALUE PER ----------------------- REDEMPTION REDEMPTION PREFERRED STOCK SERIES OUTSTANDING SHARE MAXIMUM MINIMUM CURRENT DATE PRICE (1) ---------------------- ----------- --------- ------- ------- ------- ---------- ---------- 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 Cumulative Fixed Rate Series E (3).......... 160,000 625.00 8.45 8.45 8.45 11/16/97(4) 625.00 Cumulative Convertible Fixed Rate Series B (5).......... 30,786 5,000.00 5.75 5.75 5.75 4/1/97(6) 5,172.50
- -------- (1) Plus accrued and unpaid dividends. (2) Currently redeemable. (3) Represented by 4,000,000 depositary shares, with a corresponding annual dividend of $2.1125 each and a $25 stated value. 56 (4) The preferred shares are redeemable on or after November 16, 1997, at $625 per share (equivalent to $25 per depositary share). (5) Represented by 3,078,688 depositary shares, with a corresponding annual dividend of $2.875 each and a $50 stated value. (6) The preferred shares may be converted into shares of the Corporation's common stock at the option of the stockholders at any time at the conversion price of $29.6271 per common share, subject to adjustment under certain conditions. Shares are redeemable beginning April 1, 1997, at the option of the Corporation, at a price of $5,172.50 ($51.725 per depositary share), with the redemption price decreasing annually until the shares are redeemable on or after April 1, 2003, at their stated value of $5,000 per share ($50 per depositary share). In 1996, 8,988 preferred shares were converted into 1,516,628 shares of the Corporation's common stock. A total of 9,214 preferred stock shares have been converted into 1,554,786 shares of the Corporation's common stock through the end of 1996. All shares of Cumulative Preferred Stock, Series A, were called for redemption in August 1995. The redemption price was $50 per share plus accrued and unpaid dividends. On February 14, 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 ($5,000 stated value), and the related redemption of all outstanding depositary shares representing a one-hundredth interest in a share of the Series B Convertible Preferred, at a redemption price of $51.725 per depositary share, plus an accrued and unpaid dividend of $0.71875 per depositary share. NOTE 12--EMPLOYEE BENEFITS The Corporation has established common plans covering pension, postretirement benefits, postemployment benefits, employee savings and stock compensation, all of which were effective January 1, 1997. Such plans replaced the former FCC and NBD benefit plans. The benefit plans and related costs described below relate primarily to former FCC and NBD benefit plans. (A) PENSION PLANS The Corporation sponsors pension plans covering substantially all salaried employees. The pension plans are noncontributory, defined benefit plans that provide benefits 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. 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 $20 million in 1996 and $15 million in 1995. Net periodic pension cost includes the following components for the years ended December 31.
1996 1995 1994 (IN MILLIONS) ----- ----- ---- Service cost--benefits earned during period................. $ 61 $ 45 $ 53 Interest cost on projected benefit obligation............... 110 100 93 Actual loss (return) on assets.............................. (353) (351) 13 Net amortization and deferral............................... 197 206 (154) ----- ----- ---- Net periodic pension cost................................... $ 15 $ -- $ 5 ===== ===== ====
57 The following table reconciles the aggregated funded status of the plans and amounts recognized in the consolidated balance sheet at December 31.
1996 1995 (IN MILLIONS) ------- ------- Actuarial present value of the projected benefit obligation, based on employment service to date and current salary levels: Vested employees.......................................... $(1,164) $(1,105) Nonvested employees....................................... (376) (88) ------- ------- Accumulated benefit obligation............................ (1,540) (1,193) Additional amounts related to projected salary increases.... (19) (259) ------- ------- Projected benefit obligation................................ (1,559) (1,452) Plan assets (at fair value)................................. 1,965 1,803 ------- ------- Plan assets in excess of projected benefit obligation....... 406 351 Unrecognized net gain due to experience different from assumptions................................................ (91) (6) Unrecognized transition asset............................... (45) (55) Unrecognized prior service cost............................. 114 97 ------- ------- Prepaid pension cost included in the consolidated balance sheet....................................................... $ 384 $ 387 ======= =======
The December 31, 1996, amounts include the effect of plan amendments effective on January 1, 1997. The assumptions used in determining the projected benefit obligation and net periodic pension (credit) cost of such plans at December 31 are as follows.
1996 1995 1994 ----- --------- --------- Discount rate......................................... 7.75% 7.25% 8.0%-9.0% Salary increase assumption............................ 5.25% 5.25% 5.0%-5.5% Expected long-term rate of return on plan assets...... 9.5% 9.0%-9.5% 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.
1996 1995 1994 (IN MILLIONS) ---- ---- ---- Service cost..................................................... $ 2 $ 1 $ 1 Interest cost.................................................... 5 4 3 Net amortization................................................. -- 14 -- --- --- --- Net periodic postretirement benefit cost......................... $ 7 $19 $ 4 === === ===
58 The Corporation funds postretirement benefit cost as claims are incurred. The following table reconciles the plan's funded status and amounts recognized in the consolidated balance sheet at December 31.
1996 1995 (IN MILLIONS) ---- ---- Accumulated postretirement benefit obligation: Retirees......................................................... $(52) $(55) Fully eligible active plan participants.......................... (10) (11) Other active plan participants................................... (14) (11) ---- ---- Total accumulated postretirement benefit obligation................ (76) (77) Plan assets (at market value)...................................... -- -- ---- ---- Accumulated postretirement benefit obligation in excess of plan assets............................................................ (76) (77) Unrecognized net (gain)............................................ (13) (9) Unrecognized prior service cost.................................... 4 4 ---- ---- Accrued postretirement benefit liability recognized in the consolidated balance sheet........................................ $(85) $(82) ==== ====
The December 31, 1996, amounts include the effect of plan amendments effective on January 1, 1997. The assumption used to measure postretirement benefit costs is an 8% annual rate of increase in the per capita cost of covered health care benefits for 1997, 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, 1996, by $4 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by approximately $0.4 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% at December 31, 1996, and 7.25% at December 31, 1995. The Corporation adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. The cumulative effect of adoption was a charge of $12 million ($8 million net of income taxes). The effect of postemployment benefit costs on income before income taxes was not significant in 1996 or 1995. (C) EMPLOYEE SAVINGS PLANS The Corporation maintains various savings plans for U.S.-based employees meeting certain eligibility requirements. Under the FCC 401(k) plan, participants contributed from 1% to 6% of their salary on a pretax basis, and an additional 1% to 10% of salary on an after- tax basis. The Corporation's contribution to the plan was 100% of the first $750 of pretax contributions made by participants and 50% of any pretax contributions in excess of $750. The plan also allowed a supplemental profit- based contribution. The NBD 401(k) plan required employer contributions equal to participants' contributions up to 2% of their salary, plus an amount equal to one-half of participants' contributions between 2% and 6% of their salary subject to certain limitations imposed by the IRS. Total expense for these plans was $43 million in 1996, $37 million in 1995, and $36 million in 1994. (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 Corporation's Stock Performance and Employee Stock Purchase and Savings Plans was $26.3 million for 1996, $21.1 million for 1995, and $20.5 million for 1994. See Note 1(m) on page 47 for the Corporation's accounting policies relating to stock-based compensation. 59 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 2% of its shares annually, based on the number of outstanding shares 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 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 a three-year period with 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 Corporation does not recognize any compensation expense with respect to stock option awards. The following tables summarize stock option activity for 1996 and provide details of stock options outstanding at December 31, 1996.
WTD. AVG. EXERCISE SHARES PRICE (SHARES IN THOUSANDS) ------ -------- Outstanding at January 1, 1996................................. 12,406 $25.23 Granted........................................................ 4,585 41.38 Exercised...................................................... (4,598) 24.19 Forfeited...................................................... (169) 32.22 ------ ------ Outstanding at December 31, 1996............................... 12,224 $31.59 ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE (SHARES IN THOUSANDS) --------------------------------- --------------------- NUMBER WTD. AVG. OUTSTANDING WTD. AVG. REMAINING WTD. AVG. RANGE OF DEC. 31, EXERCISE CONTRACTUAL NUMBER EXERCISE EXERCISE PRICES 1996 PRICE LIFE EXERCISABLE PRICE --------------- ----------- --------- ----------- ----------- --------- $ 6.26-$15.00 357 $13.01 2.7 yrs. 357 $13.01 15.01- 30.00 5,345 24.02 5.6 3,449 23.43 30.01- 45.00 5,935 37.72 7.2 2,787 36.35 45.01- 58.44 587 49.80 5.6 2 45.19 - ------------- ------ ------ -------- ----- ------ $ 6.26-$58.44 12,224 $31.59 6.3 yrs. 6,595 $28.33 ====== =====
60 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 the plan. Under the plan, the Corporation issued 1,370,779 shares in 1996 at prices ranging from $24.53 to $36.34. The Corporation does not recognize any compensation expense with respect to this plan. 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 contained in SFAS No. 123, the Corporation's net income would have been $1,423.0 million and $1,143.6 million for the years ended December 31, 1996 and 1995, respectively. Primary and fully diluted earnings per share related to these pro forma net income amounts are $4.35 and $4.28, respectively, for 1996, and $3.43 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, 1996:
NUMBER OF WTD. AVG. GRANT SHARES DATE FAIR VALUE (SHARES IN THOUSANDS) ------ --------------- Performance Shares (1)................................... 0-462 $40.58 Restricted Shares........................................ 601 41.30 Stock Options............................................ 4,585 6.74 Employee Stock Purchase and Savings Plan (2)............. 2,127 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 for 1996: dividend yield of 3.70%; expected volatility of 18.82%; risk-free interest rate of 6.10%; and an expected life of 2.2 years. 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 3.46% and 4.24% in 1996 and 1995, respectively; expected volatility of 18.74% and 17.28% in 1996 and 1995, respectively; risk-free interest rates of 5.91% and 6.78% in 1996 and 1995, respectively; and expected lives of 4.2 years and 3.9 years in 1996 and 1995, respectively. 61 NOTE 13--INCOME TAXES The components of total applicable income tax expense (benefit) in the consolidated income statement for the years ended December 31, 1996, 1995 and 1994, are as follows.
1996 1995 1994 (IN MILLIONS) ---- ---- ---- Income tax expense (benefit) Current Federal..................................................... $561 $737 $397 Foreign..................................................... 17 27 14 State....................................................... 64 84 64 ---- ---- ---- Total..................................................... 642 848 475 Deferred Federal..................................................... 77 (216) 149 State....................................................... 7 (28) 8 ---- ---- ---- Total..................................................... 84 (244) 157 ---- ---- ---- Applicable income taxes......................................... $726 $604 $632 ==== ==== ====
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 (benefits) recorded directly in stockholders' equity amounted to $(56) million, $133 million and $(86) million in 1996, 1995 and 1994, 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.
1996 1995 1994 (IN MILLIONS) ---- ---- ---- Taxes at statutory federal income tax rate.................... $757 $614 $649 Increase (decrease) in taxes resulting from: Tax-exempt income (net)..................................... (40) (54) (50) State income taxes, net of federal income taxes............. 47 37 47 Other....................................................... (38) 7 (14) ---- ---- ---- Applicable income taxes....................................... $726 $604 $632 ==== ==== ====
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, 1996 and 1995, are as follows.
1996 1995 (IN MILLIONS) ------ ------ Deferred tax liabilities Deferred income on lease financing............................. $ 867 $ 828 Appreciation on equity security investments.................... 123 111 Prepaid pension costs.......................................... 142 144 Other.......................................................... 215 244 ------ ------ Gross deferred tax liabilities................................. 1,347 1,327 ------ ------ Deferred tax assets Allowance for credit losses.................................... 513 491 Securitization of credit card receivables...................... 81 102 Depreciation................................................... 70 66 Other.......................................................... 300 341 ------ ------ Gross deferred tax assets...................................... 964 1,000 Valuation allowance............................................ -- -- ------ ------ Gross deferred tax assets, net of valuation allowance.......... 964 1,000 ------ ------ Net deferred tax liability....................................... $ 383 $ 327 ====== ======
62 NOTE 14--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) 1997................................................................. $ 84 1998................................................................. 78 1999................................................................. 73 2000................................................................. 61 2001................................................................. 48 2002 and thereafter.................................................. 209 ---- $553 ====
Occupancy expense has been reduced by rental income from premises leased to others in the amount of $32 million in 1996, $44 million in 1995 and $38 million in 1994. NOTE 15--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. (A) CREDIT RISK 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. (B) MARKET RISK 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. (C) 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. (D) CREDIT-RELATED FINANCIAL INSTRUMENTS The table below summarizes credit-related financial instruments, including both commitments to extend credit and letters of credit. 63 COMMITMENTS AND LETTERS OF CREDIT
1996 1995 DECEMBER 31 (IN BILLIONS) ----- ----- Unused loan commitments*........................................... $59.1 $54.0 Unused credit card lines........................................... 75.8 76.7 Unused home-equity lines........................................... 1.7 1.8 Commercial letters of credit....................................... 0.8 0.9 Standby letters of credit and foreign office guarantees............ 7.5 6.9
- -------- *Includes unused commercial real estate exposure of $1.7 billion and $1.2 billion at December 31, 1996 and 1995, respectively. 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, 1996 and 1995, standby letters of credit and foreign office guarantees had been issued for the following purposes. STANDBY LETTERS OF CREDIT AND FOREIGN OFFICE GUARANTEES
1996 1995 DECEMBER 31 (IN MILLIONS) ------ ------ Financial Tax-exempt obligations.......................................... $2,921 $2,407 Insurance-related............................................... 804 849 Other financial................................................. 2,785 3,031 Performance....................................................... 996 616 ------ ------ Total*........................................................ $7,506 $6,903 ====== ======
- -------- *Includes $818 million and $833 million participated to other institutions at December 31, 1996, and December 31, 1995, respectively. At December 31, 1996, $5.531 billion of standby letters of credit was due to expire within three years and $1.975 billion was to expire after three years. (E) 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 64 falling interest rates, exchange rates, commodity prices and equity 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 to either 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 to either 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. . 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. . Commodity price contracts represent swap, futures, cap, floor and option contracts that derive their value from underlying commodity prices. . Equity price contracts represent swap, forward, futures, cap, floor and option contracts that derive their value from underlying equity 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 27 to 30. 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, commodity prices and equity 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 35 report the Corporation's gross notional principal or contractual amounts of derivative financial instruments as of December 31, 1996, and December 31, 1995. These instruments include swaps, forwards, 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. 65 NOTE 16--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 for the Corporation were consumer, commercial real estate and the U.S. government. Information on the Corporation's consumer and commercial real estate loans is presented in Note 7, on page 52, and information on unused consumer and commercial real estate commitments is presented in Note 15, beginning on page 63. 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 77. In addition to these foreign outstandings, the Corporation's credit risk from derivative financial instruments and other off- balance-sheet commitments to banks in Japan was approximately $2.0 billion and $2.9 billion at December 31, 1996, and December 31, 1995, respectively. NOTE 17--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 the Corporation's credit card relationships and core deposits. 66 The following table summarizes the carrying values and estimated fair values of financial instruments as of December 31, 1996 and 1995.
