<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 10, 1998
BANC ONE CORPORATION
(Exact Name of Registrant as Specified in Charter)
Ohio
(State or Other Jurisdiction of Incorporation)
1-8552 31-0738296
(Commission File Number) (IRS Employer Identification No.)
100 East Broad Street, Columbus, Ohio 43271
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (614) 248-5944
N/A
(Former Name or Former Address, If Changed Since Last Report)
<PAGE> 2
The Current Report on Form 8-K dated April 10, 1998 and filed with the
Securities and Exchange Commission on April 14, 1998 is amended to add Exhibits
99.5, 99.6 and 99.7 and to amend and restate Item 7 in its entirety as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The following consolidated financial statements of First Chicago
NBD Corporation are incorporated herein by reference to Exhibit
99.5 filed herewith:
1. Consolidated Balance Sheets as of December 31, 1997
and 1996.
2. Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.
3. Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1997, 1996
and 1995.
4. Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.
5. Notes to the Consolidated Financial Statements.
The report of Arthur Andersen LLP, independent accountants, on
the consolidated financial statements of First Chicago NBD
Corporation as of December 31, 1997 and 1996 and for the years
ended December 31, 1997, 1996 and 1995 is filed herewith as part
of Exhibit 99.5 and the related consent is filed herewith as
Exhibit 99.6. Both the opinion and the consent are incorporated
herein by reference.
(b) Pro Forma Financial Information.
The following pro forma financial statements are incorporated
herein by reference to Exhibit 99.7 filed herewith:
1. Pro Forma Condensed Combined Balance Sheet at
December 31, 1997 (unaudited).
2. Pro Forma Condensed Combined Statements of Income for
the years ended December 31, 1997, 1996 and 1995
(unaudited).
3. Pro Forma Condensed Combined Statement of Income for
the year ended December 31, 1997 (unaudited).
4. Pro Forma Condensed Combined Statement of Income for
the year ended December 31, 1996 (unaudited).
5. Pro Forma Condensed Combined Statement of Income for
the year ended December 31, 1995 (unaudited).
<PAGE> 3
6. Notes to the Unaudited Pro Forma Condensed Combined
Financial Information.
(c) Exhibits.
Exhibit 2.1 Agreement and Plan of Reorganization dated as of
April 10, 1998 by and among BANC ONE CORPORATION,
First Chicago NBD Corporation and Hornet
Reorganization Corporation. *
Exhibit 99.1 Stock Option Agreement dated as of April 10,
1998, by and between First Chicago NBD
Corporation, as issuer, and BANC ONE CORPORATION,
as grantee. *
Exhibit 99.2 Stock Option Agreement dated as of April 10,
1998, by and between BANC ONE CORPORATION, as
issuer, and First Chicago NBD Corporation, as
grantee. *
Exhibit 99.3 Joint Press Release, dated April 13, 1998. *
Exhibit 99.4 Investor Presentation, dated April 13, 1998. *
Exhibit 99.5 Consolidated Financial Statements of First
Chicago NBD Corporation and Report of Arthur
Andersen LLP.
Exhibit 99.6 Consent of Arthur Andersen LLP.
Exhibit 99.7 Unaudited Pro Forma Condensed Combined Financial
Information.
- -------------
* Previously filed.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BANC ONE CORPORATION
(Registrant)
Date: April 21, 1998 By: /s/ William C. Leiter
-------------------------------
William C. Leiter
Senior Vice President
<PAGE> 1
Exhibit 99.5
CONSOLIDATED BALANCE SHEET
FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997 1996
---- ----
DECEMBER 31 (DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS Cash and due from banks......................... $ 7,223 $ 7,823
Interest-bearing due from banks........................ 6,904 5,474
Federal funds sold and securities under resale
agreements........................................... 8,501 4,197
Trading assets......................................... 4,198 4,812
Derivative product assets.............................. 4,547 4,974
Investment securities.................................. 9,330 7,178
Loans (net of unearned income--$961 in 1997 and
$764 in 1996)........................................ 68,724 66,414
Less allowance for credit losses..................... (1,408) (1,407)
-------- --------
Loans, net............................................. 67,316 65,007
Premises and equipment................................. 1,439 1,415
Customers' acceptance liability........................ 708 577
Other assets........................................... 3,930 3,162
-------- --------
Total assets........................................... $114,096 $104,619
======== ========
LIABILITIES
Deposits Demand........................................ $ 16,069 $ 15,702
Savings.............................................. 21,437 21,722
Time................................................. 15,178 14,994
Foreign offices...................................... 15,805 11,251
Total deposits..................................... 68,489 63,669
-------- --------
Federal funds purchased and securities under
repurchase agreements................................ 9,271 7,859
Other short-term borrowings............................ 9,710 7,572
Long-term debt......................................... 9,092 7,706
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated debt............... 996 748
Acceptances outstanding................................ 708 577
Derivative product liabilities......................... 4,616 4,753
Other liabilities...................................... 3,254 2,728
-------- --------
Total liabilities...................................... 106,136 95,612
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
Preferred stock--without par value, authorized 10,000,000 shares
Shares Outstanding 1997 1996
----------- -----------
<S> <C> <C> <C> <C>
Series B ($100 stated value)..... 1,191,000 1,191,000 119 119
Series C ($100 stated value)..... 713,800 713,800 71 71
Series E ($625 stated value)..... -- 160,000 -- 100
Convertible Series B ($5,000
stated value).................. -- 30,786 -- 154
Common stock--$1 par value....... 320 320
Number of shares authorized...... 750,000,000 750,000,000
Number of shares issued.......... 319,509,114 319,509,189
Number of shares outstanding..... 289,137,449 313,473,520
Surplus..................................................... 1,966 2,149
Retained earnings........................................... 7,446 6,433
Fair value adjustment on investment securities available-
for-sale.................................................. 49 38
Deferred compensation......................................... (79) (58)
Accumulated translation adjustment............................ 6 7
Treasury stock at cost, 30,371,665 shares in 1997 and
6,035,669 shares in 1996..................................... (1,938) (326)
-------- --------
Stockholders' equity.......................................... 7,960 9,007
Total liabilities and stockholders' equity................ $114,096 $104,619
======== ========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
41
<PAGE> 2
CONSOLIDATED INCOME STATEMENT
FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997 1996 1995
FOR THE YEAR (IN MILLIONS, EXCEPT PER-SHARE DATA) ------ ------ ------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees......................................$5,849 $5,745 $5,260
Bank balances.............................................. 451 463 620
Federal funds sold and securities under resale agreements.. 304 510 922
Trading assets............................................. 277 394 467
Investment securities--taxable............................. 369 364 694
Investment securities--tax-exempt.......................... 97 93 127
------ ------ ------
Total................................................. 7,347 7,569 8,090
INTEREST EXPENSE
Deposits................................................... 2,178 2,175 2,581
Federal funds purchased and securities under repurchase
agreements............................................... 498 671 1,192
Other short-term borrowings................................ 480 552 538
Long-term debt............................................. 619 551 571
------ ------ ------
Total................................................. 3,775 3,949 4,882
NET INTEREST INCOME........................................ 3,572 3,620 3,208
Provision for credit losses................................ 725 735 510
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES...... 2,847 2,885 2,698
NONINTEREST INCOME
Combined trading profits................................... 81 58 210
Equity securities gains.................................... 182 255 253
Investment securities gains (losses)....................... 43 27 (16)
------ ------ ------
Market-driven revenue................................. 306 340 447
Credit card fee revenue.................................... 904 914 901
Fiduciary and investment management fees................... 407 400 404
Service charges and commissions............................ 936 803 735
------ ------ ------
Fee-based revenue..................................... 2,247 2,117 2,040
Other income............................................... 198 91 104
------ ------ ------
Total................................................. 2,751 2,548 2,591
NONINTEREST EXPENSE
Salaries and employee benefits............................. 1,748 1,707 1,692
Occupancy expense of premises, net......................... 252 259 252
Equipment rentals, depreciation and maintenance............ 210 227 225
Amortization of intangible assets.......................... 60 79 88
Other...................................................... 1,062 981 1,011
------ ------ ------
Operating Expense..................................... 3,332 3,253 3,268
Merger-related charges..................................... -- -- 267
FDIC special assessment.................................... -- 18 --
------ ------ ------
Total................................................. 3,332 3,271 3,535
------ ------ ------
INCOME BEFORE INCOME TAXES................................. 2,266 2,162 1,754
Applicable income taxes.................................... 741 726 604
------ ------ ------
NET INCOME.................................................$1,525 $1,436 $1,150
====== ====== ======
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY.....$1,504 $1,405 $1,113
EARNINGS PER SHARE
BASIC.................................................$ 4.99 $ 4.44 $ 3.48
DILUTED....................................................$ 4.90 $ 4.33 $ 3.41
</TABLE>
The accompanying notes are an integral part of this statement.
42
<PAGE> 3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
FOR THE YEAR (IN MILLIONS)
<S> <C> <C> <C>
PREFERRED STOCK
Balance, beginning of period...................... $ 444 $ 489 $ 611
Conversion of preferred stock..................... (154) (45) (1)
Redemption of preferred stock..................... (100) -- (121)
------- ----- ------
Balance, end of period............................ 190 444 489
------- ----- ------
COMMON STOCK
Balance, beginning of period...................... 320 319 329
Issuance of stock................................. -- 1 1
Cancellation of shares held in treasury........... -- -- (11)
------- ----- ------
Balance, end of period............................ 320 320 319
------- ----- ------
SURPLUS
Balance, beginning of period...................... 2,149 2,185 2,555
Issuance of common stock.......................... -- 4 14
Issuance of treasury stock........................ (100) (84) (21)
Conversion of preferred stock..................... (138) (18) --
Acquisition of subsidiaries....................... -- 17 (3)
Cancellation of shares held in treasury........... -- -- (369)
Other............................................. 55 45 9
------- ----- ------
Balance, end of period............................ 1,966 2,149 2,185
------- ----- ------
RETAINED EARNINGS
Balance, beginning of period...................... 6,433 5,497 4,808
Net income........................................ 1,525 1,436 1,150
Cash dividends declared on common stock........... (491) (469) (424)
Cash dividends declared on preferred stock........ (21) (31) (37)
------- ----- ------
Balance, end of period............................ 7,446 6,433 5,497
------- ------ ------
FAIR VALUE ADJUSTMENT ON INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
Balance, beginning of period...................... 38 112 (158)
Unrealized gain on securities transferred from held-
to-maturity to available-for-sale on November 17,
1995 (net of taxes of $55)....................... -- -- 101
Change in fair value (net of taxes of $6 in 1997,
$(41) in 1996, and $99 in 1995).................. 11 (74) 169
------- ------ ------
Balance, end of period............................ 49 38 112
------- ------ ------
DEFERRED COMPENSATION
Balance, beginning of period...................... (58) (39) (33)
Awards granted.................................... (42) (32) (18)
Amortization of deferred compensation............. 50 26 21
Other............................................. (29) (13) (9)
------- ------ ------
Balance, end of period............................ (79) (58) (39)
------- ------ ------
ACCUMULATED TRANSLATION ADJUSTMENT
Balance, beginning of period...................... 7 8 7
Translation gain (loss), net of taxes............. (1) (1) 1
------- ------ ------
Balance, end of period............................ 6 7 8
------- ------ ------
TREASURY STOCK
Balance, beginning of period...................... (326) (121) (310)
Purchase of common stock.......................... (2,045) (412) (513)
Acquisition of subsidiaries....................... -- -- 262
Cancellation of shares held in treasury........... -- -- 380
Conversion of preferred stock..................... 292 62 1
Issuance of stock................................. 141 145 59
------- ------ ------
Balance, end of period............................ (1,938) (326) (121)
------- ------ ------
Total Stockholders' Equity, end of period...... $ 7,960 $9,007 $8,450
======= ====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
43
<PAGE> 4
CONSOLIDATED STATEMENT OF CASH FLOWS
FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
FOR THE YEAR (IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 1,525 $ 1,436 $ 1,150
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 234 255 274
Provision for credit losses.................... 725 735 510
Equity securities gains........................ (182) (255) (253)
Net (increase) decrease in net derivative
product balances............................. 290 (231) 296
Net (increase) decrease in trading assets...... 538 3,331 (2,766)
Net (increase) decrease in loans held for sale. 273 11 (243)
Net (increase) decrease in accrued income
receivable................................... (4) 133 (131)
Net increase (decrease) in accrued expenses
payable...................................... 277 (17) (178)
Net (increase) decrease in other assets........ (705) (91) 174
Merger-related charges......................... -- -- 267
Other noncash adjustments...................... (243) 5 (106)
-------- -------- --------
Total adjustments............................ 1,203 3,876 (2,156)
Net cash provided by (used in) operating
activities..................................... 2,728 5,312 (1,006)
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold
and securities under resale agreements......... (4,304) 7,501 2,003
Purchase of investment securities--available-
for-sale....................................... (13,518) (4,626) (4,340)
Purchase of debt investment securities--held-to-
maturity....................................... -- -- (119)
Purchase of equity securities--fair value........ (142) (138) (385)
Proceeds from maturities of debt securities--
available-for-sale............................. 1,272 2,248 3,652
Proceeds from maturities of debt securities--
held-to-maturity............................... -- -- 1,042
Proceeds from sales of investment securities--
available-for-sale............................. 10,168 4,340 5,564
Proceeds from sales of equity securities--fair
value.......................................... 308 425 1,051
Credit card receivables securitized.............. 1,143 2,286 2,286
Net (increase) in loans.......................... (4,554) (5,291) (10,815)
Loan recoveries.................................. 192 145 142
Net proceeds from sales of assets held for
accelerated disposition........................ 3 26 59
Purchases of premises and equipment.............. (270) (286) (382)
Proceeds from sales of premises and equipment.... 67 79 74
Net cash and cash equivalents due to mergers,
acquisitions and dispositions.................. (90) (245) 116
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (9,725) 6,464 (52)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits.............. 5,005 (4,936) 2,616
Net increase (decrease) in federal funds
purchased and securities under repurchase
agreements..................................... 1,409 (7,852) (1,208)
Net increase (decrease) in other short-term
borrowings..................................... 2,138 (2,230) 1,574
Proceeds from issuance of long-term debt......... 17,575 2,519 2,163
Redemption and repayment of long-term debt....... (15,853) (2,230) (1,262)
Net increase (decrease) in other liabilities..... 335 (384) 103
Dividends paid................................... (516) (488) (447)
Proceeds from issuance of common and treasury
stock.......................................... -- 59 23
Purchase of treasury stock....................... (2,074) (412) (513)
Payment for redemption of preferred stock........ (100) -- (121)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... 7,919 (15,954) 2,928
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.................................... (92) (63) 119
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 830 (4,241) 1,989
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR... 13,297 17,538 15,549
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 14,127 $ 13,297 $ 17,538
======== ======== ========
OTHER CASH FLOW DISCLOSURES
Interest paid.................................. $ 3,791 $ 4,055 $ 4,666
State and federal income taxes paid............ 576 663 808
-------- -------- --------
</TABLE>
Loans transferred to other real estate were $7 million, $25 million and $18
<PAGE> 5
million in 1997, 1996 and 1995, respectively.
The accompanying notes are an integral part of this statement.
44
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On December 1, 1995, FCC merged with and into NBD, with the combined
company renamed First Chicago NBD Corporation. The merger was accounted for as a
pooling of interests, and accordingly, the financial statements prior to the
merger have been restated to reflect the consolidated results of the combined
company.
The consolidated financial statements for the Corporation, including its
subsidiaries, have been prepared in conformity with generally accepted
accounting principles. Such preparation requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain financial statement
reclassifications have been made to prior years' information to conform with
the current year's financial statement presentation.
(A) PRINCIPLES OF CONSOLIDATION
The Corporation's consolidated financial statements include the accounts of
the Corporation (the "Parent Company") and all subsidiaries that are more than
50% owned by the Corporation. All significant intercompany accounts and
transactions have been eliminated.
(B) TRADING ACTIVITIES
Trading assets and liabilities are carried at fair value. Realized and
unrealized gains and losses related to trading activities are reflected in
noninterest income as combined trading profits.
Combined trading profits include interest rate, exchange rate, equity
price, and commodity price trading results from both cash and derivative
financial instruments. More information on the Corporation's trading revenue is
shown in the "Trading Revenue" table on page 19.
(C) INVESTMENT SECURITIES
Debt and equity investment securities classified as available-for-sale are
carried at fair value with unrealized gains and losses, net of applicable income
taxes, reported in the fair value adjustment on investment securities
available-for-sale in stockholders' equity. Realized gains and losses and other
than temporary impairments related to these securities are determined using the
specific identification method and are reported in noninterest income as
investment securities gains (losses) or equity securities gains, as appropriate.
The Corporation carries investments of its venture capital subsidiaries at
fair value. Changes in the fair value of such investments are recognized in
noninterest income as equity securities gains. The fair value of publicly traded
investments takes into account their quoted market prices with adjustments made
for market liquidity or sale restrictions. For investments that are not publicly
traded, management has made estimates of fair value that consider the investees'
financial results, conditions and prospects, and the values of comparable public
companies.
(D) LOANS
Loans are generally reported at the principal amount outstanding, net of
unearned income. Loans held for sale are valued at the lower of cost or fair
value, with unrealized losses as well as realized gains or losses included in
other noninterest income.
Loan origination and commitment fees generally are deferred and amortized
as interest income over the life of the related loan. Other credit-related fees,
such as syndication management fees, commercial letters of credit fees, and fees
on unused, available lines of credit, are recorded as service charges and
commissions in noninterest income when earned.
Loans, including lease financing receivables, are considered nonperforming
when placed on nonaccrual status, or when renegotiated at terms that represent
an economic concession to the borrower. Nonperforming loans are generally
identified as impaired loans.
45
<PAGE> 7
A commercial loan is placed on nonaccrual status when the collection of
contractual principal or interest is deemed doubtful by management or becomes 90
days or more past due, and the loan is not well-secured and in the process of
collection. Accrued but uncollected interest is reversed and charged against
interest income when the commercial loan is placed on nonaccrual status.
