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First Chicago NBD Corp – ‘10-K405’ for 12/31/96

As of:  Thursday, 3/27/97   ·   For:  12/31/96   ·   Accession #:  950131-97-2081   ·   File #:  1-07127

Previous ‘10-K405’:  ‘10-K405’ on 3/27/96 for 12/31/95   ·   Latest ‘10-K405’:  This Filing

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/27/97  First Chicago NBD Corp            10-K405    12/31/96   15:520K                                   Donnelley R R & S… 03/FA

Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405                93    484K 
 2: EX-3.(B)    By-Laws of the Corporation, as Amended                11     59K 
 3: EX-10.(C)   1st Chicago/Nbd Corporation Executive Estate Plan      6     23K 
 4: EX-10.(D)   Financial Planning Program for Executives              1      8K 
 5: EX-10.(F)   Long Term Disability Restoration Plan                  2     12K 
 6: EX-10.(J)   Deferred Compensation Plan                            13     34K 
 7: EX-10.(K)   Supplemental Savings and Investment Plan               7     17K 
 8: EX-10.(L)   Personal Pension Account Supplemental Plan             6     26K 
 9: EX-10.(M)   Individual Change of Control Employment Agreement     16     71K 
10: EX-10.(N)   Individual Executive Employment Agreement             14     60K 
11: EX-10.(Q)   Nbd Bancorp, Inc. Benefit Protection Trust Agmt       16     54K 
12: EX-12       Statements Re Computation of Ratios                    1      6K 
13: EX-21       First Chicago Nbd Corporation Subsidiaries             2     12K 
14: EX-23       Consent of Independent Public Accountants              1      9K 
15: EX-27       Financial Data Schedule                                2     13K 


10-K405   —   Annual Report — [x] Reg. S-K Item 405
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
"Description of Business
6Employees
"Competition
"Monetary Policy and Economic Controls
7Supervision and Regulation
8FDICIA and FIRREA
10FDIC Insurance
11Other
13Financial Review
14Selected Financial Data
15Business Segments
"Overview
19Other Activities
"Earnings Analysis
20Net interest income
21Noninterest income
"Trading Revenue
22Provision for credit losses
"Noninterest expense
23Applicable income taxes
25Risk Management
"Liquidity Risk Management
27Market Risk Management
31Credit Risk Management
"Selected Statistical Information
"At year-end
32Loan Composition
36Derivative Financial Instruments
38Capital Management
43Interest income
46Notes to Consolidated Financial Statements
511996
55Parent Company
65Standby letters of credit and foreign office guarantees
74Report of Management on Responsibility for Financial Reporting
76Report of Independent Public Accountants
77Investment securities
78Securitization of credit card receivables
"Foreign Outstandings
81Foreign offices
82Quarterly Dividends and Market Price Summary
87Item 2. Properties
88Item 3. Legal Proceedings
"Item 4. Submission of Matters to a Vote of Security Holders
"Executive Officers of the Registrant
"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
89Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
"Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
90Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-7127 FIRST CHICAGO NBD CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 38-1984850 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60670 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE) Registrant's telephone number, including area code: (312) 732-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: [Download Table] NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ----------------------- Common Stock, $1.00 par value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Preferred Stock with Cumulative and Adjustable Dividends, Series B ($100 stated value), no par value New York Stock Exchange Preferred Stock with Cumulative and Adjustable Dividends, Series C ($100 stated value), no par value New York Stock Exchange Depositary Shares, each representing one-twenty-fifth of a share of 8.45% Cumulative Preferred Stock, Series E ($625 stated value), no par value New York Stock Exchange Depositary Shares, each representing one-hundredth of a share of 5 3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 stated value), no par value New York Stock Exchange 7 1/2% Preferred Purchase Units New York Stock Exchange 7 1/4% Subordinated Debentures Due 2004 New York Stock Exchange 8.10% Subordinated Notes Due 2002 New York Stock Exchange 8 1/2% Notes Due June 1, 1998 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF CLASS -------------- 8.45% Cumulative Preferred Stock, Series E ($625 stated value) 5 3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 stated value) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the Corporation at December 31, 1996, was approximately $17,342,000,000 (based on the average price of such stock on February 28, 1997). At December 31, 1996, the Corporation had 313,473,520 shares of its Common Stock, $1.00 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE CORPORATION'S DEFINITIVE PROXY STATEMENT DATED MARCH 28, 1997, ARE INCORPORATED BY REFERENCE INTO PART III HEREOF. ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
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FIRST CHICAGO NBD CORPORATION FORM 10-K INDEX [Download Table] PAGE ---- PART I Item 1. Business..................................................... 2 Description of Business...................................... 2 Employees.................................................... 5 Competition.................................................. 5 Monetary Policy and Economic Controls........................ 5 Supervision and Regulation................................... 6 Financial Review............................................. 12 Item 2. Properties................................................... 86 Item 3. Legal Proceedings............................................ 87 Item 4. Submission of Matters to a Vote of Security Holders.......... 87 Executive Officers of the Registrant..................................... 87 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................................... 87 Item 6. Selected Financial Data...................................... 88 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 88 Item 8. Financial Statements and Supplementary Data.................. 88 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 88 PART III Item 10. Directors and Executive Officers of the Registrant........... 88 Item 11. Executive Compensation....................................... 88 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 88 Item 13. Certain Relationships and Related Transactions............... 88 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 89 1
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PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS General First Chicago NBD Corporation (the "Corporation"), incorporated in Delaware in 1972, is a multibank holding company registered under the Bank Holding Company Act of 1956 (the "BHC Act"). The Corporation is the surviving corporation resulting from the merger (the "Merger"), effective December 1, 1995, of First Chicago Corporation ("FCC"), a Delaware corporation and registered bank holding company, with and into NBD Bancorp, Inc. ("NBD"), also a Delaware corporation and registered bank holding company. Through its bank subsidiaries, the Corporation provides consumer and corporate banking products and services. The Corporation's lead bank subsidiary is The First National Bank of Chicago ("FNBC"). The Corporation also is the parent corporation of NBD Bank (Michigan) ("NBD Michigan"), American National Bank and Trust Company of Chicago ("ANB"), FCC National Bank ("FCCNB"), NBD Bank, National Association (Indiana) ("NBD Indiana"), NBD Bank (Florida) ("NBD Florida") and several other bank subsidiaries. In addition, the Corporation directly or indirectly owns various nonbank companies engaged in businesses related to banking and finance. The Corporation also directly or indirectly raises funds principally to finance the operations of its nonbank subsidiaries. A substantial portion of the Corporation's annual income typically has been derived from dividends from its subsidiaries and from interest on loans, some of which are subordinated, to its subsidiaries. The Corporation, on an ongoing basis, evaluates its existing business operations and organizational structures, and routinely explores opportunities to acquire financial institutions and other financial services-related businesses and assets. In addition, the Corporation occasionally sells assets, or exits businesses or markets determined not to be consistent with the Corporation's overall business strategy. During 1996, the Corporation acquired Barrington Bancorp, Inc. ("Barrington"), a one-thrift holding company with assets of approximately $68 million; Barrington's thrift subsidiary was merged into FNBC. In addition, the Corporation merged NBD Bank (Illinois) with and into FNBC and consolidated its retail and middle market banking operations with those of FNBC and ANB. Also in 1996, the Corporation announced its intention to exit the stand-alone domestic institutional custody and master trust businesses and discontinued its emerging markets activities. The Corporation engages primarily in three lines of business--Regional Banking, which includes retail banking and middle market banking; Corporate and Institutional Banking and Corporate Investments; and Credit Card. Each of these businesses is conducted through the Corporation's bank and nonbank subsidiaries, as described below. Regional Banking Retail Banking Retail banking is conducted primarily through FNBC, NBD Michigan, NBD Indiana and NBD Florida by providing traditional retail banking products and services to consumers and small businesses. Products and services offered include demand, savings and time deposit accounts; cash management accounts; installment loans and related services; lines of credit and other open-end credit products; mortgage banking; electronic banking; safekeeping; nondeposit investment products and related services, including mutual funds, annuities and discount brokerage services; and trust and investment services. Trust and investment services include financial planning, estate planning, retirement planning, tax counseling, custody services and fiduciary services, including acting as executor, administrator and personal representative of estates. The Corporation offers an array of additional financial products to its retail customers, including property and casualty insurance, and credit life and other life insurance products. The Corporation also offers a proprietary mutual fund family--the Pegasus Funds; First Chicago NBD Investment Management Company ("FCNIMC"), a subsidiary of FNBC, is the investment advisor to these funds. The Pegasus Funds comprise a variety of mutual funds covering a wide range of investment objectives. As of December 31, 1996, the Pegasus Funds ranked among the largest bank-managed fund families in the country, with over $13 billion in assets. 2
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The Corporation's primary retail banking markets are metropolitan Chicago and the states of Michigan and Indiana. The Corporation enjoys a leading market share in each of these geographic markets, serving approximately 3,000,000 households through over 650 bank branches, more than 1,300 automatic teller machines ("ATMs"), 24-hour telephone support, and online banking services available through personal computers. Additionally, retail banking is available nationally through "direct banking," which offers 24-hour telephone support, nationwide debit card access at ATMs and merchants, and online banking services. ATM services are provided to retail banking clients through two regional shared networks in which the Corporation has an ownership interest, CASH STATION and Magic Line, and through the CIRRUS system, a national shared ATM network. Pursuant to a contract with MasterCard, the Corporation operates the computerized transaction routing switch for CIRRUS. The Corporation also operates a similar routing switch for Magic Line. Middle Market Banking Middle market banking is conducted primarily through ANB, NBD Michigan and NBD Indiana, and serves midsized business enterprises located predominantly in the Midwest. The Corporation seeks to position itself as the lead financial services provider to its middle market customers by offering a broad array of targeted products including traditional lending arrangements, asset-based lending, commercial real estate, and lease financing. Corporate finance products and services offered include merger and acquisition advisory services, financial advisory services, interest rate protection products and mezzanine debt capabilities. In addition, the Corporation offers a full range of cash management, international, investment management, corporate trust and employee benefit products to its middle market customers. For business owners and key executives, the Corporation offers personal banking, trust, insurance, investment, loan, deposit and estate planning services. The Corporation enjoys leading market positions in middle market banking in each of its major geographic markets. Corporate & Institutional Banking and Corporate Investments Corporate & Institutional Banking Corporate & Institutional Banking encompasses the broad range of commercial and investment banking products and services that FNBC, NBD Michigan and NBD Indiana, along with other subsidiaries, provide to domestic and foreign customers. The Corporation's principal focus in this area is the delivery of corporate financial services, including the extension of credit, to commercial, financial and governmental customers. Corporate & Institutional Banking serves the manufacturing, wholesaling, retailing, commodities, banking, finance, insurance, transportation, securities, real estate, mortgage banking, communications, utilities, and petroleum and mining industries, as well as municipalities and health, education and service organizations. Customers include large and midsized corporations. The Corporation offers capital-raising products to its corporate and institutional clients, including loans, private placements of debt securities, merger and acquisition advisory services, highly leveraged transaction financing, asset sales and distributions, asset securitizations and loan syndications. In the global financial marketplace, the Corporation engages in investment and trading activities in U.S. government, municipal, corporate fixed-income and federal agency securities. The Corporation also provides to its corporate and institutional clients a wide range of risk management products, such as foreign exchange, futures, foreign exchange options, interest rate options, and interest rate and currency swaps. 3
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First Chicago Capital Markets, Inc. ("FCCM"), one of the Corporation's subsidiaries, is a primary government bond dealer and is principally responsible for activities in the securities of states, municipalities, other governmental entities and certain corporate entities, including trading, sales, underwriting, research, and maintenance of an active secondary market with national sales distribution. In addition, the Corporation, through a number of its subsidiaries, develops, markets and delivers cash management, operating, clearing, and other noncredit products and services, both overseas and domestically. These include money transfer, collection, disbursement, documentary, remittance, trade finance and international securities clearing services. Corporate & Institutional Banking offers a wide range of administrative and trust and investment advisory services to corporations, municipalities and charitable organizations. Each of FNBC, NBD Michigan, NBD Indiana and ANB act as trustee of corporate, pension, profit-sharing and other employee-benefit trusts, and act as registrar, fiscal and paying agent for business entities. In addition, First Chicago Trust Company of New York ("FCTC"), a New York state-chartered trust company ranking among the largest stock transfer agents in the United States, provides custody, special agency, stock transfer, and securities issuing, paying and clearance services. Corporate Investments Corporate Investments encompasses mostly noncustomer-oriented activities that are conducted primarily through the Corporation's nonbank subsidiaries, including First Chicago Investment Corporation, First Chicago Equity Corporation, First Chicago Leasing Corporation, First Chicago Capital Corporation and First Chicago Financial Corporation, which raises funds to help finance these activities. The activities of Corporate Investments comprise growth equity investments, tax-advantaged investments, value-oriented investments, and funding and liquidity investments. Growth equity investment activities include various forms of equity funding for acquisitions, management buyouts and growing businesses; funding for these activities is provided by First Chicago Investment Corporation. First Chicago Equity Corporation, a small business investment company licensed under the Small Business Investment Act of 1958, offers equity funding for small business ventures. Tax-advantaged investment activities include advising on and investing in leases for commercial aircraft and major industrial and power production facilities and equipment. Investments are also made in alternative energy programs and affordable housing projects qualifying for tax credits under Section 29 and Section 42, respectively, of the Internal Revenue Code of 1986. Primary support for these activities is provided by First Chicago Leasing Corporation. Value-oriented investment activities include positions in the distressed and value investment markets, such as: loans, letters of credit, trade claims and securities of distressed companies; securities of companies whose debt trades below full face value of the claim; below-investment-grade tranches of commercial mortgage-backed securities; and fixed-income securities, publicly traded debt (including subordinated debt), equities, options and other securities. Support for the majority of these activities is provided by First Chicago Capital Corporation. Funding and liquidity investment activities provide funding to meet the incremental financing needs of the Corporation's bank subsidiaries by placing deposits and making investments in the wholesale money markets to provide a diversified funding base. These liquid investments include Fed funds and interest-bearing deposits. In addition, investments are generally made in short- to medium-term municipal, government, and agency securities that provide increased liquidity and satisfy various collateral requirements. Credit Card Credit Card has primary responsibility for developing and marketing credit card products and related services to individuals nationwide using direct response, telemarketing and other techniques that do not require a local physical presence. While the Corporation's proprietary First Card line of VISA and MasterCard accounts are the primary Credit Card products, other products include check-accessed lines of credit and certificates of deposit. 4
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The majority of the Corporation's credit card accounts are owned and administered by FCCNB, a Delaware-based national banking association. FCCNB ranks among the largest issuers of bank credit cards in the United States. The Corporation's Credit Card operations centers are located in Wilmington, Delaware; Elgin, Illinois; Indianapolis, Indiana; Troy, Michigan; and Uniondale (Long Island), New York. A processing center in Springfield, Missouri, is currently under construction. At December 31, 1996, Credit Card managed approximately $18.5 billion in card-related receivables. Financial and Risk Policy The Corporation's Risk Management Committee determines the desired risk profile of the Corporation, allocates resources, including risk capacity against expected return, to the lines of business, approves major investment programs that are consistent with strategic priorities and risk appetite, and makes capital management decisions to appropriately fund the Corporation's portfolio of investments. The Risk Management Committee includes, among others, the Chairman and Chief Executive Officer, the Vice Chairmen, the Chief Risk Management Officer and the Chief Financial Officer. The Risk Management Committee is supported by: the Credit Risk Committees, which are responsible for approving credit exposures within authorities granted; the Investment Risk Management Committee, which is responsible for approving trading and investment/sale decisions for the Corporation's own account, managing the Corporation's liquidity, monitoring and adjusting structural interest rate risk, and overseeing market-related trading activities; the Fiduciary Risk Committee, which is responsible for approving the processes and mechanisms designed to mitigate fiduciary risks; the Operating Risk Committee, which is responsible for approving the processes and mechanisms designed to mitigate operating risks; and the Review Committee, which is responsible for providing strategic direction and senior management oversight for the risk management process. EMPLOYEES As of December 31, 1996, the Corporation and its subsidiaries had 33,414 employees on a full-time-equivalent basis. COMPETITION All of the Corporation's principal business activities are highly competitive. The Corporation's subsidiaries, including the bank subsidiaries (the "Banks"), compete actively with other financial services providers offering a wide array of financial products and services. The Corporation's competitors include other national and state banks, savings banks, savings and loan associations, finance companies, credit unions, mutual funds, securities brokers, mortgage bankers, leasing companies, insurance companies, other domestic and foreign financial institutions, and various nonfinancial intermediaries. MONETARY POLICY AND ECONOMIC CONTROLS The earnings of the Banks, and therefore the earnings of the Corporation, are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). An important function of the Federal Reserve Board is to promote orderly economic growth by influencing interest rates and the supply of money and credit. Among the methods that have been used to achieve this objective are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, interest rates on loans and securities, and rates paid for deposits. The Federal Reserve Board's monetary policies strongly influence the behavior of interest rates and can have a significant effect on the operating results of commercial banks. Continued tame price inflation in 1996 contributed to the decision of the Federal Reserve Board to hold short-term interest rates stable. 5
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The effects of the various Federal Reserve Board policies on the future business and earnings of the Corporation cannot be predicted. Other economic controls also have affected the Corporation's operations in the past. The Corporation cannot predict the nature or extent of any effects that possible future governmental controls or legislation may have on its business and earnings. SUPERVISION AND REGULATION General Bank holding companies, banks and financial institutions generally are highly regulated, with numerous federal and state laws and regulations governing their activities. As a bank holding company, the Corporation is subject to regulation under the BHC Act and to examination and supervision by the Federal Reserve Board. Under the BHC Act, the Corporation is prohibited, with certain exceptions, from acquiring or retaining direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company, and from engaging in activities other than those of banking or of managing or controlling banks, other than companies engaged in activities that the Federal Reserve Board determines to be so closely related to the business of banking as to be a proper incident thereto. The acquisition of direct or indirect ownership or control of a bank or bank holding company by the Corporation also is subject to certain restrictions under the BHC Act and applicable state laws. The Corporation is a legal entity separate and distinct from the Banks and the Corporation's other subsidiaries. The Banks are subject to certain restrictions imposed by federal laws on any extensions of credit to the Corporation or, with certain exceptions, other affiliates; on investments in stock or other securities of the Corporation; on the taking of such securities as collateral for loans; and on the terms of transactions between the Banks and other subsidiaries. The Corporation and its subsidiaries also are subject to certain restrictions with respect to engaging in the issuance, flotation, underwriting, public sale or distribution of securities. The national bank subsidiaries of the Corporation, including FNBC, ANB, FCCNB and NBD Indiana, are supervised, examined and regulated by the Office of the Comptroller of the Currency (the "Comptroller") under the National Bank Act. Since national banks also are members of the Federal Reserve System and their deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"), they also are subject to the applicable provisions of the Federal Reserve Act, the Federal Deposit Insurance Act and, in certain respects, to state laws applicable to financial institutions. NBD Michigan and the other state-chartered bank subsidiaries of the Corporation are, in general, subject to the same or similar restrictions and regulations, but with more extensive regulation and examination by state banking departments, the Federal Reserve Board for state banks that are members of the Federal Reserve System, and the FDIC for state banks that are not members of the Federal Reserve System. In addition, the Banks' operations in other countries are subject to various restrictions imposed by the laws of those countries. Federal law prohibits the Corporation and certain of its subsidiaries from borrowing from the Banks without the prior approval of the respective Bank's Board of Directors and unless such loans are secured by United States Treasury securities or other specified obligations. Further, such loans and investments by any of the Banks to the Corporation or any other affiliate are limited to 10% of the respective Bank's capital and surplus, and as to the Corporation and all such affiliates to an aggregate 20% of the respective Bank's capital and surplus. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each Bank and to commit resources to support such Bank in circumstances where it might not do so absent that policy. In addition, any capital loans by the Corporation to any of the Banks would be subordinate in right of payment to deposits and to certain other indebtedness of such Bank. Additionally, there are certain federal and state regulatory limitations on the payment of dividends to the Corporation by the Banks. Dividend payments by national banks are limited to the lesser of (i) the level of undivided profits and (ii) absent regulatory approval, an amount not in excess of net income for the current year combined with retained net income for the preceding two years. As of January 1, 1997, the Banks could 6
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have declared additional dividends of approximately $0.9 billion without the approval of bank regulatory agencies. The payment of dividends by any Bank also may be affected by other factors, such as the maintenance of adequate capital for that Bank. Banking regulatory agencies have the authority to prohibit the banking organizations they supervise from paying dividends if, in the regulator's opinion, the payment of dividends would, in light of the bank's financial condition, constitute an unsafe or unsound practice. The BHC Act, subject to certain exceptions, generally prohibits the Banks from entering into certain tie-in arrangements in connection with extensions of credit or providing property or services. Legislation may be enacted or regulations imposed in the United States or its political subdivisions, or in any other jurisdiction in which the Corporation does business, to further regulate banking and financial services. There can be no assurance that any such legislation or regulation will not place additional limitations or restrictions on the Corporation's or any Bank's operations. Capital Adequacy The Federal Reserve Board has adopted risk-based capital guidelines that require bank holding companies to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) of 8%. At least half of total capital must be composed of common stockholders' equity, minority interest, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less disallowed intangibles and other adjustments ("Tier I capital"). The remainder ("Tier II capital") may consist of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan loss reserves. At December 31, 1996, the Corporation's consolidated Tier I capital and total capital ratios were 9.2% and 13.3%, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier I capital to total average assets (the "leverage ratio") of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The Corporation's leverage ratio at December 31, 1996, was 9.3%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a "tangible Tier I capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. Each of the Banks is subject to similar risk-based and leverage capital requirements adopted by the applicable federal bank regulatory agency. Each of the Banks was in compliance with the applicable minimum capital requirements as of December 31, 1996. Neither the Corporation nor any of the Banks has been advised by any federal bank regulatory agency of any specific minimum leverage ratio requirement applicable to it. Failure to meet capital requirements could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business, which are described below under "FDICIA and FIRREA." FDICIA and FIRREA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") significantly expanded the regulatory and enforcement powers of federal banking regulators, in particular the FDIC, and has important consequences for the Corporation, the Banks and other depository institutions located in the United States. 7
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A major feature of FDICIA is the comprehensive directions it gives federal banking regulators to promptly direct or require the correction of problems at inadequately capitalized banks in the manner that is least costly to the federal deposit insurance funds. The degree of corrective regulatory involvement in the operations and management of banks and their holding companies is, under FDICIA, largely determined by the actual or anticipated capital positions of the subject institutions. FDICIA established five tiers of capital measurement for regulatory purposes ranging from "well-capitalized" to "critically undercapitalized." Under regulations adopted by the federal banking agencies, a depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below such measure, and critically undercapitalized if its tangible equity is not greater than 2% of total tangible assets. A depository institution may be deemed to be in a capitalization category lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. FDICIA requires banking regulators to take increasingly strong corrective steps, based on the capital tier of any subject bank, to cause such bank to achieve and maintain capital adequacy. Even if a bank is adequately capitalized, however, the banking regulators are authorized to apply corrective measures if the bank is determined to be in an unsafe or unsound condition or engaging in an unsafe or unsound activity. Depending on the level of capital of an insured depository institution, the banking regulatory agencies' corrective powers can include: requiring a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to reduce total assets; requiring the institution to issue additional stock (including voting stock) or to be acquired; placing restrictions on transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election for the institution's board of directors; requiring that certain senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; prohibiting the institution's parent holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution. If the insured depository institution is undercapitalized, the parent holding company is required to guarantee that the institution will comply with any capital restoration plan submitted to, and approved by, the appropriate federal banking agency in an amount equal to the lesser of (i) 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with the capital restoration plan. If such parent holding company guarantee is not obtained, the capital restoration plan may not be accepted by the banking regulators. As a result, such institution would be subject to the more severe restrictions imposed on significantly undercapitalized institutions. Further, the failure of such a depository institution to submit an acceptable capital plan is grounds for the appointment of a conservator or receiver. FDICIA also contains a number of other provisions affecting depository institutions, including additional reporting and independent auditing requirements, the establishment of safety and soundness standards, the system of risk-based assessments described below under "FDIC Insurance," a review of accounting standards, and supplemental disclosures and limits on the ability of all but well-capitalized depository institutions to acquire brokered deposits. Since FDICIA was enacted, Congress has enacted the Riegle Community Development and Regulatory Improvement Act of 1994, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 and other legislation, which contain a number of specific provisions easing to some extent the regulatory burden on banks and bank holding companies, including some FDICIA-imposed requirements, and which are intended to make the bank regulatory system more efficient. Where required, federal banking regulators are taking actions to implement these provisions. 8
