<PAGE>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
AMENDMENT NO. 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5872
CONTINENTAL BANK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2664023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
231 South LaSalle Street
Chicago, Illinois 60697
(Address of principal executive offices) (Zip Code)
(312) 828-1614
(Registrant's telephone number
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
Common Stock--$4 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Adjustable Rate Preferred Stock,
Series 1
- - --$50 stated value New York Stock Exchange
Adjustable Rate Cumulative Preferred
Stock, Series 2
- - --$100 stated value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this chapter)
is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of January 31, 1994, based on
the reported closing price on that date on the New York Stock
Exchange--Composite Tape of $35.125 per share:
Common Stock--$4 par value--$1,781,886,543*
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of January 31, 1994.
Common Stock--$4 par value--51,265,932 shares.
*Excludes reported beneficial ownership by all directors and
executive officers of the registrant; however, this
determination does not constitute an admission of affiliate
status for any of these individual stockholders.
<PAGE>
<PAGE> 2
Table of Contents
Part I
Item 1. Business.................................... 3
Statistical Information............................ 5
Securities......................................... 9
Loans.............................................. 11
Credit Analysis and Loss Experience................ 12
Deposits........................................... 13
Short-Term Borrowings.............................. 14
Financial Ratios................................... 15
Foreign Outstandings............................... 16
Loan Concentrations................................ 16
Foreign Operations................................. 16
Employees.......................................... 16
Competition........................................ 16
Monetary Policy and Economic Conditions............ 17
Supervision and Regulation......................... 17
Item 2. Properties.................................. 20
Item 3. Legal Proceedings........................... 20
Item 4. Submission of Matters to a Vote of
Security Holders.......................... 20
Executive Officers of the Corporation.............. 20
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters........... 22
Common Stockholders......................... 22
Common Stock Listing........................ 22
Item 6. Selected Financial Data..................... 23
Quarterly Financial Information............. 23
Sensitivity to Interest-Rate Changes........ 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 25
Item 8. Financial Statements and Supplementary
Data...................................... 58
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................ 105
Part III
Item 10. Directors and Executive Officers of the
Registrant................................ 105
Item 11. Executive Compensation...................... 107
Item 12. Security Ownership of Certain Beneficial
Owners and Managers....................... 114
Item 13. Certain Relationships and Related
Transactions.............................. 116
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................... 121
Signatures........................................... 125
<PAGE> 3
ITEM 1. BUSINESS
CONTINENTAL BANK CORPORATION
Continental Bank Corporation (Continental) is a bank holding
company registered under the Bank Holding Company Act of 1956, as
amended, the principal asset of which is all of the outstanding
stock of Continental Bank N.A. (Bank). Continental was
incorporated in Delaware in November 1968, and the Bank became
its subsidiary in March 1969. The Bank and its predecessors have
been in business for more than 135 years. As the context
requires, references to Continental in the remaining portion of
Item 1 of this Form 10-K mean either Continental acting as a
single entity or Continental acting through its direct or
indirect subsidiaries.
For information on the proposed merger of Continental and
BankAmerica Corporation (BankAmerica), see Note 1--Proposed
Merger with BankAmerica--of Notes to Consolidated Financial
Statements.
Continental's strategic plan focuses on the needs of its business
customers. Continental's business customer base consists
principally of its longstanding corporate, institutional, and
depository customers in the United States and abroad. Through
its direct and indirect subsidiaries, Continental concentrates on
four principal areas: corporate finance, specialized financial
services, trading, and equity financing. Continental is both an
originator of financial products to be issued or used by its
customers and a distributor of financial products that investors
may purchase or trade.
As an originator of financial products, Continental's objective
is to provide corporations, governmental entities, and other
depository institutions with funding capabilities. In
distribution, the objective is to provide investors with
securities and other investment vehicles, many of which are
originated by the Bank, that will meet their investment
objectives.
Continental provides a broad range of deposit, credit, advisory,
and related financial services to its business customers. These
customers are provided a variety of capital funding alternatives,
including syndicated and non-syndicated long-term debt,
acquisition financing, secured business credit, and securitized
financings. Continental also arranges private placements, lease
financing, and commercial paper programs. Continental has a
large domestic and international network of correspondent banking
relationships and provides a wide variety of services for banks,
including check clearing, transfer of funds, loan participations,
and investment advice. Continental provides direct transactional
<PAGE> 4
assistance for its customers through cash management, investment
advisory, securities transfer, custodial, corporate and pension
trust, and similar types of operational services. Continental
engages in market-making and risk-management activities in all
U.S. and selected international capital markets to provide
specialized services for its customers. Continental arranges
financial transactions (including mergers, acquisitions, and
divestitures) and distributes financial assets to third parties.
Continental also provides foreign-exchange, money-market,
interest-rate, and financial futures products and services.
Continental's products and services are provided through a
network of domestic and foreign subsidiaries, affiliates,
branches, and representative offices in key capital markets
worldwide. In 1993, approximately 97 percent of Continental's
consolidated gross revenues, which are composed of interest
revenue and fees, trading, and other revenues, was derived from
the Bank. The Bank's commercial lending relationships currently
generate the greatest percentage of corporate consolidated gross
revenues. While Continental anticipates increased contributions
from the operations of its other subsidiaries, the Bank is
expected to continue to be the major source of Continental's
consolidated gross revenues for the foreseeable future.
Continental also owns directly or indirectly a small-business
investment company and an equity-investment company. Other
subsidiaries engage in asset-based financing and fiduciary and
investment services.
As an extension of Continental's overall business focus, the
Bank, from offices in Boca Raton, Chicago, Dallas, Los Angeles,
and Sarasota, concentrates on meeting the deposit, financing,
investment, brokerage, and fiduciary needs of professionals,
entrepreneurs, executives, and private investors. Fiduciary and
investment services for these customers are also offered through
Continental's subsidiary in Florida.
Continental is a legal entity separate and distinct from the Bank
and its other subsidiaries. Under federal law, there are various
restrictions on the extent to which the Bank may finance or
otherwise supply funds to Continental and its affiliates.
<PAGE>
<PAGE> 5
STATISTICAL INFORMATION
<TABLE>
Consolidated Average Balance Sheet and Net Interest Revenue
<CAPTION>
1993 1992
Average Average Average Average
($ in millions) balance Interest(a) rate(b) balance Interest(a) rate(b)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Interest-bearing deposits,
primarily foreign.................... $ 1,941 $ 151 7.80% $ 1,897 $ 151 7.95%
Federal funds sold..................... 357 11 3.20 268 10 3.68
Securities purchased under agreements
to resell............................ 849 54 6.31 841 66 7.86
Trading account assets................. 1,454 73 5.00 1,239 48 3.92
U.S. Treasury and federal agency
securities........................... 449 21 4.65 789 50 6.35
State, county, and municipal
securities........................... 1 -- 8.08 36 3 7.90
Other securities....................... 76 9 12.05 248 40 16.20
Total securities held to maturity.... 526 30 5.72 1,073 93 8.68
U.S. Treasury and federal agency
securities........................... 465 26 5.50 -- -- --
Other securities....................... 101 11 11.11 -- -- --
Total securities held for sale....... 566 37 6.50 -- -- --
Loans, net of unearned income
Domestic............................. 10,732 694 6.46 11,502 800 6.96
Foreign.............................. 1,186 74 6.22 1,754 137 7.81
Total loans(c)......................... 11,918 768 6.44 13,256 937 7.07
Total interest-earning assets.......... 17,611 1,124 6.38 18,574 1,305 7.03
Other Assets
Cash and non-interest-bearing deposits. 1,847 1,824
Interest and fees receivable........... 141 163
Properties and equipment............... 245 230
Equity investments..................... 545 439
Other assets........................... 1,433 1,213
Reserve for credit losses.............. (385) (411)
Total assets......................... $21,437 $22,032
Interest-Bearing Liabilities
Savings deposits....................... $ 2,309 $ 53 2.29% $ 2,269 $ 66 2.91%
Other time deposits.................... 5,037 175 3.47 5,586 243 4.35
Foreign-office deposits................ 3,072 163 5.32 4,193 240 5.72
Total interest-bearing deposits...... 10,418 391 3.75 12,048 549 4.56
Federal funds purchased................ 967 29 2.98 1,094 38 3.47
Securities sold under agreements to
repurchase........................... 623 30 4.84 729 36 4.96
Other short-term borrowings............ 2,317 129 5.57 1,390 112 8.10
Long-term debt......................... 1,153 78 6.71 993 77 7.71
Total interest-bearing liabilities... 15,478 657 4.24 16,254 812 5.00
Other Liabilities and Stockholders'
Equity
Non-interest-bearing deposits
Domestic offices..................... 2,596 2,428
Foreign offices...................... 63 42
Other liabilities...................... 1,473 1,715
Stockholders' equity................... 1,827 1,593
Total liabilities and
stockholders' equity............... $21,437 $22,032
Average earning assets--domestic....... $13,187 $13,740
--foreign........ 4,424 4,834
--total.......... 17,611 18,574
Net interest revenue --domestic....... $ 402 $ 410
--foreign........ 65 83
--total.......... 467 493
Net interest margin(d)--domestic....... 3.05% 2.98%
--foreign........ 1.47 1.72
--total.......... 2.65 2.66
<PAGE> 6
<FN>
(a) Taxable-equivalent adjustments are used in adjusting
interest on tax-exempt assets (primarily state, county, and
municipal securities) to a fully taxable basis. Such
adjustments are based on the prevailing federal and state
income tax rates. For 1993 and 1992 the adjustments
amounted to $3 million and $4 million, respectively.
(b) Average rate is computed using amounts rounded to thousands.
(c) The principal amounts of cash-basis and renegotiated loans
have been included in the average loan balances used to
determine the rate earned on loans. Interest on cash-basis
loans is included in revenue only to the extent that cash
payments have been received, and is included for
renegotiated loans at renegotiated rates.
(d) Net interest margin is net interest revenue on a taxable-
equivalent basis divided by average earning assets.
</TABLE>
<PAGE>
<PAGE> 7
<TABLE>
Consolidated Average Balance Sheet and Net Interest Revenue
<CAPTION>
1991
Average Average
balance Interest(a) rate(b)
<S> <C> <C> <C>
Interest-Earning Assets
Interest-bearing deposits,
primarily foreign.................... $ 2,309 $ 254 10.99%
Federal funds sold..................... 354 21 5.91
Securities purchased under agreements
to resell............................ 1,466 87 5.97
Trading account assets................. 1,549 92 5.92
U.S. Treasury and federal agency
securities........................... 672 53 7.84
State, county, and municipal
securities........................... 40 3 7.91
Other securities....................... 260 40 15.53
Total securities held to maturity.... 972 96 9.90
U.S. Treasury and federal agency
securities........................... -- -- --
Other securities....................... -- -- --
Total securities held for sale....... -- -- --
Loans, net of unearned income
Domestic............................. 12,331 1,056 8.56
Foreign.............................. 2,254 240 10.67
Total loans(c)......................... 14,585 1,296 8.89
Total interest-earning assets.......... 21,235 1,846 8.70
Other Assets
Cash and non-interest-bearing deposits. 1,793
Interest and fees receivable........... 183
Properties and equipment............... 234
Equity investments..................... 319
Other assets........................... 1,231
Reserve for credit losses.............. (378)
Total assets......................... $24,617
Interest-Bearing Liabilities
Savings deposits....................... $ 1,969 $ 84 4.28%
Other time deposits.................... 6,402 418 6.52
Foreign-office deposits................ 4,686 425 9.07
Total interest-bearing deposits...... 13,057 927 7.10
Federal funds purchased................ 1,273 71 5.56
Securities sold under agreements to
repurchase........................... 1,289 84 6.49
Other short-term borrowings............ 2,341 185 7.91
Long-term debt......................... 943 85 9.06
Total interest-bearing liabilities... 18,903 1,352 7.15
Other Liabilities and Stockholders'
Equity
Non-interest-bearing deposits
Domestic offices..................... 2,260
Foreign offices...................... 52
Other liabilities...................... 1,798
Stockholders' equity................... 1,604
Total liabilities and
stockholders' equity............... $24,617
Average earning assets--domestic....... $15,574
--foreign........ 5,661
--total.......... 21,235
Net interest revenue --domestic....... $ 421
--foreign........ 73
--total.......... 494
Net interest margin(d)--domestic....... 2.71%
--foreign........ 1.30
--total.......... 2.33
<PAGE>
<PAGE> 8
<FN>
(a) Taxable-equivalent adjustments are used in adjusting
interest on tax-exempt assets (primarily state, county, and
municipal securities) to a fully taxable basis. Such
adjustments are based on the prevailing federal and state
income tax rates. For 1991, the adjustments amounted to
$7 million.
(b) Average rate is computed using amounts rounded to thousands.
(c) The principal amounts of cash-basis and renegotiated loans
have been included in the average loan balances used to
determine the rate earned on loans. Interest on cash-basis
loans is included in revenue only to the extent that cash
payments have been received, and is included for
renegotiated loans at renegotiated rates.
(d) Net interest margin is net interest revenue on a taxable-
equivalent basis divided by average earning assets.
</TABLE>
<PAGE>
<PAGE> 9
<TABLE>
Analysis of Year-To-Year Changes in Net Interest Revenue
<CAPTION>
1993/1992 1992/1991
Increase (decrease) Increase (decrease)
due to change in: due to change in:
Average Average Average Average
($ in millions) balance rate Total balance rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest revenue*
Interest-bearing deposits,
primarily foreign............. $ 3 $ (3) $ -- $ (40) $ (63) $(103)
Federal funds sold.............. 3 (2) 1 (4) (7) (11)
Securities purchased under
agreements to resell.......... 1 (13) (12) (44) 23 (21)
Trading account assets.......... 9 16 25 (16) (28) (44)
Securities...................... 2 (28) (26) 9 (12) (3)
Domestic loans.................. (52) (54) (106) (67) (189) (256)
Foreign loans................... (39) (24) (63) (47) (56) (103)
Total interest revenue........ (73) (108) (181) (209) (332) (541)
Interest expense
Domestic office deposits........ (19) (62) (81) (29) (164) (193)
Foreign office deposits......... (61) (16) (77) (41) (144) (185)
Federal funds purchased......... (4) (5) (9) (9) (24) (33)
Securities sold under
agreements to repurchase...... (5) (1) (6) (31) (17) (48)
Other short-term borrowings..... 59 (42) 17 (77) 4 (73)
Long-term debt.................. 12 (11) 1 4 (12) (8)
Total interest expense........ (18) (137) (155) (183) (357) (540)
Net change in net interest
revenue................... $(55) $ 29 $ (26) $ (26) $ 25 $ (1)
<FN>
*On a taxable-equivalent basis.
</TABLE>
SECURITIES
<TABLE>
Securities Held to Maturity
<CAPTION>
($ in millions) Amount Yield(a)
<S> <C> <C>
U.S. Treasury and federal agency securities
Maturity distribution on December 31, 1993
Within 1 year................................... $378 4.82%
After 1 but within 5 years...................... 53 4.85
After 5 but within 10 years..................... 14 4.86
After 10 years.................................. 113 5.59
Total on December 31, 1993.................... 558 4.98
Total on December 31, 1992........................ 317 4.42
Total on December 31, 1991........................ 763 7.66
State, county, and municipal securities
Total on December 31, 1993.................... -- --
Total on December 31, 1992........................ -- --
Total on December 31, 1991........................ 37 8.13
Other securities
Maturity distribution on December 31, 1993
Within 1 year................................... 1 9.24
After 1 but within 5 years...................... 2 5.76
After 5 but within 10 years..................... -- --
After 10 years.................................. 46 4.70
Total on December 31, 1993(b)................. 49 4.87
Total on December 31, 1992........................ 190 6.79
Total on December 31, 1991........................ 251 7.44
<FN>
(a) The weighted-average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each issue. The
yields for tax-exempt securities are calculated on a taxable-equivalent
basis incorporating a combined federal and state effective tax rate of
approximately 38%.
(b) Securities of any single issuer were less than 10% of stockholders'
equity on December 31, 1993.
</TABLE>
<PAGE> 10
<TABLE>
Securities Available for Sale(a)
<CAPTION>
($ in millions) Amount Yield(b)
<S> <C> <C>
U.S. Treasury and federal agency securities
Maturity distribution on December 31, 1993
Within 1 year................................... $ -- --%
After 1 but within 5 years...................... -- --
After 5 but within 10 years..................... -- --
After 10 years.................................. 550 5.02
Total on December 31, 1993.................... 550 5.02
Other securities
Maturity distribution on December 31, 1993
Within 1 year................................... 26 4.15
After 1 but within 5 years...................... 144 5.74
After 5 but within 10 years..................... 47 11.96
After 10 years.................................. 153 5.65
Total on December 31, 1993(c)................. 370 6.39
<FN>
(a) As a result of the adoption of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," on December 31, 1993, Continental transferred
$665 million of securities from securities held for sale, $157 million
from loans, and $98 million from trading account assets to securities
available for sale.
(b) The weighted-average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each issue. The
yields for tax-exempt securities are calculated on a taxable-equivalent
basis incorporating a combined federal and state effective tax rate of
approximately 38%.
(c) Securities of any single issuer were less than 10% of stockholders'
equity on December 31, 1993.
</TABLE>
<TABLE>
Securities Held for Sale(a)
<CAPTION>
December 31, 1992 ($ in millions) Amount Yield(b)
<S> <C> <C>
U.S. Treasury and federal agency securities........ $414 6.48%
State, county, and municipal securities............ 34 8.06
Other securities................................... 47 6.31
<FN>
(a) On December 31, 1992, Continental reclassified $495 million of
securities held to maturity to securities held for sale.
(b) The weighted-average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each issue. The
yields for tax-exempt securities are calculated on a taxable-equivalent
basis incorporating a combined federal and state effective tax rate of
approximately 37%.
</TABLE>
<PAGE> 11
LOANS
The tables for year-end and average loans for the last five years
are presented in Note 6--Loans--of Notes to Consolidated
Financial Statements on pages 71 through 73.
<TABLE>
Maturity and Interest-Rate Sensitivity of Loans*
<CAPTION>
After one
One year through After five
December 31, 1993 ($ in millions) or less five years years Total
<S> <C> <C> <C> <C>
Maturity
Domestic loans
Commercial and industrial.......... $3,082 $2,985 $1,023 $ 7,090
Mortgage and real estate........... 602 575 55 1,232
Financial institutions............. 360 491 260 1,111
All other.......................... 772 278 168 1,218
Total domestic loans............. 4,816 4,329 1,506 10,651
Foreign loans...................... 613 144 192 949
Total loans...................... $5,429 $4,473 $1,698 $11,600
Rate sensitivity
Predetermined interest rates....... $ 367 $ 104
Floating interest rates............ 4,106 1,594
Total............................ $4,473 $1,698
<FN>
*Estimated distribution, excluding leases, and loans secured by one-to-four-
family residential properties.
</TABLE>
Nonperforming Loans
The discussion of and tables for nonperforming loans for the last
five years are presented in Note 6--Loans--of Notes to
Consolidated Financial Statements on pages 71 through 73.
Information concerning Continental's interest-accrual policies
for loans is presented in Note 2--Summary of Significant
Accounting Policies--of Notes to Consolidated Financial
Statements on pages 64 through 68.
<PAGE> 12
CREDIT ANALYSIS AND LOSS EXPERIENCE
<TABLE>
Analysis of Net Credit Loss Experience
<CAPTION>
($ in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Reserve for Credit Losses--Beginning of Year
General....................................... $ 355 $ 385 $ 288 $ 257 $ 992
Allocated transfer risk....................... 21 25 -- -- --
Total reserve for credit losses--beginning
of year................................... 376 410 288 257 992
Provision for Credit Losses
General....................................... 183 124 315 118 44
Allocated transfer risk....................... (2) 1 25 -- --
Total provision for credit losses........... 181 125 340 118 44
Charge-Offs
Commercial and industrial loans............... 34 74 80 55 70
Mortgage and real estate loans................ 184 68 98 19 8
Loans to financial institutions............... 2 4 6 -- --
Consumer loans................................ 4 2 7 -- 1
All other loans............................... -- -- 26 2 --
Total domestic charge-offs.................. 224 148 217 76 79
Foreign charge-offs*.......................... 53 68 60 55 718
Total charge-offs........................... 277 216 277 131 797
Recoveries
Commercial and industrial loans............... 20 9 11 3 14
Mortgage and real estate loans................ 2 3 2 4 --
Loans to financial institutions............... -- -- 5 -- 1
Consumer loans................................ -- 1 -- 1 --
All other loans............................... -- 1 4 -- 1
Total domestic recoveries................... 22 14 22 8 16
Foreign recoveries............................ 33 44 32 36 3
Total loan recoveries....................... 55 58 54 44 19
Other Adjustments
Other adjustments............................. (7) (1) 5 -- (1)
Total other adjustments..................... (7) (1) 5 -- (1)
Reserve for Credit Losses--Year-End
General....................................... 328 355 385 288 257
Allocated transfer risk....................... -- 21 25 -- --
Total reserve for credit losses--year-end... $ 328 $ 376 $ 410 $ 288 $ 257
Reserve as a percentage of loans--year-end.... 2.80% 3.02% 2.95% 1.88% 1.65%
Net charge-offs............................... $ 222 $ 158 $ 223 $ 87 $ 778
Net charge-offs as a percentage of average
loans....................................... 1.86% 1.19% 1.53% 0.57% 4.83%
<FN>
*Included charge-offs against the allocated transfer risk reserve of $19 million in 1993
and $5 million in 1992.
</TABLE>
Discussion of the reserve for credit losses is set forth on
page 30 and pages 52 and 53 of Management's Discussion and
Analysis, under the captions "Provision for Credit Losses" and
"Reserve for Credit Losses," respectively.
<PAGE> 13
<TABLE>
Allocation of Reserve for Credit Losses
<CAPTION>
1993 1992 1991 1990 1989
December 31 Reserve Percent of Reserve Percent of Reserve Percent of Reserve Percent of Reserve Percent of
($ in millions) amount total loans amount total loans amount total loans amount total loans amount total loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic loans
Commercial and
industrial.......... $ 85 60.4% $ 80 56.0% $117 52.3% $117 51.1% $ 64 51.3%
Mortgage and real
estate.............. 100 11.5 104 16.5 73 17.7 27 18.3 23 17.9
Financial
institutions........ 8 9.5 7 9.7 6 7.8 15 6.8 7 6.1
Consumer.............. 4 3.9 2 3.1 2 2.6 3 2.2 3 2.3
All other ............ 3 6.5 2 5.0 2 5.2 2 4.4 2 5.1
Total domestic...... 200 91.8 195 90.3 200 85.6 164 82.8 99 82.7
Foreign loans
Foreign............... 23 8.2 43 9.7 58 14.4 49 17.2 51 17.3
Total allocated....... 223 100.0 238 100.0 258 100.0 213 100.0 150 100.0
Unallocated........... 105 -- 138 -- 152 -- 75 -- 107 --
Total............... $328 100.0% $376 100.0% $410 100.0% $288 100.0% $257 100.0%
</TABLE>
The following table presents an analysis of the changes in the
foreign component of the reserve for credit losses for the five
years ended December 31, 1993:
<TABLE>
Changes in Foreign Component of Reserve for Credit Losses
<CAPTION>
December 31 ($ in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Balance at beginning of year....................... $ 43 $ 58 $ 49 $ 51 $ 763
Provisions for credit losses....................... -- 10 37 16 4
Charge-offs*....................................... (53) (68) (60) (55) (718)
Recoveries......................................... 33 44 32 36 3
Other adjustments.................................. -- (1) -- 1 (1)
Balance at end of year........................... $ 23 $ 43 $ 58 $ 49 $ 51
<FN>
*Included charge-offs against the allocated transfer risk reserve of $19 million in
1993 and $5 million in 1992.
</TABLE>
DEPOSITS
<TABLE>
Average Deposits in Foreign Offices
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Banks............................................... $2,231 $3,257 $3,551
Governments and official institutions............... 79 70 95
Other time.......................................... 760 870 1,051
Other demand........................................ 65 38 41
Total............................................. $3,135 $4,235 $4,738
</TABLE>
<PAGE> 14
<TABLE>
Time Deposits of $100,000 or More
<CAPTION>
Time certificates Other time
December 31, 1993 ($ in millions) of deposit deposits Total
<S> <C> <C> <C>
Maturity distribution in domestic offices
3 months or less............................ $ 515 $ 79 $ 594
Over 3 through 6 months..................... 491 2 493
Over 6 through 12 months.................... 284 2 286
Over 12 months.............................. 3,425 26 3,451
Total domestic offices.................... 4,715 109 4,824
In foreign offices
Foreign offices............................. 13 2,106 2,119
Total..................................... $4,728 $2,215 $6,943
</TABLE>
SHORT-TERM BORROWINGS
<TABLE>
Short-Term Borrowings
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Federal funds purchased(a)
Balance on December 31..................... $1,312 $1,367 $ 999
Maximum balance at any month-end........... 1,312 1,489 1,666
Average amount outstanding................. 967 1,094 1,273
Average interest rate
For the year............................. 2.98% 3.47% 5.56%
On December 31........................... 2.96 2.93 4.41
Securities sold under agreements to
repurchase(a)
Balance on December 31..................... $ 419 $ 667 $ 943
Maximum balance at any month-end........... 886 1,470 1,639
Average amount outstanding................. 623 729 1,289
Average interest rate
For the year............................. 4.84% 4.96% 6.49%
On December 31........................... 7.76 4.17 5.12
Demand notes issued to the U.S. Treasury
Balance on December 31..................... $1,300 $ 768 $1,300
Maximum balance at any month-end........... 1,385 1,800 1,300
Average amount outstanding................. 651 579 677
Average interest rate
For the year............................. 2.81% 3.37% 5.56%
On December 31........................... 2.75 2.66 4.13
All other borrowings(b)
Balance on December 31..................... $1,718 $1,419 $ 952
Maximum balance at any month-end........... 1,783 1,419 2,178
Average amount outstanding................. 1,666 811 1,664
Average interest rate
For the year............................. 6.65% 11.48% 8.86%
On December 31........................... 7.22 6.34 14.70
Total
Balance on December 31..................... $4,749 $4,221 $4,194
Maximum balance at any month-end........... 4,749 4,461 6,303
Average amount outstanding................. 3,907 3,213 4,903
Average interest rate
For the year............................. 4.81% 5.81% 6.92%
On December 31........................... 5.25 4.48 7.12
<FN>
(a) Generally mature within 30 days.
(b) Consisted primarily of borrowings of the foreign branches and
subsidiaries and commercial paper.
</TABLE>
<PAGE> 15
FINANCIAL RATIOS
<TABLE>
Selected Statistical Information
<CAPTION>
Year ended December 31 ($ in millions, except common share data) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Operating Results
Net interest revenue.................................................. $ 464 $ 489 $ 487 $ 498 $ 540
Fees, trading, and other revenues(a).................................. 640 475 477 436 452
Total revenues...................................................... 1,104 964 964 934 992
Provision for credit losses........................................... 181 125 340 118 44
Operating expenses(a)................................................. 683 597 680 722 652
Income tax expense (credit)........................................... (18) 20 17 6 10
Income (loss) from continuing operations.............................. 258 222 (73) 88 286
Loss from business held for sale...................................... -- -- (3) (13) (139)
Income (loss) before cumulative effect of accounting change........... 258 222 (76) 75 147
Cumulative effect of accounting change for income taxes............... 80 -- -- -- --
Net income (loss)..................................................... $ 338 $ 222 $ (76) $ 75 $ 147
Per Common Share Data
Earnings (loss) from continuing operations and before cumulative
effect of accounting change......................................... $ 4.12 $ 3.44 $ (2.03) $ 0.95 $ 4.64
Earnings from cumulative effect of accounting change.................. 1.47 -- -- -- --
Earnings (loss)....................................................... 5.59 3.44 (2.08) 0.70 2.06
Cash dividends declared............................................... 0.60 0.60 0.80 1.00 0.85
Book value(b)......................................................... 30.01 24.06 20.89 23.73 24.01
Year-End Balances
Loans(c).............................................................. $11,729 $12,450 $13,881 $15,330 $15,571
Assets................................................................ 22,601 22,467 24,008 27,143 29,549
Deposits.............................................................. 13,542 14,144 15,735 16,098 17,176
Stockholders' equity.................................................. 1,923 1,688 1,512 1,665 1,680
Financial Ratios
Year-end
Common equity to total assets(b).................................... 6.79% 5.78% 4.68% 4.70% 4.37%
Equity to total assets(d)........................................... 8.51 7.51 6.30 6.13 5.69
Reserve for credit losses to total loans(c)......................... 2.80 3.02 2.95 1.88 1.65
Average equity to average total assets................................ 8.52 7.23 6.52 5.60 5.75
Return on(e)
Average total assets................................................ 1.20 1.01 (0.30) 0.30 0.97
Average common equity(b)............................................ 15.58 15.61 (8.97) 4.00 19.40
Common dividend payout................................................ 10.73 17.44 (f) 142.86 41.26
Operating expenses to total revenues(g)............................... 55.71 60.58 68.88 77.30 65.73
Net interest margin(h)................................................ 2.65 2.66 2.33 1.99 2.12
<FN>
(a) Amounts for 1992 and 1991 restated to reflect reclassification of certain revenues and expenses to net costs of other
nonperforming assets (ONPA).
(b) Assumed conversion of Junior Perpetual Convertible Preference Stock outstanding until it was converted to common stock in
June 1991.
(c) Restated to reflect reclassification of certain loans from other real estate owned for 1992 and 1991. See Note 2 to the
financial statements.
(d) On December 31, 1993, the ratios of Tier 1 capital and total capital to risk-adjusted assets were 7.8% and 10.8%.
(e) Based on continuing operations.
(f) Ratio not meaningful due to net loss for the year.
(g) Excludes net costs of ONPA.
(h) Computed using amounts rounded in thousands.
</TABLE>
<PAGE> 16
<TABLE>
Ratios of Earnings to Fixed Charges
<CAPTION>
Year ended December 31 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Earnings to fixed charges
Excluding interest on deposits.......... 1.88x 1.90x 0.87x 1.12x 1.37x
Including interest on deposits.......... 1.36x 1.30x 0.96x 1.04x 1.13x
Earnings to combined fixed charges and
preferred stock dividend requirements
Excluding interest on deposits.......... 1.78x 1.80x 0.88x 1.11x 1.35x
Including interest on deposits.......... 1.34x 1.28x 0.96x 1.04x 1.13x
</TABLE>
For purposes of computing these ratios, earnings represent income
from continuing operations before income taxes after adding back
fixed charges. Fixed charges represent interest and one-third of
rents (the portion deemed representative of the interest factor).
Preferred stock dividend requirements represent an amount equal
to the pretax earnings required to meet applicable preferred
stock dividend requirements.
Earnings for 1991 were inadequate to cover fixed charges. The
coverage deficiency for both fixed charges and combined fixed
charges and preferred stock dividend requirements was
$56 million.
FOREIGN OUTSTANDINGS
Information concerning Continental's foreign outstandings is set
forth on pages 53 through 55 of Management's Discussion and
Analysis, under the caption "Country Risk."
LOAN CONCENTRATIONS
A discussion addressing risk diversification is set forth on
pages 40 through 53 of Management's Discussion and Analysis,
under the caption "Credit Risk Management."
FOREIGN OPERATIONS
Information concerning Continental's foreign operations is
presented in Note 22--Domestic and Foreign Operations--of Notes
to Consolidated Financial Statements on pages 97 and 98.
EMPLOYEES
As of December 31, 1993, Continental had (on a
full-time-equivalent basis) 4,238 officers and employees, all but
32 of whom were employed by the Bank and its subsidiaries.