1996 1995 -------------------- -------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE (IN MILLIONS) -------- ---------- -------- ---------- Financial assets Cash and other short-term financial instruments (a)..................... $17,494 $17,494 $29,236 $29,236 Trading assets (a)................... 4,812 4,812 8,150 8,150 Investment securities (a)............ 7,178 7,178 9,449 9,449 Loans (b)............................ 66,414 65,023 64,434 64,208 Allowance for credit losses.......... (1,407) -- (1,338) -- ------- ------- ------- ------- Loans, net........................... 65,007 65,023 63,096 64,208 Derivative product assets Trading purposes (1)(a)............ 4,895 4,895 6,644 6,644 Other than trading purposes (e).... 79 162 69 217 ------- ------- ------- ------- Total derivative product assets.. 4,974 5,057 6,713 6,861 Other financial instruments (a)...... 1,655 1,655 1,666 1,666 Financial liabilities Deposits (a)(c)...................... $63,669 $63,747 $69,106 $69,168 Securities sold but not yet purchased (a)................................. 1,236 1,236 1,765 1,765 Other short-term financial instruments (a)..................... 14,772 14,772 24,477 24,477 Long-term debt (a)(d)................ 8,454 8,570 8,163 8,504 Derivative product liabilities Trading purposes (1)(a)............ 4,716 4,716 6,681 6,681 Other than trading purposes (e).... 37 66 42 55 ------- ------- ------- ------- Total derivative product liabilities..................... 4,753 4,782 6,723 6,736
- -------- (1) The estimated average fair values of derivative financial instruments used in trading activities during 1996 were $5.4 billion classified as assets and $5.4 billion classified as liabilities. Estimated fair values are determined as follows: (A) FINANCIAL INSTRUMENTS WHERE 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, represents fair value. 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 50, for information on methods for estimating the fair value of equity investment securities. The estimated fair value of commercial real estate loans held for accelerated disposition was based on their estimated liquidation value. 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. 67 (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 fair value of floating rate loans is equal to their carrying value. 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 18--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. 68 NOTE 19--FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEET
1996 1995 DECEMBER 31 (IN MILLIONS) ------- ------- ASSETS Cash and due from banks--bank subsidiaries...................... $ 3 $ 24 Interest-bearing due from banks Bank subsidiaries............................................. 1,138 313 Other......................................................... 249 500 Resale agreement with bank subsidiary........................... -- 3 Trading assets.................................................. 67 74 Investment securities--available-for-sale....................... 46 43 Loans and receivables--subsidiaries Bank subsidiaries............................................. 2,044 1,789 Nonbank subsidiaries.......................................... 989 1,072 Investment in subsidiaries Bank subsidiaries............................................. 9,054 8,701 Nonbank subsidiaries.......................................... 1,229 1,051 Other assets.................................................... 76 127 ------- ------- Total assets................................................ $14,895 $13,697 ======= ======= LIABILITIES Short-term borrowings Nonbank subsidiaries.......................................... $ 76 $ 139 Other......................................................... 224 288 Long-term debt Nonbank subsidiaries.......................................... 771 -- Other......................................................... 4,463 4,439 Other liabilities............................................... 354 381 ------- ------- Total liabilities........................................... 5,888 5,247 STOCKHOLDERS' EQUITY............................................ 9,007 8,450 ------- ------- Total liabilities and stockholders' equity.................. $14,895 $13,697 ======= =======
69 FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED INCOME STATEMENT
1996 1995 1994 FOR THE YEAR (IN MILLIONS) ------ ------ ------ OPERATING INCOME Dividends Bank subsidiaries...................................... $ 957 $ 686 $ 575 Nonbank subsidiaries................................... 94 114 111 Interest income Bank subsidiaries...................................... 159 163 139 Nonbank subsidiaries................................... 53 67 62 Other.................................................. 37 48 29 Other income Bank subsidiaries...................................... -- 8 9 Nonbank subsidiaries................................... -- 1 1 Other.................................................. 5 -- 26 ------ ------ ------ Total................................................ 1,305 1,087 952 OPERATING EXPENSE Interest expense Nonbank subsidiaries................................... 11 4 1 Other.................................................. 345 367 298 Merger-related charges................................... -- 69 -- Other expense............................................ 39 39 31 ------ ------ ------ Total................................................ 395 479 330 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES............................. 910 608 622 Applicable income taxes (benefit)........................ (62) (59) (26) INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES............................................ 972 667 648 Equity in undistributed net income of subsidiaries Bank subsidiaries...................................... 322 418 552 Nonbank subsidiaries................................... 142 65 21 ------ ------ ------ NET INCOME............................................... $1,436 $1,150 $1,221 ====== ====== ======
The Parent Company Only Statement of Stockholders' Equity is the same as the Consolidated Statement of Stockholders' Equity (see page 43). 70 FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS
1996 1995 1994 FOR THE YEAR (IN MILLIONS) ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................... $ 1,436 $ 1,150 $ 1,221 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries............... (1,515) (1,282) (1,259) Dividends received from subsidiaries............... 1,036 800 677 Depreciation and amortization...................... 7 8 9 Merger-related charges............................. -- 45 -- Net (increase) in trading assets................... -- (74) -- Net (increase) decrease in accrued income receivable........................................ 4 (2) (2) Net increase (decrease) in accrued expenses payable........................................... 2 (7) (5) Other noncash adjustments.......................... (15) (88) 46 ------- ------- ------- Total adjustments.................................. (481) (600) (534) ------- ------- ------- Net cash provided by operating activities............ 955 550 687 CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans to subsidiaries..... (176) 35 66 Net decrease in resale agreements with bank subsidiary.......................................... 3 39 179 Net (increase) decrease in capital investments in subsidiaries........................................ (46) 101 (141) Purchase of investment securities--available-for- sale................................................ (143) (71) (225) Proceeds from maturities of investment securities-- available-for-sale.................................. 143 78 52 Proceeds from sales of investment securities-- available-for-sale.................................. 7 48 107 Purchases of premises and equipment.................. -- (1) -- Sales of premises and equipment...................... -- 51 -- Other, net........................................... 9 -- -- ------- ------- ------- Net cash provided by (used in) investing activities.. (203) 280 38 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings..... (131) 155 (80) Proceeds from issuance of long-term debt............. 1,297 772 935 Redemption and repayment of long-term debt........... (492) (335) (640) Net (decrease) in other liabilities.................. (32) (86) (29) Dividends paid....................................... (488) (447) (397) Proceeds from issuance of common and treasury stock.. 59 23 52 Purchase of treasury stock........................... (412) (513) (397) Payment for redemption of preferred stock............ -- (121) (150) ------- ------- ------- Net cash (used in) financing activities.............. (199) (552) (706) NET INCREASE IN CASH AND CASH EQUIVALENTS............ 553 278 19 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 837 559 540 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 1,390 $ 837 $ 559 ======= ======= ======= OTHER CASH FLOW DISCLOSURES Interest paid...................................... $ 351 $ 364 $ 322 Income tax payment (receipt)....................... (56) (53) 6
71 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. Based on these statutory requirements, the Principal Banks could, in the aggregate, have declared additional dividends of up to approximately $0.9 billion without regulatory approval at January 1, 1997. 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, 1996, 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 37, 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, 1996, 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 agreements providing future credit availability (back-up lines of credit) with various nonaffiliated banks. The agreements aggregated $300 million at December 31, 1996. The commitment fees paid under each agreement range between .07% and .09%. The back-up lines 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, 1996. 72 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 recommending the independent public accountants for the Corporation who are appointed by the Board of Directors. 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 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. 73 The Corporation assessed its internal control structure over financial reporting as of December 31, 1996, 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, 1996, 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, 1997 Chairman, President and Chief Executive Officer /s/ Robert A. Rosholt Robert A. Rosholt Executive Vice President and Chief Financial Officer 74 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of First Chicago NBD Corporation: We have audited the accompanying consolidated balance sheet of First Chicago NBD Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of First Chicago NBD Corporation's management. Our responsibility is to express an opinion of 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Chicago, Illinois, January 15, 1997 /s/ Arthur Andersen LLP 75 SELECTED STATISTICAL INFORMATION FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES
1996 1995 1994 DECEMBER 31 (IN MILLIONS) ------ ------ ------- Debt securities U.S. government and federal agency Held-to-maturity...................................... $ -- $ -- $ 6,469 Available-for-sale.................................... 4,598 6,840 4,910 ------ ------ ------- Total............................................... 4,598 6,840 11,379 States and political subdivisions Held-to-maturity...................................... -- -- 1,591 Available-for-sale.................................... 1,208 1,462 76 ------ ------ ------- Total............................................... 1,208 1,462 1,667 Other bonds, notes and debentures Held-to-maturity...................................... -- -- 5 Available-for-sale.................................... 259 94 276 ------ ------ ------- Total............................................... 259 94 281 ------ ------ ------- Total debt securities............................... 6,065 8,396 13,327 Equity securities (1)..................................... 1,113 1,053 1,688 ------ ------ ------- Total............................................... $7,178 $9,449 $15,015 ====== ====== =======
- -------- (1) Includes Federal Reserve stock. MATURITY OF DEBT INVESTMENT SECURITIES As of December 31, 1996, debt investment securities had the following maturity and yield characteristics.
BOOK VALUE YIELD (DOLLARS IN MILLIONS) ------ ----- U.S. government and federal agency Within one year................................................... $1,065 5.75% After one but within five years................................... 2,633 6.58 After five but within ten years................................... 835 6.90 After ten years................................................... 65 7.58 ------ ----- $4,598 6.46% ====== ===== States and political subdivisions* Within one year................................................... $ 222 10.52% After one but within five years................................... 543 10.11 After five but within ten years................................... 240 8.75 After ten years................................................... 203 8.96 ------ ----- $1,208 9.73% ====== ===== Other bonds, notes and debentures Within one year................................................... $ 26 4.90% After one but within five years................................... 223 6.16 After five but within ten years................................... 4 6.97 After ten years................................................... 6 7.36 ------ ----- $ 259 6.07% ====== =====
- -------- *Yields for obligations of states and political subdivisions are calculated on a tax-equivalent basis using a tax rate of 35%. 76 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 1996, $8.9 billion in credit card receivables was securitized, compared with $7.9 billion at year-end 1995. For analytical purposes only, the following table shows income statement line items adjusted for the net impact of securitization of credit card receivables.
1996 1995 --------------------------------- --------------------------------- CREDIT CARD CREDIT CARD REPORTED SECURITIZATIONS ADJUSTED REPORTED SECURITIZATIONS ADJUSTED (IN MILLIONS) -------- --------------- -------- -------- --------------- -------- Net interest income-- tax-equivalent basis... $ 3,722 $ 667 $ 4,389 $ 3,311 $ 658 $ 3,969 Provision for credit losses................. 735 447 1,182 510 336 846 Noninterest income...... 2,548 (220) 2,328 2,591 (322) 2,269 Noninterest expense..... 3,271 -- 3,271 3,535 -- 3,535 Net income.............. 1,436 -- 1,436 1,150 -- 1,150 Assets--year-end........ 104,619 8,888 113,507 122,002 7,877 129,879 - --average............... 112,565 7,672 120,237 122,370 7,179 129,549
FOREIGN OUTSTANDINGS The Corporation's cross-border outstandings consist of loans (including accrued interest), acceptances, interest-bearing deposits with other banks, equity investments, other interest-bearing investments and other nonlocal currency monetary assets. The table below presents a breakout of cross-border outstandings for each of the past three year-ends where such outstandings exceeded 1.0% of total assets.
BANKS AND GOVERNMENT OTHER COMMERCIAL (IN MILLIONS) AND OFFICIAL FINANCIAL AND COUNTRY DECEMBER 31 INSTITUTIONS INSTITUTIONS INDUSTRIAL OTHER TOTAL - ------------- ----------- ------------ ------------ ---------- ----- ------ Japan............ 1996 $ -- $3,677 $ 59 $-- $3,736 1995 -- 6,140 169 20 6,329 1994 -- 4,724 156 30 4,910 Korea............ 1996 $ -- $ 676 $544 $20 $1,240 1995 * * * * * 1994 * * * * * United Kingdom... 1996 $ * $ * $ * $ * $ * 1995 360 671 292 45 1,368 1994 * * * * * France........... 1996 $ * $ * $ * $ * $ * 1995 162 1,077 25 -- 1,264 1994 * * * * *
- -------- *Outstandings were less than 1% of total assets. 77 At December 31, 1996, the only country for which cross-border outstandings totaled between 0.75% and 1.0% of total assets was the United Kingdom; such outstandings totaled $940 million. At December 31, 1995, the only country for which cross-border outstandings totaled between 0.75% and 1.0% of total assets was Korea; such outstandings totaled $1.023 billion. At December 31, 1994, the only countries for which cross-border outstandings totaled between 0.75% and 1.0% of total assets were the United Kingdom and Korea; such outstandings totaled $1.921 billion. 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 DECEMBER 31, 1996 OR LESS FIVE YEARS FIVE YEARS TOTAL (IN MILLIONS) -------- ---------- ---------- ------- Domestic Commercial............................ $15,323 $ 9,977 $2,418 $27,718 Real estate........................... 1,875 2,900 1,385 6,160 ------- ------- ------ ------- Total domestic...................... 17,198 12,877 3,803 33,878 Foreign................................. 2,557 755 344 3,656 ------- ------- ------ ------- Total............................... $19,755 $13,632 $4,147 $37,534 ======= ======= ====== ======= Loans with floating interest rates...... $ 9,332 $2,912 $12,244 Loans with predetermined interest rates. 4,300 1,235 5,535 ------- ------ ------- Total............................... $13,632 $4,147 $17,779 ======= ====== =======
NONPERFORMING LOANS The following table shows a breakout of nonperforming loans for the past five years.
