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FIRST CHICAGO CORPORATION
(FIRST CHICAGO LOGO)
ANNUAL REPORT
1993
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F I N A N C I A L H I G H L I G H T S
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(Dollars in millions, except per share data) 1993 1992 Change
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FOR THE YEAR
Net interest income--tax-equivalent basis...................................... $1,264.0 $1,217.0 + 4%
Combined credit provisions..................................................... 274.2 1,106.9 -75
Noninterest income............................................................. 2,202.4 1,488.2 +48
Noninterest expense*........................................................... 1,853.9 1,764.4 + 5
Income (loss) before cumulative effect of changes in accounting principles..... 804.5 (114.5) --
Net income..................................................................... 804.5 93.5 --
Return on assets............................................................... 1.42% 0.17%
Return on common stockholders' equity.......................................... 24.2% 1.8%
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AT YEAR-END
Assets......................................................................... $52,560 $49,281 + 7%
Deposits....................................................................... 28,186 29,740 - 5
Loans.......................................................................... 23,103 22,692 + 2
Common stockholders' equity.................................................... 3,503 2,732 +28
Risk-based capital ratio....................................................... 13.6% 10.8%
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AVERAGE BALANCES
Assets......................................................................... $56,854 $54,768 + 4%
Loans.......................................................................... 21,997 24,347 -10
Deposits....................................................................... 29,677 31,694 - 6
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COMMON SHARE DATA
Earnings per share--primary
Income (loss) before cumulative effect of changes in accounting principles... $ 8.78 $(2.08) --
Net income................................................................... 8.78 0.64 --
Earnings per share--fully diluted
Income (loss) before cumulative effect of changes in accounting principles... 8.43 (2.08) --
Net income................................................................... 8.43 0.64 --
Dividends declared............................................................. 1.30 1.20 + 8%
Book value, year-end........................................................... 40.55 33.19 +22
Market price, year-end......................................................... 43.25 36.75 +18
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NONFINANCIAL DATA (YEAR-END)
Number of employees (full-time-equivalent)..................................... 17,355 16,998
Number of common stockholders of record........................................ 15,034 15,995
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*Excludes provisions for other real estate.
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T A B L E O F C O N T E N T S
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Letter to Stockholders.............................. 2
Overview of Products and Services................... 7
Board of Directors.................................. 16
Financial Review.................................... 17
Executive Officers.................................. 68
U.S. Offices and International Facilities........... 69
Corporate Information............................... 70
1
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TO THE OWNERS OF FIRST CHICAGO
------------------------------
Nineteen ninety-three was a year of great accomplishment for First
Chicago--a year in which the decisions and actions taken in 1992 began to
produce intended results. Details of the significant aspects of our 1993
performance will follow in this letter and in the Financial Review section of
this Annual Report.
Most notably, in 1993 First Chicago firmly reestablished itself as a
high-performing banking company. We believe that the Corporation is better
positioned today to compete against all challengers in our chosen market
segments than in many, many years, and that we are capable of producing
attractive returns for stockholders.
The basis for our confidence lies in the competence and dedication of our
employees, in our product expertise and marketing skills, in our total commit-
ment to quality, in our outstanding client base and market positions, and in our
increasingly robust financial position. In the aggregate, these attributes
represent a very strong franchise. In large corporate banking, First Chicago has
the leading market share in greater Chicago and the Midwest, and is a major
player in both national and international markets. We have the leading positions
in serving both small and medium-size businesses as well as the consumer mar-
ket in metropolitan Chicago. And our credit card is a strong competitor
nationally with good growth prospects.
While serving customers is the essence of what we do, converting this activity
into attractive financial results is the ultimate objective. And in that regard,
1993 was a highly satisfying year. Earnings of $804 million, or $8.78 per share,
far exceeded those of any previous year. Even if venture capital earnings were
excluded, earnings of $600 million were a new record. The return on equity was
24 percent on a reported basis, and 21 percent excluding venture capital.
In addition to the record level of earnings, the quality of those earnings
has improved significantly. Indeed, provisions for commercial credit losses in
1993, at $78 million, were the lowest in many years. At the same time, we have
placed relatively greater emphasis on fee-based advisory and operating busi-
nesses. Noninterest revenues, excluding trading results and equity gains, grew
more than 20 percent in 1993.
Although trading operations have become a more significant contributor to
earnings, we believe that their inherent volatility is mitigated both by the
lower risk profile of our commercial portfolio and by the less volatile earnings
from our fee-generating businesses. Further, as our trading activities are
based primarily on customer transactions as opposed to proprietary position
taking, and as our trading covers a broader range of products than previously,
we believe that the resulting revenue stream should be more consistent than in
earlier years.
We also emphasized balance sheet strength in 1993, with gratifying results.
Regulatory capital ratios at year-end exceeded ``well-capitalized'' guidelines
by a wide margin, and our intention is to operate with strong ratios going
forward. Equally as important, credit quality improved substantially. Key credit
quality indicators, such as reserve ratios and nonperforming asset ratios, are
now much better than peer averages. Nonperforming assets at December 31, 1993,
were 1.2 percent of related assets, or $277 million, the lowest absolute level
since 1976.
In addition, large corporate loans represent a substantially smaller
percentage of our total assets, and our overall credit exposure is increasingly
diversified by product, and by industries and customers served.
Much of the balance sheet improvement is attributable to the highly
successful execution of the accelerated asset disposition program that was
initiated in September 1992. At that time, $2.4 billion of lower-quality real
estate exposure was written down to $1.2 billion. At year-end 1993, the carrying
value of the remaining portfolio was $126 million, or 26 percent of original
exposure.
Based on the Corporation's 1993 earnings performance and a careful
assessment of our prospects, the Board of Directors in November approved a 33
per-
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Leo F. Mullin Richard L. Thomas David J. Vitale
cent increase in the dividend on our common stock, from an annual rate of $1.20
to $1.60, and also approved a program to buy back up to 2.5 million common
shares.
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Line of Business Results
...............................................................................
All of the major business units performed above expectations in 1993 and
contributed importantly to overall corporate results. Particularly strong
performances were turned in by our credit card (First Card) and corporate
banking units, with both achieving record levels of earnings.
In addition to achieving record earnings, First Card reached several other
milestones in 1993. Managed receivables grew 24 percent over 1992 and passed the
$10 billion mark in December. Our 10-millionth account was added late in the
year as well. In fact, during 1993 we added 2.3 million new accounts, and by
most measures our market share in the U.S. increased for the third year in a
row. Our strengths in operating efficiency, marketing savvy and credit
management will be the basis for continued growth.
Corporate and institutional banking operations accounted for the greatest
positive swing in earnings, from a modest profit in 1992 to a record level in
1993. Dramatic improvement in credit quality, driven by the asset disposition
program and diligent management of the core loan portfolio, was the largest
factor in the turnaround. In addition, trading and other market-driven
activities achieved record results, and the units that provide operating
products and services performed well. Perhaps most important is a renewed
sense of enthusiasm and confidence in our ability to serve corporate and
institutional customers effectively and profitably. With emphasis on providing
quality products and services to our customer base and with a strong focus on
profitability, we are optimistic about continued success in serving this market.
American National Corporation, our lead provider of banking services to
medium-size businesses in Chicagoland, built its market position, improved its
credit quality, and recorded another impressive year of earnings growth. We are
confident that American National now has the capability and momentum to achieve
further growth in income and market share in 1994 and beyond.
In our local retail banking activities, significant operational progress was
achieved by the conversion of all local subsidiary banks into branches of The
First National Bank of Chicago, and by continued
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An important contributor to
First Chicago's earnings, First Card
consistently ranks among the top four
bank card issuers in the U.S. and is
the largest issuer of Visa Gold/R/ cards
in the world.
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systems integration into the First Chicago network. Consumer banking is
undergoing tremendous technological change, and with our leading market posi-
tions in metropolitan Chicago, we are establishing a foundation for substantial
earnings progress in the years to come.
On November 22, 1993, First Chicago announced an agreement to acquire the $1.3
billion-asset Lake Shore Bancorp for $323 million, payable in shares of First
Chicago common stock. We expect this acquisition to be completed in mid-1994.
This transaction is fully priced. However, from our perspective Lake Shore is a
unique franchise, combining a splendid reputation and record with a commanding
presence on North Michigan Avenue and attractive operations in two suburbs
where First Chicago has no existing locations. North Michigan Avenue is one of
the most active retail, commercial and residential markets in the country, and
we consider it critical that we achieve a major penetration in this market.
After realizing substantial cost reductions and aggressively building on the
strengths of Lake Shore in Chicago and the suburbs, we believe that this
acquisition will be a valuable addition to the First Chicago franchise.
We are not compelled to make acquisitions in order to generate growth and
attractive returns for our stockholders. But we remain opportunistic in our
outlook and plan to hold to our disciplined approach regarding acquisition
strategy and pricing.
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Venture Capital
...............................................................................
A special note about our venture capital business is appropriate. Since 1962,
First Chicago has been regarded as one of the premier companies engaged in
venture capital. Over the past 30 years, and especially during the past 10, this
business has been a major contributor to corporate earnings. However, in 1992,
because of anticipated regulatory restraints, growing capital requirements and
the inherent volatility of the business, we began a program of reducing the
existing portfolio of investments over time in such a way as to generate maximum
returns for our stockholders. Concurrent with this decision, we changed our
accounting treatment for venture capital assets from the lower of cost or market
value to fair value accounting.
Since the adoption of fair value accounting, and as a result of disposition
activities, gains of $406 million have been realized in cash, and $552 million
of appreciation has been recognized through December 31, 1993. Consequently,
at year-end 1993 the carrying value of the portfolio had grown to $1.5
billion, up from $1.4 billion at September 30, 1992.
We believe that our remaining portfolio should produce incremental earnings
for several years, over and above current carrying values. As we generate cash
from the sale of our holdings and free up capital, our priority will be to use
the proceeds to further strengthen or expand our core businesses. However, if we
determine that prospective returns are not sufficiently attractive, we will
return excess capital to our stockholders over time.
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Outlook
...............................................................................
We are optimistic that we should be able to generate further earnings growth
in our core businesses without compromising First Chicago's improved risk
profile. Several factors underly our confidence:
. Revenue Growth
Revenue growth will be critical to enhancing profits over the next few
years. We believe that our franchise strengths and business mix should enable us
to increase revenues at a satisfactory rate. The dynamics of the credit card
business suggest annual revenue growth in the 12 to 15 percent range for the
industry, and we plan to do at least as well. Our targeted revenue growth rate
in the middle market
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Providing retail customers with
sophisticated investment resources
for every generation under the theme
``Invest Where You Bank,'' First Chicago
makes investment services available
throughout its 70-plus branch network.
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business is 8 to 10 percent, which we believe will be achievable through
continued growth in the Midwestern economy, combined with our planned increases
in market share. Finally, our goals for the retail banking and large corporate
businesses are to grow revenues in the 6 to 8 percent range. In sum, the
Corporation should be able to generate core revenue growth of 8 to 10 percent
per annum on average for the next few years, which should be sufficient for
attractive earnings growth.
. Resource Allocation and Expense Control
Given the competitive pressures in banking today, close control over expenses
will continue to be critical to success. It is also important to be disciplined
in the allocation of expenses, so that available expense dollars are invested in
the areas offering the greatest potential returns while expenses are sharply
curtailed in those areas with limited prospects. We have followed this practice
at First Chicago in recent years, and we are determined to sustain this
discipline. In 1993, for example, we chose to invest heavily in our credit card
operation (as we did in 1992), and total expense in that area rose 18 percent.
This investment was more than justified by the growth in earnings and market
share produced by the credit card operation.
The increase in base operating expenses of all other businesses was held below
5 percent for the year, although there was substantial differentiation among
these businesses as well. We believe this represents a very credible
performance. We will continue to work to improve the operating efficiency of
our retail banking and processing businesses, and we intend to maintain the
favorable trends we have begun to establish.
. Risk Management Practices
Our confidence about revenue growth is related to our approach to managing
interest rate risk. For a number of years, we have carefully limited our expo-
sure to rising or falling interest rates. As a result, we have not benefited
from falling rates over the past 18 months to the same extent as some of our
competitors. On the other hand, we believe we are well protected against margin
pressures that might develop should interest rates rise significantly.
In addition, over the past several years we have built, installed and
implemented sophisticated credit risk and market risk policies and procedures.
Given the constantly changing nature of markets and technological
developments--the derivatives area being a very timely example--this must be an
ongoing process, and there is no such thing as perfection. However, we believe
that we are now among the leaders in the industry in our understanding and
management of credit and market risks.
It is important to remember that we are not in business to avoid risk but to
manage risk, and to make sure that the risk/reward ratio is appropriate. As we
expand our various trading operations, for example, we intend to assess
thoroughly and understand the potential risks in new products and to determine
that the potential rewards justify the exposures we will incur. We believe the
Corporation's risk profile today is the best it has been for many years.
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External Environment
...............................................................................
As we enter 1994, indicators for continued growth in the U.S. economy are
encouraging. The fourth quarter of 1993 was the most robust in terms of in-
dustrial production growth since the second quarter of 1987, and it appears that
the momentum will carry well into 1994. The economy of the greater Midwest is
doing considerably better than the national average, which augurs well for
First Chicago. In a larger context, passage of the General Agreement on Tariffs
and Trade and the North American Free Trade Agreement, strong growth in
Southeast Asia and signs of a modest upturn in Europe are all positive develop-
ments. Thus, the near-term environment for our
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FirstWindow 2000, innovative and easy
to use, is our award-winning, fully auto-
mated, PC-based global payment system
that helps corporate customers access
wire transfer systems and retrieve and
store bank account information.