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The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), among other things, provides generally that, upon the default of any bank of a multi-unit holding company, the FDIC may assess an affiliated insured depository institution for the estimated losses incurred by the FDIC. Specifically, FIRREA provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of a default. "Default" is defined generally as the appointment of a conservator or receiver. "In danger of a default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. All of the Banks are FDIC-insured depository institutions. FDIC Insurance The Banks are subject to FDIC deposit insurance assessments. Under the FDIC's risk-based assessment system, the assessment rate is based on classification of a depository institution in one of nine risk assessment categories. Such classification is based upon the institution's capital level and upon certain supervisory evaluations of the institution by its primary regulator. The assessment rate schedule, effective January 1, 1997, creates a spread in assessment rates ranging from 0.27% per annum on the amount of domestic deposits for banks classified as weakest by the FDIC down to no annual assessment for banks classified as strongest by the FDIC. Interstate Banking and Branching The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") significantly revised prior laws applicable to interstate acquisitions of banks and bank holding companies and the branching powers of national banks. Prior to the Riegle-Neal Act, the Federal Reserve Board was not permitted to approve an application to acquire shares of a bank located outside the state in which the operations of the applicant's bank subsidiaries were principally conducted unless the acquisition was specifically authorized by a statute of the acquired bank's state. The Federal Reserve Board is now authorized to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of a bank located in another state without regard to whether such transaction is prohibited under the laws of such state. The Federal Reserve Board may not, however, approve such an application if, following the acquisition, the applicant would control either (l) more than 10% of all insured depository institution deposits in the United States or (2) under certain circumstances, 30% or more of all insured depository institution deposits in any state where either the applicant or the acquired bank is located. The 30% limit on aggregate deposits that may be controlled by an applicant can be adjusted by the states on a nondiscriminatory basis. The Riegle-Neal Act also revises the laws applicable to mergers between insured banks located in different states. Before passage of the Riegle-Neal Act, such mergers generally were not authorized. Commencing June l, 1997, however, adequately capitalized and adequately managed insured banks in different states may merge without regard to whether the merger is authorized under the laws of any state. States may elect to prohibit interstate bank mergers or may elect to permit early interstate bank mergers by adopting, prior to June 1, 1997, legislation that expressly so provides, and that applies on equal terms to all out-of-state banks. The Riegle-Neal Act provides that an interstate merger involving the acquisition of a bank branch (as distinguished from an entire bank) or the de novo establishment of a bank branch in another state may be approved only if the law of the host state expressly permits such action. Generally an interstate merger may not be approved if, following the merger, the resulting bank (and all insured depository institutions that are affiliates of the resulting bank) would control (1) more than 10% of all insured depository institution deposits in the United States or (2) under certain circumstances, 30% or more of all insured depository institution deposits in any state where the resulting bank will be located. The 30% limit on aggregate deposits that may be controlled by the resulting bank can be adjusted 9
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by the states on a nondiscriminatory basis. The laws of the host state regarding community reinvestment, consumer protection, fair lending and the establishment of intrastate branches will apply to any branch of an out-of- state bank unless, in the case of an out-of-state branch of a national bank, such host state laws are preempted by federal law or the Comptroller determines that application of such laws would have a discriminatory effect on the national bank. The Riegle-Neal Act contains a number of other provisions related to banks and bank holding companies, including: authorization of interstate branching by foreign banks; additional branch closing notice requirements for interstate banks proposing to close a branch in a low- or moderate-income area; amendments to the Community Reinvestment Act of 1977 to require separate written evaluations of an insured depository institution for each state in which it maintains branches; a prohibition on interstate banks maintaining out-of-state deposit production offices; and authorization for a bank subsidiary of a bank holding company to receive deposits, renew time deposits, close and service loans, and receive payments on loans as agent for a depository institution affiliate of such bank. The extent to and terms on which full interstate branching and certain other actions authorized under the Riegle-Neal Act are implemented will depend on the actions of entities other than the Corporation and the Banks, including the legislatures of the various states. Further developments by state and federal authorities, including legislation, with respect to matters covered by the Riegle-Neal Act reasonably can be anticipated to occur in the future. In addition, there may be new banking legislation enacted or introduced in the current Congress related to bank holding companies and their powers; the likelihood of passage and effect, if any, of such legislation on the Corporation and the Banks cannot be predicted. Other FNBC, NBD Michigan, NBD Indiana and ANB are registered with the Comptroller or the Securities and Exchange Commission (the "Commission") as transfer agents and are subject to the rules and regulations of the Commission and/or the Comptroller with respect to their activities as transfer agents. FCTC is registered as a transfer agent with the Commission and also is subject to regulation by the New York State Banking Department and the Federal Reserve Board. Certain organizational units within FNBC, NBD Michigan, ANB and NBD Indiana are registered with the Commission as municipal securities dealers. These units are subject to the applicable rules and regulations of the Commission and the Municipal Securities Rulemaking Board with respect to transactions in municipal securities performed in a municipal securities dealer capacity. FNBC, NBD Michigan and NBD Indiana also are regulated government securities brokers and dealers under the Government Securities Act, and are subject to regulations issued thereunder in connection with the conduct of their United States government securities business. In addition, First Chicago NBD Investment Services, Inc. ("FCNIS"), which provides investment products and brokerage services for individuals and small businesses, is registered as a broker-dealer with the Commission and is a member of the National Association of Securities Dealers ("NASD"). FCNIS was formed as the result of the merger in 1996 of First Chicago Investment Services, Inc. with NBD Securities, Inc., and the resulting entity's later merger with NBD Brokerage Services, Inc. FCNIS provides products and services to clients of FNBC, ANB, NBD Michigan, and NBD Indiana. The brokerage activities of FCNIS are subject to the applicable rules and regulations of the Commission and the NASD. FCCM also is registered as a broker-dealer with the Commission and is a member of the NASD. The securities distribution and trading activities of FCCM are subject to the applicable rules and regulations of the Federal Reserve Board, the Commission and the NASD. First Chicago Futures, Inc. ("FCFI"), a subsidiary of FNBC that conducts a commodities and securities brokerage business, is registered with the Commission as a broker-dealer and with the Commodity Futures Trading Commission ("CFTC") as a futures commission merchant, and is a member of the National Futures Association ("NFA") and the NASD. FCFI is subject to the applicable rules and regulations of the Commission, the CFTC, the NFA, the NASD, and certain commodities and securities exchanges of which FCFI is a member with respect to its activities as a futures commission merchant and broker-dealer. 10
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FCNIMC and ANB Investment Management and Trust Company ("ANBIMC"), a subsidiary of FCNIMC, provide investment advisory, management and administrative services to a variety of clients. FCNIMC and ANBIMC are registered with the Commission as investment advisers and, as such, are subject to the Investment Advisers Act of 1940. In addition, as an adviser to regulated investment companies, FCNIMC also may be subject to certain provisions of the Investment Company Act of 1940. The Corporation's insurance services and products are marketed through various bank and nonbank subsidiaries, each of which is licensed and regulated by applicable state insurance regulatory agencies. Similarly, certain of the Corporation's mortgage banking activities are subject to various federal and state licensing and/or regulatory requirements. 11
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FINANCIAL REVIEW INDEX TO FINANCIAL REVIEW [Download Table] PAGE ---- Selected Financial Data.................................................... 13 Business Segments.......................................................... 14 Earnings Analysis.......................................................... 18 Risk Management............................................................ 24 Liquidity Risk Management.................................................. 24 Market Risk Management..................................................... 26 Credit Risk Management..................................................... 30 Derivative Financial Instruments........................................... 35 Capital Management......................................................... 37 Consolidated Financial Statements.......................................... 41 Notes to Consolidated Financial Statements................................. 45 Report of Management on Responsibility for Financial Reporting............. 73 Report of Independent Public Accountants................................... 75 Selected Statistical Information........................................... 76 12
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Selected Financial Data [Download Table] (DOLLARS IN MILLIONS, EXCEPT PER 1996 1995 1994 1993 1992 SHARE DATA) -------- -------- -------- ------- ------- SUMMARY OF INCOME Net interest income.............. $3,620 $3,208 $2,956 $2,784 $2,692 Provision for credit losses...... 735 510 276 390 653 Provision for assets held for accelerated disposition (1)..... -- -- -- -- 625 Noninterest income............... 2,548 2,591 2,393 2,769 2,018 Merger-related charges........... -- 267 -- -- 76 FDIC special assessment.......... 18 -- -- -- -- Operating expense................ 3,253 3,268 3,220 3,161 3,084 Income before cumulative effect of changes in accounting principles...................... 1,436 1,150 1,221 1,290 224 Net income....................... 1,436 1,150 1,221 1,290 394 EARNINGS PER SHARE Primary Income before cumulative effect of changes in accounting principles.................... $4.39 $3.45 $3.62 $3.91 $0.60 Net income..................... 4.39 3.45 3.62 3.91 1.17 Fully diluted Income before cumulative effect of changes in accounting principles.................... 4.32 3.41 3.58 3.79 0.60 Net income..................... 4.32 3.41 3.58 3.79 1.17 PERIOD-END BALANCES Total assets..................... $104,619 $122,002 $112,763 $93,140 $90,011 Long-term debt................... 8,454 8,163 7,246 5,250 4,175 Total stockholders' equity....... 9,007 8,450 7,809 7,499 6,323 COMMON SHARE DATA Dividends declared............... $ 1.48 $ 1.35 $ 1.23 $ 1.08 $ 1.04 Book value, year-end............. 27.31 25.25 22.60 21.25 18.27 Market price, year-end........... 53 3/4 39 1/2 27 3/8 29 3/4 32 3/4 CAPITAL RATIOS (2) Common equity-to-assets ratio.... 8.2% 6.9% 6.8% 7.6% 6.5% Regulatory leverage ratio........ 9.3 6.9 7.3 7.8 6.6 Risk-based capital Tier 1 ratio................... 9.2 7.8 8.6 9.0 7.4 Total capital ratio............ 13.3 11.8 13.0 13.6 11.3 -------- (1) Of the total provision, $491 million relates to loans and $134 million relates to other real estate held for accelerated disposition. (2) Net of investment in FCCM. 13
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Business Segments OVERVIEW Financial results are reported by major business segments, principally structured around the customer markets served: Credit Card, Regional Banking, and Corporate & Institutional Banking and Corporate Investments. EARNINGS CONTRIBUTION BY BUSINESS LINES Pie Chart 1996 1995* 1994 Credit Card 24% 23% 29% Regional 41% 38% 32% Corporate & Institutional/ Corporate Investments 34% 38% 35% Other 1% 1% 4% *Operating Earnings Business segment results are derived from the internal profitability reporting systems and reflect full allocation of all institutional and overhead items. These systems use a detailed funds transfer methodology and an equity allocation based on risk elements. Information for prior years has been adjusted in order to achieve consistency for comparison purposes. Credit Card results are presented before the securitization of credit card receivables (presecuritized) to facilitate analysis of trends. See the discussion of net interest income and noninterest income on pages 19 and 20, respectively, as well as the reconciliation of reported to presecuritized results on page 77. Revenues and costs for investment management and insurance products are also aligned with customers and, therefore, are reported within the appropriate business segment. Certain corporate revenues and expenses, generally unusual or one-time in nature, are included in "Other Activities." 14
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REGIONAL BANKING [Download Table] 1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ------ Net interest income--tax-equivalent basis............... $2,078 $2,008 $1,787 Provision for credit losses............................. 116 97 75 Noninterest income...................................... 748 649 594 Noninterest expense..................................... 1,771 1,725 1,677 Net income.............................................. 591 514 390 Return on equity........................................ 16% 17% 15% Efficiency ratio........................................ 63% 65% 70% Average loans (in billions)............................. $33.9 $31.3 $26.4 Average assets (in billions)............................ 38.1 36.0 30.0 Average common equity (in billions)..................... 3.5 3.0 2.5 More than 40% of the Corporation's earnings in 1996 were generated by Regional Banking, where the Corporation is the leading banking company in the three-state region of Illinois, Indiana and Michigan. This business segment encompasses retail banking and investment management activities for consumers as well as a host of financial services for small businesses and middle market companies. Transactions are conducted through branch and electronic banking networks. Additionally, ANB provides services specifically tailored to Chicagoland's middle market. Net income was $591 million for the year, up 15% from 1995. Return on equity was slightly above 16%. Loan volume in Regional Banking averaged just under $34 billion for 1996, up 8% from 1995. [Download Table] MIDDLE RETAIL MARKET -------------- ------------ 1996 1995 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ----- ----- Net interest income--tax-equivalent basis......... $1,308 $1,273 $ 770 $ 735 Provision for credit losses....................... 83 51 33 46 Noninterest income................................ 567 492 181 157 Noninterest expense............................... 1,328 1,306 443 419 Net income........................................ 292 249 299 265 Return on equity.................................. 16% 16% 17% 17% Efficiency ratio.................................. 71% 74% 47% 47% Average loans (in billions)....................... $19.0 $17.5 $14.9 $13.8 Average assets (in billions)...................... 21.6 20.5 16.5 15.5 Average common equity (in billions)............... 1.8 1.5 1.7 1.5 -------- The retail and middle market breakdowns are not available for 1994. The retail banking segment of Regional Banking produced net income of $292 million for a return on equity of 16%. Earnings increased 17% from 1995, driven by a 6% increase in total revenue and expense growth of less than 2%. The provision for credit losses in the retail segment rose $32 million, reflecting some deterioration in consumer credit quality. Middle market earnings in 1996 were $299 million, up 13% from 1995. Return on equity was 17%. Total revenue increased about 7%, mostly in loan spread and deposit and trust fees. Credit quality improved year-over-year as the provision dropped by $13 million. Operating efficiency remained excellent, at 47%. 15
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CORPORATE & INSTITUTIONAL BANKING AND CORPORATE INVESTMENTS [Download Table] 1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ----- ------ ----- Net interest income--tax-equivalent basis................. $809 $817 $748 Provision for credit losses............................... 37 41 (22) Noninterest income........................................ 905 1,015 851 Noninterest expense....................................... 933 992 933 Net income................................................ 481 510 424 Return on equity.......................................... 13% 14% 11% Efficiency ratio.......................................... 54% 54% 58% Average assets (in billions).............................. $64.5 $78.9 $71.8 Average common equity (in billions)....................... 3.6 3.6 3.6 The Corporation manages its corporate and institutional activities in two distinct business segments: Corporate & Institutional Banking, which includes customer-based businesses; and Corporate Investments, which comprises activities such as venture capital, leveraged leasing, funding and arbitrage, and the fixed income investment account. Together these two segments earned $481 million in 1996, for a 13% return on equity. Despite operating expense reductions in both segments, combined results were below the levels reported in 1995 due to a shortfall in revenues generated by trading businesses. [Download Table] CORPORATE & INSTITUTIONAL CORPORATE BANKING INVESTMENTS -------------- ------------ 1996 1995 1996 1995 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ----- ----- Net interest income--tax-equivalent basis......... $714 $700 $ 95 $117 Provision for credit losses....................... 37 41 -- -- Noninterest income................................ 606 718 299 297 Noninterest expense............................... 880 930 53 62 Net income........................................ 264 278 217 232 Return on equity.................................. 8% 9% 48% 32% Efficiency ratio.................................. 67% 66% N/M N/M Average loans (in billions)....................... $ 20.1 $ 19.3 $ 1.2 $ 1.3 Average assets (in billions)...................... 45.6 54.7 18.9 24.2 Average common equity (in billions)............... 3.1 2.9 0.5 0.7 -------- N/M--Not meaningful Detailed breakdowns for Corporate & Institutional Banking and Corporate Investments are not available for 1994. CORPORATE & INSTITUTIONAL BANKING Corporate & Institutional Banking provides sophisticated products and services to large corporations, governments, institutions and investors both nationally and internationally. Specific areas of expertise include: traditional credit products, syndications, corporate finance, cash management, trade finance, stock transfer, corporate trust, trading and the derivatives business. The Corporation is the leading provider of these products and services in the Midwest. Corporate & Institutional Banking earned $264 million in 1996, down about 5% from 1995. Disappointing results from the foreign exchange and interest rate derivatives businesses offset the gains in other areas. Expenses were down 5% in 1996 as a result of merger synergies, lower trading-related incentive compensation and disciplined expense management. In addition, the provision for credit losses was 10% lower in 1996, reflecting excellent loan quality and overall favorable economic conditions. 16
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Return on equity for the segment was 8% in 1996, well below the 15% hurdle rate targeted for this business. Corporate & Institutional Banking is focused on increasing returns through maximizing profitability of products and customer relationships, improving trading results and reducing the amount of risk capital required to support the business. CORPORATE INVESTMENTS In 1996, Corporate Investments made a significant contribution to earnings, generating $217 million, or 15%, of consolidated net income. Return on equity was 48%. Strong equity securities gains--$232 million--drove this exceptional performance. Lower asset and capital levels in 1996 reflected a substantial decline in investment securities as part of the Corporation's asset reduction strategy. The nature of Corporate Investments implies that it will be a more variable component of earnings going forward than the other business lines. However, because of the Corporation's expertise in this high-return area, continued significant earnings contributions are expected. CREDIT CARD (PRESECURITIZED) [Download Table] 1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ------ Net interest income--tax-equivalent basis............... $1,495 $1,175 $1,007 Provision for credit losses............................. 1,029 708 476 Noninterest income...................................... 651 560 491 Noninterest expense..................................... 558 541 459 Net income.............................................. 347 302 350 Return on equity........................................ 32% 36% 54% Efficiency ratio........................................ 26% 31% 31% Average loans (in billions)............................. $17.4 $14.2 $11.4 Average common equity (in billions)..................... 1.1 0.8 0.6 Among the largest bankcard issuers in the United States, Credit Card contributed about one-quarter of the Corporation's earnings in 1996. For the year, net income was $347 million and return on equity was a superior 32%. Earnings in 1996 were 15% higher than in 1995, as average managed credit card receivables grew 23% to $17.4 billion. At year-end 1996, receivables were $18.5 billion. Consistent with this growth, common equity allocated to Credit Card increased by about $300 million. Net interest income rose $320 million, or 27%, in 1996 due to higher average receivables volume. Likewise, fee income improved by $91 million, or 16%, due in part to changes in fee pricing. Expenses increased a modest 3% as new account solicitations declined from 1995's record level. Credit Card's operating efficiency remained excellent in 1996, at 26%. Credit Card is managed to achieve a superior return relative to risk over time. In 1996, rapid deterioration in this business line's credit quality partially offset the positive revenue and expense trends. The provision for credit losses grew to $1,029 million, up $321 million from 1995. The average net charge-off rate in the managed portfolio reached 5.8% for 1996, compared with 4.0% for 1995 and 3.5% for 1994. This substantial rise reflected the increasing rate of personal bankruptcy filings. Although the Corporation expects the charge-off rate to continue rising in the near term, the level and timing of the peak rate is uncertain. 17
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OTHER ACTIVITIES [Download Table] 1996 1995 1994 (DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ---- ----- ---- Total revenue................................................. $31 $ 14 $139 Noninterest expense........................................... 9 277 79 Net income (loss)............................................. 17 (176) 57 Average assets (in billions).................................. -- 0.4 0.1 Results for 1996 include a $7 million gain from the sale of Ohio branch operations. Merger-related charges totaled $267 million in 1995, of which $225 million was related to direct merger and restructuring costs. The remaining one-time charges of $42 million were for the conformance of accounting practices between the merged companies. Investment securities losses of $19 million in 1995 are also included in Other Activities. Earnings for 1994 included gains of $46 million from the sale of assets held in the accelerated disposition portfolio and a $35 million gain from the sale of an interest in an investment management business. Noninterest expense in 1994 included a charge of $25 million related to the depreciation of personal computer equipment and $19 million of other general corporate costs. Earnings Analysis SUMMARY Net income for 1996 was $1.436 billion, or $4.32 per share, compared with $1.150 billion, or $3.41 per share, in 1995 and $1.221 billion, or $3.58 per share, in 1994. Operating earnings for 1996, which excluded the after-tax effect of the one- time special FDIC assessment, were $1.447 billion, or $4.36 per share. Operating earnings for 1995, which excluded the after-tax effect of the merger-related charges and fourth-quarter 1995 investment securities losses, were $1.341 billion, or $3.99 per share. [Download Table] 1996 1995 1994 (IN MILLIONS, EXCEPT PER SHARE DATA) ------ ------ ------ Net income.............................................. $1,436 $1,150 $1,221 Fully diluted earnings per share........................ 4.32 3.41 3.58 Return on common equity................................. 17.0% 14.3% 16.6% Return on assets........................................ 1.28 0.94 1.13 The Corporation's 1996 results reflected the following highlights: . Net interest income grew 12% and net interest margin improved 69 basis points to 3.83% as a result of loan growth in the credit card and regional banking businesses as well as the effects of the targeted asset reduction program. . Adjusted fee revenue increased 10%, reflecting growth in both credit card and other product-based revenue. . Market-driven revenue was down 24%, principally due to disappointing trading results; Corporate Investment activities turned in a strong performance. . Commercial credit quality remained strong as nonperforming assets declined 27% to $290 million at year-end. . Credit Card earned an attractive return on equity of 32%. The net charge-off rate for credit card receivables increased to 5.8% for the year, up from 4.0% in 1995 and 3.5% in 1994. 18
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. Operating expense was slightly below the 1995 level. . Merger-related initiatives were successfully completed, including targeted earning asset reductions, key business integration efforts and revenue enhancements. In addition, in the fourth quarter the Corporation announced a common stock repurchase program totaling 40 million shares to be executed over a 2-3 year period. Under this program, 7.3 million shares were purchased during the fourth quarter at an average price of $53.93. NET INTEREST INCOME Net interest income includes fundamental spreads on earning assets as well as such items as loan fees, cash interest collections on problem loans, dividend income, interest reversals, and income or expense on derivatives used to manage interest rate risk. Net interest margin measures how efficiently the Corporation uses its earning assets and its underlying capital. In order to analyze fundamental trends in net interest margin, it is useful to adjust for securitization of credit card receivables and the activities of FCCM. [Download Table] 1996 1995 1994 (DOLLARS IN MILLIONS) ------- -------- ------- Reported Net interest income--tax-equivalent basis......... $ 3,722 $ 3,311 $ 3,043 Average earning assets............................ 97,274 105,306 92,598 Net interest margin............................... 3.83% 3.14% 3.29% Adjusted Net interest income--tax-equivalent basis......... $ 4,377 $ 3,956 $ 3,579 Average earning assets............................ 98,652 101,793 88,969 Net interest margin............................... 4.44% 3.89% 4.02% When credit card receivables are sold in securitization transactions, the Corporation's earnings are unchanged. However, the net interest income related to these high-yield assets is replaced by increased servicing fees, net of related credit losses. The average levels of securitized receivables were $7.7 billion in 1996, $7.2 billion in 1995, and $5.5 billion in 1994. FCCM is the Corporation's wholly owned subsidiary engaged in permissible investment banking activities. Because capital requirements for FCCM are risk- exposure driven rather than based on asset levels, FCCM can generate substantial volumes of relatively riskless, thin-spread earning assets that require little additional capital. The Corporation's net interest margin trends can be better analyzed if these earning assets and related margins are excluded. Adjusted net interest income increased by $421 million, or 11%, in 1996. In addition, adjusted net interest margin improved to 4.44% compared with 3.89% in 1995. Loan growth in both the credit card and regional banking businesses, coupled with the Corporation's successful efforts in reducing $25 billion of targeted low-margin assets, accounted for this improved performance. Adjusted net interest income in 1995 was up $377 million, or 11%, while adjusted net interest margin was 3.89%, down slightly from 4.02% in 1994. The 1995 growth in dollar spread income was principally driven by a 14% increase in adjusted average earning assets. Percentage spreads, on the other hand, were down principally due to a less profitable earning asset mix, reflecting the growth in thinly priced assets, including trading assets and loans to large corporate banking customers. 19
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NONINTEREST INCOME Credit card fee revenue and total noninterest income have been adjusted to exclude the effect of credit card securitizations to provide a more meaningful trend analysis. Credit card fee revenue in the following table excludes the amount of net servicing revenue (spread income less credit costs) associated with securitized credit card receivables. [Download Table] PERCENT INCREASE (DECREASE) ------------------- 1996 1995 1994 1995-1996 1994-1995 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Combined trading profits............ $ 58 $ 210 $ 86 (72)% 144% Equity securities gains............. 255 253 229 1 10 Investment securities gains (losses)........................... 27 (16) (1) N/M N/M ------ ------ ------ Market-driven revenue.............. 340 447 314 (24) 42 Credit card fee revenue (1)......... 694 579 574 20 1 Fiduciary and investment management fees............................... 400 404 377 (1) 7 Service charges on deposits......... 414 382 372 8 3 Other service charges and commissions........................ 389 353 316 10 12 ------ ------ ------ Adjusted fee-based revenue......... 1,897 1,718 1,639 10 5 Gain on sale of loans............... 8 7 6 14 17 Accelerated disposition portfolio gains.............................. 6 37 46 (84) (20) Gain on sale of investment advisory business........................... -- -- 35 -- N/M Other............................... 77 60 56 28 7 ------ ------ ------ Adjusted noninterest income....... $2,328 $2,269 $2,096 3 8 ====== ====== ====== -------- (1) Net credit card servicing revenue totaled $220 million in 1996, $322 million in 1995 and $297 million in 1994. N/M--Not Meaningful Combined trading profits totaled $58 million in 1996, compared with $210 million in 1995 and $86 million in 1994. Disappointing results from the foreign exchange and interest rate derivative trading businesses accounted for much of the 1996 decline. These trading businesses contributed to the improved 1995 results as increased customer demand and market volatility provided additional profit opportunities. The following table provides additional details on revenue from the Corporation's various trading businesses, including both trading profits and net interest income generated from these activities. TRADING REVENUE [Download Table] 1996 1995 1994 (IN MILLIONS) ---- ---- ---- Foreign exchange and derivatives................................ $ 63 $ 83 $ 56 Fixed income and derivatives.................................... 48 106 74 Emerging markets................................................ 6 6 (49) Other trading................................................... 58 97 79 ---- ---- ---- Total....................................................... $175 $292 $160 ==== ==== ==== Equity securities gains, principally from Corporate Investment activities, were $255 million during 1996, compared with $253 million in 1995 and $229 million in 1994. Investment securities gains totaled $27 million in 1996, compared with losses of $16 million in 1995 and $1 million in 1994. Beginning in the fourth quarter of 1995, the investment securities portfolio was reduced through sales and maturities as part of the Corporation's asset reduction program. From June 30, 1995, to December 31, 1996, the investment securities portfolio was reduced by $6.5 billion. 20
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Credit card fee revenue was $694 million in 1996, up 20% from 1995. The increase was due to both higher transaction volume and pricing changes instituted during 1996 to mitigate rising credit costs. Adjusted for the reclassification of Mileage Plus payments, the growth in credit card fee revenue in 1995 was 15%. Fiduciary and investment management fees include revenue generated by the Corporation's traditional trust products and services, investment management activities, and the shareholder services business. Fees generated from these activities decreased slightly in 1996, compared with a modest increase in 1995. In 1996, the Corporation decided to exit its stand-alone global custody and master trust businesses; the exit should be substantially completed by the second quarter of 1997. Revenues from these activities in 1996 totaled approximately $54 million. Revenues from the shareholder services business increased to $88 million in 1996 from $82 million in 1995 and $81 million in 1994. Revenue growth in the shareholder services business continues to be hampered by industry consolidation and price competition. Net gains from the active management of assets held in the accelerated disposition portfolio were $6 million in 1996, compared with $37 million in 1995 and $46 million in 1994. In the first quarter of 1996, the sale of the Corporation's Ohio branch network to Fifth Third Bancorp generated a $6.9 million gain, which is included in other noninterest income. PROVISION FOR CREDIT LOSSES Details of the Corporation's credit risk management and performance are presented in the "Credit Risk Management" section, beginning on page 30. NONINTEREST EXPENSE Operating expense in 1996 was $15 million below that of a year ago. Merger savings were channeled into investments in technology and used to fund growth in selected business activities. Overall 1995 expense growth, adjusted for the reclassification of Mileage Plus payments, was limited to 4% despite higher employee costs, increased equipment costs and investment in core business growth. SALARIES AND BENEFITS [Download Table] PERCENT INCREASE (DECREASE) ------------------- 1996 1995 1994 1995-1996 1994-1995 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Salaries.............................. $1,423 $1,420 $1,325 -% 7% Employee benefits..................... 284 272 277 4 (2) ------ ------ ------ Total................................. $1,707 $1,692 $1,602 1 6 ====== ====== ====== Average full-time-equivalent employees............................ 34,115 35,352 35,642 (3) (1) ====== ====== ====== Total employee costs grew by only $15 million, or 1%, in 1996, following an increase of $90 million, or 6%, between 1994 and 1995. Salary costs increased only slightly from a year ago as annual salary increases and higher performance-based incentive accruals were partially offset by reduced staff levels. Employee benefit costs increased $12 million in 1996 due mainly to higher pension expense. The 6% increase in 1995 reflected staff increases in certain business units as well as higher performance-based incentive costs. 21