1996 1995 1994 1993 1992 DECEMBER 31 (DOLLARS IN MILLIONS) ---- ---- ---- ---- ---- Nonaccrual loans.................................. $262 $344 $267 $478 $712 Accrual renegotiated loans........................ -- 19 27 7 5 ---- ---- ---- ---- ---- Total nonperforming loans..................... $262 $363 $294 $485 $717 ==== ==== ==== ==== ==== Nonperforming loans Domestic........................................ $257 $360 $284 $421 $589 Foreign......................................... 5 3 10 64 128 ---- ---- ---- ---- ---- Total nonperforming loans..................... $262 $363 $294 $485 $717 ==== ==== ==== ==== ==== Nonperforming loans/loans outstanding............. 0.4% 0.6% 0.5% 1.0% 1.5%
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING INTEREST The amounts above exclude those domestic loans that were 90 days or more past due and still accruing interest. Such loans totaled $268 million, $197 million, $150 million, $121 million and $122 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. 78 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.
1996 1995 1994 1993 DECEMBER 31 (DOLLARS IN MILLIONS) ------ ------ ------ ------ Commercial Domestic...................................... $ 927 $ 929 $ 848 $ 789 Foreign....................................... 66 57 59 81 Consumer Credit card................................... 355 303 215 201 Other......................................... 59 49 36 35 ------ ------ ------ ------ Total....................................... $1,407 $1,338 $1,158 $1,106 ====== ====== ====== ====== Percentage of loans to total loans Commercial Domestic...................................... 54% 53% 56% 56% Foreign....................................... 6 6 6 6 Consumer Credit card................................... 14 15 13 13 Other......................................... 26 26 25 25 ------ ------ ------ ------ Total....................................... 100% 100% 100% 100% ====== ====== ====== ======
Allocation for potential losses not specifically identified is included in the commercial segment. Allocation information is not available for 1992. 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, 1996. DOMESTIC TIME CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
AMOUNT PERCENT (DOLLARS IN MILLIONS) ------ ------- Three months or less............................................. $2,436 61% Over three months to six months.................................. 506 13 Over six months to twelve months................................. 400 10 Over twelve months............................................... 620 16 ------ --- Total........................................................ $3,962 100% ====== ===
DOMESTIC OTHER TIME DEPOSITS OF $100,000 AND OVER
AMOUNT PERCENT (DOLLARS IN MILLIONS) ------ ------- Three months or less............................................. $ 618 52% Over three months to six months.................................. 215 18 Over six months to twelve months................................. 143 12 Over twelve months............................................... 205 18 ------ --- Total........................................................ $1,181 100% ====== ===
79 FOREIGN OFFICES
AMOUNT PERCENT (DOLLARS IN MILLIONS) ------- ------- Three months or less............................................ $10,987 98% Over three months to six months................................. 156 1 Over six months to twelve months................................ 105 1 Over twelve months.............................................. 3 -- ------- --- Total....................................................... $11,251 100% ======= ===
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:
1996 1995 1994 (DOLLARS IN MILLIONS) ------- ------- ------- Federal funds purchased Outstanding at year-end............................ $ 3,938 $ 3,447 $ 2,562 Weighted average rate at year-end.................. 5.58% 5.49% 5.72% Daily average outstanding for the year............. $ 3,025 $ 3,505 $ 2,846 Weighted average rate for the year................. 5.68% 6.24% 4.48% Highest outstanding at any month-end............... $ 3,938 $ 4,824 $ 3,087 Securities under repurchase agreements Outstanding at year-end............................ $ 3,921 $12,264 $14,357 Weighted average rate at year-end.................. 5.78% 5.79% 4.65% Daily average outstanding for the year............. $ 9,699 $16,536 $13,519 Weighted average rate for the year................. 5.15% 5.88% 4.27% Highest outstanding at any month-end............... $15,459 $20,439 $17,977 Bank notes Outstanding at year-end............................ $ 4,346 $ 7,027 $ 6,070 Weighted average rate at year-end.................. 5.60% 5.93% 5.72% Daily average outstanding for the year............. $ 7,359 $ 5,731 $ 5,181 Weighted average rate for the year................. 5.62% 5.96% 4.71% Highest outstanding at any month-end............... $ 9,102 $ 7,027 $ 6,537 Other short-term borrowings Outstanding at year-end............................ $ 3,226 $ 2,775 $ 2,352 Weighted average rate at year-end.................. 5.51% 5.45% 4.51% Daily average outstanding for the year............. $ 3,250 $ 3,436 $ 3,448 Weighted average rate for the year................. 4.27% 5.72% 3.88% Highest outstanding at any month-end............... $ 4,839 $ 4,212 $ 4,722 Total short-term borrowings Outstanding at year-end............................ $15,431 $25,513 $25,341 Weighted average rate at year-end.................. 5.62% 5.75% 5.00% Daily average outstanding for the year............. $23,333 $29,208 $24,994 Weighted average rate for the year................. 5.24% 5.92% 4.33%
1996 1995 1994 1993 1992 COMMON STOCK AND STOCKHOLDER DATA* ------- ------- ------- ------- ------- Market price High for the year.................... $58 7/8 $42 1/2 $33 $36 3/8 $33 1/8 Low for the year..................... 34 3/4 27 3/8 26 3/4 28 5/8 26 3/4 At year-end.......................... 53 3/4 39 1/2 27 3/8 29 3/4 32 3/4 Book value (at year-end)............... 27.31 25.25 22.60 21.25 18.27 Dividend payout ratio.................. 34% 39% 34% 28% 89%
- -------- * There were 39,438 common stockholders of record as of December 31, 1996. 80
1996 1995 1994 1993 1992 FINANCIAL RATIOS ---- ---- ---- ---- ---- Net income as a percentage of: Average stockholders' equity.................. 16.4% 13.8% 15.8% 18.5% 6.4% Average common stockholders' equity........... 17.0 14.3 16.6 19.9 6.3 Average total assets.......................... 1.28 0.94 1.13 1.33 0.42 Average earning assets........................ 1.48 1.09 1.32 1.52 0.48 Stockholders' equity at year-end as a percentage of: Total assets at year-end...................... 8.6 6.9 6.9 8.1 7.0 Total loans at year-end....................... 13.6 13.1 14.2 15.4 13.2 Total deposits at year-end.................... 14.2 12.2 12.0 12.9 10.4 Average stockholders' equity as a percentage of: Average assets................................ 7.8 6.8 7.2 7.2 6.5 Average loans................................. 13.5 14.1 15.4 14.8 12.6 Average deposits.............................. 13.6 12.4 12.8 11.7 9.9 Income to fixed charges: Excluding interest on deposits................ 2.2X 1.8x 2.2x 3.0x 1.3x Including interest on deposits................ 1.5X 1.4x 1.6x 1.8x 1.1x
QUARTERLY DIVIDENDS AND MARKET PRICE SUMMARY
STOCK MARKET DIVIDENDS PRICE RANGE (1) DECLARED --------------- PER SHARE LOW HIGH --------- ------- ------- 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 ===== 1995 First quarter....................................... $0.33 $27 3/8 $32 7/8 Second quarter...................................... 0.33 30 1/8 33 1/4 Third quarter....................................... 0.33 31 1/2 39 1/4 Fourth quarter...................................... 0.36 36 1/2 42 1/2 ----- Year.............................................. $1.35 27 3/8 42 1/2 =====
- -------- (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. 81 CONSOLIDATED SUMMARY OF QUARTERLY FINANCIAL INFORMATION
1996 (IN MILLIONS, EXCEPT PER SHARE DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 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 Primary........................... $1.15 $1.09 $1.10 $1.04 Fully diluted..................... 1.14 1.08 1.09 1.03 1995 (IN MILLIONS, EXCEPT PER SHARE DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 DATA) ----------- ------------ ------- -------- Interest income..................... $2,066 $2,054 $2,011 $1,959 Net interest income................. 834 796 784 794 Provision for credit losses......... 210 125 90 85 Noninterest income.................. 655 702 631 603 Noninterest expense................. 1,088 827 821 799 Net income.......................... 126 357 331 336 Earnings per share Primary........................... $0.37 $1.07 $0.99 $1.01 Fully diluted..................... 0.37 1.06 0.98 0.99
82 [This Page Intentionally Left Blank] 83 AVERAGE BALANCES/NET INTEREST MARGIN/RATES FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
1996 1995 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)................ $ 7,995 $ 463 5.79% $ 10,011 $ 620 6.19% Federal funds sold and securities under resale agreements............... 9,597 510 5.31 15,701 922 5.87 Trading assets............ 6,990 397 5.68 7,300 469 6.42 Investment securities (2) U.S. government and federal agency.......... 5,165 343 6.64 10,023 681 6.79 States and political subdivisions............ 1,319 118 8.95 1,546 141 9.12 Other.................... 1,259 72 5.72 1,781 71 3.99 -------- ------ ---- -------- ------ ---- Total investment securities............ 7,743 533 6.88 13,350 893 6.69 Loans (3)(4) Domestic offices......... 61,441 5,532 9.12 55,530 5,043 9.21 Foreign offices.......... 3,508 236 6.73 3,414 246 7.21 -------- ------ ---- -------- ------ ---- Total loans............ 64,949 5,768 8.99 58,944 5,289 9.09 -------- ------ ---- -------- ------ ---- Total earning assets (5)................... 97,274 7,671 7.89 105,306 8,193 7.78 Cash and due from banks... 6,248 6,328 Allowance for credit losses................... (1,396) (1,198) Other assets.............. 10,439 11,934 -------- -------- Total assets........... $112,565 $122,370 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits--interest-bearing Savings.................. $ 10,940 $ 244 2.23% $ 11,716 $ 298 2.54% Money market............. 9,904 364 3.68 8,942 369 4.13 Time..................... 16,008 880 5.50 17,346 1,008 5.81 Foreign offices (6)...... 13,452 687 5.11 15,821 906 5.73 -------- ------ ---- -------- ------ ---- Total deposits-- interest-bearing...... 50,304 2,175 4.32 53,825 2,581 4.80 Federal funds purchased and securities under repurchase agreements.... 12,724 671 5.27 20,041 1,192 5.95 Other short-term borrowings............... 10,609 552 5.20 9,167 538 5.87 Long-term debt............ 8,173 551 6.74 7,941 571 7.19 -------- ------ ---- -------- ------ ---- Total interest-bearing liabilities........... 81,810 3,949 4.83 90,974 4,882 5.37 Demand deposits........... 13,724 13,254 Other liabilities......... 8,295 9,807 Preferred stock........... 483 570 Common stockholders' equity................... 8,253 7,765 -------- -------- Total liabilities and stockholders' equity.. $112,565 $122,370 ======== ======== Interest income/earning assets (5)............... $7,671 7.89% $8,193 7.78% Interest expense/earning assets................... 3,949 4.06 4,882 4.64 ------ ---- ------ ---- Net interest margin....... $3,722 3.83% $3,311 3.14% ====== ==== ====== ====
- -------- (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 1996 and 1995 would be $7.597 billion and $13.428 billion, respectively, and the average earned rate in 1996 and 1995 would be 7.02% and 6.65%, respectively. (3) Average lease-financing receivables are reduced by related deferred tax liabilities in calculating the average rate. (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% for 1996, 1995, 1994 and 1993, and 34% for 1992. (6) Includes International Banking Facilities' deposit balances in domestic offices and balances of Edge Act and overseas offices. 84
1994 1993 1992 ----------------------------------------------------- ------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- ------- -------- ------- ------- -------- ------- $ 8,497 $ 395 4.65% $ 8,098 $ 332 4.10% $ 8,136 $ 406 4.99% 14,340 624 4.35 11,740 350 2.98 8,356 291 3.48 4,927 286 5.80 4,876 229 4.70 4,556 270 5.93 11,093 698 6.29 8,973 585 6.52 8,084 613 7.58 1,649 146 8.85 1,757 151 8.59 2,009 179 8.91 1,990 48 2.41 2,054 57 2.78 2,552 95 3.72 -------- ------ ---- ------- ------ ---- ------- ------ ---- 14,732 892 6.05 12,784 793 6.20 12,645 887 7.01 47,208 3,832 8.24 44,262 3,441 7.88 45,514 3,678 8.17 2,894 194 6.70 3,131 211 6.74 3,727 293 7.86 -------- ------ ---- ------- ------ ---- ------- ------ ---- 50,102 4,026 8.15 47,393 3,652 7.80 49,241 3,971 8.15 -------- ------ ---- ------- ------ ---- ------- ------ ---- 92,598 6,223 6.72 84,891 5,356 6.31 82,934 5,825 7.02 6,553 6,171 5,425 (1,132) (1,062) (1,117) 9,827 6,642 6,968 -------- ------- ------- $107,846 $96,642 $94,210 ======== ======= ======= $ 11,815 $ 274 2.32% $11,100 $ 265 2.39% $ 9,732 $ 296 3.04% 9,280 261 2.81 10,163 247 2.43 10,211 311 3.05 13,650 570 4.18 14,204 543 3.82 18,665 910 4.88 12,347 548 4.44 10,944 417 3.81 11,972 566 4.73 -------- ------ ---- ------- ------ ---- ------- ------ ---- 47,092 1,653 3.51 46,411 1,472 3.17 50,580 2,083 4.12 16,365 704 4.30 13,245 404 3.05 13,419 469 3.50 8,629 378 4.38 7,374 253 3.43 3,896 159 4.08 6,755 445 6.59 4,817 334 6.93 4,025 310 7.70 -------- ------ ---- ------- ------ ---- ------- ------ ---- 78,841 3,180 4.03 71,847 2,463 3.43 71,920 3,021 4.20 13,377 13,078 11,620 7,898 4,730 4,505 686 794 581 7,044 6,193 5,584 -------- ------- ------- $107,846 $96,642 $94,210 ======== ======= ======= $6,223 6.72% $5,356 6.31% $5,825 7.02% 3,180 3.43 2,463 2.90 3,021 3.64 ------ ---- ------ ---- ------ ---- $3,043 3.29% $2,893 3.41% $2,804 3.38% ====== ==== ====== ==== ====== ====
85 ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table shows the approximate effect on net interest income of volume and rate changes for 1996 and 1995. For purposes of this table, changes that are not due solely to volume or rate changes are allocated to volume.