Interest payments on a partially charged-off commercial loan are applied to
the remaining principal balance until the balance is fully recovered. Once
principal is recovered, cash payments received are recorded as recoveries to the
extent of prior charge-offs, and then as interest income.
A charge-off on a commercial loan is recorded in the reporting period in
which either an event occurs that confirms the existence of a loss or it is
determined that a loan or a portion of a loan is uncollectible.
Consumer loans are generally not placed on nonaccrual status but are
typically charged off after reaching certain delinquency periods that range from
approximately 120 to 180 days past due, or earlier in the event of notification
of bankruptcy. The timing and amount of the charge-off will depend on the type
of consumer loan and any related collateral. Accrued but uncollected interest on
a consumer loan typically is reversed against interest income when the loan is
charged off.
An economic concession on a renegotiated loan may represent forgiveness of
principal and/or interest or a below-market interest rate offered to the
borrower to maximize recovery of the loan. Generally, this occurs when the
borrower's cash flow is insufficient to service the loan under its original
terms. Subject to the above nonaccrual policy, interest on these loans is
accrued at the reduced rates.
(E) CREDIT CARD SECURITIZATIONS
The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," on January 1, 1997. This new Statement
establishes criteria based on legal control to determine whether a transfer of a
financial asset is a sale or a secured borrowing. A sale is recognized when the
Corporation relinquishes control over a financial asset and is compensated for
such asset. The difference between the net proceeds received and the carrying
amount of the financial asset(s) being sold or securitized is recognized as a
gain or loss on sale.
The Corporation actively packages and sells credit card receivables as
securities to investors. Based on the immaterial level of net interest cash
flows related to such transactions, as well as the short average life of
receivables sold, the Corporation does not record a gain or loss at the time of
the securitization but recognizes excess interest on an accrual basis. Net
interest cash flows include finance charges and late payment fees, net of
charge-offs and the interest paid to certificateholders. Cash flows attributable
to cardholder relationships (e.g., annual fees) or enhancement fee revenues
(e.g., return payment fees) are recognized when earned as credit card fee
revenue. Transaction costs are generally deferred and amortized as a reduction
to credit card fee revenue over the terms of the related securitizations.
(F) ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level that in
management's judgment is adequate to provide for estimated probable credit
losses inherent in on- and off-balance-sheet credit exposure. The allowance for
credit losses attributable to off-balance-sheet credit exposure is not material.
The amount of the allowance is based on formal review and analysis of potential
credit losses, as well as prevailing economic conditions.
(G) PREMISES AND EQUIPMENT
Premises and equipment are carried at amortized cost. Depreciation is
charged to noninterest expense over the estimated useful lives of the assets on
either a straight-line or an accelerated depreciation basis. Leasehold
improvements are amortized over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. Maintenance,
repairs and minor alterations are expensed as incurred. Gains and losses on
disposition are reflected in other noninterest income.
46
<PAGE> 8
(H) OTHER REAL ESTATE
Other real estate includes primarily assets that have been received in
satisfaction of debt. Other real estate is initially recorded and subsequently
carried at the lower of cost or fair value less estimated selling costs. Any
valuation adjustments required at the date of transfer are charged to the
allowance for credit losses. Operating results from other real estate are
recorded in other noninterest expense.
(I) INTANGIBLE ASSETS
Intangible assets are included in other assets. Goodwill, representing the
cost of investments in subsidiaries and affiliated companies in excess of the
fair value of net assets acquired, is amortized on a straight-line basis over
periods ranging from 10 to 25 years. Other intangible assets, such as customer
lists, core deposits and credit card relationships, are amortized using various
methods over the periods benefited.
(J) DERIVATIVE FINANCIAL INSTRUMENTS
For a discussion of the Corporation's accounting policies for derivative
financial instruments, see the "Derivative Financial Instruments" section,
beginning on page 34.
(K) FOREIGN CURRENCY TRANSLATION
If a foreign installation's functional currency is the U.S. dollar, then
its local currency financial statements are remeasured to U.S. dollars.
Remeasurement effects and the results of related hedging transactions are
included in other noninterest income.
If a foreign installation's functional currency is its local currency, then
its local currency financial statements are translated into U.S. dollars.
Translation adjustments, related hedging results and applicable income taxes are
included in accumulated translation adjustment within stockholders' equity.
(L) MORTGAGE SERVICING RIGHTS
The Corporation capitalizes originated mortgage servicing rights in
accordance with SFAS No. 125. Such rights are carried at the lower of cost or
market value on the consolidated balance sheet. The mortgage servicing rights
portfolio is stratified by both product type and interest rate band for purposes
of evaluating carrying value. The initial capitalization of originated mortgage
servicing rights, in 1996, did not have a material effect on the Corporation's
financial results.
(M) STOCK-BASED COMPENSATION
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of this Statement, the Corporation elected
to retain its current method of measuring and recognizing costs related to
employee stock compensation plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and to disclose the
pro forma effect of applying the fair value method contained in SFAS No. 123.
Accordingly, no compensation costs are charged against income for stock options
awarded under the Corporation's Stock Performance Plan or stock purchase rights
offered under its Employee Stock Purchase and Savings Plan. In addition, the
unamortized cost of performance and restricted shares awarded continues to be
included in deferred compensation, a separate component of stockholders' equity.
Information on the Corporation's stock-based compensation plans is included in
Note 13(d), beginning on page 58.
(N) CASH FLOW REPORTING
The Corporation uses the indirect method, which reports cash flows from
operating activities by adjusting net income to reconcile to net cash flows from
operating activities. Cash and cash equivalents consist of cash and due from
banks, whether interest-bearing or not. Net reporting of cash transactions has
been used when the balance sheet items consist predominantly of maturities of
three months or less, or where otherwise permitted. Other items are reported on
a gross basis.
47
<PAGE> 9
In 1997 and 1996, $154 million and $45 million, respectively, of the
Corporation's 5 3/4% Cumulative Convertible Preferred Stock, Series B, were
converted into common stock. See Note 12, on page 56, for more details.
In 1995, a noncash transfer of $7.2 billion attributable to reclassifying
debt investment securities from held-to-maturity to available-for-sale was made.
The decision to reclassify was made in conjunction with the Financial Accounting
Standards Board's ("FASB") issuance of an implementation guide.
(O) RECENTLY ISSUED ACCOUNTING STANDARDS
Certain provisions of SFAS No. 125 became effective and were adopted on
January 1, 1998. The Corporation does not expect that this adoption will have a
material effect on its financial position or results of operations.
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which became effective January 1, 1998. The Statement distinguishes
comprehensive income between net income and other comprehensive income, which
includes items such as "fair value adjustment on investment securities available
for sale" and "accumulated translation adjustment." The Statement requires that
all components of comprehensive income and a total amount for comprehensive
income be displayed in either the income statement, a separate statement of
comprehensive income, or the statement of stockholders' equity. Since this
Statement solely relates to disclosure requirements, it will have no effect on
the Corporation's financial results.
In 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which becomes effective for the
Corporation's 1998 Annual Report. The Statement establishes the "management
approach" for identifying and reporting operating segments for interim and
annual reporting purposes. The management approach identifies operating segments
based on the information management uses to evaluate performance and allocate
resources to its operating segments. The Statement also requires certain
disclosures pertaining to products and services, geographic areas, and major
customers. The Statement is not expected to have a significant impact on the
Corporation's current business segment disclosures.
48
<PAGE> 10
NOTE 2--EARNINGS PER SHARE
In 1997, the Corporation adopted No. 128, "Earnings Per Share." As
required, all prior periods presented were restated. The Statement replaces
primary earnings per share ("EPS") with earnings per common share ("Basic EPS").
Basic EPS is computed by dividing income available to common stockholders by the
average number of common shares outstanding for the period.
The Statement also requires presentation of EPS assuming dilution. The
diluted EPS calculation includes net shares that may be issued under the
Employee Stock Purchase and Savings Plan, outstanding stock options, and common
shares that would result from the conversion of convertible preferred stock. In
the diluted calculation, income available to common stockholders is not reduced
by preferred stock dividend requirements related to convertible preferred stock,
since such dividends would not be paid if the preferred stock were converted to
common stock.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Basic
Net income......................................... $ 1,525 $ 1,436 $ 1,150
Preferred stock dividends.......................... (21) (31) (37)
-------- -------- --------
Net income attributable to common stockholders'
equity........................................... $ 1,504 $ 1,405 $ 1,113
======== ======== ========
Diluted
Net income........................................ $ 1,525 $ 1,436 $ 1,150
Preferred stock dividends, excluding convertible
Series B, where applicable....................... (19) (20) (26)
-------- -------- --------
Diluted income available to common stockholders... $ 1,506 $ 1,416 $ 1,124
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Average shares outstanding.......................... 301,421 316,765 320,049
Dilutive shares:
Employee Stock Purchase and Savings Plan.......... 1,003 467 205
Stock options..................................... 3,503 3,011 2,603
Convertible preferred stock....................... 1,050 6,488 6,741
-------- -------- --------
Average shares outstanding assuming full dilution... 306,977 326,731 329,598
======== ======== ========
Earnings Per Share
Basic............................................. $ 4.99 $ 4.44 $ 3.48
======== ======== ========
Diluted........................................... $ 4.90 $ 4.33 $ 3.41
======== ======== ========
</TABLE>
NOTE 3--MERGER-RELATED CHARGES
In 1995, merger-related charges were $267 million and included direct
merger and restructuring-related charges totaling $225 million, as well as the
effect of conforming a number of accounting practices between FCC and NBD, which
totaled $42 million. The effect of conforming these practices was not material
to the Corporation's financial statements.
At December 31, 1997, the merger-related reserve was $7 million, which is
primarily associated with personnel-related costs. This remaining reserve has
been identified with specific personnel actions and will be paid over the
remaining severance period.
The following table provides details on the merger-related reserve as of
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
DECEMBER 31 (IN MILLIONS)
<S> <C> <C>
Personnel............................................................ $ 42 $ 92
Facilities and equipment............................................. 71 94
Other................................................................ 5 14
---- ----
$118 $200
==== ====
</TABLE>
49
<PAGE> 11
Personnel-related costs primarily reflect the costs of employee severance
packages. Facilities costs consist of lease termination costs and facilities-
related exit costs arising from the consolidation of duplicate headquarters and
operational facilities. Equipment costs consist of computer equipment and
software write-offs due to duplication or incompatibility.
NOTE 4--ACQUISITIONS
In July 1995, the Corporation consummated its merger with Deerbank
Corporation, a $766 million thrift holding company located in Deerfield,
Illinois. The merger was accounted for as a purchase. The purchase price of $106
million was funded by the issuance of 3.3 million shares of the Corporation's
common stock.
In January 1995, the Corporation consummated its merger with AmeriFed
Financial Corp., a thrift holding company located in Joliet, Illinois, with
total assets of $910 million. The purchase price of $148 million was funded by
the issuance of 5.2 million shares of the Corporation's common stock. The merger
was accounted for as a purchase.
NOTE 5--BUSINESS SEGMENTS
The Corporation is engaged primarily in the banking business, which is
divided into three business segments and one segment that captures all other
activities. For information regarding the Corporation's business segments, as
defined by management, see the "Business Segments--Overview" section on page 14
and the tables on pages 15 to 17.
The table below covers the approximate consolidated financial data
attributable to domestic and foreign operations for the three years ended
December 31, 1997.
<TABLE>
<CAPTION>
INCOME BEFORE NET TOTAL
REVENUES (1) EXPENSES (2) INCOME TAXES INCOME ASSETS
------------ ------------ ------------- ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1997
DOMESTIC OPERATIONS.... $ 9,040 $6,823 $2,217 $1,489 $ 99,227
FOREIGN OPERATIONS
(3).................... 1,058 1,009 49 36 14,869
CONSOLIDATED........... $10,098 $7,832 $2,266 $1,525 $114,096
1996
Domestic operations.... $ 9,020 $6,919 $2,101 $1,391 $ 90,070
Foreign operations
(3).................... 1,097 1,036 61 45 14,549
Consolidated........... $10,117 $7,955 $2,162 $1,436 $104,619
1995
Domestic operations.... $ 9,277 $7,590 $1,687 $1,099 $100,601
Foreign operations
(3).................... 1,404 1,337 67 51 21,401
Consolidated........... $10,681 $8,927 $1,754 $1,150 $122,002
</TABLE>
(1) Includes interest income and noninterest income.
(2) Includes interest expense, provision for credit losses and noninterest
expense.
(3) No foreign region accounted for more than 10% of consolidated net income.
Internally developed allocation procedures are used to segregate assets,
related revenues, and expenses shown in the preceding table into domestic and
foreign components. Such allocations typically are subjective, given that many
of the resources employed by the Corporation and global markets are common to
both domestic and foreign activities. The principal internal allocation
procedures include allocating corporate overhead based on individual activities,
expenses based on the geographic area benefited, assets and revenues based on
the domicile of the customer, and capital (excluding that invested in foreign
subsidiaries) to domestic operations.
50
<PAGE> 12
NOTE 6--INVESTMENT SECURITIES
The following is a summary of the Corporation's available-for-sale
investment securities portfolio. Aside from those investments accounted for at
fair value in accordance with specialized industry practice, the remaining
investments in the portfolio are classified as available-for-sale.
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED FAIR VALUE
AMORTIZED COST GAINS LOSSES (BOOK VALUE)
-------------- ---------------- ---------------- ------------
DECEMBER 31, 1997
IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury............... $3,014 $ 23 $-- $3,037
U.S. government agencies
Mortgage-backed
securities.............. 1,719 17 -- 1,736
Collateralized
mortgage obligations... 186 -- -- 186
Other..................... 866 12 -- 878
States and political
subdivisions............. 733 34 -- 767
Other debt securities....... 1,542 -- 4 1,538
Equity securities
(1)(2).................... 1,076 156 44 1,188
------ ---- --- ------
Total................... $9,136 $242 $48 $9,330
====== ==== === ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury............... $2,878 $ 18 $ 6 $2,890
U.S. government agencies
Mortgage-backed
securities.............. 1,603 23 18 1,608
Collateralized
mortgage obligations.... 40 -- 1 39
Other..................... 60 1 -- 61
States and political
subdivisions.............. 1,150 59 1 1,208
Other debt securities....... 256 3 -- 259
Equity securities
(1)(2).................... 1,004 180 71 1,113
------ ---- --- ------
Total................... $6,991 $284 $97 $7,178
====== ==== === ======
</TABLE>
(1) The fair values of certain securities for which market quotations were not
available were estimated. In addition, the fair values of certain securities
reflect liquidity and other market-related factors.
(2) Includes investments accounted for at fair value, in keeping with
specialized industry practice. The following is a summary of the proceeds
from the sale of available-for- sale investment securities and the related
gross realized gains and losses.
<TABLE>
<CAPTION>
GROSS REALIZED GROSS REALIZED
PROCEEDS GAINS LOSSES
-------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
1997.................................... $10,168 $62 $18
1996.................................... 4,340 65 34
1995.................................... 5,564 45 62
</TABLE>
In 1995, the Corporation reclassified all held-to-maturity debt securities
as available-for-sale and recorded a $156 million unrealized pretax gain in the
fair value adjustment on investment securities available-for-sale in
stockholders' equity. Previously, these debt investment securities were carried
at amortized cost. The decision to reclassify was made in conjunction with the
FASB issuance of an implementation guide.
51
<PAGE> 13
The maturity distribution of debt investment securities is shown below. The
distribution of mortgage-backed securities and collateralized mortgage
obligations is based on average expected maturities. Actual maturities may
differ because issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
DECEMBER 31, 1997 (IN MILLIONS)
<S> <C> <C>
Due in one year or less................................... $1,820 $1,823
Due after one year through five years..................... 3,807 3,846
Due after five years through ten years.................... 1,507 1,534
Due after ten years....................................... 926 939
------ ------
$8,060 $8,142
====== ======
</TABLE>
NOTE 7--LOANS
Following is a breakdown of loans included in the consolidated balance
sheet as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN MILLIONS)
<S> <C> <C>
Commercial
Domestic
Commercial................................................. $28,939 $27,718
Real estate
Construction............................................. 1,380 1,057
Other.................................................... 5,324 5,103
Lease financing.......................................... 2,144 1,820
Foreign.................................................... 4,515 3,656
------- -------
Total commercial...................................... 42,302 39,354
======= =======
Consumer
Credit cards............................................... 9,693 9,601
Secured by real estate..................................... 8,911 9,406
Automotive................................................. 4,040 4,423
Other...................................................... 3,778 3,630
------- -------
Total consumer........................................ 26,422 27,060
------- -------
Total............................................... $68,724 $66,414
======= =======
</TABLE>
The amount of interest shortfall related to nonperforming loans at year-end
1997 was $17 million. The shortfall amount represents the difference between the
$29 million of interest contractually due and the $12 million of interest
actually received. For 1996, the interest shortfall related to nonperforming
loans at year-end was $16 million. The contractual amount of interest due
totaled $27 million, and $11 million of interest was actually received.
Credit card receivables are available for sale through the Corporation's
credit card securitization program. In addition, other loans available for sale
at December 31, 1997 and 1996, totaled $818 million and $545 million,
respectively.
The Corporation has loans outstanding to certain of its directors and
executive officers and to partnerships or companies in which a director or
executive officer has at least a 10% beneficial interest. At December 31, 1997
and 1996, $639 million and $339 million, respectively, of such loans to related
parties were outstanding.
52
<PAGE> 14
An analysis of the activity during 1997 with respect to such loans includes
additions of $722 million, and reductions of $422 million.
NOTE 8--ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for the three years ended
December 31, 1997, were as follows.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year............................ $1,407 $1,338 $1,158
Additions (deductions)
Charge-offs........................................... (916) (815) (409)
Recoveries............................................ 192 145 145
------ ------ ------
Net charge-offs....................................... (724) (670) (264)
Provision for credit losses........................... 725 735 510
Other.................................................