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OTHER NONINTEREST EXPENSE [Download Table] PERCENT INCREASE (DECREASE) ------------------- 1996 1995 1994 1995-1996 1994-1995 (DOLLARS IN MILLIONS) ------ ------ ------ --------- --------- Occupancy expense of premises, net.... $ 259 $ 252 $ 244 3% 3% Equipment rentals, depreciation and maintenance.......................... 227 225 245 1 (8) Marketing and public relations........ 120 161 128 (25) 26 FDIC insurance expense................ 4 58 105 (93) (45) Amortization of intangible assets..... 79 88 93 (10) (5) Telephone............................. 88 80 67 10 19 Freight and postage................... 87 78 68 12 15 Travel and entertainment.............. 55 50 47 10 6 Stationery and supplies............... 48 45 39 7 15 Operating and other taxes............. 30 29 31 3 (6) Other................................. 549 510 551 8 (7) ------ ------ ------ Operating expense.................... 1,546 1,576 1,618 (2) (3) Merger-related charges................ -- 267 -- N/M N/M FDIC special assessment............... 18 -- -- N/M N/M ------ ------ ------ Total............................. $1,564 $1,843 $1,618 (15) 14 ====== ====== ====== Equipment expense increased 1% in 1996 to $227 million. A special charge of $25 million was taken in 1994 to reflect the reduction in the estimated useful life of existing personal computer equipment. The changes in marketing costs over the past several years generally reflect the level of credit card solicitation costs. Increased costs in 1995 supported a significant solicitation program that produced a record 3.4 million credit card accounts. FDIC insurance expense, excluding a one-time special assessment in 1996 of $18 million related to the recapitalization of the Savings Association Insurance Fund (SAIF), totaled $4 million in 1996. The decline from 1995 resulted from a substantial reduction in the insurance rate for Bank Insurance Fund deposits. However, a good portion of this expense savings was passed on to business customers in the form of fee reductions. Intangible amortization expense declined in both periods as certain core deposit intangibles became fully amortized. Merger-related charges in 1995 totaled $267 million, of which $225 million was related to direct merger and related restructuring costs. Other charges of $42 million were related to the one-time conformance of accounting practices. (See Note 3 on page 49 for more details.) APPLICABLE INCOME TAXES The following table shows the Corporation's income before income taxes, applicable income taxes, and effective tax rate for each of the past three years. [Download Table] 1996 1995 1994 (DOLLARS IN MILLIONS) ------ ------ ------ Income before income taxes.............................. $2,162 $1,754 $1,853 Applicable income taxes................................. 726 604 632 Effective tax rates..................................... 33.6% 34.4% 34.1% Tax expense for 1996 and 1995 included benefits for tax-exempt income and general business tax credits offset by the effect of nondeductible expenses, including goodwill. 22
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Tax expense in 1994 included a one-time tax benefit related to the implementation of final Internal Revenue Service ("IRS") bad debt recapture regulations as well as the effects of several favorable tax rulings. MERGER-RELATED INITIATIVES The Corporation successfully completed its merger-related initiatives in 1996, including targeted asset reductions, key business integration efforts to generate cost savings of $200 million, and revenue enhancements of $50 million from cross-sales of products to an expanded customer base. The Corporation completed its $25 billion asset reduction program by September 30, 1996, well ahead of schedule. The following table shows the components of the $25 billion decline using average assets for the first half of 1995 as a baseline. ASSET REDUCTION INITIATIVE [Download Table] AVERAGE AVERAGE INCREASE 4TH QTR. 1996 1ST HALF 1995 (DECREASE) (IN MILLIONS) ------------- ------------- --------- Loans.................................... $ 65,494 $ 56,927 $ 8,567 Targeted items Deposit placements..................... 5,664 9,715 (4,051) Federal funds sold..................... 739 1,846 (1,107) Trading assets......................... 8,888 20,659 (11,771) Investment securities.................. 5,311 14,507 (9,196) -------- -------- -------- Subtotal............................. 20,602 46,727 (26,125) Other assets (1)......................... 16,591 16,830 (239) -------- -------- -------- Total assets......................... $102,687 $120,484 $(17,797) ======== ======== ======== -------- (1) Includes approximately $1.8 billion of investment securities required in conjunction with the Corporation's government-related cash management and payment services. The Corporation has made the decisions necessary to effectively integrate its business activities, including organization and staffing changes to facilitate their implementation. At year-end 1996, staff reductions of over 2,000 had been identified, with severance payments already initiated for approximately 1,800 of such positions. The remaining identified staff reductions will occur as integration decisions are fully implemented. Staff level reductions have more than exceeded the Corporation's initially established goals. The Corporation has realized incremental fee revenue as a result of its wider array of product offerings to an expanded customer base. This has been particularly evident in increased cash management fee revenue and net interest income despite targeted asset reductions. In addition, due to an upgrade in its credit ratings, the Corporation has generated additional business with new customers. The Corporation established a reserve for direct merger and restructuring- related charges totaling $225 million at the time of the merger. The table below details the components of the reserve at year-end 1996 and 1995. MERGER RESERVE [Download Table] DECEMBER 31, DECEMBER 31, 1996 1995 (IN MILLIONS) ------------ ------------ Personnel............................................. $ 42 $ 92 Facilities & Equipment................................ 71 94 Other................................................. 5 14 ---- ---- Total................................................ $118 $200 ==== ==== 23
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At this time, the Corporation anticipates full usage of the merger reserve based on the projected cost of identified business actions. Such costs (i.e. severance payments, lease payments) will be absorbed by the merger reserve as incurred based on existing contractual arrangements. Risk Management The Corporation's various business activities generate liquidity, market and credit risks: . Liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely manner. . Market risk is the possibility that changes in future market rates or prices will make the Corporation's positions less valuable. . Credit risk is the possibility of loss from the failure of a customer to perform according to the terms of a transaction. Compensation for assuming these risks is reflected in interest income, combined trading profits and fee income. In addition, these risks are factored into the allocation of capital to support various business activities, as discussed in the "Capital Management" section, beginning on page 37. The Corporation is a party to transactions involving financial instruments that create risks that may or may not be reflected on a traditional balance sheet. These financial instruments can be subdivided into three categories: . Cash financial instruments, generally characterized as on-balance-sheet transactions, include loans, bonds, stocks and deposits. . Credit-related financial instruments include such instruments as commitments to extend credit and standby letters of credit. . Derivative financial instruments include such instruments as interest rate, foreign exchange, commodity price and equity price contracts, including forwards, swaps and options. The Corporation's risk management policies are intended to monitor and limit exposure to liquidity, market and credit risks that arise from each of these financial instruments. Liquidity Risk Management Liquidity risk management encompasses the Corporation's ability to meet all present and future financial obligations in a timely manner. The Consolidated Statement of Cash Flows, on page 44, presents data on cash and cash equivalents provided by and used in operating, investing and financing activities. The Corporation considers strong capital ratios, credit quality and core earnings as essential to retaining high credit ratings and, thereby, cost-effective access to market liquidity. The Corporation believes its prudent management policies and guidelines will ensure adequate levels of liquidity to fund anticipated needs of on- and off- balance-sheet items. In addition, a contingency funding plan identifies actions to be taken in response to an adverse liquidity event. The objectives of liquidity management policies are to maintain: . strong credit ratings and capital ratios; . adequate liquid assets; . liability diversification among instruments, maturities and customers; and . a continuously strong presence both in the wholesale purchased funds market and in the retail deposit market. Strong credit ratings foster the ability to attract wholesale funds on a regular basis and at a competitive cost. The Corporation's principal Banks (referred to collectively as the "Principal Banks"), comprising ANB, FNBC, FCCNB, NBD Indiana and NBD Michigan, all have identical ratings. The short- term debt ratings for 24
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the parent cover commercial paper issuances. The long- and short-term debt ratings for the Principal Banks cover bank note issuances. [Download Table] LONG-TERM SHORT-TERM DEBT DEBT CREDIT RATINGS ----------- ------------ S&P MOODY'S S&P MOODY'S DECEMBER 31, 1996 --- ------- ---- ------- First Chicago NBD Corporation (parent)................. A+ A1 A-1 P-1 The Principal Banks.................................... AA- Aa3 A-1+ P-1 Liquid assets are maintained in the form of federal funds sold, deposit placements and selected investment securities to meet any immediate cash flow obligations. Note 6, beginning on page 50, provides a detailed breakdown of the investment portfolio. The Corporation segments its balance sheet into liquid assets, core assets and non-core assets for liquidity management purposes. Liabilities are grouped as core liabilities, wholesale purchased funds and non-core liabilities. Core assets and liabilities consist primarily of customer-driven lending and deposit-taking activities. The large retail customer deposit base (the principal component of core liabilities) is one of the significant sources of liquidity. Through its various banking entities, the Corporation maintains direct access to local retail deposit markets and uses a network of brokers for gathering retail deposits on a national basis. Core liabilities also include subordinated debt and equity. As part of the monthly liquidity measurement process, the funding of core assets with core liabilities is monitored. As of December 31, 1996, 78% of core assets were funded with core liabilities. The wholesale market provided only 22% of core asset funding. The Corporation has established a 35% limit on the use of wholesale purchased funds for funding core assets. By limiting dependence on the wholesale market, the risk of a disruption to the Corporation's lending business from an adverse liquidity event is minimized. Access to a variety of funding markets and customers in the retail and wholesale sectors is vital both to liquidity management and to cost minimization. A reliable, diversified mix of funding from the wholesale market is created by active participation in global capital markets. Internal guidelines are used to manage the product mix and customer concentration of wholesale funding. In addition, as part of the normal liquidity management process, the Corporation securitizes and sells assets such as credit card receivables. Securitization is an important funding vehicle that both diversifies funding sources and raises large amounts of term funding in a cost-effective manner. DEPOSITS AND OTHER PURCHASED FUNDS [Download Table] 1996 1995 1994 1993 1992 DECEMBER 31 (IN MILLIONS) ------- -------- ------- ------- ------- Domestic offices Demand............................... $15,702 $ 15,234 $14,378 $14,852 $14,247 Savings.............................. 21,722 20,180 20,088 21,154 20,929 Time Under $100,000..................... 9,851 9,972 8,720 8,310 9,779 $100,000 and over.................. 5,143 5,947 4,484 4,089 5,688 Foreign offices........................ 11,251 17,773 17,225 9,602 10,098 ------- -------- ------- ------- ------- Total deposits................... 63,669 69,106 64,895 58,007 60,741 Federal funds purchased and securities under repurchase agreements........... 7,859 15,711 16,919 11,038 10,591 Commercial paper....................... 762 288 206 323 357 Other short-term borrowings............ 6,810 9,514 8,216 6,506 3,808 Long-term debt......................... 8,454 8,163 7,246 5,250 4,175 ------- -------- ------- ------- ------- Total other purchased funds...... 23,885 33,676 32,587 23,117 18,931 ------- -------- ------- ------- ------- Total............................ $87,554 $102,782 $97,482 $81,124 $79,672 ======= ======== ======= ======= ======= 25
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Market Risk Management OVERVIEW Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Corporation has risk management policies to monitor and limit exposure to market risk. Through its trading activities, the Corporation strives to take advantage of profit opportunities available in interest and exchange rate movements. In asset and liability management activities, policies are in place that are designed to minimize structural interest rate and foreign exchange rate risk. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 17, beginning on page 66. TRADING ACTIVITIES The Corporation takes active trading positions in a variety of markets and instruments, including U.S. government, municipal and money market securities. It also maintains positions in derivative products associated with these markets and instruments, such as interest rate and currency swaps, and commodity and equity index options. The Corporation's trading activities are primarily customer-oriented, and trading positions are established as necessary for customers. In order to accommodate customer demand, an inventory in capital markets instruments is carried, and access to market liquidity is maintained by making bid-offer prices to other market makers. Although these two activities constitute proprietary trading business, they are essential to providing customers with capital markets products at competitive prices. Many trading positions are kept open for brief periods of time, often less than one day. Other trading positions are held for longer periods, and these positions are valued at prevailing market rates on a present value basis. Realized and unrealized gains and losses on these positions are included in noninterest income as combined trading profits. Value at risk is intended to measure the maximum amount the Corporation could lose, given a specified confidence level, over a given period of time. The overall market risk that any business can assume is approved by the Risk Management Committee of the Board of Directors, which utilizes a risk point system in managing the Corporation's value at risk. Risk points measure the market risk (potential overnight loss) in a capital markets product. Products that have more inherent price volatility are assigned more risk points. 26
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Value at risk is monitored in each significant trading portfolio on a daily basis. The following charts show the average, maximum and minimum daily value at risk for 1994, 1995 and 1996, and the actual trading revenue for each year. [Enlarge/Download Table] Daily Value at Risk Trading Revenue* Bar Graph Bar Graph $ Millions $ Millions 1994 1995 1996 1994 1995 1996 Average $45 $32 $28 $160 $292 $175 Maximum $66 $45 $38 Minimum $34 $24 $21 *Includes trading profits and net interest income. Value at risk is estimated using statistical models calibrated at a three- standard-deviation confidence interval. The Corporation has made significant progress in recognizing offsets and correlations across different trading portfolios. This has contributed to a decline in daily value at risk from 1995 to 1996. However, the Corporation's reported value at risk remains somewhat overstated because all offsets and correlations are not fully considered in the calculation. The Corporation is continuing its progress toward a fully consolidated view of market risk. STRUCTURAL INTEREST RATE RISK MANAGEMENT Movements in interest rates can create fluctuations in the Corporation's income and economic value due to an imbalance in the repricing or maturity of asset, liability and off-balance-sheet positions. Interest rate risk exposure is actively managed with the goal of minimizing the impact of interest rate volatility on current earnings and on the market value of equity. In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to repricing or maturity characteristics. Access to the derivatives market is an important element in maintaining the Corporation's interest rate risk position within policy guidelines. Using off-balance-sheet instruments, principally interest rate swaps (asset and liability management or "ALM" derivatives), the interest rate sensitivity of specific on-balance-sheet transactions, as well as pools of assets or liabilities, is adjusted to maintain the desired interest rate risk profile. At year-end 1996, the notional value of ALM interest rate swaps totaled $9.6 billion, including $4.7 billion against specific transactions and $4.9 billion against specific pools of assets or liabilities. 27
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ASSET AND LIABILITY MANAGEMENT SWAPS--NOTIONAL PRINCIPAL [Download Table] RECEIVE FIXED PAY FIXED BASIS PAY FLOATING RECEIVE FLOATING SWAPS DECEMBER 31, 1996 --------------- ------------------- ----- SPECIFIC POOL SPECIFIC POOL POOL TOTAL (IN MILLIONS) -------- ------ ---------- -------- ----- ------ Swaps associated with: Loans....................... $ -- $ 982 $ 46 $ -- $ -- $1,028 Investment securities....... -- -- 240 -- -- 240 Securitized credit card receivables................ -- 500 -- -- -- 500 Deposits.................... 50 2,991 -- -- -- 3,041 Funds borrowed (including long-term debt)............ 4,329 -- -- 125 340 4,794 ------ ------ -------- -------- ---- ------ Total..................... $4,379 $4,473 $ 286 $ 125 $340 $9,603 ====== ====== ======== ======== ==== ====== Swaps used to adjust the interest rate sensitivity of specific transactions will not need to be replaced at maturity since the corresponding asset or liability will mature along with the swap. However, swaps against the asset and liability pools will have an impact on the overall risk position as they mature and may need to be reissued to maintain the same interest rate risk profile. These swaps could create modest earnings sensitivity to changes in interest rates. Substantially all ALM interest rate swaps are standard swap contracts. The variable interest rates, which generally are the one-month, three-month and six-month LIBOR rates in effect on the date of repricing, are assumed to remain constant. However, the variable interest rates will change and would affect the related weighted average information presented in the table. ASSET AND LIABILITY MANAGEMENT SWAPS--MATURITIES AND RATES [Download Table] 1997 1998 1999 2000 2001 THEREAFTER TOTAL (DOLLARS IN MILLIONS) ------ ------ ---- ---- ---- ---------- ------ Receive fixed/pay floating swaps Notional amount........ $4,102 $1,112 $629 $330 $761 $1,919 $8,853 Weighted average Receive rate......... 5.97% 6.24% 6.23% 5.76% 7.17% 6.87% 6.31% Pay rate............. 5.66% 5.74% 5.62% 5.67% 5.66% 5.70% 5.68% Pay fixed/receive floating swaps Notional amount........ $ 97 $ 57 $ 83 $110 $ 25 $ 38 $ 410 Weighted average Receive rate......... 5.63% 5.67% 5.68% 5.68% 5.70% 5.70% 5.67% Pay rate............. 7.22% 8.07% 7.99% 7.74% 8.01% 8.01% 7.75% Basis swaps Notional amount........ $ 50 $ 265 $ 25 -- -- -- $ 340 Weighted average Receive rate......... 5.59% 5.76% 5.69% -- -- -- 5.73% Pay rate............. 5.58% 5.62% 5.58% -- -- -- 5.61% ------ ------ ---- ---- ---- ------ ------ Total notional amount............ $4,249 $1,434 $737 $440 $786 $1,957 $9,603 ====== ====== ==== ==== ==== ====== ====== The Corporation uses a variety of measurement tools to monitor and control the overall interest rate risk exposure of both the on- and off-balance-sheet positions, including the ALM derivatives. For each measurement tool, the level of interest rate risk created by the assets, liabilities, equity and off- balance-sheet positions are a function primarily of their contractual interest rate repricing dates and contractual maturity (including principal amortization) dates. Modifications to the interest rate risk measure are made where there are historical differences between contractual and actual payment flows. These modifications are designed to capture principal prepayments on loans and early withdrawals of deposits. Additionally, assumptions are made on the measurement of the interest rate risk of indeterminate maturity assets, liabilities and equity. Finally, income volatility from positions such as 28
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credit card securitizations, mortgage servicing and cash management service products, which subject servicing fee revenue to interest rate risk, are included in one or more of the risk measures. Static gap analysis is one of the tools used for interest rate risk measurement. The net difference between the amount of assets, liabilities, equity and off-balance-sheet instruments repricing within a cumulative calendar period is typically referred to as the "rate sensitivity position." Interest rate risks in trading and overseas balance sheet positions are assumed to be matched and are managed principally as trading risks. The Corporation's policy is to limit the cumulative one-year gap position, including ALM derivatives, to within 4% of total assets. The following table details the Corporation's static gap position. As of December 31, 1996, the cumulative one-year gap position was 1.0% of total assets. INTEREST RATE SENSITIVITY [Download Table] 0-90 91-180 181-365 1-5 BEYOND DECEMBER 31, 1996 DAYS DAYS DAYS YEARS 5 YEARS TOTAL (DOLLARS IN MILLIONS) ------- ------- ------- ------- ------- -------- Loans................... $46,716 $ 3,401 $ 4,092 $12,955 $ 2,799 $ 69,963 Investment securities... 400 454 856 3,830 1,387 6,927 Other earning assets.... 19,219 101 107 115 -- 19,542 Nonearning assets....... 14,149 77 145 1,226 1,478 17,075 ------- ------- ------- ------- ------- -------- Total assets........ $80,484 $ 4,033 $ 5,200 $18,126 $ 5,664 $113,507 ======= ======= ======= ======= ======= ======== Deposits................ $28,597 $ 3,868 $ 5,067 $14,309 $ 984 $ 52,825 Other interest-bearing liabilities............ 34,575 3,102 1,896 2,306 3,352 45,231 Noninterest-bearing liabilities............ 5,773 -- 19 15 637 6,444 Equity.................. 405 368 528 3,425 4,281 9,007 ------- ------- ------- ------- ------- -------- Total liabilities and equity......... $69,350 $ 7,338 $ 7,510 $20,055 $ 9,254 $113,507 ======= ======= ======= ======= ======= ======== Balance sheet sensitivity gap........ $11,134 $(3,305) $(2,310) $(1,929) $(3,590) -- Cumulative gap as a % of total assets........... 9.8% 6.9% 4.9% 3.2% -- -- Effect of off-balance- sheet ALM derivative transactions: Specific transactions. (4,650) 1,696 690 478 1,786 -- Specific asset or liability pools...... (2,969) 154 642 2,079 94 -- ------- ------- ------- ------- ------- -------- Interest rate sensitivity gap........ $ 3,515 $(1,455) $ (978) $ 628 $(1,710) -- ======= ======= ======= ======= ======= ======== Cumulative gap.......... $ 3,515 $ 2,060 $ 1,082 $ 1,710 -- -- Cumulative gap as a % of total assets........... 3.1% 1.8% 1.0% 1.5% -- -- Static gap analysis does not fully capture the impact of embedded options, lagged interest rate changes, administered interest rate products, or certain off-balance-sheet sensitivities to interest rate movements. Therefore, this tool cannot be used in isolation to determine the level of interest rate risk exposure in more complex banking institutions. The Corporation performs an earnings simulation analysis and a value-at-risk measure to identify more dynamic interest rate risk exposures, including embedded option positions. The earnings simulation analysis estimates the effect that specific interest rate changes would have on 12 months of pretax earnings. This exercise includes management assumptions regarding the level of interest rate or balance changes on indeterminate maturity deposit products (passbook savings, money market, NOW and demand deposits) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Interest rate caps and floors on all products are included to the extent that they are exercised in the 12-month simulation period. Additionally, changes in prepayment behavior of the residential mortgage portfolio in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. Sensitivity of fee income to market interest rate levels, such as those related to securitized credit card receivables, cash management service products and mortgage servicing, are included as well. Finally, the impact of planned growth and anticipated new business activities is factored into the simulation model. 29
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The Corporation's policy is to limit the change in annual pretax earnings to $100 million from an immediate parallel change in interest rates of 200 basis points. As of December 31, 1996, the Corporation had the following estimated earnings sensitivity profile. [Download Table] IMMEDIATE CHANGE IN RATES -------------------------- +200 BP -200 BP (IN MILLIONS) ------------ ------------- Pretax earnings change...................... $23 $(10) FOREIGN EXCHANGE RISK MANAGEMENT Wherever possible, foreign currency-denominated assets are funded with liability instruments denominated in the same currency. If a liability denominated in the same currency is not immediately available or desired, a forward foreign exchange contract is used to fully hedge the risk due to cross-currency funding. To minimize the earnings and capital impact of translation gains or losses measured on an after-tax basis, the Corporation uses forward foreign exchange contracts on a selective basis to hedge the exposure created by investments in overseas branches and subsidiaries. Credit Risk Management The Corporation has developed policies and procedures to manage the level and composition of risk in its credit portfolio. The objective of this credit risk management process is to quantify and manage credit risk on a portfolio basis as well as to reduce the risk of a loss resulting from a customer's failure to perform according to the terms of a transaction. Customer transactions create credit exposure that is reported both on and off the balance sheet. On-balance-sheet credit exposure includes such items as loans and derivative financial instruments. Off-balance-sheet credit exposure includes unfunded credit commitments and other credit-related financial instruments. Credit exposures resulting from derivative financial instruments are reported both on and off the balance sheet as explained on page 36. SELECTED STATISTICAL INFORMATION [Download Table] 1996 1995 1994 1993 1992 (DOLLARS IN MILLIONS) ------- ------- ------- ------- ------- At year-end Loans outstanding............... $66,414 $64,434 $55,176 $48,654 $47,836 Nonperforming loans............. 262 363 294 485 717 Other real estate, net.......... 28 34 57 87 81 Nonperforming assets............ 290 397 351 572 798 Allowance for credit losses..... 1,407 1,338 1,158 1,106 1,041 Nonperforming assets/loans outstanding and other real estate, net.................... 0.4% 0.6% 0.6% 1.2% 1.7% Allowance for credit losses/loans outstanding....... 2.1 2.1 2.1 2.3 2.2 Allowance for credit losses/nonperforming loans..... 537 369 394 228 145 For the year Average loans................... $64,949 $58,944 $50,083 $47,110 $49,042 Net charge-offs................. 670 264 192 296 572 Net charge-offs/average loans... 1.0% 0.4% 0.4% 0.6% 1.2% 30
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For analytical purposes, the Corporation's portfolio is divided into commercial (domestic and foreign) and consumer (credit card and other consumer) segments. LOAN COMPOSITION [Download Table] 1996 1995 1994 1993 1992 DECEMBER 31 (IN MILLIONS) ------- ------- ------- ------- ------- Commercial risk Domestic Commercial......................... $27,718 $25,551 $22,546 $19,310 $19,944 Real estate Construction..................... 1,057 1,151 1,074 1,105 1,323 Other............................ 5,103 6,103 5,903 5,613 5,869 Lease financing.................... 1,820 1,588 1,381 1,295 1,312 Foreign.............................. 3,656 3,726 3,305 3,083 3,176 ------- ------- ------- ------- ------- Total commercial............... 39,354 38,119 34,209 30,406 31,624 ------- ------- ------- ------- ------- Consumer risk Credit cards......................... 9,601 9,649 6,980 6,393 4,829 Secured by real estate(1)............ 9,406 8,933 7,025 6,088 6,163 Automotive........................... 4,423 4,477 3,994 3,241 2,911 Other................................ 3,630 3,256 2,968 2,526 2,309 ------- ------- ------- ------- ------- Total consumer................. 27,060 26,315 20,967 18,248 16,212 ------- ------- ------- ------- ------- Total.......................... $66,414 $64,434 $55,176 $48,654 $47,836 ======= ======= ======= ======= ======= -------- (1) Includes home-equity loans. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is maintained at a level that in management's judgment is adequate to provide for estimated probable credit losses inherent in various on- and off-balance-sheet financial instruments. The level of the allowance reflects management's formal review and analysis of potential credit losses, as well as prevailing economic conditions. Each quarter, the adequacy of the allowance for credit losses is evaluated and reported to a committee of the Board of Directors. 31
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ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES [Download Table] 1996 1995 1994 1993 1992 (IN MILLIONS) ------ ------ ------ ------ ------ Balance, beginning of year.............. $1,338 $1,158 $1,106 $1,041 $1,136 Provision for credit losses............. 735 510 276 390 653 Provision for loans held for accelerated disposition............................ -- -- -- -- 491 Charge-offs Commercial Domestic Commercial........................... 114 70 68 122 253 Real estate.......................... 20 25 41 99 149 Lease financing...................... 7 2 3 6 6 Foreign (1)........................... 2 1 9 47 78 Consumer Credit card........................... 567 241 193 165 180 Other................................. 105 70 50 46 52 ------ ------ ------ ------ ------ Total charge-offs................... 815 409 364 485 718 Recoveries Commercial Domestic Commercial........................... 45 59 55 81 39 Real estate.......................... 20 16 15 9 6 Lease financing...................... 1 2 1 2 5 Foreign............................... 15 9 44 17 22 Consumer Credit card........................... 33 33 32 57 52 Other................................. 31 26 25 23 22 ------ ------ ------ ------ ------ Total recoveries.................... 145 145 172 189 146 Net charge-offs......................... 670 264 192 296 572 Charge-offs of loans upon transfer to accelerated disposition portfolio...... -- -- -- -- 636 Transfers related to securitized receivables............................ 4 (75) (49) (29) (42) Other (2)............................... -- 9 17 -- 11 ------ ------ ------ ------ ------ Balance, end of year.................... $1,407 $1,338 $1,158 $1,106 $1,041 ====== ====== ====== ====== ====== -------- (1) 1992 amounts include $12 million defined as commercial real estate. (2) Primarily acquisitions. 32