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customers, and consequently for First Chicago, should continue to be positive.
The Administration, mindful of the importance of a strong banking system, has
proposed new initiatives to improve the effectiveness of the regulatory
process, and is also supportive of legislation that would permit interstate
banking. While we applaud the thrust of these initiatives, their outcome will
not be known for several months, and efforts to achieve more fundamental reform
face an uphill battle in Congress.
Meanwhile, we and others in our industry are expending enormous time and
effort to protect the authority we already have to offer insurance and other
products. At the same time, we seek to build support in Congress for the repeal
of the Glass-Steagall Act and for passage of other measures that will enable us
to compete more effectively by offering services that our customers now obtain
from other providers. U.S. commercial banks are at a distinct disadvantage in
global competition with foreign banks and with nonbank providers of financial
services in the U.S. We encourage you to express your support for legislative
proposals that would improve our relative position.
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Commitment to Community
...............................................................................
First Chicago's success is tied closely to the quality of life and the
economic health of the Chicago area and the state of Illinois. Consequently, as
a corporate citizen and as individual officers and employees, we are engaged
in a wide variety of activities that we hope and expect will make a difference
in our communities. Specifically, we are involved with a number of neighborhood
development programs; we are active lenders in the inner city; and, through our
charitable contributions, we assist many deserving social and economic
development agencies. Our employees also volunteer their time generously, work-
ing with many agencies and institutions as directors, trustees and volunteers.
Perhaps the most dramatic example of how First Chicago employees care is that
our 1993 United Way/Crusade of Mercy giving increased by a substantial margin
over 1992. Our employee campaign in Chicago raised $3.4 million. Including our
corporate gifts, the local First Chicago family contributed nearly $5
million--roughly 5 percent of the projected total--to the campaign.
Non-Chicago area employees gave generously as well. We are tremendously proud
of all our employees for this outpouring of support.
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Conclusion
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We are pleased and gratified by our 1993 accomplishments. Although the
banking industry faces many challenges in 1994 and beyond, we are confident
that we have established a platform for producing attractive financial returns
for our stockholders. We have the market positions, the products, the finan-
cial strength and the customer base on which to build. And we have the people,
the will and the determination to achieve our objectives.
To our stockholders, customers and all of our employees, we greatly appreciate
your support and your confidence.
/s/ Richard L. Thomas
Richard L. Thomas
Chairman
/s/ Leo F. Mullin
Leo F. Mullin
President
/s/ David J. Vitale
David J. Vitale
Vice Chairman
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With more than 17,000 employees and offices
throughout Chicagoland, across the nation and
around the world, First Chicago serves a broad
group of customers ranging from individual
consumers to large corporate and institutional
clients.
While the products and services that we offer also differ in scope and com-
plexity, we seek to deliver them with the highest standards of personal
integrity and commitment to customer service.
In the pages that follow, we present ``Windows of First Chicago'' -- a visual
representation of the many markets and customers that create the totality that
is First Chicago Corporation. Emphasizing ever-higher levels of customer service
through expanded use of technology, increased availability of banking and credit
services, and ongoing commitment to customer relationships, these ``windows''
illustrate the ways in which First Chicago strives to be the provider of choice
in all of the markets that we serve.
We invite your close review of these highlights of our capabilities.
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PROVIDING VALUE TO CUSTOMERS over the long term is the key to success in the
middle market. For over 60 years, American National Corporation, our lead pro-
vider of services to mid-sized businesses, has built long-standing customer
relationships by understanding each customer's individual needs. With a singular
focus on business banking, our bankers respond quickly to the challenges and
opportunities that arise. Delivering the financial services that support
customers' operating and management plans has earned for us the leading position
in middle market banking in the Chicago area. We intend to maintain that
position by continuing to seek financial solutions that meet not just today's
needs, but also consider the impact of today's decisions on tomorrow.
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GROCERIES ARE ONE EXAMPLE of purchases that increasingly are being made with
First Chicago's skyline banking cards and Visa and MasterCard credit cards.
Offering more security than carrying cash and more convenience than writing
checks, our family of cards can be used in many Chicago-area supermarkets and at
more than 10 million merchant locations worldwide--an important convenience for
our customers.
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INTERNATIONAL CAPABILITIES are vital in today's worldwide marketplace. Serving
customers throughout the Americas, in Europe, the Middle East, Africa, Asia and
the Pacific Basin, First Chicago provides specialized expertise in foreign
exchange, derivatives products, international cash management and trade finance,
as well as traditional credit origination and structuring services.
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WITH OVER 350 ATMs (automatic teller machines), First Chicago provides customers
more access to no-fee ATMs than any other Chicago bank. Averaging more than
100,000 ATM transactions a day, First Chicago customers value ATMs' convenience
and flexibility for everyday banking needs: deposits, withdrawals, loan payments
and balance inquiries. Customers can also use ATM cards for purchases at over
2,300 merchant locations in the Chicago area, including Amoco and Mobil gas
stations and Jewel food stores. Cash Station's intended merger with the Magic
Line network will add an additional 1,600 merchant locations. Increasing ATM
locations and expanding the uses for the ATM card are just a few of the ways
that First Chicago is working to make banking more accessible and shopping
more convenient for our customers.
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SMALL BUSINESSES provide economic vitality for communities, and First Chicago
provides the financial tools to help them thrive. With a leading share in this
market, we offer the business banking services and the personal attention that
small businesses require, including commercial loans; checking accounts;
lockbox collection, balance and transaction reporting, money transfer and
disbursement products; trust and investment services; and direct deposit of
payroll services.
Meeting small businesses' needs often extends to counseling them on business
plans, cash flow, or retirement planning and identifying government or other
nonprofit agencies that assist small business.
With the resources of a large bank and the convenience of our 70-plus
locations, we will continue to help small businesses grow and strengthen
communities across our service area.
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MILEAGE PLUS FIRST CARD, the co-branded credit card that we launched with United
Airlines in 1987, is extremely popular. Mileage Plus cardmembers earned more
than nine billion frequent flyer miles in 1993. With the convenience of our
credit card and the attractiveness of United as our partner, Mileage Plus First
Card continues to be a winner for everyone.
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SERVING CUSTOMERS in the middle market means providing customized financial
solutions and responding one-on-one to their needs as conditions change.
Whether financing a growth opportunity or recapitalizing a business during a
cyclical downturn, our bankers work creatively to use our capabilities in
commercial banking, asset-based financing, and corporate finance to meet the
needs of mid-sized businesses.
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LARGE CORPORATE CUSTOMERS look to First Chicago for a broad range of financial
advisory services, including loans, operating products and capital markets
offerings. Ranking first in the Midwest and among the top banks in the nation
serving the large corporate and institutional market, we are a recognized leader
in cash management services, the premier Midwest provider of corporate trust
services and the nation's largest provider of shareholder services. As a
prominent arranger and syndicator of credit facilities, First Chicago is also
a major player in the secondary distribution and trading of long-term credits.
Our success depends on understanding our customers' strategies and selecting the
right mix of banking products and services to help their businesses prosper.
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TRADING ACTIVITIES contribute significantly to First Chicago's earnings and to
its reputation in international banking. We have well-recognized capabilities in
foreign exchange, and we are a major structurer, underwriter and distributor of
tax-exempt securities. A leader in sophisticated risk management products, we
are well known for our innovative interest rate and currency option derivative
products. In the emerging markets, First Chicago ranks among the top
institutions trading public and private sector loans and bonds. We have
demonstrated expertise in the Latin American debt market, with increasing
presence in the countries of Eastern Europe, the Middle East and Asia. In 1993,
we traded $45 billion of emerging market debt.
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SUPERMARKET BRANCHES give customers the opportunity of banking where they shop
with the convenience of seven-day-a-week and evening-hour availability.
Offering consumer loans, checking and savings accounts, investment services
and safe deposit boxes, supermarket branches allow us to expand our network
quickly and economically, particularly in previously underserved com-
munities.
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NEW USES FOR FIRST CARD credit products include purchases of medical services,
tuition expenses, fast food, movie tickets and, in some areas, telephone and
utility bills. With the convenience of MasterCard and Visa acceptance at over
10 million locations worldwide, First Card customers also benefit from the
flexibility of payment options and the financial recordkeeping provided by
monthly statements.
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UNDERSTANDING MIDDLE MARKET CUSTOMERS means visiting them on-site, learning
about their businesses to help them achieve their objectives, and extending
credit in a timely manner that is suited to their particular circumstances.
Middle market customers may also benefit from risk management products,
financial advisory services, and support for their international trade
activities. Cash management products such as lockbox services are also valuable
tools in shaping a strong relationship with a middle market customer. Where
appropriate, investment management services for the business owner and the
company's pension and profit-sharing plans provide a continuity of service that
underscores the important linkage between the personal and professional require-
ments of middle market businesses.
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PURCHASING OFFICE SUPPLIES with First Chicago's new Procurement Card is one way
corporate customers can improve controls related to purchasing activity and
reduce payment processing expenses. Building on the existing MasterCard
system, the Procurement Card was officially launched in 1993 as a
business-to-business product. Combining purchasing and payment in one step, it
is fully integrated with a corporation's cash management system and offers the
convenience of being readily accepted in the worldwide MasterCard network.
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ADVISORY SERVICES for large corporate and institutional customers are
increasingly important for First Chicago. Utilizing extensive levels of internal
expertise, groups of specialists work with customers to develop solutions for
their financing needs. Our advisory services include securitization, asset
disposition, restructuring, financial engineering, tax-oriented leasing, and
structured private placements. Working as partners with our customers, we help
them stay ahead of changing business, economic and market conditions. With our
global presence and innovative advisory services, we are committed to
providing them with the highest quality financial products and services.
................................................................................
FINANCING A HOME PURCHASE is the most important transaction that many people
undertake, so we work hard to provide a variety of mortgage products tailored to
our customers' plans and abilities. We offer fixed and variable rate con-
ventional mortgages including attractive jumbo loans, FHA/VA programs and fi-
nancing for multi-unit dwellings. We have developed a special mortgage program
for first-time home buyers, and we work with community groups to prepare these
buyers for the mortgage process. Our variable rate equity credit lines provide
homeowners convenient, tax-advantaged financing for important purchases such as
home improvements, education and automobiles. We offer a variety of refi-
nancing options to help customers take advantage of lower interest rate oppor-
tunities.
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COMMITMENT AND TRUST are essential to a mutually rewarding banking
relationship. While technologies are ever-evolving and competition continues to
increase, First Chicago is dedicated to satisfying customers with quality prod-
ucts and services in all of the markets that we serve. With this focus, we move
forward with confidence and pride that we are First Chicago Corporation.
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B O A R D O F D I R E C T O R S
-------------------------------------
Richard L. Thomas
Chairman of the Board and
Chief Executive Officer
First Chicago Corporation
Leo F. Mullin
President and
Chief Operating Officer
First Chicago Corporation
David J. Vitale
Vice Chairman of the Board
First Chicago Corporation
John H. Bryan*
Chairman of the Board and
Chief Executive Officer
Sara Lee Corporation
Global manufacturer and marketer of
brand name products
Dean L. Buntrock
Chairman of the Board and
Chief Executive Officer
WMX Technologies, Inc.
Comprehensive environmental and
engineering services company
James S. Crown
General Partner
Henry Crown and Company
(Not Incorporated)
Diversified investments
Donald V. Fites
Chairman of the Board and
Chief Executive Officer
Caterpillar Inc.
Manufacturer of a wide range of
construction, earthmoving and material
handling equipment and engines
Donald P. Jacobs
Dean of the J.L. Kellogg
Graduate School of Management
Northwestern University
Education and research
Andrew J. McKenna*
Chairman of the Board, President
and Chief Executive Officer
Schwarz Paper Company
Printer, converter and distributor of
packaging materials
Richard M. Morrow
Retired Chairman and
Chief Executive Officer
Amoco Corporation
Diversified international petroleum
company
Earl L. Neal*
Principal
Earl L. Neal & Associates
Law firm
James J. O'Connor
Chairman and
Chief Executive Officer
Commonwealth Edison Company
Production, distribution and sale of
electric energy
Jerry K. Pearlman
Chairman and
Chief Executive Officer
Zenith Electronics Corporation
Manufacturer and distributor of a
diversified line of electronics products
Jack F. Reichert
Chairman of the Board and
Chief Executive Officer
Brunswick Corporation
A multinational company with leader-
ship positions in marine power, pleasure
boating and recreation
Patrick G. Ryan
President and
Chief Executive Officer
Aon Corporation
A broad-based insurance holding
company
Adele Simmons
President
The John D. and Catherine T.
MacArthur Foundation
Philanthropic foundation
Roger W. Stone
Chairman of the Board, President
and Chief Executive Officer
Stone Container Corporation
Manufacturer of paper, paper-related
products and packaging systems
equipment
*Member of the Audit Committee
Director Retirements:
Ernestine M. Raclin, Chairman of
the Board, 1st Source Corporation,
retired from First Chicago's Board
of Directors on October 8, 1993.
Mrs. Raclin had been a Director
since 1978. In addition, pursuant
to the Corporation's retirement
policy, Frank W. Considine,
Honorary Chairman of the Board
and Chairman of the Executive
Committee, American National
Can Company, a Director since
1979, is not standing for reelection
this year. We extend our great
appreciation to Mrs. Raclin and
Mr. Considine for their support,
dedication and commitment
during their long tenures.