COMPETITION
Active competition exists in local, regional, national, and/or
international markets in all principal business areas in which
Continental is currently engaged, not only with other national
and state banks but also with savings and loan institutions,
finance companies, and other financial services companies.
<PAGE> 17
Continental competes principally through prices and the quality
and nature of services offered. In attracting deposits,
Continental's banking subsidiaries pay interest, subject to
applicable government regulations, that reflects adjustments in
the money markets. Continental's goal is to provide
the best possible service for its customers, and in many business
areas, including trust activities, correspondent banking, and
international banking, service is a primary means of competition.
MONETARY POLICY AND ECONOMIC CONDITIONS
Two key factors in the performance and profitability of bank
holding companies are loan volume and the margin or spread
between earning yields and interest rates paid to obtain lendable
funds in worldwide money markets. Major influences on these
factors are federal government policies, including those of the
Federal Reserve Board (FRB). Designed to promote orderly
economic growth and to control the growth of both money and
credit, these policies influence financial and credit market
conditions, and affect general interest-rate levels and the
ability to lend. Thus, changes in these policies can
significantly affect Continental's future business and earnings.
Discussion and analysis of the economic environment and its
impact on Continental's 1993 and future earnings is set forth on
pages 25 through 57 of Management's Discussion and Analysis.
SUPERVISION AND REGULATION
In addition to setting monetary policy, the FRB is the principal
regulator of bank holding companies such as Continental. The
Bank Holding Company Act of 1956, as amended, generally limits
bank holding companies to activities that the FRB determines to
be closely related to banking or managing or controlling banks.
Under FRB policy, Continental is expected to act as a source of
strength to its principal subsidiary, the Bank, and to commit
resources in support of it.
A bank holding company cannot acquire substantially all of the
assets or control more than 5 percent of the voting shares of any
commercial bank of which it is not already the majority
shareholder without the approval of the FRB. Also, the FRB
cannot approve any application to acquire shares of an additional
commercial bank located outside the state in which a holding
company's existing bank subsidiaries are located unless
specifically authorized by the laws of the additional bank's
state. Illinois has enacted a reciprocal national interstate
banking statute, which became effective on December 1, 1990. The
statute authorizes a bank holding company whose principal place
of business is in another state to acquire control of an Illinois
bank or bank holding company if the laws of the home state of the
acquiring bank holding company authorize an Illinois bank holding
company to acquire control of a bank or bank holding company in
that state. The approval of the Illinois Commissioner of Banks
and Trust Companies (Illinois Commissioner) is required to effect
such an acquisition within Illinois.
<PAGE> 18
The FRB has adopted risk-based capital guidelines for bank
holding companies. The minimum ratio of qualifying total capital
to risk-adjusted assets (including certain off-balance-sheet
items, such as standby letters of credit) is 8 percent. At least
half of the total capital is to comprise common stock, retained
earnings, and a limited amount of qualifying perpetual preferred
stock, less disallowed intangibles, including goodwill (Tier 1
capital). The remainder may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves (Tier
2 capital). In addition, the FRB has established minimum
leverage ratio guidelines for bank holding companies. These
guidelines provide for a minimum leverage ratio of Tier 1 capital
to adjusted average quarterly assets equal to between 3 percent
and 5 percent. The FRB has not advised Continental of any
specific minimum Tier 1 leverage ratio applicable to it.
Information concerning Continental's capital ratios is set forth
on pages 34 and 35 of Management's Discussion and Analysis, under
the caption "Capital."
As a national bank, the Bank is a regulated entity permitted to
engage only in banking and activities incidental to banking.
National banks are primarily regulated and examined by the Office
of the Comptroller of the Currency (Comptroller). In addition,
national banks are subject to certain regulations adopted by the
FRB and the Federal Deposit Insurance Corporation (FDIC). Major
matters regulated include loan limits, deposit reserves and
insurance, interest rates, securities dealings, international
operations, dividends, and transactions with affiliates. The
Comptroller has adopted risk-based capital and minimum leverage
ratio guidelines for national banks similar to those adopted by
the FRB for bank holding companies. The Comptroller has not
advised the Bank of any specific leverage ratio applicable to it.
On December 31, 1993, the Bank's capital ratios exceeded those
required under the Comptroller's guidelines.
In late 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) became law. The statute
significantly revised key aspects of bank regulation. Many parts
of the statute have delayed effective dates and provisions for
phasing in certain new requirements. The federal bank regulatory
agencies have adopted implementing regulations in many of the
areas impacted, including ones relating to risk-based FDIC
insurance assessments, brokered deposits, interbank liabilities,
operational and managerial standards, and auditing requirements.
FDICIA also requires those agencies to take "prompt corrective
action" with respect to depository institutions that do not meet
minimum regulatory capital requirements. The Bank presently
exceeds all such requirements. FDICIA establishes five capital
levels and imposes increasingly stringent limitations on banks
that fall below the highest level. The federal bank regulatory
agencies have issued various implementing regulations, certain of
which are described below, and have others in the proposal stage,
including one that would add an interest-rate-risk component to
risk-based capital requirements. It is anticipated that FDICIA
<PAGE> 19
and the regulations issued thereunder will result in increased
costs for the banking industry, including the Bank, due to higher
FDIC insurance assessments and additional operating and reporting
requirements. FDICIA and those regulations are not expected to
have a material adverse effect on the Bank's present operations.
The Bank's deposits are insured by the FDIC. Pursuant to FDICIA,
the FDIC has adopted an interim risk-based system for the payment
of insurance premiums beginning in 1993 at rates ranging from
$0.23 to $0.31 per $100 of deposits. A final risk-based system
must be implemented under FDICIA by mid-1994.
Subject to regulation by the FRB, banks and their Edge Act
corporation subsidiaries which engage in international banking
and finance may establish foreign branches. With FRB approval,
Edge Act corporations may also establish United States branches
and invest in the shares of financial companies whose
transactions in the United States are solely and directly related
to international business. Moreover, with FRB consent, bank
holding companies and their nonbank subsidiaries may own or
control the voting shares of any company in which an Edge Act
corporation may invest and of certain other companies whose
business is closely related to banking.
On February 8, 1994, the FRB terminated the agreement, dated as
of July 26, 1984, between the FRB and Continental, under which
Continental, in order to ease any liquidity pressures, was
required to establish from time to time interim target levels of
consolidated assets that could be funded on a sustainable basis.
Federal law also places restrictions on extensions of credit by
banks to their parent bank holding companies and, with some
exceptions, other affiliates, on investments in stock or
securities thereof, and on the taking of such stock or securities
as collateral for loans.
Banks and their affiliates are also subject to certain
restrictions on the issuance, underwriting, public sale, and
distribution of securities. Operations in countries other than
the United States are subject to various restrictions and to the
supervision of various regulatory authorities, under federal law
and the laws of those countries.
On December 23, 1993, Continental filed with the Illinois
Commissioner an Application For Approval to Convert From a
National Bank to a State Bank. In connection therewith,
Continental has pending applications with the FRB for approval of
membership therein as an Illinois bank and with the Illinois
Commissioner for authorization as a state bank to exercise trust
powers.
Note 10--Regulatory Matters--of Notes to Consolidated Financial
Statements on pages 76 and 77 provides information on dividend
restrictions on Continental and the Bank, and limitations on
loans from Continental's bank subsidiaries to Continental and its
affiliates.
<PAGE> 20
ITEM 2. PROPERTIES
The Bank's banking headquarters and Continental's principal
offices are located at 231 South LaSalle Street, Chicago,
Illinois, in a 23-story building owned by the Bank on land of
which one-half is owned by the Bank and one-half is held under a
lease expiring in 1996 (with an option to purchase for
$23 million prior to lease expiration). Approximately 97 percent
of the building is occupied by the Bank. Continental and certain
other subsidiaries, including the Bank, own directly or
beneficially other unimproved and improved land in Chicago and
own or lease office space at various locations in the United
States and in foreign countries. For information on properties
leased by Continental, see Note 12--Lease and Other
Commitments--of Notes to Consolidated Financial Statements on
page 78.
ITEM 3. LEGAL PROCEEDINGS
Information pertaining to legal matters is presented in
Note 1--Proposed Merger with BankAmerica--and Note 24--Legal
Proceedings--of Notes to Consolidated Financial Statements on
pages 63 and 64 and page 102, respectively.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE CORPORATION
Continental Bank Corporation
Thomas C. Theobald (56) (1987)
Chairman
William M. Goodyear (45) (1991)
Vice Chairman
Richard L. Huber (57) (1990)
Vice Chairman
Michael J. Murray (49) (1991)
Vice Chairman
Michael E. O'Neill (47) (1993)
Chief Financial Officer
Roger H. Sherman (60) (1989)
Executive Vice President
Richard S. Brennan (55) (1982)
General Counsel and Secretary,
Partner in the law firm of Mayer, Brown & Platt
John J. Higgins (50) (1985)
Controller
<PAGE> 21
Kurt P. Stocker (56) (1991)
Chief Corporate Relations Officer
Joseph V. Thompson (51) (1986)
Chief Human Resources Officer
The parentheses enclose age, followed by the year in which the
individual was initially classified as an executive officer of
Continental for Securities and Exchange Commission reporting
purposes. Each individual listed also serves as an executive
officer of the Bank. Executive officers are appointed by the
Board of Directors of Continental or the Bank to hold office
until the first meeting of the Board of Directors after the
annual meeting of stockholders next following appointment, and
until a successor is qualified. They may be removed and replaced
only by the Board of Directors of Continental or the Bank, and
may be removed, with or without cause, at any time by a majority
vote of the directors at the time in office. Under provisions of
federal banking law, the initial appointment of an individual as
an executive officer of Continental or the Bank presently
requires the respective approval of the Board of Governors of the
Federal Reserve System and the Office of the Comptroller of the
Currency, and these regulatory authorities in certain
circumstances can cause the suspension or removal of an executive
officer.
With the exception of Messrs. Huber and O'Neill, all of the
executive officers have served in an executive capacity with
Continental, the Bank, or an affiliate of Continental for more
than five years. Mr. Huber joined Continental in January 1990.
Prior to joining Continental, he served as an executive vice
president and head of the Capital Markets and Foreign Exchange
Sector at Chase Manhattan Corporation in 1988 and 1989. Prior to
that experience, he served in various executive capacities at
Citicorp and Citibank since 1973. Mr. O'Neill first joined
Continental in 1974 and held a number of international banking
positions through the early 1980s. He remained with First
Interstate Capital Markets as managing director and co-chief
executive when it bought Continental's London-based merchant bank
in 1984, but rejoined Continental in 1989 as a managing director
in its mergers and acquisitions area. Mr. O'Neill was also
responsible for long-term planning at Continental prior to his
appointment as chief financial officer in July 1993.
<PAGE>
<PAGE> 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCKHOLDERS
There were 9,709 holders of Continental Bank Corporation common
stock on December 31, 1993.
COMMON STOCK LISTING
Continental Bank Corporation common stock is traded on the New
York, Midwest, Pacific, and London stock exchanges. Many
newspapers quote the daily price per share of the common stock as
reported on the New York Stock Exchange Composite Tape, using the
abbreviation ContBkCp. The official trading symbol is CBK.
Dividends declared on Continental common stock were $0.60, $0.60,
and $0.80 per share in 1993, 1992, and 1991, respectively.
Information setting forth the high and low sales prices of
Continental common stock during the past two years is presented
in tabular form on page 23, under the caption "Quarterly
Financial Information."
Information setting forth restrictions on Continental's ability
to pay dividends on its common stock is presented in Note
10--Regulatory Matters--of Notes to Consolidated Financial
Statements on pages 76 and 77.
<PAGE>
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
Quarterly Financial Information
<CAPTION>
($ in millions, except 1993 1992
common share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating results
Interest revenue........... $ 272 $ 284 $ 268 $ 297 $ 299 $ 305 $ 334 $ 363
Interest expense........... 160 165 158 174 169 195 215 233
Net interest revenue....... 112 119 110 123 130 110 119 130
Fees, trading, and other
revenues................. 183 172 141 144 137 124 99 115
Provision for credit
losses................... 45 45 35 56 45 25 25 30
Operating expenses......... 189 181 162 151 157 150 137 153
Income tax expense
(credit)................. (7) (3) (7) (1) 4 6 5 5
Income before cumulative
effect of accounting
change................... 68 68 61 61 61 53 51 57
Cumulative effect of
accounting change for
income taxes............. -- -- -- 80 -- -- -- --
Net income................. $ 68 $ 68 $ 61 $ 141 $ 61 $ 53 $ 51 $ 57
Per common share data
Earnings before cumulative
effect of accounting
change................... $ 1.11 $ 1.11 $ 0.95 $ 0.96 $ 0.95 $ 0.82 $ 0.78 $ 0.90
Earnings................... 1.11 1.11 0.95 2.40 0.95 0.82 0.78 0.90
Cash dividends............. 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
Book value--period-end..... 30.01 28.26 27.17 26.33 24.06 23.14 22.39 21.78
Stock price--high.......... 28.500 27.375 28.375 28.250 22.000 19.625 19.625 17.375
low........... 23.250 22.875 21.375 19.500 15.125 15.750 15.250 9.125
close......... 26.375 27.000 23.875 27.875 21.625 16.250 18.250 16.750
</TABLE>
Fourth-Quarter Summary
Continental reported a $7 million, or 11 percent, increase in net
income for the fourth quarter of 1993 over the 1992 period. The
year-to-year improvement was due to higher revenues and the
recognition of additional deferred tax benefits, partially offset
by increases in operating expenses, including the costs of other
nonperforming assets (ONPA).
Net interest revenue fell $18 million from the 1992 fourth
quarter, due to a narrower interest-rate spread and a lower level
of average earnings assets. Fees, trading, and other revenues
rose $46 million, or 34 percent, over the prior year's quarter,
primarily due to a $24 million increase in revenues from equity
investments and a $14 million rise in trading revenues.
Fourth-quarter 1993 operating expenses increased 20 percent from
the 1992 quarter. Much of the increase was due to an $18 million
rise in the net costs of ONPA, mainly foreclosure costs related
to other real estate owned (OREO) properties. The remainder of
the increase was largely attributable to higher incentive
compensation, professional service, and insurance expenses.
<PAGE> 24
The fourth-quarter provision for credit losses remained level
with the same period last year. Fourth-quarter 1993 charge-offs
rose $14 million, or 25 percent, from the same period last year,
primarily due to higher write-downs in the residential real
estate portfolio. Recoveries were down $5 million from last
year's fourth quarter.
Nonperforming assets decreased $113 million from
September 30, 1993. Nonperforming loans dropped significantly in
all major categories, offset, in part, by a $22 million increase
in ONPA.
The income tax credit of $7 million, compared with income tax
expense of $4 million in the 1992 quarter, was due to the
recognition of additional deferred tax benefits.
SENSITIVITY TO INTEREST-RATE CHANGES
<TABLE>
Sensitivity To Interest-Rate Changes
<CAPTION>
Repricing Periods
1-30 31-90 91-180 181-365 Over
December 31, 1993 ($ in millions) days days days days 1 year Total
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans........................ $ 6,503 $ 3,586 $ 785 $ 171 $ 684 $11,729
Interest-bearing deposits.... 1,199 604 -- -- -- 1,803
Other earning assets......... 3,279 327 398 406 334 4,744
Interest-earning assets.... 10,981 4,517 1,183 577 1,018 18,276
Interest-bearing liabilities
Time deposits................ 3,861 1,745 661 489 3,818 10,574
Other borrowings*............ 4,363 358 28 -- -- 4,749
Long-term debt............... 64 351 -- 35 718 1,168
Interest-bearing
liabilities.............. 8,288 2,454 689 524 4,536 16,491
Net interest-bearing gaps.... 2,693 2,063 494 53 (3,518) 1,785
Impact of net interest-
free funds................. (7) (442) (58) (97) (1,181) (1,785)
Impact of off-balance-
sheet items................ (1,852) (3,848) (476) 1,333 4,843 --
Interest-sensitive gap....... 834 (2,227) (40) 1,289 144 --
Cumulative gap............... $ 834 $(1,393) $(1,433) $ (144) $ -- $ --
<FN>
*Includes federal funds purchased, securities sold under agreements to repurchase, and
other short-term borrowings.
</TABLE>
The relationships shown are for one day only, and significant
changes can occur in the sensitivity relationships as a result of
market forces and management decisions. Moreover, although
certain assets and liabilities may by their contractual terms
change their interest rates within a certain period, they will
not necessarily change at the same time or to the same extent.
The table includes the effect of off-balance-sheet instruments,
such as financial futures contracts and interest-rate swaps.
<PAGE>
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis uses the following
abbreviations:
Allocated transfer risk reserve--ATRR
Federal Deposit Insurance Corporation--FDIC
Highly leveraged transaction--HLT
In-substance foreclosure--ISF
Other nonperforming assets--ONPA
Other real estate owned--OREO
Statement of Financial Accounting Standards--SFAS
On January 28, 1994, Continental and BankAmerica announced that
they had signed a definitive agreement for BankAmerica to acquire
Continental in a transaction structured as a cash-election
merger. Continental's financial condition on December 31, 1993,
results of operation for the year then ended, and management's
discussion thereof, do not give effect to any financial
consequences of the proposed merger. For information on the
proposed merger, see Note 1 to the financial statements.
RESULTS OF OPERATIONS--1993 AND 1992
Continental reported net income of $338 million, or $5.59 per
common share, for 1993, compared with $222 million, or $3.44 per
common share, for 1992. Excluding the $80 million effect of an
accounting change for income taxes in 1993, net income was
$258 million, or $4.12 per share. Revenues increased
15 percent in 1993 over the prior year, aided by higher trading
profits and revenues from equity investments, partially offset by
higher credit costs and operating expenses. The recognition of
additional deferred tax benefits in 1993 also favorably impacted
results.
Revenues
Total revenues in 1993 increased $140 million from the 1992
level. With only a moderate demand for credit continuing during
1993, revenue growth was highly dependent on customer needs for
other services. In this regard, fees, trading, and other
revenues increased 35 percent over 1992 and more than offset the
5 percent decline in net interest revenue. Trading revenues more
than tripled the 1992 level. Gains on loan sales increased
40 percent, and revenues from equity investments were up
32 percent from 1992.
<PAGE> 26
<TABLE>
Total Revenues
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Net interest revenue................................ $ 464 $489 $487
Fees, trading, and other revenues
Fees and commissions................................ 194 188 168
Trust income........................................ 98 93 95
Trading revenues.................................... 102 30 73
Security gains (losses)............................. 5 (2) 7
Revenues from equity investments.................... 198 150 131
Other revenues*..................................... 43 16 3
Total fees, trading, and other revenues........... 640 475 477
Total............................................. $1,104 $964 $964
<FN>
*Amounts for 1992 and 1991 restated to reflect reclassification of certain
revenues and expenses to net costs of ONPA.
</TABLE>
Net Interest Revenue
Net interest revenue, the difference between interest revenue and
interest expense, decreased 5 percent from the 1992 level. Net
interest revenue is influenced by market interest rates; the
level, composition, and repricing characteristics of earning
assets and liabilities; loan fees; and the level of and interest
collections on nonperforming loans. While Continental relies
mainly on interest-bearing funds, it also maintains a
considerable amount of interest-free funding, such as demand
deposits and stockholders' equity. The level of and benefit from
these interest-free funds significantly affect net interest
revenue.
Net interest revenue decreased $25 million in 1993, due to a
$1 billion reduction in average earning assets, primarily loans,
and a slight decline in the net interest margin. The lower level
of earning assets caused $17 million of the decline in net
interest revenue. The lower margin was due to a reduced benefit
from interest-free funds in the lower interest-rate environment,
partially offset by a $14 million increase in collections on
nonperforming loans and a $7 million increase in loan fees.
See Consolidated Average Balance Sheet and Net Interest Revenue
on pages 5 through 8 of Statistical Information for detail of
annual average balance-sheet volumes with associated revenues and
rates.
<PAGE> 27
<TABLE>
Components of Net Interest Margin
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Yield on earning assets........................... 5.97% 6.75% 8.45%
Rate on interest-bearing liabilities............. 4.24 5.00 7.15
Net interest-rate spread.......................... 1.73 1.75 1.30
Net cash collections on nonperforming loans....... 0.10 0.03 0.04
Benefit from interest-free funds.................. 0.51 0.62 0.79
Loan fee revenue.................................. 0.29 0.24 0.17
Tax-equivalent adjustment......................... 0.02 0.02 0.03
Net interest margin(a).......................... 2.65% 2.66% 2.33%
Average Earning Assets
($ in billions)
Short-term, liquid assets(b)...................... $ 4.6 $ 4.2 $ 5.7
Loans(c).......................................... 11.9 13.3 14.6
Securities........................................ 1.1 1.1 0.9
Total........................................... $17.6 $18.6 $21.2
<FN>
(a) Net interest revenue on a taxable-equivalent basis as a percentage of
average earning assets.
(b) Includes interest-bearing deposits, federal funds sold, securities
purchased under agreements to resell, and trading account assets.
(c) Amounts for 1992 restated to reflect reclassification of certain loans
from OREO. See Note 2 to the financial statements.
</TABLE>
Fees, Trading, and Other Revenues
All categories of fees, trading, and other revenues showed
increases in 1993 over 1992. Fees and commissions from the
origination and distribution of loans and other assets, cash
management services, and other service-related activities rose
3 percent in 1993. Fees and commissions provided more than
30 percent of Continental's non-interest revenue in each of the
last five years.
Trust income, derived primarily from portfolio management,
fiduciary, and securities services, increased 5 percent in 1993.
The trust business has been a reliable source of revenue,
providing more than 15 percent of Continental's non-interest
revenue in each of the last five years.
Continental primarily engages in trading activities to serve
customers' needs, buying and selling various types of
securities, money market instruments, currencies, and derivative
and other risk-management products. In 1993, these activities
produced revenues of $102 million, $72 million more than 1992,
primarily because of improved revenues from the origination of
interest-rate-derivative transactions for customers and
Continental's management of the resultant risk portfolio. Also
contributing to the increase were significantly higher revenues
from the trading of emerging markets debt.
Equity investments, both domestic and foreign, have been
important revenue providers for Continental and represent another
avenue through which Continental profits by serving the financing
<PAGE> 28
needs of its customers. Revenues from these investments have
averaged more than $100 million per year over the last five
years.
The major components of revenues from equity investments were as
follows:
<TABLE>
Revenues from Equity Investments
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Net gains on sale of equity investments............. $ 93 $100 $ 69
Net unrealized gains................................ 81 22 35
Dividends........................................... 15 20 22
Other............................................... 9 8 5
Total............................................... $198 $150 $131
Equity investments--period-end...................... $679 $504 $383
</TABLE>
Revenues from domestic equity investments were $150 million in
1993, up from $113 million in 1992, due to a $59 million increase
in net unrealized gains, partially offset by a $22 million
decrease in net gains on sales. A significant portion of
unrealized gains recorded in 1993 is expected to be realized in
the first quarter of 1994. Revenues from foreign equity
investments increased to $48 million from $37 million in 1992,
primarily due to a $15 million increase in net gains on sales,
mainly from Latin American investments.
During 1993, Continental invested directly in a wide variety of
companies engaging in activities such as television broadcasting,
publishing, healthcare, telecommunications, and financial
services. Approximately 36 percent of the 1993 revenues was from
ten investments in the telecommunications industry, both domestic
and foreign. Revenues from investments in the financial services
and apparel industries accounted for an additional 23 percent and
11 percent, respectively. No other industry accounted for more
than 10 percent of the revenues. The adoption of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," at year-end 1993 resulted in a $45 million increase
in the equity-investment portfolio. Under the standard, certain
securities previously carried at lower of cost or market in this
portfolio are required to be carried at fair value. The increase
in value from adopting the standard had no effect on the income
statement and is included, net of tax, in a separate component of
stockholders' equity. See Note 5 to the financial statements for
further discussion of equity investments.
The other revenue component of total revenues includes gains and
losses from the translation of foreign-currency assets and
liabilities, and a variety of other activities. In 1993, other
revenues included gains on loan sales of $36 million, $7 million
from the settlement of outstanding claims, and foreign-exchange
translation losses attributable to Latin American operations of
$4 million. In 1992, other revenues included gains on loan sales
<PAGE> 29
of $26 million, $8 million from the collection of claims retained
from the sale of a business, and foreign-exchange translation
losses of $21 million.
Banking Product Revenues
Four product categories form the core of Continental's business
strategy: corporate finance; specialized financial services;
trading; and equity financing. The amounts in the following
table differ from those in similar revenue lines in the
consolidated statement of operations, because Continental
presents banking product revenues after allocating funding costs
among product lines.
<TABLE>
Banking Product Revenues*
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Corporate finance
Lending............................................ $ 350 $367 $345
Syndication, distribution, and other credit
products......................................... 187 169 153
Total corporate finance.......................... 537 536 498
Specialized financial services
Cash management.................................... 119 116 102
Securities and clearing............................ 59 64 57
Private banking, personal trust, and other......... 80 86 109
Total specialized financial services............. 258 266 268
Trading............................................ 123 46 98
Equity financing
Domestic........................................... 139 100 66
Foreign............................................ 43 30 52
Total equity financing........................... 182 130 118
Total banking product revenues................... 1,100 978 982
All other revenues................................. 4 (14) (18)
Total revenues................................... $1,104 $964 $964
<FN>
*Prior years restated to conform to the 1993 presentation.
</TABLE>
Corporate Finance: Corporate finance revenues, which include
revenues from lending, syndication, and distribution activities,
rose slightly from the 1992 level. Lending revenues fell
5 percent due to a $1.3 billion decline in average loans,
partially offset by higher cash collections on nonperforming
loans and increased loan fees. Increased capital markets
activity in 1993 produced higher syndication and distribution
revenues from gains on Latin American debt sales and higher
domestic transaction flow.
Specialized Financial Services: Cash management revenues
increased 3 percent, primarily due to increased business volume.
The $5 million drop in revenue from securities and clearing
services reflected downward pricing pressure. Revenues from
private banking, personal trust, and other activities, primarily
deposit-related, fell 7 percent due to the lower value of
interest-free funds in a lower interest-rate environment.
<PAGE> 30
Trading: Trading revenues rose $77 million due to increased
revenues from secondary asset trading and growth in revenues from
customer-driven activity in interest-rate derivative products.
While achieving significant revenue growth year-to-year, this
area is still viewed by management as one in which opportunities
to expand business will continue. The key to continued growth
lies in Continental's ability to provide financial products and
services to assist customers in managing financial risk inherent
to their businesses, and to deliver value to financial investors.
Equity Financing: Revenues from equity financing increased
40 percent from the prior year to a record level of $182 million.
In 1993, 55 percent of revenues from equity financing was from
net gains on sales, dividends, and fees; the remaining 45 percent
was from unrealized market appreciation. In 1992, 83 percent of
revenues represented net gains on sales, dividends, and fees.
Equity investments have consistently contributed to product
revenues, averaging 14 percent of total banking product revenues
over the past three years.
All Other Revenues: All other revenues consists of revenues from
non-product-related activities, such as foreign-exchange
translation. In 1993, all other revenues included $7 million
from the settlement of outstanding claims and $4 million of
foreign-exchange translation losses attributable to Latin
American operations. In 1992, foreign-exchange translation
losses amounted to $21 million; $8 million from the collections
retained from the sale of a business was also included in all
other revenues. Losses from write-downs of nonperforming assets
acquired in connection with corporate finance activities are
included in corporate finance product revenues.
Provision for Credit Losses
The provision for credit losses totaled $181 million in 1993,
compared with $125 million in 1992. See Reserve for Credit
Losses on pages 52 and 53 for a discussion of reserve adequacy.
<PAGE> 31
Operating Expenses
<TABLE>
Operating Expenses
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Employee expenses................................ $313 $299 $344
Net occupancy expense............................ 50 46 52
Equipment expense................................ 19 20 43
Provision for business restructuring............. 3 6 46
Other expenses*.................................. 230 213 179
Subtotal....................................... 615 584 664
Net costs of other nonperforming assets.......... 68 13 16
Total.......................................... $683 $597 $680
Staff level--period-end
Operating...................................... 4,216 4,235 4,596
Total.......................................... 4,238 4,276 5,054
<FN>
*Restated to reflect reclassification of certain revenues and expenses to net
costs of ONPA.
</TABLE>
Total operating expenses rose 14 percent in 1993. Excluding the
net costs of ONPA of $68 million for 1993 and $13 million for
1992, operating expenses increased 5 percent over the 1992 level.
On this basis, despite the increase in operating expenses, the
efficiency ratio (operating expenses as a percentage of revenues)
improved to 56 percent in 1993, compared with 61 percent in 1992.
Employee expenses increased $14 million year-to-year, primarily
due to higher provisions for incentive compensation related to
improved revenue levels. Increases in base salaries, as well as
pension, medical, and other employee benefit expenses, also
contributed to the 1993 rise. Partially offsetting these
increases were reductions in contributions to the Employees Stock
Ownership Plan and payroll tax expense. The increase in medical
expense was related to the adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
Net occupancy expense increased slightly in 1993, primarily due
to higher expenses for the maintenance of banking premises.
Other expenses rose 8 percent and included higher professional
service fees, an increase in FDIC insurance premiums, and higher
travel expense. Professional service fees increased $7 million,
resulting from several marketing-related projects.
Net costs of ONPA were $68 million in 1993, compared with
$13 million in 1992. The increase was primarily due to write-
downs and foreclosure costs related to OREO. Continental expects
these costs in future periods to be below the 1993 level. For
information about the components of net costs of ONPA, see
Note 21 of the financial statements.
<PAGE> 32
Income Taxes
Effective January 1, 1993, Continental adopted SFAS No. 109,
"Accounting for Income Taxes," which resulted in the recognition
of $354 million of deferred federal tax benefits, reduced by the
establishment of a valuation allowance of $274 million. The net
amount of $80 million is included in 1993 net income as the
cumulative effect of a change in accounting principle.
Realization of deferred tax benefits is dependent on
Continental's ability to generate taxable income in the current
and future years. The recognition of benefits in the financial
statements is based upon projections by management of future
operating income and the anticipated reversal of temporary
differences that will result in taxable income. Projections of
future earnings were based on adjusted historical earnings.
Continental had taxable income and pretax book income for 1993
and the prior two years as follows:
<TABLE>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Taxable income (loss)......................... $178 $ 94 $(133)
Pretax book income (loss)..................... 240 242 (56)
</TABLE>
Continental recorded an income tax credit of $18 million in 1993,
compared with income tax expense, primarily foreign taxes
applicable to equity investment gains, of $20 million in 1992.
The 1993 credit included the recognition of an additional
$49 million of deferred federal tax benefits as a result of a
decrease in the valuation allowance of $157 million, partially
offset by a decrease in the gross deferred tax asset of
$108 million.
Management increased its projection of future taxable income in
view of Continental's 1993 earnings and, as a result, reduced the
valuation allowance to $117 million as of December 31, 1993.
In order to fully realize the December 31, 1993, deferred tax
asset of $129 million (without regard to a $19 million deferred
tax liability resulting from the adoption of SFAS No. 115),
Continental will need to generate future taxable income of
approximately $369 million. Management believes that it is more
likely than not that the required amount of taxable income will
be realized. Management will periodically reconsider the
assumptions utilized in the projection of future earnings, and,
if current earnings and taxable income trends continue,
additional tax benefits will be recognized through further
reductions of the valuation allowance. See Note 20 to the
financial statements for additional information on income taxes.
<PAGE> 33
DOMESTIC/FOREIGN OPERATIONS
Continental attributes assets and earnings to domestic and
foreign operations based on the location of the principal
obligor. The level of foreign assets increased in 1993 after
years of decline principally due to the downsizing or closing of
certain foreign operations and a reduction of Latin American
exposure. The increase from year-end 1992 was primarily due to
an increase in short-term assets in the Asia/Pacific region.
