-----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, Dgqfpqece4H83U5/DutzZ7hvohsKdZMx8lpeIaMNbohke/Mgj4gkMAYXU0jRBmt4 juLojbLvqZZVecbeGJPomg== 0000950131-97-003458.txt : 19970520 0000950131-97-003458.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950131-97-003458 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07127 FILM NUMBER: 97606661 BUSINESS ADDRESS: STREET 1: ONE FIRST NATIONAL PLAZA CITY: CHICAGO STATE: IL ZIP: 60670 BUSINESS PHONE: 3127324000 MAIL ADDRESS: STREET 1: ONE FIRST NATIONAL PLAZA CITY: CHICAGO STATE: IL ZIP: 60670 FORMER COMPANY: FORMER CONFORMED NAME: NBD BANCORP INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL DETROIT CORP DATE OF NAME CHANGE: 19810522 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number 1-7127 -------- FIRST CHICAGO NBD CORPORATION --------------------------------------------------------------- (exact name of registrant as specified in its charter) DELAWARE 38-1984850 ------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60670 -------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 312-732-4000 -------------------------------------------------------------------------- (Registrant's telephone number, including area code) NO CHANGE -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 30, 1997. Class Number of Shares Outstanding - ------------------------- ---------------------------- Common Stock $1 par value 308,570,386
- ------------------------------------------------------------------------------------------------------------- F I V E - Q U A R T E R S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N First Chicago NBD Corporation and Subsidiaries - ------------------------------------------------------------------------------------------------------------- (Dollars in millions, except March 31 Dec. 31 Sept. 31 June 30 March 31 per share data) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------- Selected Financial Data for the Quarter Net interest income........................ $ 876 $ 883 $ 942 $ 910 $ 885 Tax-equivalent adjustment.................. 31 24 25 25 28 -------- -------- -------- -------- -------- Net interest income--tax-equivalent basis................................. 907 907 967 935 913 Provision for credit losses................ 187 190 185 185 175 Noninterest income......................... 679 682 597 643 626 Operating expense.......................... 800 813 798 814 828 FDIC special assessment.................... - - 18 - - Net income................................. 380 377 358 361 340 - ------------------------------------------------------------------------------------------------------------- Earnings Per Share Primary.................................. $ 1.18 $ 1.15 $ 1.09 $ 1.10 $ 1.04 Fully diluted............................ 1.17 1.14 1.08 1.09 1.03 - ------------------------------------------------------------------------------------------------------------- Net Interest Margin Adjusted................................. 4.73% 4.64% 4.51% 4.38% 4.23% Reported................................. 4.11 4.11 4.00 3.74 3.51 - ------------------------------------------------------------------------------------------------------------- At Quarter-End Assets..................................... $109,133 $104,619 $106,694 $113,714 $115,465 Loans...................................... 66,536 66,414 66,602 66,431 64,253 Deposits................................... 64,927 63,669 63,679 64,593 64,243 Long-term debt............................. 8,514 8,454 7,967 7,951 8,011 Common stockholders' equity................ 8,495 8,563 8,612 8,339 8,135 Stockholders' equity....................... 8,785 9,007 9,087 8,827 8,624 - ------------------------------------------------------------------------------------------------------------- Average Balances Assets..................................... $105,133 $102,687 $110,715 $116,280 $120,708 Loans...................................... 65,177 65,494 65,962 64,534 63,790 Earning assets............................. 89,352 87,896 96,123 100,564 104,629 Deposits................................... 62,389 61,580 63,482 65,162 65,922 Common stockholders' equity................ 8,517 8,565 8,352 8,183 8,053 Stockholders' equity....................... 8,936 9,030 8,839 8,672 8,543 - ------------------------------------------------------------------------------------------------------------- Financial Ratios Return on common stockholders' equity...... 17.8% 17.2% 16.7% 17.4% 16.6% Return on stockholders' equity............. 17.2 16.6 16.1 16.7 16.0 Return on assets........................... 1.47 1.46 1.29 1.25 1.13 - ------------------------------------------------------------------------------------------------------------- Capital Data (1) Common-equity-to-assets ratio.............. 7.9% 8.2% 8.1% 7.6% 7.3% Regulatory leverage ratio.................. 9.2 9.3 8.1 7.6 7.3 Risk-based capital Tier 1 capital ratio..................... 9.1 9.2 8.4 8.1 8.1 Total capital ratio...................... 13.1 13.3 12.4 12.2 12.3 - ------------------------------------------------------------------------------------------------------------- Common Share and Stockholder Data For the Quarter Ended Market price High..................................... $ 63 5/8 $ 58 7/8 $ 45 1/4 $ 45 1/2 $ 44 1/4 Low...................................... 51 1/2 45 36 5/8 38 5/8 34 3/4 At quarter-end........................... 54 1/8 53 3/4 45 1/4 39 1/8 41 1/2 Book value (at quarter-end)................ 27.20 27.31 27.11 26.31 25.70 Dividends declared per common share........ 0.40 0.40 0.36 0.36 0.36 Dividend payout ratio...................... 33.9% 34.8% 33.0% 32.7% 34.6% Average number of common and common- equivalent shares (in millions)........... 316.5 321.4 320.2 320.2 319.2 Average number of shares, assuming full dilution (in millions).................... 320.8 327.6 327.5 326.9 326.2 - -------------------------------------------------------------------------------------------------------------
(1) Net of investment in First Chicago Capital Markets, Inc. 1
BUSINESS SEGMENTS - --------------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31 Corporate & Institutional Regional Banking and Corporate Other Credit Card Banking Investments Activities (Dollars in millions, ----------- -------- ------------ ---------- except where noted) 1997 1996 1997 1996 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Net income............................. $ 75 $ 78 $ 163 $ 144 $ 140 $ 110 $ 2 $ 8 Return on equity....................... 22% 28% 18% 17% 20% 13% N/M N/M Average assets (presecuritized) (in billions)........................ $17.3 $17.0 $38.3 $36.6 $57.7 $74.2 - 0.7 Average common equity (in billions)........................... 1.3 1.1 3.6 3.3 2.8 3.4 0.8 0.3 - --------------------------------------------------------------------------------------------------------------------------- N/M -Not meaningful.
Financial results are reported by major business lines, principally structured around the customer segments served. These major businesses are: Credit Card, Regional Banking (retail and middle market), and Corporate & Institutional Banking and Corporate Investments. Investment management activities, while managed separately, serve customers in both the Regional and Corporate & Institutional Banking segments. Therefore, investment management's financial results are captured within those businesses. 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 on page 6 and a reconciliation of reported to presecuritized results on page 29. Certain corporate revenues and expenses not allocable to specific lines of business are included in Other Activities. Results are derived from internal profitability reporting systems, which use a detailed funds transfer methodology, and reflect full allocation of all institutional and overhead items. Beginning in 1997, the Corporation adopted a revised method of assigning capital to business units. Common equity is allocated based on two separate risk types: portfolio risk (potential losses arising from credit, market and investment risks) and business risk (including operating risk, event risk and technology risk, as well as goodwill). Under the revised methodology, risk assessment changed for most lines of business in 1997. The capital at risk for the Credit Card and Regional Banking segments increased, while the risk profile of Corporate & Institutional Banking improved, leading to a lower capital allocation for that business. Capital assigned to the business units reflects a standard structure composed of a fixed proportion of common (90%) and noncommon (10%) equity. Any residual equity is held in Other Activities. See page 20 for more information on the Corporation's capital management practices. Line-of-business financial results for 1996 have been adjusted to reflect the key tenets of the enhanced capital methodology, as well as for organizational changes. [PIE CHARTS APPEAR HERE] Earnings Contribution by Business Lines For the Three Months Ended March 31 1997 1996 Corporate & Institutional Banking and Corporate Investments 36% 33% Regional Banking 43% 42% Credit Card 20% 23% Other Activities 1% 2% 2
Credit Card - --------------------------------------------------------------------- (Presecuritized) Three Months Ended (Dollars in millions, except where March 31 noted) 1997 1996 - --------------------------------------------------------------------- Net interest income--tax-equivalent basis..... $389 $367 Provision for credit losses................... 319 220 Noninterest income............................ 185 129 Noninterest expense........................... 133 153 Net income.................................... 75 78 Return on equity.............................. 22% 28% Efficiency ratio (1).......................... 23% 31% Average loans (in billions)................... $17.5 $17.3 Average common equity (in billions)........... 1.3 1.1 - ---------------------------------------------------------------------
(1) Noninterest expense as a percentage of total revenue. The Corporation reaches consumers nationally through its Credit Card business, known as First Card, which is one of the largest issuers of bank credit cards in the U.S. This segment contributes about one-fifth of the Corporation's earnings. Net income for Credit Card was $75 million for the first quarter of 1997, versus $78 million a year ago. Return on equity was 22% for the quarter, down from 28% for the first quarter of 1996. The lower return reflects both the lower net income and the higher capital allocation. Revenue increased 16% year over year, driven by pricing initiatives, higher transaction volumes and modest growth in the loan portfolio. Lower marketing costs and the realization of merger synergies led to a 13% decline in expenses in 1997. However, the positive revenue and expense trends were offset by significantly higher credit costs, up almost $100 million. Increased credit risk throughout the credit card industry contributed to the higher capital allocation for this business segment in 1997.
Regional Banking - ----------------------------------------------------------------- Three Months Ended (Dollars in millions, except where March 31 noted) 1997 1996 - ----------------------------------------------------------------- Net interest income--tax-equivalent basis.... $ 538 $ 511 Provision for credit losses.................. 33 30 Noninterest income........................... 201 193 Noninterest expense.......................... 447 443 Net income................................... 163 144 Return on equity............................. 18% 17% Efficiency ratio (1)......................... 60% 63% Average loans (in billions).................. $35.1 $33.8 Average assets (in billions)................. 38.3 36.6 Average common equity (in billions).......... 3.6 3.3 - -----------------------------------------------------------------
(1) Noninterest expense as a percentage of total revenue. The Corporation's Regional Banking business serves local consumers, small businesses and middle market customers through more than 650 offices in Michigan, Indiana and Illinois in addition to a niche business in Florida. Regional Banking contributed 43% of the Corporation's earnings for the three months ended March 31, 1997. Net income of $163 million was up 13% from a year earlier. Return on equity for this segment was 18% for the quarter, compared with 17% a year ago. 3
- -------------------------------------------------------------------------- Three Months Ended March 31 Retail Middle Market (Dollars in millions, except where ------- ------------- noted) 1997 1996 1997 1996 - -------------------------------------------------------------------------- Net interest income--tax-equivalent basis.................................. $ 312 $ 295 $ 226 $ 216 Provision for credit losses.............. 19 14 14 16 Noninterest income....................... 143 140 58 53 Noninterest expense...................... 318 315 129 128 Net income............................... 74 66 89 78 Return on equity......................... 16% 15% 20% 19% Efficiency ratio (1)..................... 70% 72% 45% 48% Average loans (in billions).............. $17.6 $16.7 $17.5 $17.1 Average assets (in billions)............. 19.5 18.9 18.8 17.7 Average common equity (in billions)...... 1.8 1.7 1.8 1.6 - -------------------------------------------------------------------------
(1) Noninterest expense as a percentage of total revenue. Retail Banking The Retail Banking segment earned $74 million in the first quarter, a 12% increase over a year ago. Return on equity for this segment was 16%. The earnings increase was driven by a 5% increase in total revenue combined with tight expense control. The provision for credit losses rose $5 million, reflecting some deterioration in consumer credit quality. Middle Market Banking Net income for the Middle Market segment increased 14% in the first quarter to $89 million. Return on equity was a healthy 20% for the first quarter. Lower credit costs, expense management and steady revenue growth drove the strong performance.