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CONSUMER RISK MANAGEMENT Consumer loans consist of credit card receivables as well as home mortgage loans, automobile financing and other forms of consumer installment credit. The consumer loan portfolio increased slightly during the year to $27.1 billion at year-end 1996. Including securitized credit card receivables, the consumer portfolio increased $1.8 billion, or 5%, to $35.9 billion at December 31, 1996. CONSUMER LOANS [Download Table] 1996 1995 1994 1993 1992 DECEMBER 31 (IN MILLIONS) ------- ------- ------- ------- ------- Credit card loans...................... $ 9,601 $ 9,649 $ 6,980 $ 6,393 $ 4,829 Securitized credit card receivables.... 8,888 7,877 6,117 4,958 4,500 ------- ------- ------- ------- ------- Total managed credit card receivables......................... 18,489 17,526 13,097 11,351 9,329 Other consumer loans Secured by real estate (1)............ 9,406 8,933 7,025 6,088 6,163 Automotive............................ 4,423 4,477 3,994 3,241 2,911 Other................................. 3,630 3,256 2,968 2,526 2,309 ------- ------- ------- ------- ------- Other consumer loans................. 17,459 16,666 13,987 11,855 11,383 ------- ------- ------- ------- ------- Total.............................. $35,948 $34,192 $27,084 $23,206 $20,712 ======= ======= ======= ======= ======= -------- (1) Includes home-equity loans. Consumer risk management focuses on the credit card segment separately from other parts of the portfolio. For both the on-balance-sheet and the securitized credit card portfolios, loss potential is tested using statistically expected levels of losses based on delinquencies and on the source, age and other risk characteristics of each portfolio. For the other segments of the consumer portfolio, reserve factors are based on historical loss rates, trends and other relevant risk factors. Managed credit card receivables (i.e. those held in the portfolio and those sold to investors through securitization) were $18.5 billion at December 31, 1996, up 5% from 1995. Average managed credit card receivables grew to $17.4 billion in 1996, up 23% from 1995. Credit card receivables represent the most significant risk element in the consumer portfolio. The credit card charge-off rate of 5.8% in 1996 represents a significant increase from prior years. In addition, the portfolio experienced an increase in delinquency rates as presented in the following table. CREDIT CARD RECEIVABLES [Download Table] 1996 1995 1994 1993 1992 (DOLLARS IN MILLIONS) ------- ------- ------- ------ ------ Average balances: Credit card loans.................. $ 9,774 $ 7,006 $ 5,904 $4,772 $4,155 Securitized credit card receivables....................... 7,672 7,179 5,538 4,839 3,918 ------- ------- ------- ------ ------ Total average managed credit card receivables..................... $17,446 $14,185 $11,442 $9,611 $8,073 ======= ======= ======= ====== ====== Total net charge-offs (including securitizations).................... $1,019 $572 $403 $342 $333 ======= ======= ======= ====== ====== Net charge-offs/average total managed receivables......................... 5.8% 4.0% 3.5% 3.6% 4.1% Credit Card Delinquency Rate 30 or more days.................... 4.5 3.6 3.0 3.0 3.1 90 or more days.................... 1.8 1.3 1.1 1.0 1.0 Credit card receivables are generally charged off no later than 180 days past due, or earlier in the event of bankruptcy. Current levels of unemployment and personal bankruptcy filings make reductions in the charge-off rate unlikely in the near term. Consumer debt service burden and defaults have increased as a result of the 33
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growing consumer debt levels coupled with stagnant real wage growth. In response to these trends, credit management policies and practices have been tightened. COMMERCIAL RISK MANAGEMENT The commercial risk portfolio includes all domestic and foreign commercial credit exposure. Credit exposure includes the credit risks associated with both on- and off-balance-sheet financial instruments. Commercial loans increased 3% from $38.1 billion at December 31, 1995, to $39.4 billion at December 31, 1996. Commercial net charge-offs were $62 million in 1996, up from the relatively low levels of $12 million in 1995 and $6 million in 1994. At the same time, the level of nonperforming commercial assets declined $107 million to $290 million at year-end 1996, representing 0.4% of total loans and other real estate. In the commercial portfolio, credit quality is rated according to defined levels of credit risk. The lower categories of credit risk are equivalent to the four bank regulatory classifications: Special Mention, Substandard, Doubtful and Loss. These categories define levels of credit deterioration at which it may be increasingly difficult for the Corporation to be fully repaid without restructuring the credit. Each quarter, the Corporation conducts an asset-by-asset review of significant lower-rated credit or country exposure. Potential losses are identified during this review, and reserves are adjusted accordingly. (BAR GRAPH) NONPERFORMING ASSETS-PERIOD END $ MILLIONS [Download Table] 1992 1993 1994 1995 1996 $798 $572 $351 $397 $290 OREO $81 $87 $57 $34 $28 Loans $717 $485 $294 $363 $262 (BAR GRAPH) NONPERFORMING ASSETS AS A PERCENTAGE OF LOANS AND OTHER REAL ESTATE - PERIOD END [Download Table] 1992 1993 1994 1995 1996 1.7% 1.2% 0.6% 0.6% 0.4% COMMERCIAL REAL ESTATE Commercial real estate consists primarily of loans secured by real estate as well as certain loans that are real estate-related. A loan is categorized as real estate-related when 80% or more of the borrower's revenues are derived from real estate activities and the loan is not collateralized by cash or marketable securities. At December 31, 1996, commercial real estate loans totaled $6.2 billion, or 16% of commercial loans, compared with $7.3 billion, or 19% of commercial loans, at December 31, 1995. During 1996, net charge-offs in the commercial real estate portfolio segment were under $1 million, compared with $9 million in 1995. 34
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Nonperforming commercial real estate assets, including other real estate, totaled $128 million, or 2.1% of related assets, at December 31, 1996, compared with $125 million, or 1.7% of related assets, at December 31, 1995. Derivative Financial Instruments The Corporation uses a variety of derivative financial instruments in its trading, asset and liability management, and Corporate Investment activities. These instruments include interest rate, currency, commodity and equity swaps, forwards, futures, options, caps, floors, forward rate agreements, and other conditional or exchange contracts, and include both exchange-traded and over- the-counter contracts. See Note 15, beginning on page 63, for a discussion of the nature and terms of derivative financial instruments. NOTIONAL PRINCIPAL OR CONTRACTUAL AMOUNTS OF DERIVATIVE FINANCIAL INSTRUMENTS The following tables represent the gross notional principal or contractual amounts of outstanding derivative financial instruments used in certain activities. These amounts do not represent the market or credit risk associated with these instruments, but instead indicate the volume of the transactions. The amounts greatly exceed the associated credit risk of these instruments and do not reflect the netting of offsetting transactions. [Download Table] ASSET AND LIABILITY CORPORATE DECEMBER 31, 1996 TRADING MANAGEMENT INVESTMENTS TOTAL (IN BILLIONS) -------- ---------- ----------- -------- Interest rate contracts................ $ 644.1 $ 9.6 $ -- $ 653.7 Foreign exchange contracts............. 375.4 1.7 -- 377.1 Equity contracts....................... 8.6 -- 0.2 8.8 Commodity contracts.................... 3.4 -- -- 3.4 -------- ----- ---- -------- Total.............................. $1,031.5 $11.3 $0.2 $1,043.0 ======== ===== ==== ======== ASSET AND LIABILITY CORPORATE DECEMBER 31, 1995 TRADING MANAGEMENT INVESTMENTS TOTAL (IN BILLIONS) -------- ---------- ----------- -------- Interest rate contracts................ $415.4 $ 9.7 $ -- $425.1 Foreign exchange contracts............. 378.8 1.8 -- 380.6 Equity contracts....................... 7.9 -- 0.1 8.0 Commodity contracts.................... 1.0 -- -- 1.0 -------- ----- ---- -------- Total.............................. $803.1 $11.5 $0.1 $814.7 ======== ===== ==== ======== ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments used in trading activities are valued at prevailing market rates on a present-value basis. Realized and unrealized gains and losses are included in noninterest income as combined trading profits. Where appropriate, compensation for credit risk and ongoing servicing is deferred and recorded as income over the term of the derivative financial instrument. Income or expense on most derivative financial instruments used to manage interest rate exposure is recorded on an accrual basis, as an adjustment to the yield of the related exposures over the periods covered by the contracts. The income recognition treatment of the related exposure, generally assets or liabilities carried at historical cost, is recorded on an accrual basis. If an interest rate swap is terminated early, any resulting gain or loss is deferred and amortized as an adjustment of the yield on the underlying interest rate exposure position over the remaining periods originally covered by the terminated swap. If all or part of an underlying position is terminated, e.g., an underlying asset is sold or prepaid, the related pro rata portion of any unrecognized gain or loss on the swap is recognized in income at that time, as part of the gain or loss on the termination, sale or prepayment. 35
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In general, purchased option, cap and floor contracts are reported in derivative product assets, and written option, cap and floor contracts are reported in derivative product liabilities. For other derivative financial instruments, an unrealized gain is reported in derivative product assets and an unrealized loss is reported in derivative product liabilities. Derivative financial instruments executed with the same counterparty under a legally enforceable master netting arrangement are reported on a net basis. Cash flows from derivative financial instruments are reported net as operating activities. INCOME RESULTING FROM DERIVATIVE FINANCIAL INSTRUMENTS The Corporation's income from derivatives used in trading activities is included in the "Trading Revenue" table on page 20. The Corporation uses interest rate derivative financial instruments to reduce structural interest rate risk and the volatility of net interest margin. Net interest margin reflects the effective use of these derivatives. Without their use, net interest income would have been lower by $33 million in 1996, higher by $12 million in 1995, and lower by $48 million in 1994. The sale of fixed- and floating-rate credit card receivables as securities to investors subjects servicing revenue to interest rate risk. Therefore, interest rate derivatives, whose terms match those of the credit card securitizations, are used to reduce this volatility. Without the use of these instruments, credit card fee revenue would have been reduced by $9 million in 1996, $6 million in 1995 and $39 million in 1994. CREDIT EXPOSURE RESULTING FROM DERIVATIVE FINANCIAL INSTRUMENTS The Corporation maintains risk management policies that monitor and limit exposure to credit risks. For a further discussion of credit risks, see the "Credit Risk Management" section, beginning on page 30. Credit exposure from derivative financial instruments arises from the risk of a customer default on the derivative contract. The amount of loss created by the default is the replacement cost or current fair value of the defaulted contract. The Corporation utilizes master netting agreements whenever possible to reduce its credit exposure from customer default. These agreements allow the netting of contracts with unrealized losses against contracts with unrealized gains to the same customer, in the event of a customer default. The table below shows the impact of these master netting agreements at December 31, 1996: DECEMBER 31, 1996 (IN MILLIONS) [Download Table] Gross replacement cost................................................. $14,933 Less: Adjustment due to master netting agreements.................... (9,876) ------- Current credit exposure................................................ 5,057 Less: Unrecognized net gains due to nontrading activity.............. (83) ------- Balance sheet exposure................................................. $ 4,974 ======= The $5.057 billion of total current credit exposure represents the total loss that the Corporation would have suffered had every counterparty been in default on that date. This amount is reduced by $83 million related to the unrealized and unrecognized gains on derivatives used to manage interest rate exposures to arrive at the balance sheet exposure. Since a derivative's replacement cost, measured by its fair value, is subject to change over the contract's life, the Corporation's evaluation of credit risk incorporates potential increases to the contract's fair value. Potential exposure is calculated with a statistical model that estimates changes over time in exchange rates, interest rates and other relevant factors using a 95% confidence level. This potential credit exposure is calculated on a portfolio basis incorporating master netting agreements as well as any natural offsets that exist between 36
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contracts within the customer's portfolio. In total, the potential credit exposure was approximately $6.3 billion higher than the current credit exposure at December 31, 1996. Capital Management SELECTED CAPITAL RATIOS [Download Table] CORPORATE 1996 1995 1994 1993 1992 GUIDELINE DECEMBER 31 ---- ---- ---- ---- ---- --------- Common equity/total assets (1).......... 8.2% 6.9% 6.8% 7.6% 6.5% N/A Tangible common equity ratio (1)........ 7.8 6.4 6.3 6.9 5.7 N/A Stockholders' equity/total assets....... 8.6 6.9 6.9 8.1 7.0 N/A Risk-based capital ratios (1) (2) Tier 1................................ 9.2 7.8 8.6 9.0 7.4 7-8% Total................................. 13.3 11.8 13.0 13.6 11.3 11-12% Leverage ratio (1) (2).................. 9.3 6.9 7.3 7.8 6.6 5.5-7.0% Double leverage ratio (2)............... 105 115 113 108 112 120%* Dividend payout ratio................... 34 39 34 28 89 30-40% -------- (1) Net of investment in FCCM. (2) Includes trust preferred capital securities. N/A--Not Applicable * less than or equal to Capital represents the stockholders' investment on which the Corporation strives to generate attractive returns. It is the foundation of a cohesive risk management framework that links return with risk. Capital supports business growth and provides protection to depositors and creditors. Key capital management objectives are to: .generate attractive returns to enhance shareholder value; .maintain a capital base commensurate with overall risk profile; .maintain strong capital ratios relative to peers; and .meet or exceed all regulatory guidelines. In conjunction with the annual financial planning process, a capital plan is established to ensure that the Corporation and all of its subsidiaries have capital structures consistent with prudent management principles and regulatory requirements. ECONOMIC CAPITAL In the normal course of business, the Corporation assumes several types of risk: credit, liquidity, structural interest rate, market and operating/fiduciary. To integrate the individual processes monitoring these risks, an economic capital framework has been constructed to allocate capital to business segments, products and customers based on the amount and type of risk inherent in the activity. Return on economic capital is a key decision- making tool for managing risk-taking activities, as well as for ensuring that capital is efficiently and profitably employed. A financial instrument or business activity attracts economic capital based on its potential for loss of value over a particular time period. The allocated amount is designed to cover unexpected losses to a desired level of statistical significance. Credit and operating loss experiences form the basis for assessing the volatility of these risks. Volatility of interest and exchange rates and commodity and equity prices is used to determine the capital for market risk. Total economic capital will vary proportionately with the level and riskiness of the Corporation's businesses and products. 37
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The Corporation has established a Tier 1 capital target necessary to provide management flexibility while maintaining an adequate capital base for its overall risk profile and in relation to its peers. The long-term target for the Tier 1 ratio is 7% to 8%; this ratio is currently being managed to the high end of the range. Line of business activities determine the Corporation's risk profile and hence the total level of capital. Allocations of capital to lines of business, which are used in performance measurement, equaled the 8% target. Excess capital, defined as common equity above that required for the 8% Tier 1 target, is available for core business investment and acquisitions. During 1996, this excess amount averaged $171 million, compared with $327 million in 1995. If attractive long-term opportunities are not available over time in core businesses, management intends to return any excess capital to stockholders, typically by way of stock repurchase programs and/or dividend increases. REGULATORY CAPITAL The Corporation aims to maintain regulatory capital ratios, including those of its principal banking subsidiaries, in excess of the well-capitalized guidelines. To ensure this goal is met, target ranges of 7% to 8% have been established for Tier 1 capital and 11% to 12% for total risk-based capital. Both targets exceed the respective well-capitalized guidelines of 6% and 10%. The Tier 1 and total capital ratios for the past three years have reached or exceeded the upper end of the target ranges. The lower year-end 1995 ratios reflect the impact of merger-related charges. Tier 1 and Total Capital Ratios-Period End Bar Graph [Download Table] 1994 1995 1996 Tier 1 8.6% 7.8% 9.2% Total 13.0% 11.8% 13.3% Regulatory Guidelines Tier 1 6% 6% 6% Total 10% 10% 10% In the fourth quarter of 1996, two wholly owned consolidated trust subsidiaries of the Corporation issued, in the aggregate, $750 million of preferred securities. These "Trust Preferred Capital Securities" are tax- advantaged issues that qualify for Tier 1 capital treatment. In January 1997, an additional $250 million of Trust Preferred Capital Securities were issued. During 1996, the Corporation increased Tier 2 capital through the issuance of $300 million in subordinated debt. 38
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The components of the Corporation's regulatory risk-based capital and risk- weighted assets are shown below: [Download Table] 1996 1995 1994 DECEMBER 31 (IN MILLIONS) -------- ------- ------- Regulatory Risk-Based Capital Tier 1 capital......................................... $ 9,186 $ 7,750 $ 7,489 Tier 2 capital......................................... 4,146 4,017 3,806 -------- ------- ------- Total capital...................................... $13,332 $11,767 $11,295 ======== ======= ======= Regulatory Risk-Weighted Assets Balance sheet risk-weighted assets..................... $ 71,177 $71,040 $62,778 Off-balance-sheet risk-weighted assets................. 29,078 28,403 23,852 -------- ------- ------- Total risk-weighted assets......................... $100,255 $99,443 $86,630 ======== ======= ======= In arriving at Tier 1 and total capital, such amounts are reduced by goodwill and other nonqualifying intangible assets as shown below. INTANGIBLE ASSETS [Download Table] 1996 1995 1994 DECEMBER 31 (IN MILLIONS) ---- ---- ---- Goodwill......................................................... $397 $446 $326 Other nonqualifying intangibles.................................. 3 12 19 ---- ---- ---- Subtotal..................................................... 400 458 345 Qualifying intangibles........................................... 69 94 142 ---- ---- ---- Total intangibles............................................ $469 $552 $487 ==== ==== ==== The Principal Banks have exceeded the well-capitalized guidelines for the past three years, as shown in the following tables. [Download Table] 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 [Download Table] NBD NBD FNBC MICHIGAN FCCNB ANB INDIANA DECEMBER 31, 1995 ---- -------- ----- ---- ------- Risk-Based Capital Ratios Tier 1 capital............................. 7.6% 7.6% 10.0% 9.2% 10.3% Total capital.............................. 11.3 10.9 12.1 11.5 11.5 Leverage ratio............................... 5.9 7.4 11.7 9.2 7.9 [Download Table] NBD NBD FNBC MICHIGAN FCCNB ANB INDIANA DECEMBER 31, 1994 ---- -------- ----- ---- ------- Risk-Based Capital Ratios Tier 1 capital............................. 8.1% 7.5% 12.1% 9.5% 12.4% Total capital.............................. 12.5 11.1 15.0 12.0 13.7 Leverage ratio............................... 6.3 6.1 14.4 9.1 8.9 By maintaining regulatory well-capitalized status, these banks benefit from lower FDIC deposit premiums. In September 1996, federal bank regulators amended risk-based capital requirements to incorporate a measure for market risk inherent in the trading portfolio. Under the new market risk requirements, capital will 39
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be allocated to support the amount of market risk that relates to the Corporation's trading activities. The market risk rules are not effective until 1998. It is currently estimated that the new rules will not significantly affect the risk-based capital ratios of the Corporation or the Principal Banks. DIVIDENDS The Corporation's common dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain an adequate capital level and alternative investment opportunities. The Corporation is currently targeting a common dividend payout ratio in the range of 30% to 40% of operating earnings over time. On November 8, 1996, the Corporation increased its quarterly common dividend to $0.40 per share. This represented an 11% increase from the previous $0.36 per share common dividend rate. [Download Table] Common Stock Dividends Declared Bar Graph 1994 1995 1996 $1.23 $1.35 $1.48 STOCK REPURCHASE PROGRAM AND OTHER CAPITAL ACTIVITIES The repurchase of shares is an integral part of capital management used to enhance shareholder value. The Corporation's stock repurchase program, announced in October 1996, authorizes the repurchase of up to 40 million shares of common stock. Under this authorization, the Corporation repurchased 7.3 million shares of common stock at an average price of $53.93 per share. At December 31, 1996, 32.7 million shares remain available for repurchase under this program. On February 14, 1997, the Corporation authorized the redemption on April 1, 1997, of all shares outstanding of its 5 3/4% Cumulative Convertible Preferred Stock, Series B, and the corresponding redemption of the related depositary shares, each representing a one-hundredth interest in a share of the Convertible Preferred Stock. As of December 31, 1996, there were 3,078,688 depositary shares of Series B outstanding. DOUBLE LEVERAGE Double leverage is the extent to which parent debt is used to finance equity investments in subsidiaries. Presently, the Corporation intends to limit its double leverage ratio to no more than 120% at any time. On December 31, 1996, double leverage was 105%, compared with 115% at year-end 1995. Trust Preferred Capital Securities of $748 million are included in capital for purposes of this calculation. 40
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CONSOLIDATED BALANCE SHEET FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES [Download Table] 1996 1995 DECEMBER 31 (DOLLARS IN MILLIONS) -------- -------- ASSETS Cash and due from banks.................................... $ 7,823 $ 7,297 Interest-bearing due from banks............................ 5,474 10,241 Federal funds sold and securities under resale agreements.. 4,197 11,698 Trading assets............................................. 4,812 8,150 Derivative product assets.................................. 4,974 6,713 Investment securities...................................... 7,178 9,449 Loans (net of unearned income--$764 in 1996 and $610 in 1995)..................................................... 66,414 64,434 Less allowance for credit losses......................... (1,407) (1,338) -------- -------- Loans, net............................................... 65,007 63,096 Premises and equipment..................................... 1,415 1,423 Customers' acceptance liability............................ 577 729 Other assets............................................... 3,162 3,206 -------- -------- Total assets........................................... $104,619 $122,002 ======== ======== LIABILITIES Deposits Demand................................................... $ 15,702 $ 15,234 Savings.................................................. 21,722 20,180 Time..................................................... 14,994 15,919 Foreign offices.......................................... 11,251 17,773 -------- -------- Total deposits......................................... 63,669 69,106 Federal funds purchased and securities under repurchase agreements................................................ 7,859 15,711 Other short-term borrowings................................ 7,572 9,802 Long-term debt............................................. 8,454 8,163 Acceptances outstanding.................................... 577 729 Derivative product liabilities............................. 4,753 6,723 Other liabilities.......................................... 2,728 3,318 -------- -------- Total liabilities...................................... 95,612 113,552 STOCKHOLDERS' EQUITY Preferred stock--without par value, authorized 10,000,000 shares SHARES OUTSTANDING: 1996 1995 ------------------- ----------- ----------- Series B ($100 stated value)..... 1,191,000 1,191,000 119 119 Series C ($100 stated value)..... 713,800 713,800 71 71 Series E ($625 stated value)..... 160,000 160,000 100 100 Convertible Series B ($5,000 stated value).................... 30,786 39,774 154 199 1996 1995 ----------- ----------- Common stock--$1 par value................................. 320 319 Number of shares authorized...... 750,000,000 750,000,000 Number of shares issued.......... 319,509,189 318,535,798 Number of shares outstanding..... 313,473,520 315,241,109 Surplus.................................................... 2,149 2,185 Retained earnings.......................................... 6,433 5,497 Fair value adjustment on investment securities available- for-sale................................................... 38 112 Deferred compensation...................................... (58) (39) Accumulated translation adjustment......................... 7 8 Treasury stock at cost, 6,035,669 shares in 1996 and 3,294,689 shares in 1995................................... (326) (121) -------- -------- Stockholders' equity..................................... 9,007 8,450 -------- -------- Total liabilities and stockholders' equity............. $104,619 $122,002 ======== ======== The accompanying notes are an integral part of this balance sheet. 41
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CONSOLIDATED INCOME STATEMENT FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES [Download Table] 1996 1995 1994 FOR THE YEAR (IN MILLIONS, EXCEPT PER SHARE DATA) ------ ------ ------ INTEREST INCOME Loans, including fees..................................... $5,745 $5,260 $4,000 Bank balances............................................. 463 620 395 Federal funds sold and securities under resale agreements. 510 922 624 Trading assets............................................ 394 467 284 Investment securities--taxable............................ 364 694 716 Investment securities--tax-exempt......................... 93 127 117 ------ ------ ------ Total................................................. 7,569 8,090 6,136 INTEREST EXPENSE Deposits.................................................. 2,175 2,581 1,653 Federal funds purchased and securities under repurchase agreements............................................... 671 1,192 704 Other short-term borrowings............................... 552 538 378 Long-term debt............................................ 551 571 445 ------ ------ ------ Total................................................. 3,949 4,882 3,180 ------ ------ ------ NET INTEREST INCOME 3,620 3,208 2,956 Provision for credit losses............................... 735 510 276 ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES..... 2,885 2,698 2,680 NONINTEREST INCOME Combined trading profits.................................. 58 210 86 Equity securities gains................................... 255 253 229 Investment securities gains (losses)...................... 27 (16) (1) ------ ------ ------ Market-driven revenue................................... 340 447 314 Credit card fee revenue................................... 914 901 871 Fiduciary and investment management fees.................. 400 404 377 Service charges and commissions........................... 803 735 688 ------ ------ ------ Fee-based revenue....................................... 2,117 2,040 1,936 Other income.............................................. 91 104 143 ------ ------ ------ Total................................................. 2,548 2,591 2,393 NONINTEREST EXPENSE Salaries and employee benefits............................ 1,707 1,692 1,602 Occupancy expense of premises, net........................ 259 252 244 Equipment rentals, depreciation and maintenance........... 227 225 245 FDIC insurance expense.................................... 4 58 105 Amortization of intangible assets......................... 79 88 93 Other..................................................... 977 953 931 ------ ------ ------ Operating Expense....................................... 3,253 3,268 3,220 Merger-related charges.................................... -- 267 -- FDIC special assessment................................... 18 -- -- ------ ------ ------ Total................................................. 3,271 3,535 3,220 ------ ------ ------ INCOME BEFORE INCOME TAXES................................ 2,162 1,754 1,853 Applicable income taxes................................... 726 604 632 ------ ------ ------ NET INCOME................................................ $1,436 $1,150 $1,221 ====== ====== ====== NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY.... $1,405 $1,113 $1,169 ====== ====== ====== EARNINGS PER SHARE NET INCOME--PRIMARY..................................... $4.39 $3.45 $3.62 NET INCOME--FULLY DILUTED............................... $4.32 $3.41 $3.58 The accompanying notes are an integral part of this statement. 42
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES [Download Table] FOR THE YEAR ENDED DECEMBER 31 1996 1995 1994 (IN MILLIONS) ------ ------ ------ PREFERRED STOCK Balance, beginning of period............................. $ 489 $ 611 $ 761 Conversion of preferred stock............................ (45) (1) -- Redemption of preferred stock............................ -- (121) (150) ------ ------ ------ Balance, end of period................................... 444 489 611 ------ ------ ------ COMMON STOCK Balance, beginning of period............................. 319 329 318 Issuance of stock........................................ 1 1 -- Acquisition of subsidiaries.............................. -- -- 11 Cancellation of shares held in treasury.................. -- (11) -- ------ ------ ------ Balance, end of period................................... 320 319 329 ------ ------ ------ SURPLUS Balance, beginning of period............................. 2,185 2,555 2,542 Issuance of common stock................................. 4 14 14 Issuance of treasury stock............................... (84) (21) (39) Conversion of preferred stock............................ (18) -- (5) Acquisition of subsidiaries.............................. 17 (3) 39 Cancellation of shares held in treasury.................. -- (369) -- Other.................................................... 45 9 4 ------ ------ ------ Balance, end of period................................... 2,149 2,185 2,555 ------ ------ ------ RETAINED EARNINGS Balance, beginning of period............................. 5,497 4,808 3,924 Net income............................................... 1,436 1,150 1,221 Cash dividends declared on common stock.................. (469) (424) (367) Cash dividends declared on preferred stock............... (31) (37) (47) Acquisition of subsidiaries.............................. -- -- 77 ------ ------ ------ Balance, end of period................................... 6,433 5,497 4,808 ------ ------ ------ FAIR VALUE ADJUSTMENT ON INVESTMENT SECURITIES AVAILABLE- FOR-SALE Balance, beginning of period............................. 112 (158) (6) Unrealized gain on securities transferred from held-to- maturity to available-for-sale on November 17, 1995 (net of taxes of $55)................................... -- 101 -- Change in fair value (net of taxes of $(41) in 1996, $99 in 1995 and $(87) in 1994).............................. (74) 169 (148) Acquisition of subsidiaries.............................. -- -- (4) ------ ------ ------ Balance, end of period................................... 38 112 (158) ------ ------ ------ DEFERRED COMPENSATION Balance, beginning of period............................. (39) (33) (30) Awards granted........................................... (32) (18) (28) Amortization of deferred compensation.................... 26 21 21 Other.................................................... (13) (9) 4 ------ ------ ------ Balance, end of period................................... (58) (39) (33) ------ ------ ------ ACCUMULATED TRANSLATION ADJUSTMENT Balance, beginning of period............................. 8 7 3 Translation gain (loss), net of taxes.................... (1) 1 4 ------ ------ ------ Balance, end of period................................... 7 8 7 ------ ------ ------ TREASURY STOCK Balance, beginning of period............................. (121) (310) (13) Purchase of common stock................................. (412) (513) (388) Acquisition of subsidiaries.............................. -- 262 -- Cancellation of shares held in treasury.................. -- 380 -- Conversion of preferred stock............................ 62 1 -- Issuance of stock........................................ 145 59 91 ------ ------ ------ Balance, end of period................................... (326) (121) (310) ------ ------ ------ Total Stockholders' Equity, end of period.............. $9,007 $8,450 $7,809 ====== ====== ====== The accompanying notes are an integral part of this statement. 43