<TABLE>
Foreign Operations*
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Total revenues............... $ 246 22% $ 202 21% $ 198 21%
Income (loss) from
continuing operations...... 97 38 51 23 (9) 12
Period-end total assets...... 4,907 22 4,559 20 5,456 23
<FN>
*Presented as a percent of total consolidated amounts.
</TABLE>
Income from continuing operations attributable to foreign
operations was $97 million in 1993, compared with $51 million in
1992. Latin America continued to be the principal contributor to
foreign earnings. However, a $51 million increase in non-
interest revenues, primarily from higher gains from equity
investments, was almost entirely offset by lower net interest
revenue and higher income taxes. Results improved in all other
regions, except Asia/Pacific where a decline in net interest
revenue and an increase in operating expenses resulted in a
$17 million drop in earnings. Domestic income from continuing
operations amounted to $161 million in 1993, compared with
$171 million in 1992.
For country risk information, see pages 53 through 55.
BALANCE-SHEET ANALYSIS
Continental's well-established distribution network enables it to
meet customer needs by placing financial assets with a broad
range of investors. This limits Continental's need to use its
balance sheet, thereby maximizing risk-adjusted returns.
Assets
Although total assets increased only slightly from year-end 1992,
the composition of total assets changed more significantly. As a
result of the adoption of SFAS No. 115 on December 31, 1993,
Continental transferred $665 million of securities from
securities held for sale, $157 million from loans, and
$98 million from trading account assets to securities available
for sale. The recording of net unrealized gains on securities
available for sale and equity investments increased those
categories by $9 million and $45 million, respectively.
<PAGE> 34
<TABLE>
Total Assets
<CAPTION>
1993 1992
December 31 Percent of Percent of
($ in billions) Balance total assets Balance total assets
<S> <C> <C> <C> <C>
Short-term,
liquid assets*.......... $ 5.0 22% $ 5.3 24%
Loans..................... 11.7 52 12.5 55
Other..................... 5.9 26 4.7 21
Total................... $22.6 100% $22.5 100%
<FN>
*Includes interest-bearing deposits, federal funds sold, securities purchased
under agreements to resell, and trading account assets. Certain securities
available for sale, not included in these amounts, provide additional
liquidity.
</TABLE>
Continental estimates that $7 billion of credit facilities
(unused credit commitments and loans) were sold in 1993,
excluding sales of short-term loans (for example, loan
participation certificates).
Deposits
Deposits, the principal source of funds, totaled $13.5 billion on
December 31, 1993, down $602 million from year-end 1992. Most of
the reduction was in deposits in domestic offices, primarily
interest-bearing. At year-end 1993, $3.7 billion of deposits had
a remaining maturity of more than one year, compared with
$4.4 billion the prior year. Such funds are considered to be
term deposits and are included in Continental's term funding.
The Bank has issued certificates of deposit through securities
brokers. At year-end 1993, these deposits totaled $4.3 billion.
During 1993, Continental issued approximately $250 million of
these deposits, with an average maturity of more than five years.
These deposits allow Continental to obtain retail-priced term
funding without incurring costs associated with a retail branch
network.
Capital
Maintaining a strong capital base is a key component of a
successful funding strategy and provides Continental with both
the level of capital to prudently support the financial risks
inherent in its businesses and the flexibility to take advantage
of new business opportunities.
Continental's objective is to maintain capital ratios in excess
of the regulatory minimums through retention of earnings, asset
management, and the issuance of qualifying debt. Despite an
increase in risk-adjusted assets, the ratios of Tier 1 capital
and total capital to risk-adjusted assets increased from year-end
1992, due to an increase in capital from retention of earnings.
In addition, the $80 million net deferred tax benefit that was
<PAGE> 35
recorded upon adoption of SFAS No. 109 was recognized for
regulatory capital purposes. However, the purchase of treasury
stock in 1993 reduced capital. The improvement in the leverage
ratio resulted primarily from the increase in Tier 1 capital.
The adoption of SFAS No. 115 resulted in the recording of net
appreciation on securities available for sale and certain equity
investments of $35 million, net of income tax effect ($54 million
on a pretax basis). The net appreciation is reported as a
separate component of stockholders' equity. This portion of
equity did not qualify as regulatory capital as of
December 31, 1993.
<TABLE>
Regulatory Capital Ratios
<CAPTION>
Continental Bank
December 31 ($ in millions) 1993 1992 1993 1992
<S> <C> <C> <C> <C>
Capital
Tier 1............................ $ 1,888 $ 1,688 $ 2,110 $ 1,828
Tier 2............................ 733 643 700 590
Total*.......................... $ 2,621 $ 2,331 $ 2,810 $ 2,418
Risk-adjusted assets
Balance-sheet assets.............. $15,537 $15,069 $15,440 $14,987
Off-balance-sheet assets.......... 8,776 8,358 8,700 8,312
Total........................... $24,313 $23,427 $24,140 $23,299
Capital ratios
Tier 1 capital to risk-adjusted
assets (regulatory minimum
--4%)........................... 7.8% 7.2% 8.7% 7.8%
Total capital to risk-adjusted
assets (regulatory minimum
--8%)........................... 10.8 9.9 11.6 10.4
Leverage ratio.................... 9.0 7.9 10.2 8.6
<FN>
*Includes stockholders' equity, subordinated and other qualifying debt, and a
portion of the reserve for credit losses.
</TABLE>
The largest component of capital is stockholders' equity. The
ratio of equity to assets was 8.5 percent at year-end 1993, an
improvement from 7.5 percent at year-end 1992, primarily due to
earnings retention.
OFF-BALANCE-SHEET ACTIVITIES
Continental engages in a variety of transactions with customers
and for its own account which by their nature, are not recorded
on the balance sheet. These transactions are in the form of
contingent liabilities, including commitments to extend credit,
contracts to purchase and sell foreign currencies, and derivative
instruments. Some of these transactions are entered into to
assist Continental and its customers to manage financial risks,
while others are for Continental's proprietary trading purposes.
The products most often involved in these transactions are
derivative and credit-related.
<PAGE> 36
Derivative Products
Derivative products involve the use of one or more of the
following basic instruments: futures, forwards, swaps, and
options. The financial risks inherent in these instruments may
include interest-rate, foreign-currency, and other price risks.
Basic derivative instruments may be combined to "build" other
derivatives. For example, an interest-rate collar combines a
sold option and a purchased option to provide protection for a
range of interest-rate movements at a low cost. Financial
instruments also may be combined to build other derivatives for
the management of more than one financial risk. For example, a
cross-currency interest-rate swap is designed to manage both
interest-rate and foreign-currency risk. For more information
about Continental's derivative products, see Note 14 to the
financial statements.
Credit-Related Products
Off-balance-sheet credit-related products primarily include
commitments to fund under various scenarios and conditions, such
as a standby letter of credit. With this product, Continental's
obligation is contingent in nature, and, therefore, a liability
is not recorded on the balance sheet. However, if the standby
letter of credit is expected to be funded and the customer is not
expected to repay, then a loss must be recognized in the
financial statements.
The credit risks inherent in credit-related products as well as
any credit risk associated with derivative products are managed
as part of the Bank's overall credit review process and are
subject to the same credit policies and practices as a loan.
These policies and procedures are discussed in greater detail in
Credit Risk Management on pages 40 through 53.
FINANCIAL RISK MANAGEMENT
As a provider of financial services, Continental is exposed to
certain inherent risks and, to be successful, must actively
manage these risks under dynamic conditions. Continental's
Financial Risk Management Committee coordinates and oversees the
application of financial risk-management policy and financial
strategies. This committee reviews and analyzes Continental's
balance-sheet management and financial-risk profile, including
liquidity risk, interest-rate risk, trading risk, and
foreign-currency risk, as well as risks related to new markets
and new products.
Continental utilizes derivatives to manage certain of its
financial risks. These include interest-rate risk resulting from
Continental's asset and liability structure, trading activities,
foreign-currency exposure related to investments in foreign
subsidiaries, and price risk associated with certain equity
investments.
<PAGE> 37
Liquidity Management
Continental's liquidity management balances the trade-off between
financial flexibility and funding costs to provide adequate
liquidity. Because of its business banking strategy,
Continental's primary source of funds is the wholesale capital
markets. Therefore, key elements of Continental's liquidity
management policy include limiting the reliance on short-dated
funding, establishing an appropriate level of medium- and
long-term funding to provide stability, diversifying funding
sources, and maintaining a liquidity cushion using readily
marketable and/or short-maturity assets. For a more detailed
discussion of liquidity, see Funding Strategy below.
In 1993, Continental's net cash flow was $188 million, compared
with $147 million in 1992. The net decrease in loans produced
cash inflows of $167 million in 1993 and $1.269 billion in 1992.
Issuance of long-term debt, net of repayments and retirements,
provided $183 million of cash in 1993. However, in 1992,
repayments and retirements exceeded proceeds from the issuance of
long-term debt, resulting in a net cash outflow of $21 million.
Proceeds from sales and maturities of securities held to maturity
and sales of equity investments totaled $338 million in 1993 and
$735 million in the prior year. During 1993, the purchase of
securities held to maturity and equity investments totaled
$514 million in 1993 and $685 million in the prior year.
Funding Strategy
Continental accesses various capital markets when they are
economically attractive, while maintaining a balance among
capital, term funding, and short-term funding. This strategy, in
conjunction with its liquidity policy, is designed to mitigate
any adverse impact on Continental when unfavorable conditions
exist in capital markets.
Term Funding
Continental considers term funding (funding with remaining
maturities of more than one year) a key element of its liquidity
management, especially due to the corporation's limited retail
deposit base. Although most of Continental's term funding is
fixed-rate, it has been converted to a floating-rate basis
through the use of derivative products. In general, interest-
rate risk on these funds is managed as part of Continental's
overall interest-rate-sensitivity position.
Term funding decreased from $5.2 billion on December 31, 1992, to
$4.8 billion on December 31, 1993, consistent with the
$0.7 billion decline in loans. During 1993, Continental issued
$1.0 billion of term liabilities with an average original
maturity of 5.1 years, bringing the average remaining
maturity of term funds to 3.4 years at year-end. The level of
term funding in 1994 will be managed in accordance with changing
<PAGE> 38
conditions in capital markets and the size and composition of
Continental's balance sheet. See Note 7 to the financial
statements for additional information on long-term debt.
Short-Term Funding
Short-term obligations are used to fund short-term assets and a
portion of longer-term assets. Short-term obligations include
deposits with remaining maturities of less than one year, federal
funds purchased, securities sold under agreements to repurchase,
and other short-term borrowings. These obligations amounted to
$14.6 billion at year-end 1993.
Interest-Rate-Risk Management
In managing interest-rate risk, Continental recognizes that
earnings and the market value of financial instruments are
affected by movements in interest rates and the repricing
characteristics of assets and liabilities. Interest-rate risk is
managed on a macro, or enterprise, basis designed to achieve a
level of interest-rate risk that mitigates and controls the
conflicting risks of net-interest-revenue variability and
variability in the market value of interest-sensitive assets and
liabilities. Limits associated with interest-rate-risk
management are approved and monitored by the Financial Risk
Management Committee.
As described in Funding Strategy above, Continental strives to
maintain sufficient term funding to limit its reliance on short-
term, volatile funding. This funding strategy, designed to
mitigate the impact of limited core deposits, creates interest-
rate risk due to the overall short-term repricing nature of
Continental's assets. As shown in Sensitivity to Interest-Rate
Changes on page 24 of Selected Financial Data, off-balance-sheet
products used for hedging purposes substantially reduce
Continental's interest-rate risk. It can be misleading to view
off-balance-sheet products (including derivatives) separately
from the balance-sheet items to which they relate. What may
appear to be a large off-balance-sheet exposure is in fact a
hedge of a balance-sheet position, which, when viewed with the
hedged item, actually minimizes risk. If the derivatives market
did not exist, or were less liquid, other techniques would be
used to manage Continental's interest-rate risk and funding.
Management of Trading and Other Financial Risks
Trading Portfolio
As a financial intermediary, Continental provides various
interest-rate, commodity, foreign-exchange, fixed-income,
emerging-market, and other products to its customers through its
marketing and distribution activities. Continental manages the
risk exposures created by these activities through transactions
involving cash instruments as well as derivative products. The
risks inherent in the trading of these products are managed and
controlled worldwide. The Financial Risk Management Committee
establishes limits for trading activity with respect to each type
<PAGE> 39
of financial risk and business activity. The limits are based on
Continental's current financial strategy and risk profile.
Positions are monitored daily against those limits.
Foreign-Currency Exposure
Continental is exposed to foreign-currency exchange-rate
fluctuations through its trading activities, as well as through
its investments in foreign subsidiaries and branches. Risk
arising through trading activities is hedged as part of the
overall management of Continental's trading portfolio.
Continental's policy is to manage foreign-currency exposure from
investments in foreign subsidiaries and branches through hedging
where available and strategically appropriate.
Securities Available for Sale
Securities that are held for indefinite periods of time are
classified as securities available for sale and carried at fair
value, with unrealized appreciation or depreciation recognized in
a component of stockholders' equity. This category includes
securities that may be used as part of Continental's
asset/liability management strategy and that may be sold in
response to changes in interest rates, prepayments, or similar
factors.
Equity Investments
Continental has a well-diversified portfolio of equity
investments which has been consistently profitable. This
portfolio totaled $679 million on December 31, 1993.
Approximately 24 percent of the portfolio at year-end was
invested in foreign securities, primarily Latin American. The
equity-investment portfolio has generated a steady revenue stream
from realized gains on sales, unrealized market appreciation, and
dividends.
The focus of Continental's domestic equity-investment portfolio
is direct equity ownership in successful private businesses that
need additional capital to expand and businesses in which
experienced management maintains a substantial financial
interest. Continental also acquires equity investments
through debt-for-equity swaps, settlement of loans, and
enhancements to lending agreements. In addition to direct equity
ownership, investments in externally managed equity funds are an
important part of Continental's equity portfolio strategy.
Continental actively manages risks through established limits on
the aggregate level of equity investments; the size of individual
deals; and the number of investments within a single industry, an
economically linked sector of the economy, or a geographic
region. The portfolio is managed by proven, experienced
professionals within Continental and through professionally
managed funds externally. Continental manages market risk
<PAGE> 40
related to certain publicly traded equity investments held by its
equity-investment companies. Derivatives are entered into to
minimize volatility of earnings.
CREDIT RISK MANAGEMENT
Continental remains committed to a thorough, active credit
management process which it views as essential to its success as
a financial intermediary. Continental's worldwide credit approval
and monitoring process is driven by the size and inherent risk of
each transaction and exposure to any one customer, whether the
customer is a borrower or counterparty. Extensive analysis and
monitoring of the financial strength and structure of each
transaction and customer is an integral part of these processes.
Additionally, a process called watch-loan reporting serves as
management's early-warning system, flagging potential problems
early for senior management review and action, and includes
scrutiny of collateral positions and values. Continental's
credit portfolio, as discussed in this section, includes loans,
OREO, all other nonperforming assets, and funded bankers'
acceptances and is gross of unearned income and deferred fees.
Diversification of risk and rigorous monitoring of composition
are critical to maintaining a well-managed credit portfolio.
Continental regularly monitors and actively manages the credit
portfolio by customer diversification, industry diversification,
and credit-quality measures. Management's analysis of each of
its four portfolios--general corporate, commercial real estate,
residential real estate, and Latin American--encompasses all of
the foregoing elements of diversification. Continental's Credit
Policy Committee is responsible for setting and maintaining
credit standards and ensuring the overall quality of the credit
portfolio.
<TABLE>
Credit Portfolio
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
General corporate................................... $ 9,491 $ 9,715
Commercial real estate.............................. 1,040 1,165
Residential real estate............................. 676 1,023
Latin American...................................... 721 768
Total............................................. $11,928 $12,671
</TABLE>
Continental also monitors credit exposure arising from off-
balance-sheet financial instruments, mainly unused credit
commitments, standby letters of credit, and interest-rate and
other risk-management products. To manage and minimize credit
risk, limits are established for each counterparty in derivative
transactions. Additionally, master netting arrangements are
entered into with counterparties whenever possible, and, where
appropriate, collateral is required to further mitigate credit
risk.
<PAGE> 41
In the context of credit risk management, credit exposure from
interest-rate and foreign-exchange products includes the
estimated cost of replacing, at current market rates, all
agreements that are favorable to Continental and an amount that
represents the potential risk from market variability for all
contracts. For additional information about concentrations in
Continental's total credit exposure (excluding advised lines of
credit), both balance-sheet and off-balance-sheet, see Note 15 to
the financial statements.
Customer Diversification
Continental monitors the size of credits in the portfolio to
manage concentrations to single and related borrowers. The table
below shows the distribution by size of Continental's worldwide
portfolio to single borrowers.
<TABLE>
Credit Portfolio Distribution by Size
<CAPTION>
1993 1992
Percent of Percent of
Number total Number total
December 31 of borrowers dollars of borrowers dollars
<S> <C> <C> <C> <C>
$100 million and over... 1 2% 4 5%
$75 to 100 million...... 3 2 9 6
$50 to 75 million....... 17 8 11 5
$25 to 50 million....... 69 19 75 19
$15 to 25 million....... 144 23 129 19
$5 to 15 million........ 427 32 465 33
Less than $5 million.... 2,512 14 3,165 13
Total................. 3,173 100% 3,858 100%
</TABLE>
Continental's largest single loan, which was $200 million to a
government-owned import/export bank, represented about 28 percent
of the maximum amount the Bank at year-end could lend to a single
borrower. Only 20 other loans were $50 million or greater.
Other than the three largest borrower groups, with outstandings
of $264 million, $185 million, and $177 million, no related
borrower group had outstandings greater than $100 million at
year-end 1993.
Credit exposure arising from off-balance-sheet financial
instruments, excluding Latin America, included unused commitments
and advised lines of credit totaling $18 billion on
December 31, 1993. The largest such exposure was $153 million,
with 17 others greater than $100 million; there were 66 between
$50 million and $100 million, and 150 between $25 million and
$50 million. Standby letters of credit totaled $2.7 billion on
December 31, 1993. The two largest were $217 million to a large
freight handling company and $184 million to a corporation that
specializes in the purchase of receivables and other financial
<PAGE> 42
assets. Of the remaining standby letters of credit (aggregated
by customer), only three were between $50 million and
$100 million, and 14 were between $25 million and $50 million.
Industry Diversification
Continental closely monitors the industry diversification of its
portfolio across more than 50 industry segments. More
information on industry diversification is in the portfolio
discussions that follow and in Credit Portfolio Information on
pages 47 through 52.
Credit Quality
At year-end 1993, nonperforming assets were $495 million, or
41 percent lower than at year-end 1992. Nonperforming loans
decreased $372 million, more than 53 percent, from
December 31, 1992.
<TABLE>
Nonperforming Assets
<CAPTION>
December 31 ($ in millions) 1993 1992(a)
<S> <C> <C>
Nonperforming loans
General corporate................................ $190 $306
Commercial real estate........................... 35 60
Residential real estate.......................... 102 230
Latin American................................... 1 104
Total nonperforming loans...................... 328 700
Other nonperforming assets
Commercial OREO(b)............................... 35 48
Residential OREO(b).............................. 101 66
All other nonperforming assets(b)................ 31 20
Total other nonperforming assets............... 167 134
Total nonperforming assets..................... $495 $834
Nonperforming loans to total loans................. 2.80% 5.62%
<FN>
(a) Restated to reflect reclassification of certain loans from OREO.
See Note 2 to the financial statements.
(b) Includes credits designated as ISFs for accounting purposes.
</TABLE>
For more information about nonperforming assets, see Credit
Portfolio Information on pages 47 through 52.
Nonperforming loans include loans for which interest is recorded
only when it is received (cash basis) and loans that have been
renegotiated, for which concessions have been granted due to the
borrower's deteriorating financial condition. Continental
generally places loans that are past-due 60 days or more on
nonperforming status.
The combined costs of credit-loss provisions, forgone revenue on
nonperforming loans, and ONPA costs were $301 million in 1993,
compared with $196 million in 1992 and $444 million in 1991.
These costs are expected to decline in 1994. See Operating
<PAGE> 43
Expenses on page 31 for further discussion of the net costs of
ONPA. See Note 6 to the financial statements for the pretax
impact of nonperforming loans on interest revenue.
Principal and interest were contractually current for 30 percent
of nonperforming loans on December 31, 1993. Nonperforming
loans, excluding fully charged-off loans, were carried at
65 percent of the contractual balance. Supplemental Information
on Nonperforming Loans in Credit Portfolio Information on
pages 51 and 52 provides information on the degree of performance
of Continental's nonperforming loans on December 31, 1993.
General Corporate Portfolio
The general corporate portfolio of $9.5 billion represented the
largest portion, 80 percent, of the total credit portfolio on
December 31, 1993, compared with $9.7 billion, or 77 percent, on
December 31, 1992. This portfolio included $873 million of
highly leveraged transactions, which represented approximately
9 percent of the general corporate portfolio at year-end 1993.
Continental's corporate portfolio represents a cross-section of
the U.S. economy. Customers range in size from small companies
to the nation's largest corporations, and include individuals.
Excluding financial institutions and Private Banking customers,
about 60 percent are privately held. For more information on the
general corporate portfolio, see the tables on pages 47 and 48 of
Credit Portfolio Information.
On December 31, 1993, nonperforming assets in the general
corporate portfolio totaled $199 million, or 2 percent of this
portfolio, a decrease from $321 million, or 3 percent, at year-
end 1992. There were 54 nonperforming general corporate assets
at year-end 1993; the two largest amounted to $33 million and
$21 million, and 29 were less than $0.5 million. At year-end
1992, the three largest nonperforming assets were $62 million,
$56 million, and $21 million; 14 additional nonperforming assets
were between $5 million and $20 million.
No single credit in the general corporate portfolio had
outstandings of more than $100 million at year-end 1993. Three
had outstandings between $75 million and $100 million; and
15 credits were between $50 million and $75 million. In total,
all credits of more than $50 million represented only 12 percent
of the general corporate portfolio. The largest industry
concentrations for the general corporate credit portfolio were
services, $703 million; brokerage firms, $671 million; fabricated
metals, $550 million; and leasing--transportation, $523 million.
Highly Leveraged Transactions
Continental classifies a transaction as an HLT in accordance with
the definition established jointly by federal bank regulatory
agencies in February 1990.
<PAGE> 44
<TABLE>
Selected HLT Portfolio Information
<CAPTION>
($ in millions) 1993 1992
<S> <C> <C>
Number of transactions completed................ 19 15
Domestic credits syndicated, assigned, and
participated.................................. $254 $ 228
At year-end:
HLT outstandings.............................. 873 1,040
HLT nonperforming assets...................... 62 204
Additional exposure* to HLT borrowers......... 639 527
Equity investments in highly leveraged
companies................................... 362 277
Additional commitments to invest in
highly leveraged companies.................. 136 83
HLT outstandings collateralized by stock of
principal operating subsidiaries or direct
pledge of operating assets.................. 90% 94%
Percent to borrowers outside United States.... 1 7
*Includes unused commitments, unused advised lines of credit, and standby
letters of credit.
</TABLE>
On December 31, 1993, $62 million, or 7 percent, of HLT
outstandings was nonperforming, a decline from $204 million, or
20 percent, at year-end 1992. See Reserve for Credit Losses on
pages 52 and 53 for information on HLT charge-offs and
recoveries.
Commercial Real Estate Portfolio
The commercial real estate portfolio consists primarily of loans
secured by retail facilities, offices, hotels, and industrial
facilities. This portfolio declined $125 million from
$1.165 billion on December 31, 1992, to $1.040 billion at year-
end 1993, primarily due to payments by borrowers and $40 million
of charge-offs and write-downs. The largest single credit
amounted to $73 million at year-end 1993.
On December 31, 1993, mortgage credits were 57 percent of this
portfolio, construction and development credits were 32 percent,
and working capital loans were 11 percent. The largest
geographic concentration was in Illinois, with 35 percent of the
portfolio, followed by New England and California, each with
11 percent.
On December 31, 1993, $70 million, or 7 percent, of the
commercial real estate portfolio was nonperforming, compared with
$108 million, or 9 percent, at year-end 1992. There were 19
nonperforming commercial real estate credits at year-end 1993;
the largest amounted to $13 million. This was the only
nonperforming commercial real estate loan of more than
$10 million. One OREO also was more than $10 million. See
Reserve for Credit Losses on pages 52 and 53 for information on
commercial real estate charge-offs and recoveries.
<PAGE> 45
At year-end 1993, 54 percent of the nonperforming commercial real
estate assets was mortgages, 40 percent was construction and
development credits, and 6 percent was working capital credits.
The quality of the commercial real estate portfolio has been, and
over the near term will continue to be, affected by fiscal and
monetary policy, consumer confidence, appraised values during the
current economic climate, the level of interest rates, and
borrowers' liquidity problems.
For more information on Continental's commercial real estate
portfolio, see pages 48 and 49 of Credit Portfolio Information.
Residential Real Estate Portfolio
The residential real estate portfolio generally consists of
credits to real estate developers for single-family homebuilding.
Residential real estate outstandings declined $347 million to
$676 million on December 31, 1993, from $1.0 billion at year-end
1992. Of this amount, California residential real estate
amounted to $282 million at year-end 1993, down from $588 million
at year-end 1992. On December 31, 1993, approximately 38 percent
of the total portfolio outstandings represented mortgages,
26 percent was for construction, 19 percent for land development,
10 percent for land acquisition, and 7 percent for working
capital loans.
At year-end 1993, the largest credit was $59 million, and seven
other credits ranged from $15 million to $38 million.
Nonperforming assets in this portfolio decreased $93 million in
1993. On December 31, 1993, $203 million, or 30 percent, of the
residential real estate portfolio was nonperforming, compared
with $296 million, or 29 percent, at year-end 1992. There were
35 nonperforming residential real estate credits at year-end
1993; the largest was carried at $45 million. Only three
nonperforming residential real estate loans and three OREO were
more than $10 million at year-end 1993. At year-end 1993, all
$101 million of residential OREO was ISFs, the largest relating
to one borrower group, carried at $42 million, and with projects
primarily in California. Land acquisition credits represented
$13 million of OREO. See Reserve for Credit Losses on pages 52
and 53 for information on residential real estate charge-offs and
recoveries.
As with the commercial real estate portfolio, the quality of the
residential real estate portfolio has been, and over the near
term will continue to be, affected by a variety of external
factors.
California Residential Real Estate
California represented the largest geographic concentration of
residential real estate exposure, with $282 million of
outstandings and $176 million of nonperforming assets on
December 31, 1993. The carrying value of nonperforming assets
<PAGE> 46
was 35 percent at year-end 1993, 51 percent excluding
working-capital loans. The largest credit was $49 million, and
five others ranged from $15 million to $40 million; five of these
six credits were nonperforming.
<TABLE>
Selected California Residential Real Estate Portfolio Information
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Outstandings..................................... $282 $588
Percentage of total residential real estate
portfolio...................................... 42% 57%
Nonperforming assets............................. $176 $271
</TABLE>
For more information on the residential real estate portfolio,
see the tables on pages 49 and 50 of Credit Portfolio
Information.
Latin American Portfolio
The Latin American portfolio, before deduction of guarantees,
totaled $721 million at year-end 1993. On December 31, 1993,
with the adoption of SFAS No. 115, approximately $157 million of
debt securities of Argentina, Mexico, and Venezuela was
transferred from loans to securities available for sale. These
outstandings are collateralized by U.S. Treasury obligations and
are deemed to be securities under SFAS No. 115. In addition, in
1993, $58 million of loans to Brazil was transferred to trading
account assets after charge-offs of $19 million against the ATRR.
The decline in the portfolio due to these transfers was partially
offset by a sharp increase in short-term, trade-related credits,
primarily to Mexico.
<TABLE>
Latin American Portfolio
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Mexico....................................... $374 $185
Chile........................................ 150 88
Argentina.................................... 86 128
Venezuela.................................... 67 195
Brazil....................................... 40 154
Other........................................ 4 18
Total...................................... $721 $768
</TABLE>
On December 31, 1993, $23 million of Latin American assets was
nonperforming, a decrease from $109 million at year-end 1992.
See Country Risk on pages 53 through 55 for further discussion of
countries experiencing liquidity problems. Amounts in that
section differ from amounts in the table above because guarantees
have been deducted and other financial instruments with transfer
risk are included in Country Risk.
<PAGE> 47
Credit Portfolio Information
The following tables present additional information on
Continental's credit portfolio:
General Corporate Portfolio
<TABLE>
Distribution by Industry Segment
<CAPTION>
1993 1992
Total Nonperforming Total Nonperforming
December 31 ($ in millions) outstandings assets outstandings assets
<S> <C> <C> <C> <C>
Services.................... $ 703 $ 2 $ 674 $ 10
Brokerage firms............. 671 -- 397 --
Fabricated metals........... 550 3 569 62
Leasing--transportation..... 523 -- 425 --
Food products............... 474 11 460 18
Individuals................. 446 17 403 29
Wholesale trade--Midwest.... 400 16 334 --
Insurance companies......... 377 1 429 1
Financial services--other... 364 2 678 6
Machinery................... 339 -- 359 2
Communications.............. 337 -- 217 2
Paper and allied products... 258 -- 243 --
Wholesale trade--other...... 249 -- 336 21
Automotive and parts
manufacturers, including
finance subsidiaries...... 245 -- 272 --
All Other................... 3,555 147 3,919 170
Total..................... $9,491 $199 $9,715 $321
</TABLE>
<TABLE>
Distribution by Size
<CAPTION>
1993 1992
Percent Percent
Number of total Number of total
December 31 of borrowers dollars of borrowers dollars
<S> <C> <C> <C> <C>
$100 million and over........... -- --% 2 3%
$75 to 100 million.............. 3 3 6 5
$50 to 75 million............... 15 9 7 4
$25 to 50 million............... 58 20 67 23
$15 to 25 million............... 125 25 101 19
$5 to 15 million................ 338 32 366 34
Less than $5 million............ 1,423 11 1,703 12
Total......................... 1,962 100% 2,252 100%
</TABLE>
<PAGE> 48
<TABLE>
Nonperforming Distribution by Size
<CAPTION>
1993 1992
Percent Percent
Number of total Number of total
December 31 of borrowers dollars of borrowers dollars
<S> <C> <C> <C> <C>
$50 to 75 million..... -- --% 2 36%
$25 to 50 million..... 1 16 -- --
$15 to 25 million..... 4 37 5 28
$5 to 15 million...... 8 31 10 22
Less than $5 million.. 41 16 50 14
Total............... 54 100% 67 100%
</TABLE>
Other nonperforming assets of $9 million at year-end 1993 and
$15 million at year-end 1992 are included in the general
corporate tables above.