Corporate & Institutional Banking and Corporate Investments - --------------------------------------------------------------- Three Months Ended (Dollars in millions, except where March 31 noted) 1997 1996 - --------------------------------------------------------------- Net interest income--tax-equivalent basis...................................... $ 173 $ 201 Provision for credit losses................. - 24 Noninterest income.......................... 253 226 Noninterest expense......................... 209 229 Net income.................................. 140 110 Return on equity............................ 20% 13% Efficiency ratio (1)........................ 49% 54% Average loans (in billions)................. $21.1 $20.6 Average assets (in billions)................ 57.7 74.2 Average common equity (in billions)......... 2.8 3.4 - ---------------------------------------------------------------
(1) Noninterest expense as a percentage of total revenue. 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 segments contributed over one-third of the Corporation's first quarter net income. Earnings were $140 million for the quarter, representing a 27% increase over the first quarter of last year. The earnings improvement was the result of significantly lower operating expenses, coupled with zero credit costs in the first quarter. Return on equity was 20%. 4
- ------------------------------------------------------------------------------------ Three Months Ended March 31 Corporate & Institutional Corporate Banking Investments -------------------------------------------- (Dollars in millions, except where 1997 1996 1997 1996 noted) - ------------------------------------------------------------------------------------ Net interest income--tax-equivalent basis..................................... $ 147 $ 163 $ 26 $ 38 Provision for credit losses................ - 24 - - Noninterest income......................... 161 160 92 66 Noninterest expense........................ 196 214 13 15 Net income................................. 70 54 70 56 Return on equity........................... 13% 7% 45% 43% Efficiency ratio (1)....................... 64% 66% 11% 15% Average loans (in billions)................ $19.6 $19.3 $ 1.5 $ 1.3 Average assets (in billions)............... 41.0 51.9 16.7 22.3 Average common equity (in billions)........ 2.2 2.9 0.6 0.5 - ------------------------------------------------------------------------------------
(1) Noninterest expense as a percentage of total revenue. Corporate & Institutional Banking The Corporate & Institutional Banking segment earned $70 million in the first quarter of 1997, for a return on equity of 13%. This represents significant improvement over the $54 million and 7% return earned in the year ago quarter. Expenses were down 8% as the business continues its streamlining process. At the same time, favorable credit conditions in the large commercial lending portfolio more than offset the modest decline in revenue. Capital assigned to Corporate & Institutional Banking fell by nearly 25% consistent with the improved risk profile as determined by the new capital allocation method. Corporate Investments Corporate Investments earned $70 million, or 18% of consolidated net income in the first quarter of 1997. Return on equity was 45%, compared with 43% a year earlier. Leasing gains and strong trading results led to the 1997 earnings improvement. Lower average asset levels reflected the substantial decline in investment securities and short term assets resulting from last year'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.
Other Activities - ---------------------------------------------------------------------- Three Months Ended March 31 (Dollars in millions, except where noted) 1997 1996 - ---------------------------------------------------------------------- Total revenue....................................... $ 9 $ 10 Noninterest expense................................. 11 3 Net income.......................................... 2 8 Average assets (in billions)........................ - $ 0.7 - ----------------------------------------------------------------------
The Corporation reported $2 million in earnings from Other Activities for the first quarter of 1997, compared with $8 million a year earlier. Revenue in both 1997 and 1996 includes earnings associated with excess capital held at the corporate level; the first quarter of 1996 also includes the gain from the sale of the Ohio branches. Operating expenses in 1997 included charges not specific to any of the lines of business. 5 EARNINGS ANALYSIS Summary The Corporation reported record net income of $380 million, or $1.17 per share, for the first quarter of 1997. Net income for the year-ago quarter was $340 million, or $1.03 per share.
- ------------------------------------------------------------ Three Months Ended (Dollars in millions, except per share March 31 data) 1997 1996 - ------------------------------------------------------------ Net interest income--tax-equivalent basis.................................... $ 907 $ 913 Provision for credit losses............... 187 175 Noninterest income........................ 679 626 Noninterest expense....................... 800 828 Net income................................ 380 340 Common Share Data Primary earnings per share.............. $ 1.18 $ 1.04 Average common and common-equivalent shares (in millions)................... 316.5 319.2 Fully diluted earnings per share........ $ 1.17 $ 1.03 Average shares, assuming full dilution (in millions)................. 320.8 326.2 Return on assets.......................... 1.47% 1.13% Return on common stockholders' equity..... 17.8 16.6 - ------------------------------------------------------------
First-quarter 1997 highlights: . The adjusted net interest margin was a record 4.73% for the quarter, reflecting a more profitable mix of earning assets. . The provision for credit losses was $187 million, up from the $175 million reported a year ago. . Market-driven revenues were $107 million, on par with the year-ago quarter but up significantly from both the third and fourth quarters of 1996. . Adjusted fee-based revenue rose 21% from a year ago. Substantial growth in credit card fee revenue was the driver behind this marked improvement. . Operating expense was $800 million, down 3% from $828 million one year ago. The operating efficiency ratio was 50.4%, compared with 53.8% in the first quarter of 1996. Net Interest Income Net interest income includes fundamental spreads on earning assets as well as such items as loan fees, cash interest collections on problem loans, dividend income, interest reversals, and income or expense on interest rate derivatives used to manage interest rate risk. Net interest margin measures how efficiently the Corporation uses its earning assets and its underlying capital. In order to analyze fundamental trends in net interest margin, it is useful to adjust for securitization of credit card receivables and the activities of First Chicago Capital Markets, Inc. (FCCM). When credit card receivables are sold in securitization transactions, the Corporation's earnings are unchanged. However, the net interest income related to these high-yield assets is replaced by fee revenue, net of related credit losses. The average level of securitized receivables was $8.8 billion in the first quarter of 1997, compared with $7.9 billion in the first quarter of 1996. 6 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 in the first quarter of 1997 was $1.1 billion, unchanged from a year ago. Improved spreads were essentially offset by the reduced level of total average earning assets. On an adjusted basis, net interest margin for the first quarter of 1997 was 4.73%, compared with 4.23% for the year-ago quarter. The increase was attributable to an improved average earning asset mix, principally reflecting successful efforts to reduce low-margin earning assets. The following charts illustrate trends in net interest income on a tax- equivalent ("TEA") basis, both reported and adjusted, as well as net interest margin over the past five quarters. [BAR CHART APPEARS HERE] Net Interest Income--TEA (In Millions) 1Q96 2Q96 3Q96 4Q96 1Q97 ------ ------ ------ ------ ------ Reported $ 913 $ 935 $ 967 $ 907 $ 907 Adjusted $1,078 $1,100 $1,115 $1,084 $1,101 [GRAPH APPEARS HERE] Net Interest Margin 1Q96 2Q96 3Q96 4Q96 1Q97 ------ ------ ------ ------ ------ Reported 3.51% 3.74% 4.00% 4.11% 4.11% Adjusted 4.23% 4.38% 4.51% 4.64% 4.73% 7 Provision for Credit Losses Details of the Corporation's credit risk management and performance during the quarter ended March 31, 1997, are presented in the Credit Risk Management section, beginning on page 15. Noninterest Income The following table provides a breakdown of the components of noninterest income for the first three months of 1997 compared with a year ago. Credit card fee revenue excludes the amount of net fee revenue (spread income less credit costs) associated with securitized credit card receivables.