16
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
I N D E X T O F I N A N C I A L R E V I E W
- ------------------------------------------------------------------------------
<S> <C>
Five-Year Summary of Selected Financial Information 18
- ------------------------------------------------------------------------------
Business Segments 19
- ------------------------------------------------------------------------------
Earnings Analysis 21
- ------------------------------------------------------------------------------
Risk Management 24
- ------------------------------------------------------------------------------
Liquidity Risk Management 24
- ------------------------------------------------------------------------------
Market Risk Management 26
- ------------------------------------------------------------------------------
Credit Risk Management 29
- ------------------------------------------------------------------------------
Derivative Financial Instruments 35
- ------------------------------------------------------------------------------
Capital Management 36
- ------------------------------------------------------------------------------
Consolidated Financial Statements 38
- ------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 42
- ------------------------------------------------------------------------------
Report of Management on Responsibility for Financial Reporting 62
- ------------------------------------------------------------------------------
Report of Independent Public Accountants 63
- ------------------------------------------------------------------------------
Selected Statistical Information 64
- ------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
F I V E - Y E A R S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N
First Chicago Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in millions, except per share data) 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA FOR THE YEAR
Net interest income............................ $1,225.8 $1,183.0 $1,080.0 $1,197.6 $1,235.0
Tax-equivalent adjustment...................... 38.2 34.0 37.9 44.2 48.1
-------- -------- -------- -------- --------
Net interest income--tax-equivalent basis...... 1,264.0 1,217.0 1,117.9 1,241.8 1,283.1
Combined credit provisions
Assets held for accelerated disposition...... -- 625.0 -- -- --
Other........................................ 274.2 481.9 544.3 518.8 468.4
Noninterest income............................. 2,202.4 1,488.2 1,225.2 1,199.3 1,135.2
Noninterest expense (1)........................ 1,853.9 1,764.4 1,597.0 1,565.9 1,430.2
Income (loss) before cumulative effect of
changes in accounting principles............. 804.5 (114.5) 116.3 249.3 358.7
Cumulative effect of changes in accounting
principles................................... -- 208.0 -- -- --
Net income..................................... 804.5 93.5 116.3 249.3 358.7
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Primary
Income (loss) before cumulative effect
of changes in accounting principles........ $8.78 $(2.08) $1.15 $3.35 $5.10
Net income................................... 8.78 0.64 1.15 3.35 5.10
Fully diluted
Income (loss) before cumulative effect
of changes in accounting principles........ 8.43 (2.08) 1.15 3.32 4.99
Net income................................... 8.43 0.64 1.15 3.32 4.99
Dividends declared per common share............ 1.30 1.20 2.00 2.00 1.80
- --------------------------------------------------------------------------------------------------------------------------
AT YEAR-END
Assets......................................... $52,560 $49,281 $48,963 $50,779 $47,907
Deposits....................................... 28,186 29,740 32,091 32,543 32,935
Loans.......................................... 23,103 22,692 25,661 27,706 29,725
Long-term debt................................. 2,065 1,705 1,725 1,428 1,351
Common stockholders' equity.................... 3,503 2,732 2,401 2,393 2,273
Stockholders' equity........................... 4,264 3,401 2,970 2,812 2,692
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Assets......................................... $56,854 $54,768 $52,655 $53,097 $48,534
Earning assets................................. 48,517 46,706 44,512 45,502 42,290
Loans.......................................... 21,997 24,347 27,281 30,609 29,239
Deposits....................................... 29,677 31,694 32,819 34,213 32,420
Common stockholders' equity.................... 3,092 2,733 2,431 2,343 2,119
Stockholders' equity........................... 3,886 3,314 2,938 2,762 2,538
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on stockholders' equity................. 20.7% 2.8% 4.0% 9.0% 14.1%
Return on common stockholders' equity.......... 24.2 1.8 3.2 9.4 15.5
Return on assets............................... 1.42 0.17 0.22 0.47 0.74
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Common-equity-to-assets (2).................... 7.2% 5.9% 5.1% 4.8% 4.5%
Regulatory leverage ratio...................... 8.0 6.6 5.8 5.0 4.9
Risk-based capital
Tier 1 ratio................................. 8.8 6.7 5.5 4.9 4.7
Total capital ratio.......................... 13.6 10.8 9.4 8.3 8.0
Tier 1 capital............................... $4,098 $3,223 $2,804 $2,642 $2,517
Total capital................................ 6,292 5,221 4,762 4,441 4,307
- --------------------------------------------------------------------------------------------------------------------------
COMMON SHARE AND STOCKHOLDER DATA
Market price, end of year...................... $43-1/4 $36-3/4 $24-5/8 $16-1/2 $37-1/8
Book value, end of year........................ 40.55 33.19 34.90 36.27 34.82
Common dividends............................... 109.6 89.3 135.5 131.8 114.5
Preferred dividends............................ 57.0 44.6 38.2 29.8 29.9
Dividend payout ratio.......................... 14.8% 187.5% 174.0% 59.7% 35.3%
Number of common stockholders of record........ 15,034 15,995 13,089 12,445 12,855
Average common and common-equivalent shares.... 85,173,941 76,496,506 67,666,850 65,525,045 64,455,138
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes provisions for other real estate.
(2) Net of investment in First Chicago Capital Markets, Inc.
18
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
Corporate & Institutional Other Corporate
Banking Consumer Banking Middle Market Banking Activities (1)
------------------------- ------------------ --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions,
except where noted) 1993 1992 1991 1993 1992 1991 1993 1992 1991 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income--
tax-equivalent basis.......... $416 $482 $459 $634 $548 $491 $224 $213 $201 $(10) $(26) $(33)
Combined credit
provisions.................... 35 261 272 197 169 168 42 53 105 -- 624 (1)
Noninterest income.............. 825 556 551 867 681 534 81 72 63 429 179 77
Noninterest expense (2)......... 771 721 705 869 755 648 192 184 165 22 104 79
Net income (loss)............... 247 38 18 258 182 124 44 29 (5) 255 (155) (21)
Return on equity (3)............ 15% 1% 1% 35% 30% 21% 13% 9% (2)% N/M N/M N/M
Efficiency ratio (4)............ 62% 69% 70% 58% 61% 63% 63% 65% 63% N/M N/M N/M
Average assets (in billions).... $40.0 $39.2 $37.9 $9.6 $8.5 $8.3 $5.5 $5.5 $5.5 $1.8 $1.6 $0.9
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes results from the accelerated asset disposition portfolio, the
venture capital group, other special corporate expense provisions, and the
cumulative effect of changes in accounting principles. See Note 4 on pages
45 and 46 for further detail.
(2) Excludes provision for other real estate.
(3) The capital allocation methodology was changed in 1993. Prior results
have been restated to reflect this change, which did not have a material
impact on results.
(4) Noninterest expense as a percentage of total revenue.
N/M--Not meaningful.
The Corporation reports business segment information to promote a greater
understanding of its financial performance and strategic direction.
Segmentation is based on markets served: large corporate and institutional cus-
tomers, consumers and middle market businesses. In addition, results from
venture capital, the accelerated disposition portfolio (since its segregation
in September 1992), and other items not specifically associated with a core seg-
ment are reported separately as other corporate activities.
. Corporate and Institutional Banking encompasses the business serving large
commercial customers, investors, governments and institutions nationally and
internationally. Products and services include lending, trading, corporate
finance, cash management and securities services. The Corporation ranks
first in Chicago and the Midwest, and is among the leading U.S. banking com-
panies serving this market worldwide.
. Consumer Banking includes all retail banking, small business and
professional services delivered through the Corporation's network of more than
70 branches throughout Chicagoland. First Chicago is the leader in this
market. Consumer Banking also includes the national credit card product. First
Card is among the four largest issuers of bank credit cards in the U.S.
. Middle Market Banking is represented by American National Corporation, the
leading provider of banking services to Chicago's middle market businesses.
Segment financial results are derived from the Corporation's internal
profitability reporting system and reflect full allocation of all items,
including institutional assets and overhead items. The Corporation maintains a
detailed funds transfer pricing system that charges or credits assets and
liabilities based on known or assumed repricing characteristics. In cases
where liquidity characteristics differ significantly from repricing
characteristics, a liquidity charge or credit is assigned. Common equity is
allocated to each segment based on the measured risk of that segment using
historical loss and volatility data.
CORPORATE AND INSTITUTIONAL BANKING
In 1993, Corporate and Institutional Banking earned $247 million, a dramatic
improvement from $38 million in 1992, and a reflection of the renewed emphasis
on profitable customer relationships. This business achieved a return on equity
of 15 percent in 1993, within the Corporation's target range of 14-16 percent.
These results reflected a variety of favorable trends:
. Commercial credit costs were down substantially, due largely to the asset
disposition program initiated in 1992.
. Combined trading profits reached a record level: $276 million, up 63 percent
from 1992. Foreign exchange trading, interest rate derivative transactions,
and trading in emerging markets securities were strong contributors to this
performance.
. Fee-based revenues, principally from operating products and services and
corporate finance activities, grew 18 percent in 1993. This revenue source
represented an increasing proportion of total revenues in Corporate and
Institutional Banking.
. Average loan volume declined to $8.8 billion from $11.8 billion in 1992
(excluding the asset disposition portfolio) as the commercial loan product
continued to be used selectively.
19
<PAGE>
- --------------------------------------------------------------------
Revenue performance by activity, which includes both net
interest income and fee revenue, is summarized in the
following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(In millions) 1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
Trading.................................... $ 387 $ 332
Servicing.................................. 370 316
Lending.................................... 213 186
Financing.................................. 208 117
Other...................................... 63 87
------ ------
Total.................................... $1,241 $1,038
====== ======
- --------------------------------------------------------------------
</TABLE>
Growth in noninterest expense was held to 7 percent although total revenues
increased nearly 20 percent for the year. Much of the expense increase was due
to higher incentive compensation accruals resulting from the year's excellent
performance.
CONSUMER BANKING
Consumer Banking was the largest contributor to corporate earnings in 1993,
generating net income of $258 million. This was up sharply, 42 percent, from
$182 million in 1992. Return on equity was 35 percent, up from 30 percent in
1992.
The national credit card product produced the bulk of this segment's earnings.
Average receivables grew to $9 billion in 1993, an excellent growth rate of 21
percent over 1992. This performance substantially boosted both net interest
income and noninterest income. At the same time, provisions for credit card
losses increased, and continued investment for growth caused credit card
expenses to rise 18 percent for the year.
The overall financial performance of local retail banking has been negatively
affected by low interest rates that reduce the value assigned to core deposits.
In 1993, the integration of the retail branch network was completed, and
noninterest expense included modest one-time charges related to this branch
conversion and other restructuring efforts.
MIDDLE MARKET BANKING
Middle Market Banking contributed $44 million in net income in 1993, for a 13
percent return on equity. (Before purchase accounting and other allocations,
American National Corporation earned $60 million.) Middle Market earnings in
1992 were $29 million. The 1993 improvement resulted in part from a 21 percent
decline in combined credit provisions. Total revenues grew 7 percent, while
noninterest expense increases were constrained to 4 percent.
OTHER CORPORATE ACTIVITIES
Other corporate activities include the financial results from the venture
capital business and the accelerated asset disposition portfolio. In addition,
special corporate expense provisions and the cumulative impact of accounting
changes have been included in this category.
Venture capital generated net income of $204 million in 1993, up from $80
million in 1992. This improved performance reflected market appreciation in
the portfolio as well as cash gains from sales. Unrealized gains, which already
have been recognized in earnings, were $510 million pretax at year-end 1993;
the Corporation has undertaken a major effort to lock in these gains.
Net gains from asset disposition portfolio activities were $60 million in 1993.
At year-end, the carrying value of this portfolio was $126 million, down from $1
billion at December 31, 1992.
Special corporate expenses totaled $14 million in 1993, primarily for corporate
contributions and litigation. This compares with $86 million in 1992 and $67
million in 1991.
Included in 1992 net income is the cumulative positive impact of accounting
changes, which totaled $208 million.
STAFFING LEVELS
Staff levels for each of the three business segments as well as corporate and
utility support functions were as follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Average Full-Time-
Equivalent Staff 1993 1992 1991
- --------------------------------------------------------------------
<S> <C> <C> <C>
Corporate and Institutional........ 6,280 6,178 6,632
Consumer........................... 7,304 7,028 6,536
Middle Market...................... 2,032 2,090 2,201
Corporate Support.................. 1,502 1,530 1,649
------ ------ ------
First Chicago Corporation....... 17,118 16,826 17,018
====== ====== ======
- --------------------------------------------------------------------
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------
EARNINGS ANALYSIS
SUMMARY
Net income for 1993 was a record $804.5 million, or $8.78
per common share, versus $93.5 million, or 64 cents per
share, in 1992 and $116.3 million, or $1.15 per share,
in 1991.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(In millions, except
per share data) 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INCOME
Income (loss) before cumu-
lative effect of changes in
accounting principles........ $804.5 $(114.5) $116.3 $249.3 $358.7
Cumulative effect of
changes in accounting
principles................... -- 208.0 -- -- --
Net income..................... $804.5 $ 93.5 $116.3 $249.3 $358.7
PRIMARY EARNINGS PER SHARE
Income (loss) before cumu-
lative effect of changes in
accounting principles........ $ 8.78 $ (2.08) $ 1.15 $ 3.35 $ 5.10
Cumulative effect of
changes in accounting
principles................... -- 2.72 -- -- --
Net income..................... $ 8.78 $ 0.64 $ 1.15 $ 3.35 $ 5.10
- -------------------------------------------------------------------------
</TABLE>
The 1993 results reflected significant improvement from core lines of business.
Highlights included:
. Earnings from the credit card business grew considerably in 1993. The level
of average managed credit card receivables grew 21 percent, contributing to
both improved net interest income and a notable increase in fee revenue.