Commercial Real Estate Portfolio
<TABLE>
Geographic Distribution
<CAPTION>
Construction & Development Mortgages Working Capital
December 31, 1993 Total Nonperforming Total Nonperforming Total Nonperforming Total
($ in millions) outstandings assets outstandings assets outstandings assets outstandings
<S> <C> <C> <C> <C> <C> <C> <C>
Illinois.......... $118 $ 5 $194 $10 $ 53 $ 1 $ 365
New England....... 13 13 99 -- -- -- 112
California........ 32 3 46 11 32 1 110
Metro Washington,
D.C............. 5 4 83 3 2 2 90
Florida........... 43 2 40 7 -- -- 83
Texas............. 22 1 1 -- 1 -- 24
Foreign........... -- -- 11 -- -- -- 11
All Other......... 97 -- 119 7 29 -- 245
Total........... $330 $28 $593 $38 $117 $ 4 $1,040
</TABLE>
<TABLE>
Distribution by Industry Segment
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Construction and development
Retail...................................................... $ 214 $ 257
Office...................................................... 71 139
Industrial.................................................. 29 31
Other....................................................... 16 35
Mortgages
Office...................................................... 230 272
Retail...................................................... 126 90
Hotel/motel................................................. 98 108
Industrial.................................................. 56 40
Other....................................................... 83 68
Real-estate-related working capital........................... 117 125
Total....................................................... $1,040 $1,165
</TABLE>
<PAGE> 49
<TABLE>
Distribution by Size
<CAPTION>
1993 1992
Percent Percent
Number of total Number of total
December 31 of borrowers dollars of borrowers dollars
<S> <C> <C> <C> <C>
$100 million and over....... -- --% -- --%
$75 to 100 million.......... -- -- 1 7
$50 to 75 million........... 1 7 1 5
$25 to 50 million........... 5 18 4 13
$15 to 25 million........... 10 18 16 27
$5 to 15 million............ 47 42 49 37
Less than $5 million........ 109 15 66 11
Total..................... 172 100% 137 100%
</TABLE>
<TABLE>
Nonperforming Distribution by Size
<CAPTION>
1993 1992
Percent Percent
Number of total Number of total
December 31 of borrowers dollars of borrowers dollars
<S> <C> <C> <C> <C>
$50 to 75 million........... -- --% -- --%
$25 to 50 million........... -- -- -- --
$15 to 25 million........... -- -- 1 18
$5 to 15 million............ 4 51 7 51
Less than $5 million........ 15 49 12 31
Total..................... 19 100% 20 100%
</TABLE>
Other commercial real estate owned of $35 million at year-end
1993 and $48 million at year-end 1992 are included in the tables
above.
Residential Real Estate Portfolio
<TABLE>
Geographic Distribution
<CAPTION>
Construction & Development Mortgages Working Capital
December 31, 1993 Total Nonperforming Total Nonperforming Total Nonperforming Total
($ in millions) outstandings assets outstandings assets outstandings assets outstandings
<S> <C> <C> <C> <C> <C> <C> <C>
California........ $237 $173 $ 36 $-- $ 9 $ 3 $282
Illinois.......... 35 4 146 2 23 -- 204
Florida........... 35 7 26 -- -- -- 61
Metro Washington,
D.C............. 30 -- 3 -- -- -- 33
Texas............. 6 6 6 -- 14 -- 26
New England....... -- -- 9 3 -- -- 9
All Other......... 29 -- 32 5 -- -- 61
Total........... $372 $190 $258 $10 $46 $ 3 $676
</TABLE>
<PAGE> 50
<TABLE>
Distribution by Size
<CAPTION>
1993 1992
Percent Percent
Number of total Number of total
December 31 of borrowers dollars of borrowers dollars
<S> <C> <C> <C> <C>
$100 million and over....... -- --% 1 13%
$75 to 100 million.......... -- -- 1 8
$50 to 75 million........... 1 9 3 16
$25 to 50 million........... 3 14 2 7
$15 to 25 million........... 4 12 6 13
$5 to 15 million............ 22 27 25 21
Less than $5 million........ 887 38 1,275 22
Total..................... 917 100% 1,313 100%
</TABLE>
<TABLE>
Nonperforming Distribution by Size
<CAPTION>
1993 1992
Percent Percent
Number of total Number of total
December 31 of borrowers dollars of borrowers dollars
<S> <C> <C> <C> <C>
$75 to 100 million.......... -- --% 1 28%
$50 to 75 million........... -- -- 1 23
$25 to 50 million........... 3 52 2 24
$15 to 25 million........... 1 8 2 12
$5 to 15 million............ 5 21 4 11
Less than $5 million........ 26 19 20 2
Total..................... 35 100% 30 100%
</TABLE>
Other residential real estate owned of $101 million at year-end
1993 and $66 million at year-end 1992 are included in the tables
above.
<PAGE>
<PAGE> 51
Nonperforming Asset Information
<TABLE>
Reconciliation of Change in Nonperforming Assets
<CAPTION>
Commercial Residential
General Corporate real real Latin
($ in millions) Corporate HLT estate estate American Total
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans
Balance on December 31, 1992*.... $102 $204 $ 60 $ 230 $104 $ 700
Loans placed on nonperforming
status......................... 159 61 68 294 -- 582
Charge-offs...................... (33) (39) (27) (159) (19) (277)
Sales............................ (3) (56) (15) (88) (25) (187)
Payments......................... (55) (30) (10) (68) -- (163)
Transfers to:
Accrual status................. (26) (78) (15) (14) -- (133)
Other nonperforming assets..... (13) -- (26) (93) -- (132)
Trading account assets......... -- -- -- -- (58) (58)
Other............................ (3) -- -- -- (1) (4)
Balance on December 31, 1993... $128 $ 62 $ 35 $ 102 $ 1 $ 328
Carrying value on
December 31, 1993.............. 61% 89% 78% 57% 100% 65%
Percentage contractually
current on December 31, 1993... 30 53 47 9 100 30
Other nonperforming assets
Balance on December 31, 1992*.... $ 15 $ -- $ 48 $ 66 $ 5 $ 134
Transfers from nonperforming
loans.......................... 13 -- 26 93 -- 132
Other additions.................. 2 -- -- -- 21 23
Sales............................ (2) -- (22) (25) -- (49)
Write-downs...................... (1) -- (13) (25) (2) (41)
Payments and settlements......... (16) -- (1) (10) -- (27)
Other............................ (2) -- (3) 2 (2) (5)
Balance on December 31, 1993... $ 9 $ -- $ 35 $ 101 $ 22 $ 167
Total nonperforming assets
on December 31, 1993......... $137 $ 62 $ 70 $ 203 $ 23 $ 495
<FN>
*Restated to reflect reclassification of certain loans from OREO. See Note 2 to the
financial statements.
</TABLE>
Supplemental Information on Nonperforming Loans: The following
table provides information on the degree of performance of
Continental's nonperforming loans on December 31, 1993. There
can be no assurance, however, that individual borrowers will
continue to perform. Also, performance characteristics can
change significantly over time. Both book and contractual
balances are presented; the difference represents charge-offs and
the application of interest payments to principal. Amounts for
fully charged-off loans are excluded.
On December 31, 1993, principal and interest were contractually
current for 30 percent of nonperforming loans. As shown in the
table, these loans were carried at 65 percent of the contractual
balance.
<PAGE> 52
<TABLE>
Supplemental Information on Nonperforming Loans
<CAPTION>
Cumulative Cash Interest
December 31, 1993 Payments Applied as(a)
Book Contractual Interest Reduction of
($ in millions) balance balance revenue principal
<S> <C> <C> <C> <C>
Contractually current
Payment in full of principal
or interest expected............ $ 13 $ 14 $-- $ 1
Payment in full of principal
or interest uncertain........... 85 107 -- 6
Contractually past due
Substantial performance(b)........ 46 67 -- 4
Limited performance............... 42 50 1 4
No performance.................... 142 268 1 6
Total........................... $328 $506 $ 2 $21
<FN>
(a) Includes payments received since loans were placed on nonperforming status.
(b) Interest payments received represented at least 85% of the contracted amount.
</TABLE>
Reserve for Credit Losses
Continental has established a reserve for credit losses that in
management's judgment is adequate to absorb probable losses
inherent in the portfolio on December 31, 1993. The reserve,
excluding the ATRR in 1992, is not allocated to specific credits.
Management's quarterly evaluation of the adequacy of the reserve
for credit losses is based on a variety of factors, such as the
credit quality and diversification of the credit portfolio, the
risk characteristics of individual credits, and historical loss
experience.
Continental's ongoing approach to evaluating reserve adequacy
consists of estimating the inherent losses in the credit
portfolio using various tests that analyze the portfolios and
evaluate the potential impact of other significant factors on the
probable loss in the portfolio. The process for evaluating
reserve adequacy is both quantitative and subjective, with
significant quantitative analysis involved in both the derivation
of historical loss experience and in the ongoing adequacy tests
themselves. Consideration is also given to other more subjective
factors, such as forecasted economic trends, that may influence
the evaluation process. This overall analysis process provides
the necessary and documented framework for evaluating reserve
adequacy.
The foundation of Continental's methodology to determine reserve
adequacy consists of four separate tests. Two multiple portfolio
tests measure reserve adequacy through an assessment of portfolio
risk based on internal credit risk ratings. The other two
portfolio tests utilize single ratios to set minimum
standards for the reserve. Each of the four tests embodies a
different approach, the results of which provide multiple
perspectives to the overall adequacy analysis and evaluation.
<PAGE> 53
The reserve was $328 million, or 2.8 percent of total loans, on
December 31, 1993, compared with $376 million, or 3.0 percent of
total loans, at year-end 1992. The reserve for credit losses was
100 percent of nonperforming loans on December 31, 1993, compared
with 54 percent at year-end 1992. There was no ATRR at year-end
1993; the ATRR was $21 million at year-end 1992.
Net charge-offs were $222 million in 1993, compared with
$158 million in 1992. The increase resulted primarily from
higher charge-offs on loans to residential real estate developers
in California, partially offset by net recoveries on Latin
American loans and lower charge-offs on corporate and HLT loans.
<TABLE>
Net Loan Charge-Offs (Recoveries)
<CAPTION>
($ in millions) 1993 1992
<S> <C> <C>
General corporate
Corporate............................................. $ 27 $ 31
HLT................................................... 20 73
Commercial real estate.................................. 26 9
Residential real estate................................. 158 57
Latin American.......................................... (9) (12)
Total................................................. $222 $158
</TABLE>
See Analysis of Net Credit Loss Experience on page 12 of Credit
Analysis and Loss Experience.
COUNTRY RISK
Continental's foreign transactions present elements of risk
beyond those associated with domestic business. There is the
risk that borrowers within a country will default on their debt
due to economic problems within the country. Another risk
factor, transfer risk, occurs when there is a shortage of
available non-local currency in the borrower's country with which
to repay the credit.
In evaluating country risk, Continental's Country Risk Committee
monitors such factors as the political, social, and economic
conditions of the country. Management maintains country lending
limits to control the total amount of credit extended to
borrowers in individual countries.
On December 31, 1993, Continental's foreign-currency
outstandings, which include loans, accrued interest, deposits
with banks, acceptances, and securities, totaled $3.7 billion,
compared with $3.1 billion at year-end 1992. Outstandings are
reported net of legally binding third-party guarantees.
These guarantees are considered outstandings of the country of
the guarantor. Foreign-currency outstandings do not include
local currency assets in excess of local currency liabilities.
<PAGE> 54
<TABLE>
Foreign-Currency Outstandings of 1 Percent or More of Total Assets
<CAPTION>
Public Sector Private Sector
Governments Commercial,
and official Financial industrial,
($ millions) institutions institutions and other Total
<S> <C> <C> <C> <C>
December 31, 1993
Japan............ $ -- $1,545 $ 12 $1,557
Mexico........... 251 42 91 384
Italy............ 205 70 2 277
Argentina........ 108 25 125 258
December 31, 1992
Japan............ $ -- $1,479 $ 55 $1,534
United Kingdom... -- 109 437 546
December 31, 1991
Japan............ $ -- $ 944 $ 75 $1,019
Italy............ 198 227 22 447
</TABLE>
Countries with foreign-currency outstandings that were greater
than 0.75 percent but less than 1 percent of total assets were as
follows: On December 31, 1993--Venezuela, with an aggregate of
$186 million; on December 31, 1992--Spain, Argentina, and Mexico,
with an aggregate of $549 million; and on December 31, 1991--
Netherlands, Argentina, and Brazil, with an aggregate of
$595 million.
Brazil
On December 31, 1993, total outstandings to Brazil were
$122 million, down $9 million from year-end 1992. Term
outstandings declined $76 million to $9 million on
December 31, 1993. This decline was mostly offset by an increase
in short-term outstandings from $46 million at year-end 1992 to
$113 million at year-end 1993, primarily due to the transfer of
loans with a book value of $58 million (net of charge-offs of
$19 million) to trading account assets. On December 31, 1993,
Continental had no Brazilian nonperforming loans. Brazilian
nonperforming loans totaled $85 million at year-end 1992.
Continental received $7 million of cash payments for Brazil's
past-due interest in 1993 and recognized the entire amount as
interest revenue. At year-end, unrecognized past-due interest on
Brazilian loans, including those held as trading account assets,
amounted to $22 million.
The refinancing of Brazil's eligible debt and past-due interest
is still pending. Under the agreements in principle between the
Government of Brazil and the Bank Advisory Committee reached in
July 1992, banks are to receive a combination of bonds and cash
interest payments in settlement of Brazil's medium- and long-term
debt and 1991 and 1992 past-due interest. Continental expects to
receive these bonds and remaining cash payments in 1994.
<PAGE> 55
Argentina
In the first quarter of 1993, Continental sold its eligible
Argentine debt with a book value of $17 million for approximately
$41 million, resulting in recoveries of $24 million. In 1993,
Continental converted all of its past-due Argentine interest
claim to interest bonds with a face amount of $38 million and
$5 million of cash payments for Argentine past-due interest. The
cash was recognized as interest revenue, and the interest bonds
were recorded at a nominal amount. During 1993, interest bonds
with a face amount of $16 million were sold for approximately
$14 million, which was recognized as gains on loan sales. On
December 31, 1993, the remaining interest bonds, with a face
value of $22 million, were written up, upon adoption of SFAS No.
115, to their market value of $19 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1992, the FASB issued Interpretation No. 39, "Offsetting
of Amounts Related to Certain Contracts." This interpretation
requires assets or liabilities related to certain contracts, such
as interest-rate swaps and foreign-exchange contracts, to be
reported gross, rather than offset, in the balance sheet, unless
certain conditions are met. Offsetting across product lines also
will be acceptable under certain conditions. The new
interpretation will be adopted on January 1, 1994, and the effect
on Continental's total assets and liabilities is expected to be
an increase of approximately 5 percent. There will be no
material impact on the results of operations or on Continental's
risk-based capital ratios. However, the regulatory leverage
ratio is expected to decrease by less than 50 basis points.
In November 1992, the FASB issued SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This standard requires
the cost of benefits provided to former or inactive employees
after employment but before retirement to be accrued if certain
conditions are met. Under current practice, employer costs are
generally recognized as benefits are actually paid. The adoption
of the new standard is required for years beginning after
December 15, 1993. The effect of the standard on Continental is
expected to be immaterial.
In May 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." Adoption of this standard
is required for fiscal years beginning after December 15, 1994.
The standard requires that certain loans be identified as
impaired whenever it is probable that a creditor will be unable
to collect all amounts due according to contractual terms. The
amount of impairment of these loans is then measured as the
difference between the recorded loan balance and the present
value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or
the fair value of the collateral. At adoption and each
subsequent reporting date, the overall amount of measured
impairment will be reported as a component of the reserve for
<PAGE> 56
credit losses. The scope of SFAS No. 114 is limited to loans
deemed impaired and does not include other components of the
credit portfolio.
Since the impact of the standard on Continental's financial
statements will depend on the composition of the loan portfolio
and level of the reserve for credit losses at the time of
adoption, the future effect of adoption cannot be precisely
determined at this time. To approximate the effect, however, the
requirements of SFAS No. 114 were applied to the loan portfolio
as of December 31, 1993. The resulting preliminary analysis
indicated that adoption at year-end 1993 would not have affected
the amount of the provision for credit losses and that the level
of the reserve for credit losses would not have changed. More
detailed information on the process used in determining the
adequacy of the credit loss reserve is in Reserve for Credit
Losses on pages 52 and 53.
RESULTS OF OPERATIONS--1992 AND 1991
Continental reported net income and income from continuing
operations of $222 million, or $3.44 per common share, for 1992.
In 1991, Continental reported a net loss of $76 million, or $2.08
per common share, and a loss from continuing operations of
$73 million, or $2.03 per common share.
Net interest revenue increased only $2 million in 1992, due to a
number of significant, but offsetting, factors. As interest
rates fell during the year, interest-bearing liabilities repriced
faster than earning assets, causing the net interest-rate spread
to widen and net interest revenue to increase by $86 million over
1991. Also, loan fees rose $8 million. However, the benefit
derived from interest-free funds declined $52 million, again due
to the lower interest-rate environment. In addition, a
$2.7 billion decrease in average earning assets resulted in a
$38 million decline in revenue.
Fees, trading, and other revenues in 1992 decreased slightly from
the 1991 level. Fees and commissions from the origination and
distribution of loans and other assets, cash management services,
and other service-related activities rose 12 percent in 1992.
Trading activities produced revenues of $30 million, 59 percent
less than 1991, because of lower profits from risk-management
products.
Revenues from domestic equity investments were $113 million in
1992, up from $74 million in 1991, primarily due to higher gains
on sales of companies in varied industries, such as hospital
supply, manufacturing, insurance, and computer-related retail.
Revenues from foreign equity investments decreased to $37 million
from $57 million in 1991, due to lower sales and dividend levels.
<PAGE> 57
In 1992, other revenues included gains on loan sales of
$26 million, $8 million from the collection of claims retained
from the sale of a business, and foreign-exchange translation
losses of $21 million. In 1991, Continental incurred $14 million
of foreign-exchange translation losses.
The provision for credit losses totaled $125 million in 1992,
compared with $340 million in 1991 which included a special
provision of $150 million and a $25 million provision to
establish an ATRR against Brazilian loans. The 1992 total
included a $1 million ATRR provision.
Operating expenses fell $83 million in 1992 ($80 million,
excluding the net costs of ONPA of $13 million in 1992 and
$16 million in 1991). When restructuring provisions and the net
costs of ONPA are excluded, operating expenses declined
$40 million, or 6 percent. This drop reflected the benefits from
the restructuring and other ongoing cost-control efforts. The
net costs of ONPA primarily resulted from asset write-downs.
The year-end 1991 outsourcing of information technology services
reduced employee and equipment expenses in 1992 and increased
other expenses. This action, along with the outsourcing of the
law function, resulted in an overall cost savings of
approximately $16 million in 1992.
Staff levels declined 8 percent, or 361 people, during 1992.
This decline, along with the year-end 1991 staff reduction,
contributed to a $54 million drop in salary and benefit expenses
in 1992. The decrease was partially offset by an increase of
$9 million in the provision for incentive compensation.
Net occupancy expense decreased $6 million in 1992, primarily due
to the corporate downsizing from the restructuring. Other
expenses rose 19 percent in 1992, as professional service fees
increased $38 million. This increase related primarily to the
cost of the outsourced functions.
Income tax expense, primarily foreign taxes applicable to equity-
investment gains, was $20 million, compared with $17 million in
1991. The 1992 income tax expense reflected the recognition of
previously unrecognized U.S. federal income tax benefits of
$77 million. In 1991, Continental recognized no federal income
tax benefit for the loss recorded. On December 31, 1992,
Continental's unrecognized federal income tax benefits, computed
at a 34 percent rate, totaled approximately $354 million.
<PAGE>
<PAGE> 58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
<TABLE>
CONSOLIDATED BALANCE SHEET
Continental Bank Corporation and Subsidiaries
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Assets
Cash and non-interest-bearing deposits............................. $ 2,042 $ 1,854
Interest-bearing deposits.......................................... 1,803 2,067
Federal funds sold................................................. 658 719
Securities purchased under agreements to resell.................... 922 1,427
Trading account assets............................................. 1,637 1,079
Securities held to maturity (fair value: $611 in 1993 and
$511 in 1992).................................................... 607 507
Securities available for sale...................................... 920 --
Securities held for sale (fair value: $499 in 1992)............... -- 495
Total securities................................................. 1,527 1,002
Equity investments................................................. 679 504
Loans, net of unearned income...................................... 11,729 12,450
Less: Reserve for credit losses................................. 328 376
Net loans........................................................ 11,401 12,074
Interest and fees receivable....................................... 124 141
Properties and equipment........................................... 256 231
Other assets....................................................... 1,552 1,369
Total assets................................................... $22,601 $22,467
Liabilities
Non-interest-bearing deposits in domestic offices.................. $ 2,899 $ 2,921
Interest-bearing deposits in domestic offices...................... 7,376 8,339
Deposits in foreign offices, primarily interest-bearing............ 3,267 2,884
Total deposits................................................... 13,542 14,144
Federal funds purchased............................................ 1,312 1,367
Securities sold under agreements to repurchase..................... 419 667
Other short-term borrowings........................................ 3,018 2,187
Other liabilities.................................................. 1,219 1,434
Long-term debt..................................................... 1,168 980
Total liabilities.............................................. 20,678 20,779
Stockholders' Equity
Adjustable Rate Preferred Stock, Series l--$50 stated value
Authorized and outstanding: l,788,000 shares.................... 89 89
Adjustable Rate Cumulative Preferred Stock, Series 2--$100 stated
value
Authorized and outstanding: 3,000,000 shares.................... 300 300
Common stock--$4 par value
Authorized: 100,000,000 shares
Outstanding: 53,978,633 shares.................................. 216 216
Capital surplus.................................................... 1,000 1,000
Retained earnings.................................................. 363 95
Accumulated translation adjustment................................. (5) (5)
Net unrealized security gains, net of income tax effect............ 35 --
Less: Treasury stock, at cost (1993--2,868,892 shares)............ 70 --
Loans to ESOP Trust......................................... 5 7
Total stockholders' equity..................................... 1,923 1,688
Total liabilities and stockholders' equity..................... $22,601 $22,467
<FN>
Commitments and contingencies (Notes 12 and 14).
See notes to financial statements.
/TABLE
<PAGE>
<PAGE> 59
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
Continental Bank Corporation and Subsidiaries
<CAPTION>
Year ended December 31 ($ in millions, except common share data) 1993 1992 1991
<S> <C> <C> <C>
Interest Revenue
Loans......................................................... $ 766 $ 935 $1,293
Securities held to maturity................................... 29 91 94
Securities held for sale...................................... 37 -- --
Trading account assets........................................ 73 48 90
Interest-bearing deposits..................................... 151 151 254
Federal funds sold............................................ 11 10 21
Securities purchased under agreements to resell............... 54 66 87
Total interest revenue...................................... 1,121 1,301 1,839
Interest Expense
Deposits...................................................... 391 549 927
Federal funds purchased....................................... 29 38 71
Securities sold under agreements to repurchase................ 30 36 84
Other short-term borrowings................................... 129 112 185
Long-term debt................................................ 78 77 85
Total interest expense...................................... 657 812 1,352
Provision for Credit Losses
Net interest revenue.......................................... 464 489 487
Provision for credit losses................................... 181 125 340
Net interest revenue after provision for credit losses........ 283 364 147
Fees, Trading, and Other Revenues
Fees and commissions.......................................... 194 188 168
Trust income.................................................. 98 93 95
Trading revenues.............................................. 102 30 73
Security gains (losses)....................................... 5 (2) 7
Revenues from equity investments.............................. 198 150 131
Other revenues................................................ 43 16 3
Total fees, trading, and other revenues..................... 640 475 477
Operating Expenses
Salaries...................................................... 259 250 285
Employee benefits............................................. 54 49 59
Net occupancy expense......................................... 50 46 52
Equipment expense............................................. 19 20 43
Provision for business restructuring.......................... 3 6 46
Other expenses................................................ 230 213 179
Subtotal.................................................... 615 584 664
Net costs of other nonperforming assets....................... 68 13 16
Total operating expenses.................................... 683 597 680
Income (Loss) from Continuing Operations
Income (loss) from continuing operations before income taxes.. 240 242 (56)
Income tax expense (credit)................................... (18) 20 17
Income (loss) from continuing operations...................... 258 222 (73)
Discontinued Operations and Cumulative Effect of
Accounting Change
Loss from business held for sale (net of income tax benefits). -- -- (3)
Income (loss) before cumulative effect of accounting
change for income taxes..................................... 258 222 (76)
Cumulative effect of accounting change for income taxes....... 80 -- --
Net Income (Loss)
Net income (loss)............................................. $ 338 $ 222 $ (76)
Net income (loss) applicable to common stock.................. $ 304 $ 188 $ (112)
Common Share Data
Earnings (loss) from continuing operations and before
cumulative effect of accounting change...................... $4.12 $ 3.44 $(2.03)
Earnings from cumulative effect of accounting change.......... 1.47 -- --
Earnings (loss)............................................... 5.59 3.44 (2.08)
Cash dividends declared....................................... 0.60 0.60 0.80
<FN>
See notes to financial statements.
</TABLE>
<PAGE> 60
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Continental Bank Corporation and Subsidiaries
<CAPTION>
Year ended December 31 ($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Operating Activities
Income (loss) from continuing operations.................. $ 258 $ 222 $ (73)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities
Provision for credit losses............................. 181 125 340
Net change in interest-rate swap payables/receivables... (18) (143) (415)
Net gains on sales of equity investments................ (93) (100) (69)
Net unrealized gains from equity investments............ (81) (22) (35)
Decrease (increase) in trading inventory, net of
securities sold but not yet purchased................. (499) 350 (565)
Net change in securities held for sale.................. (57) -- --
Write-downs of other nonperforming assets............... 41 11 16
Other................................................... (135) (32) (9)
Net cash provided (used) by operating activities........ (403) 411 (810)
Investing Activities
Net decrease (increase) in interest-bearing deposits...... 258 308 (120)
Net decrease (increase) in federal funds sold and
securities purchased under agreements to resell......... 565 (376) 1,040
Purchase of securities held to maturity................... (362) (514) (922)
Proceeds from sales of securities held to maturity........ 23 249 878
Proceeds from maturities of securities held to maturity... 119 295 253
Purchase of equity investments............................ (152) (171) (181)
Proceeds from sales of equity investments................. 196 191 156
Net decrease in loans..................................... 167 1,269 1,213
Proceeds from sales of other nonperforming assets......... 48 19 --
Other..................................................... (32) (36) 209
Net cash provided by investing activities............... 830 1,234 2,526
Financing Activities
Net decrease in deposits.................................. (657) (1,627) (391)
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase.......... (303) 92 (1,124)
Net increase (decrease) in other short-term borrowings.... 834 (44) (867)
Proceeds from issuance of long-term debt.................. 445 15 437
Repayment or retirement of long-term debt................. (262) (36) (376)
Purchase of treasury stock................................ (77) -- --
Cash dividends paid....................................... (65) (66) (80)
Other..................................................... (154) 168 217
Net cash used by financing activities................... (239) (1,498) (2,184)
Effect of exchange-rate changes on cash................... -- -- (1)
Net increase (decrease) in cash and non-interest-bearing
deposits................................................ 188 147 (469)
Cash and non-interest-bearing deposits on January 1....... 1,854 1,707 2,176
Cash and non-interest-bearing deposits on December 31..... $ 2,042 $ 1,854 $ 1,707
<FN>
Cash interest payments approximated interest expense in 1993, 1992, and 1991. Income tax
payments totaled $12 million in 1993, $10 million in l992, and $4 million in 1991. Noncash
transactions: In 1993, securities were transferred to securities available for sale amounting
to $665 million from securities held for sale, $157 million from loans, and $98 million from
trading account assets. Also in 1993, $112 million of securities held to maturity was
transferred to securities held for sale. In 1992, $495 million of securities held to maturity
were transferred to securities held for sale. In 1993, 1992, and 1991, transfers of loans to
various asset categories amounted to $190 million, $165 million, and $46 million,
respectively.
Prior-year amounts were restated to conform to the 1993 presentation.
See notes to financial statements.
</TABLE>
<PAGE> 61
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Continental Bank Corporation and Subsidiaries
<CAPTION>
Year ended December 31 ($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Adjustable Rate Preferred Stock, Series 1
Balance at beginning of period............................... $ 89 $ 89 $ 89
Balance at end of period................................. 89 89 89
Adjustable Rate Cumulative Preferred Stock, Series 2
Balance at beginning of period............................... 300 300 300
Balance at end of period................................. 300 300 300
Junior Perpetual Convertible Preference Stock
Balance at beginning of period............................... -- -- 73
Conversion to common stock................................... -- -- (73)
Balance at end of period................................. -- -- --
Common Stock
Balance at beginning of period............................... 216 215 199
Stock options exercised...................................... -- 1 --
Conversion of Junior Perpetual Convertible Preference Stock.. -- -- 16
Balance at end of period................................. 216 216 215
Capital Surplus
Balance at beginning of period............................... 1,000 1,043 1,020
Cash dividends declared
Adjustable Rate Preferred Stock, Series l.................. -- (5) (3)
Adjustable Rate Cumulative Preferred Stock, Series 2....... -- (21) (15)
Common stock............................................... -- (19) (16)
Stock options exercised...................................... -- 2 --
Conversion of Junior Perpetual Convertible Preference Stock.. -- -- 57
Balance at end of period................................. 1,000 1,000 1,043
Retained Earnings (Deficit)
Balance at beginning of period............................... 95 (104) 18
Net income (loss) for the period............................. 338 222 (76)
Cash dividends declared
Adjustable Rate Preferred Stock, Series l.................. (7) (1) (4)
Adjustable Rate Cumulative Preferred Stock, Series 2....... (27) (7) (15)
Junior Perpetual Convertible Preference Stock.............. -- -- (1)
Common stock............................................... (31) (13) (26)
Stock options exercised...................................... (5) (2) --
Balance at end of period................................. 363 95 (104)
Accumulated Translation Adjustment
Balance at beginning of period............................... (5) (16) (19)
Sale of units................................................ -- 11 3
Balance at end of period................................. (5) (5) (16)
Net unrealized security gains, net of income tax effect
Balance at beginning of period............................... -- -- --
Net unrealized security gains................................ 35 -- --
Balance at end of period................................. 35 -- --
Treasury Stock
Balance at beginning of period............................... -- -- --
Common stock purchased....................................... (77) -- --
Stock options exercised...................................... 7 -- --
Balance at end of period................................. (70) -- --
Loans to ESOP Trust
Balance at beginning of period............................... (7) (15) (15)
Loan to ESOP................................................. -- (1) (6)
Repayment of ESOP loan....................................... 2 9 6
Balance at end of period................................. (5) (7) (15)
Total stockholders' equity at end of period.............. $1,923 $1,688 $1,512
<FN>
See notes to financial statements.
</TABLE>
<PAGE> 62
<TABLE>
CONSOLIDATED BALANCE SHEET
Continental Bank N.A. and Subsidiaries
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Assets
Cash and non-interest-bearing deposits................... $ 2,042 $ 1,854
Interest-bearing deposits................................ 1,802 2,067
Federal funds sold....................................... 658 719
Securities purchased under agreements to resell.......... 922 1,427
Trading account assets................................... 1,637 1,075
Securities held to maturity (fair value: $607 in
1993 and $507 in 1992)................................ 603 503
Securities available for sale............................ 920 --
Securities held for sale (fair value: $499 in 1992)..... -- 495
Total securities....................................... 1,523 998
Equity investments....................................... 445 294
Loans, net of unearned income............................ 11,699 12,434
Less: Reserve for credit losses....................... 328 376
Net loans.............................................. 11,371 12,058
Interest and fees receivable............................. 124 141
Properties and equipment................................. 231 206
Other assets............................................. 1,485 1,293
Total assets......................................... $22,240 $22,132
Liabilities
Non-interest-bearing deposits in domestic offices........ $ 2,907 $ 2,927
Interest-bearing deposits in domestic offices............ 7,376 8,339
Deposits in foreign offices, primarily
interest-bearing....................................... 3,801 3,473
Total deposits......................................... 14,084 14,739
Federal funds purchased.................................. 1,312 1,367
Securities sold under agreements to repurchase........... 419 667
Other short-term borrowings.............................. 2,926 2,050
Other liabilities........................................ 1,062 1,295
Long-term debt........................................... 422 318
Total liabilities..................................... 20,225 20,436
Capital
Common stock--$5 par value
Authorized: l44,300,000 shares
Outstanding: 136,991,431 shares....................... 685 685
Surplus.................................................. 827 827
Undivided profits........................................ 473 189
Accumulated translation adjustment....................... (5) (5)
Net unrealized security gains, net of income tax effect.. 35 --
Total capital........................................ 2,015 1,696
Total liabilities and capital........................ $22,240 $22,132
<FN>
Commitments and contingencies (Notes 12 and 14).