- ---------------------------------------------------------------------------------- Three Months Ended Percent March 31 Increase (In millions) 1997 1996 (Decrease) - ---------------------------------------------------------------------------------- Combined trading profits.................. $ 28 $ 36 (22)% Equity securities gains................... 54 49 10 Investment securities gains............... 25 22 14 ---- ---- Market-driven revenue................... 107 107 - Credit card fee revenue (1)............... 199 137 45 Fiduciary and investment management fees.. 105 100 5 Deposit fees (includes deficient balance fees)............................ 109 101 8 Other service charges and commissions..... 104 88 18 ---- ---- Adjusted fee-based revenue.............. 517 426 21 Other income.............................. 20 23 (13) ---- ---- Adjusted noninterest income............. $644 $556 16 ==== ==== - ----------------------------------------------------------------------------------
(1) Net credit card fee revenue related to the securitized receivables totaled $35 and $70 million in the first three months of 1997 and 1996, respectively. Combined trading activities generated gains of $28 million in the first quarter of 1997. For the quarter, combined trading profits were below 1996 levels, reflecting lower trading profits in both the global derivatives and foreign exchange trading businesses. Equity securities gains were $54 million for the first quarter of 1997, compared with $49 million for the first quarter of 1996. Gains from the sale of venture capital investments totaled $47 million in the first quarter of 1997 and $44 million in the first quarter of 1996. For the first three months of 1997, investment securities gains totaled $25 million, up from the $22 million reported in the same period a year ago. Adjusted for credit card securitizations, credit card fee revenue was $199 million in the first quarter of 1997, up 45% from $137 million in the year- earlier period. The increase primarily reflects higher transaction volume and pricing changes instituted during 1996 to mitigate rising credit costs. Fiduciary and investment management fees increased $5 million from one year ago to $105 million. Increased revenue from both enhanced product offerings and specialized services in the shareholder services business accounted for much of this increase. Deposit fees increased to $109 million in 1997 from $101 million in 1996. Increased retail deposit and cash management fees contributed to this year-over- year growth. 8 Other service charges and commissions increased 18% from the year-ago quarter. Increased transaction flow in the loan syndication management business, as well as higher levels of fees from the sale of investment management products in the retail banking network, contributed to this excellent performance. Other noninterest income in the first quarter of 1996 includes a $7 million gain related to the Corporation's sale of its Ohio banking network. The following chart compares market-driven revenue and the significant components of fee-based revenue for the past five quarters. Fee-based revenue continues to be a significant contributor to overall profitability, with some seasonal effects associated with credit card fee revenue. Credit card fee revenue and total noninterest income have been adjusted to exclude the effect of credit card securitizations in order to provide a more meaningful trend analysis. [BAR CHART APPEARS HERE] Noninterest Income (In Millions) 1Q96 2Q96 3Q96 4Q96 1Q97 ------ ------ ------ ------ ------ Market-Driven Revenue $107 $110 $ 40 $ 83 $107 Adjusted Credit Card Fees $137 $169 $183 $205 $199 Serv. Chgs. & Commissions $189 $195 $201 $218 $213 Fiduciary & Inv. Mgmt. Fees $100 $ 98 $100 $102 $105 Other Revenue $ 23 $ 20 $ 28 $ 20 $ 20 ---- ---- ---- ---- ---- Total $556 $592 $552 $628 $644 Noninterest Expense Operating expense in the first quarter of 1997 was $800 million, versus $828 million in the first quarter of 1996. Over the past five quarters, overall expense levels have been maintained within a narrow range, with resultant operating efficiency ratios showing continued improvement, as indicated by the following charts. [BAR CHART APPEARS HERE] Operating Expense ($ Millions) 1Q96 2Q96 3Q96 4Q96 1Q97 ------ ------ ------ ------ ------ Salaries & Benefits $436 $426 $419 $426 $425 Other Operating $392 $388 $379 $387 $375 ---- ---- ---- ---- ---- Total $828 $814 $798 $813 $800 [GRAPH APPEARS HERE] Operating Efficiency (1) 1Q96 2Q96 3Q96 4Q96 1Q97 ----- ----- ----- ----- ----- 53.8% 51.6% 51.0% 51.2% 50.4% (1) Operating expense as a percentage of total revenue. 9
- ----------------------------------------------------------------------- Salaries and Employee Benefits Three Months Ended Percent March 31 Increase (Dollars in millions) 1997 1996 (Decrease) - ----------------------------------------------------------------------- Salaries................................ $ 350 $ 356 (2)% Employee benefits....................... 75 80 (6) ------- ------- Total................................. $ 425 $ 436 (3) ======= ======= Average full-time-equivalent employees.. 33,832 34,512 (2) ======= ======= - -----------------------------------------------------------------------------
Overall salaries and benefit costs in the first quarter of 1997 were down $11 million, or 3%, from the first quarter of 1996. Reduced staff levels, in conjunction with merger-related and business re-engineering initiatives, were the primary reason for the reduced costs. In conjunction with the integration of the Corporation's various employee benefit programs, postretirement medical benefits were discontinued. As a result, a curtailment gain was recorded that reduced other benefit costs by approximately $6 million in the first quarter of 1997.
- ----------------------------------------------------------------------------- Other Noninterest Expense Three Months Ended Percent March 31 Increase (Dollars in millions) 1997 1996 (Decrease) - ----------------------------------------------------------------------------- Occupancy expense of premises, net......... $ 66 $ 67 (1)% Equipment rentals, depreciation and maintenance............................... 54 55 (2) Marketing and public relations............. 24 42 (43) Amortization of intangible assets.......... 18 20 (10) Telephone.................................. 23 20 15 Freight and postage........................ 23 22 5 Travel and entertainment................... 12 12 - Stationery and supplies.................... 12 11 9 Other...................................... 143 143 - ----- ----- Total................................... $ 375 $ 392 (4) ===== ===== - -----------------------------------------------------------------------------
Other operating expense was $375 million in the first quarter of 1997, down 4% from 1996. Reduced market solicitation costs in the credit card business accounted for much of this decline. Merger savings continued to be channeled into investments in technology and used to fund growth in selected business activities.
Applicable Income Taxes - -------------------------------------------------- Three Months Ended March 31 (Dollars in millions) 1997 1996 - ------------------------------------------------- Income before income taxes..... $ 568 $ 508 Applicable income taxes........ 188 168 Effective tax rate............. 33.1% 33.1% - -------------------------------------------------
Tax expense in both periods included benefits from tax-exempt income and general business tax credits offset by the effect of nondeductible expenses, including goodwill. 10 LIQUIDITY RISK MANAGEMENT Liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely manner. The Corporation considers strong capital ratios, credit quality and core earnings essential to retaining high credit ratings and, thereby, cost-effective access to market liquidity. The Statement of Cash Flows, on page 26, presents data on cash and cash equivalents provided and used in operating, investing and financing activities. The Corporation's ability to attract wholesale funds on a regular basis and at a competitive cost is fostered by strong ratings from the major credit rating agencies. As of March 31, 1997, the parent company and the major banking subsidiaries had the following long- and short-term debt ratings.
- ----------------------------------------------------------------------------- Long-Term Debt Short-Term Debt - ----------------------------------------------------------------------------- S&P Moody's S&P Moody's - ----------------------------------------------------------------------------- First Chicago NBD Corporation (parent)... A+ A1 A-1 P-1 The Principal Banks...................... AA- Aa3 A-1+ P-1 - -----------------------------------------------------------------------------
A large customer deposit base is one of the significant strengths of the Corporation's liquidity position. The Corporation has established a 35% limit on the use of wholesale funds for funding core assets. As of March 31, 1997, its major banking subsidiaries collectively funded 79% of core assets with core liabilities, accessing the wholesale market for only 21% of core asset funding needs.
The following table shows the total funding source mix for the past five quarters. - ---------------------------------------------------------------------------------------------------------- Deposits and Other Purchased Funds As of As of As of As of As of March 31 December 31 September 30 June 30 March 31 (In millions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------- Domestic offices Demand................................... $15,016 $15,702 $16,242 $14,482 $13,566 Savings.................................. 21,381 21,722 20,882 20,890 19,912 Time Under $100,000......................... 9,788 9,851 9,944 9,952 10,008 $100,000 and over...................... 5,290 5,143 5,900 5,864 6,263 Foreign offices............................ 13,452 11,251 10,711 13,405 14,494 ------- ------- ------- ------- ------- Total deposits........................ 64,927 63,669 63,679 64,593 64,243 - ---------------------------------------------------------------------------------------------------------- Federal funds purchased and securities under repurchase agreements............... 9,656 7,859 8,193 11,630 13,110 Commercial paper........................... 830 762 864 743 742 Other short-term borrowings................ 7,687 6,810 8,966 11,754 10,777 Long-term debt............................. 8,514 8,454 7,967 7,951 8,011 ------- ------- ------- ------- ------- Total other purchased funds........... 26,687 23,885 25,990 32,078 32,640 ------- ------- ------- ------- ------- Total................................. $91,614 $87,554 $89,669 $96,671 $96,883 ======= ======= ======= ======= ======= - ----------------------------------------------------------------------------------------------------------
11 MARKET RISK MANAGEMENT Overview Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Corporation maintains 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 to minimize structural interest rate and foreign exchange rate risk. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Trading Activities The Corporation takes active trading positions in a variety of markets and instruments, including U.S. government, municipal and money market securities. It also maintains positions in derivative products associated with these markets and instruments, such as interest rate and currency swaps, and 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 for such transactions, 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, they are essential to providing customers with capital markets products at competitive prices. 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. Risk points measure the market risk (potential overnight loss) in a capital markets product. Value at risk is monitored in each significant trading portfolio on a daily basis. The following tables show average, maximum and minimum daily value at risk for the first quarter of 1997 and the preceding four quarters, and the actual trading revenue for each quarter.
- ------------------------------------------------------------------------------------------------- Daily Value at Risk March 31 December 31 September 30 June 30 March 31 (In millions) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------- Average......................... $21 $24 $26 $32 $32 Maximum......................... 25 27 30 37 38 Minimum......................... 18 21 23 28 25 - ------------------------------------------------------------------------------------------------- Quarter Ended March 31 December 31 September 30 June 30 March 31 (In millions) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------- Trading revenue*................ $54 $33 $19 $55 $68 - ------------------------------------------------------------------------------------------------
*Includes trading profits and related net interest income. Value at risk is estimated using statistical models calibrated at a three- standard-deviation confidence interval. The reported value at risk remains somewhat overstated because all offsets and correlations across different trading portfolios are not fully considered in the calculation. Structural Interest Rate Risk Management Movements in interest rates can create fluctuations in the Corporation's net interest income and economic value to an imbalance in the repricing or maturity of assets and liabilities. Asset and liability positions are actively managed with the goal of minimizing the impact of interest rate volatility on current earnings and on the market value of equity. The following table details the Corporation's interest rate gap analysis as of March 31, 1997. Interest rate risks in trading and overseas asset and liability positions are assumed to be matched and are managed principally as trading risks. Credit card securitizations, which subject fee revenue to interest rate risk, are included in the gap analysis measure. 12
Interest Rate Sensitivity - ------------------------------------------------------------------------------------------------------- March 31, 1997 0-90 91-180 181-365 1-5 Beyond (Dollars in millions) days days days years 5 years Total - ------------------------------------------------------------------------------------------------------- Loans................................... $47,011 $ 3,008 $ 3,929 $12,928 $ 2,799 $ 69,675 Investment securities................... 873 293 942 3,531 1,182 6,821 Other earning assets.................... 23,484 381 34 29 - 23,928 Nonearning assets....................... 14,320 76 144 1,247 1,519 17,306 ------- ------- -------- ------- ------- -------- Total assets......................... $85,688 $ 3,758 $ 5,049 $17,735 $ 5,500 $117,730 - ------------------------------------------------------------------------------------------------------- Deposits................................ $27,941 $ 4,269 $ 4,212 $14,401 $ 990 $ 51,813 Other interest-bearing liabilities...... 39,616 1,647 2,805 2,290 3,054 49,412 Noninterest-bearing liabilities......... 7,010 11 10 48 641 7,720 Equity.................................. 403 212 525 3,398 4,247 8,785 ------- ------- -------- ------- ------- -------- Total liabilities and equity......... $74,970 $ 6,139 $ 7,552 $20,137 $ 8,932 $117,730 - ------------------------------------------------------------------------------------------------------- Balance sheet sensitivity gap........... $10,718 $(2,381) $ (2,503) $(2,402) $(3,432) - - ------------------------------------------------------------------------------------------------------- Cumulative gap as a % of total assets... 9.1% 7.1% 5.0% 2.9% - - - ------------------------------------------------------------------------------------------------------- Effect of off-balance-sheet ALM derivative transactions: Specific transactions................. $(4,040) $ 222 $ 1,720 $ 532 $ 1,566 - Specific asset or liability pools..... (2,719) (68) 524 2,173 90 - ------------------------------------------------------------------------------------------------------ Interest rate sensitivity gap........... $ 3,959 $(2,227) $ (259) $ 303 (1,776) - - ------------------------------------------------------------------------------------------------------- Cumulative gap.......................... $ 3,959 $ 1,732 $ 1,473 $ 1,776 - - - ------------------------------------------------------------------------------------------------------- Cumulative gap as a % of total assets... 3.4% 1.5% 1.3% 1.5% - - - -------------------------------------------------------------------------------------------------------
The Corporation's policy is to limit the cumulative one-year gap position, including asset and liability management ("ALM") derivatives, to within 4% of total assets. As of March 31, 1997, the cumulative one-year gap position was 1.3% of total assets. The Corporation uses off-balance-sheet transactions, principally interest rate swaps, to adjust the interest rate sensitivity of specific transactions, as well as pools of assets or liabilities to remain structurally neutral to interest rate changes. As shown in the table above, the net result of ALM derivatives was to reduce the cumulative one-year gap position from 5.0% to 1.3% of total assets. In addition to static gap analysis, an earnings simulation analysis and a value- at-risk measure are performed to identify more dynamic interest rate risk exposures of the businesses, including embedded option positions. The earnings simulation analysis estimates the effect that specific interest rate changes would have on pretax earnings. 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 March 31, 1997, the Corporation had the following estimated earnings sensitivity profile.