1996 OVER 1995 1995 OVER 1994 ------------------- ------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL YEAR ENDED DECEMBER 31 (IN MILLIONS) ------ ---- ----- ------ ---- ------ Increase (decrease) in Interest income Interest-bearing due from banks...... $(117) $(40) $(157) $ 94 $131 $ 225 Federal funds sold and securities under resale agreements............. (324) (88) (412) 80 218 298 Trading assets....................... (18) (54) (72) 152 31 183 Investment securities U.S. government and federal agency. (323) (15) (338) (73) 56 (17) States and political subdivisions.. (20) (3) (23) (9) 4 (5) Other.............................. (30) 31 1 (8) 31 23 Loans Domestic offices................... 532 (43) 489 756 455 1,211 Foreign offices.................... 6 (16) (10) 37 15 52 ----- ------ Total.............................. (522) 1,970 Increase (decrease) in Interest expense Deposits Savings............................ (17) (37) (54) (3) 27 24 Money market....................... 35 (40) (5) (14) 122 108 Time............................... (74) (54) (128) 215 223 438 Foreign offices.................... (121) (98) (219) 199 159 358 Federal funds purchased and securities under repurchase agreements.......................... (386) (135) (521) 219 269 488 Other short-term borrowings.......... 75 (61) 14 32 128 160 Long-term debt....................... 16 (36) (20) 85 41 126 ----- ------ Total.............................. (933) 1,702 ----- ------ Increase in net interest income...... $ 411 $ 268 ===== ======
ITEM 2. PROPERTIES The Corporation's headquarters are at One First National Plaza, Chicago, Illinois, a 60-story building located in the center of the Chicago "Loop" business district. The building is master-leased by FNBC and has approximately 1,850,000 square feet of rentable space, of which the Corporation occupies approximately 57% and the balance is subleased to others. The Corporation also owns a 23-story office building in Chicago's west Loop business district, to be used for future operations consolidation and expansion, and three buildings in Elgin, Illinois, used for FCCNB operations. In 1996, the Corporation purchased 23.2 acres of land in Springfield, Missouri, on which construction of a 150,000-square-foot FCCNB processing center has begun. NBD Michigan owns and occupies a 14-story, 540,000-square-foot main office building in Detroit's central financial and business district; a 14-story, 300,000-square-foot office building in Troy, Michigan, housing its retail support activities; and a 380,000-square-foot facility in Van Buren Township, near Detroit Metropolitan Airport, housing its data center and check processing operations. NBD Michigan also owns approximately 143 acres of land in Farmington Hills, Michigan, for possible future facility needs. In addition, NBD Michigan leases 86 and occupies a 200,000-square-foot office center in Troy, Michigan, and NBD Indiana leases and occupies the majority of a 380,000-square-foot office building in Indianapolis, Indiana. At December 31, 1996, the Corporation and its subsidiaries occupied a total of 892 locations within the United States. 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 and Windsor, Canada. These offices all are located in leased premises. ITEM 3. LEGAL PROCEEDINGS The information required by this Item is set forth in Note 18 to the Consolidated Financial Statements, on page 68 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 (56).... 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 (58). Director and Vice Chairman of the Board (10-1-85) Scott P. Marks, Jr. (51)................... Director and Vice Chairman of the Board (12-1-95) David J. Vitale (50).... Director and Vice Chairman of the Board (12-1-95) Frederick M. Adams, Jr. (52)................... Executive Vice President (6-15-92) John W. Ballantine (51). Executive Vice President (12-1-95) David P. Bolger (39).... Executive Vice President (10-11-96) William H. Elliott III (55)................... Executive Vice President (10-15-96) Sherman I. Goldberg Executive Vice President, General Counsel and Secretary (12-1- (54)................... 95) Philip S. Jones (54).... Executive Vice President (6-15-92) W.G. Jurgensen (45)..... Executive Vice President (12-1-95) Thomas J. McDowell (58). Executive Vice President (1-1-95) Timothy P. Moen (44).... Executive Vice President (12-1-95) Susan S. Moody (43)..... Executive Vice President (1-1-95) Andrew J. Paine, Jr. (59)................... Executive Vice President (10-15-92) Robert A. Rosholt (47).. Executive Vice President and Chief Financial Officer (12-1-95) Willard A. Valpey (53).. Executive Vice President (3-8-96)
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 9, 1997). 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 80 and the "Quarterly Dividends and Market Price Summary" table on page 81, and is expressly incorporated herein by reference. 87 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 81, 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 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 30, the "Loan Composition" table on page 31, the Consolidated Financial Statements and the Notes thereto on pages 41 to 72, the "Report of Independent Public Accountants" on page 75 and the "Selected Statistical Information" section on pages 76 to 86, and is expressly incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information required by this Item has been previously reported in the Corporation's Current Report on Form 8-K dated September 18, 1995. 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 87 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 is set forth under the heading "Election of Directors" in the Corporation's definitive proxy statement dated March 28, 1997, 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 28, 1997, and is expressly incorporated herein by reference. 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 28, 1997, 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 28, 1997, and is expressly incorporated herein by reference. 88 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements:
PAGE ---- Consolidated Balance Sheet--December 31, 1996 and 1995................. 41 Consolidated Income Statement--Three Years Ended December 31, 1996..... 42 Consolidated Statement of Stockholders' Equity--Three Years Ended December 31, 1996..................................................... 43 Consolidated Statement of Cash Flows--Three Years Ended December 31, 1996.................................................................. 44 Notes to Financial Statements.......................................... 45
(2) Financial Statement Schedules. All schedules normally required by Form 10-K are omitted since they either 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.* 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.* 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 Strategic Stock Incentive Plan, as amended [Exhibit 10(A) to FCC's 1988 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(I). 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(J). Form of First Chicago NBD Corporation Deferred Compensa- tion Plan.* 10(K). Form of First Chicago NBD Corporation Supplemental Savings and Investment Plan.* 10(L). Form of First Chicago NBD Corporation Supplemental Per- sonal Pension Account Plan.* 10(M). Form of Individual Change of Control Employment Agree- ment.*
89 10(N). Form of Individual Executive Employment Agreement.* 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.* 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].* 10(U). Agreement and Plan of Merger, dated as of July 11, 1995, between NBD Bancorp, Inc. and First Chicago Corporation, as amended [Exhibit 10(AA) 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, 1996:
DATE ITEM REPORTED ---- ------------- October 15, 1996 The Corporation's earnings for the quarter ended September 30, 1996.
- -------- + 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. 90 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 14TH DAY OF FEBRUARY, 1997. 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 14TH DAY OF FEBRUARY, 1997. /s/ Terence E. Adderley /s/ Scott P. Marks, Jr. - ------------------------------------- ------------------------------------- Terence E. Adderley Scott P. Marks, Jr. Director Director /s/ James K. Baker /s/ William T. McCormick, Jr. - ------------------------------------- ------------------------------------- James K. Baker William T. McCormick, Jr. 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/ Patrick G. Ryan - ------------------------------------- ------------------------------------- Maureen A. Fay Patrick G. Ryan Director Director /s/ Charles T. Fisher III /s/ Adele Simmons - ------------------------------------- ------------------------------------- Charles T. Fisher III Adele Simmons Director Director /s/ Donald V. Fites /s/ Richard L. Thomas - ------------------------------------- ------------------------------------- Donald V. Fites Richard L. Thomas Director Director /s/ Verne G. Istock /s/ David J. Vitale - ------------------------------------- ------------------------------------- Verne G. Istock David J. Vitale Director Director /s/ Thomas H. Jeffs II /s/ Robert A. Rosholt - ------------------------------------- ------------------------------------- Thomas H. Jeffs II 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 91
EXHIBIT INDEX TO EXHIBITS PAGE - ------- ----------------- ---- 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. 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. 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 Strategic Stock Incentive Plan, as amended [Exhibit 10(A) to FCC's 1988 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference]. 10(I). 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(J). Form of First Chicago NBD Corporation Deferred Compensa- tion Plan. 10(K). Form of First Chicago NBD Corporation Supplemental Savings and Investment Plan. 10(L). Form of First Chicago NBD Corporation Supplemental Per- sonal Pension Account Plan. 10(M). Form of Individual Change of Control Employment Agree- ment. 10(N). Form of Individual Executive Employment Agreement. 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. 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]. 10(U). Agreement and Plan of Merger, dated as of July 11, 1995, between NBD Bancorp, Inc. and First Chicago Corporation, as amended [Exhibit 10(AA) 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.
- -------- + 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. EX-3.(B) 2 BY-LAWS OF THE CORPORATION, AS AMENDED EXHIBIT 3(B) BY-LAWS As Amended and Restated July 12, 1996 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 entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. -2- (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 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. -3- 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 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. -4- 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 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 -5- 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. Executive Committee. There shall be an Executive Committee composed and created as the Board of Directors may designate by resolution approved by a majority of the entire Board. During intervals between regular meetings of the Board of Directors, the Executive Committee, to the extent permitted by law, the Certificate of Incorporation and these By-Laws, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. Section 2. Other Committees. The Board of Directors may, by resolution, designate one or more other 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. 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. 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. -6- 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. 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 -7- 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) 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 -8- 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 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 -9- 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 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. -10- 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 1ST CHICAGO/NBD CORPORATION EXECUTIVE ESTATE PLAN EXHIBIT 10(C) DRAFT FIRST CHICAGO NBD CORPORATION EXECUTIVE ESTATE PLAN SECTION 1 - PURPOSE The FIRST CHICAGO NBD CORPORATION EXECUTIVE ESTATE PLAN (hereinafter called the "Plan") is established and maintained to promote and advance the performance of First Chicago NBD Corporation (hereinafter called the "Corporation") by providing designated senior officers of the Corporation and of its affiliated companies who have significant responsibility for such performance with competitive death benefit coverage and to assist the Corporation in attracting and retaining as senior officers individuals of superior ability by enhancing the value of the death benefit coverage benefits. This document is an amendment and restatement of the NBD Bancorp, Inc. Executive Estate Plan and the First Chicago Corporation Executive Estate Plan. SECTION 2 - DEFINITIONS (a) The term "Affiliated Companies" shall mean those corporations a majority of the outstanding voting capital stock of which is directly or indirectly owned or controlled by the Corporation. (b) The term "After-Tax Equivalent" shall mean such amount that would provide the recipient of a taxable death benefit under the Plan with an amount, after the payment of federal income tax, approximately equal to the death benefit the recipient would have received if the taxable death benefit were not subject to federal income taxation when made. (c) The term "Committee" shall mean the Organization, Compensation and Nominating Committee of the Board of Directors of the Corporation, the members of which shall be "disinterested persons" under Rule 16b-3 of the Securities and Exchange Commission or any successor regulation issued under the federal securities laws and shall be ineligible to participate in the Plan. (d) The term "Disability" shall mean the incapability of a Participant to perform the principal duties of his or her customary employment or position as the result of a physical or mental condition that is expected to be permanent and continuous during the remainder of the Participant's life, as determined in the sole discretion of the Committee on the basis of evidence satisfactory to it. (e) The term "Disabled Participant" shall mean a Participant who incurs a Disability hereunder while a Participant under the Plan from which he or she has not recovered. (f) The term "Participant" shall mean a senior officer of the Corporation or of one of its Affiliated Companies who becomes and remains a Participant in the Plan as provided in Section 7 of the Plan. (g) The term "Retired Participant" shall mean a Participant whose employment with the Corporation and all its Affiliated Companies terminates as the result of Retirement hereunder and who does not subsequently resume such employment. (h) The term "Retirement" shall mean the cessation of employment with the Corporation and all its Affiliated Companies on or after the date a Participant (i) attains age sixty-five (65), or (ii) completes fifteen (15) years of service, attains age fifty-five (55), and receives the consent of the Committee. SECTION 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 the Corporation as provided in Section 12. SECTION 4 - PRE-EFFECTIVE DATE TERMINATIONS OF EMPLOYMENT Except as specifically provided herein, benefits provided under the Plan with respect to any Participant whose employment with the Affiliated Companies terminated before January 1, 1997, will be governed by the Plan as in effect on the date of the Participant's termination of employment. SECTION 5 - 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. SECTION 6 - FUND The death benefits payable under the Plan shall be paid out of the general assets of the Corporation. SECTION 7 - PARTICIPATION (a) Eligibility for participation in the Plan shall be limited to executive officers of the Corporation as designated by the Chief Executive Officer of the Corporation. In addition, participants under the NBD Bancorp, Inc. Executive Estate Plan who are not executive officers of the Corporation and are employed by the Corporation or one of its Affiliated Companies on January 1, 1997 shall also be eligible. (b) Participation in the Plan by an eligible officer shall be solely within the discretion of the Chief Executive Officer of the Corporation. 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. (c) A Participant shall remain a Participant only for so long as he continues in the employ of the Corporation or one of its Affiliated Companies or is 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. SECTION 8 - AMOUNT OF PRE-RETIREMENT DEATH BENEFIT (a) Upon the death of a Participant prior to his or her Retirement from the Corporation and its Affiliated Companies, the Corporation shall pay to his or her designated beneficiary an After-Tax Equivalent death benefit equal to four hundred percent (400%) of the Participant's base salary at the time of death. (b) If a Disabled Participant dies before attaining age sixty-five (65), the Corporation shall pay to his or her designated beneficiary an After-Tax Equivalent death 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 and entitled to benefit coverage only in accordance with Section 9, 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 before attaining age sixty-five (65), 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) on that date and does not then return to employment with the Corporation or any Affiliated Company. In all other cases, a Disabled Participant who recovers from Disability shall have no further interest or rights under the Plan, except as may be provided by such person's subsequent participation in the Plan. SECTION 9 - 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 an After-Tax Equivalent 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 an After-Tax Equivalent death 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 an After-Tax Equivalent 3 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 an After-Tax Equivalent 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). SECTION 10 - BENEFICIARY DESIGNATION AND PAYMENT (a) 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. Each Participant may designate one or more individuals, trusts or organizations as the primary beneficiary(ies). If more than one primary beneficiary is designated, the Participant shall specify the percentage to be paid to each primary beneficiary. Each Participant shall also designate a contingent beneficiary(ies), who shall receive payment hereunder only if the designated primary beneficiary(ies) does not survive the Participant. (b) 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. (c) In the event a Participant failed to make a beneficiary designation, the amount payable under Section 8 or Section 9 shall be paid to the Participant's estate. The amount payable under Section 8 or Section 9 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 announced from time to time by The First National Bank of Chicago or its successor by merger during the period from the date the payment shall have been made to the date it is made. The Corporation shall withhold from such payment any applicable federal, state or local taxes thereon. SECTION 11 - GENERAL (a) 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 or its Affiliated Companies, and the Corporation and its Affiliated Companies expressly reserve the right to discharge any such Participant whenever the interests of the Corporation and its Affiliated Companies may so require. 