See notes to financial statements.
Member Federal Deposit Insurance Corporation.
</TABLE>
<PAGE>
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS
NOTE 1--PROPOSED MERGER WITH BANKAMERICA
On January 28, 1994, Continental Bank Corporation (Continental)
and BankAmerica Corporation (BankAmerica) announced that they had
signed a definitive agreement for BankAmerica to acquire
Continental for 21.25 million shares of BankAmerica common stock
and $939 million in cash, subject to adjustment in certain
circumstances. Based on BankAmerica's closing price on
January 27, 1994, of $45.75 per share, the transaction was then
valued at approximately $1.9 billion.
The transaction will be structured as a cash-election merger, in
which Continental stockholders may elect to receive either all
cash or all BankAmerica common stock. The merger is expected to
be tax-free to the extent stock is received, but may become
taxable in certain circumstances. The acquisition is expected to
close in the third quarter of 1994 and is subject to completion
of due diligence and approval by regulators and Continental
stockholders.
The amount of BankAmerica stock to be issued in the merger is
subject to adjustment pursuant to an exchange ratio, which is
based on the average BankAmerica stock price during a ten-day
period ending ten days prior to closing. The conversion of
Continental shares into cash or BankAmerica stock is subject to
the BankAmerica average stock price not being greater than $55.84
or less than $36.16. Continental has granted BankAmerica an
option to purchase shares of Continental common stock
representing 19.9% of its outstanding common shares, at a price
of $37.50 per share. The option is exercisable in certain
circumstances, including the purchase by a third party of more
than 20% of Continental shares or Continental's completion of an
alternative transaction with a third party at a higher price. In
addition, if Continental enters into such an alternative
transaction, it would be obligated to pay BankAmerica the greater
of $60 million or 3% of the transaction's value.
Each outstanding share of Continental Adjustable Rate Preferred
Stock, Series 1 (Series 1 preferred stock) and Continental
Adjustable Rate Preferred Stock, Series 2 (Series 2 preferred
stock), except for shares of Continental Series 2 preferred stock
as to which appraisal rights are perfected, will be converted
into one share of BankAmerica Series 1 Preferred Stock and one
share of BankAmerica Series 2 Preferred Stock, respectively. The
BankAmerica Series 1 Preferred Stock and BankAmerica Series 2
Preferred Stock will have substantially the same terms as the
Continental Series 1 preferred stock and Continental Series 2
preferred stock, respectively. For information on Continental's
preferred stock, see Note 8.
Continental's Board of Directors has unanimously approved the
merger agreement and has agreed to recommend the transaction to
Continental stockholders at a meeting to be held on
<PAGE> 64
June 27, 1994, following the clearance of a proxy statement/
rospectus by the Securities and Exchange Commission. Continental
has amended its stockholder rights plan as of January 27, 1994,
so as to provide that (i) none of the approval, execution, or
delivery of the merger agreement or the stock option agreement,
the consummation of the merger, or the acquisition of shares of
common stock pursuant to the stock option agreement will cause
the rights issued thereunder to become exercisable and (ii) upon
the consummation of the merger, the rights issued thereunder will
expire. For information on Continental's stockholder rights
plan, see Note 9.
On January 28, 1994, four lawsuits were filed in Delaware
Chancery Court against Continental, Continental's directors, and
BankAmerica Corporation. The lawsuits are entitled Alvin J.
Slater v. Continental Bank Corporation, et al., C.A. No. 13362;
Max Fecht, et al. v. Thomas C. Theobald, et al., C.A. No. 13363;
John J. Nitti v. Thomas C. Theobald, et al., C.A. No 13364; and
James M. Dupree v. Thomas A. Gildehaus, et al., C.A. No. 13365.
In general, each lawsuit alleges that Continental's directors
breached their fiduciary duties to the stockholders by agreeing
to the merger of Continental with BankAmerica Corporation
(Merger) at an allegedly inadequate price and without certain
auction or open bidding procedures, and by agreeing to certain
terms of the Merger that allegedly prevent or discourage
additional potential acquirors from offering a higher price to
Continental's stockholders than the price to be paid by
BankAmerica. The Slater lawsuit further alleges that the
directors breached their fiduciary duties by failing to appoint a
committee of unaffiliated directors to consider the Merger. Each
of the lawsuits seeks certification of a class action on behalf
of Continental's stockholders. Each of the lawsuits, except the
Slater lawsuit, seeks to enjoin the Merger. The Slater lawsuit
seeks an injunction that would enjoin certain provisions of the
Merger agreement and require Continental to solicit higher bids
from additional potential acquirors. All four lawsuits also seek
monetary damages in an unspecified amount. See Note 24 for
discussion of management's assessment of the effect of these
lawsuits.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by Continental, Continental Bank
N.A. (Bank), and their subsidiaries, and the methods of applying
these policies, conform with generally accepted accounting
principles and with prevailing practice within the banking
industry. Policies materially affecting the determination of
financial position, results of operations, or cash flows are
summarized below.
Basis of Presentation: Consolidated financial statements of
Continental and the Bank include all majority-owned subsidiaries.
Intercompany accounts and transactions are eliminated.
<PAGE> 65
Beginning in 1993, the net costs of other nonperforming assets
(ONPA) were presented separately within operating expenses on the
Consolidated Statement of Operations in order to highlight credit
costs impacting Continental other than the provision for credit
losses. Prior years were restated to conform. The components of
net costs of ONPA are write-downs, gains and losses from sales,
and net operating and direct legal expenses. ONPA comprises
other real estate owned (OREO) and all other nonperforming
assets, excluding loans.
Effective January 1, 1993, Continental adopted prospectively
Statement of Financial Accounting Standards (SFAS) No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." This standard requires that the cost of benefits such
as healthcare and life insurance provided to retirees be
recognized over a prescribed period. Under this standard,
calculation of reported expense is similar to the approach
followed for pensions, which involves the use of actuarial
assumptions regarding employee population and estimating the
timing and amount of future benefit costs. See Note 18 for
further information on postretirement benefits other than
pensions.
Effective January 1, 1993, Continental changed its method of
accounting for income taxes to conform with SFAS No. 109,
"Accounting for Income Taxes." See Note 20 for further
information on the accounting change, including the impact on
Continental's financial statements.
Effective December 31, 1993, Continental adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." This standard establishes more stringent criteria
for classifying investments as "held-to-maturity" and requires
investments categorized as "available-for-sale" to be carried at
fair value, with any net unrealized gains or losses reported in
stockholders' equity, net of related taxes. Prior years have not
been restated pursuant to SFAS No. 115. See Notes 4 and 5 for
further information on debt securities and equity investments.
In accordance with a recent clarification by bank regulatory
agencies and supplemental guidance by the Securities and Exchange
Commission to the banking industry, Continental reclassified
certain loans previously classified as in-substance foreclosures
(ISFs) to nonperforming loans. These loans, which were included
in OREO, were reclassified because Continental had not taken
possession of the collateral at the reporting date and had no
intent to do so. Prior periods have been restated to reflect
this reclassification. These restatements did not change total
nonperforming assets.
Discontinued Operations: In 1989, the Bank decided to sell its
wholly owned subsidiary, First Options of Chicago, Inc. (First
Options). The sale was completed in 1991. Prior to the sale,
all revenues and expenses attributable to First Options were
included in the statement of operations under the caption "Loss
from business held for sale, net of income tax benefits," and
<PAGE> 66
its net assets were included in other assets on the balance
sheet. Except where indicated, footnote disclosures relate
solely to continuing operations.
Securities and Trading Account Assets: Debt securities are
classified as securities held to maturity only if there is intent
and ability to hold until maturity. These debt securities are
carried at amortized cost.
Prior to the adoption of SFAS No. 115, certain debt securities
that were held for indefinite periods of time were classified as
securities held for sale and carried at the lower of cost or
market value. After the adoption of SFAS No. 115, these
securities are classified as securities available for sale and
carried at fair value, with unrealized appreciation or
depreciation recognized in "Net unrealized security gains, net of
income tax effect," a component of stockholders' equity. This
category includes certain securities that may be used as part of
Continental's asset/liability management strategy and that may be
sold in response to changes in interest rates, prepayments, or
similar factors.
The gain or loss on the sale of debt securities is determined by
using the specific identification method and is displayed as a
separate line in the statement of operations. All debt
securities are evaluated individually to determine if an "other-
than-temporary" decline in value has occurred, with any such
losses resulting in a direct write-down of the investment.
Assets, predominately debt securities, are classified as trading
account assets when purchased with the intent to profit from
short-term market-price movements. Debt securities are carried
at fair value unless they are traded in an illiquid market, in
which case they are carried at the lower of cost or market.
Other assets classified as trading account assets are carried at
the lower of cost or market. A gain or loss on a trading account
asset sale is determined by using the average cost method.
Realized and unrealized gains and losses are included in trading
revenues.
Transfers of securities generally are not permitted between
trading account assets, securities held to maturity, or
securities available for sale.
Equity Investments: Securities held by Continental's equity-
investment subsidiaries are carried at fair value, with
appreciation or depreciation recognized in revenues from equity
investments. The fair value of publicly traded securities is
based on quoted market prices, discounted where appropriate.
Fair values for non-publicly traded securities are determined by
management's estimates based on quoted market prices of similar
securities, prior earnings, comparable investments, liquidity,
percentage ownership, original cost, and other evidence.
Management's valuations are approved by the boards of directors
of the respective equity-investment subsidiaries.
<PAGE> 67
Prior to the adoption of SFAS No. 115, equity investments held by
other subsidiaries were carried at the lower of cost or market.
After adoption, investments held by these subsidiaries that have
a readily determinable fair value are carried at such value, with
unrealized appreciation or depreciation recognized in "Net
unrealized security gains, net of income tax effect." All other
equity investments are carried at cost. The carrying value of
equity investments held by these subsidiaries is reduced by
"other-than-temporary" declines in value.
Interest-Rate and Foreign-Exchange Products: Note 14 contains
information about the accounting for interest-rate and foreign-
exchange products.
Loans: Loans, net of deferred origination fees, are generally
carried at amortized cost. Fees received for the origination of
loans are deferred and amortized to interest revenue over the
life of the loan.
Cash-Basis Loans: The accrual of interest revenue is stopped
when full or timely collection of scheduled payments becomes
doubtful. All loans on which there is a default of scheduled
principal or interest payments for a period of 60 days or more
are placed on a cash basis, unless the loans are well secured and
in the process of collection. Domestic loans that are 30 days
past final maturity also are placed on a cash basis. Once a loan
is placed on a cash basis, all accrued but uncollected revenue is
reversed, with the reversal reported in current-period income.
Reserve for Credit Losses: The reserve for credit losses is
available to absorb credit losses on loans and other credit and
risk-management products. The level of the reserve is based upon
management's review of the loan portfolio and other credit and
risk-management products, historical credit loss experience,
current economic and political conditions, and other pertinent
factors that form a basis for determining the adequacy of the
reserve for credit losses.
Other Nonperforming Assets: ONPA includes OREO acquired for
debts previously contracted, assets considered to be in-substance
foreclosed for accounting purposes, and other assets acquired
through settlement or foreclosure. An asset is deemed to have
been in-substance foreclosed if the creditor receives physical
possession of loan collateral, regardless of whether formal
foreclosure has taken place. ONPA are carried at the lower of
cost or fair value, less estimated costs to sell. ONPA write-
downs at time of reclassification are charged to the reserve for
credit losses. Subsequent write-downs, costs of maintaining
these assets, and net gains or losses on sale are reported in
other expenses.
Income Taxes: Continental and its U.S. subsidiaries file a
consolidated federal income tax return, with each subsidiary
recognizing and remitting to Continental its share of the current
tax liability. Tax benefits of losses and tax credits are
allocated to the subsidiary incurring such losses or
<PAGE> 68
generating such credits, only to the extent they reduce
consolidated taxes payable. See page 32 of Management's
Discussion and Analysis for discussion of the adoption of SFAS
No. 109, "Accounting for Income Taxes."
NOTE 3--PLEDGED AND RESTRICTED ASSETS
On December 31, 1993 and 1992, certain securities and other
assets totaling $2.286 billion and $1.830 billion, respectively,
were pledged to secure government, public, and trust deposits,
repurchase agreements for securities and loans, and Treasury tax
and loan borrowings, as required by law.
Continental maintained average deposits at Federal Reserve Banks
of $103 million and $79 million during 1993 and 1992,
respectively, to satisfy reserve requirements. These deposits
are included in cash and non-interest-bearing deposits in the
consolidated balance sheet.
NOTE 4--SECURITIES
Effective December 31, 1993, Continental adopted SFAS No. 115.
See Note 2 for further information on accounting for securities.
Securities Held to Maturity: Book values, gross unrealized
gains, gross unrealized losses, and fair values of securities
held to maturity are shown below:
<TABLE>
<CAPTION>
Gross Gross
Book unrealized unrealized Fair
December 31, 1993 ($ in millions) value gains losses value
<S> <C> <C> <C> <C>
U.S. Treasury and federal
agency securities............ $558 $ 4 $-- $562
Other securities............... 49 -- -- 49
Total securities held to
maturity................... $607 $ 4 $-- $611
December 31, 1992
U.S. Treasury and federal
agency securities............ $317 $ 5 $-- $322
Other securities............... 190 1 2 189
Total securities held to
maturity................... $507 $ 6 $ 2 $511
</TABLE>
The amortized cost of securities held to maturity that were sold
in 1993, 1992, and 1991 was $23 million, $251 million, and
$871 million, respectively. Gross realized gains and losses on
securities held to maturity were immaterial in 1993. In 1992,
gross realized gains were $1 million and gross realized
losses were $3 million, and, in 1991, $9 million and $2 million,
respectively. Tax-exempt interest revenue on securities held to
maturity was immaterial in 1993 and $2 million in 1992 and 1991.
Book and fair values of securities held to maturity by maturity
distribution are shown in the table below:
<PAGE> 69
<TABLE>
<CAPTION>
Book Fair
December 31, 1993 ($ in millions) value value
<S> <C> <C>
Within 1 year........................................... $379 $382
After 1 but within 5 years.............................. 55 55
After 5 but within 10 years............................. 14 14
After 10 years.......................................... 159 160
Total securities held to maturity..................... $607 $611
</TABLE>
Securities Available for Sale: As a result of the adoption of
SFAS No. 115 on December 31, 1993, Continental transferred
securities amounting to $665 million from securities held for
sale, $157 million from loans, and $98 million from trading
account assets to securities available for sale.
Cost basis, gross unrealized gains, gross unrealized losses, and
fair values of securities available for sale are shown below:
<TABLE>
<CAPTION>
Gross Gross
Cost unrealized unrealized Fair
December 31, 1993 ($ in millions) basis gains losses value
<S> <C> <C> <C> <C>
U.S. Treasury and federal
agency securities............ $548 $ 3 $ 1 $550
Other securities............... 363 29 22 370
Total securities available
for sale................... $911 $32 $23 $920
</TABLE>
Fair values of securities available for sale by maturity
distribution are shown in the table below:
<TABLE>
<CAPTION>
Fair
December 31, 1993 ($ in millions) value
<S> <C>
Within 1 year....................................................... $ 26
After 1 but within 5 years.......................................... 144
After 5 but within 10 years......................................... 47
After 10 years...................................................... 703
Total securities available for sale............................... $920
</TABLE>
"Net unrealized security gains, net of income tax effect"
includes net unrealized appreciation on securities available for
sale and certain equity investments as discussed in Note 5. The
amount attributable to securities available for sale was
$6 million, net of related taxes of $3 million.
Securities Held for Sale: On December 31, 1992, Continental
reclassified $495 million of securities held to maturity to
securities held for sale. The write-down of these securities to
the lower of cost or market resulted in a loss of $4 million,
included in security losses on the consolidated statement of
operations.
<PAGE> 70
Book values, gross unrealized gains, and fair values of
securities held for sale are shown below:
<TABLE>
<CAPTION>
Gross
Book unrealized Fair
December 31, 1992 ($ in millions) value gains value
<S> <C> <C> <C>
U.S. Treasury and federal
agency securities.......................... $414 $ 4 $418
State, county, and municipal
securities................................. 34 -- 34
Other securities............................. 47 -- 47
Total securities held for sale............. $495 $ 4 $499
</TABLE>
Gross realized gains on securities held for sale in 1993 amounted
to $5 million.
NOTE 5--EQUITY INVESTMENTS
Equity-investment securities are held by equity-investment
subsidiaries and other subsidiaries and are considered to be
available for sale.
The proceeds from sales of equity investments were $196 million,
$191 million, and $156 million for 1993, 1992, and 1991,
respectively. Gross unrealized gains were $108 million,
$28 million, and $40 million in 1993, 1992, and 1991,
respectively.
The following table shows the composition of the equity-
investment portfolio:
<TABLE>
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Held by equity-investment subsidiaries
Publicly traded........................................ $144 $ 92
Non-publicly traded.................................... 316 233
Held by other subsidiaries
Carried at fair value.................................. 69 --
Carried at cost........................................ 150 179
Total equity investments............................... $679 $504
</TABLE>
See page 28 of Management's Discussion and Analysis for the
composition of revenues from equity investments. The cost basis
and gross unrealized gains of equity investments held by other
subsidiaries and carried at fair value on December 31, 1993, were
$24 million and $45 million, respectively.
"Net unrealized security gains, net of income tax effect"
includes net appreciation on equity investments held by other
subsidiaries and carried at fair value and securities available
for sale, as discussed in Note 4. The amount attributable to
equity investments held by other subsidiaries was $29 million,
<PAGE> 71
net of related taxes of $16 million. "Net unrealized security
gains, net of income tax effect" does not include appreciation on
investments held by Continental's equity-investment subsidiaries.
NOTE 6--LOANS
The following table presents loans by type:
<TABLE>
<CAPTION>
December 31 ($ in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Domestic loans
Commercial and industrial............... $ 7,090 $ 6,974 $ 7,276 $ 7,851 $ 8,011
Mortgage and real estate................ 1,352 2,052 2,462 2,804 2,794
Financial institutions.................. 1,111 1,209 1,083 1,044 947
Consumer................................ 451 385 358 339 351
All other............................... 767 626 724 674 794
Total domestic loans.................. 10,771 11,246 11,903 12,712 12,897
Foreign loans
Commercial and industrial............... 436 499 1,105 1,589 1,650
Financial institutions.................. 126 225 149 340 378
Governments and official institutions... 291 428 612 581 455
All other............................... 107 60 139 134 222
Total foreign loans................... 960 1,212 2,005 2,644 2,705
Less: Unearned income................ 2 8 27 26 31
Total loans, net*................... $11,729 $12,450 $13,881 $15,330 $15,571
<FN>
*Amounts for 1992 and 1991 restated to reflect reclassification of certain loans from
OREO. See Note 2.
</TABLE>
No single industry equalled or exceeded 10% of total loans at
year-end 1993 or 1992.
The following table shows average loans by type:
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Domestic loans
Commercial and industrial....... $ 6,732 $ 7,203 $ 7,726 $ 7,885 $ 7,958
Mortgage and real estate........ 1,807 2,329 2,730 2,726 2,460
Financial institutions.......... 1,181 1,101 997 993 1,097
Consumer........................ 390 348 353 325 353
All Other....................... 623 523 530 554 733
Total......................... 10,733 11,504 12,336 12,483 12,601
Foreign loans................... 1,191 1,766 2,276 2,763 3,535
Less: Unearned income........ 6 14 27 27 28
Total loans, net*........... $11,918 $13,256 $14,585 $15,219 $16,108
<FN>
*Amounts for 1992 restated to reflect reclassification of certain loans from OREO. See
Note 2.
</TABLE>
The following table shows the amount of nonperforming loans at
year-end for the past five years:
<PAGE> 72
<TABLE>
<CAPTION>
December 31 ($ in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Cash basis
Domestic loans
Commercial and industrial....... $148 $212 $328 $308 $101
Mortgage and real estate........ 137 286 160 49 81
All other ...................... 22 35 25 34 12
Total domestic loans............ 307 533 513 391 194
Foreign loans..................... 21 167 227 292 233
Total cash basis loans.......... 328 700 740 683 427
Renegotiated
Domestic loans.................... -- -- -- -- 3
Total renegotiated loans........ -- -- -- -- 3
Total nonperforming loans(a,b).. $328 $700 $740 $683 $430
<FN>
(a) Continental had less than $1 million of legally binding commitments to
lend additional funds to borrowers with loans on a renegotiated basis on
December 31, 1993.
(b) Amounts for 1992 and 1991 restated to reflect reclassification of certain
loans from OREO. See Note 2.
</TABLE>
Loans classified as performing that had scheduled principal or
interest payments past due 60 days or more amounted to
$4 million, $43 million, $16 million, $9 million, and $3 million
on December 31, 1993, 1992, 1991, 1990, and 1989, respectively.
Continental considered these loans to be well secured and in the
process of collection.
The following table shows the pretax impact of nonperforming
loans on interest revenue for the years 1989 through 1993. The
negative impact on interest revenue in 1993 decreased from 1992,
due to higher cash collections.
<PAGE> 73
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Interest revenue that would have
been recorded at the original rate
for the year ended December 31
Domestic.......................... $66 $53 $ 71 $49 $ 30
Foreign........................... 10 20 37 40 87
Total............................. $76 $73 $108 $89 $117
Interest revenue that was recorded
for the year ended December 31
Domestic.......................... $14 $ 7 $ 8 $10 $ 9
Foreign........................... 10 8 12 6 36
Total............................. $24 $15 $ 20 $16 $ 45
Negative impact for the year ended
December 31
Domestic.......................... $52 $46 $ 63 $39 $ 21
Foreign........................... -- 12 25 34 51
Total............................. $52 $58 $ 88 $73 $ 72
</TABLE>
For a reconciliation of the reserve for credit losses for each of
the last five years, see Analysis of Net Credit Loss Experience
on page 12 of Credit Analysis and Loss Experience.
See Management's Discussion and Analysis for unaudited
information on credit risk.
NOTE 7--LONG-TERM DEBT
Long-term notes at year-end 1993 and 1992 were as follows:
<PAGE> 74
<TABLE>
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Parent company
Fixed-rate notes
Due l0/l5/93 (9.l25%)............................. $ -- $161
Due 10/18/94 (11.09%)............................. 35 35
Due 3/15/95 (9.75%)............................... 150 150
Due 6/15/96 (9.875%).............................. 150 150
Due 3/3l/97 (8.75%)............................... 23 29
Floating-rate notes(a)
Due 10/18/94 (3.52/4.13%)......................... 40 40
Due 8/19/98 (3.86/--%)............................ 200 --
Due 5/18/2000 (4.56/--%).......................... 150 --
Total parent company............................ 748 565
Subsidiaries
Fixed-rate notes
Subordinated due 4/1/2001 (12.50%)................ 200 200
Subordinated due 7/1/2001 (11.25%)................ 100 100
Subordinated due 2/1/2003 (7.875%)................ 100 --
Floating-rate notes(a)
Subordinated due 1994 (--/5.33%).................. -- 94
Total subsidiaries.............................. 400 394
Unamortized hedge amounts(b)...................... 27 24
Unamortized discount amounts...................... (7) (3)
Total long-term debt............................ $1,168 $980
<FN>
(a) Average per annum rates for 1993/1992.
(b) Unamortized hedge amounts are associated with the notes due 6/15/96 and
4/1/2001.
</TABLE>
The interest rates on floating-rate notes are determined
periodically pursuant to formulas based on certain money market
rates, as specified in the agreements governing the issues.
Terms of several of the note offerings restrict Continental's
ability to dispose of shares of the capital stock of the Bank.
None of the notes can be redeemed before maturity, except as
noted below.
The subordinated notes due July 1, 2001, are redeemable, in whole
or in part, at the option of the Bank at any time on or after
July 1, 1998, at 100% of the principal amount thereof plus
accrued interest to the date of redemption.
In February 1993, the Bank issued $100 million of 7 7/8%
subordinated notes due February 1, 2003. Interest on the notes
is payable semiannually on February 1 and August 1 of each year.
In May 1993, Continental issued $150 million of floating-rate
unsecured notes due May 18, 2000. Interest on these notes is
payable quarterly. The per annum rate of interest is reset
quarterly based on the greater of 4.5% or the three-month London
Interbank Offered Rate plus 0.375%.
In August 1993, Continental issued $200 million of floating-rate
Euronotes due August 19, 1998. Interest on these notes is
payable quarterly. The notes are priced at 50 basis points above
the three-month London Interbank Offered Rate and are callable
after August 1995 at par.
<PAGE> 75
Scheduled maturities and sinking fund requirements for all
long-term debt for the years 1994 through 1998 aggregate
$81 million, $156 million, $156 million, $5 million, and
$200 million, respectively.
NOTE 8--COMMON AND PREFERRED STOCK
Common Stock: From time to time, Continental has acquired shares
of its common stock in the open market to be used in connection
with employee benefit and compensation programs and for other
corporate purposes. On December 31, 1993, 295,342 shares were
carried at cost in other assets and deemed held on a temporary
basis; 2,868,892 shares were carried at cost as treasury stock
and recorded in a separate component of stockholders' equity.
Preferred Stock: Continental has no obligation to repurchase or
retire its Series 1 preferred stock or Series 2 preferred stock,
but may at its option redeem this stock in whole or in part. The
Series 1 preferred stock is redeemable at $50.00 per share. The
Series 2 preferred stock is redeemable at $108 per share prior to
August 16, 1999, and $100 per share on or after that date. The
Series 2 preferred stock is traded in depositary shares, each
depositary share representing a one-quarter fractional interest
in a share. Both series of preferred stock have limited voting
rights. They have no conversion or preemptive rights but have
priority over common stock as to dividends and liquidation
rights. The Series 1 preferred stock ranks on a parity with the
Series 2 preferred stock as to dividends and liquidation rights.
Dividends on Series 1 and Series 2 preferred stock, payable
quarterly, are cumulative and accrue at an adjustable rate
determined each quarter. A factor is added to or subtracted from
specified money market rates to determine the dividend rate.
Information on preferred dividend rates is shown below:
<TABLE>
<CAPTION>
First
1993 quarter
Minimum Maximum average 1994
<S> <C> <C> <C> <C>
Series 1................... 7.50% 13.50% 7.50% 7.50%
Series 2................... 9.00 15.75 9.00 9.00
</TABLE>
See Note 1 for information on the impact the proposed merger of
Continental and BankAmerica will have on preferred stock.
NOTE 9--STOCKHOLDER RIGHTS PLAN
On July 22, 1991, Continental's Board of Directors (Board)
adopted a Stockholder Rights Plan (Plan) which is designed to
strengthen its ability to act for common stockholders in the
event of an unsolicited bid to acquire control of the
corporation. Each outstanding share of common stock is entitled
to one right under the Plan. At present, each right, when
exercisable, would entitle the holder (except the acquiring
person or entity referred to below) to purchase from Continental
<PAGE> 76
one one-hundredth of a share of Series 3 preferred stock, without
par value, at a price of $55.00, subject to adjustment as
provided in the Plan. If a person or entity becomes a 20%
beneficial owner of Continental common stock, each holder of a
right would be entitled to receive, in lieu of the Series 3
preferred stock, at the then current exercise price of the right,
common stock (or, in certain circumstances, cash, property, or
other securities of Continental) having a value equal to two
times the exercise price.
In general, these rights become exercisable if another person or
entity without Board approval acquires 20% or more of
Continental's outstanding common stock or makes a tender offer
for that amount of stock. The acquiring person or entity would
not be entitled to exercise the rights. These rights expire at
the earliest of July 22, 2001; upon redemption by Continental at
a price of $0.01 per right; and, upon exchange of the rights in
accordance with the Plan. The rights will cause substantial
dilution to a person or entity attempting to acquire Continental
without conditioning the offer on the rights' being redeemed or a
substantial number of rights being acquired.
In connection with the proposed merger of Continental and
BankAmerica, the Plan has been amended. See Note 1 for further
information.
NOTE 10--REGULATORY MATTERS
Dividend Restrictions: There are two provisions of the federal
banking laws that may restrict the Bank's ability to pay
dividends to its parent--Continental. One statutory provision
requires that net profits then on hand (as determined under the
statute) exceed bad debts (as therein defined) after
the payment of any dividends. On December 31, 1993, the Bank's
net profits then on hand exceeded its bad debts. The second
statutory provision requires that dividends declared in any
calendar year not exceed the Bank's net profits (as therein
defined) for the current calendar year plus the retained net
profits for the two preceding calendar years, unless approval of
the Comptroller of the Currency (Comptroller) is obtained. Under
the more restricting of the two provisions, the Bank had the
ability to pay $405 million in dividends as of January 1, 1994,
without obtaining the Comptroller's approval. The Bank paid
$85 million of dividends during 1993.
In addition to the statutory restrictions set forth above,
Continental may not declare or pay any dividends on its common
stock while there is any dividend arrearage on any class or
series of its capital stock ranking, as to dividends, ahead of
its common stock. There are currently no dividend arrearages on
any class of Continental's capital stock.
The Board of Governors of the Federal Reserve System (FRB)
generally considers it to be an unsafe and unsound banking
practice for a bank holding company to pay dividends except out
of current operating earnings, although other factors such as
overall capital adequacy, projected earnings, and the composition
<PAGE> 77
of such earnings may also be relevant in determining whether
dividends should be paid. The Comptroller has a similar view
with respect to the payment of dividends by a national bank.
The payment and amount of future dividends will depend upon the
earnings and financial condition of Continental, restrictive
covenants in its debt securities, and other factors, such as the
views of the bank regulatory agencies.
Loan Restrictions: The Federal Reserve Act (Act) places
restrictions on loans by subsidiary banks to bank holding
companies and other affiliates. Other than loans secured by U.S.
Government securities or certain segregated deposits, the maximum
amount of loans to any single affiliate may not exceed 10% of a
bank's capital and surplus, as defined, less the amount of other
transactions subject to the Act, and to all affiliates may not
exceed 20% of the bank's capital and surplus, as defined, less
the amount of other transactions subject to the Act. On
December 31, 1993, the maximum amount of all loans that the Bank
would be permitted to have outstanding to Continental was
$283 million plus the amount of any loans secured by U.S.
Government securities or certain segregated deposits.
Other Regulatory Matters: The Bank is currently classified as
"well capitalized" for purposes of the brokered deposit
regulations issued by the Federal Deposit Insurance Corporation
(FDIC) pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), and thus may solicit, accept,
renew, and roll over brokered deposits without restrictions. The
Bank continues to actively use brokered deposits.
A bank's capital category for purposes of applying various FDICIA
regulations may not necessarily be representative of its overall
financial condition or prospects.
NOTE 11--EARNINGS PER COMMON SHARE
The basis for the calculation of primary earnings per share for
each of the last three years is presented below:
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Income (loss) from continuing operations
applicable to common stock before
cumulative effect of accounting change
for income taxes....................... $224 $188 $(109)
Cumulative effect of accounting change
for income taxes....................... 80 -- --
Net income (loss) applicable to common
stock.................................. 304 188 (112)
Average number of shares of
common stock........................... 54 54 54
</TABLE>
<PAGE> 78
The earnings (loss) per common share was computed by dividing the
net income (loss) applicable to common stock, which excludes the
preferred dividend requirements, by the weighted average number
of shares of Continental common stock outstanding and included
common shares that would result from conversion of the Junior
Perpetual Convertible Preference Stock, which was outstanding
until June 1991. For 1993 and 1992, earnings per common share
were computed using the treasury stock method. Under this
method, common stock equivalents include shares that would result
from the exercise of options reduced by the number of shares
assumed to be repurchased from the proceeds received.