- ------------------------------------------------------- Immediate Change in Rates ------------------------------- (In millions) +200 bp -200 bp - ------------------------------------------------------- Pretax earnings change...... $20 $(2) - -------------------------------------------------------
Access to the derivatives market is an important element in maintaining the interest rate risk position within policy guidelines. At March 31, 1997, the notional principal amount of ALM interest rate swaps totaled $10.3 billion, including $5.5 billion against specific transactions and $4.8 billion against specific pools of assets or liabilities. The following table summarizes the interest rate swaps used for asset and liability management purposes. 13
Asset and Liability Management Swaps--Notional Principal - ------------------------------------------------------------------------------------------- March 31, 1997 Receive Fixed Pay Fixed Basis (In millions) Pay Floating Receive Floating Swaps Total - -------------------------------------------------------------------------------------------- Specific Pool Specific Pool Pool -------- ---- --------- ---- ----- Swaps associated with: Loans................................. $ - $ 928 $ 39 $ - $ - $ 967 Investment securities................. - - 240 - - 240 Securitized credit card receivables... - 458 - - - 458 Deposits.............................. 50 2,989 - - - 3,039 Funds borrowed (including long-term debt)................................ 5,135 - - 125 340 5,600 ------ ------ ---- ---- ---- ------- Total............................... $5,185 $4,375 $279 $125 $340 $10,304 ====== ====== ==== ==== ==== ======= - --------------------------------------------------------------------------------------------
Substantially all ALM interest rate swaps are standard swap contracts. The table that follows summarizes the contractual maturities and weighted average pay and receive rates for the ALM swap position at March 31, 1997. 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.
- --------------------------------------------------------------------------------------- (Dollars in millions) 1997 1998 1999 2000 2001 Thereafter Total - --------------------------------------------------------------------------------------- Receive fixed/pay floating swaps Notional amount..... $3,350 $2,319 $ 630 $ 564 $ 762 $1,935 $ 9,560 Weighted average Receive rate...... 6.00% 6.16% 6.23% 6.01% 7.17% 6.87% 6.32% Pay rate.......... 5.63% 5.69% 5.74% 5.68% 5.68% 5.70% 5.67% Pay fixed/receive floating swaps Notional amount..... $ 91 $ 57 $ 83 $ 110 $ 25 $ 38 $ 404 Weighted average Receive rate...... 5.63% 5.68% 5.68% 5.68% 5.70% 5.70% 5.67% Pay rate.......... 7.27% 8.07% 7.99% 7.74% 8.01% 8.01% 7.77% Basis swaps Notional amount..... $ 50 $ 265 $ 25 $ - $ - $ - $ 340 Weighted average Receive rate...... 5.84% 5.80% 5.74% -% -% -% 5.80% Pay rate.......... 5.54% 5.65 5.58% -% -% -% 5.63% - --------------------------------------------------------------------------------------- Total notional amount $3,491 $2,641 $ 738 $ 674 $ 787 $1,973 $10,304 - ---------------------------------------------------------------------------------------
14 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 process is to quantify and manage credit risk on a portfolio basis as well as reduce the risk of a loss resulting from a customer's failure to perform according to the terms of a transaction.
- --------------------------------------------------------------------------------------------------- Selected Statistical Information March 31 December 31 September 30 June 30 March 31 (Dollars in millions) 1997 1996 1996 1996 1996 - --------------------------------------------------------------------------------------------------- At period-end Loans outstanding................... $66,536 $66,414 $66,602 $66,431 $64,253 Nonperforming loans................. 257 262 309 356 391 Other real estate, net.............. 28 28 26 33 39 Nonperforming assets................ 285 290 335 389 430 Allowance for credit losses......... 1,408 1,407 1,447 1,430 1,383 Nonperforming assets/loans outstanding and other real estate, net............................... 0.4% 0.4% 0.5% 0.6% 0.7% Allowance for credit losses/ loans outstanding.................. 2.1 2.1 2.2 2.2 2.2 Allowance for credit losses/nonperforming loans.............................. 548 537 468 402 354 For the quarter ended Average loans....................... $65,177 $65,494 $65,962 $64,534 $63,790 Net charge-offs..................... 186 190 182 153 145 Net charge-offs/average loans....... 1.2% 1.2% 1.1% 0.9% 0.9% - ---------------------------------------------------------------------------------------------------
For analytical purposes, the Corporation's portfolio is divided into commercial (domestic and foreign) and consumer (credit card and other consumer) segments.
- --------------------------------------------------------------------------------------------------- Loan Composition March 31 December 31 September 30 June 30 March 31 (In millions) 1997 1996 1996 1996 1996 - --------------------------------------------------------------------------------------------------- Commercial risk Domestic Commercial..................... $28,181 $27,718 $27,537 $26,237 $25,220 Real estate Construction................. 1,159 1,057 1,094 1,193 1,191 Other........................ 5,159 5,103 5,446 5,665 5,897 Lease financing................ 1,848 1,820 1,683 1,644 1,505 Foreign.......................... 4,022 3,656 3,587 3,790 3,487 ------- ------- ------- ------- ------- Total commercial......... 40,369 39,354 39,347 38,529 37,300 ------- ------- ------- ------- ------- Consumer risk Credit cards..................... 8,668 9,601 9,888 10,441 9,722 Secured by real estate (1)....... 9,483 9,406 9,334 9,231 9,228 Automotive....................... 4,342 4,423 4,411 4,463 4,546 Other............................ 3,674 3,630 3,622 3,767 3,457 ------- ------- ------- ------- ------- Total consumer........... 26,167 27,060 27,255 27,902 26,953 ------- ------- ------- ------- ------- Total.................... $66,536 $66,414 $66,602 $66,431 $64,253 ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------
(1) Includes home equity loans. 15 Allowance for Credit Losses The allowance for credit losses is maintained at a level that in management's judgment is adequate to provide for estimated probable credit losses inherent in on- and off-balance-sheet credit exposure attributable to various financial instruments. The amount of the allowance is based on formal review and analysis of potential credit losses, as well as prevailing economic conditions.
- ---------------------------------------------------------------------------------------- Allowance for Credit Losses March 31 December 31 September 30 June 30 March 31 (In millions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------- Balance, beginning of quarter.... $1,407 $1,447 $1,430 $1,383 $1,338 - ---------------------------------------------------------------------------------------- Provision for credit losses...... 187 190 185 185 175 - ---------------------------------------------------------------------------------------- Charge-offs Commercial Domestic Commercial.................. 21 20 30 21 43 Real estate................. 2 7 2 7 4 Lease financing............. 2 - 3 2 2 Foreign........................ - - 2 - - Consumer Credit card................... 168 163 159 141 104 Other......................... 31 42 22 20 21 ------ ------ ------ ------ ------ Total charge-offs............ 224 232 218 191 174 - ---------------------------------------------------------------------------------------- Recoveries Commercial Domestic Commercial.................. 10 11 13 9 12 Real estate................. 4 4 6 9 1 Lease financing............. - - 1 - - Foreign........................ 2 11 1 2 1 Consumer Credit card................... 11 10 6 10 7 Other......................... 11 6 9 8 8 ------ ------ ------ ------ ------ Total recoveries............. 38 42 36 38 29 - ---------------------------------------------------------------------------------------- Net charge-offs.................. 186 190 182 153 145 - ---------------------------------------------------------------------------------------- Other, net..................... - (40) 14 15 15 - ---------------------------------------------------------------------------------------- Balance, end of quarter.......... $1,408 $1,407 $1,447 $1,430 $1,383 ====== ====== ====== ====== ====== ========================================================================================
16
Consumer Risk Management - ------------------------------------------------------------------------------------------------ Consumer Loans March 31 December 31 September 30 June 30 March 31 (In millions) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------------ Credit card loans......................... $ 8,668 $ 9,601 $ 9,888 $10,441 $ 9,722 Securitized credit card receivables....... 8,596 8,888 8,039 7,336 7,553 ------- ------- ------- ------- ------- Total managed credit card receivables.. 17,264 18,489 17,927 17,777 17,275 Other consumer loans Secured by real estate (1)............. 9,483 9,406 9,334 9,231 9,228 Automotive............................. 4,342 4,423 4,411 4,463 4,546 Other.................................. 3,674 3,630 3,622 3,767 3,457 ------- ------- ------- ------- ------- Other consumer loans................ 17,499 17,459 17,367 17,461 17,231 ------- ------- ------- ------- ------- Total.............................. $34,763 $35,948 $35,294 $35,238 $34,506 ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------
(1) Includes home equity loans. Consumer risk management focuses on the credit card segment separately from other parts of the portfolio. For the credit card segment, loss potential is tested using statistically expected levels of losses based on delinquencies and on the source, age and other characteristics of the portfolio. For the other segments of the consumer portfolio, reserve factors are based on historical loss rates. Credit card receivables represent the most significant risk element in the consumer portfolio. The credit card charge-off rate of 7.4% for the first quarter represents a significant increase from prior quarters. Reductions in the credit card charge-off rate are unlikely in the near term.