Acquisitions.......................................... -- -- 9
Transfers related to securitized receivables.......... -- 4 (75)
------ ------ ------
Balance, end of year.................................. $1,408 $1,407 $1,338
====== ====== ======
</TABLE>
A loan is considered impaired when it is probable that all principal and
interest amounts due will not be collected in accordance with its contractual
terms. Certain loans, such as loans carried at the lower of cost or fair value
or small-balance homogeneous loans (e.g., credit card and installment credit)
are exempt from impairment determinations. Impairment is recognized to the
extent that the recorded investment of an impaired loan or pool of loans exceeds
the calculated present value of projected cash flows discounted at the
contractual interest rate. Loans having a significant recorded investment are
measured on an individual basis, while loans not having a significant recorded
investment are grouped and measured on a pool basis. This reserve computation is
considered in management's determination of the allowance for credit losses.
At December 31, 1997, the recorded investment in impaired loans was $311
million, which required a related allowance for credit losses of $46 million.
Substantially all of the $311 million in impaired loans had a related allowance
for credit losses. At December 31, 1996, the recorded investment in impaired
loans was $262 million, which required a related allowance for credit losses of
$39 million.
The average recorded investment in impaired loans was approximately $292
million for 1997 and $341 million in 1996. The Corporation recognized interest
income associated with impaired loans of $24 million during 1997 and $17 million
during 1996.
NOTE 9--PLEDGED AND RESTRICTED ASSETS
At December 31, 1997, $21.7 billion of assets were pledged to secure
government deposits, trust deposits, and borrowings, and for other purposes
required by law. The Banks are required to maintain noninterest-bearing cash
balances with the Federal Reserve System based on the types and amounts of
deposits held. During 1997 and 1996, the average balances maintained to meet
this requirement were $1.134 billion and $1.357 billion, respectively.
NOTE 10--LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of
greater than one year. Original issue discount and deferred issuance costs are
amortized over the terms of the related notes. Long-term debt at December 31,
1997 and 1996, was as follows.
53
<PAGE> 15
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
PARENT COMPANY
SUBORDINATED DEBT
9% notes due 1999............................................... $ 200 $ 199
9 7/8% notes due 2000........................................... 99 99
9 1/5% notes due 2001........................................... 5 5
9 1/4% notes due 2001........................................... 100 100
10 1/4% notes due 2001.......................................... 100 100
11 1/4% notes due 2001.......................................... 96 96
8 7/8% notes due 2002........................................... 100 100
8 1/10% notes due 2002.......................................... 200 200
8 1/4% notes due 2002........................................... 100 100
7 5/8% notes due 2003........................................... 199 199
6 7/8% notes due 2003........................................... 200 200
Floating rate notes due 2003.................................... 150 149
7 1/4% debentures due 2004...................................... 200 200
Floating rate notes due 2005.................................... 96 96
6 1/8% notes due 2006........................................... 150 149
7% notes due 2006............................................... 149 149
7 1/8% notes due 2007........................................... 199 199
6 3/8% notes due 2009........................................... 198 198
7 1/2% preferred purchase units due 2023........................ 150 150
9 7/8% equity commitment notes due 1999......................... 200 200
SENIOR DEBT
8 1/2% notes due 1998............................................. 100 100
Other Parent Company debt......................................... 3,034 1,475
Total Parent Company............................................ 6,025 4,463
SUBSIDIARIES
Bank notes, various rates and maturities........................ 2,311 2,465
Subordinated 6 1/4% notes due 2003.............................. 200 200
Subordinated 8 1/4% notes due 2024.............................. 250 250
8 3/4% notes due 1997-1999...................................... -- 10
Capitalized lease obligations, various rates and maturities..... 14 13
Other........................................................... 292 305
------ ------
Total subsidiaries.............................................. 3,067 3,243
------ ------
Total long-term debt............................................ $9,092 $7,706
====== ======
</TABLE>
(A) PARENT COMPANY LONG-TERM DEBT
SUBORDINATED NOTES
These notes are subordinated to other indebtedness of the Corporation. The
fixed-rate notes have interest rates that range from 6 1/8% to 11 1/4% and
maturities that range from 1999 to 2023. The floating rate notes due in 2003
have an interest rate priced at the greater of 4 1/4% or the three-month LIBOR
plus 1/8%. The interest rate on this issue on December 31, 1997, was 5 15/16%.
The floating rate notes due 2005 may be redeemed, in whole or in part, on any
interest payment date at par. Interest payment on the notes is at a rate of 1/4%
above the average offered rate quoted in the London interbank market for
three-month Eurodollar deposits, but in no event may the rate be less than 5
1/4%. On December 31, 1997, the interest rate was 6 1/4%.
54
<PAGE> 16
Each 7 1/2% preferred purchase unit consists of a 7.40% subordinated
debenture due May 10, 2023, in a principal amount of $25 and a related purchase
contract paying fees of 0.10% of the principal amount of the debenture per year.
The contract requires the purchase on May 10, 2023 (or earlier at the
Corporation's election), of one depository share representing a one-fourth
interest in a share of 7 1/2% cumulative preferred stock of the Corporation at a
purchase price of $25 per depository share.
SENIOR DEBT
The 8 1/2% notes are unsecured obligations that are not subordinated to any
other indebtedness of the Corporation and may not be redeemed prior to their
stated maturity.
Other Parent Company long-term debt of $3.034 billion includes various
notes with a weighted average interest rate of 6.00% and remaining weighted
average maturity of 41 months at December 31, 1997.
(B) SUBSIDIARIES' LONG-TERM DEBT
The bank notes are unsecured and unsubordinated debt obligations of the
Banks. At December 31, 1997, the weighted average rate of the bank notes was
6.21%, and remaining weighted average maturity was 14 months.
The 6 1/4% subordinated notes due 2003 are unsecured, subordinated to the
claims of depositors and other creditors of NBD Michigan, and are not redeemable
prior to maturity.
The 8 1/4% subordinated notes due 2024 are unsecured, subordinated to the
claims of depositors and other creditors of NBD Michigan, and are not redeemable
by the bank prior to maturity. Registered holders have a one-time right to
redeem the notes at par, in whole or in part, on November 1, 2004.
Other long-term debt at December 31, 1997, included $291 million related to
the sale and lease back of certain bank properties. The effective interest rate
related to this transaction is 8.7%, with expected maturity in 2018.
(C) MATURITY OF LONG-TERM DEBT
Of the Corporation's $9.092 billion total long-term debt, $1.919 billion,
$1.028 billion, $1.195 billion, $841 million and $1.189 billion is scheduled to
mature in 1998, 1999, 2000, 2001 and 2002, respectively.
NOTE 11--GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S JUNIOR
SUBORDINATED DEBT
The $996 million of Guaranteed Preferred Beneficial Interest in the
Corporation's Junior Subordinated Debt ("Trust Preferred Capital Securities")
represents the net proceeds from the issuance of preferred capital securities by
First Chicago NBD Institutional Capital A ("the Series A Trust"), First Chicago
NBD Institutional Capital B (the "Series B Trust"), and First Chicago NBD
Capital I (the "Series I Trust"). Each of the trusts is a statutory business
trust organized for the sole purpose of issuing capital securities and investing
the proceeds thereof in junior subordinated debentures of the Corporation
("Junior Subordinated Debt"). The preferred capital securities represent
preferred individual beneficial interests in the respective trusts and are
subject to mandatory redemption upon repayment of the Junior Subordinated Debt.
The common securities of each trust are owned by the Corporation. The
Corporation's obligations under the Junior Subordinated Debt and other relevant
agreements, in aggregate, constitute a full and unconditional guarantee by the
Corporation of each respective trust's obligations under the preferred
securities issued by such trust.
The Series A Trust issued $500 million in aggregate liquidation amount of
7.95% preferred capital securities on December 1, 1996. The sole asset of the
Series A Trust is $515 million principal amount of 7.95% Junior Subordinated
Debt that will mature on December 1, 2026, and is redeemable prior to maturity
at the option of the Corporation on or after December 1, 2006.
55
<PAGE> 17
The Series B Trust issued $250 million in aggregate liquidation amount of
7.75% preferred capital securities on December 1, 1996. The sole asset of the
Series B Trust is $258 million principal amount of 7.75% Junior Subordinated
Debt that will mature on December 1, 2026, and is redeemable prior to maturity
at the option of the Corporation on or after December 1, 2006.
The Series I Trust issued $250 million in aggregate liquidation amount of
floating rate preferred capital securities in January 1997. The sole asset of
the Series I Trust is $258 million principal amount of floating rate Junior
Subordinated Debt of the Corporation, bearing interest at an annual rate equal
to three-month LIBOR plus 0.55% that will mature on February 1, 2027, and is
redeemable at the option of the Corporation on or after February 1, 2007.
The Trust Preferred Capital Securities are tax-advantaged issues and
qualify as Tier 1 capital. Distributions on these securities are included in
interest expense on long-term debt.
NOTE 12--PREFERRED STOCK
The Corporation is authorized to issue 10,000,000 shares of preferred
stock, without par value. The Board of Directors is authorized to fix the
particular designations, preferences, rights, qualifications and restrictions
for each series of preferred stock issued. All preferred shares rank prior to
common shares both as to dividends and liquidation, but have no general voting
rights. The dividend rate on each of the cumulative adjustable rate series is
based on stated value and adjusted quarterly, based on a formula that considers
the interest rates for selected short- and long-term U.S. Treasury securities
prevailing at the time the rate is set. The minimum, maximum and current
dividend rates for individual series of preferred stock are presented in the
following table.
<TABLE>
<CAPTION>
STATED ANNUAL DIVIDEND RATE EARLIEST
SHARES VALUE ----------------------- REDEMPTION REDEMPTION
OUTSTANDING PER SHARE MAXIMUM MINIMUM CURRENT DATE PRICE (1)
----------- --------- ----------------------- ---------- ----------
DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative Adjustable
Rate
Series B.............. 1,191,000 $100.00 12.00% 6.00% 6.00% (2) $100.00
Series C.............. 713,800 100.00 12.50 6.50 6.50 (2) 100.00
</TABLE>
- ---------
(1) Plus accrued and unpaid dividends.
(2) Currently redeemable.
In February 1997, the Corporation announced it would redeem all shares of
its 5 3/4% Cumulative Convertible Preferred Stock, Series B ($5,000 stated
value), and the related depositary shares, on April 1, 1997. Each such
depositary share was convertible into 1.6876 shares of the Corporation's common
stock at the option of the holder and, in 1997, approximately 3.1 million
depositary shares were converted into approximately 5.2 million shares of common
stock. In total, substantially all of the 4.0 million depositary shares had been
converted into 6.7 million common shares. Resultant fractional shares were paid
in cash. On April 1, 1997, the Corporation redeemed the remaining shares of the
Cumulative Convertible Preferred Stock, Series B, at the price of $51.725 per
depositary share plus an accrued and unpaid dividend of $0.71875 per depositary
share.
All shares of the Corporation's 8.45% Cumulative Preferred Stock, Series E
($625 stated value), and the related depositary shares, were redeemed on
November 17, 1997, at the price of $25.27 per depositary share, including
accrued and unpaid dividends of $0.27 per depositary share.
NOTE 13--EMPLOYEE BENEFITS
The Corporation has established common plans covering pension,
postretirement and postemployment benefits, employee savings, and stock
compensation, all of which replaced predecessor plans effective January 1, 1997.
(A) PENSION PLANS
The Corporation sponsors pension plans covering substantially all salaried
employees. The pension plans are noncontributory, defined benefit cash-balance
plans that provide balance accumulations based on years of service and
compensation level. The funding policy varies for each plan. Depending on the
plan, consideration is given to net periodic pension cost for the year, the
minimum funding required by the Employee Retirement Income Security Act of 1974
("ERISA") and the maximum tax deductible amount based on IRS limits.
56
<PAGE> 18
Plan assets primarily include equity securities and debt securities issued by
the U.S. government and its agencies or by corporations. Plan assets include
common stock of the Corporation having a fair value of $26 million and $20
million at December 31, 1997 and 1996, respectively. Net periodic pension cost
includes the following components for the years ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during period.................. $ 62 $ 61 $ 45
Interest cost on projected benefit obligation............... 127 110 100
Actual loss (return) on assets.............................. (291) (353) (351)
Net amortization and deferral............................... 129 197 206
----- ----- -----
Net periodic pension cost................................... $ 27 $ 15 $ --
===== ===== =====
</TABLE>
The following table reconciles the aggregated funded status of the plans
and amounts recognized in the consolidated balance sheet at December 31.
<TABLE>
<CAPTION>
1997 1996
------ -------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of the projected benefit obligation,
based on employment to date and current salary levels:
Vested employees........................................ $(1,558) $(1,164)
Nonvested employees..................................... (15) (376)
------- -------
Accumulated benefit obligation.......................... (1,573) (1,540)
Additional amounts related to projected salary increases.. (26) (19)
------- -------
Projected benefit obligation.............................. (1,599) (1,559)
Plan assets (at fair value)............................... 2,116 1,965
------- -------
Plan assets in excess of projected benefit obligation..... 517 406
Unrecognized net gain due to experience different from
assumptions............................................ (204) (91)
Unrecognized transition asset............................. (35) (45)
Unrecognized prior service cost........................... 112 114
------- -------
Prepaid pension cost included in the consolidated balance
sheet.................................................. $ 390 $ 384
======= =======
</TABLE>
The assumptions used in determining the projected benefit obligation and
net periodic pension cost of such plans at December 31 are as follows.
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Discount rate............................................ 7.25% 7.75% 7.25%
Salary increase assumption............................... 5.25 5.25 5.25
Expected long-term rate of return on plan assets......... 9.5 9.5 9.0-9.5
</TABLE>
(B) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation sponsors postretirement life insurance plans and provides
health care benefits for certain retirees and grandfathered employees when they
retire. The postretirement life insurance benefit is noncontributory. Retirees
and employees eligible for postretirement health care benefits participate on a
contributory basis.
Net periodic postretirement benefit cost included the following components
for the years ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost..................................................... $ 1 $ 2 $ 1
Interest cost.................................................... 6 5 4
Net amortization and deferral.................................... (6) -- 14
---- ---- ----
Net periodic postretirement benefit cost......................... $ 1 $ 7 $19
==== ==== ====
</TABLE>
57
<PAGE> 19
The Corporation funds postretirement benefit costs as claims are incurred.
The following table reconciles the plan's funded status and amounts recognized
in the consolidated balance sheet at December 31.
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees....................................................... $(55) $(52)
Fully eligible active plan participants........................ (10) (10)
Other active plan participants................................. (14) (14)
---- ----
Total accumulated postretirement benefit obligation.............. (79) (76)
Plan assets (at market value).................................... -- --
Accumulated postretirement benefit obligation in excess of plan
assets........................................................... (79) (76)
Unrecognized net (gain).......................................... (3) (13)
Unrecognized prior service cost.................................. 3 4
Accrued postretirement benefit liability recognized in the
consolidated balance sheet..................................... $(79) $(85)
</TABLE>
The assumption used to measure postretirement benefit costs is a 7% annual
rate of increase in the per capita cost of covered health care benefits for
1998, trending downward to 5.5% by the year 2000, and remaining at that level
thereafter. This assumption has a significant effect on the amounts reported.
Increasing the assumed health care cost trend rates by one percentage point in
each year would have increased the accumulated postretirement benefit obligation
as of December 31, 1997, by $3 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1997 by
approximately $0.2 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1997, and 7.75% at
December 31, 1996.
(C) SAVINGS AND INVESTMENT PLAN
The Corporation maintains a savings and investment plan for U.S.-based
employees meeting certain eligibility requirements. The Savings and Investment
Plan requires employer contributions equal to participants' contributions up to
3% of their salary, plus an amount equal to one-half of participants'
contributions between 3% and 6% of their salary, subject to certain limitations
imposed by the IRS. The plan also allows a supplemental profit-based
contribution.
Total employer contributions and expense for this plan were $50 million in
1997, $43 million in 1996, and $37 million in 1995.
(D) STOCK-BASED COMPENSATION
The Corporation utilizes various stock-based awards as part of its overall
compensation program through its Stock Performance Plan. In addition, the
Corporation provides employees the opportunity to purchase its shares through
its Employee Stock Purchase and Savings Plan. The compensation cost that has
been charged against income for the Stock Performance Plan was $50 million for
1997, $26 million for 1996 and $21 million for 1995. See Note 1(m) on page 47
for the Corporation's accounting policies relating to stock-based compensation.
STOCK PERFORMANCE PLAN
Under the Stock Performance Plan, the Corporation may grant to employees
various stock-based awards, including performance shares, restricted shares and
stock options. The Corporation is authorized to award up to an aggregate of 2%
of the outstanding common shares of the Corporation as reported at the prior
year end.
PERFORMANCE SHARES
The Corporation provides performance-based stock awards for its senior
managers. The level of performance shares eventually distributed depends on the
achievement of specific performance criteria that are
58
<PAGE> 20
set at the grant date. The ultimate expense attributable to these awards is
based on the market value of the shares distributed at the end of the defined
performance period. The expense associated with such awards is recognized over
the defined performance period.
RESTRICTED SHARES
Restricted shares granted to key officers require them to continue employment
for up to four years from the grant date before restrictions on the shares are
removed. The market value of the restricted shares as of the date of grant is
amortized to compensation expense ratably over the period the shares remain
restricted.
STOCK OPTIONS
The Corporation also awards stock options to both senior managers and key
officers. The exercise price of such options is equivalent to the market value
of the Corporation's common stock at the award date. Options granted generally
vest one-third each year over the three-year period following the grant date
and have a maximum term of ten years. Stock options include the right to
receive additional options not exceeding the number of options exercised under
the original grant if certain criteria are met. The exercise price of an
additional option is equal to the fair market value of the common stock on the
date the additional option is granted. The vesting period for such additional
options is six months.
The following tables summarize stock option activity for 1997 and 1996,
respectively, and provide details of stock options outstanding at December 31,
1997.