4 (b) Notwithstanding any other provision in the Plan to the contrary, but subject to Paragraph (c) of this Section 11, 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 or any Affiliated Company (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 any Affiliated Company) 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 or an Affiliated Company 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 such person's duties, or if during the course of such employment, the Participant engages in, or had engaged in, such conduct. (c) 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) 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 to designate irrevocably a beneficiary to receive the amounts hereunder upon the Participant's death. (e) 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. SECTION 12 - AMENDMENT, SUSPENSION AND TERMINATION The Board of Directors of the 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. 5 SECTION 13 - GOVERNING LAW The Plan and all determinations made and action taken pursuant thereto shall be governed by the laws of the State of Delaware and construed in accordance therewith. 6 EX-10.(D) 4 FINANCIAL PLANNING PROGRAM FOR EXECUTIVES EXHIBIT 10(D) FIRST CHICAGO NBD CORPORATION FINANCIAL PLANNING PROGRAM FOR EXECUTIVES SUMMARY OF PROGRAM Effective Date: January 1, 1997 Eligibility: Executive officers of First Chicago NBD Corporation as designated by the Chief Executive Officer Annual Limits on Reimbursements: Chairman and Chief Executive Officer $10,000 Vice Chairman: $ 7,500 Executive Vice President: $ 5,000 Below Executive Vice President (if designated) $ 2,500 (no carry forward of unused amounts) Benefit Following Retirement: An amount equal to one and one-half times the normal annual limit to be available at any time during the two calendar years immediately following the year of retirement (exclusive of the annual reimbursement allowed in the year of retirement). Services Covered: Tax counseling and preparation Financial planning and advisory services Legal fees associated with wills, trusts, medical instruments, guardianships and similar arrangements. Services Excluded: Brokerage fees or similar investment fees Fees associated with sale or purchase of personal property EX-10.(F) 5 LONG TERM DISABILITY RESTORATION PLAN EXHIBIT 10(F) Draft FIRST CHICAGO NBD CORPORATION LONG-TERM DISABILITY RESTORATION PLAN ------------------------------------- Section 1 - Effective Date - -------------------------- This plan is effective as of January 1, 1997. Section 2 - Purpose - -------------------- The principal purpose of this Plan is to provide for the payment of certain long-term disability benefits to certain officers of First Chicago NBD Corporation, and its affiliated corporations (hereinafter "FCNBD") in excess of (a) the limitations on benefits imposed by Section 505(b)(7) of the Internal Revenue Code of 1986, as amended (hereinafter the "Code"), and (b) the limitation on the maximum monthly benefit contained in the First Chicago NBD Corporation Long-Term Disability Plan (hereinafter the "LTD Plan"). This Plan is established to insure that the total long-term disability benefits of all totally disabled officers of FCNBD entitled to receive benefits under the LTD plan can be determined on the same basis. Section 3 - Administration - -------------------------- (a) This Plan shall be administered by the Organization, Compensation and Nominating Committee of the Board of Directors of FCNBD (hereinafter the "Compensation Committee") as an unfunded plan. The Compensation Committee's decisions in all matters involving the interpretation and application of this Plan shall be conclusive. (b) The Plan shall at all times be maintained by FCNBD and administered by the Compensation Committee as a plan wholly separate from the LTD Plan. Section 4 - Eligibility - ----------------------- Officers whose long-term disability benefits under the LTD Plan are limited by the provisions set forth therein to conform to Section 505(b)(7) of the Code or whose monthly long-term disability benefit payment is limited by the maximum monthly benefit limitation contained in the LTD Plan shall be eligible for benefits provided by this Plan. In no event shall an officer who is not entitled to benefits under the LTD Plan be eligible for any benefits under this Plan. Section 5 - Amount of Benefits - ------------------------------ The benefits payable to an eligible officer or his or her eligible survivors hereunder shall equal the excess, if any, of: (a) the benefits that would have been paid to such officer or his or her eligible survivors under the LTD Plan if the provisions of the LTD Plan were administered and benefits paid as if the officer had elected the 60% of pay option and without regard to the benefit limitations contained in the LTD Plan to conform it to Section 505(b)(7) of the Code or the maximum monthly benefit limitation contained in the LTD Plan over (b) the benefits that are payable to such officer or his or her eligible survivors under the LTD Plan. Section 6 - Payment of Benefits - ------------------------------- (a) Payment of benefits under this Plan shall be made coincident with the payment of benefits under the LTD Plan or as soon as practicable thereafter. (b) Benefits under the Plan shall be payable solely from the general assets of FCNBD. The Plan shall remain unfunded during the entire period of its existence. Section 7 - Rights of Employees - ------------------------------- Except to the extent provided in Section 8 hereinbelow, no officer or his or her eligible survivors shall at any time have any vested right to receive the benefits provided by this Plan. Section 8 - Amendment and Discontinuance - ---------------------------------------- FCNBD expects to continue this Plan indefinitely, but reserves the right to amend or discontinue it if, in its sole judgment, such amendment or discontinuance is deemed necessary or desirable. However, if FCNBD should amend or discontinue this Plan, FCNBD shall be liable for any benefits that have accrued under this Plan as of the date of such action (determined on the basis of an eligible officer's total disability as of the date of such amendment or discontinuance). EX-10.(J) 6 DEFERRED COMPENSATION PLAN EXHIBIT 10(J) DRAFT 1-08-97 FIRST CHICAGO NBD CORPORATION DEFERRED COMPENSATION PLAN Effective January 1, 1997 FIRST CHICAGO NBD CORPORATION DRAFT ----------------------------- 1/08/97 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. ----------- 2.1 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. 2.2 Board means the Board of Directors of the Corporation, ----- excluding any member who is an officer or Employee of the Corporation. 2.3 Corporation means First Chicago NBD Corporation or its ----------- successor or successors and its fifty percent (50%) or more owned subsidiaries. 2.4 Covered Compensation means ninety percent of the annual -------------------- cash bonus or fifty percent 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. 2.5 Effective Date means the effective date of this Plan, -------------- January 1, 1997. 2.6 Employee means an employee or retiree of the Corporation. -------- 2.7 Exchange Act means the Securities Exchange Act of 1934, as ------------ amended. 2.8 FCC Plan means the First Chicago Compensation Deferral Plan -------- as in existence immediately prior to the Effective Date. 2.9 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. 2.10 NBD Plan means the NBD Bancorp, Inc. Executive Incentive -------- Plan Deferred Compensation Program as in existence immediately prior to the Effective Date. 2.11 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. 2.12 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. 2.13 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 except that the timing of the distribution of such transferred balance (and subsequent earnings thereon) shall be governed by the Participant's election as filed under the prior plan except as otherwise determined by the Plan Administrator or permitted under this Plan. 4. Election to Defer Covered Compensation. -------------------------------------- (a) Initial Election to Defer. 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 six months after such Covered Compensation would otherwise be paid to the Employee. An Employee's election to defer must be in writing on a 3 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 the minimum deferral amount as set by the Plan Administrator. (b) Additional Deferral. A Participant may elect on a one ------------------- time basis with respect to any deferred amount of Covered Compensation 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 or arrangement maintained solely for the purpose of providing retirement benefits for employees in 4 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 (on a form or in any other 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 to 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). 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. 5 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 service is defined for purposes of determining pay-based credits 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 service is defined for purposes of determining pay-based credits 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; however, in the case of a Participant whose account balance (or a portion thereof) is transferred from another deferral plan maintained by the Corporation or an entity acquired by the Corporation, the portion of such Participant's account balance attributable to the transferred account balance will be distributed in cash pursuant to the terms of the deferral election as filed with respect to the transferred balance. 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 such distribution is made is first reduced by an amount that shall equal the greater of either (i) 10% 7 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 inside directors of the Corporation ----------------------- may, in their 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 beginning 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: (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 8 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. 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 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 9 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 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 10 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 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 - ----------- 11 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.(K) 7 SUPPLEMENTAL SAVINGS AND INVESTMENT PLAN EXHIBIT 10(K) FIRST CHICAGO NBD CORPORATION SUPPLEMENTAL SAVINGS AND INVESTMENT PLAN Effective January 1, 1997 FIRST CHICAGO NBD CORPORATION SUPPLEMENTAL SAVINGS DRAFT -------------------------------------------------- 3-20-97 AND INVESTMENT PLAN ------------------- Effective January 1, 1997 1. Purpose. The purpose of the First Chicago NBD Corporation ------- Supplemental Savings and Investment Plan ("Supplemental Plan") is to provide supplemental benefits to certain employees described in Section 3 below of First Chicago NBD Corporation and its subsidiaries (collectively the "Corporation") who are participants in the First Chicago NBD Corporation Savings and Investment Plan ("SIP") and whose ability to make contributions to the SIP is limited because of Sections 401(a)(17), 401(k)(3), 401(m), 402(g) or 415 of the Internal Revenue Code of 1986, as amended (the "Code") (or any comparable section or sections of any future legislation that amend, supplement or supersede those sections). This Supplemental Plan is an amendment and restatement of the First Chicago Corporation Supplemental Savings Incentive Plan. The rights and benefits of any Participant whose employment terminated prior to January 1, 1997 will be governed by the Plan as in effect on the date of the Participant's termination of employment. 2. Definitions. Unless the context clearly implies or indicates the ----------- contrary, a word, term or phrase used or defined in the SIP is similarly used or defined in the Supplemental Plan. The masculine pronoun whenever used herein is deemed to include the feminine and the singular shall be deemed to include the plural whenever the context requires. 3. Eligibility. Each individual who, on or after January 1, 1997, ----------- is a participant in the SIP and whose contributions thereto are limited because of the application of Sections 401(a)(17), 402(g) or 415 of the Code shall be eligible to participate in this Supplemental Plan. In addition, any such individual whose contributions to the SIP would have been limited thereto because of the application of Sections 401(k)(3) or 401(m) of the Code and whose contributions to the SIP would have been limited by any of the Code Sections described in the previous sentence but for the earlier application of Sections 401(k)(3) and 401(m) of the Code shall also be eligible to participate in this Supplemental Plan. 4. Participation. An individual eligible to participate pursuant to ------------- Section 3 above shall participate in this Supplemental Plan automatically pursuant to his election under the SIP and shall participate in the same manner with the same rights and under the same terms and conditions as his participation under the SIP, except as may otherwise be prescribed herein. The Committee shall notify each participant of his automatic participation. 5. Supplemental Benefit. A participant hereunder shall be entitled -------------------- to a distribution of his account balance equal to the amount of Before-Tax Contributions and Matching Contributions that would have been made to the SIP on his behalf but for the application of Sections 401(a)(17), 401(k)(3), 401(m), 402(g) and 415 of the Code, adjusted for the investment results attributable to such contributions had such contributions been invested in the Investment Funds in the same manner and proportions as contributions made on his behalf to the SIP were invested under the SIP. 6. Distribution of Account Balances. A participant's account -------------------------------- hereunder shall be distributed in cash in one lump sum payment as soon as practicable following the Participant's termination of employment. A participant shall have no right to an in-service distribution except: (i) in the case of a participant's total and permanent disability as defined in The First Chicago NBD Corporation Personal Pension Account Plan, or (ii) in the case of a Change of Control (as defined in the First Chicago NBD Corporation Stock Performance Plan). A participant shall not have the right to receive any portion of his distribution in Company Stock. Notwithstanding the above, in the event of a Change of Control, a participant shall have his account balance distributed to him in a lump sum as soon as practicable following such Change of Control. 7. Survivor's Benefits. In the case of a participant's death before ------------------- distribution of his entire account balance under this Supplemental Plan, the remaining account balance will be distributed to the Designated Beneficiary in a lump sum. 3 8. No Right to Withdrawal or Loans During Employment. Except as ------------------------------------------------- otherwise provided in Section 6 above with respect to a Change of Control or in the case of a total and permanent disability as defined in The First Chicago NBD Corporation Personal Pension Account Plan, no form of in-service distribution, including withdrawals or loans, shall be permitted under the Supplemental Plan. 9. Administration. The Supplemental Plan shall be administered by -------------- the Committee and its decision on any matter involving the interpretation of the Supplemental Plan shall be binding on everyone; provided, however, that a Committee member may not take any action with respect to any benefits payable to him under the Supplemental Plan unless he could take such action even if he were not a Committee member. 10. Prohibition of Alienation. Except as to a payment required under ------------------------- a qualified domestic relations order, as defined in Section 414(p) of the Code, benefits under the Supplemental Plan may not be anticipated, alienated, assigned or encumbered and any attempt to do so shall be void. 11. Records. All records held by the Corporation's Human Resources ------- Department with respect to an employee shall be binding upon everyone for purposes of the Supplemental Plan. 4 12. Amendment and Termination. The Corporation, by a resolution of ------------------------- the Organization, Compensation and Nominating Committee of the Board of Directors or by anyone authorized by the Board of Directors, may amend or terminate the Supplemental Plan at any time; provided, however, that, except as may otherwise be required by law, no such amendment to or termination of the Supplemental Plan shall reduce the benefits to which a participant (or his Designated Beneficiary) is entitled under the Supplemental Plan as of the date of such amendment or termination. 13. Financing of Supplemental Plan Benefits. Any benefits payable to --------------------------------------- a participant under the Supplemental 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 Supplemental 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 Supplemental Plan shall be entirely separate from any other plan. 14. Benefits Intended for Select Group of Management or Highly ---------------------------------------------------------- Compensated Employees. This Supplemental 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. 5 15. Controlling Laws. To the extent not superseded by Federal laws, ---------------- the laws of Illinois (except its laws of conflict) shall be controlling in all matters relating to the Supplemental Plan. 6 EX-10.(L) 8 PERSONAL PENSION ACCOUNT SUPPLEMENTAL PLAN EXHIBIT 10(L) FIRST CHICAGO NBD CORPORATION DRAFT ----------------------------- 3-20-97 PERSONAL PENSION ACCOUNT SUPPLEMENTAL PLAN --------------------------------------- (As Amended and Restated Effective January 1, 1997) FIRST CHICAGO NBD CORPORATION DRAFT ----------------------------- 3-20-97 PERSONAL PENSION ACCOUNT SUPPLEMENTAL PLAN ------------------------------------------- (Effective January 1, 1997) --------------------------- 1. Purpose. The purpose of the First Chicago NBD Corporation ------- Personal Pension Account Supplemental Plan (the "Supplemental Plan") is to provide supplemental benefits to those participants in First Chicago NBD Corporation Personal Pension Account Plan, including any supplements thereto, (the "PPAP") whose benefits are reduced because of Sections 401(a)(4), 401(a)(17) or 415 of the Internal Revenue Code of 1986, as amended (the "Code") (or any comparable section or sections of any future legislation that amend, supplement or supersede said Sections 401(a)(4), 401(a)(17) or 415). The Supplemental Plan as set forth herein is an amendment, restatement and continuation, effective January 1, 1997, of the Pension Restoration /Supplemental Plan for Certain Officers of NBD Bancorp, Inc. and The First National Bank of Chicago Supplemental Pension Plan as they were both constituted on December 31, 1996. The rights and benefits of any participant terminating employment prior to January 1, 1997 shall be governed by the plan as in effect on the date of the participant's employment termination. 