. Market-driven revenues, which consist primarily of profits from combined
trading activities and equity securities gains, nearly doubled in 1993. The
venture capital portfolio's performance was superior, generating $381 mil-
lion in securities gains. Combined trading profits reached a record $285
million for the year.
. Substantial improvement in credit quality was achieved. Combined credit
provisions declined from $1.107 billion in 1992 to $274 million in 1993.
. By the end of 1993, approximately 89 percent of the net value of the
accelerated asset disposition portfolio had been liquidated, and net gains of
$60 million were recognized as a result of transaction activity during the
year.
. Net interest income on a tax-equivalent basis rose 4 percent,
primarily as a result of increased earning assets volumes.
Return on common equity was 24.2 percent for 1993, compared with 1.8 percent
for 1992 and 3.2 percent for 1991. Return on assets was 1.42 percent for 1993
and 0.17 percent for 1992. The Corporation's year-end 1993 common
equity-to-assets ratio, net of its investment in First Chicago Capital Markets,
Inc.(FCCM), was 7.2 percent, compared with 5.9 percent at December 31, 1992.
The Corporation's regulatory capital ratios continued to exceed the required
minimums and the well-capitalized guidelines. The risk-based capital ratio
increased to 13.6 percent at year-end 1993, while the regulatory leverage ratio
increased to 8 percent. These ratios were 10.8 percent and 6.6 percent,
respectively, at December 31, 1992.
The Corporation increased regulatory capital in 1993 by issuing approximately
$200 million of cumulative convertible preferred stock and by increasing
subordinated debt by $120 million. In 1993, the Corporation added $107 million
in common equity through the successful conversion of cumulative convertible
preferred stock into approximately 3 million shares of the Corporation's
common stock.
NET INTEREST INCOME
Net interest income includes fundamental spreads on earning assets, as well as
such items as loan fees, cash interest collections on problem loans, dividend
income, interest reversals, and income or expense on interest rate derivatives
used to manage interest rate risk.
Net interest income is a function of average earning assets and the net interest
margin, which are presented in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(Dollars in millions) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest
income--tax-
equivalent basis.... $ 1,264 $ 1,217 $ 1,118 $ 1,242 $ 1,283
Average earning
assets.............. $48,517 $46,706 $44,512 $45,502 $42,290
Net interest margin... 2.61% 2.61% 2.51% 2.73% 3.03%
- -----------------------------------------------------------------------
</TABLE>
Net interest margin measures the efficiency of the use of the Corporation's
earning assets and its underlying capital. In order to analyze fundamental
trends in net interest margin, it is useful to adjust for: 1) securitization of
credit card receivables and 2) the activities of FCCM.
When credit card receivables are sold in securitization transactions, the
Corporation's earnings are unchanged. However, the net interest income related
to these high-yield assets is displaced by increased servicing fees, net of
related credit losses. The average levels of securitized receivables were $4.8
billion in 1993, $3.9 billion in 1992 and $3.3 billion in 1991. Additional
information on the effect of securitization transactions on the Corporation's
financial results is presented on page 64.
FCCM is the Corporation's wholly owned subsidiary engaged in permissible
investment banking activities. Because capital requirements for FCCM are
risk-exposure driven rather than based on asset levels, FCCM can generate
substantial volumes of relatively riskless, thin-spread earning assets that
require little additional capital. The Corporation's net interest margin trends
can be better analyzed if these earning assets and related margins are excluded.
The following table reflects the elements of net interest margin adjusted for
credit card securitizations and the activities of FCCM.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(Dollars in millions) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Adjusted net interest
income--tax-
equivalent basis... $ 1,724 $ 1,554 $ 1,401 $ 1,421 $ 1,444
Adjusted average
earning assets..... $46,610 $44,994 $44,857 $45,607 $43,618
Adjusted net interest
margin............. 3.70% 3.45% 3.12% 3.12% 3.31%
- -----------------------------------------------------------------------
</TABLE>
21
<PAGE>
- -------------------------------------------------------------------------------
Steadily improved margins over the past three years were the result of a more
profitable earning assets mix as well as higher net available demand deposits
and capital. The more profitable earning assets mix resulted from an increase
in average credit card receivables offset by a decline in average commercial
loan volume. Gains on Brazilian bonds and the revaluation of the leveraged lease
portfolio because of the change in the federal tax rate added 9 basis points to
the adjusted net interest margin in 1993.
The cost of carrying nonperforming assets declined as average nonperforming
assets (including nonperforming assets held for accelerated disposition)
decreased 50 percent in 1993 to $0.6 billion. Average nonperforming assets in
1992 were $1.2 billion.
Cash interest collections on troubled-country debtor loans were $28.4 million in
1993 and $21.4 million in 1992, primarily related to Brazilian debt.
PROVISION FOR CREDIT LOSSES AND PROVISION FOR LOANS
HELD FOR ACCELERATED DISPOSITION
Details of the Corporation's 1993 credit risk management strategy and
performance, including the provision for credit losses and provision for loans
held for accelerated disposition, are presented in the Credit Risk Management
section beginning on page 29.
NONINTEREST INCOME
Noninterest income increased 48 percent to $2.202 billion in 1993 from $1.488
billion in 1992.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(In millions) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trading account
profits.............. $ 179.7 $ 67.8 $ 90.7 $ 60.6 $ 62.7
Foreign exchange
trading profits...... 104.9 109.5 95.1 102.8 75.9
Equity securities
gains................ 480.2 204.6 63.0 105.2 109.1
Investment securi-
ties gains (losses).. 0.3 8.6 (3.3) 7.5 1.7
-------- -------- -------- -------- --------
Market-driven
revenue.............. 765.1 390.5 245.5 276.1 249.4
Fiduciary and invest-
ment manage-
ment fees............ 200.7 189.8 174.8 168.3 162.8
Credit card fee
revenue.............. 694.2 516.1 411.8 354.5 325.2
Other service
revenue and fees..... 368.6 320.0 282.4 245.9 216.2
International fees..... 63.9 61.0 66.3 61.5 64.0
Gain on lease-
financing
residuals............ 18.1 3.0 14.7 1.6 51.0
Other.................. 31.8 7.8 14.7 35.9 6.2
-------- -------- -------- -------- --------
Subtotal....... 2,142.4 1,488.2 1,210.2 1,143.8 1,074.8
Accelerated dispo-
sition portfolio
gains................ 60.0 -- -- -- --
Gain on sale of
investment advi-
sory business........ -- -- 15.0 -- 60.4
Gain on partial set-
tlement of pension
obligations.......... -- -- -- 55.5 --
-------- -------- -------- -------- --------
Total.......... $2,202.4 $1,488.2 $1,225.2 $1,199.3 $1,135.2
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------
</TABLE>
Market-driven revenues, which include trading account profits, foreign exchange
trading profits, equity securities gains and investment securities gains,
increased 96 percent to $765.1 million in 1993.
Trading account profits for 1993 were a record $179.7 million, up
substantially from $67.8 million in 1992 and $90.7 million in 1991. Trading of
interest rate derivatives generated profits of $89.8 million in 1993, $58
million in 1992 and $36.7 million in 1991. This continued improvement reflects
strong performances in interest rate derivatives, international debt,
municipal and loan trading.
Foreign exchange trading produced revenue of $104.9 million, compared with
$109.5 million in 1992 and $95.1 million in 1991. During 1993, the foreign
exchange markets experienced considerable realignment within the European
monetary system. This provided opportunities for the Corporation to generate
revenue based on high market volatility and strong customer demand.
Equity securities gains were $480.2 million in 1993, up from $204.6 million in
1992 and $63.0 million in 1991. The venture capital portfolio accounted for
$380.7 million of the 1993 gains, a significant portion of which related to a
single investment in the telecommunication services industry. Equity securities
gains arise principally from the Corporation's venture capital activities,
although gains also arise from corporate finance activities and from the sale of
securities received in troubled-debt restructurings, as presented in the
following schedule.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(In millions) 1993 1992 1991
- --------------------------------------------------------------------
<S> <C> <C> <C>
Venture capital..................... $380.7 $188.1 $ 84.0
Corporate finance................... 65.0 6.3 (27.9)
Debt restructuring.................. 34.5 10.2 6.9
------ ------ ------
Total equity securities gains....... $480.2 $204.6 $ 63.0
====== ====== ======
- --------------------------------------------------------------------
</TABLE>
The venture capital and corporate finance gains for 1993 and 1992 include
changes in the fair value of the investments. The 1991 results reflect
transaction-driven gains realized under the prior historical cost accounting
method. Details of the venture capital activities are presented on page 29.
Fiduciary and investment management fees increased to $200.7 million in 1993
from $189.8 million in 1992 and $174.8 million in 1991. First Chicago Trust
Company of N.Y., a leading provider of corporate shareholder services, generated
$81.4 million of these revenues in 1993, compared with $72 million in 1992 and
$59.5 million in 1991. This revenue increase primarily reflected an increased
customer base.
Excluding the effects of credit card securitization, credit card fee growth was
26 percent in 1993 and 22 percent in 1992. Revenue growth in both periods
resulted from increased transaction volume, due mainly to a growing card-
holder base. The number of accounts at year-end 1993 was 10.3 million, compared
with 8.9 million in 1992 and 7.1 million in 1991.
22
<PAGE>
- -------------------------------------------------------------------------------
Other service revenue and fees for 1993 increased 15 percent to $368.6 million
from $320.0 million in 1992. The growth was due primarily to increased service
charges on deposit accounts, including deficient balance fees.
Transaction activity related to assets in the accelerated disposition
portfolio resulted in net gains of $60 million in 1993. Details of the asset
disposition portfolio activities are presented on page 30 in the Credit Risk
Management section.
Other noninterest income for 1993 includes $8.5 million from the operations of
other real estate assets. In 1992 and 1991, net losses of $9.3 million and $11.9
million, respectively, were incurred.
NONINTEREST EXPENSE
Operating expense in 1993 was $1.854 billion, compared with $1.764 billion in
1992 and $1.530 billion in 1991. Expense growth in 1993 reflected higher staff
costs as well as volume-driven expense increases in specific business units.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in millions) 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and em-
ployee benefits...... $ 853.9 $ 748.0 $ 722.8 $ 688.8 $ 677.4
Occupancy expense
of premises, net..... 147.7 186.0 152.8 138.9 123.1
Equipment rentals,
depreciation, and
maintenance.......... 110.3 111.2 107.5 101.5 93.0
Amortization of
intangible assets.... 87.4 76.1 69.5 68.3 63.2
Deposit insurance
expense.............. 52.9 49.9 44.0 23.2 15.6
Other.................. 601.7 593.2 433.4 526.7 457.9
-------- -------- -------- -------- --------
Operating
expense.......... 1,853.9 1,764.4 1,530.0 1,547.4 1,430.2
Provision for other
real estate held for
accelerated
disposition.......... -- 134.0 -- -- --
Provision for other
real estate.......... 4.2 56.9 104.3 24.8 2.4
Restructuring
provision............ -- -- 67.0 18.5 --
-------- -------- -------- -------- --------
Total.......... $1,858.1 $1,955.3 $1,701.3 $1,590.7 $1,432.6
======== ======== ======== ======== ========
Average Full-Time-
Equivalent Staff..... 17,118 16,826 17,018 17,153 15,644
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------
</TABLE>
Salaries and benefits increased due to higher performance-related expense
accruals, reduced pension credits, increased 401(k) contributions and the
impact of higher staff levels.
Occupancy expense decreased 21 percent in 1993. In 1992, $29.1 million of
charges were incurred to establish accruals for relocations and space
reductions in Chicago, New York and London. Excluding these charges, occupancy
expense was 6 percent lower in 1993 than in 1992.
Amortization expense in 1993 included a $12.4 million charge for accelerated
amortization of certain acquired intangibles.
In 1993, other operating expense included $13.8 million of special corporate
expenses, primarily for litigation and other corporate activities. In 1992, $57
million of special charges related to the accelerated disposition program and to
litigation. Excluding these charges, 1993 other operating expense increased 10
percent. The higher level of operating expense reflects increased
volume-driven costs in both the corporate and institutional and the consumer
banking businesses. Higher levels of bankcard solicitation costs and community
banking integration costs were key factors in the increase.
APPLICABLE INCOME TAXES
The following table shows the Corporation's income before income taxes,
applicable income taxes and effective tax rate for each of the past five years.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(Dollars in millions) 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before
income taxes....... $1,300.1 $(200.1) $163.9 $312.2 $471.6
Applicable income
taxes (benefit).... 495.6 (85.6) 47.6 62.9 112.9
Effective tax rate... 38.1% 42.8% 29.0% 20.1% 23.9%
- ----------------------------------------------------------------------
</TABLE>
Income tax expense for 1990 and 1989 was reduced by tax benefits related to the
1987 book net operating loss and tax credit carryforwards. These benefits
totaled $28.2 million in 1990 and $23.5 million in 1989. Excluding these
benefits, the effective tax rate was 29.2 percent in 1990 and 28.9 percent in
1989. Differences in the adjusted effective tax rates are caused by the
relationship between tax-exempt income and the level of income (loss) before
income taxes.
23
<PAGE>
- --------------------------------------------------------------------------------
RISK MANAGEMENT
The Corporation's various business activities generate liquidity, market and
credit risks.
. Liquidity risk is the possibility of being unable to meet all present and
future financial obligations in a timely manner.
. Market risk is the possibility that future changes in market rates or prices
might make the Corporation's positions less valuable.
. Credit risk is the possibility that a loss might occur from the failure of a
customer to perform according to the terms of a transaction.
The Corporation is compensated by customers for assuming these risks, which is
reflected in interest income, trading profits and fee income.