NOTE 12--LEASE AND OTHER COMMITMENTS
Lease Commitments: Continental's obligations for future minimum
lease payments and sublease rentals on operating leases were as
follows:
<TABLE>
<CAPTION>
December 31, 1993 ($ in millions)
<S> <C>
1994.................................................... $ 19
1995.................................................... 15
1996.................................................... 13
1997.................................................... 12
1998.................................................... 11
Later years............................................. 48
Total minimum lease payments.......................... $118
Future minimum sublease rentals....................... $ 14
</TABLE>
In addition to the amounts set forth above, certain of the leases
require payments by Continental for taxes, insurance, and
maintenance. Rental expense included in operating expense in the
consolidated statement of operations amounted to $16 million in
1993, $15 million in 1992, and $20 million in 1991.
Other Commitments: In 1991, the Bank outsourced its information
technology operation to Integrated Systems Solutions Corporation
(ISSC), a subsidiary of International Business Machines
Corporation. The Bank entered into a ten-year contract with
ISSC, effective January 1, 1992, to obtain technology and
development services. The Bank's cost for such services is
estimated to be approximately $49 million per year, including
core inflation coverage but subject to adjustments depending upon
processing volumes. The contract is subject to termination upon
the occurrence of certain conditions.
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires all entities to estimate the fair value of
all assets, liabilities, and off-balance-sheet transactions that
are financial instruments. While a significant part of
Continental's activities falls under the definition of financial
instruments, other balance-sheet items such as properties and
<PAGE> 79
equipment are not included, nor are intangibles such as the
values of the core deposit base or various fee-based activities
such as trust and cash management services.
Fair values are point-in-time estimates of the amount at which a
financial instrument could be exchanged between a willing buyer
and seller, other than in a forced or liquidation sale. These
values can change significantly based on various factors,
including market risk related to movements in prices, interest
rates, or currency rates and credit risk related to the ability
of customers to perform under the agreed terms of the contract.
Additionally, fair values determined in accordance with SFAS No.
107 do not fully consider transaction costs, the impact of
individual transactions on prices, management's intent regarding
disposition, or even whether a willing buyer is available.
Accordingly, management cannot provide any assurance that the
estimated fair values presented below could actually be realized.
The fair value estimates for financial instruments were
determined as of December 31, 1993 and 1992, by application of
the methods and significant assumptions described below.
<PAGE> 80
<TABLE>
<CAPTION>
Adjusted
carrying Fair Unrecognized
December 31, 1993 ($ in millions) value* value gain/(loss)
<S> <C> <C> <C>
Financial Assets
Cash and non-interest bearing deposits..... $ 2,042 $ 2,042 $ --
Interest-bearing deposits.................. 1,803 1,808 5
Federal funds sold......................... 658 658 --
Securities purchased under agreements to
resell................................... 922 922 --
Trading account assets..................... 1,637 1,707 70
Securities................................. 1,527 1,531 4
Equity investments......................... 679 753 74
Net loans.................................. 11,420 11,457 37
Interest and fees receivable............... 124 124 --
Other financial assets..................... 87 87 --
Total financial assets................... 20,899 21,089 190
Financial Liabilities
Non-interest-bearing deposits.............. 2,968 2,968 --
Interest-bearing deposits.................. 10,496 10,991 (495)
Federal funds purchased.................... 1,312 1,312 --
Securities sold under agreements to
repurchase............................... 419 419 --
Other short-term borrowings................ 3,018 3,028 (10)
Long-term debt............................. 1,141 1,274 (133)
Interest payable........................... 148 148 --
Other financial liabilities................ 69 69 --
Total financial liabilities.............. 19,571 20,209 (638)
Off-Balance-Sheet Financial Instruments
Unused loan commitments.................... 20 20 --
Standby letters of credit.................. 3 3 --
Interest-rate swaps........................ 190 471 281
Futures and forward contracts.............. (134) -- 134
Forward-rate agreements.................... 4 4 --
Interest-rate options written.............. (187) (187) --
Foreign-exchange spot, forward, and
futures contracts........................ (10) (10) --
Commodity swaps............................ 8 8 --
Total other financial instruments........ (106) 309 415
Net unrecognized loss on financial
instruments.......................... $ 1,222 $ 1,189 $(33)
<FN>
*Adjusted carrying values exclude amounts not required to be disclosed as
financial instruments under SFAS No. 107. Deferred gains or losses on
futures contracts that have been designated as hedges are included in off-
balance-sheet financial instruments. For balance-sheet purposes, these
amounts are reported on the same line as the underlying asset or liability.
These were as follows: net loans, $29 million loss; interest-bearing-
deposit liabilities, $78 million loss; and long-term debt, $27 million loss.
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
Adjusted
carrying Fair Unrecognized
December 31, 1992 ($ in millions) value* value gain/(loss)
<S> <C> <C> <C>
Financial Assets
Cash and non-interest bearing deposits..... $ 1,854 $ 1,854 $ --
Interest-bearing deposits.................. 2,067 2,072 5
Federal funds sold......................... 719 719 --
Securities purchased under agreements to
resell................................... 1,427 1,427 --
Trading account assets..................... 1,079 1,082 3
Securities................................. 1,002 1,010 8
Equity investments......................... 504 559 55
Net loans.................................. 12,089 12,134 45
Interest and fees receivable............... 141 141 --
Other financial assets..................... 174 174 --
Total financial assets................... 21,056 21,172 116
Financial Liabilities
Non-interest-bearing deposits.............. 2,972 2,972 --
Interest-bearing deposits.................. 11,095 11,704 (609)
Federal funds purchased.................... 1,367 1,367 --
Securities sold under agreements to
repurchase............................... 667 667 --
Other short-term borrowings................ 2,183 2,188 (5)
Long-term debt............................. 956 1,048 (92)
Interest payable........................... 174 174 --
Other financial liabilities................ 152 152 --
Total financial liabilities.............. 19,566 20,272 (706)
Off-Balance-Sheet Financial Instruments
Unused loan commitments.................... 13 13 --
Standby letters of credit.................. -- 2 2
Interest-rate swaps........................ 153 412 259
Futures and forward contracts.............. (138) -- 138
Interest-rate options written.............. (228) (228) --
Foreign-exchange spot, forward, and
futures contracts........................ 6 6 --
Commodity swaps............................ 4 4 --
Total other financial instruments........ (190) 209 399
Net unrecognized loss on financial
instruments.......................... $ 1,300 $ 1,109 $(191)
<FN>
*Adjusted carrying values exclude amounts not required to be disclosed as
financial instruments under SFAS No. 107. Deferred gains or losses on
futures contracts that have been designated as hedges are included in off-
balance-sheet financial instruments. For balance-sheet purposes, these
amounts are reported on the same line as the underlying asset or liability.
These were as follows: net loans, $37 million loss; interest-bearing-
deposit liabilities, $77 million loss; and long-term debt, $24 million loss.
</TABLE>
The following methods and significant assumptions were used in
determining fair value estimates:
Cash and Short-Term Investments: Interest-bearing balances were
valued by discounting contractual cash flows, using market
interest rates corresponding to the remaining term of the assets.
The fair value of non-interest-bearing balances and acceptances
approximated the carrying value because of their short tenor.
<PAGE> 82
Trading Account Assets, Securities, and Equity Investments:
Values of debt and equity securities carried in the statement of
condition at either market or fair value were determined as
discussed in Note 2. For assets not carried at market or fair
value, fair values were determined by management based on quoted
market prices of the same or similar securities, prior earnings,
comparable investments, liquidity, percentage ownership, and
other evidence, as applicable. Purchased options carried as
trading account assets were valued using appropriate pricing
models.
Loans: Fair value was determined by segmenting the portfolio
into major groupings. The pricing of floating-rate performing
loans was deemed to be substantially equivalent to terms offered
by other lenders for similar credits, based on prior testing of
the loan portfolio and assessment of current market conditions.
Accordingly, no adjustment for pricing of this portfolio group
was made. The interest-rate-risk component of performing loans,
both floating- and fixed-rate, was valued by discounting
contractual cash flows, using market interest rates corresponding
to the remaining term or repricing period of the loans, as
appropriate. Prepayments were not anticipated.
Nonperforming loans were valued either at traded prices, when
available; at the present value of expected cash flows,
discounted at rates commensurate with uncertainties of those
estimated cash flows; or at an amount no greater than the
appraised value of underlying collateral, as appropriate.
In addition to the credit risk considered by the valuation of
nonperforming loans described above, the reserve for credit
losses was considered a reasonable approximation, not only for
loan credit risk, but also for other uncertainties in the entire
credit portfolio, including obligations to extend credit and
other off-balance-sheet transactions. Considering the reserve
for credit losses in this manner is only one component in
estimating the fair value of the loan portfolio. Its use in this
context is not the same as an estimate of probable credit losses
determined for financial statement reporting purposes.
Since the methodology for valuing loans encompassed the pricing
of the entire credit facility and consideration of the credit
loss reserve, segregating amounts between loans and commitments
was not feasible. However, a reasonable approximation of current
values for unused credit commitments was the amount of net
prepaid or accrued fees.
Deposits and Short-Term Liabilities: Values were determined by
discounting contractual cash flows, using current rates paid on
obligations of similar remaining tenor. As indicated in the
table, the unrecognized loss on interest-bearing deposits was
significantly offset by unrecognized gains on related interest-
rate hedges. Securities sold but not yet purchased were carried
at fair value. The fair value of non-interest-bearing deposits
<PAGE> 83
approximated the carrying value because of their short tenors. A
fair value for Continental's deposit-base intangible has not been
estimated.
Long-Term Debt: A fair value for long-term debt was determined
by reference to current market prices for Continental's
outstanding debt.
Off-Balance-Sheet Financial Instruments: Exchange-traded
instruments were valued using quoted market prices. Forward
contracts were valued at the prices of comparable instruments.
Other instruments, including swaps, forward-rate agreements, and
options, were valued using appropriate pricing models.
Unused credit commitments, primarily loan commitments and standby
letters of credit, were determined to be priced substantially at
current market levels for similar commitments. Accordingly,
estimated fair value represents currently accrued fees charged
for assuming these obligations. The fair value of letters of
credit other than standby letters of credit was immaterial.
NOTE 14--DERIVATIVE AND CREDIT-RELATED FINANCIAL INSTRUMENTS
Continental incurs off-balance-sheet risk as a result of entering
into derivative and credit-related financial instrument
transactions. A loss may occur as a result of credit or market
risk. Off-balance-sheet risk is the potential loss, assuming the
worst case situation, attributable to these financial instruments
that has not been recorded in the financial statements. It is
not intended to represent expected losses.
Credit risk is the possibility of a loss from the failure of
another party to perform according to the terms of a contract.
An example of a financial instrument that has off-balance-sheet
credit risk is a standby letter of credit. Continental's
obligation under a standby letter of credit is contingent in
nature, and, therefore, a liability is not recorded on the
balance sheet. However, if the standby letter of credit is
expected to be funded and the customer is not expected to repay,
then a loss must be recognized in the financial statements. Any
such anticipated losses are determined based on expected net cash
settlements and are covered by the reserve for credit losses.
Contractual or notional amounts related to derivatives are used
only as a base for calculating net cash settlements. Such
amounts do not represent off-balance-sheet credit risk.
Market risk is the potential loss that may be incurred due to
adverse shifts in either interest rates, foreign-exchange rates,
or prices of equity, commodity, or other financial instruments.
An example of a financial instrument with off-balance-sheet
market risk is an interest-rate swap. An interest-rate-swap
transaction in which one party receives cash based on a floating
rate and pays cash based on a fixed rate will experience a loss
in value in a falling interest-rate environment.
<PAGE> 84
Derivatives: Derivatives may be separated into four fundamental
components that are linked to various types of financial risks.
The four components are futures, forwards, swaps, and options.
The financial risks include interest-rate, foreign-currency, and
other price risks. Continental uses these instruments to manage
its financial risk position, as well as to provide customers the
tools to manage their risks.
Futures and forward contracts are commitments to buy and sell a
financial instrument at a specified future date for a specified
price. Futures differ from forwards in that they are
standardized, exchange-traded contracts that require that a
specified level of cash be placed in a margin account for daily
settlement purposes. Forwards, on the other hand, have
customized terms and are generally transacted between two
parties. As such, there is some amount of credit risk which
varies with price movements.
Swaps, primarily interest-rate, involve exchanges of fixed- for
floating-rate payments calculated over a specified time on a
specified notional amount. However, the exchange of one contract
based on a floating-rate index for another contract based on a
floating-rate index, as well as exchanges based on commodity- and
equity-price movements, also may occur. As with forwards, swaps
are contracts between two parties and, therefore, have associated
credit risk. Swaps may be entered into under master netting
arrangements; accordingly, periodic payments between
counterparties are typically settled on a net basis over the life
of the swap. For interest-rate swaps, notional amounts are used
only for calculating settlements and are not exchanged.
Collateralization and periodic settlements based on market value
are sometimes utilized to reduce credit exposure.
Options convey to the holder the right, but not the obligation,
to buy or sell a financial instrument at a specified price or
exchange rate at or over a specified time period. Options may be
entered into on an exchange or via the "over the counter" market.
Options traded on exchanges have standardized terms, while non-
exchange-traded options have customized terms and, like forwards
and swaps, are generally transacted between two parties.
Counterparty credit risk related to exchange-traded options is to
the exchange. The buyer of a non-exchange-traded option is
dependent on the seller or writer to honor the terms of the
transaction and, as a result, assumes credit risk. This risk
increases as the option value increases. In contrast, the writer
is paid a premium for assuming the obligation for adverse market-
risk movements over the life of the option.
The accounting for derivatives depends on the nature and purpose
of the transaction. The fair value of derivatives entered into
for trading purposes is recorded on the balance sheet in either
other assets, other liabilities, or trading account assets.
Changes in fair value are immediately recognized as trading
revenue. Futures contracts and options that are exchange-traded
instruments are valued using quoted market prices. Forward
contracts, swaps, and options negotiated with individual
<PAGE> 85
counterparties are valued using applicable pricing models.
Currently, unrealized gains and losses on forward contracts and
swaps are each reported net on the balance sheet. Beginning in
1994, in order to comply with a new accounting interpretation,
Continental will net only forwards or swaps by counterparty
provided a master netting arrangement exists with the
counterparty.
The extent of Continental's involvement in derivative
transactions for both hedging and trading purposes is represented
by contractual or notional amounts. These amounts, summarized in
the table below, serve as volume indicators only and do not
represent the potential gain or loss from market or credit risk.
<TABLE>
Contractual or Notional Amounts
<CAPTION>
December 31 ($ in billions) 1993 1992
<S> <C> <C>
Interest-rate futures and forwards............. $31.6 $29.9
Foreign-exchange spot, futures,
and forward contracts........................ 20.2 18.6
Forward-rate agreements........................ 2.0 7.1
Interest-rate swaps............................ 47.4 50.2
Foreign-currency swaps......................... 0.3 0.4
Interest-rate options--purchased............... 14.2 14.0
Foreign-currency options--purchased............ 2.7 7.0
Interest-rate options--written................. 15.3 28.1
Foreign-currency options--written.............. 2.8 6.7
</TABLE>
Trading revenues in 1993 related to derivative products were
primarily customer-driven and, by management's estimate, totaled
$33 million.
Derivatives Used as Hedges: The following table shows the
notional amounts for derivatives that Continental used to manage
its interest-rate risk. These amounts also are included in the
table of contractual or notional amounts above.
<TABLE>
<CAPTION>
December 31 ($ in billions) 1993 1992
<S> <C> <C>
Interest-rate swaps
Receive fixed........................................ $ 6.4 $ 7.2
Pay fixed............................................ -- 0.1
Basis................................................ 0.3 0.2
Total................................................ $ 6.7 $ 7.5
Financial futures contracts*
Long................................................. $19.1 $14.9
Short................................................ 4.7 3.2
Total................................................ $23.8 $18.1
Forward-rate agreements
Long................................................. $ -- $ --
Short................................................ 0.1 0.7
Total................................................ $ 0.1 $ 0.7
<FN>
*Primarily 3-month contracts.
</TABLE>
<PAGE> 86
The notional amounts of financial futures contracts displayed in
the preceding table consist mostly of three-month contracts used
to hedge longer-term deposits and loans, and, therefore, the
volumes included can be misleading.
Interest-rate swaps that qualify as hedges are accounted for on
an accrual basis, with gains or losses recorded in interest
revenue or interest expense, as appropriate. Futures contracts
and terminated swaps that have been identified to function as a
hedge or to adjust interest-rate risk must meet specific
criteria. The realized gains or losses related to these hedges
are deferred and amortized as interest revenue or interest
expense over the life of the designated assets, liabilities, or
anticipated transactions.
As shown in the following schedule, Continental's net interest
revenue for 1993 was favorably impacted by hedging.
<TABLE>
1993 Effect on Net Interest Revenue
<CAPTION>
Interest-
($ in millions) Futures Forwards rate swaps Total
<S> <C> <C> <C> <C>
Interest revenue........... $ 27 $ 1 $ 29 $ 57
Interest expense........... (43) (1) (194) (238)
Total.................... $ 70 $ 2 $ 223 $ 295
</TABLE>
It is important to view the hedging results in conjunction with
the related balance-sheet positions in order to determine the
impact on net income of these associated items. The tables in
Note 13 provides information about the deferred hedge gains or
losses and the unrecognized gains or losses on the underlying
assets or liabilities.
The net deferred gain related to futures hedging activity at
year-end 1993 was $134 million, which generally will be amortized
over the expected life of the underlying hedged assets or
liabilities. Since this deferred amount includes the current
value of open futures contracts, it is subject to change as
interest rates move. Again, it is critical to view this amount
in conjunction with the balance-sheet position being hedged.
Note 13 provides more information on the relationship between
hedges and the underlying risk positions.
The foreign-currency-hedge results (net of related income taxes
attributable to forward contracts) associated with certain
investments in foreign subsidiaries and branches are excluded
from income and recorded as accumulated translation adjustments
in stockholders' equity, unless the related investment is sold or
substantially liquidated.
Credit-Risk Exposure for Derivatives: The extent of
Continental's credit-risk exposure for derivatives generally
represents positions with a positive market value, in which cash
<PAGE> 87
has not yet been received by Continental. In the case of forward
and swap contracts, a positive market value may be reduced by
unrealized losses on other contracts with the same counterparty,
provided a master netting arrangement exists with that
counterparty. Written options do not pose any credit risk to
Continental because Continental is obligated to perform under the
option contract, and the purchaser, therefore, has the credit
risk.
The following table shows Continental's estimate of the credit-
risk exposure from derivatives, including those used for hedging.
<TABLE>
<CAPTION>
Off-balance-
December 31, 1993 Amount recorded sheet credit
($ in millions) Credit risk on balance sheet risk
<S> <C> <C> <C>
Futures................ $ -- $ -- $ --
Forwards............... 258 16 242
Swaps.................. 1,437 477 960
Options................ 209 173 36
Total................ $1,904 $666 $1,238
</TABLE>
The fair value of collateral held related to derivative
transactions was approximately $9 million on December 31, 1993.
For an unaudited maturity distribution for derivative
transactions as of December 31, 1993, see Sensitivity to
Interest-Rate Changes on page 24 of Selected Financial Data.
Credit-Related Financial Instruments: Credit-related financial
instruments primarily include commitments to extend credit,
standby letters of credit, and foreign-office guarantees.
Commitments to extend credit are obligations to lend to a
customer over a specified period. These agreements are typically
contingent upon the customer's maintenance of certain credit
standards during the commitment period.
Standby letters of credit and guarantees are irrevocable
commitments by Continental that generally guarantee the
performance of a customer in arrangements with a third party.
Credit-risk exposure for credit-related financial instruments is
represented by the contractual amounts of these instruments. The
following table summarizes Continental's credit-risk exposure
related to these financial instruments:
<TABLE>
<CAPTION>
December 31 ($ in billions) 1993 1992
<S> <C> <C>
Commitments to extend credit.......................... $14.9 $14.2
Standby letters and foreign-office guarantees......... 3.1 2.8
Other letters of credit............................... 0.3 0.3
Total............................................... $18.3 $17.3
</TABLE>
<PAGE> 88
Since many of the above commitments are expected to expire
without being drawn upon, or will be only partially used, the
total commitments do not necessarily represent future cash
requirements.
Continental closely monitors the credit-risk exposure of these
financial instruments as part of its credit review process.
Collateral is required as deemed necessary by the
creditworthiness of the counterparty. The nature of the
collateral varies, but may include third-party letters of credit,
securities issued by the U.S. Government and its agencies,
inventory, receivables, equipment, and property. The collateral
is reviewed periodically to determine its adequacy and ensure its
existence. Some forms of collateral, such as cash equivalents
and marketable securities in the possession of the Bank, are
readily accessible. Other forms are not in the Bank's
possession, but security agreements give the Bank rights with
respect to the title and disposition of the collateral.
In the case of standby letters of credit, credit-risk exposure is
further reduced by participations to third parties. The amount
participated to third parties was $336 million and $310 million
on December 31, 1993 and 1992, respectively.
Approximately 87% of standby letters of credit and guarantees
expire within one year, and nearly all within five years. The
amount on December 31, 1993, included $312 million to support
repayment of commercial paper and industrial revenue bonds.
Continental earns fee revenue on the above credit-related
products which it generally recognizes over the term of the
credit-related financial instrument. The amount of such fee
revenue recognized in 1993 was $66 million.
NOTE 15--CONCENTRATIONS OF CREDIT RISK
Credit concentrations exist if a number of counterparties are
engaged in similar activities and have similar economic
characteristics that would cause their ability to meet
contractual obligations to be affected similarly by changes in
economic or other conditions.
See Management's Discussion and Analysis for unaudited
information on credit risk. This information includes size,
industry, and geographic distributions of the credit portfolio
(loans, other real estate owned, and other nonperforming assets).
The table below shows Continental's credit-risk concentrations by
type with respect to all financial instruments, balance-sheet and
off-balance-sheet, except securities purchased under agreements
to resell, customers' liability on acceptances, and over-the-
counter foreign-exchange contracts:
<PAGE> 89
<TABLE>
<CAPTION>
Off-Balance-Sheet
December 31, 1993 Balance- Unused Letters Total
($ in billions) sheet commitments of credit Other exposure
<S> <C> <C> <C> <C> <C>
Domestic
Commercial and
industrial....... 43% 77% 67% 11% 57%
Mortgage and real
estate........... 8 2 2 3 5
Financial
institutions..... 10 18 24 31 15
Consumer........... 2 -- 1 -- 1
All other.......... 12 -- 1 -- 6
Total domestic... 75 97 95 45 84
Foreign............ 25 3 5 55 16
Total............ 100% 100% 100% 100% 100%
Total exposure... $18.0 $14.6 $3.0 $1.7 $37.3
</TABLE>
<TABLE>
CAPTION>
Off-Balance-Sheet
December 31, 1992 Balance- Unused Letters Total
($ in billions) sheet commitments of credit Other exposure
<S> <C> <C> <C> <C> <C>
Domestic
Commercial and
industrial....... 42% 77% 68% 17% 56%
Mortgage and real
estate........... 11 3 3 3 7
Financial
institutions..... 11 16 17 39 15
Consumer........... 2 -- 2 -- 1
All other.......... 10 2 3 2 6
Total domestic... 76 98 93 61 85
Foreign............ 24 2 7 39 15
Total............ 100% 100% 100% 100% 100%
Total exposure... $17.8 $13.6 $2.7 $1.8 $35.9
</TABLE>
NOTE 16--EMPLOYEE STOCK PLANS
Continental maintains an Employees Stock Ownership Plan (ESOP)
that provides benefits to substantially all full-time U.S.
employees. On December 31, 1993, the ESOP held 1,908,806 shares
of Continental common stock, 344,302 shares of which were
unallocated. All loans to the ESOP Trust have been recorded as a
reduction of stockholders' equity.
Continental contributed $4 million to the ESOP in 1993, all of
which represented the compensation element. The 1992 and 1991
contributions were $10 million and $7 million, respectively
($9 million and $6 million, respectively, representing the
compensation element). The contributions in 1992 and 1991 were
net of $1 million of dividends on unallocated shares of common
stock.
Continental maintains a stock plan and a stock-equivalent plan
for certain non-U.S.-paid employees. Expense recognized for both
plans was less than $1 million in 1993, 1992, and 1991.
<PAGE> 90
Continental adopted a stock option plan during l979 and a
combined stock option and restricted stock plan in l982. In
April 1991, Continental's stockholders approved the 1991 Equity
Performance Incentive Plan (1991 Plan). Under the 1991 Plan,
officers and other key employees may receive awards consisting of
options, stock appreciation rights, restricted stock, and
restricted stock units. The 1991 Plan allows for a maximum of
3,500,000 shares of common stock to be issued. Awards generally
are not assignable or transferable and may be exercised only by
the participant.
Authorized shares of Continental common stock reserved for
issuance to key personnel under the stock option plans amounted
to 7 million and 8 million on December 31, 1993 and l992,
respectively. Stock options expire ten years from the date of
grant.
Data with respect to options are as follows:
<TABLE>
<CAPTION>
December 31 1993 1992 1991
<S> <C> <C> <C>
Shares under option at year-end... 5,700,683 5,228,880 4,046,312
Option price per share............ $9-155 $9-155 $9-155
</TABLE>
Options for 763,621 shares were exercised during 1993. In 1992,
443,245 options were exercised. In 1991, no options were
exercised.
In addition to the plans described above, Continental has granted
stock options to three present or former members of executive
management in conjunction with their employment, all of which are
currently exercisable. The following table sets forth
information with respect to these options:
<TABLE>
<CAPTION>
Number Option Expiration
December 31, 1993 of shares price date
<S> <C> <C> <C>
Granted in 1984....... 175,000 $18.00 8/13/94
Granted in 1987....... 500,000 21.50 7/31/97
</TABLE>
Under the terms of the options granted in 1984, the optionees
have the right to exercise the options in exchange for common
stock or to surrender any of the options in return for a cash
payment equal to the book value per share of common stock at the
end of the preceding quarter less $26.00 per share. In
addition, these optionees have until August 13, 1994, to require
Continental to repurchase shares acquired through exercise of the
options, at a price per share equal to the book value per share
of common stock at the end of the preceding quarter less $8.00
per share.
<PAGE> 91
NOTE 17--PENSION PLAN
Continental and certain subsidiaries have a noncontributory
defined benefit pension plan covering substantially all full-time
U.S. employees. The plan benefits are based on years of service
and a final-pay formula. Continental's policy is to fund the
plan in compliance with the Employee Retirement Income Security
Act (ERISA).
The domestic pension expense for 1993 and 1991 was less than
$1 million and $3 million, respectively; the domestic pension
benefit for 1992 totaled $1 million. Continental did not
contribute to the plan in any of the last three years, since the
plan was overfunded for ERISA purposes.
Continental recognized a curtailment gain of $9 million in 1991
as a result of the decrease in projected benefit obligations
associated with the reduction in the total number of employees.
This gain is included as part of the provision for business
restructuring in 1991.
The following table reconciles the domestic pension plan's funded
status and the amounts recorded in Continental's consolidated
balance sheet:
<TABLE>
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Market value of plan assets, invested in equities
and bonds................................................ $218 $202
Actuarial present value of accumulated benefits,
including vested benefits of $155 and $118............... 172 133
Additional benefits based on estimated future
salary levels............................................ 44 50
Projected benefit obligation............................. 216 183
Funded status.............................................. 2 19
Unrecognized net asset..................................... (13)* (15)
Prior service cost......................................... (3) --
Unrecognized net loss...................................... 39 22
Prepaid pension costs.................................... $ 25 $ 26
<FN>
*The remaining unrecognized net asset will be amortized over five years.
</TABLE>
The following table shows the rates used in determining the
actuarial present values of projected benefits and the expected
long-term rate of return on plan assets:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Discount rate......................................... 7.75% 8.25%
Rate of increase in future compensation levels........ 5.00 5.50
Rate of return on plan assets......................... 10.00 10.00
</TABLE>
<PAGE> 92
In addition to considering borrowing rates, Continental's
discount rate for 1993 was actuarially derived by comparing
expected cash outflows under its pension plan to cash flows
related to a hypothetical, but obtainable, bond portfolio of
highly rated bonds which could be purchased to settle
Continental's pension obligation.
The components of pension expense for each of the last three
years are as follows:
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Service cost--benefits earned during year......... $ 8 $ 7 $ 7
Interest cost on projected benefit obligation..... 14 14 14
Actual return on plan assets...................... (24) (12) (36)
Net amortization and deferral..................... 2 (10) 18
Net pension expense (benefit)................... $ -- $ (1) $ 3
</TABLE>
Employees of certain foreign units of Continental participate in
defined benefit or contributory pension plans established by
those units; the pension expense related to these plans was not
material in any of the last three years.
NOTE 18--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Continental and certain subsidiaries have a contributory
postretirement healthcare plan covering substantially all
salaried U.S. employees. Eligibility for plan benefits is based
on a combination of age and length of service. Healthcare
benefits are subject to limitations on both individual and total
benefits available. Continental also has retained the right to
amend the plan in the future. Continental provides
postretirement life insurance only for retirees who retired by
December 31, 1991, and certain key executives. Continental funds
its portion of the postretirement benefits on a pay-as-you-go
basis.
The following table presents the components of the accumulated
postretirement benefit obligation as of December 31, 1993:
<TABLE>
<CAPTION>
December 31, 1993 ($ in millions)
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ 58
All other participants............................................ 19
Total........................................................... 77
Unrecognized experience net loss.................................... (3)
Unrecognized prior service cost..................................... (6)
Unrecognized transition obligation*................................. (63)
Accrued postretirement benefit cost............................... $ 5
<FN>
*The remaining unrecognized transition obligation will be amortized over
19 years.
</TABLE>
<PAGE> 93
The following table shows the rates used in determining the
actuarial present values of projected benefits:
<TABLE>
<CAPTION>
1993
<S> <C>
Discount rate....................................................... 7.75%
Medical trend on net charges........................................ 14.0*
Administration costs................................................ 5.0
<FN>
*This trend rate decreases by 1% a year until the year 2001, when an ultimate
trend rate of 6.5% is assumed.
</TABLE>
Continental's discount rate for postretirement benefits was
derived using the same methodology as that used to determine the
pension discount rate.
A one-percentage point increase in the assumed medical trend and
administration cost rates in each year would increase the
accumulated postretirement benefit obligation on
December 31, 1993, by approximately $8 million. The increase on
the combined service and interest cost components of the 1993
annual postretirement benefit expense would have been
approximately $1 million.
The components of postretirement benefit expense for 1993 are as
follows:
<TABLE>
<CAPTION>
($ in millions) 1993
<S> <C>
Service cost........................................................ $ 1
Interest cost....................................................... 5
Net amortization and deferral....................................... 3
Postretirement benefit expense.................................... $ 9
</TABLE>
The difference between the accrued postretirement benefit cost on
December 31, 1993, and postretirement benefit expense for 1993
was expenses paid during the year.
NOTE 19--OTHER EMPLOYEE BENEFITS
Employee Savings Plan: Continental maintains a savings incentive
plan under Section 401(k) of the Internal Revenue Code, covering
substantially all full-time U.S. employees. Under the plan,
employee contributions are partially matched by Continental.
Total savings plan expense amounted to $3 million, $2 million,
and $3 million for 1993, 1992, and 1991, respectively.
Healthcare and Life Insurance Benefits: Continental provides
healthcare and life insurance benefits to certain active
employees based on a combination of age and length of service.
Healthcare benefits are subject to limitations on both individual
and total benefits available. The amount charged to expense
<PAGE> 94
includes healthcare benefits paid to participants, net of their
contributions, and administrative costs. Life insurance premiums
paid to insurance companies are recognized as an expense when
paid. The expense for healthcare and life insurance benefits in
1993, 1992, and 1991, was $12 million, $12 million, and
$13 million, respectively, for active employees.