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CONSOLIDATED STATEMENT OF CASH FLOWS FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES [Download Table] FOR THE YEAR 1996 1995 1994 (IN MILLIONS) ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................... $ 1,436 $ 1,150 $ 1,221 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization..................... 255 274 277 Provision for credit losses....................... 735 510 279 Equity securities gains........................... (255) (253) (229) Net (increase) decrease in net derivative product balances......................................... (231) 296 (62) Net gains from accelerated disposition portfolio activities....................................... (6) (37) (46) Net (increase) decrease in trading assets......... 3,331 (2,766) (427) Net (increase) decrease in loans held for sale.... 11 (243) 197 Net (increase) decrease in accrued income receiv- able............................................. 133 (131) (143) Net increase (decrease) in accrued expenses pay- able............................................. 65 (153) 102 Net (increase) decrease in other assets........... (91) 174 (212) Interest income from Brazilian debt restructuring. -- (2) (17) Merger-related charges............................ -- 242 -- Other noncash adjustments......................... 11 (67) 70 ------- ------- ------- Total adjustments................................. 3,958 (2,156) (211) Net cash provided by (used in) operating activi- ties.............................................. 5,394 (1,006) 1,010 CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in federal funds sold and securities under resale agreements ............... 7,501 2,003 (4,623) Purchase of investment securities--available-for- sale.............................................. (4,626) (4,340) (6,392) Purchase of debt investment securities--held-to-ma- turity............................................ -- (119) (3,081) Purchase of equity securities--fair value.......... (138) (385) (181) Proceeds from maturities of debt securities--avail- able-for-sale..................................... 2,248 3,652 2,811 Proceeds from maturities of debt securities--held- to-maturity....................................... -- 1,042 2,052 Proceeds from sales of investment securities-- available-for-sale................................ 4,340 5,564 2,164 Proceeds from sales of equity securities--fair val- ue................................................ 425 1,051 333 Credit card receivables securitized................ 2,286 2,286 2,000 Net (increase) in loans............................ (5,291) (10,815) (8,200) Loan recoveries.................................... 145 142 155 Net proceeds from sales of assets held for acceler- ated disposition.................................. 26 59 112 Purchases of premises and equipment................ (286) (382) (370) Proceeds from sales of premises and equipment...... 79 74 107 Net cash and cash equivalents due to mergers, ac- quisitions and dispositions....................... (245) 116 38 ------- ------- ------- Net cash provided by (used in) investing activi- ties.............................................. 6,464 (52) (13,075) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits................ (4,936) 2,616 5,776 Net increase (decrease) in federal funds purchased and securities under repurchase agreements........ (7,852) (1,208) 5,832 Net increase (decrease) in other short-term borrowings........................................ (2,230) 1,574 1,581 Proceeds from issuance of long-term debt........... 2,519 2,163 3,357 Redemption and repayment of long-term debt......... (2,230) (1,262) (1,231) Net increase (decrease) in other liabilities....... (466) 103 2 Dividends paid..................................... (488) (447) (397) Proceeds from issuance of common and treasury stock............................................. 59 23 52 Purchase of treasury stock......................... (412) (513) (397) Payment for redemption of preferred stock.......... -- (121) (150) ------- ------- ------- Net cash provided by (used in) financing activi- ties.............................................. (16,036) 2,928 14,425 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS....................................... (63) 119 109 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS............................................. (4,241) 1,989 2,469 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 17,538 15,549 13,080 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR........... $13,297 $17,538 $15,549 ======= ======= ======= OTHER CASH FLOW DISCLOSURES: Interest paid..................................... $4,055 $4,666 $3,165 State and federal income taxes paid............... 663 808 575 -------- Loans transferred to other real estate were $25 million, $18 million and $29 million in 1996, 1995 and 1994, respectively. The accompanying notes are an integral part of this statement. 44
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES On December 1, 1995, FCC merged with and into NBD, with the combined company renamed First Chicago NBD Corporation. The merger was accounted for as a pooling of interests, and accordingly, the financial statements prior to the merger have been restated to reflect the consolidated results of the combined company. The consolidated financial statements for the Corporation, including its subsidiaries, have been prepared in conformity with generally accepted accounting principles. Such preparation requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain financial statement reclassifications have been made to prior years' information to conform with the current year's financial statement presentation. (a) Principles of Consolidation The Corporation's consolidated financial statements include the accounts of the Corporation (the "Parent Company") and all subsidiaries more than 50% owned. All significant intercompany accounts and transactions have been eliminated. (b) Trading Activities Trading assets and liabilities are carried at fair value. Realized and unrealized gains and losses related to trading activities are reflected in noninterest income as combined trading profits. Combined trading profits include interest rate, exchange rate, commodity price, and equity price trading results from both cash and derivative financial instruments. More information on the Corporation's trading revenue is shown in the "Trading Revenue" table on page 20. (c) Investment Securities In 1995, the Corporation reclassified all held-to-maturity debt securities to available-for-sale and recorded a $156 million unrealized pretax gain in the fair value adjustment on investment securities available-for-sale in stockholders' equity. Previously, these debt investment securities were carried at amortized cost. The decision to reclassify was made in conjunction with the Financial Accounting Standards Board's ("FASB") issuance of an implementation guide. Debt and equity investment securities classified as available-for-sale are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in the fair value adjustment on investment securities available-for-sale in stockholders' equity. Realized gains and losses and other than temporary impairments related to these securities are determined using the specific identification method and are reported in noninterest income as investment securities gains (losses) or equity securities gains, as appropriate. The Corporation carries investments of its venture capital subsidiaries at fair value. Changes in the fair value of such investments are recognized in noninterest income as equity securities gains. The fair value of publicly traded investments takes into account their quoted market prices with adjustments made for market liquidity or sale restrictions. For investments that are not publicly traded, management has made estimates of fair value that consider the investees' financial results, conditions and prospects, and the values of comparable public companies. 45
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(d) Loans Loans are generally reported at the principal amount outstanding, net of unearned income. Loans held for sale are valued at the lower of cost or fair value with unrealized losses as well as realized gains or losses included in other noninterest income. Loan origination and commitment fees generally are deferred and amortized as interest income over the life of the related loan. Other credit-related fees, such as syndication management fees, commercial letters of credit fees, and fees on unused, available lines of credit, are recorded as service charges and commissions in noninterest income when earned. Loans, including lease financing receivables, are considered nonperforming when placed on nonaccrual status, or when renegotiated at terms that represent an economic concession to the borrower. Nonperforming loans are generally identified as "impaired loans." A commercial loan is placed on nonaccrual status when the collection of contractual principal or interest is deemed doubtful by management or becomes 90 days or more past due, and the loan is not well-secured and in the process of collection. Accrued but uncollected interest is reversed and charged against interest income when the commercial loan is placed on nonaccrual status. Interest payments on a partially charged-off commercial loan are applied to the remaining principal balance until the balance is fully recovered. Once principal is recovered, cash payments received are recorded as recoveries to the extent of prior charge-offs, and then as interest income. A charge-off on a commercial loan is recorded in the reporting period in which either an event occurs that confirms the existence of a loss or it is determined a loan or a portion of a loan is uncollectible. Consumer loans are generally not placed on nonaccrual status but are typically charged off after reaching certain delinquency periods that range from approximately 120 to 180 days past due. The timing and amount of the charge-off will depend on the type of consumer loan and any related collateral. Accrued but uncollected interest on a consumer loan typically is reversed against interest income when the loan is charged off. An economic concession on a renegotiated loan may represent forgiveness of principal and/or interest or a below-market interest rate offered to the borrower to maximize recovery of the loan. Generally, this occurs when the borrower's cash flow is insufficient to service the loan under its original terms. Subject to the above nonaccrual policy, interest on these loans is accrued at the reduced rates. (e) Credit Card Securitization The Corporation actively packages and sells credit card receivables as securities to investors. At the time of securitization no gain or loss is recorded since the amount of proceeds received is equal to the par value of the receivables. Transaction costs are deferred and amortized ratably as a reduction of servicing fees over the terms of the related securitizations. The amount of credit card interest income and fee revenue in excess of interest paid to certificate holders, credit losses and other trust expenses is recognized on an accrual basis as servicing fees in credit card fee revenue. Refer to Section (o) of this note for further details. (f) Allowance for Credit Losses The allowance for credit losses is maintained at a level that in management's judgment is adequate to provide for estimated probable credit losses inherent in on- and off-balance-sheet credit exposure. The allowance for credit losses attributable to off-balance-sheet credit exposure is not material. The amount of the allowance is based on formal review and analysis of potential credit losses, as well as prevailing economic conditions. 46
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(g) Premises and Equipment Premises and equipment are carried at amortized cost. Depreciation is charged to noninterest expense over the estimated useful lives of the assets on either a straight-line or an accelerated depreciation basis. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Maintenance, repairs and minor alterations are expensed as incurred. Gains and losses on disposition are reflected in other noninterest income. (h) Other Real Estate Other real estate includes primarily assets that have been received in satisfaction of debt. Other real estate is initially recorded and subsequently carried at the lower of cost or fair value less estimated selling costs. Any valuation adjustments required at the date of transfer are charged to the allowance for credit losses. Operating results from other real estate are recorded in other noninterest expense. (i) Intangible Assets Intangible assets are included in other assets. Goodwill, representing the cost of investments in subsidiaries and affiliated companies in excess of the fair value of net assets acquired, is amortized on a straight-line basis over periods ranging from 10 to 25 years. Other intangible assets, such as customer lists, core deposits and credit card relationships, are amortized using various methods over the periods benefited. (j) Derivative Financial Instruments For a discussion of the Corporation's accounting policies for derivative financial instruments, see pages 35 and 36. (k) Foreign Currency Translation When the primary operating currency (functional currency) of a foreign installation is the U.S. dollar, its monetary assets and liabilities carried in local currency are remeasured into U.S. dollars at current exchange rates. Its premises and equipment are remeasured at historical exchange rates. Remeasurement effects and the results of related hedging transactions are included in other noninterest income. If the foreign installation's functional currency is its local currency, all assets and liabilities are translated at current exchange rates. Translation adjustments, related hedging results and applicable income taxes are included in accumulated translation adjustment within stockholders' equity. (l) Mortgage Servicing Rights The Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on January 1, 1996. This Statement amended existing accounting rules by requiring originated mortgage servicing rights to be capitalized under certain circumstances. SFAS No. 122 also requires that the Corporation's portfolio be stratified by primary risk characteristics when assessing impairment. The Corporation stratifies its portfolio by both product type and interest rate bands. The statement did not have a material effect on the Corporation's financial results in 1996. Refer to Section (o) of this Note for more details. (m) Stock-Based Compensation In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation." Under the provisions of this Statement, the Corporation elected to retain its current method of measuring and recognizing costs (the intrinsic value method) related to employee stock compensation plans and to disclose the pro forma effect of applying the fair value method contained in SFAS No. 123. Accordingly, there continue to be no 47
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compensation costs charged against income for stock options awarded under the Corporation's Stock Performance Plan or stock purchase rights offered under its Employee Stock Purchase and Savings Plan. In addition, the unamortized cost of performance and restricted shares awarded continues to be included in deferred compensation, a separate component of stockholders' equity. Information on the Corporation's stock-based compensation plans is included in Note 12, beginning on page 57. (n) Cash Flow Reporting The Corporation uses the indirect method, which reports cash flows from operating activities by adjusting net income to reconcile to net cash flows from operating activities. Cash and cash equivalents consist of cash and due from banks, whether interest-bearing or not. Net reporting of cash transactions has been used when the balance sheet items consist predominantly of maturities of three months or less, or where otherwise permitted. Other items are reported on a gross basis. In 1996, $45 million of the Corporation's Cumulative Convertible Preferred Stock was converted into common stock. See Note 11, beginning on page 56, for more details. In 1995, a noncash transfer of $7.2 billion attributable to reclassifying debt investment securities from held-to-maturity to available-for-sale was made. Refer to Section (c) of this note for more details. (o) Recently Issued Accounting Standards In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which generally became effective on a prospective basis beginning January 1, 1997. In December, 1996, the FASB deferred the effective date of certain provisions, primarily relating to collateral, securities lending and dollar repurchase agreements until January 1, 1998. The new Statement establishes criteria based on legal control to determine whether a transfer of a financial asset is a sale or a secured borrowing. A sale is recognized when the Corporation relinquishes control over a financial asset and is compensated for such asset. The difference between net proceeds received and the carrying amount of the financial asset(s) being sold or securitized is recognized as a gain or loss on sale. SFAS No. 125 also supersedes SFAS No. 122 and, in general, applies the accounting for mortgage servicing rights under SFAS No. 122 to servicing rights of all financial assets. In general, the Corporation expects that transactions it recorded as sales under prior accounting standards will continue to receive sales treatment under the new Statement, and does not expect the new Statement to have a significant effect on its financial results. NOTE 2--EARNINGS PER SHARE Earnings per share are presented on both a primary and a fully diluted basis. Primary earnings per share were computed by dividing net income, after deducting dividends on preferred stock, by the average number of common and common-equivalent shares outstanding during the period. Common-equivalent shares consist of net shares issuable under the Employee Stock Purchase and Savings Plan and outstanding stock options. The fully diluted earnings per share calculation also includes common shares that would result from the conversion of convertible preferred stock and convertible notes. Accordingly, net income was not reduced by preferred stock dividend requirements related to convertible preferred stock or the interest expense on the convertible notes. [Download Table] 1996 1995 1994 (IN MILLIONS) ------ ------ ------ Primary Net income........................................... $1,436 $1,150 $1,221 Preferred stock dividends (1)........................ (31) (37) (52) ------ ------ ------ Net income attributable to common stockholders' equity.............................................. $1,405 $1,113 $1,169 ====== ====== ====== Fully diluted Net income........................................... $1,436 $1,150 $1,221 Preferred stock dividends, excluding convertible Series B, where applicable (1)................................ (20) (26) (40) Interest on convertible notes, net of taxes............ -- -- 2 ------ ------ ------ Fully diluted net income............................. $1,416 $1,124 $1,183 ====== ====== ====== 48
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[Download Table] 1996 1995 1994 (IN THOUSANDS) ------- ------- ------- Average shares outstanding............................. 316,765 320,049 319,929 Common stock equivalents............................... 3,478 2,808 2,737 ------- ------- ------- Average number of common and common-equivalent shares (primary).............................................. 320,243 322,857 322,666 Incremental shares related to convertible preferred stock, debentures and other......................... 7,814 7,240 8,145 ------- ------- ------- Average number of shares, assuming full dilution..... 328,057 330,097 330,811 ======= ======= ======= 1996 1995 1994 ------- ------- ------- Earnings Per Share Net income--primary.................................. $4.39 $3.45 $3.62 ======= ======= ======= Net income--fully diluted............................ $4.32 $3.41 $3.58 ======= ======= ======= -------- (1) 1994 preferred dividends include a $4.5 million, or 3%, premium paid on the redemption of the Corporation's Cumulative Preferred Stock, Series D. NOTE 3--MERGER-RELATED CHARGES In 1995, merger-related charges were $267 million and included direct merger and restructuring-related charges totaling $225 million, as well as the effect of conforming a number of accounting practices between FCC and NBD, which totaled $42 million. The effect of conforming these practices is not material to the Corporation's financial statements. The following table provides details on the merger-related reserve as of December 31, 1996, compared with that of a year ago and at consummation of the merger transaction. [Download Table] DECEMBER 31, DECEMBER 31, DECEMBER 1, MERGER RESERVE 1996 1995 1995 (IN MILLIONS) ------------ ------------ ----------- Personnel................................. $ 42 $ 92 $ 93 Facilities & Equipment.................... 71 94 95 Other..................................... 5 14 37 ---- ---- ---- $118 $200 $225 ==== ==== ==== Personnel-related costs primarily reflect the costs of employee severance packages. Facilities costs consist of lease termination costs and facilities- related exit costs arising from the consolidation of duplicate headquarters and operational facilities. Equipment costs consist of computer equipment and software write-offs due to duplication or incompatibility. The remaining reserve has been fully allocated to identified merger-related activities and will be charged with costs as incurred based on existing contractual arrangements. NOTE 4--ACQUISITIONS In July 1995, the Corporation consummated its merger with Deerbank Corporation, a $766 million thrift holding company located in Deerfield, Illinois. The merger was accounted for as a purchase. The purchase price of $106 million was funded by the issuance of 3.3 million shares of the Corporation's common stock. Before the closing, the Corporation repurchased an amount of shares equivalent to the shares issued in the transaction. In January 1995, the Corporation consummated its merger with AmeriFed Financial Corp., a thrift holding company located in Joliet, Illinois, with total assets of $910 million. The purchase price of $148 million was funded by the issuance of 5.2 million shares of the Corporation's common stock. The merger was accounted for as a purchase. The Corporation had repurchased 5.0 million of the shares issued before the closing of the merger, and repurchased the remaining shares issued soon after the closing. 49
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On July 8, 1994, the Corporation issued approximately 11.6 million shares of its common stock for all of the common stock of Lake Shore Bancorp., Inc. of Chicago, Illinois, with total assets of $1.2 billion and capital of $123 million. The combination was accounted for on a pooling-of-interests basis; however, because the transaction was not considered significant from an accounting perspective, the Corporation did not restate either 1994 or prior- year financial data. NOTE 5--BUSINESS SEGMENTS The Corporation is engaged primarily in the banking business, and with the continuing globalization of financial markets, the distinction between international and domestic activities has become less important. The following table shows approximate consolidated financial data for the three years ended December 31, 1996, attributable to domestic and foreign operations. No foreign geographic region accounted for more than 10% of consolidated results. [Download Table] INCOME BEFORE NET TOTAL REVENUES(1) EXPENSES(2) INCOME TAXES INCOME ASSETS (IN MILLIONS) ----------- ----------- ------------- ------ -------- 1996 Domestic operations.... $ 9,020 $6,919 $2,101 $1,391 $ 90,070 Foreign operations..... 1,097 1,036 61 45 14,549 ------- ------ ------ ------ -------- Consolidated........... $10,117 $7,955 $2,162 $1,436 $104,619 ======= ====== ====== ====== ======== 1995 Domestic operations.... $ 9,277 $7,590 $1,687 $1,099 $100,601 Foreign operations..... 1,404 1,337 67 51 21,401 ------- ------ ------ ------ -------- Consolidated........... $10,681 $8,927 $1,754 $1,150 $122,002 ======= ====== ====== ====== ======== 1994 Domestic operations.... $ 7,745 $5,926 $1,819 $1,204 $ 97,372 Foreign operations..... 784 750 34 17 15,391 ------- ------ ------ ------ -------- Consolidated........... $ 8,529 $6,676 $1,853 $1,221 $112,763 ======= ====== ====== ====== ======== -------- (1) Includes interest income and noninterest income. (2) Includes interest expense, provision for credit losses and noninterest expense. Because many of the resources employed by the Corporation are common to both its foreign and domestic activities, it is difficult to segregate assets, related revenues and expenses into their foreign and domestic components. The amounts in the preceding table are estimated on the basis of internally developed assignment and allocation procedures, which to some extent are subjective. The principal internal allocations used to prepare this information are described below. Corporate overhead is allocated based on individual activities. Expenses are generally allocated to the geographic area benefited. Assets and revenues are generally allocated based on the domicile of the customer. Capital, with the exception of that invested in foreign subsidiaries, is allocated to domestic operations. For information regarding the Corporation's line of business activities, see the "Business Segments--Overview" section on page 14 as well as the tables on pages 15 to 18, which summarize financial results for the Corporation's major business segments and other activities. NOTE 6--INVESTMENT SECURITIES The following is a summary of the Corporation's available-for-sale investment securities portfolio. Aside from those investments accounted for at fair value in accordance with specialized industry practice, the remaining investments in the portfolio are classified as available-for-sale. 50
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[Download Table] AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE DECEMBER 31, 1996 (IN COST GAINS LOSSES (BOOK VALUE) MILLIONS) --------- ---------------- ---------------- ------------ U.S. Treasury........... $2,878 $ 18 $ 6 $2,890 U.S. government agencies Mortgage-backed securities........... 1,603 23 18 1,608 Collateralized mortgage obligations. 40 -- 1 39 Other................. 60 1 -- 61 States and political subdivisions........... 1,150 59 1 1,208 Other debt securities... 256 3 -- 259 Equity securities (1)(2)................. 1,004 180 71 1,113 ------ ---- ---- ------ Total............... $6,991 $284 $ 97 $7,178 ====== ==== ==== ====== AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE DECEMBER 31, 1995 (IN COST GAINS LOSSES (BOOK VALUE) MILLIONS) --------- ---------------- ---------------- ------------ U.S. Treasury........... $1,416 $ 8 $ 1 $1,423 U.S. government agencies Mortgage-backed securities........... 4,855 119 20 4,954 Collateralized mortgage obligations. 5 -- -- 5 Other................. 457 1 -- 458 States and political subdivisions........... 1,383 81 2 1,462 Other debt securities... 92 2 -- 94 Equity securities (1)(2)................. 986 152 85 1,053 ------ ---- ---- ------ Total............... $9,194 $363 $108 $9,449 ====== ==== ==== ====== -------- (1) The fair values of certain securities for which market quotations were not available were estimated. In addition, the fair values of certain securities reflect liquidity and other market-related factors. (2) Includes investments accounted for at fair value, in keeping with specialized industry practice. The following is a summary of the proceeds from the sale of available-for- sale investment securities and the related gross realized gains and losses. [Download Table] GROSS REALIZED GROSS REALIZED PROCEEDS GAINS LOSSES (IN MILLIONS) -------- -------------- -------------- 1996..................................... $4,340 $65 $34 1995..................................... 5,564 45 62 1994..................................... 2,164 14 15 The maturity distribution of debt investment securities is shown below. The distribution of mortgage-backed securities and collateralized mortgage obligations is based on average expected maturities. Actual maturities may differ because issuers may have the right to call or prepay obligations. [Download Table] AMORTIZED FAIR COST VALUE DECEMBER 31, 1996 (IN MILLIONS) --------- ------ Due in one year or less....................................... $1,303 $1,313 Due after one year through five years......................... 3,352 3,399 Due after five years through ten years........................ 1,070 1,079 Due after ten years........................................... 262 274 ------ ------ $5,987 $6,065 ====== ====== 51
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NOTE 7--LOANS Following is a breakdown of loans included in the consolidated balance sheet as of December 31, 1996 and 1995. [Download Table] 1996 1995 (IN MILLIONS) ------- ------- Commercial Domestic Commercial.................................................. $27,718 $25,551 Real estate Construction.............................................. 1,057 1,151 Other..................................................... 5,103 6,103 Lease financing............................................. 1,820 1,588 Foreign....................................................... 3,656 3,726 ------- ------- Total commercial........................................ 39,354 38,119 ------- ------- Consumer Credit cards.................................................. 9,601 9,649 Secured by real estate........................................ 9,406 8,933 Automotive.................................................... 4,423 4,477 Other......................................................... 3,630 3,256 ------- ------- Total consumer.......................................... 27,060 26,315 ------- ------- Total................................................... $66,414 $64,434 ======= ======= The amount of interest shortfall for related nonperforming loans at year-end 1996 was $16 million. The shortfall amount represents the difference between the $27 million of interest contractually due and the $11 million of interest actually recorded. For 1995, the interest shortfall related to nonperforming loans at year-end was $19 million. Contractual amounts due were $32 million and $13 million of interest was actually recorded. Credit card receivables are available for sale through the Corporation's credit card securitization program. In addition, other loans available for sale at December 31, 1996 and 1995, totaled $545 million and $556 million, respectively. The Corporation has loans outstanding to certain of its directors and executive officers and to partnerships or companies in which a director or executive officer has at least a 10% beneficial interest. At December 31, 1996 and 1995, $339 million and $271 million, respectively, of such loans to related parties were outstanding. An analysis of the activity during 1996 with respect to such loans includes additions of $331 million, and reductions of $263 million. NOTE 8--ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses for the three years ended December 31, 1996, were as follows. [Download Table] 1996 1995 1994 (IN MILLIONS) ------ ------ ------ Balance, beginning of year.............................. $1,338 $1,158 $1,106 Additions (deductions) Charge-offs........................................... (815) (409) (364) Recoveries............................................ 145 145 172 ------ ------ ------ Net charge-offs....................................... (670) (264) (192) Provision for credit losses........................... 735 510 276 Other Acquisitions.......................................... -- 9 16 Transfers related to securitized receivables.......... 4 (75) (49) Other................................................. -- -- 1 ------ ------ ------ Balance, end of year.................................... $1,407 $1,338 $1,158 ====== ====== ====== 52
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Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." SFAS No. 114 addresses the accounting for a loan when it is probable that all principal and interest amounts due will not be collected in accordance with its contractual terms. Certain loans, such as loans carried at the lower of cost or market or small-balance homogeneous loans (e.g., credit card installment credit), are exempt from SFAS No. 114's provisions. On a quarterly basis, the Corporation identifies impaired loans, and impairment is recognized to the extent the recorded investment of an impaired loan or pool of loans exceeds the calculated present value. Loans having a significant recorded investment are measured on an individual basis while loans not having a significant recorded investment are grouped and measured on a pool basis. The allocated reserve associated with impaired loans is considered in management's determination of the allowance for credit losses. At December 31, 1996, the recorded investment in impaired loans was $262 million, which required a related allowance for credit losses of $39 million. Substantially all of the $262 million in impaired loans had a related allowance for credit losses. At December 31, 1995, the recorded investment in impaired loans was $363 million, which required a related allowance for credit losses of $36 million. The average recorded investment in impaired loans was approximately $341 million for 1996 and $302 million in 1995. The Corporation recognized interest income associated with impaired loans of $17 million during 1996 and $15 million during 1995. NOTE 9--PLEDGED AND RESTRICTED ASSETS At December 31, 1996, $17.1 billion of assets were pledged to secure government deposits, trust deposits, borrowings, and for other purposes required by law. The Banks are required to maintain noninterest-bearing cash balances with the Federal Reserve based on the types and amounts of deposits held. During 1996 and 1995, the average balances maintained to meet this requirement were $1.357 billion and $1.374 billion, respectively. 53
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NOTE 10--LONG-TERM DEBT Long-term debt consists of borrowings having an original maturity of over one year. Original issue discount and deferred issuance costs are amortized over the terms of the related notes. Long-term debt at December 31, 1996 and 1995, was as follows. [Download Table] 1996 1995 (IN MILLIONS) ------ ------ PARENT COMPANY SUBORDINATED DEBT 9% notes due 1999.............................................. $ 199 $ 199 9 7/8% notes due 2000.......................................... 99 99 9 1/5% notes due 2001.......................................... 5 5 9 1/4% notes due 2001.......................................... 100 100 10 1/4% notes due 2001......................................... 100 100 11 1/4% notes due 2001......................................... 96 96 8 7/8% notes due 2002.......................................... 100 100 8 1/10% notes due 2002......................................... 200 200 8 1/4% notes due 2002.......................................... 100 100 7 5/8% notes due 2003.......................................... 199 199 6 7/8% notes due 2003.......................................... 200 200 Floating rate notes due 2003................................... 149 149 7 1/4% debentures due 2004..................................... 200 200 Floating rate notes due 2005................................... 96 96 6 1/8% notes due 2006.......................................... 149 -- 7% notes due 2006.............................................. 149 -- 7 1/8% notes due 2007.......................................... 199 199 6 3/8% notes due 2009.......................................... 198 198 7 1/2% preferred purchase units due 2023....................... 150 150 9 7/8% equity commitment notes due 1999........................ 200 200 Floating rate equity contract notes due 1996................... -- 125 SENIOR DEBT 8 1/2% notes due 1998.......................................... 100 100 Other Parent Company debt...................................... 1,475 1,624 ------ ------ Total Parent Company......................................... 4,463 4,439 ------ ------ SUBSIDIARIES Bank notes, various rates and maturities....................... 2,465 2,944 Subordinated 6 1/4% notes due 2003............................. 200 200 Subordinated 8 1/4% notes due 2024............................. 250 250 8 3/4% notes due 1997-1999..................................... 10 10 Capitalized lease obligations, various rates and maturities.... 13 15 Other.......................................................... 305 305 Guaranteed preferred beneficial interest in the Corporation's junior subordinated debt...................................... 748 -- ------ ------ Total subsidiaries........................................... 3,991 3,724 ------ ------ Total long-term debt......................................... $8,454 $8,163 ====== ====== (A) PARENT COMPANY LONG-TERM DEBT SUBORDINATED NOTES These notes are subordinated to other indebtedness of the Corporation. The fixed-rate notes have interest rates that range from 6 1/8% to 11 1/4% and maturities that range from 1999 to 2023. The floating rate notes due in 54