The Corporation is a party to a broad range of financial instruments that create
risks that may or may not be reflected on a traditional balance sheet. The
Corporation's risk management policies monitor and limit exposure to liquidity,
market and credit risks that arise from all of these financial instruments,
which can be subdivided into three categories:
. Cash financial instruments, generally characterized as on-balance-sheet
transactions, include instruments such as loans, bonds, stocks and deposits.
. Credit-related financial instruments include instruments such as commitments
to extend credit and standby letters of credit.
. Derivative financial instruments include instruments such as interest rate,
foreign exchange, commodity price and equity price contracts, including
forwards, swaps and options.
Credit-related and derivative financial instruments generally are
characterized as off-balance-sheet transactions.
LIQUIDITY RISK MANAGEMENT
In order to maintain sufficient resources to meet all present and future
financial obligations, the Corporation has developed liquidity policies and
guidelines that are approved by the Corporation's Finance Committee and reviewed
by the Examining Committee of the Board of Directors. These policies cover
balance sheet assets and liabilities as well as off-balance-sheet items that are
potential sources or uses of liquidity. Asset management policies set
guidelines for minimum levels of liquid assets, determined largely by the
Corporation's total asset volume, its off-balance-sheet funding exposures, and
its ability to access market funding sources. Liability management policies
emphasize diversification of funding sources across customers, maturities,
products and markets.
The Corporation's Statement of Cash Flows, on page 41, presents data about cash
and cash equivalents provided and used by the Corporation in its operating,
investing and financing activities.
ASSET LIQUIDITY
The Corporation believes that asset liquidity is one of the most effective means
for managing overall liquidity. Short-term assets defined as liquid are federal
funds sold and interest-bearing deposit placements with other banks. In 1993,
the Corporation targeted a range of 10 percent to 15 percent minimum ratio of
liquid assets to total assets for The First National Bank of Chicago (FNBC) and
FCC National Bank (FCCNB). During 1993, the Corporation maintained an average
liquid asset ratio of 20 percent. The cost of maintaining this level of
lower-spread liquid assets has been carefully considered against the value that
these assets provide to the Corporation's overall funding strategy. This
relatively high degree of liquidity allows greater flexibility in balancing the
fluctuating borrowing requirements of customers against the Corporation's daily
funding capacity.
The investment securities portfolio, trading account assets and securities
purchased under resale agreements provide secondary sources of liquidity to the
balance sheet. Generally, the debt investment securities are used to fulfill
collateral-pledging requirements for certain customer deposits. Certain debt
securities are available for sale in conjunction with the execution of the
Corporation's asset/liability management strategy, in response to changes in
interest rates or prepayment patterns, or in response to a need to increase
regulatory capital, and are carried at fair value.
Equity securities held in the investment securities portfolio primarily
represent the Corporation's venture capital investments, which are accounted for
on a fair value basis. While ultimately providing an additional source of
liquidity, these investments generally are not readily saleable due to the
form or size of the Corporation's equity interest in the underlying entity.
For further information on the venture capital portfolio, see the discussion of
venture capital activities on page 29.
The Corporation can sell or securitize loans to enhance balance sheet liquidity.
During 1993, $1.7 billion of credit card receivables were securitized. At
year-end 1993, a total of $5.0 billion in credit card receivables had been
securitized. Asset securitizations enable the Corporation to diversify its
funding sources and to access large amounts of term funding in a cost-effective
manner.
24
<PAGE>
- --------------------------------------------------------------------------------
LIABILITY LIQUIDITY
The diversification of the Corporation's liabilities among instruments,
maturities and depositors is intended to minimize the total expense of
gathering funds, while matching anticipated cash needs with cash sources.
FNBC has direct access to the local retail market as a source of funds. In
addition, retail certificates of deposit are gathered nationally through a
network of brokers. American National Bank and Trust Company of Chicago (ANBC)
also has access to the local retail, business and financial institutions market.
Although retail deposits represent a growing proportion of the Corporation's
funding, most of its funding is raised from nonretail sources. Management has
enhanced the stability of its wholesale deposits by stressing direct dis-
tribution and diversification of funding sources across customers, markets,
products and maturities.
FNBC maintains relationships with large institutional depositors through
established distribution networks, domestically and overseas. This approach has
proved successful in creating reliable sources of funds. Overseas, funding is
raised primarily from corporations, central banks and official institutions
rather than through the interbank market. FNBC benefits from a diversified
institutional customer base, in which concentrations among funding sources are
closely monitored.
FNBC and ANBC obtain demand deposits from large corporations, middle market
companies and individual consumers. Commercial paper, deposit notes, bank
notes, bank investment contracts, medium-term notes and long-term debt also
provide funding for the Corporation and its subsidiaries.
The Corporation has reduced its use of time deposits over the past two years and
has increased its use of short-term borrowings (bank notes) in order to better
match asset repricing and maturity characteristics.
The Corporation's policies and guidelines for the management of
off-balance-sheet funding exposure are integrated into all its liquidity risk
management activities.
In sum, the Corporation believes that its liquidity is adequate to cover
anticipated needs based upon its assessment of asset liquidity, core deposit
levels, direct funding sources, and contractual asset and liability maturities.
The following table shows the Corporation's deposits and other purchased funds.
<TABLE>
<CAPTION>
DEPOSITS AND OTHER PURCHASED FUNDS
- ------------------------------------------------------------------------------------------------
December 31 (In millions) 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic offices
Demand........................................... $ 8,184 $ 7,575 $ 6,200 $ 7,065 $ 5,614
Savings.......................................... 7,541 7,618 7,059 5,166 4,525
Time
Under $100,000................................. 2,312 2,737 3,865 3,828 4,326
$100,000 and over.............................. 2,613 3,525 5,666 6,074 5,821
Foreign offices
Banks in foreign countries....................... 2,463 2,693 2,599 2,372 2,964
Foreign governments and official institutions.... 750 926 983 784 1,033
Other time and savings........................... 4,126 4,493 5,439 7,022 8,513
Other demand..................................... 197 173 280 232 139
------- ------- ------- ------- -------
Total deposits............................. 28,186 29,740 32,091 32,543 32,935
- ------------------------------------------------------------------------------------------------
Federal funds purchased and securities under
repurchase agreements............................ 8,255 6,962 5,145 6,250 3,676
Commercial paper................................... 164 172 226 237 952
Other funds borrowed............................... 5,843 3,997 2,712 2,770 2,596
Long-term debt..................................... 2,065 1,705 1,725 1,428 1,351
------- ------- ------- ------- -------
Total other purchased funds................ 16,327 12,836 9,808 10,685 8,575
------- ------- ------- ------- -------
Total...................................... $44,513 $42,576 $41,899 $43,228 $41,510
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
- -------------------------------------------------------------------------------
The following table summarizes the Corporation's credit-related financial
instruments, which include both commitments to extend credit and letters of
credit, all of which are considered in its liquidity risk management practices.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
December 31 (In billions) 1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
Unused commercial loan commitments............ $27.4 $26.7
Unused credit card lines...................... 46.3 35.2
Unused home equity lines...................... 0.7 0.6
Commercial letters of credit.................. 0.7 0.8
Standby letters of credit and
foreign office guarantees................... 4.7 6.2
- --------------------------------------------------------------------
</TABLE>
Since many of the Corporation's unused commitments are expected either to
expire unused or to be used only partially, the total amount of unused
commitments in the table above does not necessarily represent future cash
requirements.
MARKET RISK MANAGEMENT
OVERVIEW
Market risk arises from changes in interest rates, exchange rates, commodity
prices and equity prices. The Corporation maintains risk management policies
that monitor and limit exposure to market risks. It strives to take advantage of
the profit opportunities available in interest and exchange rate movements
through its trading activities. In asset and liability management activities,
the Corporation attempts to eliminate structural interest rate and foreign
exchange rate risk. The measurement of market risk associated with financial
instruments is meaningful only when all related and offsetting on-and
off-balance-sheet transactions are aggregated, and the resulting net positions
are identified. Disclosures about fair value of financial instruments, which
reflect changes in market prices and rates, begin on page 58.
TRADING ACTIVITES
The Corporation maintains active trading positions in a variety of markets and
instruments, including U.S. government securities, municipal securities and
money market securities. It also maintains positions in derivative products
associated with these markets and instruments, such as interest rate and
currency swaps, and commodity and equity index options.
Most of the Corporation's trading activities are customer-oriented, and trading
positions are established as necessary for customers. However, in order to
anticipate customer demand for such transactions, the Corporation also carries
an inventory in capital markets instruments, and maintains its access to market
liquidity by making bid-offer prices to other market makers. These two
activities constitute its proprietary trading business, but are essential in
order to continue providing customers with capital markets products at
competitive prices.
Many trading positions are kept open for brief periods of time, often less than
one day. Other trading positions are maintained for longer periods, and these
positions are valued at prevailing market rates on a present value basis.
Realized and unrealized gains and losses on these trading positions are also
included in noninterest income as trading account profits and foreign exchange
trading profits.
Trading positions are strictly monitored at all times. The overall market risk
that any business unit can assume is approved by the Examining Committee of the
Board of Directors through a risk point limit. Risk points represent the amount
of potential overnight loss in a capital markets product. Products that have
more inherent price volatility incur more risk points. A business unit will use
up more of its risk point limit if it trades in the more volatile products.
The risk point system, therefore, is the means by which the Corporation limits
earnings volatility from market risk.
The Examining Committee of the Board of Directors also approves the
Corporation's overall policies governing market risk. More detailed market
risk policies are approved by the Corporation's Market Risk Committee, which is
composed of senior capital markets managers.
In addition to managing market risk through its risk point system, each business
unit establishes dollar limits governing intra-day trading activity, and
allocates them to the dealers depending on their trading experience. These dol-
lar limits are reviewed and approved by the Market Risk Committee.
This committee also reviews and approves statistical models used for measuring
market risk, or for pricing and hedging transactions; reviews audit and internal
control issues arising from the Corporation's trading operations; and approves
the business plans for new capital markets activities.
Independent oversight of trading activities is provided by the Market Risk
Management Department. As part of this oversight role, the Market Risk
Management Department monitors the credit risk associated with capital market
products.
The credit exposure for certain derivative financial instruments fluctuates as
market prices change. As a result, the credit exposure for these derivative
instruments includes both the current fair value of the instrument and an incre-
mental amount that represents the potential movement in its fair value over the
remaining life. This incremental amount of credit exposure is calculated using
statistical models that estimate the change over time in exchange rates,
interest rates and other market indices.
The resultant credit exposure is used in monitoring total customer credit
exposure and in the management of credit risks associated with capital markets
products.
26
<PAGE>
- -------------------------------------------------------------------------------
STRUCTURAL INTEREST RATE RISK MANAGEMENT
The Corporation manages interest rate risk in several ways, including
limitations on earnings volatility, monitoring of duration of equity, stress
testing of net interest income and traditional gap analysis. The Corporation's
interest rate risk profile has been minimal, operating within a policy intended
to limit volatility of annual earnings due to interest rate changes. A 100
basis point change in interest rates would affect the Corporation's annual
pretax earnings by only an estimated $14 million. This minimal sensitivity has
largely been accomplished through asset-pricing strategies and disciplined
funding procedures.
Whenever possible, assets are funded with liability instruments of similar
interest rate sensitivity, thereby reducing structural interest rate risk and
stabilizing returns. If a liability with the desired characteristics is not
readily available in the cash market, derivatives such as interest rate swaps
are used to alter the characteristics of those liabilities that are readily
available. Interest rate swaps are entered into covering the specific amount and
term of the associated liability. The notional principal amount of these matched
interest rate swaps totaled $2.8 billion as of December 31, 1993. Since matched
swaps are associated only with contractual financial instruments that have spe-
cific rates and maturities, the Corporation has no exposure to roll-over risk
since the amount and maturity of the swap and the related liability are
identical. Substantially all interest rate swaps used in this activity are
"plain vanilla" interest rate swaps.
Certain assets have indefinite maturities or interest rate sensitivities and are
not readily matched with specific liabilities. Such assets are funded by
liability pools based on the asset's estimated maturity and repricing
characteristics. For example, domestic floating-rate loans are funded by a
short-term liability pool that reprices frequently, while fixed-rate credit card
loans are funded by a longer-term liability pool that reprices less frequently.
Overall, this matched funding strategy has resulted in a more stable net
interest margin for the Corporation.
This disciplined approach to matching the interest rate risk characteristics of
assets and liabilities significantly reduces the structural interest rate risk
inherent in the Corporation's balance sheet. Residual structural interest rate
risk can be further reduced through the use of interest rate derivatives (gap
swaps) used to offset net overall positions rather than specific assets or
liabilities. At year-end 1993, the Corporation had $3.4 billion notional
principal amount of interest rate swap contracts outstanding that were used to
manage gap exposure. Of this amount, $1.3 billion matures during 1994, and $0.9
billion will mature in 1995.
Interest rate derivative financial instruments used by the Corporation to manage
interest rate exposure reduce the volatility of net interest margin. Without the
use of these instruments, net interest margin would have declined by 35 basis
points in 1993; by 32 basis points in 1992; and by 8 basis points in 1991.