NOTE 20--INCOME TAXES
Income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Current
Federal....................................... $ (1) $ 2 $--
State......................................... -- -- 1
Foreign....................................... 32 10 5
Total current............................... 31 12 6
Deferred
Federal....................................... (49) -- --
Foreign....................................... -- 8 11
Total deferred.............................. (49) 8 11
Total income tax expense (credit)........... $(18) $20 $17
</TABLE>
The components of and changes in the federal deferred tax asset
were as follows:
<TABLE>
<CAPTION>
Deferred
January 1 expense December 31
($ in millions) 1993 (benefit) 1993
<S> <C> <C> <C>
Reserve for credit losses........... $ 190 $ 52 $ 138
Statutory change to mark-to-market
tax accounting.................... -- (26) 26
Unrealized gains on
risk-management products.......... (27) (24) (3)
Net unrealized equity gains......... (18) 15 (33)
Deferred fee and interest income.... 10 (2) 12
Other temporary differences......... 37 12 25
Federal regular tax operating
loss carryforwards................ 67 56 11
Foreign tax credit carryforwards.... 75 28 47
Alternative minimum tax and
business tax credit
carryforwards..................... 20 (3) 23
Gross federal deferred tax
assets.......................... 354 108 246
Valuation allowance................. (274) (157) (117)
Total federal deferred tax asset.. $ 80 $ (49) $ 129
</TABLE>
In addition to the federal deferred tax asset shown above,
Continental recorded a federal deferred tax liability of
$19 million due to the adoption of SFAS No. 115. See Note 2 for
further discussion of the adoption of SFAS No. 115.
<PAGE> 95
For discussion of management's assessment of the valuation
allowance, see Income Taxes on page 32 of Management's Discussion
and Analysis.
The components of deferred income tax expense for 1992 and 1991
relate to the factors listed below:
<TABLE>
<CAPTION>
($ in millions) 1992 1991
<S> <C> <C>
Provision for credit losses............................... $ 42 $ (6)
Reserves for restructuring and other expenses............. 8 (7)
Translation losses........................................ (2) (2)
Deferred fee and interest income.......................... (6) 1
Unrealized gains on risk-management products.............. -- 11
Recognition of previously unrecorded regular federal
tax benefits............................................ (45) (22)
Property dispositions..................................... 2 3
Net unrealized equity gains............................... 7 11
Deferred foreign taxes.................................... 8 11
Exchange of LDC debt...................................... (8) --
Other..................................................... 2 11
Total deferred income tax expense....................... $ 8 $ 11
</TABLE>
On December 31, 1993, Continental had the following federal
income tax carryforwards.
<TABLE>
<CAPTION>
Expiration Regular Alternative
($ in millions) date tax minimum tax
<S> <C> <C> <C>
Federal net operating loss
carryforwards................... 1996 $33 $18
Foreign tax credit carryforwards.. 1994 $ 6 $--
1995 6 4
1996 15 14
1997 4 4
1998 16 16
Total foreign tax credit
carryforwards................. $47 $38
Business tax credit
carryforwards................... 1996-2004 $ 5 $--
Alternative minimum tax credit
carryforwards................... Indefinite $18 $--
</TABLE>
In addition to the federal tax benefits indicated in the table
above, Continental has net operating loss carryforwards available
in various state and foreign jurisdictions, none of which have
been recognized for financial statement purposes.
The following table provides a reconciliation of income taxes on
continuing operations included in the consolidated statement of
operations to an income tax provision computed by applying the
statutory federal corporate tax rate of 35% for 1993 and 34% for
1992 and 1991 to income (loss) before income taxes:
<PAGE> 96
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Tax at statutory rate............................ $ 84 $ 82 $(19)
Increase (decrease) in taxes resulting from:
Nontaxable interest and dividend income........ (1) (2) (4)
Limitation (utilization) of deferred benefits.. -- (77) 18
Change in valuation allowance.................. (157) -- --
Change in tax attributes....................... 26 -- --
Foreign income taxes........................... 32 18 16
Other.......................................... (2) (1) 6
Total income tax expense (credit).............. $ (18) $ 20 $ 17
</TABLE>
The effect of the change in federal income tax rates enacted as
part of the Revenue Reconciliation Act of 1993 was an immaterial
increase to net deferred tax benefits as of January 1, 1993.
The following table shows income (loss) from continuing
operations before taxes from domestic and foreign operations. In
this table, foreign operations include foreign branches and
foreign subsidiaries only.
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Domestic........................................ $124 $214 $(50)
Foreign......................................... 116 28 (6)
Total......................................... $240 $242 $(56)
</TABLE>
NOTE 21--SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Other revenues in the consolidated statement of operations
included gains on loan sales and foreign-exchange translation
losses. Gains on loan sales were $36 million in 1993,
$26 million in 1992, and $3 million in 1991. Foreign-exchange
translation losses totaled $4 million in 1993, $21 million in
1992, and $14 million in 1991.
The main components of other expenses included in the
consolidated statement of operations are as follows:
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Professional service fees .................. $123 $116 $ 78
Insurance (includes FDIC assessments)....... 35 29 29
Travel and related.......................... 18 16 18
Supplies.................................... 10 11 12
Advertising and public affairs.............. 9 9 10
Communication............................... 8 9 13
All other .................................. 27 23 19
Total other expenses...................... $230 $213 $179
</TABLE>
<PAGE> 97
The main components of net costs of ONPA included in the
consolidated statement of operations are as follows:
<TABLE>
<CAPTION>
($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Write-downs....................................... $35 $11 $16
Net operating and legal expenses.................. 32 2 --
Net losses from sales............................. 1 -- --
Net costs of ONPA............................... $68 $13 $16
</TABLE>
NOTE 22--DOMESTIC AND FOREIGN OPERATIONS
Due to the nature of Continental's business, it is not possible
to separate precisely domestic and foreign operations. Thus,
subjective judgments related to the distribution of earning
assets, revenues, and costs were used to derive operating
results. Charges or credits for intercompany funding were based
on the cost of selected short-term funds. Equity was allocated
based on the level of total average assets. Gross expenses
included interest expense and provisions for credit losses.
Other operating expenses were allocated between regions for
expenses incurred by one on behalf of another. Income taxes were
adjusted for the difference between foreign and U.S. tax rates.
The general provision for credit losses was allocated on the
basis of net charge-off experience and management's assessment of
risk characteristics of the portfolio. In 1992 and 1991, the
allocated transfer risk reserve was netted against assets of the
Latin American/Caribbean region. The information presented for
foreign operations was based on the location of the principal
obligor without regard to guarantors. Prior-year amounts have
been restated to conform with the current year's presentation.
<PAGE> 98
<TABLE>
Continuing Domestic and Foreign Operations
<CAPTION>
Total Income
assets on Gross Gross (loss) Income
($ in millions) December 31 revenues expenses before taxes (loss)
<S> <C> <C> <C> <C> <C>
1993
Continental Europe.......... $ 246 $ 11 $ 17 $ (6) $ (7)
Latin America/Caribbean..... 1,913 319 154 165 111
Asia/Pacific................ 1,455 60 57 3 3
United Kingdom.............. 1,064 98 103 (5) (10)
Other foreign countries..... 229 9 9 -- --
Total foreign............. 4,907 497 340 157 97
Total domestic............ 17,694 1,264 1,181 83 161
Consolidated total........ $22,601 $1,761 $1,521 $240 $258
1992
Continental Europe.......... $ 342 $ 48 $ 58 $(10) $(11)
Latin America/Caribbean..... 1,856 287 140 147 106
Asia/Pacific................ 970 56 36 20 20
United Kingdom.............. 1,162 102 161 (59) (59)
Other foreign countries..... 229 13 16 (3) (5)
Total foreign............. 4,559 506 411 95 51
Total domestic............ 17,908 1,270 1,123 147 171
Consolidated total........ $22,467 $1,776 $1,534 $242 $222
1991
Continental Europe.......... $ 747 $ 74 $ 82 $ (8) $ (9)
Latin America/Caribbean..... 1,587 351 262 89 76
Asia/Pacific................ 1,411 118 113 5 4
United Kingdom.............. 1,289 104 174 (70) (70)
Other foreign countries..... 422 34 43 (9) (10)
Total foreign............. 5,456 681 674 7 (9)
Total domestic............ 18,552 1,635 1,698 (63) (64)
Consolidated total........ $24,008 $2,316 $2,372 $(56) $(73)
</TABLE>
<PAGE>
<PAGE> 99
NOTE 23--CONDENSED PARENT COMPANY STATEMENTS
The condensed balance sheet and statements of operations and cash
flows for the parent company, Continental Bank Corporation, are
as follows:
<TABLE>
Balance Sheet
<CAPTION>
December 31 ($ in millions) 1993 1992
<S> <C> <C>
Assets
Deposits with banks*......................... $ 529 $ 566
Loans
Banks*..................................... -- 20
Nonbank subsidiaries*...................... 117 127
Other...................................... 22 23
Investment in
Banks*..................................... 2,019 1,699
Nonbank subsidiaries*...................... 165 138
Other assets................................. 104 97
Total assets............................... $2,956 $2,670
Liabilities
Advances from nonbank subsidiaries*.......... $ -- $ 92
Commercial paper
Nonbank subsidiaries*...................... 28 41
Other...................................... 88 155
Other borrowings............................. 29 27
Long-term debt............................... 746 568
Other liabilities............................ 142 99
Total liabilities.......................... 1,033 982
Stockholders' equity......................... 1,923 1,688
Total liabilities and
stockholders' equity..................... $2,956 $2,670
<FN>
*Eliminated in consolidation.
</TABLE>
<PAGE>
<PAGE> 100
<TABLE>
Statement of Operations
<CAPTION>
Year ended December 31 ($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Operating revenues
Interest from subsidiaries
Banks*.................................... $ 18 $ 20 $ 38
Nonbank subsidiaries*..................... 4 4 6
Dividends from subsidiaries
Banks*.................................... 85 75 55
Nonbank subsidiaries*..................... -- -- 20
Other interest revenue...................... 2 2 3
Gain on sale of real estate................. -- 1* 6*
Other revenues.............................. 1 -- 6
Total operating revenues.................. 110 102 134
Operating expenses
Interest on advances from nonbank
subsidiaries*............................. 3 5 7
Interest on commercial paper and other
borrowings
Nonbank subsidiaries*..................... 1 1 1
Other..................................... 4 4 5
Other interest expense...................... 47 47 60
Other expenses.............................. 8 3 3
Total operating expenses.................. 63 60 76
Income before income taxes and equity in
undistributed income of subsidiaries...... 47 42 58
Income tax expense (credit)................. 21 (9) (9)
Equity in undistributed income (loss) of
subsidiaries.............................. 312 171 (143)
Net income (loss)......................... $338 $222 $ (76)
<FN>
*Eliminated in consolidation.
</TABLE>
<PAGE>
<PAGE> 101
<TABLE>
Statement of Cash Flows
<CAPTION>
Year ended December 31 ($ in millions) 1993 1992 1991
<S> <C> <C> <C>
Operating activities
Net income (loss)................................................ $ 338 $ 222 $ (76)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Equity in undistributed loss (income) of subsidiaries.......... (397) (245) 68
Accretion of discounts......................................... -- 1 --
Gain on sale of real estate.................................... (1) (1) (6)
Other.......................................................... 39 (14) (17)
Net cash used by operating activities.......................... (21) (37) (31)
Investing activities
Net decrease (increase) in interest-bearing deposits with banks.. 35 83 (264)
Loans originated
Bank subsidiaries.............................................. -- (20) (346)
Nonbank subsidiaries........................................... (27) (59) (36)
Other.......................................................... -- -- --
Principal collections on loans
Bank subsidiaries.............................................. 20 -- 744
Nonbank subsidiaries........................................... 37 39 19
Other.......................................................... 1 1 --
Net decrease in investments in subsidiaries...................... -- 1 47
Dividends from subsidiaries...................................... 85 75 75
Net cash provided by investing activities...................... 151 120 239
Financing activities
Net increase (decrease) in commercial paper...................... (80) 19 83
Net increase (decrease) in other borrowings...................... 2 (6) 10
Proceeds from issuance of long-term debt......................... 345 -- 150
Repayment or retirement of long-term debt........................ (260) (36) (376)
Dividends paid................................................... (65) (66) (80)
Loan to ESOP Trust............................................... -- (1) (6)
Other............................................................ (74) 9 10
Net cash used by financing activities.......................... (132) (81) (209)
Cash and non-interest-bearing deposits on January l............ 3 1 2
Cash and non-interest-bearing deposits on December 3l.......... $ 1 $ 3 $ 1
<FN>
Cash payments for interest expense amounted to $61 million for 1993, $58 million for 1992,
and $72 million for 1991. Income tax payments of $3 million and $2 million were made in 1993
and 1992, respectively; income tax refunds received totaled $1 million in 1991. See
consolidated statement of cash flows for significant noncash transactions.
</TABLE>
<PAGE>
<PAGE> 102
NOTE 24--LEGAL PROCEEDINGS
The following consolidated civil action is a proceeding that
primarily seeks monetary damages against the Bank. On
September 25, 1984, two actions were instituted in Oklahoma
entitled The First National Bank and Trust Company of Oklahoma
City and Continental Illinois National Bank and Trust Company of
Chicago v. Ray Bell, et al. (Bell Group), and The First National
Bank and Trust Company of Oklahoma City and Continental Illinois
National Bank and Trust Company of Chicago v. Atex Oil Company of
Oklahoma, Inc., et al. (Bell Group), in which the Bank sought
repayment of obligations due under various notes and guarantees.
The Bell Group filed counterclaims against the Bank seeking
$13 million in damages for alleged fraud and violations of both
federal and Oklahoma securities laws. The FDIC was substituted
for the Bank as plaintiff, and the actions were consolidated for
trial in the United States District Court for the Western
District of Oklahoma (the Bell action). The FDIC obtained
summary judgment on its claim against the Bell Group, and
thereafter the Bell Group amended their counterclaims to seek
damages of approximately $52 million against the Bank. On
April 4, 1988, the court entered judgment on the jury verdict in
the amount of approximately $52 million in damages against the
Bank. On April 24, 1990, the United States Court of Appeals for
the Tenth Circuit reversed the judgment against the Bank based on
common law fraud and violation of the federal securities laws,
while affirming the jury verdict against the Bank for non-
registration of a security under Oklahoma securities law and
remanding the case for a redetermination of damages on that
issue. The Bank became aware that certain members of the Bell
Group purportedly assigned their rights to any judgment against
the Bank to the FDIC. On June 6, 1991, following a bench trial,
a federal judge issued an opinion that the Bell Group was not
entitled to any damages against the Bank. On September 14, 1993,
the United States Court of Appeals for the Tenth Circuit affirmed
the District Court's findings in the Bell case that the Bell
Group is not entitled to any damages against the Bank. On
January 13, 1994, the plaintiffs filed a petition for a writ of
certiorari in the Supreme Court of the United States.
In addition to these actions, Continental and certain
subsidiaries, including the Bank, are defendants in various other
lawsuits. It is the opinion of management that the ultimate
resolution of the Bell action, the actions discussed in Note 1,
and all other lawsuits will not have a material effect on the
financial condition of Continental.
<PAGE>
<PAGE> 103
MANAGEMENT REPORT
Management is responsible for the content of the Annual Report on
Form 10-K, including the financial statements and related notes
appearing on pages 58 through 102, and believes that the
statements and notes have been prepared in conformity with
generally accepted accounting principles appropriate in the
circumstances and present fairly Continental Bank Corporation's
financial condition and results of operations. Where amounts
must be based on estimates and judgments, they represent the best
estimates of management. All financial information appearing in
the Annual Report on Form 10-K is consistent with that in the
financial statements.
The accounting system and related internal accounting controls
are designed to provide reasonable assurance that assets are
safeguarded and that transactions are properly executed and
recorded. Emphasis is placed on proper segregation of duties and
authorities, the development and dissemination of written
policies and procedures, and a comprehensive program of internal
audits and management follow-up. Inherent limitations exist in
any system of internal accounting controls based upon the
recognition that the cost of control should not exceed the
benefit derived. Recognizing this cost/benefit relationship, the
system provides reasonable assurance that material errors and
irregularities are prevented or would be detected within a timely
period by employees in the normal course of performing their
assigned duties.
The financial statements have been audited by Price Waterhouse,
independent accountants, who are responsible for conducting their
audits in accordance with generally accepted auditing standards.
The Board of Directors pursues its oversight role for accounting
and internal accounting control matters through an Audit
Committee of the Board of Directors, composed entirely of outside
directors. The Audit Committee meets periodically with
management, internal auditors, and independent accountants. The
independent accountants and internal auditors have full and free
access to the Audit Committee, and meet with it privately as well
as with management present to discuss internal control,
accounting, and auditing matters.
Thomas C. Theobald
Chairman
Michael E. O'Neill
Chief Financial Officer
John J. Higgins
Controller
February 28, 1994
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Continental Bank Corporation
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of changes in
stockholders' equity, and of cash flows of Continental Bank
Corporation and its subsidiaries, and the consolidated balance
sheet of Continental Bank N.A. and its subsidiaries, present
fairly, in all material respects, the financial position of
Continental Bank Corporation and its subsidiaries at
December 31, 1993 and 1992, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1993, and the financial position of
Continental Bank N.A. and its subsidiaries at December 31, 1993
and 1992, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of
the Corporation's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements,
the Corporation changed its method of accounting for
postretirement benefits other than pensions, income taxes and
certain investments in debt and equity securities in 1993.
PRICE WATERHOUSE
Chicago, Illinois
January 18, 1994, except as to Note 1, which is as of
January 28, 1994.
<PAGE> 105
Quarterly financial information for the quarterly periods ended
December 31, 1993 and 1992, is set forth in Item 6, under the
caption "Quarterly Financial Information" and "Fourth-Quarter
Summary."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Continental's Board of Directors has fixed the number of
directors at 13. Directors serve until the next annual meeting
of stockholders and until their successors are duly elected and
qualified. All directors of Continental also serve as directors
of the Bank. The name, age, principal occupation for the last
five years, and the date first elected to the Board of Directors
for each of the directors is as follows:
Bert A. Getz
56, chairman of the board, president and director of Globe
Corporation, a diversified investment company. Joined that
company in 1959, became its president in 1974 and its chairman in
1992. Other directorships include CalMat Co. and Dean Foods
Company. Director since 1992. (2)
Thomas A. Gildehaus
53, president, chief executive officer and director since July
1992 of UNR Industries, Inc., a holding company with businesses
engaged principally in metal fabrication. Previously employed by
Deere & Company, a manufacturer of agricultural and industrial
equipment, from 1980 to June 1992, becoming executive vice
president in 1982. Director since 1993. (2)
Robert B. Goergen
55, chairman of the board, chief executive officer and director
since 1976 of Blyth Industries, Inc., a manufacturer of candles
and various home accessories. Chairman of the board since April
1990 of XTRA Corporation, a trailer leasing firm. Director of
Wellstead Industries, Inc. Director since 1991. (3)(4)
William M. Goodyear
45, vice chairman of Continental and the Bank since February
1993. Joined the Bank in 1972, elected senior vice president of
the Bank in 1984 and executive vice president of Continental and
the Bank in 1985. Director since 1993.
<PAGE> 106
Richard L. Huber
57, vice chairman of Continental and the Bank since 1990.
Previously employed as executive vice president for two years by
Chase Manhattan Corporation. Prior thereto, was a group
executive of Citicorp and Citibank, N.A. Joined Citibank, N.A.
in 1973. Director of Capital Re Corporation and Specialty
Equipment Companies, Inc. Director since 1991.
Miles L. Marsh
46, chairman, chief executive officer and director since April
1991 of Pet Incorporated, a food products company. From 1989
through March 1991, was president and chief operating officer of
Whitman Corporation, an international consumer goods and services
company. Previously employed by units of Philip Morris Companies
Inc., a holding company with subsidiaries engaged primarily in
the manufacture and sale of various consumer products, from 1981
to 1989, becoming president of General Foods U.S.A. in February
1989, having served as president, Kraft Operations and Technology
Group, from 1988. Other directorships include Hartmarx
Corporation and Whirlpool Corporation. Director since 1993. (4)
Roger H. Morley
62, business consultant and private investor since 1981.
Previously employed by American Express Company for seven years,
becoming vice chairman in 1975 and president in 1977. Served as
a director of that company between 1975 and 1980. Also served as
a director of American Express Bank from 1975 through 1979. Vice
president of Schiller International University, Germany.
Director of Biogen, Inc., and Artal S.A. (Luxembourg). Director
since 1992. (2)
Michael J. Murray
49, vice chairman of Continental and the Bank since February
1993. Joined the Bank in 1969, elected senior vice president of
the Bank in 1984 and executive vice president of Continental and
the Bank in 1985. Director of Technology Solutions Company.
Director since 1993.
Linda Johnson Rice
36, president and chief operating officer of Johnson Publishing
Company, Inc., the publisher of Ebony and other magazines.
Joined that company in 1980, became vice president in 1985 and
president and chief operating officer in 1987. Director of
Bausch & Lomb Incorporated and The Dial Corp. Director since
1989. (3)(4)
John M. Richman
66, of counsel to the law firm of Wachtell, Lipton, Rosen & Katz
since January 1990. Retired in 1989 from the management of
Philip Morris Companies Inc., a holding company with subsidiaries
<PAGE> 107
engaged primarily in the manufacture and sale of various consumer
products, and Kraft General Foods, Inc., a subsidiary of Philip
Morris Companies Inc. Joined Kraft in 1954, becoming chairman
and chief executive officer in 1979 and vice chairman of Philip
Morris Companies Inc. in 1988. Directorships include Philip
Morris Companies Inc., R.R. Donnelley & Sons Company and USX
Corporation. Director since 1980. (1)(3)(4)
Gordon I. Segal
55, president, chief executive officer and director of Crate &
Barrel, a housewares retail company. Founded that company in
1962. Director since 1991. (2)
Thomas C. Theobald
56, chairman and chief executive officer of Continental and the
Bank since 1987. Previously vice chairman of Citicorp and
Citibank, N.A. for five years, having joined Citibank, N.A. in
1960. Director of Xerox Corporation. Trustee of The Mutual Life
Insurance Company of New York. Director since 1987. (1)
James L. Vincent
54, chairman of the board of directors, chief executive officer
and director since 1985 of Biogen, Inc., a biotechnology and
pharmaceutical firm. Director of Millipore Corporation.
Director since 1991. (4)
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Committee on Directors
(4) Member of Human Resources Committee
OFFICERS
The information on executive officers of Continental is set forth
following Item 4, under the caption "Executive Officers of the
Corporation," and is incorporated herein by reference.
REPORTS OF BENEFICIAL OWNERSHIP
Following his retirement, Hollis W. Rademacher, former chief
financial officer of Continental, was inadvertently late in
filing a required report with the Securities Exchange Commission
covering four transactions in Continental common stock in
November 1993.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors other than salaried officers of Continental or its
subsidiaries receive an annual retainer fee of $30,000 (of which
$13,000 is ordinarily payable in Continental common stock as
described below), a fee of $1,000 for each board and committee
<PAGE> 108
meeting attended and an annual fee for service on committees as
described below. The Chairman and other members of the Audit
Committee receive annual fees of $15,000 and $10,000,
respectively. The Chairman and other members of the Human
Resources Committee receive annual fees of $10,000 and $7,500,
respectively. Members of the Committee on Directors receive
annual fees of $3,000. Directors may elect to defer payment of
any of their director fees, which then accrue earnings at a money
market rate. Deferred fees are paid in a lump sum or in
installments, generally commencing after a director ceases to be
a director of Continental and the Bank.
Continental's Stock Plan for Directors (Directors Stock Plan)
provides that, except as noted below, $13,000 of each director's
retainer fee will be paid in Continental common stock at the fair
market value of the Continental common stock on the date of
payment. Dividends are paid on the Continental common stock
issued pursuant to the Directors Stock Plan. At each director's
election, the director may receive restricted Continental common
stock which may not be sold, hypothecated, or transferred and may
be subject to forfeiture unless the director remains on the
Continental Board of Directors until death, disability,
retirement, termination of service approved by the Continental
Board of Directors, or a change in control of Continental (as
defined in the Directors Stock Plan). Directors who own 2,500
shares or more of Continental's common stock (other than
Continental common stock acquired under the Directors Stock Plan)
instead will receive cash (unless the director elects to receive
Continental common stock), and the cash (or Continental common
stock), at each director's election, may be subject to the same
forfeiture provisions as described above. Directors may also
elect to receive up to the entire amount of their retainer and
meeting attendance fees in Continental common stock (on the same
terms as the Continental common stock otherwise provided for in
the Directors Stock Plan).
The Directors Stock Plan has been suspended during the pendency
of the proposed merger of Continental into BankAmerica
Corporation, described in Note 1--Proposed Merger with
BankAmerica--of Notes to Consolidated Financial Statements
provided in Item 8. In the interim, all payments of accrued
retainers or meeting attendance fees are being made solely in
cash.
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table
The following table summarizes for the years indicated the
compensation of Continental's Chairman of the Board of Directors,
who is the chief executive officer, the four other most highly
compensated executive officers of Continental, and one additional
executive officer who retired during the year.
<PAGE> 109
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus(b) Options/SARs(c) Compensation(d)
<S> <C> <C> <C> <C> <C>
Thomas C. Theobald....... 1993 $660,000 $1,025,000 100,000 $ 4,497
Chairman 1992 620,000 922,500 196,000 4,364
1991 583,333 -- 146,000
Richard L. Huber.......... 1993 400,000 768,750 60,000 4,497
Vice Chairman 1992 395,833 563,750 118,000 4,364
1991 350,000 -- 88,000
Michael J. Murray......... 1993 391,667 589,375 60,000 9,085
Vice Chairman 1992 333,333 666,250 115,000 6,342
1991 283,333 -- 70,000
William M. Goodyear....... 1993 391,667 615,000 60,000 4,497
Vice Chairman 1992 333,333 563,750 115,000 4,364
1991 283,333 -- 70,000
Michael E. O'Neill(a)..... 1993 240,000 512,500 75,000 113,060
Chief Financial Officer
Hollis W. Rademacher(a)... 1993 273,958 250,000 40,000 694,332
Chief Financial Officer 1992 322,917 384,375 101,000 45,662
1991 300,000 -- 76,000
<FN>
(a) Mr. Rademacher retired during 1993, and his position was assumed by Mr. O'Neill.
(b) To further promote stock ownership, 25% of base annual incentives for 1992 and 1993 were
paid in Continental common stock, subject to forfeiture upon voluntary separation (other
than retirement) until January 31, 1994, and January 10, 1995, respectively. Because of
these restrictions, each such stock award was increased by 10%, and this increase is
included in the figures shown above. Holders of such stock awards are entitled to
quarterly dividends. Mr. Rademacher's 1993 award of $250,000 was paid entirely in cash.
As of December 31, 1993, the named executive officers held the following number of shares
of stock subject to restriction until January 31, 1994: Mr. Theobald, 10,674; Mr. Huber,
6,523; Mr. Murray, 7,709; Mr. Goodyear, 6,523; and Mr. O'Neill, 3,262. Based upon the
$26.375 closing price of Continental common stock as reported for December 31, 1993, on
the NYSE composite transactions tape, the value of these shares was $281,527, $172,044,
$203,325, $172,044, and $86,035, respectively. As of December 31, 1993, Mr. Rademacher no
longer held any restricted shares.
(c) The 1991 option grants include tandem stock appreciation rights (SARs).
(d) Reflects Continental's 1993 contributions of $4,497 under the Employee Savings Incentive
Plan and Trust for each executive officer named in the table and earnings credited,
excluding dividend equivalents, to the accounts of Messrs. Murray, Rademacher and O'Neill
under Continental's Deferred Incentive Plan, as follows: Earnings credited to stock unit
account: Murray, $4,588; Rademacher, $81,868; O'Neill, $108,563. Earnings credited to
interest account: Rademacher, $20,467. In addition, Mr. Rademacher received a lump sum
payment in the amount of $587,500, consisting of $487,500 which was the full value of
salary continuation through April 30, 1995 and a special payment of $100,000 in
recognition of his long and distinguished service to Continental.
</TABLE>
<PAGE> 110
Option Grants in 1993
The following table shows grants made during 1993 to the six
executive officers named in the Summary Compensation Table to
purchase shares of Continental common stock and the potential
realizable value of these options assuming a 5 percent and
10 percent compounded appreciation in the market value of the
stock over the term of the option grants. The table also relates
those values to the gains that would be realized by the holders
of Continental common stock as a whole if those rates of
appreciation were achieved.
<TABLE>
<CAPTION>
Individual Grants
Percent
of Potential
Total Realizable Value at
Options Assumed Annual
Number of Granted Rates of Stock
Securities to Em- Exercise Price Appreciation
Underlying ployees or Expira- for Option Term
Options in Base Price tion
Name Granted 1993 Per Share Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Theobald 100,000 7.74% $23.1875 2/22/03 $ 1,460,812 $ 3,686,813
Richard L. Huber 60,000 4.65 23.1875 2/22/03 876,487 2,212,088
Michael J. Murray 60,000 4.65 23.1875 2/22/03 876,487 2,212,088
William M. Goodyear 60,000 4.65 23.1875 2/22/03 876,487 2,212,088
Michael E. O'Neill 25,000 1.94 23.1875 2/22/03 365,203 921,703
50,000 3.87 26.3750 10/25/03 830,812 2,096,813
Hollis W. Rademacher 40,000 3.10 23.1875 2/22/03(a) 584,325 1,474,725
All Common
Stockholders Gain N/A N/A 23.1875 N/A 742,303,092 1,873,431,614
Mr. Theobald's gain
on his options as
percent of All Common
Stockholders Gain N/A N/A N/A N/A 0.197% 0.197%
<FN>
(a) In light of Mr. Rademacher's retirement, the vesting of the non-vested shares of this
option grant were accelerated to his retirement date, and the options will expire no
later than October 31, 1996, in accordance with the terms of the 1991 Equity Performance
Incentive Plan. As a result of the revised option term, the potential realizable values
at assumed appreciation rates of 5% and 10% would be $146,174 and $307,003, respectively.
</TABLE>
The stock options shown above were granted at the fair market
value of Continental common stock on the date of grant and vest
ratably on an annual basis over a three-year period following the
date of grant. Mr. O'Neill's $26.375 option was granted in
recognition of his assuming the position of Chief Financial
Officer. Continental has shown the potential realizable value
based upon an assumed 5 percent and 10 percent compounded
appreciation of the stock's value over the term of the option
<PAGE> 111
because of this method's ease of understanding and because there
is not, at this time, a commonly accepted methodology for valuing
stock options. Continental has also chosen to show the
corresponding increase in All Common Stockholders value at those
appreciation levels and the Chairman's potential gain on his
options as a percentage of All Common Stockholders Gain. The
figures shown for All Common Stockholders Gain reflect the gain
in total market value which would result from the assumed annual
rates of appreciation for 50,814,399 shares of Continental common
stock outstanding as of December 31, 1993.
Aggregated Option/SAR Exercises in 1993 and Option/SAR Values at
Year-end 1993
The following table summarizes option and SAR exercises during
1993 by the six executive officers named in the Summary
Compensation Table and unexercised options held by these
individuals at year-end 1993. None of the shares acquired by
these individuals upon exercise of these options has been sold.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at Fiscal at Fiscal
Acquired Year-End Year-End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable(a)
<S> <C> <C> <C> <C>
Thomas C. Theobald.... -- N/A 895,166/206,334 $6,260,170/$1,864,337
Richard L. Huber...... 44,000 $547,140 174,000/124,000 1,689,110/1,121,610
Michael J. Murray..... -- N/A 248,500/122,500 2,705,238/1,099,013
William M. Goodyear... -- N/A 248,500/122,500 2,705,238/1,099,013
Michael E. O'Neill.... -- N/A 40,413/89,167 427,198/239,692
Hollis W. Rademacher.. -- N/A 362,250/-- 3,693,676/--
<FN>
(a) The closing price of Continental common stock as reported for December 31, 1993, on the
NYSE composite transactions tape was $26.375.