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
WTD. AVG. WTD. AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------ --------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C>
Outstanding at January 1.................... 12,224 $31.59 12,406 $25.23
Granted..................................... 3,095 61.06 4,585 41.38
Exercised................................... (3,616) 29.95 (4,598) 24.19
Forfeited................................... (197) 40.14 (169) 32.22
------ ------ ------ ------
Outstanding at December 31.................. 11,506 $39.88 12,224 $31.59
====== ======
Exerciseable at December 31................. 6,682 $33.04 6,595 $28.33
====== ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
(SHARES IN THOUSANDS)
NUMBER WTD. AVG.
RANGE OF OUTSTANDING WTD. AVG. REMAINING WTD. AVG
EXERCISE DEC. 31, EXERCISE CONTRACTUAL NUMBER EXERCISE
PRICES 1997 PRICE LIFE EXERCISABLE PRICE
----------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 6.26--$20.00......... 727 $16.27 2.6 yrs. 727 $16.27
20.01-- 33.00......... 3,910 27.30 5.2 3,070 27.05
33.01-- 46.00......... 3,577 39.86 6.8 2,038 39.37
46.01-- 59.00......... 770 52.94 5.6 757 53.03
59.01-- 72.00......... 2,365 61.33 8.5 90 61.00
72.01-- 85.06......... 157 75.57 5.3 -- --
------ ------ -------- ----- ------
$ 6.26--$85.06......... 11,506 $39.88 6.2 yrs. 6,682 $33.04
====== ====== ======== ===== ======
</TABLE>
EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN
The Corporation also offers an Employee Stock Purchase and Savings Plan
that allows eligible employees to authorize payroll deductions of up to 10% of
their annual base earnings for deposit in an interest-bearing savings account
for up to two years. Employees then have the option to either withdraw their
savings balance in cash or purchase shares of the Corporation's common stock at
a price fixed under the plan. The purchase price of the stock for a particular
employee is fixed at 95% of the stock's market price on the day that employee
becomes eligible to participate in a specific offering under the plan. Under the
plan, the Corporation issued 18,006 shares in 1997 at $36.93 per share. The
Corporation does not recognize any compensation expense with respect to this
plan.
59
<PAGE> 21
PRO FORMA COSTS OF STOCK-BASED COMPENSATION
If the Corporation had determined compensation cost for awards under its
stock plans based on their fair value at their grant dates consistent with the
method set forth in SFAS No. 123, the Corporation's net income would have been
$1.510 billion, $1.423 billion and $1.144 billion, for the years ended December
31, 1997, 1996 and 1995, respectively. Basic and diluted earnings per share
related to these pro forma net income amounts are $4.94 and $4.86, respectively,
for 1997, $4.39 and $4.29, respectively, for 1996 and $3.46 and $3.39,
respectively, for 1995. These pro forma net income amounts are not indicative of
future pro forma amounts because they do not include expenses related to
stock-based compensation awards granted prior to January 1, 1995, which would
have been amortized to expense over the vesting period of the award.
The following table summarizes stock-based compensation grants and their
related weighted average grant-date fair values for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
NUMBER OF WTD. AVG. GRANT NUMBER OF WTD. AVG. GRANT
SHARES DATE FAIR VALUE SHARES DATE FAIR VALUE
--------- --------- ----- --------- ---------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C>
Performance Shares (1)..... 0-354 $60.51 0-462 $40.58
Restricted Shares.......... 503 60.79 601 41.30
Stock Options.............. 3,095 11.95 4,585 6.74
Employee Stock Purchase and
Savings Plan (2).......... 47 9.29 2,445 5.78
</TABLE>
- ----------
(1)Range of potential shares issuable based on performance level achieved.
(2)Estimated number of shares employees will purchase under the plan.
The grant date fair values of stock options granted under the Stock
Performance Plan and employees' purchase rights under the Employee Stock
Purchase and Savings Plan were estimated using the Black-Scholes option- pricing
model. This model was developed to estimate the fair value of traded options,
which have different characteristics than employee stock options, and changes to
the subjective input assumptions can result in materially different fair market
value estimates. Therefore, the Black-Scholes model may not necessarily provide
a reliable single measure of the fair value of employee stock options and
purchase rights.
The following assumptions were used to estimate the grant-date fair value
of employees' purchase rights under the Employee Stock Purchase and Savings
Plan: dividend yield of 2.54% and 3.70% in 1997 and 1996, respectively; expected
volatility of 22.70% and 18.82% in 1997 and 1996, respectively; risk-free
interest rate of 5.73% and 6.10% in 1997 and 1996, respectively; and an expected
life of 1.3 years and 2.2 years in 1997 and 1996, respectively.
The following weighted average assumptions were used to estimate the grant-
date fair value of stock option awards under the Stock Performance Plan:
dividend yields of 2.61%, 3.46% and 4.24% in 1997, 1996 and 1995 respectively;
expected volatility of 19.10%, 18.74% and 17.28% in 1997, 1996 and 1995,
respectively; risk-free interest rates of 6.07%, 5.91% and 6.78% in 1997, 1996
and 1995, respectively; and expected lives of 4.7 years, 4.2 years and 3.9 years
in 1997, 1996 and 1995, respectively.
60
<PAGE> 22
NOTE 14--INCOME TAXES
The components of total applicable income tax expense (benefit) in the
consolidated income statement for the years ended December 31, 1997, 1996 and
1995, are as follows.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Income tax expense (benefit)
Current
Federal................................................. $573 $561 $737
Foreign................................................. 12 17 27
State................................................... 69 64 84
---- ---- ----
Total..................................................... 654 642 848
Deferred Federal............................................ 79 77 (216)
State....................................................... 8 7 (28)
---- ---- ----
Total....................................................... 87 84 (244)
---- ---- ----
Applicable income taxes..................................... $741 $726 $604
==== ==== ====
</TABLE>
The tax effects of fair value adjustments on securities available-for-sale,
foreign currency translation adjustments, and certain tax benefits related to
stock options are recorded directly to stockholders' equity. The net tax expense
(benefit) recorded directly in stockholders' equity amounted to $(59) million,
$(56) million and $133 million in 1997, 1996 and 1995, respectively.
A summary reconciliation of the differences between applicable income taxes
and the amounts computed at the applicable regular federal tax rate of 35% is as
follows.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Taxes at statutory federal income tax rate.................. $793 $757 $614
Increase (decrease) in taxes resulting from:
Tax-exempt income (net)................................... (30) (40) (54)
State income taxes, net of federal income taxes........... 50 47 37
Other..................................................... (72) (38) 7
---- ---- ----
Applicable income taxes..................................... $741 $726 $604
==== ==== ====
</TABLE>
A net deferred tax liability is included in other liabilities in the
consolidated balance sheet as a result of temporary differences between the
carrying amounts of assets and liabilities in the financial statements and their
related tax bases. The components of the net deferred tax liability as of
December 31, 1997 and 1996, are as follows.
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities
Deferred income on lease financing........................ $1,010 $ 867
Appreciation on equity security investments............... 47 123
Prepaid pension costs..................................... 110 142
Other..................................................... 219 215
------ ------
Gross deferred tax liabilities............................ 1,386 1,347
------ ------
Deferred tax assets
Allowance for credit losses............................... 516 513
Securitization of credit card receivables................. 79 81
Depreciation.............................................. 34 70
Other..................................................... 241 300
------ ------
Gross deferred tax assets................................. 870 964
Valuation allowance....................................... -- --
------ ------
Gross deferred tax assets, net of valuation allowance..... 870 964
------ ------
Net deferred tax liability.................................. $ 516 $ 383
====== ======
</TABLE>
61
<PAGE> 23
NOTE 15--LEASE COMMITMENTS
The Corporation has entered into a number of operating and capitalized
lease agreements for premises and equipment. The minimum annual rental
commitments under these leases are shown below.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1998..................................................................... $ 91
1999..................................................................... 86
2000..................................................................... 75
2001..................................................................... 63
2002..................................................................... 61
2003 and thereafter...................................................... 407
----
$783
====
</TABLE>
Occupancy expense has been reduced by rental income from premises leased to
others in the amount of $63 million in 1997, $32 million in 1996 and $44 million
in 1995.
NOTE 16--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Corporation is a party to financial
instruments containing credit and/or market risks that are not required to be
reflected in a balance sheet. These financial instruments include credit-
related instruments as well as certain derivative instruments. The Corporation's
risk management policies monitor and limit exposure to credit, liquidity and
market risks.
The following disclosures represent the Corporation's credit exposure,
assuming that every counterparty to financial instruments with off-balance-
sheet credit risk fails to perform completely according to the terms of the
contracts, and that the collateral and other security, if any, proves to be of
no value to the Corporation.
This note does not address the amount of market losses the Corporation
would incur if future changes in market prices make financial instruments with
off-balance-sheet market risk less valuable or more onerous. The measurement of
market risk is meaningful only when all related and offsetting on- and off-
balance-sheet transactions are aggregated, and the resulting net positions are
identified.
(A) COLLATERAL AND OTHER SECURITY ARRANGEMENTS
The credit risk of both on- and off-balance-sheet financial instruments
varies based on many factors, including the value of collateral held and other
security arrangements. To mitigate credit risk, the Corporation generally
determines the need for specific covenant, guarantee and collateral requirements
on a case-by-case basis, depending on the nature of the financial instrument and
the customer's creditworthiness. The Corporation may also receive comfort
letters and oral assurances. The amount and type of collateral held to reduce
credit risk varies but may include real estate, machinery, equipment, inventory
and accounts receivable, as well as cash on deposit, stocks, bonds and other
marketable securities that are generally held in the Corporation's possession or
at another appropriate custodian or depository. This collateral is valued and
inspected on a regular basis to ensure both its existence and adequacy.
Additional collateral is requested when appropriate.
(B) CREDIT-RELATED FINANCIAL INSTRUMENTS
The table below summarizes credit-related financial instruments, including
both commitments to extend credit and letters of credit.
<TABLE>
<CAPTION>
1997 1996
DECEMBER 31 (IN BILLIONS) ---- ----
<S> <C> <C>
Unused loan commitments (1)........................................ $66.6 $59.1
Unused credit card lines........................................... 76.7 75.8
Unused home-equity lines........................................... 1.7 1.7
Commercial letters of credit....................................... 0.8 0.8
Standby letters of credit and foreign office guarantees............ 8.5 7.5
</TABLE>
- --------------
(1) Includes unused commercial real estate exposure of $2.1 billion and $1.7
billion at December 31, 1997 and 1996, respectively
. 62
<PAGE> 24
Since many of the unused commitments are expected to expire unused or be
only partially used, the total amount of unused commitments in the preceding
table does not necessarily represent future cash requirements.
Loan commitments are agreements to make or acquire a loan or lease as long
as the agreed-upon terms (e.g., expiry, covenants or notice) are met. The
Corporation's commitments to purchase or extend loans help its customers meet
their liquidity needs. Credit card lines allow customers to use a credit card to
buy goods or services and to obtain cash advances. However, the Corporation has
the right to change or terminate any terms or conditions of the credit card
account. Extensions of credit under home-equity lines are secured by residential
real estate.
Commercial letters of credit are issued or confirmed to ensure payment of
customers' payables or receivables in short-term international trade
transactions. Generally, drafts will be drawn when the underlying transaction is
consummated as intended. However, the short-term nature of this instrument
serves to mitigate the risk associated with these contracts.
Standby letters of credit and foreign office guarantees are issued in
connection with agreements made by customers to counterparties. If the customer
fails to comply with the agreement, the counterparty may enforce the standby
letter of credit or foreign office guarantee as a remedy. Credit risk arises
from the possibility that the customer may not be able to repay the Corporation
for standby letters of credit or foreign office guarantees. At December 31, 1997
and 1996, standby letters of credit and foreign office guarantees had been
issued for the following purposes.
<TABLE>
<CAPTION>
1997 1996
------ ------
DECEMBER 31 (IN MILLIONS)
<S> <C> <C>
Financial
Tax-exempt obligations.......................................... $3,147 $2,921
Insurance-related............................................... 1,023 804
Other financial................................................. 3,202 2,785
Performance....................................................... 1,160 996
------ ------
Total (1)..................................................... $8,532 $7,506
====== ======
</TABLE>
- ---------
(1) Includes $1,073 million and $818 million participated to other
institutions at December 31, 1997, and December 31, 1996,
respectively.
At December 31, 1997, $6,647 million of standby letters of credit and
foreign office guarantees was due to expire within three years and $1,885
million was to expire after three years.
(C) DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into a variety of derivative financial instruments
in its trading, asset and liability management, and corporate investment
activities. These instruments offer customers protection from rising or falling
interest rates, exchange rates, equity prices and commodity prices. They can
either reduce or increase the Corporation's exposure to such changing rates or
prices.
Following is a brief description of such derivative financial instruments.
. Interest rate forward and futures contracts represent commitments either to
purchase or sell a financial instrument at a specified future date for a
specified price, and may be settled in cash or through delivery.
. An interest rate swap is an agreement in which two parties agree to exchange,
at specified intervals, interest payment streams calculated on an agreed-upon
notional principal amount with at least one stream based on a specified
floating rate index.
. Interest rate options are contracts that grant the purchaser, for a premium
payment, the right either to purchase or sell a financial instrument at a
specified price within a specified period of time or on a specified date from
the writer of the option.
. Interest rate caps and floors are contracts with notional principal amounts
that require the seller, in exchange for a fee, to make payments to the
purchaser if a specified market interest rate exceeds the fixed cap rate or
falls below the fixed floor rate on specified future dates.
63
<PAGE> 25
. Forward rate agreements are contracts with notional principal amounts that
settle in cash at a specified future date based on the differential between a
specified market interest rate and a fixed interest rate.
. Foreign exchange contracts represent swap, spot, forward, futures and
option contracts to exchange currencies.
. Equity price contracts represent swap, forward, futures, cap, floor and
option contracts that derive their value from underlying equity prices.
. Commodity price contracts represent swap, futures, cap, floor and option
contracts that derive their value from underlying commodity prices.
The Corporation's objectives and strategies for using derivative financial
instruments for structural interest rate risk management and foreign exchange
risk management are discussed on pages 26 to 28.
Balance sheet exposure for derivative financial instruments includes the
amount of recognized gains in the market valuation of those contracts. Those
amounts fluctuate as a function of maturity, interest rates, foreign exchange
rates, equity prices and commodity prices.
The credit risk associated with exchange-traded derivative financial
instruments is limited to the relevant clearinghouse. Options written do not
expose the Corporation to credit risk, except to the extent of the underlying
risk in a financial instrument that the Corporation may be obligated to acquire
under certain written put options. Caps and floors written do not expose the
Corporation to credit risk.
On some derivative financial instruments, the Corporation may have
additional risk. This is due to the underlying risk in the financial instruments
that the Corporation may be obligated to acquire, or the risk that the
Corporation will deliver under a contract but the customer will fail to deliver
the countervailing amount. The Corporation believes its credit and settlement
procedures minimize these risks.
Not all derivative financial instruments have off-balance-sheet market
risk. Market risk associated with options purchased and caps and floors
purchased is recorded in the balance sheet.
The tables on page 34 report the Corporation's gross notional principal or
contractual amounts of derivative financial instruments as of December 31, 1997
and December 31, 1996. These instruments include swaps, forwards, spot, futures,
options, caps, floors, forward rate agreements, and other conditional and
exchange contracts. The amounts do not represent the market or credit risk
associated with these contracts, as previously defined, but rather give an
indication of the volume of the transactions.
NOTE 17--CONCENTRATIONS OF CREDIT RISK
The Corporation provides a wide range of financial services, including
credit products, to consumers, middle market businesses and large corporate
customers. Credit policies and processes emphasize diversification of risk among
industries, geographic areas and borrowers. The only significant domestic credit
concentrations were consumer, commercial real estate and the U.S. government.
Information on consumer and commercial real estate loans is presented in
Note 7, beginning on page 52, and information on unused consumer and commercial
real estate commitments is presented in Note 16, beginning on page 62.
U.S. government risk arises primarily from the holding of government
securities and short-term credits collateralized by such securities.
Information on foreign outstandings is presented in the "Foreign
Outstandings" table on page 33. In addition to the $4.2 billion of outstandings
to banks in Japan, the Corporation's credit risk from off- balance-sheet
commitments to Japanese banks totaled $476 million at December 31, 1997. In
addition to the $3.8 billion of outstandings to banks in Japan at December 31,
1996, current credit exposure on derivative financial instruments and
off-balance-sheet commitments to Japanese banks totaled approximately $2.0
billion.
64
<PAGE> 26
NOTE 18--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation is required to disclose the estimated fair value of its
financial instruments in accordance with SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." These disclosures do not attempt to estimate or
represent an estimate of the Corporation's fair value as a whole. The
Corporation does not plan to dispose of, either through sale or settlement, the
majority of its financial instruments at these estimated fair values.
Certain limitations are inherent in the methodologies used to estimate fair
value. As a result, disclosed fair values may not be the amount realized in a
current transaction between willing parties. Specifically, the fair values
disclosed represent point-in-time estimates that may change in subsequent
reporting periods due to market conditions or other factors. Further, quoted
market prices may not be realized because the financial instrument may be traded
in a market that lacks liquidity; or a fair value derived using a discounted
cash flow approach may not be the amount realized because of the subjectivity
involved in selecting underlying assumptions, such as projecting cash flows or
selecting a discount rate. The fair value amount also may not be realized
because it ignores transaction costs and does not include potential tax effects.
Additionally, estimated fair values of certain financial instruments ignore
intangible value associated with the financial instruments; for example,
significant unrecognized value exists that is attributable to credit card
relationships and core deposits.