2. Definitions. Unless the context clearly implies or indicates ----------- the contrary, a word, term or phrase used or defined in the PPAP is similarly used or defined in the Supplemental Plan. 3. Eligibility. Each individual who, on or after the effective ----------- date, is a participant in the PPAP shall be eligible for a benefit hereunder if (a) such individual's employment terminates after completing five years of vesting service under the PPAP or (b) a Change of Control shall have occurred. 4. Supplemental Retirement Benefit. Each participant hereunder ------------------------------- shall be entitled to a supplemental benefit in the amount, if any, determined in accordance with the following: (a) First, there shall be determined the maximum annual pension benefit to which the participant would have been entitled under the PPAP, as amended and in effect on his employment termination date or date there is a Change of Control but disregarding any limitations on compensation or benefits that are set forth in the PPAP as of that date pursuant to Sections 401(a)(17) or 415 of the Code; (b) Then, there shall be determined the maximum annual ---- pension benefit to which the participant is entitled under the PPAP, as amended and in effect as of his employment termination date or date there is a Change of Control, without disregarding any limitations on compensation or benefits that are set forth in the PPAP as of that date pursuant to Sections 401(a)(17) or 415 of the Code; and (c) Finally, the excess, if any, of (a) above over (b) ------- above shall be the amount of the supplemental benefit payable under the Supplemental Plan. 5. Payment of Supplemental Plan Benefits. Except as provided ------------------------------------- below, payment of a supplemental benefit shall be made in one lump sum payment as soon as practicable following the earlier of (a) a participant's termination of employment, or (b) a Change of Control. The lump sum payment shall be the actuarial equivalent (determined in the same manner as a lump sum under the PPAP) of the supplemental benefit to which the participant is entitled under paragraph 4. In the event a supplemental benefit becomes later payable to such participant upon his subsequent termination of employment, the supplemental benefit then payable shall not include, as actuarially determined, any plan lump sum payment or other benefit payment previously paid. Notwithstanding the foregoing, a participant, by making a written election at least one year prior to the participant's termination of employment in accordance with rules established by the Retirement Committee, may have his supplemental benefit paid in any of the optional forms offered under the PPAP, in a period certain (monthly 5, 10 or 15 years) form of payment or, in the case of a participant having attained age 55 with 15 years of service at the time of termination of employment, deferred under the First Chicago NBD Corporation Deferred Compensation Plan. 6. Survivor's Benefits. A benefit will be paid (a) in a lump ------------------- sum to a participant's Designated Beneficiary, in the case of the death of a participant prior to his retirement or termination of employment, provided that such participant would have been entitled to a benefit under paragraph 4 above if he had actually retired or terminated employment on the date of his death, or (b) to a participant's Designated Beneficiary pursuant to any distribution election on file with the Retirement Committee, in the case of the death, after retirement or termination of employment, of a participant whose supplemental benefit was not paid or begun to be paid under paragraph 5 next above. The benefit will be paid in an amount or actuarial equivalent amount equal to the difference between: (x) The amount of benefit to which such Designated Beneficiary, spouse or child would have been entitled under the PPAP, as amended and in effect on the date of the participant's death but disregarding any limitations on compensation or benefits that are set forth in the PPAP as of that date pursuant to Sections 401(a)(17) or 415 of the Code; and (y) The amount of benefit to which such spouse or child is entitled under the PPAP, as amended and in effect on the date of the participant's death, without disregarding any limitations on compensation or benefits that are set forth in the PPAP as of that date pursuant to Sections 401(a)(17) or 415 of the Code. 7. Administration. The Supplemental Plan shall be administered -------------- by the Retirement Committee and its decision on any matter involving the interpretation of the Supplemental Plan shall be binding on everyone; provided, however, that a Retirement Committee member may not take any action with respect to any benefits payable to him under the Supplemental Plan unless he could take such action even if he were not a Retirement Committee member. Any matters relating to the Retirement Committee including its powers shall be the determined and/or defined in accordance with section 10 of the PPAP. 8. Prohibition of Alienation. Except as to debts owing to the ------------------------- Corporation or any of its subsidiaries, or payments required under a qualified domestic relations order, as defined in Section 414(p) of the Code, benefits under the Supplemental Plan may not be anticipated, alienated, assigned or encumbered and any attempt to do so shall be void. 9. Records. All records held by the Corporation's Human ------- Resources Department with respect to any employee shall be binding upon everyone for purposes of the Supplemental Plan. 10. Amendment and Termination. The Corporation, acting through ------------------------- the Organization, Compensation and Nominating Committee of its Board of Directors or by anyone authorized by the Board of Directors, may amend the Supplemental Plan from time to time and may terminate it at any time; provided, however, that, except as may otherwise be required by law, no such amendment or termination shall be permitted upon or following a Change of Control so long as the PPAP continues without termination and, provided, further, upon and following any termination of the PPAP, no such amendment to or termination of the Supplemental Plan shall reduce the benefits to which a participant (or his beneficiary) is entitled under the Supplemental Plan as of the date of such amendment or termination. 11. Financing of Supplemental Plan Benefits. Any benefits payable --------------------------------------- to a participant under the Supplemental 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 Supplemental Plan. This paragraph shall not prohibit the Bank from transferring assets to a grantor trust for the purpose of providing benefits hereunder. 12. Controlling Laws. To the extent not superseded by Federal ---------------- law, the laws of Illinois (except its laws of conflict) shall be controlling in all matters relating to the Supplemental Plan. 3 SUPPLEMENT A TO THE FIRST CHICAGO NBD CORPORATION SUPPLEMENTAL PERSONAL PENSION ACCOUNT PLAN FORMER FIRST CHICAGO CORPORATION EXECUTIVE RETIREMENT PLAN PARTICIPANTS ----------------------------------------------------------------------- Effective January 1, 1997 1. Purpose. Effective January 1, 1997, the purpose of this ------- Supplement A to the First Chicago Corporation Supplemental Personal Pension Account Plan ("Supplemental Plan") is to permit employees of First Chicago NBD Corporation and its subsidiaries who (i) were participants in the First Chicago Corporation Pension Plan ("FCC Pension Plan"), (ii) had attained "Rule of 65" under the FCC Pension Plan on or before December 31, 1996 and (iii) had accrued a benefit under the First Chicago Corporation Executive Retirement Plan ("Executive Plan") to receive additional retirement benefits based upon compensation which is not considered in calculating such participants' benefits under Supplement A to the First Chicago NBD Corporation Personal Pension Account Plan ("PPAP"). 2. Definitions. Unless the context clearly implies or indicates ----------- the contrary, a word, term or phrase used or defined in the PPAP is similarly used or defined in this Supplement. 3. Eligibility. Effective January 1, 1997, only employees of ----------- First Chicago NBD Corporation and its subsidiaries who (1) had attained Rule of 65 under the FCC Pension Plan as of December 31, 1996 and (2) had otherwise accrued a benefit under the Executive Plan as of December 31, 1996 shall be eligible for a benefit hereunder. 4. Executive Plan Retirement Benefit. Each participant hereunder --------------------------------- shall be entitled to a benefit in the amount, if any, determined in accordance with the following: (a) A participant's Covered Compensation under this Supplement shall be determined as follows: First, the "Covered Bonus" amount for each year shall be determined by limiting the participant's annual management bonus amount awarded for a given year, or other cash incentive award designated by the Organization, Compensation and Nominating Committee, to an amount not greater than 50% of the participant's highest salary for that same year. Next, the five highest such Covered Bonus amounts shall be averaged. If the participant has fewer than five years in which he has a Covered Bonus amount, then the Covered Bonus amounts from such lesser number of years shall be averaged based on the actual number of Covered Bonuses. A participant's Covered Compensation under this Supplement shall be the average of the Covered Bonus amounts so determined. 4 (b) The participant's benefit under this Supplement shall be the annual amount of benefit determined by multiplying the participant's vested accrued pension percentage under Supplement A to the PPAP by the Covered Compensation under Paragraph 4(a) above. (c) A participant's benefit under this Supplement shall only be paid to the participant if the benefit when combined with the benefits accrued under Supplement A to the PPAP and under the Supplemental PPAP (as it applies to any benefit limited under Supplement A to the PPAP by Sections 401(a)(17) or 415 of the Code) exceed the participant's accrued benefit computed under the pay-based credits formula under Article 4 of the PPAP and the Supplemental PPAP (as it applies to any benefit computed under the pay-based credits formula which is limited by Sections 401(a)(17) or 415 of the Code). The benefits payable under this Supplement when combined with the benefit accrued under Supplement A to the PPAP and the Supplemental PPAP may only be paid in lieu of, and not in addition to, any other benefit accrued under the PPAP and attributable to the pay- based credit formula. 5. Payment of Executive Plan Benefits. Payment of a benefit ---------------------------------- hereunder shall be made in any of the forms of benefit available under the Supplemental Plan and according to the procedures set out in the Supplemental Plan. A participant may elect to receive his payment hereunder in a form different from the form of benefit, if any, elected under the Supplemental Plan. 6. Survivor's Benefits. A benefit will be paid (a) in a lump ------------------- sum to a participant's Designated Beneficiary, in the case of the death of a participant prior to his retirement or termination of employment provided that such participant would have been entitled to a benefit under paragraph 4 above if he had actually retired or terminated employment on the date of his death, or (b) to a participant's Designated Beneficiary pursuant to any distribution election on file with the Retirement Committee, in the case of the death, after retirement or termination of employment, of a participant whose supplemental benefit was not paid or begun to be paid under paragraph 5 next above. 7. Pre-1997 Benefit of Non-Rule of 65 Participant. The benefit ----------------------------------------------- accrued under the Executive Plan as of December 31, 1996 by any participant who had not attained Rule of 65 as of December 31, 1996 is frozen and the lump sum value of such participant's accrued benefit as of December 31, 1996 shall be credited to such participant's opening account balance under the Supplemental PPAP. 8. Prohibition of Alienation. Except as to debts owing to First ------------------------- Chicago NBD Corporation or its subsidiaries, benefits under this Supplement may not be anticipated, alienated, assigned or encumbered and any attempt to do so shall be void. 9. Benefits Intended for Select Group of Management or Highly ---------------------------------------------------------- Compensated Employees. Benefits under this Supplement are 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. 5 EX-10.(M) 9 INDIVIDUAL CHANGE OF CONTROL EMPLOYMENT AGREEMENT EXHIBIT 10(M) 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. Frederick M. Adams, Jr. 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 Scott P. Marks, Jr. Thomas J. McDowell Timothy P. Moen Susan S. Moody Andrew J. Paine, Jr. Robert A. Rosholt David J. Vitale Willard A. Valpey CHANGE OF CONTROL EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and between First Chicago NBD Corporation, a Delaware corporation (the "Company"), and _______________ (the "Executive"), dated as of the 11th day of July, 1995. 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: 1. 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 2 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 Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, the merger of the Company with First Chicago Corporation shall not constitute a Change of Control. 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 3 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 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 4 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 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 5 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: (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; 6 (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 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. 7 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: (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 (1) 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 (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) 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 8 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 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 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. 9 (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 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 10 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 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 Deloitte & Touche 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 11 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 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. 12 (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 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. 10. 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 13 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 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, Michigan 48XXX If to the Company: ------------------ Fred J. Johns Secretary to the Compensation Committee Board of Directors 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. 14 (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. 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.(N) 10 INDIVIDUAL EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10(N) FORM OF INDIVIDUAL EXECUTIVE EMPLOYMENT AGREEMENT Each of the following individuals is a party to an Executive Employment Agreement with the Corporation, the form and terms of which are substantially as attached. Frederick M. Adams, Jr. 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 Scott P. Marks, Jr. Thomas J. McDowell Timothy P. Moen Susan S. Moody Andrew J. Paine, Jr. Robert A. Rosholt David J. Vitale Willard A. Valpey EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT by and between First Chicago NBD Corporation, a Delaware corporation (the "Company") and _________ (the "Executive"), dated as of the ______ day of December, 1995. In light of the merger of First Chicago Corporation and the Company ("Merger"), 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 to provide the Company after the Merger with continuity of management. 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: 1. Effective Date. The "Effective Date" shall mean the effective date of the Merger. 2. 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 December 1, 1997 (the "Employment Period"). 3. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive shall serve as _______, with such authority, duties and responsibilities as are assigned to the Executive on the Effective Date and as may be consistent with such position as may be assigned to him by the Chief Executive Officer of the Company and (B) the Executive's services shall be performed at any Company office located in the Midwestern United States. (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 substantially all of his 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 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) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans applicable generally to other peer executives of the Company and its affiliated companies. (iii) 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, provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, accidental death and travel accident insurance plans) to the extent applicable generally to other peer executives of the Company and its affiliated companies. (iv) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. (v) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, in accordance with Company policy as in effect from time to time. (vi) 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 as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect generally at any time with respect to other peer executives of the Company and its affiliated companies. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment -2- 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: (i) the 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, or (iii) conviction of a felony or any other offense involving dishonesty or breach of trust, or entry of a guilty or nolo contendere plea by the Executive or participation in a pre-trial diversion with respect thereto, or (iv) a material breach of the covenants contained in Section 9. 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 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- -3- fourths 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 in the absence of a written consent of the Executive: (i) any action by the Company which results in a diminution of officer title or a material diminution in the position, authority, duties or responsibilities associated with such officer title as are assigned to the Executive as of the Effective Date, 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 material failure by the Company to comply with any of the provisions of Section 3(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 outside of the Midwestern United States; (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 10(c) of this Agreement. For purposes of this Section 4(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (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 -4- 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 within 30 days of such notice, 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. 