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2003 have an interest rate priced at the greater of 4 1/4% or the three-month London interbank offered rate (LIBOR) plus 1/8%. The interest rate on this issue on December 31, 1996, was 5 21/32%. The floating rate notes due 2005 may be redeemed, in whole or in part, on any interest payment date at par. Interest payment on the notes is at a rate of 1/4% above the average offered rate quoted in the London interbank market for three-month Eurodollar deposits but in no event may the rate be less than 5 1/4%. On December 31, 1996, the interest rate was 5 3/4%. Each 7 1/2% preferred purchase unit consists of a 7.40% subordinated debenture due May 10, 2023, in a principal amount of $25 and a related purchase contract paying fees of 0.10% of the principal amount of the debenture per year. The contract requires the purchase on May 10, 2023 (or earlier at the Corporation's election), of one depositary share representing a one-fourth interest in a share of 7 1/2% cumulative preferred stock of the Corporation at a purchase price of $25 per depositary share. The equity commitment notes may not be redeemed prior to their stated maturity. The agreements under which these notes were issued require the Corporation, prior to maturity, to issue common stock, perpetual preferred stock or other forms of equity approved by the Federal Reserve Board in an amount equal to the original aggregate principal amount of the notes. As of December 31, 1996, all the equity securities required by the agreements had been issued. SENIOR DEBT The 8 1/2% notes are unsecured obligations that are not subordinated to any other indebtedness of the Corporation and may not be redeemed prior to their stated maturity. Other Parent Company long-term debt of $1.475 billion includes various notes with a weighted average interest rate of 6.03% and remaining weighted average maturity of 22 months at December 31, 1996. (B) SUBSIDIARIES' LONG-TERM DEBT The bank notes are unsecured and unsubordinated debt obligations of the Banks. At December 31, 1996, the weighted average rate of the bank notes was 6.06% and remaining weighted average maturity was 12 months. The 6 1/4% subordinated notes due 2003 are unsecured, subordinated to the claims of depositors and other creditors of NBD Michigan, and are not redeemable prior to maturity. The 8 1/4% subordinated notes due 2024 are unsecured, subordinated to the claims of depositors and other creditors of NBD Michigan, and are not redeemable by the bank prior to maturity. Registered holders have a one-time right to redeem the notes at par, in whole or in part, on November 1, 2004. Other long-term debt at December 31, 1996, included $286 million related to the sale and lease back of certain bank properties. The effective interest rate related to this transaction is 8.7%, with expected maturity in 2018. (C) GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S JUNIOR SUBORDINATED DEBT The $748 million of Guaranteed Preferred Beneficial Interest in the Corporation's Junior Subordinated Debt ("Trust Preferred Capital Securities") represents the net proceeds from the issuance of preferred capital securities by First Chicago NBD Institutional Capital A ("the Series A Trust") and First Chicago NBD Institutional Capital B ("the Series B Trust"). The Series A Trust and the Series B Trust are statutory business trusts created in 1996 for the sole purpose of issuing capital securities and investing the proceeds thereof in junior subordinated debentures of the Corporation ("Junior Subordinated Debt"). The preferred capital securities represent preferred individual beneficial interests in the respective trusts and are subject to mandatory redemption upon repayment of the Junior Subordinated Debt. The common securities of each trust are owned by the Corporation. The Corporation's obligations under the Junior Subordinated Debt and other relevant agreements, in aggregate, constitute a full and unconditional guarantee by the Corporation of such Trust's obligations under the preferred securities issued by the Trust. 55
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The Series A Trust issued $500 million in aggregate liquidation amount of 7.95% preferred capital securities in December 1996. The sole asset of the Series A Trust is $515 million principal amount of 7.95% Junior Subordinated Debt that will mature on December 1, 2026, and is redeemable prior to maturity at the option of the Corporation on or after December 1, 2006. The Series B Trust issued $250 million in aggregate liquidation amount of 7.75% preferred capital securities in December 1996. The sole asset of the Series B Trust is $258 million principal amount of 7.75% Junior Subordinated Debt that will mature on December 1, 2026, and is redeemable prior to maturity at the option of the Corporation on or after December 1, 2006. The Trust Preferred Capital Securities are tax-advantaged issues and qualify as Tier 1 capital. In January 1997, First Chicago NBD Capital I ("the Series I Trust"), a statutory business trust, issued $250 million in aggregate liquidation amount of floating rate preferred capital securities. The sole asset of the Series I Trust is $258 million principal amount of floating rate Junior Subordinated Debt of the Corporation that bears interest at an annual rate equal to three- month LIBOR plus 0.55%, will mature on February 1, 2027, and is redeemable at the option of the Corporation on or after February 1, 2007. All common securities of the Series I Trust are owned by the Corporation. The Corporation's obligations under the Junior Subordinated Debt and the relevant indenture, trust agreement and guarantee, in aggregate, constitute a full and unconditional guarantee by the Corporation of the Series I Trust's obligations under the preferred capital securities issued by such Trust. (D) MATURITY OF LONG-TERM DEBT Of the Corporation's $8.454 billion total long-term debt, $1.941 billion, $1.343 billion, $674 million, $361 million and $545 million is scheduled to mature in 1997, 1998, 1999, 2000 and 2001, respectively. NOTE 11--PREFERRED STOCK The Corporation is authorized to issue 10,000,000 shares of preferred stock, without par value. The Board of Directors is authorized to fix the particular designations, preferences, rights, qualifications and restrictions for each series of preferred stock issued. All preferred shares rank prior to common shares both as to dividends and liquidation, but have no general voting rights. The dividend rate on each of the cumulative adjustable rate series is based on stated value and adjusted quarterly, based on a formula that considers the interest rates for selected short- and long-term U.S. Treasury securities prevailing at the time the rate is set. The minimum, maximum and current dividend rates as of December 31, 1996, are presented in the following table. [Enlarge/Download Table] STATED ANNUAL DIVIDEND RATE EARLIEST SHARES VALUE PER ----------------------- REDEMPTION REDEMPTION PREFERRED STOCK SERIES OUTSTANDING SHARE MAXIMUM MINIMUM CURRENT DATE PRICE (1) ---------------------- ----------- --------- ------- ------- ------- ---------- ---------- Cumulative Adjustable Rate Series B.............. 1,191,000 $ 100.00 12.00% 6.00% 6.00% (2) $ 100.00 Series C.............. 713,800 100.00 12.50 6.50 6.50 (2) 100.00 Cumulative Fixed Rate Series E (3).......... 160,000 625.00 8.45 8.45 8.45 11/16/97(4) 625.00 Cumulative Convertible Fixed Rate Series B (5).......... 30,786 5,000.00 5.75 5.75 5.75 4/1/97(6) 5,172.50 -------- (1) Plus accrued and unpaid dividends. (2) Currently redeemable. (3) Represented by 4,000,000 depositary shares, with a corresponding annual dividend of $2.1125 each and a $25 stated value. 56
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(4) The preferred shares are redeemable on or after November 16, 1997, at $625 per share (equivalent to $25 per depositary share). (5) Represented by 3,078,688 depositary shares, with a corresponding annual dividend of $2.875 each and a $50 stated value. (6) The preferred shares may be converted into shares of the Corporation's common stock at the option of the stockholders at any time at the conversion price of $29.6271 per common share, subject to adjustment under certain conditions. Shares are redeemable beginning April 1, 1997, at the option of the Corporation, at a price of $5,172.50 ($51.725 per depositary share), with the redemption price decreasing annually until the shares are redeemable on or after April 1, 2003, at their stated value of $5,000 per share ($50 per depositary share). In 1996, 8,988 preferred shares were converted into 1,516,628 shares of the Corporation's common stock. A total of 9,214 preferred stock shares have been converted into 1,554,786 shares of the Corporation's common stock through the end of 1996. All shares of Cumulative Preferred Stock, Series A, were called for redemption in August 1995. The redemption price was $50 per share plus accrued and unpaid dividends. On February 14, 1997, the Corporation authorized the redemption on April 1, 1997, of all shares outstanding of its 5 3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 stated value), and the related redemption of all outstanding depositary shares representing a one-hundredth interest in a share of the Series B Convertible Preferred, at a redemption price of $51.725 per depositary share, plus an accrued and unpaid dividend of $0.71875 per depositary share. NOTE 12--EMPLOYEE BENEFITS The Corporation has established common plans covering pension, postretirement benefits, postemployment benefits, employee savings and stock compensation, all of which were effective January 1, 1997. Such plans replaced the former FCC and NBD benefit plans. The benefit plans and related costs described below relate primarily to former FCC and NBD benefit plans. (A) PENSION PLANS The Corporation sponsors pension plans covering substantially all salaried employees. The pension plans are noncontributory, defined benefit plans that provide benefits based on years of service and compensation level. The funding policy varies for each plan. Depending on the plan, consideration is given to net periodic pension cost for the year, the minimum funding required by the Employee Retirement Income Security Act of 1974 ("ERISA") and the maximum tax deductible amount based on IRS limits. Plan assets primarily include equity securities and debt securities issued by the U.S. government and its agencies or by corporations. Plan assets include common stock of the Corporation having a fair value of $20 million in 1996 and $15 million in 1995. Net periodic pension cost includes the following components for the years ended December 31. [Download Table] 1996 1995 1994 (IN MILLIONS) ----- ----- ---- Service cost--benefits earned during period................. $ 61 $ 45 $ 53 Interest cost on projected benefit obligation............... 110 100 93 Actual loss (return) on assets.............................. (353) (351) 13 Net amortization and deferral............................... 197 206 (154) ----- ----- ---- Net periodic pension cost................................... $ 15 $ -- $ 5 ===== ===== ==== 57
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The following table reconciles the aggregated funded status of the plans and amounts recognized in the consolidated balance sheet at December 31. [Download Table] 1996 1995 (IN MILLIONS) ------- ------- Actuarial present value of the projected benefit obligation, based on employment service to date and current salary levels: Vested employees.......................................... $(1,164) $(1,105) Nonvested employees....................................... (376) (88) ------- ------- Accumulated benefit obligation............................ (1,540) (1,193) Additional amounts related to projected salary increases.... (19) (259) ------- ------- Projected benefit obligation................................ (1,559) (1,452) Plan assets (at fair value)................................. 1,965 1,803 ------- ------- Plan assets in excess of projected benefit obligation....... 406 351 Unrecognized net gain due to experience different from assumptions................................................ (91) (6) Unrecognized transition asset............................... (45) (55) Unrecognized prior service cost............................. 114 97 ------- ------- Prepaid pension cost included in the consolidated balance sheet....................................................... $ 384 $ 387 ======= ======= The December 31, 1996, amounts include the effect of plan amendments effective on January 1, 1997. The assumptions used in determining the projected benefit obligation and net periodic pension (credit) cost of such plans at December 31 are as follows. [Download Table] 1996 1995 1994 ----- --------- --------- Discount rate......................................... 7.75% 7.25% 8.0%-9.0% Salary increase assumption............................ 5.25% 5.25% 5.0%-5.5% Expected long-term rate of return on plan assets...... 9.5% 9.0%-9.5% 9.5% (B) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation sponsors postretirement life insurance plans and provides health care benefits for certain retirees and grandfathered employees when they retire. The postretirement life insurance benefit is noncontributory. Retirees and employees eligible for postretirement health care benefits participate on a contributory basis. Net periodic postretirement benefit cost included the following components for the years ended December 31. [Download Table] 1996 1995 1994 (IN MILLIONS) ---- ---- ---- Service cost..................................................... $ 2 $ 1 $ 1 Interest cost.................................................... 5 4 3 Net amortization................................................. -- 14 -- --- --- --- Net periodic postretirement benefit cost......................... $ 7 $19 $ 4 === === === 58
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The Corporation funds postretirement benefit cost as claims are incurred. The following table reconciles the plan's funded status and amounts recognized in the consolidated balance sheet at December 31. [Download Table] 1996 1995 (IN MILLIONS) ---- ---- Accumulated postretirement benefit obligation: Retirees......................................................... $(52) $(55) Fully eligible active plan participants.......................... (10) (11) Other active plan participants................................... (14) (11) ---- ---- Total accumulated postretirement benefit obligation................ (76) (77) Plan assets (at market value)...................................... -- -- ---- ---- Accumulated postretirement benefit obligation in excess of plan assets............................................................ (76) (77) Unrecognized net (gain)............................................ (13) (9) Unrecognized prior service cost.................................... 4 4 ---- ---- Accrued postretirement benefit liability recognized in the consolidated balance sheet........................................ $(85) $(82) ==== ==== The December 31, 1996, amounts include the effect of plan amendments effective on January 1, 1997. The assumption used to measure postretirement benefit costs is an 8% annual rate of increase in the per capita cost of covered health care benefits for 1997, trending downward to 5.5% by the year 2000, and remaining at that level thereafter. This assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would have increased the accumulated postretirement benefit obligation as of December 31, 1996, by $4 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by approximately $0.4 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% at December 31, 1996, and 7.25% at December 31, 1995. The Corporation adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. The cumulative effect of adoption was a charge of $12 million ($8 million net of income taxes). The effect of postemployment benefit costs on income before income taxes was not significant in 1996 or 1995. (C) EMPLOYEE SAVINGS PLANS The Corporation maintains various savings plans for U.S.-based employees meeting certain eligibility requirements. Under the FCC 401(k) plan, participants contributed from 1% to 6% of their salary on a pretax basis, and an additional 1% to 10% of salary on an after- tax basis. The Corporation's contribution to the plan was 100% of the first $750 of pretax contributions made by participants and 50% of any pretax contributions in excess of $750. The plan also allowed a supplemental profit- based contribution. The NBD 401(k) plan required employer contributions equal to participants' contributions up to 2% of their salary, plus an amount equal to one-half of participants' contributions between 2% and 6% of their salary subject to certain limitations imposed by the IRS. Total expense for these plans was $43 million in 1996, $37 million in 1995, and $36 million in 1994. (D) STOCK-BASED COMPENSATION The Corporation utilizes various stock-based awards as part of its overall compensation program through its Stock Performance Plan. In addition, the Corporation provides employees the opportunity to purchase its shares through its Employee Stock Purchase and Savings Plan. The compensation cost that has been charged against income for the Corporation's Stock Performance and Employee Stock Purchase and Savings Plans was $26.3 million for 1996, $21.1 million for 1995, and $20.5 million for 1994. See Note 1(m) on page 47 for the Corporation's accounting policies relating to stock-based compensation. 59
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STOCK PERFORMANCE PLAN Under the Stock Performance Plan, the Corporation may grant to employees various stock-based awards, including performance shares, restricted shares and stock options. The Corporation is authorized to award up to 2% of its shares annually, based on the number of outstanding shares at the prior year end. PERFORMANCE SHARES The Corporation provides performance-based stock awards for its senior managers. The level of performance shares eventually distributed depends on the achievement of specific performance criteria that are set at the grant date. The ultimate expense attributable to these awards is based on the market value of the shares distributed at the end of the defined performance period. The expense associated with such awards is recognized over the defined performance period. RESTRICTED SHARES Restricted shares granted to key officers require them to continue employment for up to four years from the grant date before restrictions on the shares are removed. The market value of the restricted shares as of the date of grant is amortized to compensation expense ratably over the period the shares remain restricted. STOCK OPTIONS The Corporation also awards stock options to both senior managers and key officers. The exercise price of such options is equivalent to the market value of the Corporation's common stock at the award date. Options granted generally vest one-third each year over a three-year period with a maximum term of ten years. Stock options include the right to receive additional options not exceeding the number of options exercised under the original grant if certain criteria are met. The exercise price of an additional option is equal to the fair market value of the common stock on the date the additional option is granted. The vesting period for such additional options is six months. The Corporation does not recognize any compensation expense with respect to stock option awards. The following tables summarize stock option activity for 1996 and provide details of stock options outstanding at December 31, 1996. [Download Table] WTD. AVG. EXERCISE SHARES PRICE (SHARES IN THOUSANDS) ------ -------- Outstanding at January 1, 1996................................. 12,406 $25.23 Granted........................................................ 4,585 41.38 Exercised...................................................... (4,598) 24.19 Forfeited...................................................... (169) 32.22 ------ ------ Outstanding at December 31, 1996............................... 12,224 $31.59 ====== [Download Table] OPTIONS OUTSTANDING OPTIONS EXERCISABLE (SHARES IN THOUSANDS) --------------------------------- --------------------- NUMBER WTD. AVG. OUTSTANDING WTD. AVG. REMAINING WTD. AVG. RANGE OF DEC. 31, EXERCISE CONTRACTUAL NUMBER EXERCISE EXERCISE PRICES 1996 PRICE LIFE EXERCISABLE PRICE --------------- ----------- --------- ----------- ----------- --------- $ 6.26-$15.00 357 $13.01 2.7 yrs. 357 $13.01 15.01- 30.00 5,345 24.02 5.6 3,449 23.43 30.01- 45.00 5,935 37.72 7.2 2,787 36.35 45.01- 58.44 587 49.80 5.6 2 45.19 ------------- ------ ------ -------- ----- ------ $ 6.26-$58.44 12,224 $31.59 6.3 yrs. 6,595 $28.33 ====== ===== 60
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EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN The Corporation also offers an Employee Stock Purchase and Savings Plan that allows eligible employees to authorize payroll deductions of up to 10% of their annual base earnings for deposit in an interest-bearing savings account for up to two years. Employees then have the option to either withdraw their savings balance in cash or purchase shares of the Corporation's common stock at a price fixed under the plan. The purchase price of the stock for a particular employee is fixed at 95% of the stock's market price on the day that employee becomes eligible to participate in the plan. Under the plan, the Corporation issued 1,370,779 shares in 1996 at prices ranging from $24.53 to $36.34. The Corporation does not recognize any compensation expense with respect to this plan. PRO FORMA COSTS OF STOCK-BASED COMPENSATION If the Corporation had determined compensation cost for awards under its stock plans based on their fair value at their grant dates consistent with the method contained in SFAS No. 123, the Corporation's net income would have been $1,423.0 million and $1,143.6 million for the years ended December 31, 1996 and 1995, respectively. Primary and fully diluted earnings per share related to these pro forma net income amounts are $4.35 and $4.28, respectively, for 1996, and $3.43 and $3.39, respectively, for 1995. These pro forma net income amounts are not indicative of future pro forma amounts because they do not include expenses related to stock-based compensation awards granted prior to January 1, 1995, which would have been amortized to expense over the vesting period of the award. The following table summarizes stock-based compensation grants and their related weighted average grant-date fair values for the year ended December 31, 1996: [Download Table] NUMBER OF WTD. AVG. GRANT SHARES DATE FAIR VALUE (SHARES IN THOUSANDS) ------ --------------- Performance Shares (1)................................... 0-462 $40.58 Restricted Shares........................................ 601 41.30 Stock Options............................................ 4,585 6.74 Employee Stock Purchase and Savings Plan (2)............. 2,127 5.78 -------- (1) Range of potential shares issuable based on performance level achieved. (2) Estimated number of shares employees will purchase under the plan. The grant date fair values of stock options granted under the Stock Performance Plan and employees' purchase rights under the Employee Stock Purchase and Savings Plan were estimated using the Black-Scholes option- pricing model. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options and purchase rights. The following assumptions were used to estimate the grant-date fair value of employees' purchase rights under the Employee Stock Purchase and Savings Plan for 1996: dividend yield of 3.70%; expected volatility of 18.82%; risk-free interest rate of 6.10%; and an expected life of 2.2 years. The following weighted average assumptions were used to estimate the grant- date fair value of stock option awards under the Stock Performance Plan: dividend yields of 3.46% and 4.24% in 1996 and 1995, respectively; expected volatility of 18.74% and 17.28% in 1996 and 1995, respectively; risk-free interest rates of 5.91% and 6.78% in 1996 and 1995, respectively; and expected lives of 4.2 years and 3.9 years in 1996 and 1995, respectively. 61
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NOTE 13--INCOME TAXES The components of total applicable income tax expense (benefit) in the consolidated income statement for the years ended December 31, 1996, 1995 and 1994, are as follows. [Download Table] 1996 1995 1994 (IN MILLIONS) ---- ---- ---- Income tax expense (benefit) Current Federal..................................................... $561 $737 $397 Foreign..................................................... 17 27 14 State....................................................... 64 84 64 ---- ---- ---- Total..................................................... 642 848 475 Deferred Federal..................................................... 77 (216) 149 State....................................................... 7 (28) 8 ---- ---- ---- Total..................................................... 84 (244) 157 ---- ---- ---- Applicable income taxes......................................... $726 $604 $632 ==== ==== ==== The tax effects of fair value adjustments on securities available-for-sale, foreign currency translation adjustments, and certain tax benefits related to stock options are recorded directly to stockholders' equity. The net tax expense (benefits) recorded directly in stockholders' equity amounted to $(56) million, $133 million and $(86) million in 1996, 1995 and 1994, respectively. A summary reconciliation of the differences between applicable income taxes and the amounts computed at the applicable regular federal tax rate of 35% is as follows. [Download Table] 1996 1995 1994 (IN MILLIONS) ---- ---- ---- Taxes at statutory federal income tax rate.................... $757 $614 $649 Increase (decrease) in taxes resulting from: Tax-exempt income (net)..................................... (40) (54) (50) State income taxes, net of federal income taxes............. 47 37 47 Other....................................................... (38) 7 (14) ---- ---- ---- Applicable income taxes....................................... $726 $604 $632 ==== ==== ==== A net deferred tax liability is included in other liabilities in the consolidated balance sheet as a result of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their related tax bases. The components of the net deferred tax liability as of December 31, 1996 and 1995, are as follows. [Download Table] 1996 1995 (IN MILLIONS) ------ ------ Deferred tax liabilities Deferred income on lease financing............................. $ 867 $ 828 Appreciation on equity security investments.................... 123 111 Prepaid pension costs.......................................... 142 144 Other.......................................................... 215 244 ------ ------ Gross deferred tax liabilities................................. 1,347 1,327 ------ ------ Deferred tax assets Allowance for credit losses.................................... 513 491 Securitization of credit card receivables...................... 81 102 Depreciation................................................... 70 66 Other.......................................................... 300 341 ------ ------ Gross deferred tax assets...................................... 964 1,000 Valuation allowance............................................ -- -- ------ ------ Gross deferred tax assets, net of valuation allowance.......... 964 1,000 ------ ------ Net deferred tax liability....................................... $ 383 $ 327 ====== ====== 62
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NOTE 14--LEASE COMMITMENTS The Corporation has entered into a number of operating and capitalized lease agreements for premises and equipment. The minimum annual rental commitments under these leases are shown below. [Download Table] (IN MILLIONS) 1997................................................................. $ 84 1998................................................................. 78 1999................................................................. 73 2000................................................................. 61 2001................................................................. 48 2002 and thereafter.................................................. 209 ---- $553 ==== Occupancy expense has been reduced by rental income from premises leased to others in the amount of $32 million in 1996, $44 million in 1995 and $38 million in 1994. NOTE 15--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, the Corporation is a party to financial instruments containing credit and/or market risks that are not required to be reflected in a balance sheet. These financial instruments include credit- related instruments as well as certain derivative instruments. The Corporation's risk management policies monitor and limit exposure to credit, liquidity and market risks. (A) CREDIT RISK The following disclosures represent the Corporation's credit exposure, assuming that every counterparty to financial instruments with off-balance- sheet credit risk fails to perform completely according to the terms of the contracts, and that the collateral, and other security if any, proves to be of no value to the Corporation. (B) MARKET RISK This note does not address the amount of market losses the Corporation would incur if future changes in market prices make financial instruments with off- balance-sheet market risk less valuable or more onerous. The measurement of market risk is meaningful only when all related and offsetting on- and off- balance-sheet transactions are aggregated, and the resulting net positions are identified. (C) COLLATERAL AND OTHER SECURITY ARRANGEMENTS The credit risk of both on- and off-balance-sheet financial instruments varies based on many factors, including the value of collateral held and other security arrangements. To mitigate credit risk, the Corporation generally determines the need for specific covenant, guarantee and collateral requirements on a case-by-case basis, depending on the nature of the financial instrument and the customer's creditworthiness. The Corporation may also receive comfort letters and oral assurances. The amount and type of collateral held to reduce credit risk varies but may include real estate, machinery, equipment, inventory and accounts receivable, as well as cash on deposit, stocks, bonds and other marketable securities that are generally held in the Corporation's possession or at another appropriate custodian or depository. This collateral is valued and inspected on a regular basis to ensure both its existence and adequacy. Additional collateral is requested when appropriate. (D) CREDIT-RELATED FINANCIAL INSTRUMENTS The table below summarizes credit-related financial instruments, including both commitments to extend credit and letters of credit. 63
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COMMITMENTS AND LETTERS OF CREDIT [Download Table] 1996 1995 DECEMBER 31 (IN BILLIONS) ----- ----- Unused loan commitments*........................................... $59.1 $54.0 Unused credit card lines........................................... 75.8 76.7 Unused home-equity lines........................................... 1.7 1.8 Commercial letters of credit....................................... 0.8 0.9 Standby letters of credit and foreign office guarantees............ 7.5 6.9 -------- *Includes unused commercial real estate exposure of $1.7 billion and $1.2 billion at December 31, 1996 and 1995, respectively. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of unused commitments in the preceding table does not necessarily represent future cash requirements. Loan commitments are agreements to make or acquire a loan or lease as long as the agreed-upon terms (e.g., expiry, covenants or notice) are met. The Corporation's commitments to purchase or extend loans help its customers meet their liquidity needs. Credit card lines allow customers to use a credit card to buy goods or services and to obtain cash advances. However, the Corporation has the right to change or terminate any terms or conditions of the credit card account. Extensions of credit under home-equity lines are secured by residential real estate. Commercial letters of credit are issued or confirmed to ensure payment of customers' payables or receivables in short-term international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended. However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts. Standby letters of credit and foreign office guarantees are issued in connection with agreements made by customers to counterparties. If the customer fails to comply with the agreement, the counterparty may enforce the standby letter of credit or foreign office guarantee as a remedy. Credit risk arises from the possibility that the customer may not be able to repay the Corporation for standby letters of credit or foreign office guarantees. At December 31, 1996 and 1995, standby letters of credit and foreign office guarantees had been issued for the following purposes. STANDBY LETTERS OF CREDIT AND FOREIGN OFFICE GUARANTEES [Download Table] 1996 1995 DECEMBER 31 (IN MILLIONS) ------ ------ Financial Tax-exempt obligations.......................................... $2,921 $2,407 Insurance-related............................................... 804 849 Other financial................................................. 2,785 3,031 Performance....................................................... 996 616 ------ ------ Total*........................................................ $7,506 $6,903 ====== ====== -------- *Includes $818 million and $833 million participated to other institutions at December 31, 1996, and December 31, 1995, respectively. At December 31, 1996, $5.531 billion of standby letters of credit was due to expire within three years and $1.975 billion was to expire after three years. (E) DERIVATIVE FINANCIAL INSTRUMENTS The Corporation enters into a variety of derivative financial instruments in its trading, asset and liability management, and corporate investment activities. These instruments offer customers protection from rising or 64