- ---------------------------------------------------------------------------------------------------- Credit Card Receivables For the Quarter Ended March 31 December 31 September 30 June 30 March 31 (Dollars in millions) 1997 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------------- Average balances: Credit card loans...................... $ 8,673 $ 9,421 $10,497 $ 9,814 $ 9,380 Securitized credit card receivables.... 8,816 8,058 7,219 7,544 7,867 ------- ------- ------- ------- ------- Total average managed credit card receivables........................ $17,489 $17,479 $17,716 $17,358 $17,247 ======= ======= ======= ======= ======= Total net charge-offs (including securitizations)............ $ 319 $ 294 $ 265 $ 254 $ 206 ======= ======= ======= ======= ======= Net charge-offs/average total managed receivables............................ 7.4% 6.7% 5.9% 5.9% 4.8% ======= ======= ======= ======= ======= Credit Card Delinquency Rate-- Managed Receivables--Period End 30 or more days....................... 4.4% 4.5% 4.3% 3.8% 3.6% 90 or more days....................... 1.9 1.8 1.6 1.4 1.4 - ---------------------------------------------------------------------------------------------------
Credit card receivables generally are charged off no later than 180 days past due, or earlier in the event of bankruptcy. 17 Commercial Risk Management The commercial risk portfolio includes all domestic and foreign commercial credit exposure. Credit exposure includes the credit risks associated with both on- and off-balance-sheet financial instruments. Commercial loans totaled $40.4 billion at March 31, 1997, up 3% from December 31, 1996, and up 8% from March 31, 1996. 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 paid without restructuring the credit. Each quarter, the Corporation conducts a review of significant lower-rated credit or country exposures. Potential losses are identified during this review, and reserves are adjusted accordingly. During the first quarter, charge-offs net of recoveries were $9 million in the commercial portfolio. Nonperforming assets totaled $285 million at March 31, 1997. Commercial Real Estate Commercial real estate loans include loans secured by real estate as well as certain loans that are real estate-related. A loan is categorized as real estate-related when 80% or more of the borrower's revenues are derived from real estate activities and the loan is not collateralized by cash or marketable securities. Commercial real estate loans totaled $6.3 billion at March 31, 1997, down 11% from $7.1 billion a year ago. Commercial real estate loans were $6.2 billion at year-end 1996. During the first quarter, net recoveries in the commercial real estate portfolio were $2 million. This compares with net charge-offs of $3 million in both the first and fourth quarters of 1996. Nonperforming commercial real estate assets, including other real estate, totaled $119 million at March 31, 1997, and $128 million at year-end 1996. Nonperforming Assets Nonperforming assets at March 31, 1997, were $285 million, or 0.4% of total loans and other real estate, compared with $430 million, or 0.7%, one year ago. The following charts illustrate the positive trend in nonperforming assets over the past five quarters. [BAR CHART APPEARS HERE] Nonperforming Assets--Period End In Millions 1Q96 2Q96 3Q96 $4Q96 $1Q97 ---- ---- ---- ----- ----- Loans............ $391 $356 $309 $262 $257 OREO............. $ 39 $ 33 $ 26 $ 28 $ 28 ---- ---- ---- ---- ---- Total............ $430 $389 $335 $290 $285 [BAR CHART APPEARS HERE] Nonperforming Assts as a Percentage of Loans and Other Real Estate -- Period End 1Q96........ 0.7% 2Q96........ 0.6% 3Q96........ 0.5% 4Q96........ 0.4% 1Q97........ 0.4% 18 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 includes both exchange-traded and over- the-counter contracts. The Corporation uses interest rate derivative financial instruments to reduce structural interest rate risk and the volatility of net interest margin. Net interest margin reflects the effective use of these derivatives. Without their use, net interest income would have been lower by $6.6 million in the first quarter of 1997 and by $2.4 million in the first quarter of 1996. The sale of fixed- and floating-rate credit card receivables as securities to investors subjects fee 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, fee revenue would have been reduced by $0.6 million in the first quarter of 1997 and by $2.0 million in the first quarter of 1996. 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 March 31, 1997, and December 31, 1996:
- --------------------------------------------------------------- March 31 December 31 (In billions) 1997 1996 - --------------------------------------------------------------- Gross replacement cost................ $17.2 $14.9 Less: Adjustment due to master 11.8 9.8 netting agreements.............. ----- ----- Current credit exposure............... 5.4 5.1 Less: Unrecognized net gains due - 0.1 to nontrading activity.......... ----- ----- Balance sheet exposure................ $ 5.4 $ 5.0 ===== ===== - ---------------------------------------------------------------
The $5.4 billion of total current credit exposure at March 31, 1997, represents the total loss that the Corporation would have suffered had every counterparty been in default on that date. This amount is reduced by any unrealized and unrecognized gains on derivatives used 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 contracts within the customer's portfolio. In total, the potential credit exposure was approximately $6.9 billion higher than the current exposure at March 31, 1997. In the first three months of 1997, there were no charge-offs associated with derivative financial instruments. 19
CAPITAL MANAGEMENT - --------------------------------------------------------------------------------------------------------------------------- Selected Capital Ratios March 31 December 31 September 30 June 30 March 31 Corporate 1997 1996 1996 1996 1996 Guideline - --------------------------------------------------------------------------------------------------------------------------- Common equity/total assets (1)....... 7.9% 8.2% 8.1% 7.6% 7.3% N/A Tangible common equity ratio (1)..... 7.6 7.8 7.7 7.1 6.9 N/A Stockholders' equity/total assets.... 8.0 8.6 8.5 7.8 7.5 N/A Risk-based capital ratios (1)(2) Tier 1............................ 9.1 9.2 8.4 8.1 8.1 7-8% Total............................. 13.1 13.3 12.4 12.2 12.3 11-12% Leverage ratio (1)(2)................ 9.2 9.3 8.1 7.6 7.3 5.5-7.0% Double leverage ratio(2)............. 106 105 113 114 115 Less Than or Equal to 120% Dividend payout ratio................ 34 34 33 33 35 30-40% - ---------------------------------------------------------------------------------------------------------------------------
(1) Net of investment in FCCM. (2) Includes trust preferred capital securities. N/A - Not Applicable. Capital represents the stockholders' investment on which the Corporation strives to generate attractive returns. It supports business growth and provides protection to depositors and creditors. Management believes that capital is the foundation of a cohesive risk management framework because it links return with risk. Capital adequacy objectives have been developed for the Corporation and its major banking subsidiaries to meet these needs and also to maintain a well- capitalized regulatory position. Economic Capital An economic capital framework is used to allocate capital to lines of business, products, and customers based on the level and type of risk inherent in the activities. Return on economic capital is a key decision-making tool for managing risk-taking activities, as well as for ensuring that capital is efficiently and profitably employed. Beginning in the first quarter of 1997, the Corporation's economic capital model has been revised, as referenced in the Business Segments section. Enhancements to the model incorporate a more complete and up-to-date assessment of risk based on the evolving nature of the Corporation's activities. Capital is allocated for two types of risk: portfolio and business. Portfolio risk capital covers the potential for loss of value arising from credit, market and investment risks. The amount is designed to absorb losses to a desired level of statistical confidence. Business risk capital is determined by identifying publicly traded companies with activities comparable to the Corporation's, where possible, and applying their capital structures to the business units. This approach incorporates hard-to-quantify risks such as event, technology and operating risks. The Corporation has established a Tier 1 capital target necessary to provide management flexibility while maintaining an adequate capital base for its overall risk profile, as measured by the economic capital framework. The long- term target for the Tier 1 ratio is 7% to 8%. This ratio is currently managed to 8%, which is used for capital allocations. Excess capital, defined as common equity above that required for the 8% Tier 1 target, is available for investments and acquisitions. If attractive long-term opportunities are not available over time in core businesses, management intends to return capital to stockholders, typically by way of stock repurchase programs and/or dividend increases. 20 Other Capital Activities In October 1996, the Board of Directors authorized the purchase of up to 40 million shares of the Corporation's common stock over the subsequent two to three years. Purchases occur periodically in open market or private transactions. The Corporation bought 7.7 million shares during the first quarter of 1997 at an average price of $58.185 per share. Through March 31, a total of 15.1 million shares had been repurchased under this program. In February 1997, the Corporation authorized the redemption on April 1 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. At March 31, 1997, essentially all of this Series B Preferred Stock had been converted to common shares. Regulatory Capital The Corporation endeavors to maintain regulatory capital ratios, including those of the major banking subsidiaries, in excess of the well-capitalized guidelines. To ensure 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. As shown in the table on page 20, the Corporation's risk-based capital ratios for Tier 1 and total capital exceeded the regulatory well-capitalized guidelines of 6% and 10%, respectively. In January 1997, a wholly owned consolidated trust subsidiary of the Corporation issued in the aggregate $250 million of preferred securities, bringing the total issued on behalf of the Corporation to $1 billion. These "Trust Preferred Capital Securities" are tax-advantaged issues that qualify for Tier 1 capital treatment and are included in long-term debt in the Corporation's balance sheet. The following table shows the components of regulatory risk-based capital and risk-weighted assets.