</TABLE>
Pension Plan
Continental's Pension Plan is a noncontributory defined benefit
plan that provides for fixed benefits to employees and their
survivors in the event of retirement after certain age and
service requirements have been met. Normal retirement age under
the Pension Plan is 65, and the maximum number of years of
service considered under the Pension Plan formula is 35 years.
The following table illustrates the estimated annual benefits
payable upon retirement pursuant to the Pension Plan for
specified remuneration and years of participating service and
assuming retirement at normal retirement age. The table includes
any payments due under a supplemental pension program which
provides that if the benefit under the Pension Plan is limited by
<PAGE> 112
ERISA or the Internal Revenue Code of 1986, as amended (the
Code), a supplemental non-qualified benefit equal to the
difference between the benefit actually received under the
Pension Plan and the benefit that would have otherwise been
received absent those limitations is paid to the participant.
<TABLE>
<CAPTION>
Years of Service
Remunera-
tion 5 10 15 20 25 30 35
<S> <C> <C> <C> <C> <C> <C> <C>
$250,000 $18,750 $ 37,500 $ 56,250 $ 75,000 $ 93,750 $112,500 $131,250
350,000 26,250 52,500 78,750 105,000 131,250 157,500 183,750
450,000 38,750 67,500 101,250 135,000 168,750 202,500 236,250
550,000 41,250 82,500 123,750 165,000 206,250 247,500 288,750
650,000 48,750 97,500 146,250 195,000 243,750 292,500 341,250
750,000 56,250 112,500 168,750 225,000 281,250 337,500 393,750
850,000 63,750 127,500 191,250 255,000 318,750 382,500 446,250
950,000 71,250 142,500 213,750 285,000 356,250 427,500 498,750
</TABLE>
Messrs. Theobald, Huber, Murray, Goodyear and O'Neill,
respectively, had 6, 4, 24, 21, and 15 years of credited service
under the Pension Plan as of December 31, 1993, and Mr.
Rademacher retired during 1993 with 35 years of credited service
(capped at 35 years under the terms of the Pension Plan).
"Remuneration" means average base salary earnings, plus incentive
compensation (Bonus as displayed in the Summary Compensation
Table) up to 25% of base salary earnings, for the 60 consecutive
month period in the ten-year period immediately preceding
retirement which will result in the highest such average. The
figures above represent straight life annuities.
Executive Termination Agreements
Continental has entered into senior executive termination
agreements (Termination Agreements) with certain of its executive
officers: Messrs. Goodyear, Higgins, Huber, Murray, O'Neill,
Sherman, Stocker, Theobald, and Thompson. The Termination
Agreements generally provide that if, within two years subsequent
to a "change of control" of Continental, the officer's employment
is terminated by Continental or the Bank, or the officer
terminates his employment as the result of certain specified
actions taken by Continental or its subsidiaries, the officer
shall be entitled to receive: (i) two times the officer's annual
base salary, payable over a two-year period; (ii) a lump sum
payment equal to two times the amount determined by multiplying
the officer's base salary by the average percentage of bonus to
base salary paid to the officer during the previous two years;
(iii) the extension of life insurance and medical, health, and
disability plan coverage (or receipt of equivalent coverage) for
two years to the extent such plans are offered by Continental
during such two-year period and to the extent not received in
connection with other employment; (iv) a retirement benefit
equivalent to vested retirement benefits and two years additional
credited service under Continental's ordinary retirement plans;
<PAGE> 113
(v) an amount equal to two years of basic matching employer
contributions under Continental's Employees Savings Incentive
Plan and Trust; (vi) a payment equal to the tax, if any, payable
by the officer as a result of provisions of Section 280G of the
Code or any other similar law applicable to "change of control"
arrangements; and (vii) outplacement counseling services within
two years from the date of termination. A "change in control"
shall be deemed to have occurred if (A) any person or group
becomes the beneficial owner of securities representing
20 percent or more of the combined voting power of Continental's
then outstanding securities; (B) at any time less than a majority
of the members of the Continental Board of Directors shall be
persons who were either nominated for election by the Continental
Board of Directors or were elected by the Continental Board of
Directors; (C) the stockholders of Continental approve a merger
or consolidation of Continental with any other corporation which
would not result in the voting securities of Continental
outstanding immediately prior thereto (or securities into which
they are converted) continuing to represent at least 75 percent
of the combined voting power of the voting securities of
Continental or such surviving entity outstanding immediately
thereafter; or (D) the stockholders of Continental approve a plan
of complete liquidation of Continental or an agreement for the
sale or disposition by Continental of all or substantially all of
Continental's assets. The proposed merger (the Merger) of
Continental into BankAmerica Corporation (BankAmerica), described
in Note 1--Proposed Merger with BankAmerica--of Notes to
Consolidated Financial Statements provided in Item 8, constitutes
a "change of control" under the Termination Agreements. If
payments under the Termination Agreements are triggered after a
change of control, estimated costs associated with these
agreements would be approximately $1,500,000, $2,500,000,
$2,300,000, $2,000,000, $1,400,000, and $1,400,000 for Messrs.
Higgins, Huber, O'Neill, Sherman, Stocker, and Thompson,
respectively. Estimated costs associated with Mr. Theobald's
Termination Agreement would be approximately $3,900,000, and
certain additional non-cash benefits to Mr. Theobald for two
years after consummation of the Merger would have an estimated
value of $125,000 per year. The estimated costs associated with
all these termination arrangements aggregate approximately
$15,250,000 for the seven executives. If within two years after
termination the officer becomes employed by an employer that is
in direct competition with Continental and its subsidiaries, then
the amount of salary and bonus payments under the Termination
Agreement are offset by any salary and bonus received in
connection with such other employment. The officer is not
required to seek other employment or otherwise mitigate the
amount of any payments. The Termination Agreements contain an
initial termination date of December 31, 1994 (December 31, 1995,
for Mr. O'Neill's Termination Agreement), but, beginning
December 31, 1992 (December 31, 1993, for Mr. O'Neill's
Termination Agreement), and each December 31 thereafter,
automatically extend for one additional year unless either party
gives notice of cancellation 90 days prior to such December 31.
The expiration of such Termination Agreements would not, however,
<PAGE> 114
affect the rights or obligations of Continental or the officer
arising from a "change of control" occurring prior to such
expiration.
The Merger will also constitute a "change of control"
accelerating the vesting of all unvested Continental employee
stock options held by Messrs. Higgins, Huber, O'Neill, Sherman,
Stocker, Theobald, Thompson, Goodyear, and Murray, under the
terms of the stock option agreements evidencing such options.
Currently, such executives have been granted options, which will
not have vested by August 1, 1994, to purchase 376,667 shares of
Continental Common Stock, representing a net aggregate value of
such unvested options to such executives of $5,741,305 assuming a
value of $37.14 per share of Continental Common Stock. For
information with respect to the vested and unvested options as of
December 31, 1993, and stock held by such executives as of the
record date, see "Executive Officer Compensation -- Aggregated
Option/SAR Exercises in 1993 and Option/SAR Values at Year-End
1993," and "Principal and Other Stockholders of Continental."
Upon consummation of the Merger, Messrs. Goodyear and Murray will
assume positions with BankAmerica or its subsidiaries.
BankAmerica and Continental have entered into agreements with
Mr. Goodyear and Mr. Murray pursuant to which such officers will
waive all rights under their previously executed Termination
Agreements with Continental in exchange for the lump sum payment
by Continental to each such officer of $1,000,000 (less deduction
for taxes and other withholdings) immediately prior to the
effectiveness of the Merger. Messrs. Goodyear and Murray will
also be eligible to participate in the BankAmerica severance
program, and will receive certain other benefits, to be provided
by BankAmerica pursuant to the Merger. See Item 13 -- "Certain
Relationships and Related Transactions -- Interests of Certain
Persons in the Merger."
In connection with the retirement of Hollis W. Rademacher as
chief financial officer on October 31, 1993, Continental entered
into an agreement with him that provides for a lump sum payment
of $587,500, less required withholding taxes, on
November 1, 1993. This payment reflects the full value of salary
continuation through April 30, 1995, and a special payment of
$100,000 in recognition of his long and distinguished service to
Continental under the Management Incentive Plan. Mr. Rademacher
also received an incentive payment of $250,000 in recognition of
his overall performance and contribution during 1993. Pursuant
to a resolution of the Human Resources Committee,
Mr. Rademacher's outstanding non-vested stock options were
accelerated to vest on October 31, 1993. As a retiree,
Mr. Rademacher is entitled to continued coverage under the
Continental Medical Plan with Continental contributing
74 percent of the cost of coverage. Under the Professional
Services Program (which provides reimbursement for such services
as tax return preparation and financial and estate planning),
Continental will reimburse Mr. Rademacher for certain
professional services through calendar year 1995 (up to an annual
<PAGE> 115
maximum of $10,000). Mr. Rademacher retains use of a company car
and parking privileges until December 31, 1994, the expiration
date of the current lease on the car.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of
outstanding Continental common stock by Continental common
stockholders known by Continental to own five percent or more of
Continental's outstanding common stock. In addition, in
connection with the proposed merger of Continental with
BankAmerica, Continental has granted BankAmerica an option to
purchase shares of Continental common stock representing
19.9 percent of its outstanding common shares at a price of
$37.50 per share. See Note 1 -- Proposed Merger with
BankAmerica -- of Notes to Consolidated Financial Statements for
further information.
<TABLE>
<CAPTION>
Title of Name and Address Amount and Nature Percent of
Class of Beneficial Owner of Beneficial Ownership Class
<S> <C> <C> <C>
Common Merrill Lynch & Co., Inc. 4,623,775(a) 8.7%
World Financial Center
North Tower
250 Vesey Street
New York, New York 10281
Common Mellon Bank Corporation 6,452,000(b) 12.56%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
<FN>
(a) These shares are reported as beneficially owned as of December 31, 1993, with shared
voting and investment power, and include 4,618,000 shares beneficially owned by
Merrill Lynch Assets Management, L.P., a registered investment advisor, for Merrill
Lynch Capital Fund, Inc., a registered investment company.
(b) Mellon Bank Corporation has reported beneficial ownership of these shares in various
fiduciary capacities as of December 31, 1993, with sole voting power as to 3,226,000
shares, shared voting power as to 107,000 shares, sole dispositive power as to
3,329,000 shares and shared dispositive power as to 3,123,000 shares.
</TABLE>
The following table sets forth the beneficial ownership of
outstanding Continental common stock as of May 6, 1994, (i) by
each director and nominee and the six executive officers of
Continental named in the Summary Compensation Table under
"EXECUTIVE OFFICER COMPENSATION" (less than 1 percent in each
case except for Mr. Theobald, who owned 2.3 percent), and (ii) by
all directors and executive officers of Continental as a group
(6.7 percent).
<PAGE> 116
<TABLE>
<CAPTION>
<S> <C>
Bert A. Getz........................................... 18,762
Thomas A. Gildehaus.................................... 2,215
Robert B. Goergen...................................... 15,009(a)
William M. Goodyear.................................... 343,304(b)
Richard L. Huber....................................... 391,237(b)
Miles L. Marsh......................................... 2,739
Roger H. Morley........................................ 1,646
Michael J. Murray...................................... 346,395(b)
Michael E. O'Neill..................................... 80,277(b)(c)
Hollis W. Rademacher................................... 360,712(b)
Linda Johnson Rice..................................... 5,031
John M. Richman........................................ 9,795
Gordon I. Segal........................................ 5,256
Thomas C. Theobald..................................... 1,198,451(a)(b)
James L. Vincent....................................... 3,255
All directors and executive officers
as a group (20 in number)............................ 3,470,191(a)(b)(c)
<FN>
(a) Does not include shares as to which beneficial ownership is disclaimed,
as follows: Mr. Goergen, 1,500 shares; Mr. Theobald, 14,000 shares; all
directors and executive officers as a group, 15,500 shares.
(b) Includes the right to acquire shares under stock options or stock
appreciation rights as follows: Mr. Goodyear, 310,000 shares; Mr. Huber,
248,000 shares; Mr. Murray, 310,000 shares; Mr. O'Neill, 62,914 shares;
Mr. Rademacher, 347,750 shares; Mr. Theobald, 872,167 shares; all
directors and executive officers as a group, 2,775,163 shares. Also
includes shares with sole voting but no present investment power awarded
as a portion of base annual incentives under Continental's Management
Incentive Plan as follows: Mr. Goodyear, 6,140 shares; Mr. Huber, 7,675
shares; Mr. Murray, 5,884 shares; Mr. O'Neill, 5,117 shares; Mr.
Theobald, 10,233 shares; all directors and executive officers as a group,
47,075 shares.
(c) Includes as of December 31, 1993, 1,739 shares credited to the accounts
of two executive officers under Continental's Employees Stock Ownership
Plan as to which such officers have sole voting but no present investment
power. Persons who become executive officers are no longer eligible to
receive annual allocations of shares under the Plan.
</TABLE>
A trust of which Mr. Goergen is the trustee holds 400 shares
(less than 0.1 percent) of the outstanding Continental Adjustable
Rate Cumulative Preferred Stock, Series 2 for the benefit of a
family member. Mr. Goergen disclaims beneficial ownership in
those shares. No other director or executive officer
beneficially owns any depositary shares representing interests in
shares of Continental Adjustable Rate Cumulative Preferred Stock,
Series 2.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Richard S. Brennan, General Counsel and Secretary of Continental
and the Bank, is also a partner in the law firm of Mayer, Brown &
Platt, which has represented Continental, the Bank, and their
predecessors for many years, and is compensated solely by that
firm. Payments to Mayer, Brown & Platt for 1993 legal services
and expenses aggregated approximately $13 million.
<PAGE> 117
Directors and officers of Continental and their associates were
customers of, and had other transactions with, the Bank in the
ordinary course of business during 1993. All loans and
commitments included in such other transactions were made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than the
normal risk of collectability or present other unfavorable
features.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The agreement pursuant to which the Merger will occur (the Merger
Agreement) provides that, for six years after the effectiveness
of the Merger (the Effective Time), BankAmerica will indemnify,
defend, and hold harmless the present and former officers,
directors, employees, and agents of Continental and its
subsidiaries against all losses, expenses, claims, damages, or
liabilities arising out of actions or omissions occurring at or
prior to the Effective Time to the full extent permitted under
Delaware law and by the charter and by-laws of Continental as in
effect on the date of the Merger Agreement. The Merger Agreement
also provides that BankAmerica, for a period of six years after
the Effective Time, will maintain in effect the policies of
directors' and officers' liability insurance maintained by
Continental (provided that BankAmerica may substitute therefor
policies of at least the same coverage and amounts containing
terms and conditions no less favorable to the beneficiaries
thereof) with respect to claims arising from facts or events
which occurred before the Effective Time, provided that
BankAmerica will not be obligated to make annual premium payments
for such insurance to the extent such premiums would exceed 200
percent of the premiums paid by Continental for such insurance as
of the date of the Merger Agreement.
At the Effective Time, William M. Goodyear, Vice Chairman of
Continental, will assume the position of Chairman and Chief
Executive Officer of Continental Bank, to be renamed Bank of
America Illinois pursuant to the Merger, and will continue to be
responsible for middle-market and private banking business, and
Michael J. Murray, Vice Chairman of Continental, will become a
Group Executive Vice President of Bank of America responsible for
leading the combined corporate banking businesses of Bank of
America's U.S. Corporate Banking Group and Continental's
corporate banking group.
During Merger negotiations, BankAmerica expressed the desire that
previously executed termination agreements between Continental
and Mr. Goodyear and Mr. Murray be extinguished prior to
completion of the Merger. This led to negotiations between
BankAmerica, Continental and Messrs. Goodyear and Murray, which
resulted in BankAmerica, Continental and each of Messrs. Goodyear
and Murray entering into agreements pursuant to which such
officers will waive all rights under their previously executed
termination agreements with Continental in exchange for the lump
sum payment by Continental to each such officer of $1,000,000
<PAGE> 118
(less deductions for taxes and other withholdings) immediately
prior to the Effective Time of the Merger. Had Messrs. Goodyear
and Murray not extinguished their termination agreements with
Continental, estimated costs associated with those agreements
would have been well in excess of $1,000,000 if triggered after a
change of control. Messrs. Goodyear and Murray will also be
eligible to participate in the severance program described below
to be adopted by BankAmerica pursuant to the terms of the Merger
Agreement. Messrs. Goodyear and Murray will each be treated as a
Vice Chairman for purposes of calculating the severance pay which
such officers may be eligible to receive under such severance
program to be adopted by BankAmerica pursuant to the terms of the
Merger Agreement, as well as for purposes of treatment of stock
options, and each will be eligible to receive the maximum payment
available to a Vice Chairman. In addition, the full amount of
applicable bonuses Messrs. Goodyear and Murray actually received
(other than the $1,000,000 bonuses referred to immediately above)
will be used in calculating severance pay, no cap on severance
pay will be imposed pursuant to Section 280G of the Code and
BankAmerica will pay any excise taxes caused by the payment of
such severance pay.
The Merger will constitute a "change of control" under the
termination agreements with Messrs. Goodyear and Murray as well
as under termination agreements with other executive officers.
See Item 11 -- "Executive Compensation -- Executive Officer
Compensation -- Executive Termination Agreements," for the effect
of such a "change in control" on such termination agreements.
The Merger will also constitute a "change of control"
accelerating the vesting of all unvested Continental employee
stock options held by such executives and by Messrs. Goodyear and
Murray as of the Effective Time, under the terms of the stock
option agreements evidencing such options. Currently, such
executives have been granted options, which will not have vested
by August 1, 1994, to purchase 376,667 shares of Continental
common stock.
The Merger Agreement provides for (i) the conversion of
Continental employee stock options and stock appreciation rights
other than stock appreciation rights under Continental's 1991
performance unit plan (Continental Options) held by seven
Continental executives who are parties to existing Termination
Agreements with Continental (Messrs. Higgins, Huber, O'Neill,
Sherman, Stocker, Theobald, and Thompson), into such rights with
respect to BankAmerica common stock, and the assumption by
BankAmerica of such Continental Options, with adjustments to the
number of shares and price per share to reflect the number of
shares of Continental common stock that such executive elects to
convert into BankAmerica common stock (Stock Consideration)
pursuant to the terms of the Merger Agreement, which option may
be exercised during the time provided in accordance with the
stock option agreement by which it is evidenced and, if longer,
within a one-year period following a termination of employment
entitling such employees to termination benefits under such
termination agreements so long as the exercise period does not
extend past the stated expiration date of the stock options and
<PAGE> 119
(ii) the conversion of Continental Options held by other
Continental employees into such rights with respect to
BankAmerica common stock, and the assumption by BankAmerica of
such Continental Options, with adjustments to the number of
shares and price per share to reflect the Stock Consideration and
with an extended exercise period for certain employees who
receive severance pay under BankAmerica's severance program to be
adopted as of the Effective Time, to the extent such stock
options are vested as of the employee's separation date or would
have vested had the employee remained employed during the
particular employee's severance pay period (except for options
issued within six months of the separation date) in accord with
and subject to the severance program, equal to the time provided
in accordance with the stock option agreement by which it is
evidenced and, if longer, within a one-year period from the
employee's separation date under the severance program but not
past the stated expiration date of the stock options. At the
Effective Time, all rights with respect to Continental common
stock pursuant to stock appreciation rights granted under
Continental's 1991 performance unit plan (the Continental 1991
Plan), which are outstanding at the Effective Time, whether or
not then exercisable, will be settled for cash provided that the
amount payable for each stock appreciation right granted by
Continental in March 1991 will not exceed $2.62, and the amount
payable for each stock appreciation right granted by Continental
in May 1991 will not exceed $0.435. The stock appreciation
rights described in the preceding sentence are held by
approximately 112 present and former employees of Continental and
its subsidiaries, and the aggregate amount payable upon
settlement for cash of all such rights is expected to be
$1,672,164.
In connection with the Merger, BankAmerica has agreed to adopt a
severance program which will be similar in all material respects
to BankAmerica's Merger Transition Program and U.S. Senior
Management Transition Program (which were certain programs
adopted in connection with Security Pacific Corporation's merger
into BankAmerica in 1992) with respect to severance pay and stock
treatment and similar in all material respects to BankAmerica's
Employee Transition Program with respect to all other benefits.
According to the terms of these programs, which are subject to
certain conditions, limitations and exceptions, eligible
Continental employees may receive payments, in the event they are
terminated as a result of the Merger, equal to three weeks' base
pay for each full year of credited service, subject to a minimum
of three months' base pay and a maximum of 18 months' base pay.
Under these same programs, eligible members of senior management
of Continental, in the event such employees are terminated as a
result of the Merger, may receive payments which range in amount
(according to such employee's title or level) from 1.5 to 2.5
times the employee's "monthly pay" (as such term is defined in
the severance program) times the number of full years of credited
service, subject to a minimum ranging from 12 to 24 times monthly
pay and a maximum ranging from 18 to 30 times monthly pay. For
example, employees with the title "Vice Chairman" will receive an
amount equal to 2.5 times their monthly pay times the number of
<PAGE> 120
such employee's full years of credited service; but not less than
24 times monthly pay and not more than 30 times monthly pay.
These severance programs will not apply to Continental employees
who are party to termination agreements with Continental other
than Messrs. Goodyear and Murray as described above.
BankAmerica has agreed to maintain such severance program in
effect for not less than twelve months following the Effective
Time, provided that benefits under such program may be modified
or eliminated earlier if they are of little financial consequence
to recipients.
Continental executive officers and directors who own Continental
common stock or who hold options to purchase Continental common
stock will have such holdings converted into the Stock
Consideration and/or the amount of cash that such officers and
directors elect to receive in cash pursuant to the terms of the
Merger Agreement (Cash Consideration) or into rights with respect
to BankAmerica common stock, respectively, as a result of the
Merger. For information with respect to the stock ownership of
Continental directors and executive officers, see Item 12 --
"Security Ownership of Certain Beneficial Owners and Management."
For information with respect to Continental employee stock
options and stock appreciation rights held by the executive
officers of Continental named in the Summary Compensation Table,
including the value of such options and rights as of
December 31, 1993, see Item 11 -- "Executive Compensation --
Aggregated Option/SAR Exercises in 1993 and Option/SAR Values at
Year-End 1993."
Pursuant to Continental's Stock Plan for Directors (see
Item 11 -- "Executive Compensation -- Director Compensation"),
the Merger will constitute a "change of control" causing the
forfeiture restrictions to lapse on 6,272 shares of Continental
Common Stock owned by directors (other than salaried officers of
Continental or its subsidiaries) and received subject to these
restrictions at their election in lieu of annual retainer and
meeting fees.<PAGE>
<PAGE> 121
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements and schedules of
Continental and its subsidiaries included in Continental's 1993
Annual Report to Stockholders are included in Item 8:
For Continental Bank Corporation and Subsidiaries:
Consolidated Balance Sheet--December 31, 1993, and
December 31, 1992
Consolidated Statement of Operations--Years ended
December 31, 1993, December 31, 1992, and
December 31, 1991
Consolidated Statement of Cash Flows--Years ended
December 31, 1993, December 31, 1992, and
December 31, 1991
Consolidated Statement of Changes in Stockholders'
Equity--Years ended December 31, 1993,
December 31, 1992, and December 31, 1991
For Continental Bank N.A.:
Consolidated Balance Sheet--December 31, 1993, and
December 31, 1992
Notes to Financial Statements
(a)(2) Financial Statement Schedules
Additional statement schedules are omitted because they are not
applicable, the data are not significant, or the required
information is set forth in the consolidated financial statements
or in the notes related thereto.
(a)(3) Exhibits*
(2)(1) Agreement and Plan of Merger, dated as of
January 27, 1994, between Continental and BankAmerica
Corporation. Incorporated by reference to Exhibit 2 to
Continental's Current Report on Form 8-K, dated February 7, 1994,
File No. 1-5872.
(2)(2) Stock Option Agreement, dated as of January 27, 1994,
between Continental and BankAmerica Corporation. Incorporated by
reference to Exhibit 10 to Continental's Current Report on Form
8-K, dated February 7, 1994, File No. 1-5872.
3(1) Continental's Certificate of Incorporation. Incorporated
by reference to Exhibit 3(1) of Continental's 1989 Annual Report
on Form 10-K, File No. 1-5872 ($16.00).
3(2) Continental's Bylaws ($3.50).
<PAGE> 122
4(ii)(1) Indenture, dated as of October 1, l986, between
Continental and Manufacturers Hanover Trust Company, as Trustee,
relating to Continental's Floating Rate Notes due October 16,
1992; 9.125% Notes due October 15, 1993; 11.09% Notes due October
18, 1994; Floating Rate Notes due October 18, 1994; 9.75% Notes
due March 15, 1995; 9 7/8% Notes due June 15, 1996; and Floating
Rate Notes due May 18, 2000. Incorporated by reference to
Exhibit 4(ii)(2) of Continental's 1989 Annual Report on Form
10-K, File No. 1-5872. First Supplemental Indenture, dated as of
April 1, 1989, to the Indenture dated as of October 1, 1986,
between Continental and Manufacturers Hanover Trust Company.
Incorporated by reference to Exhibit 4(b) to Continental's
Registration Statement on Form S-3, File No. 33-27113 ($29.50).
4(ii)(2) In accordance with Paragraph (b)(4)(iii) of Item 601 of
Regulation S-K, Continental agrees to furnish to the Securities
and Exchange Commission upon its request a copy of any instrument
that defines the rights of holders of long-term debt of
Continental. With the exception of the instrument filed as
Exhibit 4(ii)(1) to this Annual Report on Form 10-K, no such
instrument authorizes a total amount of securities in excess of
10% of the total assets of Continental on a consolidated basis.
10(ii)(D) Copy of leases relating to land on which part of the
Bank's banking headquarters is located. Incorporated by
reference to Exhibit 10(ii)(D) of Continental's 1989 Annual
Report on Form 10-K, File No. 1-5872 ($25.75).
10(iii)(1) through 10(iii)(12) are management contracts or
compensatory plans or arrangements.
10(iii)(1) Continental's 1991 Equity Performance Incentive Plan.
Incorporated by reference to Exhibit 10(iii)(1) of Continental's
1991 Annual Report on Form 10-K, File No. 1-5872 ($1.25).
10(iii)(2) Continental's l982 Performance, Restricted Stock and
Stock Option Plan. Incorporated by reference to Exhibit
10(iii)(1) of Continental's 1988 Annual Report on Form 10-K, File
No. 1-5872 ($1.50).
10(iii)(3) Continental's l979 Stock Option Plan. Incorporated
by reference to Exhibit 10(c)(1) of Continental's l981 Annual
Report and Form 10-K, File No. 1-5872 ($1.00).
10(iii)(4) Continental's l974 Stock Option Plan. Incorporated
by reference to Exhibit 10(c)(2) of Continental's l981 Annual
Report and Form 10-K, File No. 1-5872 ($1.00).
10(iii)(5) Continental Supplemental Pension Program.
Incorporated by reference to Exhibit 10(iii)(4) of Continental's
1989 Annual Report on Form 10-K, File No. 1-5872 ($1.50).
10(iii)(6) Continental's Senior Management Death Benefit Plan.
Incorporated by reference to Exhibit 10(iii)(5) of Continental's
1986 Annual Report on Form 10-K, File No. 1-5872 ($2.50).
<PAGE> 123
10(iii)(7) Continental's Deferred Compensation Plan for
Directors. Incorporated by reference to Exhibit 10(iii)(6) of
Continental's 1988 Annual Report on Form 10-K, File No. 1-5872
($1.25).
10(iii)(8) Option Agreement, dated as of July 27, 1987, between
Continental and Thomas C. Theobald. Incorporated by reference to
Exhibit 10(iii)(8) of Continental's 1989 Annual Report on Form
10-K, File No. 1-5872 ($2.75).
10(iii)(9) Continental's Management Incentive Plan.
Incorporated by reference to Exhibit 10(iii)(9) of Continental's
1990 Annual Report on Form 10-K, File No. 1-5872 ($2.50).
10(iii)(10) Continental's 1985 Long-Term Incentive Compensation
Plan. Incorporated by reference to Exhibit 10(iii)(10) of
Continental's 1985 Annual Report on Form 10-K, File No. 1-5872
($2.50).
10(iii)(11) Senior Executive Termination Agreement between
Continental and Certain Executive Officers. Agreements in
substantially the same form exist between Continental and W. M.
Goodyear, J. J. Higgins, R. L. Huber, M. J. Murray, H. W.
Rademacher, R. H. Sherman, K. P. Stocker, T. C. Theobald, and
J. V. Thompson, all of which are dated as of January 1, 1992.
Incorporated by reference to Exhibit 10(iii)(12) of Continental's
1991 Annual Report on Form 10-K, File No. 1-5872 ($3.75).
10(iii)(12) Continental's Stock Plan for Directors, Amended and
Restated, Effective January 1, 1993. Incorporated by reference
to Exhibit 10(iii)(12) of Continental's 1992 Annual Report on
Form 10-K, File No. 1-5872 ($1.75).
(10)(iv)(13) Senior Executive Termination Agreement, dated as of
July 26, 1993, between Continental and Michael E. O'Neill.
11 Statement regarding computation of per share earnings
($0.25).
12 Statements regarding computation of ratios ($0.25).
21 Subsidiaries of Continental ($0.25).
23 Consent of Price Waterhouse ($0.25).
(b) Reports on Form 8-K.
During the fourth quarter of 1993, Continental filed no Current
Reports on Form 8-K.
*Stockholders may obtain a copy of any exhibit by writing to
Mr. John J. Higgins, Controller, Continental Bank Corporation,
231 South LaSalle Street, Chicago, Illinois 60697. All requests
must be accompanied by a check or money order payable to
Continental Bank Corporation in the amount indicated in the
parentheses after the exhibit ordered. No payment is required
for orders under $2.50.
<PAGE> 124
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities
Act of 1933 (the "Act"), the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by
reference into registrant's Registration Statements on Form S-8,
Nos. 2-97669 (filed May 13, 1985) and 33-28458 (filed
May 9, 1989):
Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers, and controlling persons
of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense
of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
<PAGE> 125
February 28, 1994
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONTINENTAL BANK CORPORATION
by Richard S. Brennan
Richard S. Brennan
General Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
in the capacities and on the date indicated.
Thomas C. Theobald Miles L. Marsh
Thomas C. Theobald Miles L. Marsh
Chairman and Director Director
Michael E. O'Neill Roger H. Morley
Michael E. O'Neill Roger H. Morley
Chief Financial Officer Director
John J. Higgins Michael J. Murray
John J. Higgins Michael J. Murray
Controller and Vice Chairman and Director
Principal Accounting Officer
Bert A. Getz Linda Johnson Rice
Bert A. Getz Linda Johnson Rice
Director Director
Thomas A. Gildehaus John M. Richman
Thomas A. Gildehaus John M. Richman
Director Director
Robert B. Goergen Gordon I. Segal
Robert B. Goergen Gordon I. Segal
Director Director
William M. Goodyear James L. Vincent
William M. Goodyear James L. Vincent
Vice Chairman and Director Director
Richard L. Huber
Richard L. Huber
Vice Chairman and Director
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Form S-3 (No. 33-27113) and Form S-8 (Nos. 2-97669 and 33-28458)
of Continental Bank Corporation of our report dated
January 18, 1994, except as to Note 1, which is as of
January 28, 1994, included in Continental Bank Corporation's
Annual Report on Form 10-K for the year ended December 31, 1993.
PRICE WATERHOUSE
Chicago, Illinois
May 13, 1994