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falling interest rates, exchange rates, commodity prices and equity prices. They can either reduce or increase the Corporation's exposure to such changing rates or prices. Following is a brief description of such derivative financial instruments. . Interest rate forward and futures contracts represent commitments to either purchase or sell a financial instrument at a specified future date for a specified price, and may be settled in cash or through delivery. . An interest rate swap is an agreement in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional principal amount with at least one stream based on a specified floating rate index. . Interest rate options are contracts that grant the purchaser, for a premium payment, the right to either purchase or sell a financial instrument at a specified price within a specified period of time or on a specified date from the writer of the option. . Interest rate caps and floors are contracts with notional principal amounts that require the seller, in exchange for a fee, to make payments to the purchaser if a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate on specified future dates. . Forward rate agreements are contracts with notional principal amounts that settle in cash at a specified future date based on the differential between a specified market interest rate and a fixed interest rate. . Foreign exchange contracts represent swap, spot, forward, futures and option contracts to exchange currencies. . Commodity price contracts represent swap, futures, cap, floor and option contracts that derive their value from underlying commodity prices. . Equity price contracts represent swap, forward, futures, cap, floor and option contracts that derive their value from underlying equity prices. The Corporation's objectives and strategies for using derivative financial instruments for structural interest rate risk management and foreign exchange risk management are discussed on pages 27 to 30. Balance sheet exposure for derivative financial instruments includes the amount of recognized gains in the market valuation of those contracts. Those amounts fluctuate as a function of maturity, interest rates, foreign exchange rates, commodity prices and equity prices. The credit risk associated with exchange-traded derivative financial instruments is limited to the relevant clearinghouse. Options written do not expose the Corporation to credit risk, except to the extent of the underlying risk in a financial instrument that the Corporation may be obligated to acquire under certain written put options. Caps and floors written do not expose the Corporation to credit risk. On some derivative financial instruments, the Corporation may have additional risk. This is due to the underlying risk in the financial instruments that the Corporation may be obligated to acquire, or the risk that the Corporation will deliver under a contract but the customer will fail to deliver the countervailing amount. The Corporation believes its credit and settlement procedures minimize these risks. Not all derivative financial instruments have off-balance-sheet market risk. Market risk associated with options purchased and caps and floors purchased is recorded in the balance sheet. The tables on page 35 report the Corporation's gross notional principal or contractual amounts of derivative financial instruments as of December 31, 1996, and December 31, 1995. These instruments include swaps, forwards, futures, options, caps, floors, forward rate agreements, and other conditional and exchange contracts. The amounts do not represent the market or credit risk associated with these contracts, as previously defined, but rather give an indication of the volume of the transactions. 65
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NOTE 16--CONCENTRATIONS OF CREDIT RISK The Corporation provides a wide range of financial services, including credit products, to consumers, middle market businesses and large corporate customers. Credit policies and processes emphasize diversification of risk among industries, geographic areas and borrowers. The only significant domestic credit concentrations for the Corporation were consumer, commercial real estate and the U.S. government. Information on the Corporation's consumer and commercial real estate loans is presented in Note 7, on page 52, and information on unused consumer and commercial real estate commitments is presented in Note 15, beginning on page 63. U.S. government risk arises primarily from the holding of government securities and short-term credits collateralized by such securities. Information on foreign outstandings is presented in the "Foreign Outstandings" table on page 77. In addition to these foreign outstandings, the Corporation's credit risk from derivative financial instruments and other off- balance-sheet commitments to banks in Japan was approximately $2.0 billion and $2.9 billion at December 31, 1996, and December 31, 1995, respectively. NOTE 17--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation is required to disclose the estimated fair value of its financial instruments in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." These disclosures do not attempt to estimate or represent an estimate of the Corporation's fair value as a whole. The Corporation does not plan to dispose of, either through sale or settlement, the majority of its financial instruments at these estimated fair values. Certain limitations are inherent in the methodologies used to estimate fair value. As a result, disclosed fair values may not be the amount realized in a current transaction between willing parties. Specifically, the fair values disclosed represent point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors. Further, quoted market prices may not be realized because the financial instrument may be traded in a market that lacks liquidity; or a fair value derived using a discounted cash flow approach may not be the amount realized because of the subjectivity involved in selecting underlying assumptions, such as projecting cash flows or selecting a discount rate. The fair value amount also may not be realized because it ignores transaction costs and does not include potential tax effects. Additionally, estimated fair values of certain financial instruments ignore intangible value associated with the financial instruments; for example, significant unrecognized value exists that is attributable to the Corporation's credit card relationships and core deposits. 66
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The following table summarizes the carrying values and estimated fair values of financial instruments as of December 31, 1996 and 1995. [Download Table] 1996 1995 -------------------- -------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE (IN MILLIONS) -------- ---------- -------- ---------- Financial assets Cash and other short-term financial instruments (a)..................... $17,494 $17,494 $29,236 $29,236 Trading assets (a)................... 4,812 4,812 8,150 8,150 Investment securities (a)............ 7,178 7,178 9,449 9,449 Loans (b)............................ 66,414 65,023 64,434 64,208 Allowance for credit losses.......... (1,407) -- (1,338) -- ------- ------- ------- ------- Loans, net........................... 65,007 65,023 63,096 64,208 Derivative product assets Trading purposes (1)(a)............ 4,895 4,895 6,644 6,644 Other than trading purposes (e).... 79 162 69 217 ------- ------- ------- ------- Total derivative product assets.. 4,974 5,057 6,713 6,861 Other financial instruments (a)...... 1,655 1,655 1,666 1,666 Financial liabilities Deposits (a)(c)...................... $63,669 $63,747 $69,106 $69,168 Securities sold but not yet purchased (a)................................. 1,236 1,236 1,765 1,765 Other short-term financial instruments (a)..................... 14,772 14,772 24,477 24,477 Long-term debt (a)(d)................ 8,454 8,570 8,163 8,504 Derivative product liabilities Trading purposes (1)(a)............ 4,716 4,716 6,681 6,681 Other than trading purposes (e).... 37 66 42 55 ------- ------- ------- ------- Total derivative product liabilities..................... 4,753 4,782 6,723 6,736 -------- (1) The estimated average fair values of derivative financial instruments used in trading activities during 1996 were $5.4 billion classified as assets and $5.4 billion classified as liabilities. Estimated fair values are determined as follows: (A) FINANCIAL INSTRUMENTS WHERE CARRYING VALUE APPROXIMATES FAIR VALUE A financial instrument's carrying value approximates its fair value when the financial instrument has an immediate or short-term maturity (generally one year or less), or is carried at fair value. Additionally, the carrying value of financial instruments that reprice frequently, such as floating rate debt, represents fair value. The estimated fair values of debt investment securities, trading securities and securities sold but not yet purchased were generally based on quoted market prices or dealer quotes. See Note 1, beginning on page 45, and Note 6, beginning on page 50, for information on methods for estimating the fair value of equity investment securities. The estimated fair value of commercial real estate loans held for accelerated disposition was based on their estimated liquidation value. The estimated fair value of derivative product assets and liabilities was based on quoted market prices or pricing and valuation models on a present-value basis using current market information. The majority of commitments to extend credit and letters of credit would result in loans with a market rate of interest if funded. The fair value of these commitments are the fees that would be charged customers to enter into similar agreements with comparable pricing and maturity. The recorded book value of deferred fee income approximates the fair value. 67
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(B) LOANS The discounted cash flow method was used to estimate the fair value of certain commercial and consumer installment loans. Discount rates used represent current lending rates for new loans with similar characteristics. The fair value of floating rate loans is equal to their carrying value. The estimated fair value of consumer mortgage loans was based on committed sales prices and a valuation model using current market information. (C) DEPOSITS The fair value of demand and savings deposits with no defined maturity is the amount payable on demand at the report date. The fair value of fixed-rate time deposits is estimated by discounting the future cash flows to be paid, using the current rates at which similar deposits with similar remaining maturities would be issued. (D) LONG-TERM DEBT Quoted market prices or the discounted cash flow method was used to estimate the fair value of the Corporation's fixed-rate long-term debt. Discounting was based on the contractual cash flows and the current rates at which debt with similar terms could be issued. (E) DERIVATIVE PRODUCT ASSETS AND LIABILITIES--OTHER THAN TRADING PURPOSES The estimated fair values of derivative product assets and liabilities used for risk management purposes were based on quoted market prices or pricing and valuation models on a present-value basis using current market information. NOTE 18--CONTINGENCIES The Corporation and certain of its subsidiaries are defendants in various lawsuits, including certain class actions, arising out of the normal course of business, and the Corporation has received certain tax deficiency assessments. Since the Corporation and certain of its subsidiaries, which are regulated by one or more federal and state regulatory authorities, are the subject of numerous examinations and reviews by such authorities, the Corporation is and will, from time to time, normally be engaged in various disagreements with regulators, related primarily to banking matters. In the opinion of management and the Corporation's general counsel, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements. 68
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NOTE 19--FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEET [Download Table] 1996 1995 DECEMBER 31 (IN MILLIONS) ------- ------- ASSETS Cash and due from banks--bank subsidiaries...................... $ 3 $ 24 Interest-bearing due from banks Bank subsidiaries............................................. 1,138 313 Other......................................................... 249 500 Resale agreement with bank subsidiary........................... -- 3 Trading assets.................................................. 67 74 Investment securities--available-for-sale....................... 46 43 Loans and receivables--subsidiaries Bank subsidiaries............................................. 2,044 1,789 Nonbank subsidiaries.......................................... 989 1,072 Investment in subsidiaries Bank subsidiaries............................................. 9,054 8,701 Nonbank subsidiaries.......................................... 1,229 1,051 Other assets.................................................... 76 127 ------- ------- Total assets................................................ $14,895 $13,697 ======= ======= LIABILITIES Short-term borrowings Nonbank subsidiaries.......................................... $ 76 $ 139 Other......................................................... 224 288 Long-term debt Nonbank subsidiaries.......................................... 771 -- Other......................................................... 4,463 4,439 Other liabilities............................................... 354 381 ------- ------- Total liabilities........................................... 5,888 5,247 STOCKHOLDERS' EQUITY............................................ 9,007 8,450 ------- ------- Total liabilities and stockholders' equity.................. $14,895 $13,697 ======= ======= 69
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FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED INCOME STATEMENT [Download Table] 1996 1995 1994 FOR THE YEAR (IN MILLIONS) ------ ------ ------ OPERATING INCOME Dividends Bank subsidiaries...................................... $ 957 $ 686 $ 575 Nonbank subsidiaries................................... 94 114 111 Interest income Bank subsidiaries...................................... 159 163 139 Nonbank subsidiaries................................... 53 67 62 Other.................................................. 37 48 29 Other income Bank subsidiaries...................................... -- 8 9 Nonbank subsidiaries................................... -- 1 1 Other.................................................. 5 -- 26 ------ ------ ------ Total................................................ 1,305 1,087 952 OPERATING EXPENSE Interest expense Nonbank subsidiaries................................... 11 4 1 Other.................................................. 345 367 298 Merger-related charges................................... -- 69 -- Other expense............................................ 39 39 31 ------ ------ ------ Total................................................ 395 479 330 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES............................. 910 608 622 Applicable income taxes (benefit)........................ (62) (59) (26) INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES............................................ 972 667 648 Equity in undistributed net income of subsidiaries Bank subsidiaries...................................... 322 418 552 Nonbank subsidiaries................................... 142 65 21 ------ ------ ------ NET INCOME............................................... $1,436 $1,150 $1,221 ====== ====== ====== The Parent Company Only Statement of Stockholders' Equity is the same as the Consolidated Statement of Stockholders' Equity (see page 43). 70
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FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS [Download Table] 1996 1995 1994 FOR THE YEAR (IN MILLIONS) ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................... $ 1,436 $ 1,150 $ 1,221 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries............... (1,515) (1,282) (1,259) Dividends received from subsidiaries............... 1,036 800 677 Depreciation and amortization...................... 7 8 9 Merger-related charges............................. -- 45 -- Net (increase) in trading assets................... -- (74) -- Net (increase) decrease in accrued income receivable........................................ 4 (2) (2) Net increase (decrease) in accrued expenses payable........................................... 2 (7) (5) Other noncash adjustments.......................... (15) (88) 46 ------- ------- ------- Total adjustments.................................. (481) (600) (534) ------- ------- ------- Net cash provided by operating activities............ 955 550 687 CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans to subsidiaries..... (176) 35 66 Net decrease in resale agreements with bank subsidiary.......................................... 3 39 179 Net (increase) decrease in capital investments in subsidiaries........................................ (46) 101 (141) Purchase of investment securities--available-for- sale................................................ (143) (71) (225) Proceeds from maturities of investment securities-- available-for-sale.................................. 143 78 52 Proceeds from sales of investment securities-- available-for-sale.................................. 7 48 107 Purchases of premises and equipment.................. -- (1) -- Sales of premises and equipment...................... -- 51 -- Other, net........................................... 9 -- -- ------- ------- ------- Net cash provided by (used in) investing activities.. (203) 280 38 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings..... (131) 155 (80) Proceeds from issuance of long-term debt............. 1,297 772 935 Redemption and repayment of long-term debt........... (492) (335) (640) Net (decrease) in other liabilities.................. (32) (86) (29) Dividends paid....................................... (488) (447) (397) Proceeds from issuance of common and treasury stock.. 59 23 52 Purchase of treasury stock........................... (412) (513) (397) Payment for redemption of preferred stock............ -- (121) (150) ------- ------- ------- Net cash (used in) financing activities.............. (199) (552) (706) NET INCREASE IN CASH AND CASH EQUIVALENTS............ 553 278 19 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 837 559 540 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 1,390 $ 837 $ 559 ======= ======= ======= OTHER CASH FLOW DISCLOSURES Interest paid...................................... $ 351 $ 364 $ 322 Income tax payment (receipt)....................... (56) (53) 6 71
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Dividends that may be paid by national bank subsidiaries are subject to two statutory limitations. Under the first, dividends cannot exceed the level of undivided profits. In addition, a bank cannot declare a dividend, without regulatory approval, in an amount in excess of its net income for the current year combined with the retained net profits for the preceding two years. State bank subsidiaries may also be subject to limitations on dividend payments. Based on these statutory requirements, the Principal Banks could, in the aggregate, have declared additional dividends of up to approximately $0.9 billion without regulatory approval at January 1, 1997. The payment of dividends by any bank may also be affected by other factors, such as the maintenance of adequate capital. As of December 31, 1996, all of the Principal Banks significantly exceeded the regulatory guidelines for "well-capitalized" status. The Principal Banks are subject to various regulatory capital requirements that require them to maintain minimum ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Refer to the "Capital Management" section, beginning on page 37, for the Principal Banks' capital ratios as well as the minimum capital ratios required by regulation. Failure to meet minimum capital requirements results in certain actions by bank regulators that could have a direct material effect on the Principal Banks' financial statements. As of December 31, 1996, management believes that each of the Principal Banks meets all capital adequacy requirements to which it is subject and is correctly categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that categorization that management believes have changed the institution's category. Federal banking law also restricts each bank subsidiary from extending credit to the Corporation in excess of 10% of the subsidiary's capital stock and surplus, as defined. Any such extensions of credit are subject to strict collateral requirements. In connection with issuances of commercial paper, the Corporation has agreements providing future credit availability (back-up lines of credit) with various nonaffiliated banks. The agreements aggregated $300 million at December 31, 1996. The commitment fees paid under each agreement range between .07% and .09%. The back-up lines of credit, together with overnight money market loans, short-term investments and other sources of liquid assets, exceeded the amount of commercial paper issued at December 31, 1996. 72
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REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES To the Stockholders of First Chicago NBD Corporation: FINANCIAL STATEMENTS The Management of First Chicago NBD Corporation and its subsidiaries is responsible for the preparation, integrity and objectivity of the financial statements and footnotes contained in this Form 10-K. The financial statements have been prepared in accordance with generally accepted accounting principles and are free from material fraud or error. The other financial information in this Form 10-K is consistent with the financial statements. Where financial information must of necessity be based upon estimates and judgments, they represent the best estimates and judgments of Management. The Corporation's financial statements have been audited by Arthur Andersen LLP, independent public accountants, whose appointment is ratified by the stockholders. The independent public accountants' responsibility is to express an opinion on the Corporation's financial statements. As described further in the report that follows, their opinion is based on their audit, which was conducted in accordance with generally accepted auditing standards and is believed by them to provide a reasonable basis for their opinion. Management has made available to Arthur Andersen LLP all of the Corporation's financial records and related data. Furthermore, Management believes that all representations made to Arthur Andersen LLP during their audit were valid and appropriate. INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING Management is also responsible for establishing and maintaining the Corporation's internal control structure that provides reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements. Management continually monitors the internal control structure for compliance with established policies and procedures. The Corporation maintains a strong internal auditing program that independently assesses the effectiveness of the internal control structure. The Audit Committee of the Board of Directors, composed entirely of outside Directors, oversees the Corporation's financial reporting process on behalf of the Board of Directors and has responsibility for recommending the independent public accountants for the Corporation who are appointed by the Board of Directors. The Audit Committee reviews with the independent public accountants the scope of their audit and audit reports and meets with them on a scheduled basis to review their findings and any action to be taken thereon. In addition, the Audit Committee meets with the internal auditors and with Management to review the scope and findings of the internal audit program and any actions to be taken by Management. The independent public accountants and the internal auditors meet periodically with the Audit Committee without Management being present. Management also recognizes its responsibility for fostering a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized by and reflected in the Corporation's integrity policies, which address, among other things, the necessity of ensuring open communication within the Corporation; potential conflicts of interest; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. The Corporation maintains a systematic program to assess compliance with these policies. There are inherent limitations in the effectiveness of any internal control structure, including the possibility of human error or the circumvention or overriding of controls. Accordingly, even an effective internal control structure can provide only reasonable assurance with respect to reliability of financial statements and safeguarding of assets. Furthermore, because of changes in conditions, internal control structure effectiveness may vary over time. 73
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The Corporation assessed its internal control structure over financial reporting as of December 31, 1996, in relation to the criteria described in the "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Corporation believes that as of December 31, 1996, in all material respects, the Corporation maintained an effective internal control structure over financial reporting. /s/ Verne G. Istock Chicago, Illinois Verne G. Istock January 15, 1997 Chairman, President and Chief Executive Officer /s/ Robert A. Rosholt Robert A. Rosholt Executive Vice President and Chief Financial Officer 74
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of First Chicago NBD Corporation: We have audited the accompanying consolidated balance sheet of First Chicago NBD Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of First Chicago NBD Corporation's management. Our responsibility is to express an opinion of these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Chicago NBD Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Chicago, Illinois, January 15, 1997 /s/ Arthur Andersen LLP 75
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SELECTED STATISTICAL INFORMATION FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES [Download Table] 1996 1995 1994 DECEMBER 31 (IN MILLIONS) ------ ------ ------- Debt securities U.S. government and federal agency Held-to-maturity...................................... $ -- $ -- $ 6,469 Available-for-sale.................................... 4,598 6,840 4,910 ------ ------ ------- Total............................................... 4,598 6,840 11,379 States and political subdivisions Held-to-maturity...................................... -- -- 1,591 Available-for-sale.................................... 1,208 1,462 76 ------ ------ ------- Total............................................... 1,208 1,462 1,667 Other bonds, notes and debentures Held-to-maturity...................................... -- -- 5 Available-for-sale.................................... 259 94 276 ------ ------ ------- Total............................................... 259 94 281 ------ ------ ------- Total debt securities............................... 6,065 8,396 13,327 Equity securities (1)..................................... 1,113 1,053 1,688 ------ ------ ------- Total............................................... $7,178 $9,449 $15,015 ====== ====== ======= -------- (1) Includes Federal Reserve stock. MATURITY OF DEBT INVESTMENT SECURITIES As of December 31, 1996, debt investment securities had the following maturity and yield characteristics. [Download Table] BOOK VALUE YIELD (DOLLARS IN MILLIONS) ------ ----- U.S. government and federal agency Within one year................................................... $1,065 5.75% After one but within five years................................... 2,633 6.58 After five but within ten years................................... 835 6.90 After ten years................................................... 65 7.58 ------ ----- $4,598 6.46% ====== ===== States and political subdivisions* Within one year................................................... $ 222 10.52% After one but within five years................................... 543 10.11 After five but within ten years................................... 240 8.75 After ten years................................................... 203 8.96 ------ ----- $1,208 9.73% ====== ===== Other bonds, notes and debentures Within one year................................................... $ 26 4.90% After one but within five years................................... 223 6.16 After five but within ten years................................... 4 6.97 After ten years................................................... 6 7.36 ------ ----- $ 259 6.07% ====== ===== -------- *Yields for obligations of states and political subdivisions are calculated on a tax-equivalent basis using a tax rate of 35%. 76
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SECURITIZATION OF CREDIT CARD RECEIVABLES Since 1987, the Corporation has actively packaged and sold credit card assets as securities to investors. The securitization of credit card receivables is an effective balance sheet management tool since capital is freed for other uses. In addition, while such securitizations affect net interest income, the provision for credit losses and noninterest income, net income is essentially unaffected. Credit Card continues to service credit card accounts even after receivables are securitized. Net interest income and certain fee revenue on the securitized portfolio are not recognized; however, these are offset by servicing fees as well as by lower provisions for credit losses. At year-end 1996, $8.9 billion in credit card receivables was securitized, compared with $7.9 billion at year-end 1995. For analytical purposes only, the following table shows income statement line items adjusted for the net impact of securitization of credit card receivables. [Enlarge/Download Table] 1996 1995 --------------------------------- --------------------------------- CREDIT CARD CREDIT CARD REPORTED SECURITIZATIONS ADJUSTED REPORTED SECURITIZATIONS ADJUSTED (IN MILLIONS) -------- --------------- -------- -------- --------------- -------- Net interest income-- tax-equivalent basis... $ 3,722 $ 667 $ 4,389 $ 3,311 $ 658 $ 3,969 Provision for credit losses................. 735 447 1,182 510 336 846 Noninterest income...... 2,548 (220) 2,328 2,591 (322) 2,269 Noninterest expense..... 3,271 -- 3,271 3,535 -- 3,535 Net income.............. 1,436 -- 1,436 1,150 -- 1,150 Assets--year-end........ 104,619 8,888 113,507 122,002 7,877 129,879 --average............... 112,565 7,672 120,237 122,370 7,179 129,549 FOREIGN OUTSTANDINGS The Corporation's cross-border outstandings consist of loans (including accrued interest), acceptances, interest-bearing deposits with other banks, equity investments, other interest-bearing investments and other nonlocal currency monetary assets. The table below presents a breakout of cross-border outstandings for each of the past three year-ends where such outstandings exceeded 1.0% of total assets. [Download Table] BANKS AND GOVERNMENT OTHER COMMERCIAL (IN MILLIONS) AND OFFICIAL FINANCIAL AND COUNTRY DECEMBER 31 INSTITUTIONS INSTITUTIONS INDUSTRIAL OTHER TOTAL ------------- ----------- ------------ ------------ ---------- ----- ------ Japan............ 1996 $ -- $3,677 $ 59 $-- $3,736 1995 -- 6,140 169 20 6,329 1994 -- 4,724 156 30 4,910 Korea............ 1996 $ -- $ 676 $544 $20 $1,240 1995 * * * * * 1994 * * * * * United Kingdom... 1996 $ * $ * $ * $ * $ * 1995 360 671 292 45 1,368 1994 * * * * * France........... 1996 $ * $ * $ * $ * $ * 1995 162 1,077 25 -- 1,264 1994 * * * * * -------- *Outstandings were less than 1% of total assets. 77
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At December 31, 1996, the only country for which cross-border outstandings totaled between 0.75% and 1.0% of total assets was the United Kingdom; such outstandings totaled $940 million. At December 31, 1995, the only country for which cross-border outstandings totaled between 0.75% and 1.0% of total assets was Korea; such outstandings totaled $1.023 billion. At December 31, 1994, the only countries for which cross-border outstandings totaled between 0.75% and 1.0% of total assets were the United Kingdom and Korea; such outstandings totaled $1.921 billion. MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS The following table shows a distribution of the maturity of loans and, for those loans due after one year, a breakdown between those loans that have floating interest rates and those that have predetermined interest rates. The amounts exclude domestic consumer loans and domestic lease financing receivables. [Download Table] ONE YEAR ONE TO OVER DECEMBER 31, 1996 OR LESS FIVE YEARS FIVE YEARS TOTAL (IN MILLIONS) -------- ---------- ---------- ------- Domestic Commercial............................ $15,323 $ 9,977 $2,418 $27,718 Real estate........................... 1,875 2,900 1,385 6,160 ------- ------- ------ ------- Total domestic...................... 17,198 12,877 3,803 33,878 Foreign................................. 2,557 755 344 3,656 ------- ------- ------ ------- Total............................... $19,755 $13,632 $4,147 $37,534 ======= ======= ====== ======= Loans with floating interest rates...... $ 9,332 $2,912 $12,244 Loans with predetermined interest rates. 4,300 1,235 5,535 ------- ------ ------- Total............................... $13,632 $4,147 $17,779 ======= ====== ======= NONPERFORMING LOANS The following table shows a breakout of nonperforming loans for the past five years. [Download Table] 1996 1995 1994 1993 1992 DECEMBER 31 (DOLLARS IN MILLIONS) ---- ---- ---- ---- ---- Nonaccrual loans.................................. $262 $344 $267 $478 $712 Accrual renegotiated loans........................ -- 19 27 7 5 ---- ---- ---- ---- ---- Total nonperforming loans..................... $262 $363 $294 $485 $717 ==== ==== ==== ==== ==== Nonperforming loans Domestic........................................ $257 $360 $284 $421 $589 Foreign......................................... 5 3 10 64 128 ---- ---- ---- ---- ---- Total nonperforming loans..................... $262 $363 $294 $485 $717 ==== ==== ==== ==== ==== Nonperforming loans/loans outstanding............. 0.4% 0.6% 0.5% 1.0% 1.5% LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING INTEREST The amounts above exclude those domestic loans that were 90 days or more past due and still accruing interest. Such loans totaled $268 million, $197 million, $150 million, $121 million and $122 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. 78