<TABLE>
<CAPTION>
ASSET AND LIABILITY MANAGEMENT SWAPS
- --------------------------------------------------------------------------------------------
(Dollars in millions) Specific Exposures Gap Exposures Total
------------------ -------------- --------------
Expiry Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994.......................... $1,591 4.58% $1,321 5.42% $2,912 4.96%
1995.......................... 507 6.44 887 4.66 1,394 5.31
1996.......................... 799 7.14 989 7.01 1,788 7.07
1997.......................... 865 6.00 189 6.11 1,054 6.02
1998.......................... 192 6.13 2 6.35 194 6.13
1999.......................... 55 8.84 -- -- 55 8.84
2000.......................... 32 4.99 -- -- 32 4.99
2001.......................... 308 8.26 -- -- 308 8.26
2002.......................... 207 7.69 -- -- 207 7.69
2003.......................... 406 6.68 -- -- 406 6.68
2004 and beyond............... 194 6.70 -- -- 194 6.70
------ ---- ------ ---- ------ ----
Total..................... $5,156 6.09% $3,388 5.72% $8,544 5.95%
====== ==== ====== ==== ====== ====
- --------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
- -------------------------------------------------------------------------------
The sale of floating- and fixed-rate credit card receivables as securities to
investors subjects the Corporation's servicing revenue to interest rate risk.
The Corporation uses interest rate derivatives to reduce the volatility of the
servicing income on credit card securitizations. Without the use of these
instruments, credit card fee revenue would have been reduced by $67 million in
1993, $57 million in 1992, and $19 million in 1991. The terms of these deriv-
atives match the terms of the credit card securitizations.
The degree of structural interest rate sensitivity (i.e. mismatching) is
monitored using various methods, including interest rate gap analysis. An
interest rate gap is the difference between volumes of assets and liabilities
maturing or repricing during a future time interval. To reflect anticipated
prepayments, certain asset and liability categories are stated at an estimated
rather than a contractual maturity. This ``managerial'' gap is used to monitor
the Corporation's domestic earning assets. Interest rate risks in trading
positions and in overseas earning asset positions are excluded from gap
analysis and are controlled as trading risks. Securitized credit card
receivables are added to the gap analysis since, as discussed above, they
subject the Corporation to interest rate risk. These securitized receivables
amounted to $5 billion at the end of 1993.
At December 31, 1993, assets repricing within one year exceeded liabilities
repricing within one year by $683 million, or less than 2 percent of total
domestic assets, operating within the Corporation's policy of limiting
earnings volatility. With a positive gap, the net interest margin will widen
with an increase in interest rates and narrow with a decrease in rates. The
"managerial" gaps are presented in the following table.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1993 Up to 1 to 3 3 to 6 6 Months After
(In millions) 1 Month Months Months to 1 Year 1 Year Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans............................................ $15,519 $ 2,721 $ 965 $ 335 $ 6,036 $25,576
Investment securities............................ 302 222 254 127 1,350 2,255
Other assets..................................... 16,376 1,225 58 7 2,452 20,118
------- ------- ------ ------- ------- -------
Total assets................................... $32,197 $ 4,168 $1,277 $ 469 $ 9,838 $47,949
======= ======= ====== ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and equity
Deposits......................................... $ 6,484 $ 5,152 $ 840 $ 1,228 $ 5,633 $19,337
Other liabilities................................ 15,481 1,715 397 918 5,837 24,348
Equity........................................... 121 191 150 -- 3,802 4,264
Effect of off-balance-sheet
instruments.................................... 3,625 3,331 (767) (1,438) (4,751) --
------- ------- ------ ------- ------- -------
Total liabilities and equity (including
effect of off-balance-sheet instruments)....... $25,711 $10,389 $ 620 $ 708 $10,521 $47,949
======= ======= ====== ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------
Gap (assets less liabilities and equity, including
effect of off-balance-sheet instruments)......... $ 6,486 $(6,221) $ 657 $ (239) $ (683) $ --
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative gap................................... $ 6,486 $ 265 $ 922 $ 683 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the gross notional principal amounts of outstanding
interest rate swap agreements included in the interest rate sensitivity table,
identified by the underlying interest rate exposures.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
DECEMBER 31,
(In millions) 1993
- --------------------------------------------------------------------
<S> <C>
Swaps associated with loans............................ $ 468
Swaps associated with securitized
credit card receivables.............................. 1,845
Swaps associated with deposits......................... 543
Swaps associated with other liabilities................ 2,300
Swaps against gap position............................. 3,388
------
Total............................................ $8,544
======
- --------------------------------------------------------------------
</TABLE>
Gap analysis provides a static view of interest rate sensitivity caused by
mismatching. Forecasts and simulations of net interest margin and product
behavior are used to supplement gap analysis and to identify dynamic interest
rate sensitivity. In addition, the Corporation employs duration analysis to
estimate the amount of equity value at risk due to interest rate changes.
28
<PAGE>
- -------------------------------------------------------------------------------
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 foreign exchange 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.
VENTURE CAPITAL ACTIVITIES
The Corporation's portfolio of venture capital investments is composed of
publicly traded equity securities held directly, publicly traded equity
securities held indirectly (e.g., through limited partnerships), and investments
in private companies. During 1992, the Corporation announced its intent to alter
significantly its participation in the venture capital business. The existing
portfolio is planned to be liquidated in an orderly fashion over the next five
to seven years. New investments will be made primarily through participation in
a venture capital fund that has been established by the former management of the
Corporation's venture capital subsidiaries, and other existing commitments.
Also during 1992, the Corporation adopted fair value accounting for its venture
capital portfolio. Under this method, fair value of publicly traded securities
is determined by quoted market valuations, adjusted for illiquidity of the
investments due to the size or nature of the Corporation's holdings. Privately
held securities are valued using traditional valuation techniques applied in a
conservative manner.
<TABLE>
<CAPTION>
VENTURE CAPITAL PORTFOLIO
- --------------------------------------------------------------------
Investments Investments
December 31, 1993 Held Held
(Dollars in millions) Directly Indirectly Total
- --------------------------------------------------------------------
<S> <C> <C> <C>
Publicly traded equity
investments
Gross value.................. $ 452 $ 572 $1,024
Discount..................... (105) (145) (250)
----- ----- ------
Fair value................. $ 347 $ 427 774
===== =====
Number of investments.......... 16 25
Discount ranges................ 0%-25% 25%
Investments in private
companies.................... 691
------
Total.......................... $1,465
======
- --------------------------------------------------------------------
</TABLE>
Fair value accounting for venture capital investments significantly increased
the volatility of the Corporation's reported earnings. During 1993, the
Corporation embarked on a program intended to reduce that volatility to a
specified objective through sale of investments and hedging using equity
derivatives. Under this program, the Corporation purchases put options on
specific securities, and simultaneously sells call options of identical term and
volume. As of December 31, 1993, approximately 9 percent of the venture capital
portfolio had been hedged in this manner. Without the use of equity derivatives,
equity securities gains would have been increased by $20 million in 1993. During
1994, management intends to employ this and other techniques to more fully hedge
the price risk inherent in this portfolio.
The following table provides fair value and sale information on the portfolio
during 1993.
<TABLE>
<CAPTION>
VENTURE CAPITAL PORTFOLIO ACTIVITY
- ---------------------------------------------------------------------
Publicly
Traded Private
(In millions) Companies Companies Total
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Fair value, December 31, 1992.... $ 542 $ 939 $1,481
Additional investments........... 14 174 188
Appreciation recorded as
equity securities gains........ 417 49 466
Sales and dispositions........... (284) (240) (524)
Other (1)(2)..................... 85 (231) (146)
------ ----- ------
Fair value, December 31, 1993.... $ 774 $ 691 $1,465
====== ===== ======
Unrealized appreciation
(depreciation) at
December 31, 1993............ $ 531 $ (21) $ 510
====== ===== ======
- ---------------------------------------------------------------------
</TABLE>
(1) For publicly traded companies, primarily transfers from
private classification.
(2) For private companies, primarily cash distributions from
limited partnership interests, transfers to public classification
and principal repayments.
In addition to the $1.5 billion of investments in the venture capital
portfolio at December 31, 1993, there were unfunded commitments of $287 million.
CREDIT RISK MANAGEMENT
OVERVIEW
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 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 Corporation's balance sheet. On-balance-sheet credit exposure consists of
cash financial instruments such as loans, leases and acceptances.
Off-balance-sheet credit exposure includes credit-related and derivative
financial instruments.
Credit exposure is managed according to a clearly defined process. The Credit
Strategy Committee is responsible for the strategic direction and management
oversight of that process, the elements of which include:
. identifying the types of customers that are consistent with the Corporation's
strategic business objectives;
. assessing the credit structure, return and potential risk of loss for any
extension of credit within market-driven guidelines and prudent banking
practice;
. monitoring the financial performance and compliance with contractual
obligations of credit customers in order to identify deterioration on a
timely basis;
. reviewing the credit portfolio to verify the risk assessment of individual
credits and to assess the risk profile and composition of the portfolio;
. verifying that policies and procedures have been followed in the initial
underwriting and ongoing monitoring of the credit portfolio.
29
<PAGE>
- -------------------------------------------------------------------------------
A major element of the credit risk management process is portfolio
diversification, which is achieved by limiting credit concentrations in a number
of ways. Concentrations to individual customers or a related group of customers
are limited according to the degree of repayment risk. In addition,
concentrations are limited on a portfolio basis by risk rating, credit product,
industry and geography.
ACCELERATED ASSET DISPOSITION PORTFOLIO
In the third quarter of 1992, the Corporation initiated an accelerated
disposition program, and certain real estate-related assets were transferred to
this portfolio at their estimated disposition values. The assets in this
portfolio are carried at the lower of this established carrying value or
estimated disposition value.
Significant progress has been made in reducing the accelerated disposition
portfolio. After 15 months, the Corporation was far ahead of the ``price and
pace'' goals it established for this program. Approximately 89 percent of the
portfolio's net value had been liquidated by year-end 1993. During 1993, assets
having nearly $1.8 billion in original contractual exposure were sold or
otherwise liquidated. This resulted in a $911 million reduction in the
portfolio's carrying value and the recognition of net gains of $60 million in
other income during 1993. The carrying value of the remaining assets in the
portfolio was $126 million at year-end 1993, representing 26 percent of their
original contractual exposure.
The following tables show the composition of the accelerated asset disposition
portfolio since December 31, 1992.
<TABLE>
<CAPTION>
ACCELERATED ASSET DISPOSITION PORTFOLIO--EXPOSURE
- -----------------------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31 December 31
(Dollars in millions) 1993 1993 1993 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans
Performing.................................... $ 20 $111 $163 $244 $ 504
Nonperforming................................. 16 21 27 70 115
Other real estate assets........................ 71 79 165 207 257
---- ---- ---- ---- ------
Subtotal................................ 107 211 355 521 876
Off-balance-sheet exposure...................... 19 33 47 74 161
---- ---- ---- ---- ------
Total portfolio......................... $126 $244 $402 $595 $1,037
==== ==== ==== ==== ======
Disposition value as a percentage of original
contractual exposure.......................... 26% 33% 38% 41% 46%
=== === === === ===
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF DISPOSITION VALUE
- --------------------------------------------------------------------
(In millions) 1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
Disposition value at beginning of period.... $1,037 $1,192
Sales and settlements (1)................... (876) (154)
Other, net (2).............................. (35) (1)
------ ------
Disposition value at end of period.......... $ 126 $1,037
====== ======
- --------------------------------------------------------------------
</TABLE>
(1) For the 12 months ended December 31, 1993, $128 million of proceeds were
received in excess of the estimated disposition value, and $68 million of
valuation adjustments were made to maintain the valuation of the portfolio
at its estimated disposition value.
(2) Primarily reflects partial payments and the expiration of unused
commitments.
REMAINING CREDIT PORTFOLIO
The quality of the remaining credit portfolio, which includes all credit
exposure that was not transferred to the accelerated asset disposition
portfolio, improved in 1993. Nonperforming assets at year-end 1993 were $277
million, or 1.2 percent of related assets. This was the lowest absolute level
of nonperforming assets since 1976.
30
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FIVE-YEAR SELECTED STATISTICAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At Year-End
Loans outstanding........................................ $23,103 $22,692 $25,661 $27,706 $29,725
Nonperforming loans...................................... 234 391 843 854 953
Other real estate, net................................... 43 23 457 529 175
Nonperforming assets..................................... 277 414 1,300 1,383 1,128
Allowance for credit losses (1).......................... 683 624 759 897 1,232
Nonperforming loans/loans outstanding.................... 1.0% 1.7% 3.3% 3.1% 3.2%
Nonperforming assets/loans outstanding and
other real estate, net................................. 1.2 1.8 5.0 4.9 3.8
Allowance for credit losses/loans outstanding (1)........ 3.0 2.8 3.0 3.2 4.1
Allowance for credit losses/nonperforming loans (1)...... 292 160 90 105 129
For the Year
Average loans outstanding................................ $21,997 $24,347 $27,281 $30,609 $29,239
Net charge-offs (2)...................................... 182 373 550 781 518
Net charge-offs/average loans............................ 0.8% 1.5% 2.0% 2.6% 1.8%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The reserve related to securitized credit card receivables has been
transferred to other assets for all periods presented.
(2) Excludes $636 million of loan charge-offs in 1992 recorded upon transfer
to the accelerated disposition portfolio.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate to
provide for inherent losses in the credit portfolio. The Corporation evaluates
the adequacy of the allowance each quarter and reports the findings to a
committee of the Board of Directors. After reviewing the adequacy of the
allowance, the committee approves the provision for credit losses.
The Corporation's provision for credit losses decreased to $270 million in 1993
from $425 million in 1992. A $28 million increase in the consumer provision in
1993 was offset by a $183 million reduction in the commercial provision. The
increase in the consumer provision was primarily the result of growth in credit
card receivables. The decline in the commercial provision indicates improved
overall portfolio quality.
Although the allowance for credit losses is available to absorb potential losses
inherent in the Corporation's total credit portfolio, its composition reflects
an internal allocation to the consumer and commercial segments.