The following table summarizes the carrying values and estimated fair
values of financial instruments as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Cash and other short term financial
instruments (a).................. $22,628 $22,628 $17,494 $17,494
Trading assets (a)................. 4,198 4,198 4,812 4,812
Investment securities (a).......... 9,330 9,330 7,178 7,178
Loans (a)(b)....................... 68,724 67,512 66,414 65,052
Allowance for credit losses........ (1,408) -- (1,407) --
------- ------- ------- -------
Loans, net.......................... 67,316 67,512 65,007 65,052
Derivative product assets
Trading purposes (1)(a)............ 4,442 4,442 4,895 4,895
Other than trading purposes (e).... 105 198 79 162
------- ------- ------- -------
Total derivative product assets.. 4,547 4,640 4,974 5,057
Other financial instruments (a).... 1,490 1,490 1,356 1,356
Financial liabilities
Deposits (a)(c)..................... $68,489 $68,541 $63,669 $63,747
Securities sold but not yet
purchased (a)...................... 2,215 2,215 1,236 1,236
Other short-term financial
instruments (a).................... 17,474 17,474 14,772 14,772
Long-term debt (2)(a)(d)............ 10,088 10,309 8,454 8,570
Derivative product liabilities
Trading purposes (1)(a)............. 4,592 4,592 4,716 4,716
Other than trading purposes (e)..... 24 46 37 66
------- ------ ------- -------
Total derivative product
liabilities........................ 4,616 4,638 4,753 4,782
</TABLE>
- -------------
(1) The estimated average fair values of derivative financial instruments used
in trading activities during 1997 were $4.4 billion classified as assets
and $4.5 billion classified as liabilities.
(2) Includes trust preferred capital securities.
Estimated fair values are determined as follows:
(A) FINANCIAL INSTRUMENTS WHOSE CARRYING VALUE APPROXIMATES FAIR VALUE
A financial instrument's carrying value approximates its fair value when
the financial instrument has an immediate or short-term maturity (generally one
year or less), or is carried at fair value. Additionally, the carrying value of
financial instruments that reprice frequently, such as floating rate debt,
approximates fair value.
65
<PAGE> 27
The estimated fair values of debt investment securities, trading securities
and securities sold but not yet purchased were generally based on quoted market
prices or dealer quotes. See Note 1, beginning on page 45, and Note 6, beginning
on page 51, for information on methods for estimating the fair value of equity
investment securities. The estimated fair value of derivative product assets and
liabilities was based on quoted market prices or pricing and valuation models on
a present-value basis using current market information.
The majority of commitments to extend credit and letters of credit would
result in loans with a market rate of interest if funded. The fair value of
these commitments are the fees that would be charged customers to enter into
similar agreements with comparable pricing and maturity. The recorded book value
of deferred fee income approximates the fair value.
(B) LOANS
The discounted cash flow method was used to estimate the fair value of
certain commercial and consumer installment loans. Discount rates used represent
current lending rates for new loans with similar characteristics. The estimated
fair value of consumer mortgage loans was based on committed sales prices and a
valuation model using current market information.
(C) DEPOSITS
The fair value of demand and savings deposits with no defined maturity is
the amount payable on demand at the report date. The fair value of fixed-rate
time deposits is estimated by discounting the future cash flows to be paid,
using the current rates at which similar deposits with similar remaining
maturities would be issued.
(D) LONG-TERM DEBT
Quoted market prices or the discounted cash flow method was used to
estimate the fair value of the Corporation's fixed-rate long-term debt.
Discounting was based on the contractual cash flows and the current rates at
which debt with similar terms could be issued.
(E) DERIVATIVE PRODUCT ASSETS AND LIABILITIES--OTHER THAN TRADING PURPOSES
The estimated fair values of derivative product assets and liabilities used
for risk management purposes were based on quoted market prices or pricing and
valuation models on a present-value basis using current market information.
NOTE 19--CONTINGENCIES
The Corporation and certain of its subsidiaries are defendants in various
lawsuits, including certain class actions, arising out of the normal course of
business, and the Corporation has received certain tax deficiency assessments.
Since the Corporation and certain of its subsidiaries, which are regulated by
one or more federal and state regulatory authorities, are the subject of
numerous examinations and reviews by such authorities, the Corporation is and
will, from time to time, normally be engaged in various disagreements with
regulators, related primarily to banking matters. In the opinion of management
and the Corporation's general counsel, the ultimate resolution of these matters
will not have a material effect on the consolidated financial statements.
66
<PAGE> 28
NOTE 20--FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
1997 1996
------ ------
DECEMBER 31 (IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and due from banks--bank subsidiaries................. $ -- $ 3
Interest-bearing due from banks
Bank subsidiaries........................................ 778 1,138
Other.................................................... 9 249
Trading assets............................................. -- 67
Investment securities--available-for-sale.................. 50 46
Loans and receivables--subsidiaries
Bank subsidiaries........................................ 2,549 2,044
Nonbank subsidiaries..................................... 1,696 989
Investment in subsidiaries
Bank subsidiaries........................................ 9,423 9,054
Nonbank subsidiaries..................................... 1,061 1,229
Other assets............................................... 90 76
------- -------
Total assets............................................ $15,656 $14,895
======= =======
LIABILITIES
Short-term borrowings
Nonbank subsidiaries...................................... $ 76 $ 76
Other..................................................... 287 224
Long-term debt
Nonbank subsidiaries...................................... 1,027 771
Other..................................................... 6,025 4,463
Other liabilities........................................... 281 354
------- -------
Total liabilities........................................ 7,696 5,888
Stockholders' equity........................................ 7,960 9,007
------- -------
Total liabilities and stockholders' equity............... $15,656 $14,895
======= =======
</TABLE>
67
<PAGE> 29
FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY)
CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
FOR THE YEAR (IN MILLIONS)
<S> <C> <C> <C>
OPERATING INCOME
Dividends
Bank subsidiaries..................................... $ 943 $ 957 $ 686
Nonbank subsidiaries.................................. 375 94 114
Interest income
Bank subsidiaries..................................... 195 159 163
Nonbank subsidiaries.................................. 62 53 67
Other................................................. 44 37 48
Other income
Bank subsidiaries..................................... -- -- 8
Nonbank subsidiaries.................................. -- -- 1
Other................................................. 2 5 --
------ ------ ------
Total................................................ 1,621 1,305 1,087
OPERATING EXPENSE
Interest expense
Nonbank subsidiaries.................................. 85 11 4
Other................................................. 367 345 367
Merger-related charges................................ -- -- 69
Other expense......................................... 22 39 39
------ ----- -----
Total................................................ 474 395 479
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES............................ 1,147 910 608
Applicable income taxes (benefit)....................... (74) (62) (59)
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES.......................................... 1,221 972 667
Equity in undistributed net income of subsidiaries
Bank subsidiaries..................................... 448 322 418
Nonbank subsidiaries.................................. (144) 142 65
------ ------ ------
NET INCOME.............................................. $1,525 $1,436 $1,150
====== ====== ======
</TABLE>
The Parent Company Only Statement of Stockholders' Equity is the same as
the Consolidated Statement of Stockholders' Equity (see page 43).
68
<PAGE> 30
FIRST CHICAGO NBD CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
FOR THE YEAR (IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ 1,525 $ 1,436 $ 1,150
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiaries............... (1,622) (1,515) (1,282)
Dividends received from subsidiaries............... 1,318 1,036 800
Depreciation and amortization...................... 10 7 8
Merger-related charges............................. -- -- 69
Net (increase) in trading assets................... (38) -- (74)
Net (increase) decrease in accrued income
receivable........................................ (15) 4 (2)
Net increase (decrease) in accrued expenses
payable........................................... (1) (30) (31)
Other noncash adjustments.......................... (8) (15) (88)
------- ------- -------
Total adjustments.................................. (356) (513) (600)
------- ------- -------
Net cash provided by operating activities............ 1,169 923 550
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans to subsidiaries..... (1,198) (176) 35
Net decrease in resale agreements with bank
subsidiary.......................................... -- 3 39
Net (increase) decrease in capital investments in
subsidiaries........................................ 148 (46) 101
Purchase of investment securities--available-for-
sale................................................ (29) (143) (71)
Proceeds from maturities of investment securities--
available-for-sale.................................. 27 143 78
Proceeds from sales of investment securities--
available-for-sale.................................. -- 7 48
Sales of premises and equipment...................... -- -- 51
Other, net........................................... -- 9 (1)
------- ------- -------
Net cash provided by (used in) investing activities.. (1,052) (203) 280
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings..... 57 (131) 155
Proceeds from issuance of long-term debt............. 2,465 1,297 772
Redemption and repayment of long-term debt........... (552) (492) (335)
Net (decrease) in other liabilities.................. -- -- (86)
Dividends paid....................................... (516) (488) (447)
Proceeds from issuance of common and treasury stock.. -- 59 23
Purchase of treasury stock........................... (2,074) (412) (513)
Payment for redemption of preferred stock............ (100) -- (121)
------- ------- -------
Net cash (used in) financing activities.............. (720) (167) (552)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. (603) 553 278
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 1,390 837 559
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 787 $ 1,390 $ 837
======= ======= =======
OTHER CASH FLOW DISCLOSURES
Interest paid...................................... $ 441 $ 351 $ 364
Income tax (receipt)............................... (58) (56) (53)
</TABLE>
Dividends that may be paid by national bank subsidiaries are subject to two
statutory limitations. Under the first, dividends cannot exceed the level of
undivided profits. In addition, a bank cannot declare a dividend, without
regulatory approval, in an amount in excess of its net income for the current
year combined with the retained net profits for the preceding two years. State
bank subsidiaries may also be subject to limitations on dividend payments
. 69
<PAGE> 31
Based on these statutory requirements, the Principal Banks could, in the
aggregate, have declared additional dividends of up to approximately $1.1
billion without regulatory approval at January 1, 1998. The payment of dividends
by any bank may also be affected by other factors, such as the maintenance of
adequate capital. As of December 31, 1997, all of the Principal Banks
significantly exceeded the regulatory guidelines for "well-capitalized" status.
The Principal Banks are subject to various regulatory capital requirements
that require them to maintain minimum ratios of total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets. Refer to the
"Capital Management" section beginning on page 36 for the Principal Banks'
capital ratios as well as the minimum capital ratios required by regulation.
Failure to meet minimum capital requirements results in certain actions by bank
regulators that could have a direct material effect on the Principal Banks'
financial statements. As of December 31, 1997, management believes that each of
the Principal Banks meets all capital adequacy requirements to which it is
subject and is correctly categorized as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that categorization that management believes have changed the institution's
category.
Federal banking law also restricts each bank subsidiary from extending
credit to the Corporation in excess of 10% of the subsidiary's capital stock and
surplus, as defined. Any such extensions of credit are subject to strict
collateral requirements.
In connection with issuances of commercial paper, the Corporation has an
agreement providing future credit availability (back-up lines of credit) with an
affiliated bank. The agreement aggregated $300 million at December 31, 1997. The
commitment fee paid under this agreement was .08%. The back-up line of credit,
together with overnight money market loans, short-term investments and other
sources of liquid assets, exceeded the amount of commercial paper issued at
December 31, 1997.
70
<PAGE> 32
Business Segments
OVERVIEW
Financial results are reported by major business segments, principally
structured around the customer markets served: Regional Banking, Corporate
Banking, Corporate Investments and Credit Card. Corporate Banking and Corporate
Investments are grouped together for financial reporting purposes.
EARNINGS CONTRIBUTION BY BUSINESS SEGMENTS
Pie Chart
<TABLE>
<CAPTION>
1995* 1996 1997
---- ---- ----
<S> <C> <C> <C>
Credit Card 23% 24% 19%
Regional Banking 40% 43% 47%
Corporate Banking/
Corporate Investments 36% 32% 33%
Other 1% 1% 1%
</TABLE>
*Operating Earnings
Business segment results are derived from the internal profitability reporting
systems and reflect full allocation of all institutional and overhead items.
These systems use a detailed funds transfer methodology and a capital
allocation based on risk elements.
During 1997, the method for assigning capital to business units was revised.
The "Capital Management" section, beginning on page 36, provides the conceptual
framework. The net result of this allocation change was an increase in capital
for Credit Card and a reduction to Corporate Banking's allocation. Results for
prior years have been adjusted for the enhanced capital methodology and other
changes in order to achieve consistency for comparison purposes.
Credit Card results are presented before the securitization of credit card
receivables ("presecuritized") to facilitate analysis of trends. For more
information, see the discussion of net interest income, beginning on page 18,
and noninterest income on page 19, as well as the reconciliation of reported to
presecuritized results on page 75.
Revenues and costs for investment management and insurance products are aligned
with customers and, therefore, are reported within the appropriate business
segments. Certain corporate revenues and expenses, generally unusual or
one-time in nature, are included in "Other Activities."
14
<PAGE> 33
REGIONAL BANKING
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ------ ------ ------
<S> <C> <C> <C>
Net interest income--tax-equivalent basis............... $2,213 $2,125 $2,051
Provision for credit losses............................. 105 119 102
Noninterest income...................................... 911 769 663
Noninterest expense..................................... 1,876 1,796 1,751
Net income.............................................. 711 616 531
Return on equity........................................ 20% 17% 17%
Operating efficiency ratio.............................. 60 62 64
Average loans (in billions)............................. $ 35.7 $ 34.7 $ 31.9
Average assets (in billions)............................ 39.6 38.9 36.6
Average common equity (in billions)..................... 3.6 3.5 3.0
</TABLE>
Regional Banking serves four specific customer markets: general consumers,
private banking and investments clients, small businesses, and middle market
companies. These markets are grouped as Retail and Middle Market for financial
reporting, and together contributed 47% of the Corporation's 1997 earnings. Net
income for Regional Banking rose 15% to $711 million for the year, and return
on equity reached 20%.
<TABLE>
<CAPTION>
RETAIL MIDDLE MARKET
------------------------ ---------------------
(DOLLARS IN MILLIONS, EXCEPT WHERE 1997 1996 1995 1997 1996 1995
NOTED) ------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net interest income--tax equivalent
basis............................. $1,281 $1,217 $1,175 $ 932 $ 908 $ 876
Provision for credit losses......... 79 73 51 26 46 51
Noninterest income.................. 680 556 492 231 213 171
Noninterest expense................. 1,362 1,293 1,249 514 503 502
Net income.......................... 318 259 226 393 357 305
Return on equity.................... 18% 15% 15% 21% 19% 19%
Operating efficiency ratio.......... 69 73 75 44 45 48
Average loans (in billions)......... $ 17.6 $ 17.2 $ 15.7 $18.1 $17.5 $16.2
Average assets (in billions)........ 19.7 19.5 18.7 19.9 19.4 17.9
Average common equity (in billions).. 1.8 1.7 1.5 1.8 1.8 1.5
</TABLE>
Earnings in the Retail Banking segment grew 23% for the year. Spread income
rose 5%, from a combination of higher deposits and related spreads, as well as
from modest loan growth. Restructured fee schedules and asset sales also
contributed to the overall revenue improvement. Operating efficiency trends
continued to be favorable, and provision levels increased slightly.
Middle Market's return on equity for 1997 was 21%, and its net income was
10% higher than a year earlier. A lower provision for credit losses coupled
with continued substantial increases in noninterest income drove this
performance. Loans and total spread income grew a modest 3% each.
CORPORATE BANKING AND CORPORATE INVESTMENTS
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ----- ----- -----
<S> <C> <C> <C>
Net interest income--tax-equivalent basis.................. $ 675 $ 740 $ 758
Provision for credit losses................................ 23 34 35
Noninterest income......................................... 963 920 990
Noninterest expense........................................ 882 909 966
Net income................................................. 499 465 477
Return on equity........................................... 18% 14% 13%
Operating efficiency ratio................................. 54 55 55
Average assets (in billions)............................... $59.1 $63.7 $78.4
Average common equity (in billions)........................ 2.8 3.3 3.4
</TABLE>
15
<PAGE> 34
Large corporations, institutions and governments are the principal customers of
Corporate Banking, which provides credit instruments, cash management services,
capital markets products and other services. Corporate Investments represents a
variety of functions and businesses, including the investment account, funding,
venture capital, leveraged leasing and tax-advantaged products. Together, these
business lines are analogous to the "global banking" or "wholesale banking"
businesses of other major U.S. banking companies. Their contribution to the
Corporation's earnings was nearly $500 million for 1997, or about 33% of total
net income; return on equity rose to 18%.
<TABLE>
<CAPTION>
CORPORATE
CORPORATE BANKING INVESTMENTS
--------------------- ------------------
(DOLLARS IN MILLIONS, EXCEPT WHERE 1997 1996 1995 1997 1996 1995
NOTED) ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net interest income--tax-equivalent basis.. $ 577 $ 640 $ 641 $ 98 $100 $117
Provision for credit losses................ 23 34 35 -- -- --
Noninterest income......................... 669 620 692 294 300 298
Noninterest expense........................ 833 856 904 49 53 62
Net income................................. 253 244 244 246 221 233
Return on equity........................... 12% 8% 8% 39% 41% 33%
Operating efficiency ratio................. 67 68 68 N/M N/M N/M
Average loans (in billions)................ $20.0 $19.2 $18.7 $1.5 $1.2 $1.4
Average assets (in billions)............... 40.3 44.8 54.1 18.8 18.9 24.3
Average common equity (in billions)........ 2.2 2.7 2.7 0.6 0.6 0.7
</TABLE>
- ------
N/M--Not meaningful.
Corporate Banking posted 1997 net income of $253 million, for a return on
equity of 12%. These results exclude a loss of $48 million from a segregated
derivatives trading portfolio that is being managed separately from ongoing
customer and other proprietary trading positions.
Corporate Banking's profitability continues to progress toward the 15%
return on equity target. This is being achieved through an intense focus on
customer returns and efficient capital allocation, as well as growth in fee-
based activities and ongoing expense management discipline. Market-driven
revenue increased substantially in 1997, yet remains an area of potential
further improvement.
Corporate Investments contributed $246 million of net income and earned a
39% return on equity for 1997. Leasing income and securities gains continued to
provide the vast majority of revenue for Corporate Investments. Additionally,
the lower tax rate for this business segment reflects the effects of
tax-advantaged investments.