- -------------------------------------------------------------------------- March 31 December 31 March 31 (In millions) 1997 1996 1996 - -------------------------------------------------------------------------- Regulatory Risk-Based Capital Tier 1 capital.......................... $ 9,266 $ 9,186 $ 8,006 Tier 2 capital and other adjustments.... 4,127 4,146 4,138 -------- -------- ------- Total capital...................... $ 13,393 $ 13,332 $12,144 ======== ======== ======= Regulatory Risk-Weighted Assets Balance sheet risk-weighted assets...... $ 71,878 $ 71,177 $69,825 Off-balance-sheet risk-weighted assets.. 30,158 29,078 28,876 -------- -------- ------- Total risk-weighted assets......... $102,036 $100,255 $98,701 ======== ======== ======= - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Intangible Assets March 31 December 31 March 31 (In millions) 1997 1996 1996 - -------------------------------------------------------------------------- Goodwill................................ $ 388 $ 397 $ 414 Other nonqualifying intangibles......... 4 3 4 -------- -------- ------- Subtotal........................... 392 400 418 Qualifying intangibles.................. 58 69 88 -------- -------- ------- Total intangibles.................. $ 450 $ 469 $ 506 ======== ======== ======= - --------------------------------------------------------------------------
Tier 1 and total capital have been reduced by goodwill and other nonqualifying intangible assets, which totaled $392 million at March 31, 1997, $400 million at December 31, 1996, and $418 million at March 31, 1996. The Corporation's major banking subsidiaries exceed the regulatory well- capitalized guidelines as shown in the following tables. Major banking subsidiaries include: The First National Bank of Chicago (FNBC), FCC National Bank (FCCNB), American National Bank and Trust Company of Chicago (ANB), NBD Bank (Michigan) (NBD Michigan), and NBD Bank, N.A. (Indiana)(NBD Indiana). 21
- --------------------------------------------------------------------- NBD NBD FNBC Michigan FCCNB ANB Indiana - --------------------------------------------------------------------- March 31, 1997 Risk-based capital ratios Tier 1 capital.......... 7.7% 9.4% 11.7% 8.5% 9.9% Total capital........... 11.2 13.7 14.7 11.2 11.2 Leverage ratio............. 7.5 9.9 11.7 9.2 9.0 - --------------------------------------------------------------------- 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 - --------------------------------------------------------------------- March 31, 1996 Risk-based capital ratios Tier 1 capital.......... 7.8% 8.1% 9.7% 9.2% 10.6% Total capital........... 11.6 11.5 13.0 11.6 11.8 Leverage ratio............. 6.2 8.1 9.7 9.4 8.7 - ---------------------------------------------------------------------
By maintaining regulatory well-capitalized status, these banks benefit from lower FDIC deposit premiums. In September 1996, the U.S. bank regulators amended their risk-based capital requirements to incorporate a measure for market risk inherent in the trading portfolio. Under the new market risk requirements, capital will be allocated to support the amount of market risk related to the Corporation's trading activities. The market risk rules are not effective until 1998 and will apply only to institutions with significant trading activities. It is anticipated that both the Corporation and FNBC will be subject to these new rules. It is currently estimated that the rules will not significantly affect the risk-based capital ratios of either entity. 22
First Chicago NBD Corporation and Subsidiaries Consolidated Balance Sheet - ------------------------------------------------------------------------------------------------------------------- March 31 December 31 March 31 (Dollars in millions) 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks......................................................... $ 6,800 $ 7,823 $ 6,129 Interest-bearing due from banks................................................. 7,169 5,474 8,910 Federal funds sold and securities under resale agreements....................... 6,635 4,197 10,684 Trading assets.................................................................. 5,192 4,812 7,226 Derivative product assets....................................................... 5,363 4,974 5,890 Investment securities........................................................... 7,500 7,178 8,185 Loans (net of unearned income--$814, $764 and $627, respectively)............... 66,536 66,414 64,253 Less allowance for credit losses............................................... (1,408) (1,407) (1,383) -------- -------- -------- Loans, net..................................................................... 65,128 65,007 62,870 Premises and equipment.......................................................... 1,416 1,415 1,424 Customers' acceptance liability................................................. 576 577 737 Other assets.................................................................... 3,354 3,162 3,410 -------- -------- -------- Total assets................................................................ $109,133 $104,619 $115,465 ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------- Liabilities Deposits Demand......................................................................... $ 15,016 $ 15,702 $ 13,566 Savings........................................................................ 21,381 21,722 19,912 Time........................................................................... 15,078 14,994 16,271 Foreign offices................................................................ 13,452 11,251 14,494 -------- -------- -------- Total deposits.............................................................. 64,927 63,669 64,243 Federal funds purchased and securities under repurchase agreements.............. 9,656 7,859 13,110 Other short-term borrowings..................................................... 8,517 7,572 11,519 Long-term debt.................................................................. 8,514 8,454 8,011 Acceptances outstanding......................................................... 576 577 737 Derivative product liabilities.................................................. 5,134 4,753 5,871 Other liabilities............................................................... 3,024 2,728 3,350 -------- -------- -------- Total liabilities........................................................... 100,348 95,612 106,841 - ------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock................................................................. 290 444 489 Common stock--$1 par value...................................................... 320 320 319 March 31, 1997 Dec. 31, 1996 March 31, 1996 -------------- ------------- -------------- Number of shares authorized..... 750,000,000 750,000,000 750,000,000 Number of shares issued......... 319,509,175 319,509,189 318,534,928 Number of shares outstanding.... 312,362,710 313,473,520 316,547,238 Surplus......................................................................... 1,988 2,149 2,167 Retained earnings............................................................... 6,682 6,433 5,716 Fair value adjustment on investment securities available-for-sale............... (10) 38 68 Deferred compensation........................................................... (88) (58) (68) Accumulated translation adjustment.............................................. 6 7 8 Treasury stock at cost--7,146,465; 6,035,669; and 1,987,690 shares, respectively............................................... (403) (326) (75) -------- -------- -------- Stockholders' equity......................................................... 8,785 9,007 8,624 -------- -------- -------- Total liabilities and stockholders' equity.................................. $109,133 $104,619 $115,465 ======== ======== ======== - -------------------------------------------------------------------------------------------------------------------
23
First Chicago NBD Corporation and Subsidiaries Consolidated Income Statement - ------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31 March 31 December 31 (In millions, except per share data) 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------------- Interest Income Loans, including fees......................................................... $1,401 $1,412 $1,435 Bank balances................................................................. 96 146 82 Federal funds sold and securities under resale agreements..................... 65 177 57 Trading assets................................................................ 69 123 71 Investment securities--taxable................................................ 78 109 79 Investment securities--tax-exempt............................................. 25 25 23 ------ ------ ------ Total............................................................... 1,734 1,992 1,747 - ------------------------------------------------------------------------------------------------------------------- Interest Expense Deposits...................................................................... 499 592 511 Federal funds purchased and securities under repurchase agreements............ 114 225 107 Other short-term borrowings................................................... 102 153 104 Long-term debt................................................................ 143 137 142 ------ ------ ------ Total............................................................... 858 1,107 864 - ------------------------------------------------------------------------------------------------------------------- Net Interest Income........................................................... 876 885 883 Provision for credit losses................................................... 187 175 190 ------ ------ ------ Net Interest Income After Provision for Credit Losses......................... 689 710 693 - ------------------------------------------------------------------------------------------------------------------- Noninterest Income Combined trading profits...................................................... 28 36 12 Equity securities gains....................................................... 54 49 71 Investment securities gains................................................... 25 22 - ------ ------ ------ Market-driven revenue............................................... 107 107 83 Credit card fee revenue....................................................... 234 207 259 Fiduciary and investment management fees...................................... 105 100 102 Service charges and commissions............................................... 213 189 218 ------ ------ ------ Fee-based revenue................................................... 552 496 579 ------ ------ ------ Other income.................................................................. 20 23 20 ------ ------ ------ Total............................................................... 679 626 682 - ------------------------------------------------------------------------------------------------------------------- Noninterest Expense Salaries and employee benefits................................................ 425 436 426 Occupancy expense of premises, net............................................ 66 67 64 Equipment rentals, depreciation and maintenance.............................. 54 55 61 Amortization of intangible assets............................................. 18 20 20 Other......................................................................... 237 250 242 ------ ------ ------ Total............................................................... 800 828 813 - ------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes.................................................... 568 508 562 Applicable income taxes....................................................... 188 168 185 ------ ------ ------ Net Income.................................................................... $ 380 $ 340 $ 377 ====== ====== ====== Net Income Attributable to Common Stockholders' Equity........................ $ 373 $ 332 $ 370 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------- Earnings Per Share Primary.................................................................... $ 1.18 $ 1.04 $ 1.15 Fully Diluted.............................................................. $ 1.17 $ 1.03 $ 1.14 - -------------------------------------------------------------------------------------------------------------------
24
First Chicago NBD Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity - --------------------------------------------------------------------------------------------------- Three Months Ended March 31 (In millions) 1997 1996 - --------------------------------------------------------------------------------------------------- Preferred Stock Balance, beginning of period............................................... $ 444 $ 489 Conversion of preferred stock.............................................. (154) - ------ ------ Balance, end of period..................................................... 290 489 ------ ------ Common Stock Balance, beginning of period............................................... 320 319 Issuance of stock.......................................................... - - ------ ------ Balance, end of period..................................................... 320 319 ------ ------ Capital Surplus Balance, beginning of period............................................... 2,149 2,185 Issuance of treasury stock................................................. (38) (21) Conversion of preferred stock.............................................. (138) - Other...................................................................... 15 3 ------ ------ Balance, end of period..................................................... 1,988 2,167 ------ ------ Retained Earnings Balance, beginning of period............................................... 6,433 5,497 Net income................................................................. 380 340 Cash dividends declared on common stock.................................... (124) (113) Cash dividends declared on preferred stock................................. (7) (8) ------ ------ Balance, end of period..................................................... 6,682 5,716 ------ ------ Fair Value Adjustment on Investment Securities Available-for-Sale Balance, beginning of period............................................... 38 112 Change in fair value (net of taxes) and other.............................. (48) (44) ------ ------ Balance, end of period..................................................... (10) 68 ------ ------ Deferred Compensation Balance, beginning of period............................................... (58) (39) Awards granted, net........................................................ (40) (33) Amortization of deferred compensation...................................... 9 6 Other...................................................................... 1 (2) ------ ------ Balance, end of period..................................................... (88) (68) ------ ------ Accumulated Translation Adjustment Balance, beginning of period............................................... 7 8 Translation gain (loss), net of taxes...................................... (1) - ------ ------ Balance, end of period..................................................... 6 8 ------ ------ Treasury Stock Balance, beginning of period............................................... (326) (121) Purchase of common stock................................................... (450) - Conversion of preferred stock.............................................. 292 - Issuance of stock.......................................................... 81 46 ------ ------ Balance, end of period..................................................... (403) (75) ------ ------ Total Stockholders' Equity, end of period.................................... $8,785 $8,624 ======= ====== - -------------------------------------------------------------------------------------------------
25
First Chicago NBD Corporation and Subsidiaries Consolidated Statement of Cash Flows - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31 (In millions) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income................................................................................................. $ 380 $ 340 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................................................................ 61 63 Provision for credit losses.............................................................................. 187 175 Equity securities gains.................................................................................. (54) (49) Net (increase) in net derivative product balances........................................................ (9) (29) Net (increase) decrease in trading assets................................................................ (455) 939 Net (increase) in loans held for sale.................................................................... (32) (219) Net decrease in accrued income receivable................................................................ 14 18 Net (decrease) in accrued expenses payable............................................................... 27 342 Net (increase) decrease in other assets.................................................................. 9 (301) Other noncash adjustments................................................................................ (20) (37) ------- ------- Total adjustments........................................................................................ (272) 902 Net cash provided by operating activities.................................................................. 108 1,242 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Net (increase) decrease in federal funds sold and securities under resale agreements....................... (2,438) 1,014 Purchase of investment securities--available-for-sale...................................................... (2,448) (647) Purchase of equity securities--fair value.................................................................. (19) (35) Proceeds from maturities of debt securities--available-for-sale............................................ 223 969 Proceeds from sales of investment securities--available-for-sale........................................... 1,794 888 Proceeds from sales of equity securities--fair value....................................................... 86 100 Net (increase) decrease in loans........................................................................... (299) 6 Loan recoveries............................................................................................ 38 29 Net proceeds from sales of assets held for accelerated disposition......................................... 1 - Purchases of premises and equipment........................................................................ (49) (79) Proceeds from sales of premises and equipment.............................................................. 4 23 Net cash and cash equivalents due to acquisitions and dispositions......................................... - (263) ------- ------- Net cash provided by (used in) investing activities........................................................ (3,107) 2,005 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net increase (decrease) in deposits........................................................................ 1,294 (4,194) Net increase (decrease) in federal funds purchased and securities under repurchase agreements............................................................................................... 1,797 (2,601) Net increase in other short-term borrowings................................................................ 945 1,717 Proceeds from issuance of long-term debt................................................................... 828 549 Repayment of long-term debt................................................................................ (669) (727) Net increase (decrease) in other liabilities............................................................... 109 (215) Dividends paid............................................................................................. (121) (126) Proceeds from issuance of common and treasury stock........................................................ 2 8 Repurchase of common stock................................................................................. (450) - ------- ------- Net cash provided by (used in) financing activities........................................................ 3,735 (5,589) - ----------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents............................................... (64) (157) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents....................................................... 672 (2,499) Cash and cash equivalents at beginning of period........................................................... 13,297 17,538 ------- ------- Cash and cash equivalents at end of period................................................................. $13,969 $15,039 ======= ======= - ----------------------------------------------------------------------------------------------------------------------------------
For purposes of this statement, cash and cash equivalents consist of cash and due from banks, whether interest-bearing or not. In the first three months of 1997, $154 million of the Corporation's Cumulative Convertible Preferred Stock was converted into common stock. 26 Notes to Consolidated Financial Statements Note 1 - ------ The consolidated financial statements for the Corporation, including its subsidiaries, have been prepared in conformity with generally accepted accounting principles. Such preparation requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Although the interim amounts are unaudited, they do reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods. All such adjustments are of a normal, recurring nature. Because the results from commercial banking operations are so closely related and responsive to changes in economic conditions, fiscal policy and monetary policy, and because the results for the investment security and trading portfolios are largely market-driven, the results for any interim period are not necessarily indicative of the results that can be expected for the entire year. Note 2 - ------ The Corporation presents earnings per share on both a primary and a fully diluted basis. Primary earnings per share were computed by dividing net income, after deducting dividends on preferred stock, by the average number of common and common-equivalent shares outstanding during the period. Common-equivalent shares consist of shares issuable under the Employee Stock Purchase and Savings Plan and outstanding stock options. Fully diluted shares also include the common shares that would result from the conversion of convertible preferred stock. To compute fully diluted earnings per share, net income was reduced by preferred stock dividend requirements, except those related to convertible stock. The net income, preferred stock dividends and shares used to compute primary and fully diluted earnings per share are presented in the following table.