The allowance for credit losses is tested by analyzing total credit exposure to
customers including loans, federal funds sold, deposit placements and
off-balance-sheet exposures for credit-related and derivative financial
instruments. The method used to test the adequacy of the allowance has four
elements. First, the consumer reserve is established based on a statistical
analysis of historical loss. Second, specific reserves are allocated for
commercial credits that have identified loss potential. Third, a reserve for
potential losses not specifically identified, which are inherent in the
commercial credit portfolio, is computed by assigning a specific reserve factor
to each risk category of the portfolio based on a statistical analysis of the
Corporation's history. Fourth, management's best judgment is applied to
determine any additional amount needed for loss potential based largely on
portfolio trends and an assessment of the impact of the current economic
environment.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(Dollars in millions) 1993
- --------------------------------------------------------------------
Commercial Consumer Total
- --------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period..... $488 $ 136 $ 624
Provision for credit losses...... 78 192 270
Net charge-offs.................. (78) (104) (182)
Other, transferred to other
assets, related to securitized
receivables.................... -- (29) (29)
---- ----- -----
Balance, end of period........... $488 $ 195 $ 683
==== ===== =====
Allowance as a percentage of
loans outstanding.............. 3.4% 2.2% 3.0%
Allowance as a percentage of
nonperforming loans............ 209 -- 292
- --------------------------------------------------------------------
- --------------------------------------------------------------------
1992
- --------------------------------------------------------------------
Commercial Consumer Total
- --------------------------------------------------------------------
Balance, beginning of period.... $ 627 $ 132 $ 759
Provision for credit losses..... 261 164 425
Provision for loans held for
accelerated disposition....... 491 -- 491
Net charge-offs................. (255) (118) (373)
Charge-offs of loans upon
transfer to accelerated
disposition portfolio......... (636) -- (636)
Other, transferred to other
assets, related to securitized
receivables................... -- (42) (42)
----- ----- -----
Balance, end of period.......... $ 488 $ 136 $ 624
===== ===== =====
Allowance as a percentage of
loans outstanding............. 3.1% 2.0% 2.8%
Allowance as a percentage of
nonperforming loans (1)....... 125 -- 160
- --------------------------------------------------------------------
</TABLE>
(1) Excludes assets transferred to the accelerated disposition
portfolio.
At year-end 1993, the Corporation reclassified its reserve for securitized
credit card receivables from the allowance for credit losses to other assets.
This reclassification was made to conform to prevalent industry practice and had
no impact on reserves available for losses or on reported earnings. All
comparative data and related ratios have been adjusted to reflect this
reclassification.
31
<PAGE>
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonperforming assets, which consist of nonperforming loans and other real
estate, decreased from $414 million at December 31, 1992, to $277 million at
December 31, 1993. Although quarterly fluctuations may occur, the Corporation
does not expect nonperforming assets to increase significantly in 1994.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------------------------------------------------
December 31 (Dollars in millions) 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Commercial real estate.................................. $108 $ 93 $ 309 $ 274 $ 172
Troubled-country debtor................................. 50 76 150 210 536
Other................................................... 76 222 384 370 245
---- ---- ------ ------ ------
Total nonperforming loans............................. 234 391 843 854 953
Other real estate, net
Owned assets............................................ 29 10 283 433 46
In-substance foreclosed assets.......................... 14 13 174 96 129
---- ---- ------ ------ ------
Total other real estate, net.......................... 43 23 457 529 175
---- ---- ------ ------ ------
Total nonperforming assets............................ $277 $414 $1,300 $1,383 $1,128
==== ==== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
Nonperforming loans/loans outstanding..................... 1.0% 1.7% 3.3% 3.1% 3.2%
Nonperforming assets/loans outstanding and
other real estate, net.................................. 1.2 1.8 5.0 4.9 3.8
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING LOANS
Nonperforming loans include loans on which the Corporation does not accrue
interest (nonaccrual loans) and loans that bear a rate of interest that has been
reduced below market rates due to the deteriorating financial condition of the
borrower (accrual renegotiated loans).
<TABLE>
<CAPTION>
NONPERFORMING LOANS
- -------------------------------------------------------------------------------------------------------------------------
December 31 (In millions) 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.......................................... $230 $386 $838 $844 $942
Accrual renegotiated loans................................ 4 5 5 10 11
---- ---- ---- ---- ----
Total nonperforming loans..................... $234 $391 $843 $854 $953
==== ==== ==== ==== ====
Nonperforming loans
Domestic................................................ $171 $286 $645 $620 $381
Foreign................................................. 63 105 198 234 572
---- ---- ---- ---- ----
Total nonperforming loans..................... $234 $391 $843 $854 $953
==== ==== ==== ==== ====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RECONCILIATION OF CHANGE IN NONPERFORMING LOANS
- -----------------------------------------------------------------------------
Commercial
(In millions) Real Estate Other Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans--
December 31, 1992............. $ 93 $298 $ 391
Loans placed on
nonperforming status.......... 263 99 362
Charge-offs..................... (53) (70) (123)
Transferred to other
real estate................... (51) -- (51)
Sales and dispositions.......... -- (82) (82)
Transferred to accrual
status........................ (107) (60) (167)
Other, principally
payments...................... (37) (59) (96)
----- ---- -----
Nonperforming loans--
December 31, 1993............. $ 108 $126 $ 234
===== ==== =====
- -----------------------------------------------------------------------------
</TABLE>
OTHER REAL ESTATE
Other real estate includes assets that either have been acquired in satisfaction
of debt or have been classified as in-substance foreclosures. The Corporation
believes that taking title to real estate assets improves its ability to sta-
bilize property values and liquidate those assets.
The Corporation had $43 million of other real estate at year-end 1993, compared
with $23 million at year-end 1992. The provision for other real estate was $4
million in 1993, compared with $57 million (including provisions related to the
transfer of assets to the asset disposition portfolio) in 1992. Operating
results for other real estate assets were essentially break-even in 1993, versus
$7 million in losses in 1992.
32
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Consumer Loans
- -----------------------------------------------------------------------------------------------------------------
December 31 (In millions) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Credit card loans.................................... $ 5,778 $ 4,135 $3,843 $3,930 $5,099
Other consumer loans................................. 2,896 2,737 2,482 2,494 2,791
Securitized credit card receivables.................. 4,958 4,500 3,573 3,130 1,595
------- ------- ------ ------ ------
Total........................................ $13,632 $11,372 $9,898 $9,554 $9,485
======= ======= ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------
AVERAGE CREDIT CARD RECEIVABLES
- -----------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------
Credit card loans outstanding........................ $4,170 $3,537 $3,516 $4,497 $4,190
Securitized credit card receivables.................. 4,839 3,918 3,320 2,063 1,800
------ ------ ------ ------ ------
Total credit card receivables........................ $9,009 $7,455 $6,836 $6,560 $5,990
====== ====== ====== ====== ======
Total net charge-offs (including securitizations).... $ 332 $ 316 $ 309 $ 245 $ 208
====== ====== ====== ====== ======
Net charge-offs/average total receivables............ 3.7% 4.2% 4.5% 3.7% 3.5%
=== === === === ===
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
CONSUMER RISK MANAGEMENT
Consumer loans consist of credit card receivables as well as home mortgage
loans, home equity loans and other forms of installment credit. The consumer
loan portfolio increased $1.8 billion during the year to $8.7 billion at
year-end 1993. Including securitized credit card receivables, the consumer
portfolio increased $2.3 billion, or 20 percent, to $13.6 billion at year-end
1993.
The consumer risk management process focuses on the credit card segment
separately from other parts of the portfolio. For both the on-balance-sheet and
the securitized credit card portfolios, loss potential is tested using
statistically expected levels of losses based on the source, age and other risk
characteristics of each portfolio.
For the other segments of the consumer portfolio, reserve factors are based on
the Corporation's historical loss experience for similar credits, as well as
on industry averages.
At year-end 1993, the allowance for credit losses related to the consumer
portfolio was $195 million, or 2.2 percent of loans. Comparable figures for 1992
were $136 million, or 2 percent. Net charge-offs in 1993 were $104 million,
compared with $118 million in 1992. The 1993 decrease resulted from a higher
level of securitized credit card receivables and the impact of the improving
economy on the cardholder base.
Total credit card receivables (held in the portfolio plus sold to investors
through securitization transactions) were $10.7 billion at December 31, 1993, a
24 percent increase from $8.6 billion at December 31, 1992.
Net charge-offs in 1993 for the total owned and securitized credit card
portfolio were $332 million, or 3.7 percent of receivables, compared with $316
million, or 4.2 percent of receivables, in 1992. The Corporation expects the net
charge-off rate in 1994 to be similar to that in 1993. Management continues to
maintain tight approval standards for new accounts and has implemented policies
and procedures intended to minimize losses from existing accounts.
COMMERCIAL RISK MANAGEMENT
The commercial risk portfolio includes all domestic commercial credit exposure
and all foreign exposure, including obligors defined as troubled-country
debtors in countries that have been unable or unwilling to service their
external obligations on originally contracted terms.
Credit exposure includes the credit risks associated with both on-and
off-balance-sheet-financial instruments. Credit risks from off-balance-sheet
instruments arise from credit-related and derivative financial instruments.
See Note 15 on page 56 for information related to the credit exposure associated
with these off-balance-sheet instruments.
In the commercial portfolio, credit quality is rated according to nine defined
levels of credit risk. The lower five 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 where
it may be increasingly difficult for the Corporation to be fully repaid without
restructuring the credit. Credits that are Doubtful are likely to result in some
principal loss. Those portions of credits classified as Loss are charged off.
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 established accordingly.
Commercial loans declined 9 percent from $15.8 billion at December 31, 1992, to
$14.4 billion at December 31, 1993. The reduction was due to a strategic
decision by the Corporation to focus on improving the profitability of the
loan product, which resulted in a reduction in credit exposure for certain
relationships.
Total net charge-offs in the commercial portfolio decreased to $78 million in
1993 from $255 million in 1992. The provision for commercial credit losses
decreased to $78 million in 1993 from $261 million in 1992; this represents 54
basis points of related loans, a significant improvement from 165 basis points
in 1992. The year-end commercial reserve of $488 million represented 3.4 percent
of total commercial loans and 209 percent of related nonperforming loans.
33
<PAGE>
- -------------------------------------------------------------------------------
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 percent 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, 1993, commercial real estate loans totaled $2.474 billion, of
which 83 percent were loans under $20 million, with the remaining loans between
$20 million and $40 million. Of the total, 97 percent were to domestic borrowers
and the remaining 3 percent were to foreign borrowers.
During 1993, net charge-offs in the commercial real estate portfolio segment
were $51 million. Nonperforming commercial real estate assets, including other
real estate, totaled $151 million, or 6 percent of related assets, at December
31, 1993.
Some U.S. commercial real estate markets appear to be stabilizing while others
remain depressed. As a result, individual assets in the existing commercial real
estate portfolio may continue to deteriorate in 1994.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COMMERCIAL REAL ESTATE ASSETS
- -----------------------------------------------------------------------------------------------------
December 31 (Dollars in millions) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial real estate loans.............. $2,474 $2,795 $4,403 $4,927 $4,602
Nonperforming loans....................... 108 93 309 274 172
Other real estate, net.................... 43 23 457 529 175
Nonperforming assets...................... 151 116 766 803 347
Net loan charge-offs...................... 51 127 183 79 15
Nonperforming assets/loans outstanding
and other real estate, net.............. 6.0% 4.1% 15.8% 14.7% 7.3%
- -----------------------------------------------------------------------------------------------------
</TABLE>
The real estate portfolio is diversified by geographic region, type of project
and customer. The following table shows loans secured by real estate identified
by both geographic region and collateral type. Since real estate-related loans
are not in all cases geographic- or property-specific, such loans are not
included in the table below. At December 31, 1993, real estate-related loans
totaled $195 million, of which $3 million were nonperforming.
<TABLE>
<CAPTION>
COMMERCIAL REAL ESTATE ASSETS
- ---------------------------------------------------------------------------------------------------------------
December 31, 1993 (Dollars in millions)
- ---------------------------------------------------------------------------------------------------------------
Industrial/
Office Shopping Land Service
Geographic Region Buildings Hotels Centers Loans Centers Other Total Percent
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Chicago............................ $242 $ 31 $150 $ 79 $554 $613 $1,669 73%
Southeast.......................... 23 23 43 -- 5 6 100 5
Los Angeles........................ 32 11 16 -- 13 23 95 4
Other California................... 11 31 17 -- 10 23 92 4
Other Midwest...................... 33 5 14 3 7 4 66 3
Arizona/Colorado/Texas............. 3 15 -- 27 5 -- 50 2
Other.............................. 78 69 37 6 9 8 207 9
---- ---- ---- ---- ---- ---- ------ ---
Total loans secured
by real estate........... $422 $185 $277 $115 $603 $677 $2,279 100%
==== ==== ==== ==== ==== ==== ====== ===
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans secured
by real estate................... $ 27 $ 2 $ 3 $ 28 $ 22 $ 23 $ 105 --
Other real estate.................. 1 -- 14 8 9 11 43 --
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
- ------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into a variety of derivative financial instruments in
its trading, asset and liability management, and venture capital activities.
Derivative financial instruments include interest rate, currency, commodity and
equity swaps, forwards, futures, options, caps, floors, collars, forward rate
agreements, and other conditional or exchange contracts. See Note 15 on page
56 for a discussion of the nature and terms of derivative financial instruments.