5. 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: (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 (1) the Executive's Annual Base salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Executive's average bonus under the Company's annual incentive plans with respect to the last three full fiscal years prior to the Date of Termination (the "Average Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365; and B. the amount equal to the product of (1) two and one-half and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Average Annual Bonus; (ii) the Company shall pay the following to the Executive after the Date of Termination pursuant to the terms of the applicable plan and/or deferral election: A. any compensation previously deferred (other than pursuant to a qualified plan) 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 (i)(A)(1), (i)(A)(2), and this (ii)(A) shall be hereinafter referred to as the "Accrued Obligations"); and B. 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 -5- under the Company's Retirement Plan immediately prior to the Effective Date), and any excess and/or supplemental retirement plans in which the Executive participates (together, the "SERPs") 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 3(b)(i) and assuming an annual bonus equal to the Average Annual Bonus, over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERPs as of the Date of Termination; (iii) 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, 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, described in Section 3(b)(iii) of this Agreement if the Executive's employment had not been terminated; 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, 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; (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services at a cost not to exceed $35,000; provided that the provider of such services must be approved by the Company; and (v) to the extent not theretofore paid or provided, the Company shall provide to the Executive for one year following the Date of Termination reasonable and appropriate office space, secretarial support and use of a Company provided automobile, but only if such automobile was provided prior to the Date of Termination. (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 of death benefits 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. 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. (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 -6- timely payment, after the Disability Effective Date, of disability benefits as in effect on the Disability Effective Date with respect to other peer executives of the Company and its affiliated companies. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason 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 (such deferred amounts payable pursuant to the terms of the applicable plan or deferral election) and (z) any accrued vacation pay, in each case to the extent theretofore unpaid. 6. 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. 7. Set-Off; No Mitigation; Legal Expenses. Notwithstanding any provision of this Agreement, the Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder are subject to and may be reduced by all rights of 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, except as provided in Section 5(a)(iii), 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 application Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). -7- 8. 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 8) (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 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 8(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 Grosse-Up Payment and a reduction of the Payments, 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 8(c), all determinations required to be made under this Section 8, 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 reasonably acceptable to the Company 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 surviving corporation following the Merger, the Executive may appoint another nationally recognized accounting firm reasonably acceptable to the Company 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 8, shall be paid by the Company to the Executive within five days of the later of (i) the due date for the payment of any Excise Tax or (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. -8- 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 8(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 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 8(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 -9- 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 8(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 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(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. 9. Confidential Information. (a) 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. A violation of the provisions of this Section 9 shall constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach and the Executive acknowledges that damages would be inadequate and insufficient. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. -10- 10. 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. 11. Non-Solicitation. The Executive acknowledges that the Executive has and will learn confidential information relating to the customers of the Company and its affiliated companies. The Executive further acknowledges that the Company's relationship with its customers are extremely valuable to them, are generally the result of the investment of substantial time and effort by them, and tend to be near permanent. Therefore, the Executive agrees that in the event Executive's employment terminates during the Employment Period for any reason whatsoever, the Executive shall not, for a period of one year after the occurrence of such termination, for himself, or as the agent of, on behalf of, or in conjunction with, any person or entity, solicit or attempt to solicit, whether directly or indirectly: (i) any employee of the Company or its affiliated companies to terminate such employee's employment relationship with the Company or its affiliated companies, or (ii) any business of the type provided by the Company or its affiliated companies from any person or entity that is or was a client, employee, or customer of the Company or its affiliated companies and had dealt with the Executive or any other employee of the Company or its affiliated companies under the supervision of the Executive. 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 by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -11- If to the Executive: ------------------- Name of Executive One First National Plaza Chicago, Illinois 60670 If to the Company: ----------------- First Chicago Corporation One First National Plaza Chicago, Illinois 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 4(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 prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time for any reason, 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 employment, severance or change of control agreement between the parties with respect to the subject matter hereof other than the Change of Control Employment Agreement dated July 11, 1995 between the parties, which shall, upon a Change of Control (as defined therein) supersede this Agreement. -12- (g) Notwithstanding any provision of this Agreement, the Company shall have no obligation to make any payments to the Executive if or to the extent such payments are prohibited by any applicable law or regulation, including, without limitation, Section 18(k) of the Federal Deposit Insurance Act and regulations regarding golden parachute and indemnification payments promulgated thereunder. 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. ------------------------- [Name of Executive] FIRST CHICAGO NBD CORPORATION By: ---------------------------- -13- EX-10.(Q) 11 NBD BANCORP, INC. BENEFIT PROTECTION TRUST AGMT EXHIBIT 10(Q) FIRST AMENDMENT TO NBD BANCORP, INC. BENEFIT PROTECTION TRUST AGREEMENT ---------------------------------- THIS AMENDATORY AGREEMENT made this____ day of November, 1995, by and between NBD BANCORP, INC., a corporation duly organized and existing under the laws of the State of Delaware and having its principal office and place of business at Detroit, Michigan ("NBD"), and BANKERS TRUST COMPANY, a corporation duly organized and existing under the laws of the State of New York and having its principal office and place of business at New York, New York (the "Trustee"). WITNESSETH: WHEREAS, effective August 30, 1993, NBD established the NBD Bancorp, Inc. Benefit Protection Trust (the "Trust") under agreement (the "Trust Agreement") with the Trustee; and WHEREAS, NBD now desires to amend the Trust Agreement to provide authority for the investment of Trust assets in any registered investment company or mutual fund for which the Trustee provides, for compensation, custodial, advisory or other services; and WHEREAS, NBD and the Trustee have reserved in Section 13 of the Trust Agreement the right to amend the Trust Agreement by written instrument; NOW, THEREFORE, NBD and the Trustee agree that the Trust Agreement is hereby amended as follows: I. Effective Immediately Section 6(a) is amended in its entirety to read as follows: "(a) Subject to the provisions of paragraph (b), the Trustee shall, in is sole discretion, invest and reinvest the Trust assets in any property, real or personal, or part interest therein, wherever situated, including but without being limited to, common and preferred stocks, personal, corporate and governmental obligations, trust and participation certificates, leaseholds, mortgages and other interests in realty, notes and other evidences of indebtedness or ownership, secured or unsecured, and including specifically real property, stocks, securities, obligations and interests of NBD and its affiliates. Such investments shall be limited to investments that are rated in one of the two highest rating categories by a nationally recognized rating agency. Such investments shall not be restricted to property and securities of the character authorized for investment by trustees under any present or future laws. All rights, privileges, options and elections contained in any policies or contracts issued by insurance companies and acquired pursuant to the foregoing shall vest in the Trustee and shall be exercised, assigned, or otherwise disposed of in its discretion. Without liability for interest, the Trustee may keep a portion of the Trustee assets uninvested and may deposit any uninvested assets with itself or other banks. The Trustee is further authorized and empowered in its sole discretion to invest and reinvest all or any part of the Trust assets to any registered investment company or mutual fund for which the Trustee provides, for compensation, custodial, advisory or other services." II. Except as hereinabove provided, the Trust Agreement as heretofore in effect is hereby ratified and confirmed and shall continue unchanged in full force and effect. IN WITNESS WHEREOF, this Amendatory Agreement has been executed on the ____ day of November, 1995, by NBD BANCORP, INC., as Grantor, and on the ___ day of November, 1995, by BANKERS TRUST COMPANY, as Trustee, and their respective corporate seals affixed and attested by officers hereunto duly authorized. ATTEST: NBD BANCORP, INC. By: /s/ Joseph J. Borkowski By: /s/ Fred J. Johns ---------------------------------- -------------------------------- Joseph J. Borkowski Fred J. Johns Its Vice President Its Senior Vice President (Corporate Seal) ATTEST: BANKERS TRUST COMPANY, Trustee By: /s/ Yolanda Diaz By: /s/ Vanessa Finn ---------------------------------- -------------------------------- Yolanda Diaz Vanessa Finn Its Assistant Vice President Its Vice President (Corporate Seal) STATE OF MICHIGAN) ) SS. COUNTY OF WAYNE ) On this 16th day of November, 1995, before me, a notary public in and for said County, personally appeared FRED J. JOHNS, who, being by me duly sworn, did depose and say that he is a senior vice president of NBD BANCORP, INC., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ Sharon D. Szczepankowski ---------------------------------------------- Notary Public, Wayne County, State of Michigan My Commission Expires 2/12/97 (Notarial Seal) STATE OF NEW YORK ) ) SS. COUNTY OF NEW YORK ) On this 4th day of December, 1995, before me, a notary public in and for said County, personally appeared Vanessa Finn, who, being by me duly sworn, did depose and say that he/she is a Vice President of BANKERS TRUST COMPANY, one of the corporations described in and which executed the foregoing instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like authority. /s/ Marie B. Colaninno --------------------------------------- Notary Public, Queens County State of New York My Commission Expires: 8/5/97 (Notarial Seal) 3 NBD BANCORP, INC. BENEFIT PROTECTION TRUST AGREEMENT This TRUST AGREEMENT made this 30 day of August, 1993, by and between NBD --- BANCORP, INC., a corporation duly organized and existing under the laws of the State of Delaware and having its principal office and place of business at Detroit, Michigan ("NBD"), and BANKERS TRUST COMPANY, a corporation duly organized and existing under the laws of the State of New York and having its principal office and place of business at New York, New York (the "Trustee"). WITNESSETH: WHEREAS, NBD has adopted the nonqualified deferred compensation plans (the "Plans") listed in Appendix A; WHEREAS, NBD has incurred and expects to incur liability under the terms of such Plans with respect to the individuals participating in such Plans; WHEREAS, NBD wishes to establish a trust (hereinafter called the "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of NBD's creditors in the event of NBD's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plans; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and WHEREAS, it is the intention of NBD to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plans; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of Trust ---------------------- (a) NBD hereby deposits with the Trustee in trust Ten Thousand Dollars ($10,000), which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. 4 (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which NBD is the grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of NBD and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against NBD. Any assets held by the Trust will be subject to the claims of NBD's general creditors under federal and state law in the event of insolvency, as defined in Section 4(a) herein. (e) NBD, in its sole discretion, may at any time or from time to time make additional deposits of cash or other property in trust with the Trustee to augment the principal, to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits. (f) The Trustee accepts the Trust, and undertakes to hold, invest, distribute and administer the Trust in accordance with the provisions of this Agreement. If NBD fails to supply the Trustee with the amounts that are required to satisfy the obligations of NBD under the Plans, the Trustee shall have no duty to bring suit against NBD or otherwise to enforce payment by NBD of sufficient funds to satisfy any remaining obligations of NBD under the Plans. The Trustee shall be obligated to make payments to the Plan participants and their beneficiaries only as directed by NBD and to the extent of Trust assets actually received and held by the Trustee and after payment of and provision for the expenses of Trust administration, including the reasonable compensation of the Trustee. Section 2. Authorities. ----------- NBD shall file with the Trustee a certified list of the names and specimen signatures of appropriate officers of NBD and any delegee authorized to act for it. NBD shall promptly notify the Trustee of the addition or deletion of any person's name to or from such list. Until receipt by the Trustee of notice that any person is no longer authorized to so act, the Trustee may continue to rely on the authority of the person. All certifications, notice and directions by any such person or persons to the Trustee shall be in writing signed by such person or persons. The Trustee may rely on any such certification, notice or direction purporting to have been signed by or on behalf of such person or persons that the Trustee believes to have been signed thereby. The Trustee may rely on any certification, notice or direction of NBD that the Trustee believes to have been signed by a duly authorized officer or agent of NBD. The Trustee shall have no 5 responsibility for acting or not acting in reliance upon any notification believed by the Trustee to have been so signed by a duly authorized officer or agent of NBD. NBD shall be responsible for keeping accurate books and records with respect to the employees of NBD, their compensation and their rights and interests in the Trust under the Plan. Section 3. Payments to Plan Participants and Their Beneficiaries. ----------------------------------------------------- (a) NBD shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect to each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plans), and the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provisions for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plans and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by NBD. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plans shall be determined by NBD or such party as it shall designate under the Plans, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plans. (c) NBD may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plans. NBD shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plans, NBD shall make the balance of each such payment as it falls due. The Trustee shall notify NBD where principal and earnings are not sufficient. Section 4. Trustee Responsibility Regarding Payments to Trust Beneficiary When ------------------------------------------------------------------- NBD Is Insolvent. - ---------------- (a) The Trustee shall cease payment of benefits to Plan participants and their beneficiaries if NBD is insolvent. NBD shall be considered "Insolvent" for purposes of this Trust Agreement if (i) NBD is unable to pay its debts as they become due, or (ii) NBD is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of NBD 6 under federal and state law as set forth below. (1) The Board of Directors and the Chairman and President of NBD shall have the duty to inform the Trustee in writing of NBD's Insolvency. If a person claiming to be a creditor of NBD alleges in writing to the Trustee that NBD has become Insolvent, the Trustee shall determine whether NBD is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless the Trustee has actual knowledge of NBD's Insolvency, or has received notice from NBD or a person claiming to be a creditor alleging that NBD is Insolvent, the Trustee shall have no duty to inquire whether NBD is Insolvent. The Trustee may in all events rely on such evidence concerning NBD's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning NBD's solvency. (3) If at any time the Trustee has determined that NBD is Insolvent, the Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of NBD's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of NBD with respect to benefits due under the Plans or otherwise. (4) The Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 3 of this Trust Agreement only after the Trustee has determined that NBD is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plans for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by NBD in lieu of the payments provided for hereunder during any such period of discontinuance. Section 5. Payments to NBD. --------------- Except as provided in Section 3 hereof, NBD shall have no right or power to direct the Trustee to return to NBD or to divert to others any of the Trust assets before all payments of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plans. Section 6. Investment Authority. -------------------- (a) Subject to the provisions of paragraph (b) the Trustee shall, in its sole discretion, invest and reinvest the Trust assets in any property, real or personal, or part interest therein, wherever situated, including but without being limited to, common and preferred stocks, 7 personal, corporate and governmental obligations, trust and participation certificates, leaseholds, mortgages and other interests in realty, notes and other evidences of indebtedness or ownership, secured or unsecured, and including specifically real property, stocks, securities, obligations and interests of NBD and its affiliates. Such investments shall be limited to investments that are rated in one of the two highest rating categories by a nationally recognized rating agency. Such investments shall not be restricted to property and securities of the character authorized for investment by trustees under any present or future laws. All rights, privileges, options and elections contained in any policies or contracts issued by insurance companies and acquired pursuant to the foregoing shall vest in the Trustee and shall be exercised, assigned, or otherwise disposed of in its discretion. Without liability for interest, the Trustee may keep a portion of the Trust assets uninvested and may deposit any uninvested assets with itself or other banks. The Trustee is further authorized and empowered in its sole discretion to invest and reinvest all or any part of the Trust assets through the medium of any common, collective or commingled trust fund, including those operated and maintained by the Trustee, as the same may have heretofore been or may hereafter be established or amended, subject to all of the terms of the declaration of trust pursuant to which such trust fund was established. (b) Subject to the provisions of paragraph (a) hereof, and in furtherance and not in limitation of the Trustee's investment authority, the Trustee shall have full power and authority to deal with all or any part of the Trust assets, including, without limitation, the power to invest, reinvest, and change investments; to acquire any property by purchase, subscription, lease, or other means; to sell for cash or on credit, convey, lease for long and short terms, or convert, redeem or exchange, all or any part of the Trust assets; to borrow, and to pledge as security for such borrowings all or any part of the Trust assets; to make loans with or without security; to improve, repair and develop real property; to enforce, by suit or otherwise, or to waive its rights on behalf of the Trust assets, and to defend claims asserted against it or Trust assets; to compromise, adjust and settle any and all claims against or in favor of it or the Trust assets other than claims for benefits by Plan participants or their beneficiaries; to renew, extend or foreclose any mortgage or other security; to bid on property in foreclosure; to take deeds in lieu of foreclosure, with or without paying a consideration therefor; to vote, or give proxies to vote, any stock or other security, and to waive notice of meetings; to oppose, participate in and consent to the reorganization, merger, consolidation, or readjustment of the finances of any enterprise, to pay assessments and expenses in connection therewith, and to deposit securities under deposit agreements; to hold securities unregistered, or to register them in its own name or in the names of nominees; and to cause any investment to be registered and held in the name of one or more nominees of any system for central handling of securities; to form corporations and to create trusts to hold title to any securities or other property, all upon such terms and conditions as may be deemed advisable; to make, execute, acknowledge and deliver any and all instruments that it shall deem necessary or appropriate to carry out the powers herein granted; and generally to exercise any of the powers of an owner with respect to all or any part of the Trust. No persons dealing with the Trustee shall be bound to see to the application of any money or property paid or delivered to the Trustee or to inquire into the validity or propriety of any transaction. 8 (c) NBD may direct the Trustee to transfer assets to an insurance company to provide an alternative or additional funding medium or investment vehicle for the management and control of Plan assets. If the Trustee agrees to hold any insurance contract as an asset of the Trust at the request of NBD, the Trustee shall not have any responsibility for the selection of the issuer and/or for terms of the contract, or for performing any functions under any insurance contract that it may be directed to purchase and hold as contractholder other than the execution of any documents and the transfer of payments of any funds incidental thereto on the directions of NBD. Section 7. Disposition of Income. --------------------- (a) During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 8. Accounting by the Trustee. ------------------------- The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between NBD and the Trustee. Within ninety (90) days following the close of each calendar year and within ninety (90) days after the removal or resignation of the Trustee, the Trustee shall deliver to NBD a written account of its administration of the Trust during such year, or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold, with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. In the absence of the filing in writing with the Trustee by NBD of exceptions or objections to any such accounting within ninety (90) days, NBD shall be deemed to have approved such accounting, and in such case or upon the written approval of NBD of any such accounting, the Trustee shall be released, relieved and discharged with respect to all matters and things disclosed in such accounting as though such accounting had been settled by the decree of a court of competent jurisdiction. NBD or the Trustee may nevertheless require judicial settlement of the accounts of the Trustee. Section 9. Responsibility of the Trustee. ----------------------------- (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by NBD that is contemplated by, and in conformity with, the terms of the Plans or this Trust and is given in writing by NBD. In the event of a dispute between NBD and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. 9 (b) If the Trustee undertakes or defends any litigation arising in connection with this Trust, NBD agrees to indemnify the Trustee against the Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If NBD does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) The Trustee may consult with counsel who may be counsel for NBD or for the Trustee in its individual capacity, and the Trustee shall not be deemed imprudent by reason of its taking or refraining from taking any action in accordance with the opinion of counsel. The Trustee shall be liable only for its own imprudence, negligence or willful misconduct in carrying out or in failing to carry out its duties and responsibilities under the terms of this Agreement. The Trustee shall be fully protected in relying upon the directions of NBD issued in accordance with this Agreement and shall be under no duty to inquire into the validity or propriety of any such direction. The Trustee shall not be required to give any bond or any other security for the faithful performance of its duties under this Agreement, except such as may be required by a law that prohibits the waiver thereof. (d) The Trustee shall be entitled, as it may deem appropriate from time to time, to require of NBD, any of its affiliates, or any other person involved in the administration of the Plans or investment of the Trust assets, or having any interest under the Plans or in, to, or under this Agreement or to the Trust assets held hereunder, such certificates and proofs of facts as shall permit the Trustee to exercise the powers granted the Trustee under this Agreement. (e) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (f) The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor trustee, or to loan to any person the proceeds of any borrowing against such policy. (g) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 10. Trustee Compensation, Trustee Expenses and Taxes. ------------------------------------------------ (a) The Trustee shall be paid by NBD such reasonable compensation as shall from time to time be agreed upon, in writing, by NBD and the Trustee. Such compensation of the Trustee 10 and reasonable and proper expenses of administration of the Trust, including counsel fees, shall be withdrawn by the Trustee out of the Trust assets unless paid by NBD, but such expenses shall be paid by NBD if the same cannot be withdrawn from the Trust. (b) NBD shall pay all federal, state and local income taxes or other taxes of any and all kinds levied or assessed under existing or future laws against the Trust, except to the extent applicable law requires that such taxes be paid directly out of the Trust. NBD shall indemnify and reimburse the Trust for all taxes paid by the Trust, including, to the extent permitted by law, any applicable penalties and interest. Section 11. Resignation and Removal of the Trustee. -------------------------------------- (a) The Trustee may resign at any time by written notice to NBD, which shall be effective sixty (60) days after receipt of such notice unless NBD and the Trustee agree otherwise. (b) The Trustee may be removed by NBD on sixty (60) days' written notice or upon shorter notice accepted by the Trustee. (c) Upon resignation or removal of the Trustee and appointment of a successor trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within ninety (90) days after receipt of notice of resignation, removal or transfer, unless NBD extends the time limit. (d) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 12 hereof, by the effective date of resignation or removal under paragraph (a) or (b) of this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with such proceeding shall be allowed as administrative expenses of the Trust. Section 12. Appointment of Successor. ------------------------ (a) If the Trustee resigns or is removed in accordance with Section 11(a) or (b) hereof, NBD may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law (but which shall not be NBD or any corporation affiliated with NBD), as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by NBD or the successor trustee to evidence the transfer. (b) The successor trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor 11 trustee shall not be responsible for and NBD shall indemnify and defend the successor trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event or any condition existing at the time it becomes successor trustee. Section 13. Amendment or Termination. ------------------------ (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and NBD. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plans or shall make the Trust revocable. (b) The Trust shall not terminate until the earlier of the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plans or the date the assets of the Trust have been depleted. Upon termination of the Trust any assets remaining in the Trust shall be returned to NBD. (c) Upon written approval of participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plans, NBD may terminate this Trust prior to the time all benefit payments under the Plans have been made. All assets in the Trust at termination shall be returned to NBD. Section 14. Miscellaneous. ------------- (a) No person shall have any right title, or interest in or to any of the assets of the Trust or in or to any contribution thereto, except as otherwise provided herein. (b) If a person entitled to benefits hereunder is deceased or is unable to manage his or her affairs for any reason, the Trustee shall, upon the direction of NBD, distribute any benefit payable to such person to his or her duly- appointed legal representative, if there be one, and if not, to the spouse, parents, children, or other relatives or dependents of such person as NBD in its discretion may determine. Any payment so made shall be a complete discharge of all liability with respect to such benefits. (c) NBD shall enforce this Agreement on behalf of participants and beneficiaries, to the extent of their rights hereunder and interests herein. (d) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (e) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. 12 (f) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of New York. (g) Any corporation resulting from any merger or consolidation to which the Trustee may be a party or succeeding to the trust business of the Trustee or to which substantially all the trust assets of the Trustee may be transferred shall be the successor to the Trustee hereunder without further act or formality with like effect as if such successor trustee had originally been named trustee herein; and in any such event it shall not be necessary for the Trustee or any successor trustee to give notice thereof to any person, and any requirement, statutory or otherwise, that notice shall be given is hereby waived. (h) Except to the extent otherwise provided by law, necessary parties to any accounting, litigation or other proceeding shall include only the Trustee and NBD, and the settlement or judgment in any such case in which NBD is duly served or cited shall be binding upon the participants and beneficiaries, and upon any person claiming under them or claiming to represent them or any of them. (i) This Agreement shall be binding upon the parties and upon their successors and assigns. This Agreement shall be binding upon and inure to the benefit of any successor to NBD or its business as the result of merger, consolidation, reorganization, transfer of assets or otherwise and any subsequent successor thereto. In the event of any such merger, consolidation, reorganization, transfer of assets or other similar transaction, the successor to NBD or its business or any subsequent successor thereto shall promptly notify the Trustee in writing of its successorship and furnish the Trustee with the information specified in Section 3 of this Agreement. In no event shall any such transaction described herein suspend or delay the rights of Plan participants or the beneficiaries of deceased participants to receive benefits hereunder. (j) This Agreement may be executed in any number of counterparts, each of which shall be an original, and all of which together shall constitute one and the same instrument. Section 15. Effective Date. -------------- The effective dale of this Trust Agreement shall be August 30, 1993. 13 IN WITNESS WHEREOF, this Agreement has been executed on the 31st day of August, 1993, by NBD BANCORP, INC., as Grantor, and on the 13th day of September, 1993, by BANKERS TRUST COMPANY, as Trustee, and their respective corporate seals affixed and attested by officers hereunto duly authorized. ATTEST: NBD BANCORP, INC. By: /s/ Allan O. Helland By: /s/ Fred J. Johns ------------------------------- -------------------------------- Allan O. Helland Fred J. Johns Its FirstVice President Its Senior Vice President (Corporate Seal) ATTEST: BANKERS TRUST COMPANY, Trustee By: /s/ Marie B. Colaninno By: /s/ Robert Karsch ------------------------------- -------------------------------- Marie B. Colaninno Robert Karsch Its Vice President Its Vice President (Corporate Seal) STATE OF MICHIGAN) ) SS. COUNTY OF WAYNE ) On this 31st day of August, 1993, before me, a notary public in and for said County, personally appeared FRED J. JOHNS, who, being by me duly sworn, did depose and say that he is a senior vice president of NBD BANCORP, INC., one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ Sharon D. Szczepankowski ------------------------------------ Notary Public, Wayne County State of Michigan My Commission Expires 2/12/97 (Notarial Seal) 14 STATE OF NEW YORK ) ) SS. COUNTY Of NEW YORK) On this 13th day of September, 1993, before me, a notary public in and for said County, personally appeared ROBERT KARSCH, who, being by me duly sworn, did depose and say that he is a vice president of BANKERS TRUST COMPANY, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ Allison O. Taylor -------------------------------------- Notary Public, New York County State of New York My Commission Expires 2/22/95 (Notarial Seal) 15 Appendix A Plans Covered under NBD Bancorp, Inc. Benefit Protection Trust Agreement ---------------------------------- 1. NBD Bancorp, Inc. Pension Restoration/Supplemental Plan 2. Incentive compensation payments deferred at the option of participants under the NBD Bancorp, Inc. Executive Incentive Plan. 16 EX-12 12 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 13 FIRST CHICAGO NBD CORPORATION SUBSIDIARIES EXHIBIT 21 FIRST CHICAGO NBD CORPORATION SUBSIDIARIES As of March 1, 1997, 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 Mortgage Company Delaware 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 Subsidiary: ANB Investment Management and Trust Company Illinois 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: NBD Equipment Finance, Inc. Delaware NBD Insurance Services, Inc. Michigan NBD Bank (Venice, Florida) Florida NBD Bank, National Association (Fox River Grove, Illinois) United States NBD Community Development Corporation Michigan NBD Indiana, Inc. Delaware Subsidiaries: First Chicago NBD Real Estate Services, Inc. Indiana NBD Bank (Elkhart, Indiana) Indiana NBD Bank, National Association (Indianapolis, Indiana) United States NBD Neighborhood Revitalization Corporation Indiana NBD Insurance Agency, Inc. Michigan NBD Insurance Company Arizona 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. EX-23 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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, 1997, 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-3 Registration Statement No. 33-65431, 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, and Form S-8 Registration Statement No. 333-16369. /s/ Arthur Andersen LLP Chicago, Illinois, March 27, 1997 EX-27 15 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10K 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 4.39 4.32 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 Stockholder's equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $255 million. Other expense includes: Salaries and employee benefits of $1,707 million, Occupancy of $259 million, Equipment rentals, depreciation and maintenance of $227 million, amortization of intangible assets of $79 million, and other expenses which totaled $999 million.
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