CREDIT CARD
<TABLE>
<CAPTION>
(PRESECURITIZED)
(DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net interest income--tax-equivalent basis............... $1,535 $1,500 $1,174
Provision for credit losses............................. 1,244 1,029 708
Noninterest income...................................... 752 651 560
Noninterest expense..................................... 567 558 541
Net income.............................................. 295 350 301
Return on equity........................................ 22% 31% 37%
Operating efficiency ratio.............................. 25 26 31
Average loans (in billions)............................. $ 17.4 $ 17.6 $ 14.3
Average common equity (in billions)..................... 1.3 1.1 0.8
</TABLE>
The Corporation's Credit Card business earned $295 million for 1997, or about
19% of total net income. Although earnings were down from a year ago,
profitability for this business remained strong. Its return on equity was 22%.
Credit losses continued to increase in 1997. Driven by rising personal
bankruptcies, provision for credit losses increased more than 20%, or $215
million. Likewise, the net charge-off rate increased to 7.2% from 5.8% a year
earlier. The trend throughout the year, however, did indicate signs of
stabilization in the last two quarters. As a result of this weak credit
environment, the capital assigned to Credit Card increased to $1.3 billion
for the year.
16
<PAGE> 35
Average loans were relatively flat for the year at $17.4 billion. At the same
time, industry pricing remained competitive, which led to only a slight
improvement in spread income. Fee income increased 15% for the year as an array
of new pricing initiatives took effect. Operating expenses were well controlled,
growing less than 2%.
Credit Card's return on equity is targeted in the 20-25% range over the long
term, making it one of the Corporation's most attractive businesses.
OTHER ACTIVITIES
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN MILLIONS, EXCEPT WHERE NOTED) ---- ---- ----
<S> <C> <C> <C>
Total revenue.................................................. $ 12 $ 12 $ 42
Noninterest expense............................................ 7 8 277
Net income (loss).............................................. 20 5 (159)
Average assets (in billions)................................... 0.4 0.2 0.4
</TABLE>
For 1997, net income of $20 million was recorded as Other Activities. Included
in this result was a $48 million loss from a segregated portion of the
derivatives trading portfolio. Offsetting this was a gain of $45 million from
the sale of an investment management business as well as other asset sales
gains. Furthermore, various corporate tax credits are reflected in this
category for 1997.
The 1995 loss represents primarily merger-related charges.
Earnings Analysis
SUMMARY
The Corporation reported net income for 1997 of $1.525 billion, or $4.90 per
share, compared with $1.436 billion, or $4.33 per share, for 1996 and $1.150
billion, or $3.41 per share, for 1995.
Operating earnings for 1996, which excluded the after-tax effect of a
special FDIC assessment, were $1.447 billion, or $4.36 per share. Operating
earnings for 1995, which excluded the after-tax effect of the merger-related
charges, were $1.341 billion, or $3.99 per share.
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) ------- ------- -------
<S> <C> <C> <C>
Net interest income--tax-equivalent basis........... $ 3,667 $ 3,722 $ 3,311
Provision for credit losses......................... 725 735 510
Noninterest income.................................. 2,751 2,548 2,591
Operating expense................................... 3,332 3,253 3,268
Net income.......................................... 1,525 1,436 1,150
Common Share Data
Basic earnings per share.......................... $ 4.99 $ 4.44 $ 3.48
Average shares outstanding (in thousands)......... 301,421 316,765 320,049
Diluted earnings per share........................ $ 4.90 $ 4.33 $ 3.41
Average shares outstanding assuming full dilution
(in thousands).................................. 306,977 326,731 329,598
Return on assets.................................... 1.41% 1.28% 0.94%
Return on common stockholders' equity............... 18.6 17.0 14.3
Net interest margin
Reported.......................................... 3.95 3.83 3.14
Adjusted (1)...................................... 4.54 4.44 3.89
Operating efficiency ratio.......................... 51.9 51.9 55.4
</TABLE>
- ----------
(1) Adjusted for securitization of credit card receivables and the activities of
FCCM.
17
<PAGE> 36
Adjusted net interest income for 1996 increased by $421 million, or 11%,
from that of 1995. Adjusted net interest margin improved to 4.44%, compared
with 3.89% for 1995. Loan growth in both the Credit Card and Regional Banking
businesses, coupled with the previously disclosed reduction of $25 billion of
targeted low-margin assets, accounted for this improvement.
NONINTEREST INCOME
In order to provide more meaningful trend analysis, credit card fee
revenue and total noninterest income in the following table have been adjusted
to exclude the effect of credit card securitizations. Credit card fee revenue
excludes the net credit card servicing revenue (spread income less credit
costs) associated with securitized credit card receivables.
<TABLE>
<CAPTION>
PERCENT
INCREASE (DECREASE)
---------------------
1997 1996 1995 1996-1997 1995-1996
(DOLLARS IN MILLIONS) ------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Combined trading profits...................... $ 81 $ 58 $ 210 40% (72)%
Equity securities gains....................... 182 255 253 (29) 1
Investment securities gains (losses).......... 43 27 (16) 59 N/M
------ ------ ------
Market-driven revenue....................... 306 340 447 (10) (24)
Gain on sale of loans......................... 58 26 7 N/M N/M
Gain on sale of investment management
business.................................... 45 -- -- N/M --
Accelerated disposition portfolio gains....... 2 6 37 (67) (84)
------ ------ ------
Adjusted market-driven revenue.............. 411 372 491 10 (24)
Credit card fee revenue (1)................... 795 694 579 15 20
Fiduciary and investment management fees...... 407 400 404 2 (1)
Service charges on deposits................... 460 414 382 11 8
Other service charges and commissions......... 476 389 353 22 10
------ ------ ------
Adjusted fee-based revenue.................. 2,138 1,897 1,718 13 10
Other......................................... 93 59 60 58 (2)
------ ------ ------
Adjusted noninterest income................... $2,642 $2,328 $2,269 13 3
====== ====== ======
</TABLE>
- ----------
(1) Net credit card servicing revenue totaled $109 million in 1997, $220 million
in 1996, and $322 million in 1995.
N/M--Not meaningful.
Combined trading profits totaled $81 million for 1997, compared with $58
million for 1996 and $210 million for 1995. The trading performance for 1997
was disappointing. Derivative trading results were negatively affected by
losses recognized in specific portfolio positions, as well as by a volatile
interest rate environment. Foreign exchange trading, on the other hand,
experienced better results, benefiting from the volatility in foreign currency
markets. The following table provides additional details on total revenue from
trading businesses, including both trading profits and net interest income
generated from these activities.
TRADING REVENUE
<TABLE>
<CAPTION>
1997 1996 1995
(IN MILLIONS) ---- ---- ----
<S> <C> <C> <C>
Foreign exchange and derivatives............................ $ 72 $ 63 $ 83
Fixed income and derivatives................................ 11 48 106
Emerging markets............................................ -- 6 6
Other trading............................................... 89 58 97
---- ---- ----
Total....................................................... $172 $175 $292
==== ==== ====
</TABLE>
Equity securities gains were $182 million for 1997, compared with $255 million
for 1996 and $253 million for 1995. Investment securities gains totaled $43
million for 1997, compared with gains of $27 million for 1996 and losses of $16
million for 1995.
19
<PAGE> 37
principal factors behind the increased exposure in 1997, which was
somewhat offset by reduced exposure in derivatives contracts.
STRUCTURAL INTEREST RATE RISK MANAGEMENT
Interest rate risk exposure from the Corporation's non-trading activities
is actively managed with the goal of minimizing the impact of interest rate
volatility on current earnings and on the market value of equity. The
measurement tools used to monitor the overall interest rate risk exposure of
both the on- and off-balance-sheet positions include static gap analysis,
earnings sensitivity modeling and market value sensitivity (value-at-risk)
analysis.
Static gap analysis is a representation of the net difference between the
amount of assets, liabilities, equity and off-balance-sheet instruments
repricing within a cumulative calendar period. Earnings simulation analysis and
value-at-risk are more dynamic measures designed to capture the interest rate
risk of the embedded option positions that cannot be measured through static
gap analysis. The embedded options include interest rate, prepayment and early
withdrawal options, lagged interest rate changes, administered interest rate
products, and certain off-balance-sheet sensitivities. These positions
represent the primary risk of loss to the Corporation as they are complex risk
positions that are difficult to offset completely.
Earnings sensitivity analysis measures the estimated change to pretax
earnings of various interest rate movements. The Corporation is modeled as an
on-going business, including assumptions on anticipated changes in balance sheet
mix, planned growth, asset sales and/or asset securitizations. The base case
scenario is established using current market interest rates. The comparative
scenarios assume an immediate parallel shock of the current yield curve in
increments of plus or minus 100 basis point and plus or minus 200 basis point
rate movements. The comparative interest-rate scenarios are used for analytical
purposes and do not necessarily represent management's view of future market
movements. Estimated earnings for each scenario are calculated over a
forward-looking 12-month horizon.
For residential mortgage whole loans and mortgage-backed securities, the
earnings simulation modeling captures the changing prepayment behavior under
changing interest rate environments. Industry estimates are used to dynamically
model the prepayment speeds of the various coupon segments of the portfolio.
Additionally, the model measures the impact of interest rate caps and floors on
adjustable-rate mortgage products.
Management assumptions regarding the level of interest rate or balance
changes on indeterminate maturity deposit products (passbook savings, money
market, NOW and demand deposits) for a given level of market rate changes have
been developed through a combination of historical analysis and future expected
pricing behavior. Interest rate caps and floors on all products are included to
the extent that they are exercised in the 12-month simulation period.
Sensitivity of service fee income to market interest rate levels, such as those
related to securitized credit card receivables, cash management products and
mortgage servicing, is included as well. Interest rate risk in trading
activities and other activities, primarily certain investment securities
classified as available-for-sale, is managed principally as trading risk.
The Corporation's policy is to limit the change in annual pretax earnings
to $100 million from an immediate parallel change in interest rates of 200 basis
points. At year-end, the Corporation had the following estimated earnings
sensitivity profile.
<TABLE>
<CAPTION>
IMMEDIATE
CHANGE IN RATES
---------------
+200 BP -200 BP
DECEMBER 31, 1997 (IN MILLIONS) ------- -------
<S> <C> <C>
Annual pretax earnings change................................... $ 32 $(16)
</TABLE>
While the earnings sensitivity analysis includes management's best estimate of
interest rate and balance sheet reaction to various market rate movements, the
actual behavior will likely differ from that projected. Recalibration of the
assumptions and adjustments to the modeling techniques are made as needed to
improve the
26
<PAGE> 38
accuracy of the risk measurement results. Interpretation of the results must
also consider that the actual movements of the market interest rates can
include changes in the shape of the yield curve and changes in the basis
relationship between various market rates, neither of which is captured in the
sensitivity measure. Finally, for some embedded option positions, the risk
exposure occurs at a time period beyond the 12 months captured in the earnings
sensitivity analysis. Management utilizes the value-at-risk technique to
measure these longer-term risk positions.
Access to the derivatives market is an important element in maintaining the
Corporation's interest rate risk position within policy guidelines. In general,
the assets and liabilities generated through ordinary business activities do
not naturally create offsetting positions with respect to repricing or maturity
characteristics. Using off-balance-sheet instruments, principally interest rate
swaps (asset and liability management ("ALM") derivatives), the interest rate
sensitivity of specific on-balance-sheet transactions, as well as pools of
assets or liabilities, is adjusted to maintain the desired interest rate risk
profile. At year-end 1997, the notional value of ALM interest rate swaps
totaled $9.288 billion, including $5.189 billion against specific transactions
and $4.099 billion against specific pools of assets or liabilities.
ASSET AND LIABILITY MANAGEMENT DERIVATIVES--NOTIONAL PRINCIPAL
<TABLE>
<CAPTION>
RECEIVE FIXED PAY FIXED
PAY FLOATING RECEIVE FLOATING BASIS SWAPS
----------------- -------------------- -----------
DECEMBER 31, 1997 (IN SPECIFIC POOL SPECIFIC POOL POOL TOTAL
MILLIONS) -------- ------ ---------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Swaps associated with:
Loans................................ $ -- $ 451 $ 98 $ -- $ -- $ 549
Investment securities................ -- -- 203 -- -- 203
Securitized credit card receivables.. -- 83 -- -- -- 83
Deposits............................. 50 2,450 -- -- -- 2,500
Funds borrowed
(including long-term debt)......... 4,588 -- 250 75 1,040 5,953
------ ------ ----- ------- ------ ------
Total.............................. $4,638 $2,984 $ 551 $ 75 $1,040 $9,288
====== ====== ===== ======= ====== ======
Other ALM Contracts (1)................ $ 250
======
</TABLE>
- -----------
(1) Primarily reflects the use of forward contracts.
Swaps used to adjust the interest rate sensitivity of specific
transactions will not need to be replaced at maturity since the corresponding
asset or liability will mature along with the swap. However, swaps against the
asset and liability pools will have an impact on the overall risk position as
they mature and may need to be reissued to maintain the same interest rate risk
profile. These swaps could create modest earnings sensitivity to changes
in interest rates.
Substantially all ALM interest rate swaps are standard swap contracts. The
variable interest rates, which generally are the prime rate, federal funds rate
or the one-month, three-month and six-month London interbank offered rates
("LIBOR") in effect on the date of repricing, are assumed to remain constant.
However, the variable interest rates will change and would affect the related
weighted average information presented in the table.
27
<PAGE> 39
ASSET AND LIABILITY MANAGEMENT SWAPS--MATURITIES AND RATES
<TABLE>
<CAPTION>
DECEMBER 31, 1997 (DOLLARS IN 1998 1999 2000 2001 2002 THEREAFTER TOTAL
MILLIONS) ---- ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating swaps
Notional amount............... $3,435 $649 $781 $779 $381 $1,597 $7,622
Weighted average
Receive rate................ 6.16% 6.24% 6.17% 7.15% 7.59% 6.68% 6.45%
Pay rate.................... 5.99 6.06 5.95 5.98 6.03 5.97 5.99
Pay fixed/receive floating swaps
Notional amount............... $ 62 $ 88 $116 $ 33 $291 $ 36 $ 626
Weighted average
Receive rate................ 6.03% 5.97% 5.91% 5.99% 5.99% 5.99% 5.98%
Pay rate.................... 7.93 7.89 7.67 7.64 6.48 7.51 7.16
Basis swaps
Notional amount............... $1,015 $ 25 -- -- -- -- $1,040
Weighted average Receive rate. 5.85% 5.87% -- -- -- -- 5.85%
Pay rate.................... 5.86 5.96 -- -- -- -- 5.87
------ ---- ---- ---- ---- ------ ------
Total notional amount..... $4,512 $762 $897 $812 $672 $1,633 $9,288
====== ==== ==== ==== ==== ====== ======
</TABLE>
FOREIGN EXCHANGE RISK MANAGEMENT
Wherever possible, foreign currency-denominated assets are funded with
liability instruments denominated in the same currency. If a liability
denominated in the same currency is not immediately available or desired, a
forward foreign exchange contract is used to fully hedge the risk due to
cross-currency funding.
To minimize the earnings and capital impact of translation gains or losses
measured on an after-tax basis, the Corporation uses forward foreign exchange
contracts to hedge the exposure created by investments in overseas branches and
subsidiaries.
Credit Risk Management
The Corporation has developed policies and procedures to manage the level and
composition of risk in its credit portfolio. The objective of this credit risk
management process is to quantify and manage credit risk on a portfolio basis
as well as to reduce the risk of a loss resulting from a customer's failure to
perform according to the terms of a transaction.
Customer transactions create credit exposure that is reported both on and
off the balance sheet. On-balance-sheet credit exposure includes such items as
loans. Off-balance-sheet credit exposure includes unfunded credit commitments
and other credit-related financial instruments. Credit exposures resulting from
derivative financial instruments are reported both on and off the balance sheet
as explained beginning on page 35.
28
<PAGE> 40
COMMERCIAL RISK MANAGEMENT
The commercial risk portfolio includes all domestic and foreign commercial
credit exposure. Credit exposure includes the credit risks associated with both
on- and off-balance-sheet financial instruments.
Commercial loans increased 7% from $39.4 billion at December 31, 1996, to
$42.3 billion at December 31, 1997. Nonperforming commercial assets increased
$36 million to $326 million at year-end 1997, from $290 million at December 31,
1996. Commercial net charge-offs were $42 million in 1997, compared with
$62 million in 1996 and $12 million in 1995.
In the commercial portfolio, credit quality is rated according to defined
levels of credit risk. The lower categories of credit risk are equivalent to
the four bank regulatory classifications: Special Mention, Substandard,
Doubtful and Loss. These categories define levels of credit deterioration at
which it may be increasingly difficult for the Corporation to be fully repaid
without restructuring the credit.
Each quarter, the Corporation conducts an asset-by-asset review of
significant lower-rated credit or country exposure. Potential losses are
identified during this review, and reserves are adjusted accordingly.
COMMERCIAL REAL ESTATE
Commercial real estate consists primarily of loans secured by real estate as
well as certain loans that are real estate-related. A loan is categorized as
real estate-related when 80% or more of the borrower's revenues are derived
from real estate activities and the loan is not collateralized by cash or
marketable securities.
At December 31, 1997, commercial real estate loans totaled $6.7 billion,
or 16% of commercial loans, compared with $6.2 billion, or 16% of commercial
loans, at December 31, 1996. During 1997, net recoveries in the commercial real
estate portfolio segment were $11 million, compared with less than $1 million
in 1996. Nonperforming commercial real estate assets, including other real
estate, totaled $77 million, or 1.1% of related assets, at December 31, 1997,
compared with $128 million, or 2.1% of related assets, at December 31, 1996.
FOREIGN OUTSTANDINGS
The table below presents a breakout of foreign outstandings for the past two
years, where such outstandings exceeded 1.0% of total assets. The amounts have
been prepared using the Federal Financial Institutions Examination Council's
reporting guidelines, which were revised in 1997. Under the revised guidelines,
local country claims, which include both local and nonlocal currency activity,
are reported net of local country liabilities. The 1996 amounts have been
restated to conform to the revised guidelines. Included in claims for both
periods are loans, balances with banks, acceptances, securities, equity
investments, accrued interest and other monetary assets. For 1997, cross-border
claims include the current credit exposure on derivative contracts, which is
net of master netting agreements. This current credit exposure totaled $641
million for Japan, $181 million for France and $189 million for Korea. Current
credit exposure on derivative contracts is not included in the reported 1996
amounts.