- ------------------------------------------------------------------- Three Months Ended March 31 (In millions) 1997 1996 - ------------------------------------------------------------------- Primary Net income............................... $ 380 $ 340 Preferred stock dividends................ (7) (8) ------ ------ Net income attributable to common stockholders' equity.................... $ 373 $ 332 ====== ====== Average number of common and common-equivalent shares................ 316.5 319.2 ====== ====== Fully diluted Net income............................... $ 380 $ 340 Preferred stock dividends, excluding convertible Series B.................... (5) (5) ------ ------ Fully diluted net income................. $ 375 $ 335 ====== ====== Average number of shares, assuming full dilution........................... 320.8 326.2 ====== ====== - -------------------------------------------------------------------
Note 3 - ------ At March 31, 1997, credit card receivables aggregated $8.7 billion. These receivables are available for sale through credit card securitization programs. 27 Note 4 - ------ Nonperforming loans are generally identified as "impaired loans." At March 31, 1997, the recorded investment in loans considered impaired was $257 million, which required a related allowance for credit losses of $42 million. Substantially all of the $257 million in impaired loans required the establishment of an allocated reserve. The average recorded investment in impaired loans was approximately $258 million for the quarter ended March 31, 1997. The Corporation recognized interest income associated with impaired loans of $5 million during the quarter. Loans 90 days or more past due and still accruing interest amounted to $257 million at March 31, 1997, compared with $268 million at December 31, 1996, and $218 million at March 31, 1996. Note 5 - ------ The Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on January 1, 1996. This Statement requires the capitalization of all mortgage servicing rights, except those related to loans the Corporation originated and has no plan to sell or securitize. Previously, only purchased mortgage servicing rights were capitalized. Implementation of this Statement did not have a material effect on the results of operations. 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 was no financial statement effect related to the adoption of this Statement. In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS 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 October 1996, the FASB tentatively decided to delay the effective date of certain provisions until January 1, 1998. The new Statement primarily establishes criteria based on legal control to determine whether a transfer of a financial asset is a sale or a secured borrowing. Implementation of this Statement did not have a material effect on the results of operations. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which becomes effective for the 1997 Annual Report. Earlier application is not permitted; however, restatement of all prior periods presented is required. The Statement replaces primary earnings per share (EPS) with earnings per common share (basic EPS). Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The Statement also requires presentation of EPS assuming dilution. This is computed similarly to the fully diluted EPS that is now required. Earnings per common share for the first quarter of 1997 would have been $1.19 and earnings per share assuming dilution would have been $1.17. Similarly, earnings per common share for the first quarter of 1996 would have been $1.05 and earnings per share assuming dilution would have been $1.03. Note 6 - ------ The ratio of income to fixed charges for the three months ended March 31, 1997, excluding interest on deposits was 2.5x, and including interest on deposits was 1.7x. The ratio has been computed on the basis of the total enterprise (as defined by the Securities and Exchange Commission) by dividing income before fixed charges and income taxes by fixed charges. Fixed charges consist of interest expense on all long- and short-term borrowings, excluding or including interest on deposits. Note 7 - ------ The Corporation and certain of its subsidiaries are defendants in various lawsuits, including certain class actions, arising out of the normal course of business, and the Corporation has received certain tax deficiency assessments. Since the Corporation and certain of its subsidiaries, which are regulated by one or more federal and state regulatory authorities, also are the subject of numerous examinations and reviews by such authorities, the Corporation is and will, from time to time, normally be engaged in various disagreements with regulators, related primarily to banking matters. In the opinion of management and the Corporation's general counsel, the ultimate resolution of the matters referred to in this note will not have a material effect on the consolidated financial statements. 28
First Chicago NBD Corporation and Subsidiaries Selected Statistical Information - ------------------------------------------------------------------------------------------- Investment Securities--Available-for-Sale - ------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Value March 31, 1997 (In millions) Cost Gains Losses (Book Value) - ------------------------------------------------------------------------------------------- U.S. Treasury............................ $2,926 $ 2 $ 17 $2,911 U.S. government agencies Mortgage-backed securities............. 1,471 6 36 1,441 Collateralized mortgage obligations.... 99 - - 99 Other.................................. 227 2 1 228 States and political subdivisions........ 991 41 1 1,031 Other debt securities.................... 738 1 2 737 Equity securities (1)(2)................. 976 134 57 1,053 ------ ---- ---- ------ Total................................ $7,428 $186 $114 $7,500 ====== ==== ==== ====== - -------------------------------------------------------------------------------------------
(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. Impact of Credit Card Securitization For analytical purposes only, the following table shows income statement line items adjusted for the net impact of securitization of credit card receivables.
- ------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, 1997 Three Months Ended March 31, 1996 ------------------------------------ -------------------------------------------- Credit Card Credit Card (In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted - ------------------------------------------------------------------------------------------------------------ Net interest income-- tax-equivalent basis.. $ 907 $ 197 $ 1,104 $ 913 $ 168 $ 1,081 Provision for credit losses................ 187 162 349 175 98 273 Noninterest income...... 679 (35) 644 626 (70) 556 Noninterest expense..... 800 - 800 828 - 828 Net income.............. 380 - 380 340 - 340 Assets--quarter-end..... $109,133 $8,597 $117,730 $115,465 $7,552 $123,017 --average......... 105,133 8,816 113,949 120,708 7,867 128,575 - ------------------------------------------------------------------------------------------------------------
29
First Chicago NBD Corporation and Subsidiaries Five-Quarter Consolidated Income Statement - ------------------------------------------------------------------------------------------ Three Months Ended (Dollars in millions, March 31 Dec. 31 Sept. 30 June 30 March 31 except per share data) 1997 1996 1996 1996 1996 - ------------------------------------------------------------------------------------------ Interest Income Loans, including fees...................... $1,401 $1,435 $1,482 $1,416 $1,412 Bank balances.............................. 96 82 112 123 146 Federal funds sold and securities under resale agreements......................... 65 57 113 163 177 Trading assets............................. 69 71 96 104 123 Investment securities--taxable............. 78 79 82 94 109 Investment securities--tax-exempt.......... 25 23 23 22 25 ------ ------ ------ ------ ------ Total............................ 1,734 1,747 1,908 1,922 1,992 - ------------------------------------------------------------------------------------------ Interest Expense Deposits................................... 499 511 527 545 592 Federal funds purchased and securities under repurchase agreements............... 114 107 149 190 225 Other short-term borrowings................ 102 104 156 139 153 Long-term debt............................. 143 142 134 138 137 ------ ------ ------ ------ ------ Total............................ 858 864 966 1,012 1,107 - ------------------------------------------------------------------------------------------ Net Interest Income........................ 876 883 942 910 885 Provision for credit losses................ 187 190 185 185 175 ------ ------ ------ ------ ------ Net Interest Income After Provision for Credit Losses............................. 689 693 757 725 710 - ------------------------------------------------------------------------------------------ Noninterest Income Combined trading profits (losses).......... 28 12 (12) 22 36 Equity securities gains.................... 54 71 50 85 49 Investment securities gains................ 25 - 2 3 22 ------ ------ ------ ------ ------ Market-driven revenue................. 107 83 40 110 107 Credit card fee revenue.................... 234 259 228 220 207 Fiduciary and investment management fees... 105 102 100 98 100 Service charges and commissions............ 213 218 201 195 189 ------ ------ ------ ------ ------ Fee-based revenue.................... 552 579 529 513 496 ------ ------ ------ ------ ------ Other income............................... 20 20 28 20 23 ------ ------ ------ ------ ------ Total............................ 679 682 597 643 626 - ------------------------------------------------------------------------------------------ Noninterest Expense Salaries and employee benefits............. 425 426 419 426 436 Occupancy expense of premises, net......... 66 64 64 64 67 Equipment rentals, depreciation and maintenance............................... 54 61 56 55 55 Amortization of intangible assets.......... 18 20 20 19 20 Other...................................... 237 242 257 250 250 ------ ------ ------ ------ ------ Total............................ 800 813 816 814 828 - ------------------------------------------------------------------------------------------ Income Before Income Taxes................. 568 562 538 554 508 Applicable income taxes.................... 188 185 180 193 168 ------ ------ ------ ------ ------ Net Income................................. $ 380 $ 377 $ 358 $ 361 $ 340 ====== ====== ====== ====== ====== Net Income Attributable to Common Stockholders' Equity...................... $ 373 $ 370 $ 350 $ 353 $ 332 ====== ====== ====== ====== ====== - ------------------------------------------------------------------------------------------ Earnings Per Share Primary................................ $1.18 $1.15 $1.09 $1.10 $1.04 Fully Diluted.......................... $1.17 $1.14 $1.08 $1.09 $1.03 - ------------------------------------------------------------------------------------------ Average number of common and common-equivalent shares (in millions).... 316.5 321.4 320.2 320.2 319.2 Average number of shares, assuming full dilution (in millions).................... 320.8 327.6 327.5 326.9 326.2