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ALLOCATED ALLOWANCE FOR CREDIT LOSSES While the allowance for credit losses is available to absorb credit losses in the entire portfolio, the tables below present an estimate of the allowance for credit losses allocated by loan type and the percentage of loans in each category to total loans. [Download Table] 1996 1995 1994 1993 DECEMBER 31 (DOLLARS IN MILLIONS) ------ ------ ------ ------ Commercial Domestic...................................... $ 927 $ 929 $ 848 $ 789 Foreign....................................... 66 57 59 81 Consumer Credit card................................... 355 303 215 201 Other......................................... 59 49 36 35 ------ ------ ------ ------ Total....................................... $1,407 $1,338 $1,158 $1,106 ====== ====== ====== ====== Percentage of loans to total loans Commercial Domestic...................................... 54% 53% 56% 56% Foreign....................................... 6 6 6 6 Consumer Credit card................................... 14 15 13 13 Other......................................... 26 26 25 25 ------ ------ ------ ------ Total....................................... 100% 100% 100% 100% ====== ====== ====== ====== Allocation for potential losses not specifically identified is included in the commercial segment. Allocation information is not available for 1992. DEPOSITS The following tables show a maturity distribution of domestic time certificates of deposit of $100,000 and over, other domestic time deposits of $100,000 and over, and deposits in foreign offices, predominantly in amounts in excess of $100,000, at December 31, 1996. DOMESTIC TIME CERTIFICATES OF DEPOSIT OF $100,000 AND OVER [Download Table] AMOUNT PERCENT (DOLLARS IN MILLIONS) ------ ------- Three months or less............................................. $2,436 61% Over three months to six months.................................. 506 13 Over six months to twelve months................................. 400 10 Over twelve months............................................... 620 16 ------ --- Total........................................................ $3,962 100% ====== === DOMESTIC OTHER TIME DEPOSITS OF $100,000 AND OVER [Download Table] AMOUNT PERCENT (DOLLARS IN MILLIONS) ------ ------- Three months or less............................................. $ 618 52% Over three months to six months.................................. 215 18 Over six months to twelve months................................. 143 12 Over twelve months............................................... 205 18 ------ --- Total........................................................ $1,181 100% ====== === 79
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FOREIGN OFFICES [Download Table] AMOUNT PERCENT (DOLLARS IN MILLIONS) ------- ------- Three months or less............................................ $10,987 98% Over three months to six months................................. 156 1 Over six months to twelve months................................ 105 1 Over twelve months.............................................. 3 -- ------- --- Total....................................................... $11,251 100% ======= === SHORT-TERM BORROWINGS Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings for each of the three years ended December 31: [Download Table] 1996 1995 1994 (DOLLARS IN MILLIONS) ------- ------- ------- Federal funds purchased Outstanding at year-end............................ $ 3,938 $ 3,447 $ 2,562 Weighted average rate at year-end.................. 5.58% 5.49% 5.72% Daily average outstanding for the year............. $ 3,025 $ 3,505 $ 2,846 Weighted average rate for the year................. 5.68% 6.24% 4.48% Highest outstanding at any month-end............... $ 3,938 $ 4,824 $ 3,087 Securities under repurchase agreements Outstanding at year-end............................ $ 3,921 $12,264 $14,357 Weighted average rate at year-end.................. 5.78% 5.79% 4.65% Daily average outstanding for the year............. $ 9,699 $16,536 $13,519 Weighted average rate for the year................. 5.15% 5.88% 4.27% Highest outstanding at any month-end............... $15,459 $20,439 $17,977 Bank notes Outstanding at year-end............................ $ 4,346 $ 7,027 $ 6,070 Weighted average rate at year-end.................. 5.60% 5.93% 5.72% Daily average outstanding for the year............. $ 7,359 $ 5,731 $ 5,181 Weighted average rate for the year................. 5.62% 5.96% 4.71% Highest outstanding at any month-end............... $ 9,102 $ 7,027 $ 6,537 Other short-term borrowings Outstanding at year-end............................ $ 3,226 $ 2,775 $ 2,352 Weighted average rate at year-end.................. 5.51% 5.45% 4.51% Daily average outstanding for the year............. $ 3,250 $ 3,436 $ 3,448 Weighted average rate for the year................. 4.27% 5.72% 3.88% Highest outstanding at any month-end............... $ 4,839 $ 4,212 $ 4,722 Total short-term borrowings Outstanding at year-end............................ $15,431 $25,513 $25,341 Weighted average rate at year-end.................. 5.62% 5.75% 5.00% Daily average outstanding for the year............. $23,333 $29,208 $24,994 Weighted average rate for the year................. 5.24% 5.92% 4.33% [Download Table] 1996 1995 1994 1993 1992 COMMON STOCK AND STOCKHOLDER DATA* ------- ------- ------- ------- ------- Market price High for the year.................... $58 7/8 $42 1/2 $33 $36 3/8 $33 1/8 Low for the year..................... 34 3/4 27 3/8 26 3/4 28 5/8 26 3/4 At year-end.......................... 53 3/4 39 1/2 27 3/8 29 3/4 32 3/4 Book value (at year-end)............... 27.31 25.25 22.60 21.25 18.27 Dividend payout ratio.................. 34% 39% 34% 28% 89% -------- * There were 39,438 common stockholders of record as of December 31, 1996. 80
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[Download Table] 1996 1995 1994 1993 1992 FINANCIAL RATIOS ---- ---- ---- ---- ---- Net income as a percentage of: Average stockholders' equity.................. 16.4% 13.8% 15.8% 18.5% 6.4% Average common stockholders' equity........... 17.0 14.3 16.6 19.9 6.3 Average total assets.......................... 1.28 0.94 1.13 1.33 0.42 Average earning assets........................ 1.48 1.09 1.32 1.52 0.48 Stockholders' equity at year-end as a percentage of: Total assets at year-end...................... 8.6 6.9 6.9 8.1 7.0 Total loans at year-end....................... 13.6 13.1 14.2 15.4 13.2 Total deposits at year-end.................... 14.2 12.2 12.0 12.9 10.4 Average stockholders' equity as a percentage of: Average assets................................ 7.8 6.8 7.2 7.2 6.5 Average loans................................. 13.5 14.1 15.4 14.8 12.6 Average deposits.............................. 13.6 12.4 12.8 11.7 9.9 Income to fixed charges: Excluding interest on deposits................ 2.2X 1.8x 2.2x 3.0x 1.3x Including interest on deposits................ 1.5X 1.4x 1.6x 1.8x 1.1x QUARTERLY DIVIDENDS AND MARKET PRICE SUMMARY [Download Table] STOCK MARKET DIVIDENDS PRICE RANGE (1) DECLARED --------------- PER SHARE LOW HIGH --------- ------- ------- 1996 First quarter....................................... $0.36 $34 3/4 $44 1/4 Second quarter...................................... 0.36 38 5/8 45 1/2 Third quarter....................................... 0.36 36 5/8 45 1/4 Fourth quarter...................................... 0.40 45 58 7/8 ----- Year.............................................. $1.48 34 3/4 58 7/8 ===== 1995 First quarter....................................... $0.33 $27 3/8 $32 7/8 Second quarter...................................... 0.33 30 1/8 33 1/4 Third quarter....................................... 0.33 31 1/2 39 1/4 Fourth quarter...................................... 0.36 36 1/2 42 1/2 ----- Year.............................................. $1.35 27 3/8 42 1/2 ===== -------- (1) The principal market for the Corporation's common stock is the New York Stock Exchange (the "NYSE"). In addition to the NYSE, the Corporation's common stock is listed on the Chicago Stock Exchange and the Pacific Stock Exchange. 81
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CONSOLIDATED SUMMARY OF QUARTERLY FINANCIAL INFORMATION [Download Table] 1996 (IN MILLIONS, EXCEPT PER SHARE DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 DATA) ----------- ------------ ------- -------- Interest income..................... $1,747 $1,908 $1,922 $1,992 Net interest income................. 883 942 910 885 Provision for credit losses......... 190 185 185 175 Noninterest income.................. 682 597 643 626 Noninterest expense................. 813 816 814 828 Net income.......................... 377 358 361 340 Earnings per share Primary........................... $1.15 $1.09 $1.10 $1.04 Fully diluted..................... 1.14 1.08 1.09 1.03 1995 (IN MILLIONS, EXCEPT PER SHARE DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 DATA) ----------- ------------ ------- -------- Interest income..................... $2,066 $2,054 $2,011 $1,959 Net interest income................. 834 796 784 794 Provision for credit losses......... 210 125 90 85 Noninterest income.................. 655 702 631 603 Noninterest expense................. 1,088 827 821 799 Net income.......................... 126 357 331 336 Earnings per share Primary........................... $0.37 $1.07 $0.99 $1.01 Fully diluted..................... 0.37 1.06 0.98 0.99 82
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AVERAGE BALANCES/NET INTEREST MARGIN/RATES FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES [Download Table] 1996 1995 YEAR ENDED DECEMBER 31 -------------------------- -------------------------- (INCOME AND RATES ON TAX- AVERAGE AVERAGE AVERAGE AVERAGE EQUIVALENT BASIS) BALANCE INTEREST RATE BALANCE INTEREST RATE (DOLLARS IN MILLIONS) -------- -------- ------- -------- -------- ------- ASSETS Interest-bearing due from banks (1)................ $ 7,995 $ 463 5.79% $ 10,011 $ 620 6.19% Federal funds sold and securities under resale agreements............... 9,597 510 5.31 15,701 922 5.87 Trading assets............ 6,990 397 5.68 7,300 469 6.42 Investment securities (2) U.S. government and federal agency.......... 5,165 343 6.64 10,023 681 6.79 States and political subdivisions............ 1,319 118 8.95 1,546 141 9.12 Other.................... 1,259 72 5.72 1,781 71 3.99 -------- ------ ---- -------- ------ ---- Total investment securities............ 7,743 533 6.88 13,350 893 6.69 Loans (3)(4) Domestic offices......... 61,441 5,532 9.12 55,530 5,043 9.21 Foreign offices.......... 3,508 236 6.73 3,414 246 7.21 -------- ------ ---- -------- ------ ---- Total loans............ 64,949 5,768 8.99 58,944 5,289 9.09 -------- ------ ---- -------- ------ ---- Total earning assets (5)................... 97,274 7,671 7.89 105,306 8,193 7.78 Cash and due from banks... 6,248 6,328 Allowance for credit losses................... (1,396) (1,198) Other assets.............. 10,439 11,934 -------- -------- Total assets........... $112,565 $122,370 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits--interest-bearing Savings.................. $ 10,940 $ 244 2.23% $ 11,716 $ 298 2.54% Money market............. 9,904 364 3.68 8,942 369 4.13 Time..................... 16,008 880 5.50 17,346 1,008 5.81 Foreign offices (6)...... 13,452 687 5.11 15,821 906 5.73 -------- ------ ---- -------- ------ ---- Total deposits-- interest-bearing...... 50,304 2,175 4.32 53,825 2,581 4.80 Federal funds purchased and securities under repurchase agreements.... 12,724 671 5.27 20,041 1,192 5.95 Other short-term borrowings............... 10,609 552 5.20 9,167 538 5.87 Long-term debt............ 8,173 551 6.74 7,941 571 7.19 -------- ------ ---- -------- ------ ---- Total interest-bearing liabilities........... 81,810 3,949 4.83 90,974 4,882 5.37 Demand deposits........... 13,724 13,254 Other liabilities......... 8,295 9,807 Preferred stock........... 483 570 Common stockholders' equity................... 8,253 7,765 -------- -------- Total liabilities and stockholders' equity.. $112,565 $122,370 ======== ======== Interest income/earning assets (5)............... $7,671 7.89% $8,193 7.78% Interest expense/earning assets................... 3,949 4.06 4,882 4.64 ------ ---- ------ ---- Net interest margin....... $3,722 3.83% $3,311 3.14% ====== ==== ====== ==== -------- (1) Principally balances in overseas offices. (2) The combined amounts for investment securities available-for-sale and held-to-maturity are based on their respective carrying values. Based on the amortized cost of investment securities available-for-sale, the combined average balance for 1996 and 1995 would be $7.597 billion and $13.428 billion, respectively, and the average earned rate in 1996 and 1995 would be 7.02% and 6.65%, respectively. (3) Average lease-financing receivables are reduced by related deferred tax liabilities in calculating the average rate. (4) Nonperforming loans are included in average balances used to determine rates. (5) Includes tax-equivalent adjustments based on federal income tax rate of 35% for 1996, 1995, 1994 and 1993, and 34% for 1992. (6) Includes International Banking Facilities' deposit balances in domestic offices and balances of Edge Act and overseas offices. 84
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[Download Table] 1994 1993 1992 ----------------------------------------------------- ------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- ------- -------- ------- ------- -------- ------- $ 8,497 $ 395 4.65% $ 8,098 $ 332 4.10% $ 8,136 $ 406 4.99% 14,340 624 4.35 11,740 350 2.98 8,356 291 3.48 4,927 286 5.80 4,876 229 4.70 4,556 270 5.93 11,093 698 6.29 8,973 585 6.52 8,084 613 7.58 1,649 146 8.85 1,757 151 8.59 2,009 179 8.91 1,990 48 2.41 2,054 57 2.78 2,552 95 3.72 -------- ------ ---- ------- ------ ---- ------- ------ ---- 14,732 892 6.05 12,784 793 6.20 12,645 887 7.01 47,208 3,832 8.24 44,262 3,441 7.88 45,514 3,678 8.17 2,894 194 6.70 3,131 211 6.74 3,727 293 7.86 -------- ------ ---- ------- ------ ---- ------- ------ ---- 50,102 4,026 8.15 47,393 3,652 7.80 49,241 3,971 8.15 -------- ------ ---- ------- ------ ---- ------- ------ ---- 92,598 6,223 6.72 84,891 5,356 6.31 82,934 5,825 7.02 6,553 6,171 5,425 (1,132) (1,062) (1,117) 9,827 6,642 6,968 -------- ------- ------- $107,846 $96,642 $94,210 ======== ======= ======= $ 11,815 $ 274 2.32% $11,100 $ 265 2.39% $ 9,732 $ 296 3.04% 9,280 261 2.81 10,163 247 2.43 10,211 311 3.05 13,650 570 4.18 14,204 543 3.82 18,665 910 4.88 12,347 548 4.44 10,944 417 3.81 11,972 566 4.73 -------- ------ ---- ------- ------ ---- ------- ------ ---- 47,092 1,653 3.51 46,411 1,472 3.17 50,580 2,083 4.12 16,365 704 4.30 13,245 404 3.05 13,419 469 3.50 8,629 378 4.38 7,374 253 3.43 3,896 159 4.08 6,755 445 6.59 4,817 334 6.93 4,025 310 7.70 -------- ------ ---- ------- ------ ---- ------- ------ ---- 78,841 3,180 4.03 71,847 2,463 3.43 71,920 3,021 4.20 13,377 13,078 11,620 7,898 4,730 4,505 686 794 581 7,044 6,193 5,584 -------- ------- ------- $107,846 $96,642 $94,210 ======== ======= ======= $6,223 6.72% $5,356 6.31% $5,825 7.02% 3,180 3.43 2,463 2.90 3,021 3.64 ------ ---- ------ ---- ------ ---- $3,043 3.29% $2,893 3.41% $2,804 3.38% ====== ==== ====== ==== ====== ==== 85
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ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table shows the approximate effect on net interest income of volume and rate changes for 1996 and 1995. For purposes of this table, changes that are not due solely to volume or rate changes are allocated to volume. [Download Table] 1996 OVER 1995 1995 OVER 1994 ------------------- ------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL YEAR ENDED DECEMBER 31 (IN MILLIONS) ------ ---- ----- ------ ---- ------ Increase (decrease) in Interest income Interest-bearing due from banks...... $(117) $(40) $(157) $ 94 $131 $ 225 Federal funds sold and securities under resale agreements............. (324) (88) (412) 80 218 298 Trading assets....................... (18) (54) (72) 152 31 183 Investment securities U.S. government and federal agency. (323) (15) (338) (73) 56 (17) States and political subdivisions.. (20) (3) (23) (9) 4 (5) Other.............................. (30) 31 1 (8) 31 23 Loans Domestic offices................... 532 (43) 489 756 455 1,211 Foreign offices.................... 6 (16) (10) 37 15 52 ----- ------ Total.............................. (522) 1,970 Increase (decrease) in Interest expense Deposits Savings............................ (17) (37) (54) (3) 27 24 Money market....................... 35 (40) (5) (14) 122 108 Time............................... (74) (54) (128) 215 223 438 Foreign offices.................... (121) (98) (219) 199 159 358 Federal funds purchased and securities under repurchase agreements.......................... (386) (135) (521) 219 269 488 Other short-term borrowings.......... 75 (61) 14 32 128 160 Long-term debt....................... 16 (36) (20) 85 41 126 ----- ------ Total.............................. (933) 1,702 ----- ------ Increase in net interest income...... $ 411 $ 268 ===== ====== ITEM 2. PROPERTIES The Corporation's headquarters are at One First National Plaza, Chicago, Illinois, a 60-story building located in the center of the Chicago "Loop" business district. The building is master-leased by FNBC and has approximately 1,850,000 square feet of rentable space, of which the Corporation occupies approximately 57% and the balance is subleased to others. The Corporation also owns a 23-story office building in Chicago's west Loop business district, to be used for future operations consolidation and expansion, and three buildings in Elgin, Illinois, used for FCCNB operations. In 1996, the Corporation purchased 23.2 acres of land in Springfield, Missouri, on which construction of a 150,000-square-foot FCCNB processing center has begun. NBD Michigan owns and occupies a 14-story, 540,000-square-foot main office building in Detroit's central financial and business district; a 14-story, 300,000-square-foot office building in Troy, Michigan, housing its retail support activities; and a 380,000-square-foot facility in Van Buren Township, near Detroit Metropolitan Airport, housing its data center and check processing operations. NBD Michigan also owns approximately 143 acres of land in Farmington Hills, Michigan, for possible future facility needs. In addition, NBD Michigan leases 86
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and occupies a 200,000-square-foot office center in Troy, Michigan, and NBD Indiana leases and occupies the majority of a 380,000-square-foot office building in Indianapolis, Indiana. At December 31, 1996, the Corporation and its subsidiaries occupied a total of 892 locations within the United States. The Corporation has foreign offices in: Adelaide, Melbourne and Sydney, Australia; Beijing; Buenos Aires; Frankfurt; Hong Kong; London; Mexico City; Seoul; Singapore; Taipei; Tokyo; and Toronto and Windsor, Canada. These offices all are located in leased premises. ITEM 3. LEGAL PROCEEDINGS The information required by this Item is set forth in Note 18 to the Consolidated Financial Statements, on page 68 of this Form 10-K, and is expressly incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Executive Officers of the Registrant [Enlarge/Download Table] PRESENT POSITION HELD WITH THE CORPORATION AND NAME AND AGE EFFECTIVE DATE FIRST ELECTED TO OFFICE INDICATED ------------ ------------------------------------------------ Verne G. Istock (56).... Director (10-1-85), Chairman of the Board (5-10-96), Chief Executive Officer (1-1-94) and President (12-1-95) Thomas H. Jeffs II (58). Director and Vice Chairman of the Board (10-1-85) Scott P. Marks, Jr. (51)................... Director and Vice Chairman of the Board (12-1-95) David J. Vitale (50).... Director and Vice Chairman of the Board (12-1-95) Frederick M. Adams, Jr. (52)................... Executive Vice President (6-15-92) John W. Ballantine (51). Executive Vice President (12-1-95) David P. Bolger (39).... Executive Vice President (10-11-96) William H. Elliott III (55)................... Executive Vice President (10-15-96) Sherman I. Goldberg Executive Vice President, General Counsel and Secretary (12-1- (54)................... 95) Philip S. Jones (54).... Executive Vice President (6-15-92) W.G. Jurgensen (45)..... Executive Vice President (12-1-95) Thomas J. McDowell (58). Executive Vice President (1-1-95) Timothy P. Moen (44).... Executive Vice President (12-1-95) Susan S. Moody (43)..... Executive Vice President (1-1-95) Andrew J. Paine, Jr. (59)................... Executive Vice President (10-15-92) Robert A. Rosholt (47).. Executive Vice President and Chief Financial Officer (12-1-95) Willard A. Valpey (53).. Executive Vice President (3-8-96) Excluding Mr. Elliott, each of the executive officers has served as an officer of the Corporation or a subsidiary, or their respective predecessors, for more than five years. Prior to joining the Corporation in 1996, Mr. Elliott held various executive positions with AT&T and its subsidiaries for more than five years. Executive officers of the Corporation serve until the annual meeting of the Board of Directors (May 9, 1997). PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is set forth in this Form 10-K in the "Common Stock and Stockholder Data" table on page 80 and the "Quarterly Dividends and Market Price Summary" table on page 81, and is expressly incorporated herein by reference. 87
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ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth in this Form 10-K in the "Selected Financial Data" table on page 13 and the "Financial Ratios" table on page 81, and is expressly incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is set forth on pages 13 to 40 of this Form 10-K, and is expressly incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is set forth in this Form 10-K in the "Selected Financial Data" table on page 13, the "Selected Statistical Information" table on page 30, the "Loan Composition" table on page 31, the Consolidated Financial Statements and the Notes thereto on pages 41 to 72, the "Report of Independent Public Accountants" on page 75 and the "Selected Statistical Information" section on pages 76 to 86, and is expressly incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information required by this Item has been previously reported in the Corporation's Current Report on Form 8-K dated September 18, 1995. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item pertaining to executive officers of the Corporation is set forth on page 87 of this Form 10-K under the heading "Executive Officers of the Registrant," and is expressly incorporated herein by reference. The information required by this Item pertaining to directors of the Corporation is set forth under the heading "Election of Directors" in the Corporation's definitive proxy statement dated March 28, 1997, and is expressly incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth under the headings "Compensation of Executive Officers," "Director Meeting Attendance and Fee Arrangements" and "Committees of the Board of Directors--Organization, Compensation and Nominating Committee--Committee Interlocks and Insider Participation" in the Corporation's definitive proxy statement dated March 28, 1997, and is expressly incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is set forth under the heading "Beneficial Ownership of the Corporation's Common Stock" in the Corporation's definitive proxy statement dated March 28, 1997, and is expressly incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth under the headings "Committees of the Board of Directors--Organization, Compensation and Nominating Committee--Committee Interlocks and Insider Participation" and "Transactions with Directors, Executive Officers, Stockholders and Associates" in the Corporation's definitive proxy statement dated March 28, 1997, and is expressly incorporated herein by reference. 88
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PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements: [Download Table] PAGE ---- Consolidated Balance Sheet--December 31, 1996 and 1995................. 41 Consolidated Income Statement--Three Years Ended December 31, 1996..... 42 Consolidated Statement of Stockholders' Equity--Three Years Ended December 31, 1996..................................................... 43 Consolidated Statement of Cash Flows--Three Years Ended December 31, 1996.................................................................. 44 Notes to Financial Statements.......................................... 45 (2) Financial Statement Schedules. All schedules normally required by Form 10-K are omitted since they either are not applicable or the required information is shown in the financial statements or the notes thereto. (3) Exhibits. [Download Table] 3(A). Restated Certificate of Incorporation of the Corporation, as amended [Exhibit 3(A) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 3(B). By-Laws of the Corporation, as amended. 4. Instruments defining the rights of security holders, in- cluding indentures.+ 10(A). NBD Bancorp, Inc. Performance Incentive Plan, as amended [Exhibit 10(a) to the Corporation's 1991 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by refer- ence].* 10(B). First Chicago NBD Corporation Plan for Deferring the Pay- ment of Directors' Fees [Exhibit 10(D) to the Corpora- tion's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(C). Form of First Chicago NBD Corporation Executive Estate Plan.* 10(D). First Chicago NBD Corporation Financial Planning Program for Executives.* 10(E). Supplemental Disability and Split-Dollar Life Insurance Policies of NBD Indiana, Inc. covering the named executive officers [Exhibit 10(i) to the Corporation's 1992 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(F). Form of First Chicago NBD Corporation Long-Term Disability Restoration Plan.* 10(G). First Chicago Corporation Stock Incentive Plan [Exhibit 10(A) to FCC's 1990 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(H). First Chicago Corporation Strategic Stock Incentive Plan, as amended [Exhibit 10(A) to FCC's 1988 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(I). First Chicago Corporation 1983 Stock Option Plan, as amended and restated [Exhibit 28 to FCC's Post-Effective Amendment No. 1 to Form S-8 Registration Statement (File No. 33-15779) incorporated herein by reference].* 10(J). Form of First Chicago NBD Corporation Deferred Compensa- tion Plan.* 10(K). Form of First Chicago NBD Corporation Supplemental Savings and Investment Plan.* 10(L). Form of First Chicago NBD Corporation Supplemental Per- sonal Pension Account Plan.* 10(M). Form of Individual Change of Control Employment Agree- ment.* 89
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[Download Table] 10(N). Form of Individual Executive Employment Agreement.* 10(O). First Chicago Corporation Trust Agreement (Trust A) [Ex- hibit 10(K) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(P). First Chicago Corporation Trust Agreement (Trust B) [Ex- hibit 10(L) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference].* 10(Q). NBD Bancorp, Inc. Benefit Protection Trust Agreement.* 10(R). First Chicago NBD Corporation Director Stock Plan [Exhibit 10(X) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(S). First Chicago NBD Corporation Stock Performance Plan [Ex- hibit 10(Y) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(T). First Chicago NBD Corporation Senior Management Annual In- centive Plan [Exhibit 10(Z) to the Corporation's 1995 An- nual Report on Form 10-K (File No. 1-7127) incorporated herein by reference].* 10(U). Agreement and Plan of Merger, dated as of July 11, 1995, between NBD Bancorp, Inc. and First Chicago Corporation, as amended [Exhibit 10(AA) to the Corporation's 1995 An- nual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 12. Statements re computation of ratios. 21. Subsidiaries of the Corporation. 23. Consents of experts and counsel. 27. Financial Data Schedule. (b) The Corporation filed the following Current Reports on Form 8-K during the quarter ended December 31, 1996: [Download Table] DATE ITEM REPORTED ---- ------------- October 15, 1996 The Corporation's earnings for the quarter ended September 30, 1996. -------- + The Corporation hereby agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the Corporation and its consolidated subsidiaries; the total amount of such debt does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. 90
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SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE CORPORATION HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, THIS 14TH DAY OF FEBRUARY, 1997. First Chicago NBD Corporation (Registrant) /s/ Verne G. Istock By __________________________________ Verne G. Istock Principal Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE CORPORATION AND IN THE CAPACITIES INDICATED, THIS 14TH DAY OF FEBRUARY, 1997. /s/ Terence E. Adderley /s/ Scott P. Marks, Jr. ------------------------------------- ------------------------------------- Terence E. Adderley Scott P. Marks, Jr. Director Director /s/ James K. Baker /s/ William T. McCormick, Jr. ------------------------------------- ------------------------------------- James K. Baker William T. McCormick, Jr. Director Director /s/ John H. Bryan /s/ Earl L. Neal ------------------------------------- ------------------------------------- John H. Bryan Earl L. Neal Director Director /s/ Siegfried Buschmann /s/ James J. O'Connor ------------------------------------- ------------------------------------- Siegfried Buschmann James J. O'Connor Director Director /s/ James S. Crown /s/ Thomas E. Reilly, Jr. ------------------------------------- ------------------------------------- James S. Crown Thomas E. Reilly, Jr. Director Director /s/ Maureen A. Fay /s/ Patrick G. Ryan ------------------------------------- ------------------------------------- Maureen A. Fay Patrick G. Ryan Director Director /s/ Charles T. Fisher III /s/ Adele Simmons ------------------------------------- ------------------------------------- Charles T. Fisher III Adele Simmons Director Director /s/ Donald V. Fites /s/ Richard L. Thomas ------------------------------------- ------------------------------------- Donald V. Fites Richard L. Thomas Director Director /s/ Verne G. Istock /s/ David J. Vitale ------------------------------------- ------------------------------------- Verne G. Istock David J. Vitale Director Director /s/ Thomas H. Jeffs II /s/ Robert A. Rosholt ------------------------------------- ------------------------------------- Thomas H. Jeffs II Robert A. Rosholt Director Principal Financial Officer /s/ Richard A. Manoogian /s/ William J. Roberts ------------------------------------- ------------------------------------- Richard A. Manoogian William J. Roberts Director Principal Accounting Officer 91
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[Download Table] EXHIBIT INDEX TO EXHIBITS PAGE ------- ----------------- ---- 3(A). Restated Certificate of Incorporation of the Corporation, as amended [Exhibit 3(A) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 3(B). By-Laws of the Corporation, as amended. 4. Instruments defining the rights of security holders, in- cluding indentures.+ 10(A). NBD Bancorp, Inc. Performance Incentive Plan, as amended [Exhibit 10(a) to the Corporation's 1991 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by refer- ence]. 10(B). First Chicago NBD Corporation Plan for Deferring the Pay- ment of Directors' Fees [Exhibit 10(D) to the Corpora- tion's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 10(C). Form of First Chicago NBD Corporation Executive Estate Plan. 10(D). First Chicago NBD Corporation Financial Planning Program for Executives. 10(E). Supplemental Disability and Split-Dollar Life Insurance Policies of NBD Indiana, Inc. covering the named executive officers [Exhibit 10(i) to the Corporation's 1992 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 10(F). Form of First Chicago NBD Corporation Long-Term Disability Restoration Plan. 10(G). First Chicago Corporation Stock Incentive Plan [Exhibit 10(A) to FCC's 1990 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference]. 10(H). First Chicago Corporation Strategic Stock Incentive Plan, as amended [Exhibit 10(A) to FCC's 1988 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference]. 10(I). First Chicago Corporation 1983 Stock Option Plan, as amended and restated [Exhibit 28 to FCC's Post-Effective Amendment No. 1 to Form S-8 Registration Statement (File No. 33-15779) incorporated herein by reference]. 10(J). Form of First Chicago NBD Corporation Deferred Compensa- tion Plan. 10(K). Form of First Chicago NBD Corporation Supplemental Savings and Investment Plan. 10(L). Form of First Chicago NBD Corporation Supplemental Per- sonal Pension Account Plan. 10(M). Form of Individual Change of Control Employment Agree- ment. 10(N). Form of Individual Executive Employment Agreement. 10(O). First Chicago Corporation Trust Agreement (Trust A) [Ex- hibit 10(K) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference]. 10(P). First Chicago Corporation Trust Agreement (Trust B) [Ex- hibit 10(L) to FCC's 1992 Annual Report on Form 10-K (File No. 1-6052) incorporated herein by reference]. 10(Q). NBD Bancorp, Inc. Benefit Protection Trust Agreement. 10(R). First Chicago NBD Corporation Director Stock Plan [Exhibit 10(X) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 10(S). First Chicago NBD Corporation Stock Performance Plan [Ex- hibit 10(Y) to the Corporation's 1995 Annual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 10(T). First Chicago NBD Corporation Senior Management Annual In- centive Plan [Exhibit 10(Z) to the Corporation's 1995 An- nual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 10(U). Agreement and Plan of Merger, dated as of July 11, 1995, between NBD Bancorp, Inc. and First Chicago Corporation, as amended [Exhibit 10(AA) to the Corporation's 1995 An- nual Report on Form 10-K (File No. 1-7127) incorporated herein by reference]. 12. Statements re computation of ratios. 21. Subsidiaries of the Corporation. 23. Consents of experts and counsel. 27. Financial Data Schedule. -------- + The Corporation hereby agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the Corporation and its consolidated subsidiaries; the total amount of such debt does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis.

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6/1/981
1/1/9849
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