<TABLE>
<CAPTION>
CROSS-BORDER CLAIMS
-------------------
TOTAL CROSS
GOVERNMENTS NET LOCAL BORDER & NET
& OFFICIAL COUNTRY LOCAL COUNTRY
DECEMBER 31 BANKS INSTITUTIONS OTHER CLAIMS CLAIMS
----------- ----- ------------ ----- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Japan (1)........ 1997 $4,225 $ -- $386 $ -- $4,611
1996 3,782 -- 22 -- 3,804
France........... 1997 1,137 231 249 -- 1,617
1996 * * * * *
Korea (2)........ 1997 570 10 685 256 1,521
1996 660 -- 487 183 1,330
</TABLE>
- --------------
(1) At year-end 1997 and 1996, net local country claims were reduced by local
country liabilities of $83 million and $161 million, respectively.
(2) At year-end 1997 and 1996, net local country claims were reduced by local
country liabilities of $31 million and $29 million, respectively.
*Represents less than 1% of total assets
33
<PAGE> 41
At December 31, 1997, the only country for which cross-border and net local
country claims totaled between 0.75% and 1.0% of total assets was the
Netherlands. Such outstandings totaled $1.114 billion and included $79 million
of current credit exposure on derivative contracts.
At December 31, 1996, there were no countries for which cross-border and
net local country claims totaled between 0.75% and 1.0% of total assets.
At December 31, 1995, the Corporation's foreign outstandings (presented as
cross-border and nonlocal currency claims) to Japan ($6.329 billion), the
United Kingdom ($1.368 billion) and France ($1.264 billion) each exceeded 1.0%
of total assets. At that date, the only country for which cross-border and
nonlocal currency claims totaled between 0.75% to 1.0% of total assets was
Korea ($1.023 billion).
Derivative Financial Instruments
The Corporation uses a variety of derivative financial instruments in its
trading, asset and liability management, and Corporate Investment activities.
These instruments include interest rate, currency, equity and commodity swaps,
forwards, spot, futures, options, caps, floors, forward rate agreements, and
other conditional or exchange contracts, and include both exchange-traded and
over-the-counter contracts. See Note 16, beginning on page 62, for a discussion
of the nature and terms of derivative financial instruments.
NOTIONAL PRINCIPAL OR CONTRACTUAL AMOUNTS OF DERIVATIVE FINANCIAL INSTRUMENTS
The following tables represent the gross notional principal or contractual
amounts of outstanding derivative financial instruments used in certain
activities. These amounts indicate the volume of transaction activity, and they
do not represent the market or credit risk associated with these instruments.
In addition, such volumes do not reflect the netting of offsetting
transactions.
<TABLE>
<CAPTION>
ASSET AND
LIABILITY CORPORATE
TRADING MANAGEMENT INVESTMENTS TOTAL
-------- ---------- ----------- -----
DECEMBER 31, 1997 (IN BILLIONS)
<S> <C> <C> <C> <C>
Interest rate contracts............... $ 817.9 $ 9.5 $ -- $ 827.4
Foreign exchange contracts............ 422.5 1.6 -- 424.1
Equity contracts...................... 12.3 -- 0.1 12.4
Commodity contracts................... 2.7 -- -- 2.7
-------- ----- ---- --------
Total............................... $1,255.4 $11.1 $0.1 $1,266.6
======== ===== ==== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 (IN BILLIONS)
<S> <C> <C> <C> <C>
Interest rate contracts............... $ 644.1 $ 9.6 $ -- $ 653.7
Foreign exchange contracts............ 375.4 1.7 -- 377.1
Equity contracts...................... 8.6 -- 0.2 8.8
Commodity contracts................... 3.4 -- -- 3.4
-------- ----- ---- --------
Total............................... $1,031.5 $11.3 $0.2 $1,043.0
======== ===== ==== ========
</TABLE>
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments used in trading activities are valued at
estimated fair value. Such instruments include swaps, forwards, spot, futures,
options, caps, floors and forward rate agreements in the interest rate, foreign
exchange, equity and commodity markets. The estimated fair values are based on
quoted market prices or pricing and valuation models on a present value basis
using current market information. Realized and unrealized gains and losses are
included in noninterest income as combined trading profits. Where appropriate,
compensation for credit risk and ongoing servicing is deferred and recorded as
income over the terms of the derivative financial instruments.
34
<PAGE> 42
Derivative financial instruments used in ALM activities, principally interest
rate swaps, are required to meet specific criteria. Such interest rate swaps:
are designated as ALM derivatives; are linked to and adjust the interest rate
sensitivity of a specific asset, liability, firm commitment, or anticipated
transaction or a specific pool of transactions with similar risk
characteristics; and are effective in reducing the Corporation's structural
interest rate risk. Interest rate swaps that do not meet these criteria are
designated as derivatives used in trading activities and are accounted for at
estimated fair value.
Income or expense on most ALM derivatives used to manage interest rate exposure
is recorded on an accrual basis, as an adjustment to the yield of the linked
exposures over the periods covered by the contracts. This matches the income
recognition treatment of that exposure, generally assets or liabilities carried
at historical cost, which are recorded on an accrual basis. If an interest rate
swap is terminated early, any resulting gain or loss is deferred and amortized
as an adjustment of the yield on the linked interest rate exposure position
over the remaining periods originally covered by the terminated swap. If all or
part of a linked position is terminated, e.g., a linked asset is sold or
prepaid, or if the amount of an anticipated transaction is likely to be less
than originally expected, the related pro rata portion of any unrecognized gain
or loss on the swap is recognized in earnings at that time, and the related pro
rata portion of the swap is subsequently accounted for at estimated fair value.
Purchased option, cap and floor contracts are reported in derivative
product assets, and written option, cap and floor contracts are reported in
derivative product liabilities. For other derivative financial instruments, an
unrealized gain is reported in derivative product assets and an unrealized loss
is reported in derivative product liabilities. However, fair value amounts
recognized for derivative financial instruments executed with the same
counterparty under a legally enforceable master netting arrangement are reported
on a net basis. Cash flows from derivative financial instruments are reported
net as operating activities.
INCOME RESULTING FROM DERIVATIVE FINANCIAL INSTRUMENTS
A discussion of the Corporation's income from derivatives used in trading
activities is included in the "Trading Revenue" table on page 19.
The Corporation uses interest rate derivative financial instruments to
reduce structural interest rate risk and the volatility of net interest margin.
Net interest margin reflects the effective use of these derivatives. Without
their use, net interest income would have been lower by $26 million in 1997 and
$33 million in 1996, and higher by $12 million in 1995.
CREDIT EXPOSURE RESULTING FROM DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation maintains risk management policies that monitor and limit
exposure to credit risks. For a further discussion of credit risks, see the
"Credit Risk Management" section, beginning on page 28.
Credit exposure from derivative financial instruments arises from the risk of a
customer default on the derivative contract. The amount of loss created by the
default is the replacement cost or current fair value of the defaulted contract.
The Corporation utilizes master netting agreements whenever possible to reduce
its credit exposure from customer default. These agreements allow the netting of
contracts with unrealized losses against contracts with unrealized gains to the
same customer, in the event of a customer default. The table below shows the
impact of these master netting agreements.
<TABLE>
<CAPTION>
1997 1996
DECEMBER 31 (IN MILLIONS) -------- -------
<S> <C> <C>
Gross replacement cost........................................ $ 14,675 $14,933
Less: Adjustment due to master netting agreements........... (10,035) (9,876)
-------- -------
Current credit exposure....................................... 4,640 5,057
Less: Unrecognized net gains due to nontrading activity..... (93) (83)
-------- -------
Balance sheet exposure........................................ $ 4,547 $ 4,974
======= =======
</TABLE>
35
<PAGE> 43
Current credit exposure represents the total loss that the Corporation would
have suffered had every counterparty been in default on those dates. These
amounts are reduced by the unrealized and unrecognized gains on derivatives
used in asset and liability management activities to arrive at the balance
sheet exposure.
Since a derivative's replacement cost, measured by its fair value, is subject
to change over the contract's life, the Corporation's evaluation of credit risk
incorporates potential increases to the contract's fair value. Potential
exposure is calculated with a statistical model that estimates changes over
time in interest rates, exchange rates and other relevant factors using a 95%
confidence level. This potential credit exposure is calculated on a portfolio
basis, incorporating master netting agreements as well as any natural offsets
that exist between contracts within the customer's portfolio. In total, the
potential credit exposure was approximately $6.9 billion higher than the
current credit exposure at December 31, 1997, and $6.3 billion higher at
December 31, 1996.
Year 2000 Compliance
The Corporation has established an overall plan to address systems-related Year
2000 issues. The plan calls for either modification to, or replacement of,
approximately 700 existing business system applications. Management's best
estimate of the cost of this Year 2000 compliance program related to system
modifications is approximately $100 million, of which approximately $45 million
was incurred by December 31, 1997. Such costs are charged to expense as
incurred. The Corporation currently anticipates that substantially all of the
remaining work under this program, including the testing of critical systems,
will be completed by the end of 1998.
A contingency plan has been established for critical business system
applications to mitigate potential delays or other problems associated with
either new system replacements or established vendor delivery dates.
The Corporation, however, continues to bear some risk related to the Year 2000
issue and also could be adversely affected if other entities (e.g., vendors or
customers) not affiliated with the Corporation do not appropriately address
their own Year 2000 compliance issues.
Capital Management
SELECTED CAPITAL RATIOS
<TABLE>
<CAPTION>
CORPORATE
1997 1996 1995 1994 1993 GUIDELINE
DECEMBER 31 ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Common equity/total assets.............. 6.8% 8.2% 6.5% 6.4% 7.2% N/A
Tangible common equity ratio............ 6.5 7.8 6.1 6.0 6.7 N/A
Stockholders' equity/total assets....... 7.0 8.6 6.9 6.9 8.1 N/A
Risk-based capital ratios (1)(2)
Tier 1................................ 7.9 9.2 7.8 8.6 9.0 7-8%
Total................................. 11.7 13.3 11.8 13.0 13.6 11-12%
Leverage ratio (1)(2)................... 7.8 9.3 6.9 7.3 7.8 5.5-7.0%
Double leverage ratio (1)............... 117 105 115 113 108 120%*
Dividend payout ratio................... 33 34 40 34 28 30-40%
</TABLE>
- ------------
(1) Includes trust preferred capital securities.
(2) 1997 ratios include activities of FCCM. For prior periods, ratios were
calculated net of the investment in FCCM.
N/A--Not applicable.
* Less than or equal to.
36
<PAGE> 44
Capital represents the stockholders' investment on which the Corporation
strives to generate attractive returns. It is the foundation of a cohesive risk
management framework and links return with risk. Capital supports business
growth and provides protection to depositors and creditors.
Key capital management objectives are to:
. generate attractive returns to enhance shareholder value;
. maintain a capital base commensurate with overall risk profile;
. maintain strong capital ratios relative to peers; and
. meet or exceed all regulatory guidelines.
In conjunction with the annual financial planning process, a capital plan
is established to ensure that the Corporation and all of its subsidiaries have
capital structures consistent with prudent management principles and regulatory
requirements.
ECONOMIC CAPITAL
In the normal course of business, the Corporation assumes several types of risk:
credit, liquidity, structural interest rate, market and business. An economic
capital framework has been constructed to determine the total capital the
Corporation needs to support these risks and to allocate this capital to
business segments, products and customers based on the amount and type of risk
inherent in the activity. Return on economic capital is a key decision-making
tool used for managing risk-taking activities, and for ensuring that capital is
efficiently and profitably employed. The Corporation's economic capital
framework was revised in the first quarter of 1997, as referenced in the
"Business Segments" section beginning on page 14. Enhancements to the framework
were made to provide a more current and complete assessment of the risks
inherent in the Corporation's business activities.
Capital is allocated for two types of risk: portfolio and business. Portfolio
risk capital is designed to cover the potential loss of value arising from
credit, market and investment risks. The amount of such capital is calculated
to absorb unexpected losses to a desired level of statistical confidence. The
potential for loss is based on the analysis of historical loss experience and
market expectations. Business risk capital is designed to incorporate
hard-to-quantify risks such as event and technology risks, and operating
leverage. It is determined by first examining the capital structures of
publicly traded companies engaged in activities comparable to the Corporation,
where possible. Secondly, the volatility of a business' operating margin
(excluding credit losses and market-related activities) is also used in the
assessment of business risk capital.
The Corporation has established a Tier 1 capital target necessary to provide
management flexibility while maintaining an adequate capital base for its
overall risk profile, as measured by the economic capital framework. The long-
term target for the Tier 1 capital ratio is 7% to 8%. This ratio is currently
managed to 8%, which is used for line-of-business capital allocations.
Excess capital, defined as common equity above that required for the 8% Tier 1
capital ratio target, is available for core business investment and
acquisitions. If attractive long-term opportunities are not available over time
in core businesses, management intends to return any excess capital to
stockholders, typically by way of stock repurchase programs and/or dividend
increases. During 1997, this excess amount averaged $70 million, compared with
$171 million in 1996. The repurchase of common shares in 1997 was used to keep
excess capital to a minimum.
REGULATORY CAPITAL
The Corporation aims to maintain regulatory capital ratios, including those of
the Principal Banks, in excess of the well-capitalized guidelines. To ensure
that this goal is met, target ranges of 7% to 8% have been established for Tier
1 capital and 11% to 12% for total risk-based capital. Both targets exceed the
respective well-capitalized guidelines of 6% and 10%. The Tier 1 and total
capital ratios for the past three years have exceeded or been at the upper end
of the target ranges.
37
<PAGE> 45
In January 1997, a wholly owned consolidated trust subsidiary of the
Corporation issued in the aggregate $250 million of preferred securities,
bringing the total issued on behalf of the Corporation to $1 billion. These
"Trust Preferred Capital Securities" are tax-advantaged issues that qualify for
Tier 1 capital treatment.
TIER 1 AND TOTAL CAPITAL RATIOS--PERIOD END Bar Graph
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Tier 1 7.8% 9.2% 7.9%
Total 11.8% 13.3% 11.7%
Regulatory Guidelines
Tier 1 6% 6% 6%
Total 10% 10% 10%
</TABLE>
The components of the Corporation's regulatory risk-based capital and risk-
weighted assets are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
DECEMBER 31 (IN MILLIONS)
<S> <C> <C> <C>
Regulatory Risk-Based Capital
Tier 1 capital..................................... $ 8,541 $ 9,186 $ 7,750
Tier 2 capital..................................... 4,118 4,146 4,017
-------- -------- -------
Total capital.................................... $ 12,659 $ 13,332 $11,767
======== ======== =======
Regulatory Risk-Weighted Assets
Balance sheet risk-weighted assets................. $ 76,700 $ 71,177 $71,040
Off-balance-sheet risk-weighted assets............. 31,883 29,078 28,403
-------- -------- -------
Total risk-weighted assets......................... $108,583 $100,255 $99,443
======== ======== =======
</TABLE>
In arriving at Tier 1 and total capital, such amounts are reduced by goodwill
and other nonqualifying intangible assets as shown below.
INTANGIBLE ASSETS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
DECEMBER 31 (IN MILLIONS)
<S> <C> <C> <C>
Goodwill........................................ $365 $397 $446
Other nonqualifying intangibles................. 3 3 12
---- ---- ----
Subtotal...................................... 368 400 458
Qualifying intangibles.......................... 64 69 94
---- ---- ----
Total intangibles............................. $432 $469 $552
==== ==== ====
</TABLE>
38
<PAGE> 46
The Principal Banks have exceeded the well-capitalized guidelines for the
past three years, as shown in the following tables. By maintaining regulatory
well-capitalized status, these banks benefit from lower FDIC deposit premiums.
<TABLE>
<CAPTION>
NBD NBD
FNBC MICHIGAN FCCNB ANB INDIANA
---- -------- ----- --- -------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Risk-Based Capital Ratios
Tier 1 capital.......................... 7.7% 9.0% 11.6% 8.5% 8.4%
Total capital........................... 11.0 13.5 14.3 11.7 11.3
Leverage ratio............................ 7.6 8.9 12.6 9.3 7.8
DECEMBER 31, 1996
Risk-Based Capital Ratios
Tier 1 capital.......................... 7.8% 9.3% 10.6% 8.7% 9.7%
Total capital........................... 11.2 13.5 13.5 11.5 11.0
Leverage ratio............................ 7.6 9.6 10.6 9.4 8.9
DECEMBER 31, 1995
Risk-Based Capital Ratios
Tier 1 capital.......................... 7.6% 7.6% 10.0% 9.2% 10.3%
Total capital........................... 11.3 10.9 12.1 11.5 11.5
Leverage ratio............................ 5.9 7.4 11.7 9.2 7.9
</TABLE>
Amendments to the risk-based capital requirements, incorporating market
risk, became effective January 1, 1998. Under the new market risk requirements,
capital will be allocated to support the amount of market risk related to the
Corporation's ongoing trading activities. The market risk rules apply only to
institutions with significant trading activities. Currently, the Corporation and
FNBC will be subject to the new rules. Had the rules been in effect at December
31, 1997, the Corporation's Tier 1 and Total risk-based capital ratios would
have been 7.8% and 11.6%, respectively, and FNBC's Tier 1 and Total risk-based
capital ratios would have been 7.6% and 10.8%, respectively.
DIVIDENDS
The Corporation's common dividend policy reflects its earnings outlook,
desired payout ratios, the need to maintain an adequate capital level and
alternative investment opportunities. The Corporation is currently targeting a
common dividend payout ratio in the range of 30% to 40% of operating earnings
over time. In November 1997, the Corporation increased its quarterly common
dividend to $0.44 per share. This represented a 10% increase over the previous
$0.40 per share dividend rate.