30
First Chicago NBD Corporation and Subsidiaries Selected Statistical Information - ------------------------------------------------------------------------------------------------------------------- Average Balances/Net Interest Margin/Rates - ------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------- (Income and rates on tax-equivalent basis) Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- Assets Interest-bearing due from banks....................... $ 6,721 $ 96 5.78% $ 5,664 $ 82 5.76% Federal funds sold and securities under resale agreements.................................... 5,157 66 5.15 4,330 57 5.24 Trading assets........................................ 5,016 69 5.57 5,297 72 5.41 Investment securities U.S. government and federal agency.................. 4,604 71 6.30 4,523 73 6.42 States and political subdivisions................... 1,101 25 9.15 1,231 27 8.73 Other............................................... 1,576 32 8.19 1,357 20 5.86 -------- ------ ---- -------- ------ ---- Total investment securities....................... 7,281 128 7.14 7,111 120 6.71 Loans (1)(2) Domestic offices.................................... 61,462 1,350 9.02 62,067 1,384 8.98 Foreign offices..................................... 3,715 56 6.14 3,427 56 6.50 -------- ------ ---- -------- ------ ---- Total loans....................................... 65,177 1,406 8.85 65,494 1,440 8.85 -------- ------ ---- -------- ------ ---- Total earning assets (3).......................... 89,352 1,765 8.00 87,896 1,771 8.02 Cash and due from banks............................... 6,556 6,229 Allowance for credit losses........................... (1,386) (1,417) Other assets.......................................... 10,611 9,979 -------- -------- Total assets...................................... $105,133 $102,687 ======== ======== - ------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits--interest-bearing Savings............................................. $ 9,980 $ 53 2.20% $ 10,371 $ 60 2.30% Money market........................................ 11,423 99 3.52 10,880 97 3.55 Time................................................ 15,029 201 5.41 15,482 220 5.65 Foreign offices..................................... 12,098 146 4.90 10,913 134 4.88 -------- ------ ---- -------- ------ ---- Total deposits--interest-bearing.................. 48,530 499 4.17 47,646 511 4.27 Federal funds purchased and securities under repurchase agreements.......................... 8,849 114 5.20 8,038 107 5.30 Other short-term borrowings........................... 8,001 102 5.16 7,959 104 5.20 Long-term debt........................................ 8,526 143 6.83 8,293 142 6.81 -------- ------ ---- -------- ------ ---- Total interest-bearing liabilities................ 73,906 858 4.71 71,936 864 4.78 Demand deposits....................................... 13,859 13,934 Other liabilities..................................... 8,432 7,787 Preferred stock....................................... 419 465 Common stockholders' equity........................... 8,517 8,565 -------- -------- Total liabilities and stockholders' equity........ $105,133 $102,687 ======== ======== - ------------------------------------------------------------------------------------------------------------------- Interest income/earning assets (3).................... $1,765 8.00% $1,771 8.02% Interest expense/earning assets....................... 858 3.89 864 3.91 ------ ---- ------ ---- Net interest margin................................... $ 907 4.11% $ 907 4.11% ====== ==== ====== ==== - -------------------------------------------------------------------------------------------------------------------
(1) Average lease-financing receivables are reduced by related deferred tax liabilities in calculating the average rate. (2) Nonperforming loans are included in average balances used to determine the average rate. (3) Includes tax-equivalent adjustments based on a 35% federal income tax rate. 31
- -------------------------------------------------------------------------------------------- September 30, 1996 June 30, 1996 March 31, 1996 - -------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------------------- $ 7,891 $ 112 5.65% $ 8,765 $ 123 5.64% $ 9,686 $ 146 6.06% 8,402 113 5.35 12,264 163 5.35 13,465 177 5.29 6,577 96 5.81 7,312 105 5.78 8,797 124 5.67 4,778 78 6.49 5,171 87 6.77 6,197 105 6.81 1,265 29 9.12 1,354 30 8.91 1,428 32 9.01 1,248 17 5.42 1,164 18 6.22 1,266 17 5.40 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 7,291 124 6.77 7,689 135 7.06 8,891 154 6.97 62,384 1,429 9.23 60,981 1,361 9.09 60,315 1,358 9.17 3,578 59 6.56 3,553 60 6.79 3,475 61 7.06 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 65,962 1,488 9.08 64,534 1,421 8.96 63,790 1,419 9.05 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 96,123 1,933 8.00 100,564 1,947 7.79 104,629 2,020 7.77 6,352 6,330 6,081 (1,455) (1,378) (1,335) 9,695 10,764 11,333 - -------- -------- -------- $110,715 $116,280 $120,708 ======== ======== ======== - -------------------------------------------------------------------------------------------- $ 10,940 $ 61 2.22% $ 11,184 $ 59 2.12% $ 11,273 $ 64 2.28% 10,166 92 3.60 9,910 91 3.69 8,645 84 3.91 15,736 213 5.38 15,881 213 5.39 16,941 234 5.56 12,898 161 4.97 14,324 182 5.11 15,707 210 5.38 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 49,740 527 4.22 51,299 545 4.27 52,566 592 4.53 11,227 149 5.28 14,622 190 5.23 17,076 225 5.30 11,773 156 5.27 10,947 139 5.11 11,774 153 5.23 8,122 134 6.56 8,197 138 6.77 8,079 137 6.82 - -------- ------ ---- -------- ------ ---- -------- ------ ---- 80,862 966 4.75 85,065 1,012 4.78 89,495 1,107 4.97 13,742 13,863 13,356 7,272 8,680 9,314 487 489 490 8,352 8,183 8,053 - -------- -------- -------- $110,715 $116,280 $120,708 ======== ======== ======== - -------------------------------------------------------------------------------------------- $1,933 8.00% $1,947 7.79% $2,020 7.77% 966 4.00 1,012 4.05 1,107 4.26 ------ ---- ------ ---- ------ ---- $ 967 4.00% $ 935 3.74% $ 913 3.51% ====== ==== ====== ==== ====== ==== - --------------------------------------------------------------------------------------------
32 Form 10-Q Cross-Reference Index PART I - FINANCIAL INFORMATION ------------------------------
ITEM 1. Financial Statements - ---------------------------- Page ---- Consolidated Balance Sheet -- March 31, 1997 and 1996, and December 31, 1996 23 Consolidated Income Statement -- Three months Ended March 31, 1997 and 1996, and December 31, 1996 24 Consolidated Statement of Stockholders' Equity -- Three months Ended March 31, 1997 and 1996 25 Consolidated Statement of Cash Flows -- Three months Ended March 31, 1997 and 1996 26 Notes to Consolidated Financial Statements 27-28 Selected Statistical Information 1, 15-18, 29-32 ITEM 2. Management's Discussion and Analysis of Financial - --------------------------------------------------------- Condition and Results of Operations 2-22 -----------------------------------
PART II - OTHER INFORMATION ---------------------------
ITEM 1. Legal Proceedings 34 - ------------------------- ITEM 2. Changes in Securities 34 - ----------------------------- ITEM 3. Defaults Upon Senior Securities 34 - --------------------------------------- ITEM 4. Submission of Matters to a Vote of Security Holders 34 - ----------------------------------------------------------- ITEM 5. Other Information 34 - ------------------------- ITEM 6. Exhibits and Reports on Form 8-K 34 - ---------------------------------------- Signatures 35
33 PART II. - OTHER INFORMATION ---------------------------- ITEM 1. Legal Proceedings - ------------------------- None ITEM 2. Changes in Securities - ----------------------------- None ITEM 3. Defaults Upon Senior Securities - --------------------------------------- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None ITEM 5. Other Information - ------------------------- None ITEM 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibit 12 Statement re computation of ratio Exhibit 27 Financial Data Schedule (b) The Registrant filed the following Current Reports on Form 8-K during the quarter ended March 31, 1997. Date Item Reported ---- ------------- 1/13/97 Announcement that, on February 15, 1997, the Corporation would exchange its Debt Exchangeable for Common Stock (DECS) for shares of the Class A Common Stock of Nextel Communications, Inc. 1/15/97 The Registrant's earnings for the quarter and year ended December 31, 1996. 2/7/97 The closing, on January 31, 1997, of the sale of $250,000,000 aggregate liquidation amount of Floating Rate Preferred Securities of First Chicago NBD Capital I and the filing of certain documents in connection therewith. 34 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST CHICAGO NBD CORPORATION ----------------------------- Date May 15, 1997 Verne G. Istock -------------------- ---------------------------- Verne G. Istock Principal Executive Officer Date May 15, 1997 William J. Roberts -------------------- ---------------------------- William J. Roberts Principal Accounting Officer 35 (Registrant) EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit Page - -------------- ---------------------- ---- 12 - Statement re computation of ratio 37 27 - Financial Data Schedule 38 36 EX-12 2 STATEMENT RE COMPUTATION OF RATIO Exhibit 12 COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES The computation of the ratio of income to fixed charges is set forth in Note 6 of Notes to Consolidated Financial Statements on page 28 of the Form 10-Q. EX-27 3 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from Form 10-Q for the period ended March 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 6,800 7,169 6,635 5,192 7,500 0 0 66,536 1,408 109,133 64,927 18,173 8,158 8,514 320 0 290 8,175 109,133 1,401 103 230 1,734 499 858 876 187 25 800 568 568 0 0 380 1.18 1.17 4.11 257 0 0 0 1,407 224 38 1,408 0 0 0 Treasury stock of $403 million is included as a reduction of other stockholders' equity. Investment securities gains/losses do not include the Corporation's equity securities gains which totaled $54 million. Other expense includes: Salaries and employee benefits of $425 million, occupancy of $66 million, equipment rentals, depreciation and maintenance of $54 million, amortization of intangible assets of $18 million, and other expenses which totaled $237 million. Allowance-Domestic, Allowance-Foreign and Allowance-Unallocated are only disclosed on an annual basis in the Corporation's Form 10K, and are, therefore, not included in this Financial Data Schedule.
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