COMMON STOCK DIVIDENDS DECLARED (PER SHARE)
<TABLE>
<CAPTION>
Bar Graph
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
$1.35 $1.48 $1.64
</TABLE>
39
<PAGE> 47
REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING
FIRST CHICAGO NBD CORPORATION AND SUBSIDIARIES
To the Stockholders of First Chicago NBD Corporation:
FINANCIAL STATEMENTS
The management of First Chicago NBD Corporation and its subsidiaries is
responsible for the preparation, integrity and objectivity of the financial
statements and footnotes contained in this Form 10-K. The financial statements
have been prepared in accordance with generally accepted accounting principles
and are free from material fraud or error. The other financial information in
this Form 10-K is consistent with the financial statements. Where financial
information must of necessity be based upon estimates and judgments, they
represent the best estimates and judgments of management.
The Corporation's financial statements have been audited by Arthur Andersen
LLP, independent public accountants, whose appointment is ratified by the
stockholders. The independent public accountants' responsibility is to express
an opinion on the Corporation's financial statements. As described further in
the report that follows, their opinion is based on their audit, which was
conducted in accordance with generally accepted auditing standards and is
believed by them to provide a reasonable basis for their opinion. Management has
made available to Arthur Andersen LLP all of the Corporation's financial records
and related data. Furthermore, management believes that all representations made
to Arthur Andersen LLP during their audit were valid and appropriate.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management is also responsible for establishing and maintaining the
Corporation's internal control structure that provides reasonable, but not
absolute, assurance as to the integrity and reliability of the financial
statements. Management continually monitors the internal control structure for
compliance with established policies and procedures. The Corporation maintains a
strong internal auditing program that independently assesses the effectiveness
of the internal control structure. The Audit Committee of the Board of
Directors, composed entirely of outside Directors, oversees the Corporation's
financial reporting process on behalf of the Board of Directors and has
responsibility for appointing the independent public accountants for the
Corporation. The Audit Committee reviews with the independent public accountants
the scope of their audit and audit reports and meets with them on a scheduled
basis to review their findings and any action to be taken thereon. In addition,
the Audit Committee meets with the internal auditors and with management to
review the scope and findings of the internal audit program and any actions to
be taken by management. The independent public accountants and the internal
auditors meet periodically with the Audit Committee without management's being
present.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the Corporation's affairs are conducted according to the
highest standards of personal and corporate conduct. This responsibility is
characterized by and reflected in the Corporation's integrity policies, which
address, among other things, the necessity of ensuring open communication within
the Corporation; potential conflicts of interest; compliance with all domestic
and foreign laws, including those related to financial disclosure; and the
confidentiality of proprietary information. The Corporation maintains a
systematic program to assess compliance with these policies.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error or the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to reliability of
financial statements and safeguarding of assets. Furthermore, because of changes
in conditions, internal control structure effectiveness may vary over time.
71
<PAGE> 48
The Corporation assessed its internal control structure over financial
reporting as of December 31, 1997, in relation to the criteria described in the
"Internal Control -- Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, the
Corporation believes that as of December 31, 1997, in all material respects, the
Corporation maintained an effective internal control structure over financial
reporting.
/s/ Verne G. Istock
----------------------------------
Chicago, Illinois, VERNE G. ISTOCK
January 15, 1998 Chairman, President and
Chief Executive Officer
/s/ Robert A. Rosholt
----------------------------------
ROBERT A. ROSHOLT
Executive Vice President and
Chief Financial Officer
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of First Chicago NBD Corporation:
We have audited the accompanying consolidated balance sheets of First
Chicago NBD Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
First Chicago NBD Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Chicago NBD Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Chicago, Illinois, /s/ Arthur Andersen LLP
January 15, 1998
<PAGE> 1
Exhibit 99.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Banc One Corporation:
As independent public accountants, we hereby consent to the incorporation
of our report dated January 15, 1998, on the consolidated financial statements
of First Chicago NBD Corporation included in this Current Report on Form 8-K
dated April 21, 1998, into Banc One Corporation's previously filed Form S-8
Registration Statement No. 33-03470, Form S-8 Registration Statement No.
33-14475, Form S-8 Registration Statement No. 33-10822, Form S-8 Registration
Statement No. 33-27849, Form S-8 Registration Statement No. 33-34294, Form S-8
Registration Statement No. 33-37400, Form S-8 Registration Statement No.
33-20890, Form S-8 Registration Statement No. 33-20990, Form S-8 Registration
Statement No. 33-40041, Form S-8 Registration Statement No. 33-45473, Form S-8
Registration Statement No. 33-46189, Form S-8 Registration Statement No.
33-53752, Form S-8 Registration Statement No. 33-55172, Form S-8 Registration
Statement No. 33-55174, Form S-8 Registration Statement No. 33-54100, Form S-8
Registration Statement No. 33-61760, Form S-8 Registration Statement No.
33-61758, Form S-8 Registration Statement No. 33-60424, Form S-8 Registration
Statement No. 33-50117, Form S-8 Registration Statement No. 33-55149, Form S-8
Registration Statement No. 33-55315, Form S-8 Registration Statement No.
33-58923, Form S-8 Registration Statement No. 333-00445, Form S-8 Registration
Statement No. 333-26929, Form S-8 Registration Statement No. 333-27631, Form S-8
Registration Statement No. 333-28281, Form S-8 Registration Statement No.
333-29395, Form S-8 Registration Statement No. 333-30419, Form S-8 Registration
Statement No. 333-30421, Form S-8 Registration Statement No. 333-30425, Form S-8
Registration Statement No. 333-30429, Form S-8 Registration Statement No.
333-32053 and Form S-8 Registration Statement No. 333-38387.
/s/ Arthur Andersen LLP
Chicago, Illinois,
April 21, 1998
<PAGE> 1
Exhibit 99.7
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On April 10, 1998, BANC ONE CORPORATION ("BANC ONE"), First Chicago NBD
("FCNBD") and HORNET Reorganization Corporation ("Newco") entered into an
Agreement and Plan of Reorganization (the "Agreement") pursuant to which BANC
ONE and FCNBD will be merged seriatim with and into Newco as the surviving
corporation in each case (such mergers together, the "Merger"). Common
shareholders of FCNBD will receive 1.62 shares of Newco common stock for each
share of FCNBD and common shareholders of BANC ONE will receive one share of
Newco common stock for each share of BANC ONE. The Merger will be accounted for
as a pooling of interests and pending regulatory and shareholder approval is
expected to be completed during the fourth quarter of 1998.
The following unaudited pro forma condensed combined financial
information and explanatory notes are presented to show the impact on the
historical financial position and results of operations of BANC ONE of the
Merger under the "pooling of interests" method of accounting. The unaudited pro
forma condensed combined financial information combines the historical financial
information of BANC ONE and FCNBD for the twelve-month periods ended December
31, 1997, 1996, and 1995, respectively.
The pro forma condensed combined financial information for each of the
three years ended December 31, 1997 is based on and derived from, and should be
read in conjunction with, (a) the historical consolidated financial statements
and the related notes thereto of BANC ONE, which are incorporated by reference
herein, and (b) the historical consolidated financial statements and the related
notes thereto of FCNBD, which are incorporated by reference herein.
The pro forma financial information does not give effect to BANC ONE's
pending acquisition of First Commerce Corporation as the acquisition is not
material to BANC ONE.
<PAGE> 2
BANC ONE CORPORATION & SUBSIDIARIES (CONSOLIDATED)
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 1997 (UNAUDITED)
(IN MILLIONS)
The following unaudited pro forma condensed combined balance sheet as of
December 31, 1997 is presented to show the impact on BANC ONE's historical
financial condition of the proposed Merger with FCNBD. The Merger has been
reflected under the "pooling of interests" method of accounting.
<TABLE>
<CAPTION>
PROFORMA
BANC ONE FCNBD ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Total cash and due from banks $ 7,727 $ 7,223 $ 14,950
Short-term investments 838 15,405 16,243
Trading assets 1,035 4,198 5,233
Investment securities 14,218 9,330 23,548
Loans and leases (net of unearned income and
allowance for credit losses) 83,089 67,316 150,405
Other assets 8,994 10,624 19,618
-------- -------- ------- --------
TOTAL ASSETS $115,901 $114,096 $229,997
======== ======== ======= ========
LIABILITIES
Deposits:
Non-interest bearing $ 18,444 $ 19,070 $ 37,514
Interest bearing 58,970 49,419 108,389
-------- -------- ------- --------
Total deposits 77,414 68,489 145,903
Short-term borrowings 13,804 18,981 32,785
Long-term borrowings 11,066 10,088 21,154
Other liabilities 3,241 8,578 $ 837 12,656
-------- -------- ------- --------
TOTAL LIABILITIES 105,525 106,136 837 212,498
-------- -------- ------- --------
STOCKHOLDERS' EQUITY
Preferred stock 135 190 325
Common stock 3,230 320 2,022 5,572
Capital in excess of aggregate stated value 6,719 1,966 (3,960) 4,725
Retained earnings 240 7,446 (837) 6,849
Other shareholders' equity 121 (24) 97
Less: Treasury stock (69) (1,938) 1,938 (69)
-------- -------- ------- --------
Total stockholders' equity 10,376 7,960 (837) 17,499
-------- -------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $115,901 $114,096 $ 0 $229,997
======== ======== ======= ========
</TABLE>
See accompanying notes to the pro forma financial information.
<PAGE> 3
BANC ONE CORPORATION & SUBSIDIARIES (CONSOLIDATED)
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
The following unaudited pro forma condensed combined statements of income are
presented to show the impact on BANC ONE's historical results of operations of
the proposed merger with FCNBD. Such statements assume that the companies had
been combined for each period presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases $ 14,117 $ 13,222 $ 11,686
Securities including trading 1,809 2,073 2,378
Other interest income 804 1,010 1,614
-------- -------- --------
Total 16,730 16,305 15,678
INTEREST EXPENSE
Deposits 4,723 4,635 5,008
Borrowings 3,043 2,911 3,211
-------- -------- --------
Total 7,766 7,546 8,219
NET INTEREST INCOME 8,964 8,759 7,459
Provision for credit losses 1,936 1,678 1,036
-------- -------- --------
Net interest income after provision for credit losses 7,028 7,081 6,423
NONINTEREST INCOME
Credit card revenue 2,613 2,254 2,228
Deposit fees 1,162 1,068 927
Other noninterest income 2,812 2,589 2,211
-------- -------- --------
Total 6,587 5,911 5,366
NONINTEREST EXPENSE
Salaries and employee benefits 4,116 3,912 3,568
Other operating expense 4,928 4,421 4,027
Merger and restructure related charges 337 0 267
-------- -------- --------
Total 9,381 8,333 7,862
INCOME BEFORE INCOME TAXES 4,234 4,659 3,927
Income taxes 1,403 1,550 1,332
-------- -------- --------
NET INCOME $ 2,831 $ 3,109 $ 2,595
======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 2.49 $ 2.66 $ 2.21
Diluted 2.44 2.59 2.16
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 1,120.7 1,145.7 1,144.7
Diluted 1,153.0 1,193.6 1,191.0
</TABLE>
See accompanying notes to the pro forma financial information.
<PAGE> 4
BANC ONE CORPORATION & SUBSIDIARIES (CONSOLIDATED)
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROFORMA
BANC ONE FCNBD COMBINED
-------- ------ --------
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases $8,268 $5,849 $ 14,117
Securities including trading 1,066 743 1,809
Other interest income 49 755 804
------ ------ --------
Total 9,383 7,347 16,730
INTEREST EXPENSE
Deposits 2,545 2,178 4,723
Borrowings 1,446 1,597 3,043
------ ------ --------
Total 3,991 3,775 7,766
NET INTEREST INCOME 5,392 3,572 8,964
Provision for credit losses 1,211 725 1,936
------ ------ --------
Net interest income after provision for credit losses 4,181 2,847 7,028
NONINTEREST INCOME
Credit card revenue 1,709 904 2,613
Deposit fees 702 460 1,162
Other noninterest income 1,425 1,387 2,812
------ ------ --------
Total 3,836 2,751 6,587
NONINTEREST EXPENSE
Salaries and employee benefits 2,368 1,748 4,116
Other operating expense 3,344 1,584 4,928
Merger and restructure related charges 337 0 337
------ ------ --------
Total 6,049 3,332 9,381
INCOME BEFORE INCOME TAXES 1,968 2,266 4,234
Income taxes 662 741 1,403
------ ------ --------
NET INCOME $1,306 $1,525 $ 2,831
====== ====== ========
NET INCOME PER COMMON SHARE
Basic $ 2.04 $ 4.99 $ 2.49
Diluted 1.99 4.90 2.44
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 632.4 301.4 1,120.7
Diluted 655.7 307.0 1,153.0
</TABLE>
See accompanying notes to the pro forma financial information.
<PAGE> 5
BANC ONE CORPORATION & SUBSIDIARIES (CONSOLIDATED)
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROFORMA
BANC ONE FCNBD COMBINED
-------- ------ --------
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases $7,477 $5,745 $13,222
Securities including trading 1,222 851 2,073
Other interest income 37 973 1,010
------ ------ --------
Total 8,736 7,569 16,305
INTEREST EXPENSE
Deposits 2,460 2,175 4,635
Borrowings 1,137 1,774 2,911
------ ------ --------
Total 3,597 3,949 7,546
NET INTEREST INCOME 5,139 3,620 8,759
Provision for credit losses 943 735 1,678
------ ------ --------
Net interest income after provision for credit losses 4,196 2,885 7,081
NONINTEREST INCOME
Credit card revenue 1,340 914 2,254
Deposit fees 654 414 1,068
Other noninterest income 1,369 1,220 2,589
------ ------ --------
Total 3,363 2,548 5,911
NONINTEREST EXPENSE
Salaries and employee benefits 2,205 1,707 3,912
Other operating expense 2,857 1,564 4,421
------ ------ --------
Total 5,062 3,271 8,333
INCOME BEFORE INCOME TAXES 2,497 2,162 4,659
Income taxes 824 726 1,550
------ ------ --------
NET INCOME $1,673 $1,436 $ 3,109
====== ====== ========
NET INCOME PER COMMON SHARE
Basic $ 2.60 $ 4.44 $ 2.66
Diluted 2.52 4.33 2.59
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 632.5 316.8 1,145.7
Diluted 664.3 326.7 1,193.6
</TABLE>
See accompanying notes to the pro forma financial information.
<PAGE> 6
BANC ONE CORPORATION & SUBSIDIARIES (CONSOLIDATED)
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED
BANC ONE FCNBD PROFORMA
-------- ------ --------
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases $6,426 $5,260 $ 11,686
Securities including trading 1,090 1,288 2,378
Other interest income 72 1,542 1,614
------ ------ --------
Total 7,588 8,090 15,678
INTEREST EXPENSE
Deposits 2,427 2,581 5,008
Borrowings 910 2,301 3,211
------ ------ --------
Total 3,337 4,882 8,219
NET INTEREST INCOME 4,251 3,208 7,459
Provision for credit losses 526 510 1,036
------ ------ --------
Net interest income after provision for credit losses 3,725 2,698 6,423
NONINTEREST INCOME
Credit card revenue 1,327 901 2,228
Deposit fees 545 382 927
Other noninterest income 903 1,308 2,211
------ ------ --------
Total 2,775 2,591 5,366
NONINTEREST EXPENSE
Salaries and employee benefits 1,876 1,692 3,568
Other operating expense 2,451 1,576 4,027
Merger and restructure related charges 0 267 267
------ ------ --------
Total 4,327 3,535 7,862
INCOME BEFORE INCOME TAXES 2,173 1,754 3,927
Income taxes 728 604 1,332
------ ------ --------
NET INCOME $1,445 $1,150 $ 2,595
====== ====== ========
NET INCOME PER COMMON SHARE
Basic $ 2.26 $ 3.48 $ 2.21
Diluted 2.20 3.41 2.16
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 626.2 320.0 1,144.7
Diluted 657.1 329.6 1,191.0
</TABLE>
See accompanying notes to the pro forma financial information.
<PAGE> 7
BANC ONE CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
NOTE 1. BASIS OF PRESENTATION
The pro forma condensed combined financial information reflects the
Merger using the pooling of interests method of accounting. The pro forma
information presented is not necessarily indicative of the results of operations
or the combined financial position that would have resulted had the Merger been
consummated at the beginning of the periods indicated, nor is it necessarily
indicative of the results of operations in future periods or the future
financial position of the combined entities. It is anticipated that the Merger
will be consummated in the fourth quarter of 1998, subject to shareholder and
regulatory approval.
Certain reclassifications have been included in the unaudited pro forma
condensed combined balance sheet and statements of income to conform statement
presentations.
NOTE 2. ACCOUNTING POLICIES
The accounting policies of both companies are in the process of being
reviewed. As a result of this review, certain conforming accounting adjustments
may be necessary. The nature and extent of such adjustments have not been
determined and are not expected to be significant.
NOTE 3. MERGER-RELATED EFFECTS
Management estimates that the restructuring charge for costs related to
or resulting from the Merger to be approximately $1.25 billion. The pro forma
condensed combined income statement does not reflect the impact of this charge
due to its nonrecurring nature.
The pro forma condensed combined financial information does not reflect
any benefit from potential cost savings and revenue enhancements in connection
with the Merger.
NOTE 4. PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been reflected in the pro
forma financial information:
a) Common stock and capital in excess of aggregate stated value
were adjusted by $2,022 million to reflect the Merger
accounted for as a pooling of interests through the exchange
of 468.4 million shares of BANC ONE common stock for 289.1
million shares of FCNBD common stock using an exchange rate of
1.62.
b) Treasury stock and capital in excess of aggregate stated value
were adjusted by $1,938 million to reflect the retirement of
FCNBD treasury stock.
<PAGE> 8
c) Other liabilities and retained earnings were adjusted by $1.25
billion to reflect the recording of the merger-related charge.
d) Other liabilities and retained earnings were adjusted by $413
million to reflect the tax benefit associated with the merger-
related charge.
NOTE 5. ADDITIONAL TRANSACTION
The pro forma financial information does not give effect to BANC ONE's
pending acquisition of First Commerce Corporation as the acquisition is not
material to BANC ONE.