NOTIONAL PRINCIPAL OR CONTRACTUAL AMOUNTS OF
DERIVATIVE FINANCIAL INSTRUMENTS
The following table represents the gross notional principal or contractual
amounts of outstanding derivative financial instruments used in the
Corporation's trading, asset and liability management, and venture capital
activities. The amounts do not represent the market or credit risk associated
with these derivative financial instruments, but rather give an indication of
the volume of the transactions. These amounts greatly exceed the credit risk
associated with these derivative financial instruments and do not reflect the
netting of offsetting transactions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Asset and
December 31, 1993 Liability Venture
(In billions) Trading Management Capital Total
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange
contracts............. $219.4 $ 1.1 $ -- $220.5
Interest rate
contracts............. 200.7 8.5 -- 209.2
Other contracts......... 0.8 0.8 0.1 1.7
------ ----- ---- ------
Total............... $420.9 $10.4 $0.1 $431.4
====== ===== ==== ======
- --------------------------------------------------------------------
</TABLE>
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments used in trading and venture capital
activities are valued at prevailing market rates on a present value basis.
Realized and unrealized gains and losses are included in noninterest income as
trading account profits, foreign exchange trading profits and equity securities
gains. Where appropriate, compensation for credit risk and ongoing servicing is
deferred and taken into income over the term of the derivatives. Any gain or
loss on the early termination of an interest rate swap used in trading
activities is recognized currently in trading account profits.
Interest rate derivative financial instruments are used to reduce the risk of a
specific asset or liability position or to adjust a specific interest rate
exposure that is identified by the Corporation's asset and liability monitoring
process.
Income or expense on most derivative financial instruments used to manage
interest rate exposure is recorded on an accrual basis as an adjustment to the
yield of the related interest rate exposures over the periods covered by the
contracts. If an interest rate swap that is used to manage interest rate risk is
terminated early, any resulting gain or loss is deferred and amortized as an
adjustment to the yield of the underlying interest rate exposure position over
the remaining periods originally covered by the terminated swap.
INCOME RESULTING FROM DERIVATIVE FINANCIAL INSTRUMENTS
A discussion of the Corporation's noninterest income, which includes income
resulting from derivatives used in trading and venture capital activities, is on
pages 22 and 23.
A discussion of the Corporation's structural interest rate risk management,
which addresses income resulting from derivatives used in asset and liability
management activities, is on pages 27 and 28.
Deferred gains and losses on the early termination of interest rate swaps used
to manage interest rate risk total a net deferred gain of $93 million as of
December 31, 1993. A significant portion of these deferred gains related to
securitized credit card receivables. This amount is scheduled to be amortized
into income in the following periods: $44 million in 1994, $28 million in 1995,
$19 million in 1996 and $2 million thereafter.
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 discussion on page 29.
The Corporation's credit exposure resulting from derivative financial
instruments is represented by their fair value amounts, increased by an estimate
of maximum adverse position exposure. The incremental amount of credit exposure
for potential adverse movement is calculated by using a statistical model that
estimates changes over time in exchange rates, interest rates and other relevant
factors. Credit exposure amounts fluctuate as a function of maturity, interest
rates, foreign exchange rates, commodity prices and equity prices. These amounts
may be overstated because they do not consider collateral and other security
or the offsetting of losses with the same counterparties based on legally
enforceable termination and netting rights. Gross credit exposure is presented
in the following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
December 31 (In billions) 1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
Interest rate contracts....................... $ 3.9 $ 2.8
Foreign exchange contracts.................... 2.6 5.3
----- -----
Total fair value exposure................. 6.5 8.1
Additional exposure based on estimate of
maximum adverse position exposure........... 4.1 3.7
----- -----
Gross credit exposure......................... $10.6 $11.8
===== =====
- --------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
- ----------------------------------------------------------------------------------------
SELECTED CAPITAL RATIOS
- ----------------------------------------------------------------------------------------
December 31 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common equity/assets (1)................... 7.2% 5.9% 5.1% 4.8% 4.5%
Common equity less goodwill/assets (1)..... 7.0 5.6 4.8 4.6 4.3
Tangible common equity ratio (1)........... 6.6 5.0 4.1 3.9 3.5
Stockholders' equity/assets................ 8.1 6.9 6.1 5.5 5.6
Risk-based capital ratio (1)(2)
Tier 1................................... 8.8 6.7 5.5 4.9 4.7
Total.................................... 13.6 10.8 9.4 8.3 8.0
Double leverage ratio...................... 110 114 116 119 120
Dividend payout ratio...................... 15 188 174 60 35
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Net of investment in First Chicago Capital Markets, Inc.
(2) Under 1992 risk-based capital rules.
The Corporation's capital supports business growth, provides protection to
depositors, and represents the investment of stockholders on which management
strives to achieve adequate returns. The capital adequacy objectives of the
Corporation and its principal bank subsidiaries have been developed to meet
these needs. These objectives have been integrated with the Corporation's risk
management policies to form a cohesive financial management framework.
To help achieve these objectives, the Finance Committee, which oversees and
approves the Corporation's capital goals, annually establishes a capital plan.
The plan is intended to ensure that the Corporation and each of its sub-
sidiaries have capital structures consistent with prudent management principles
and regulatory requirements.
The Corporation's principal capital adequacy objectives are: to maintain a
capital base reasonably commensurate with the overall risk profile of the
Corporation; to maintain strong capital ratios relative to its peers; and to
meet all regulatory guidelines. Management believes that a strong capital base
is instrumental in achieving enhanced stockholder returns over the long term.
To determine the level of capital appropriate to the Corporation's risk
profile, an economic capital framework has been developed that calculates
capital required to absorb both expected and unexpected losses with a high
degree of confidence. The framework encompasses credit risk, market risk and
operating/fiduciary risk, and is a key tool for business decision-making within
the Corporation. Management of differences between actual capital, economic
capital requirements and regulatory capital requirements is a fundamental task
of this capital planning process.
In 1993, the Corporation issued $200 million of convertible preferred stock
and $550 million of subordinated debt. An additional $200 million of
subordinated debt was issued in January 1994. In addition, during 1993 the Cor-
poration called its Series A Cumulative Convertible Preferred Stock for
redemption. Virtually all holders of the Series A preferred elected to convert
to common stock, resulting in the issuance of approximately 3 million addi-
tional shares of the Corporation's common stock.
In November 1993, the Corporation announced a share repurchase program intended
to meet issuance requirements arising out of various employee benefit plans.
Under the program, the Corporation may, from time to time, repurchase up to 2.5
million shares of its common stock. Through December 31, 1993, 200,000 shares
had been repurchased at an average price of $42.21.
36
<PAGE>
- -------------------------------------------------------------------------------
The Corporation has established an objective of ensuring that its regulatory
capital ratios remain in excess of the well-capitalized minimums. To provide
reasonable assurance of meeting this goal, the Corporation has established a
target range of 7 percent to 8 percent for Tier 1 capital, and a target range of
11 percent to 12 percent for total risk-based capital. The following table shows
the components of regulatory capital as defined by the banking regulators
for risk-based capital and leverage ratio guidelines.
<TABLE>
<CAPTION>
REGULATORY CAPITAL
- --------------------------------------------------------------------
December 31 (In millions) 1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
Tier 1 Capital
Common stockholders' equity................. $3,503 $2,732
Preferred stock............................. 761 669
Less: 50% of investment in First
Chicago Capital Markets, Inc.......... (69) (59)
Less: Goodwill.............................. (97) (119)
------ ------
Tier 1 Capital............................ 4,098 3,223
Tier 2 Capital
Allowance for credit losses (1)............. 581 605
Qualifying long-term debt................... 1,682 1,452
Less: 50% of investment in First
Chicago Capital Markets, Inc.......... (69) (59)
------ ------
Tier 2 Capital............................ 2,194 1,998
------ ------
Total Capital........................... $6,292 $5,221
====== ======
- --------------------------------------------------------------------
</TABLE>
(1) Limited to 1.25 percent of risk-weighted assets.
As of December 31, 1993, all of the Corporation's banking subsidiaries exceeded
the regulatory capital guidelines for well-capitalized status.
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS
- --------------------------------------------------------------------
Regulatory
December 31 Requirements
------------- ----------------------
Well-
1993 1992 Minimum Capitalized
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-Based Capital Ratios
Tier 1 capital......... 8.8% 6.7% 4.0% 6.0%
Total capital.......... 13.6 10.8 8.0 10.0
Leverage Ratio............. 8.0 6.6 3.0 5.0
- --------------------------------------------------------------------
</TABLE>
The Corporation intends to ensure that its capital level is commensurate with
its risk profile, and that capital resources on hand are adequately deployed
to earn attractive returns for stockholders. If attractive deployment
opportunities are not available, the Corporation will ultimately return excess
capital to its stockholders.
The Corporation's common dividend policy reflects its earnings outlook, its
historical dividend payout ratio, peer comparisons, and the need to build
capital or alternatives for attractive investment opportunities. During 1991,
the Corporation paid dividends in excess of its reported earnings based on its
expectation of improved future results. Due to high credit provisions resulting
from continuing weakness in the commercial real estate market, the Corporation
reduced its dividend payment by 40 percent in January 1992. Since establishing
the accelerated disposition portfolio, the Corporation's quarterly earnings
have consistently exceeded its dividend payouts. In November 1993, the
Corporation increased its quarterly common dividend rate to $0.40 per share
effective with the January 1994 payment.
In the capitalization of all subsidiaries, the Corporation's policy is to limit
double leverage (the use of holding company debt to finance equity investments
in its subsidiaries) to no more than 125 percent at any one time, and no more
than 115 percent on average. At year-end 1993, the Corporation's double leverage
ratio was 110 percent, down from 114 percent at December 31, 1992.
37
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
C O N S O L I D A T E D B A L A N C E S H E E T
First Chicago Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------
December 31 (Dollars in millions) 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks--noninterest-bearing..................................... $ 3,916 $ 3,222
Due from banks--interest-bearing................................................. 6,037 6,116
Federal funds sold and securities under resale agreements........................ 8,783 6,892
Trading account assets........................................................... 4,536 3,312
Investment securities (fair values--$2,264 in 1993 and $2,408 in 1992)........... 2,256 2,400
Loans (net of unearned income--$282 in 1993 and $357 in 1992).................... 23,103 22,692
Less allowance for credit losses............................................... 683 624
------- -------
Total loans, net............................................................... 22,420 22,068
Assets held for accelerated disposition.......................................... 107 876
Premises and equipment........................................................... 635 593
Accrued income receivable........................................................ 407 356
Customers' acceptance liability.................................................. 517 560
Currency options purchased....................................................... 536 622
Other assets..................................................................... 2,410 2,264
------- -------
Total assets........................................................... $52,560 $49,281
======= =======
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Demand......................................................................... $ 8,184 $ 7,575
Savings........................................................................ 7,541 7,618
Time........................................................................... 4,925 6,262
Foreign offices................................................................ 7,536 8,285
------- -------
Total deposits......................................................... 28,186 29,740
Federal funds purchased and securities under repurchase agreements............... 8,255 6,962
Commercial paper................................................................. 164 172
Other funds borrowed............................................................. 5,843 3,997
Long-term debt................................................................... 2,065 1,705
Acceptances outstanding.......................................................... 517 560
Currency options written......................................................... 501 612
Other liabilities................................................................ 2,765 2,132
------- -------
Total liabilities...................................................... 48,296 45,880
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
Preferred stock--without par value, authorized 15,000,000 shares
Outstanding:
- ---------------------------------------------------------------------------------
1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A ($ 50 stated value).................... 2,410,000 2,410,000 121 121
Series B ($100 stated value).................... 1,191,000 1,191,000 119 119
Series C ($100 stated value).................... 713,800 713,800 71 71
Series D ($ 25 stated value).................... 6,000,000 6,000,000 150 150
Series E ($625 stated value).................... 160,000 160,000 100 100
Convertible Series A ($50 stated value)......... -- 2,151,451 -- 108
Convertible Series B ($5,000 stated value)...... 40,000 -- 200 --
Common stock--$5 par value....................................................... 434 412
- ---------------------------------------------------------------------------------
1993 1992
- ---------------------------------------------------------------------------------
Number of shares authorized....................... 150,000,000 150,000,000
Number of shares issued........................... 86,715,812 82,353,507
Number of shares outstanding...................... 86,398,605 82,331,001
Surplus.......................................................................... 1,724 1,599
Retained earnings................................................................ 1,358 721
Other adjustments................................................................ -- 1
------- -------
Total.................................................................. 4,277 3,402
Less treasury stock at cost, 317,207 shares in 1993 and 22,506 shares in 1992.... 13 1
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity................................................... 4,264 3,401
------- -------
Total liabilities and stockholders' equity............................. $52,560 $49,281
======= =======
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this balance sheet.
38
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
C O N S O L I D A T E D I N C O M E S T A T E M E N T
First Chicago Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------
For the Year (In millions, except per share amounts) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................................................ $1,687.4 $1,894.4 $2,476.0
Interest on bank balances......................................................... 298.0 358.0 476.2
Interest on federal funds sold and securities under resale agreements............. 344.8 284.8 329.3
Interest on trading account assets................................................ 221.9 259.0 230.1
Interest on investment securities (including dividends)........................... 72.0 73.4 93.0
-------- -------- --------
Total................................................................... 2,624.1 2,869.6 3,604.6
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits.............................................................. 644.1 973.7 1,713.9
Interest on federal funds purchased and securities under repurchase agreements.... 308.1 345.3 428.2
Interest on other funds borrowed.................................................. 295.8 240.7 254.2
Interest on long-term debt........................................................ 150.3 126.9 128.3
-------- -------- --------
Total................................................................... 1,398.3 1,686.6 2,524.6
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME............................................................... 1,225.8 1,183.0 1,080.0
Provision for credit losses....................................................... 270.0 425.0 440.0
Provision for loans held for accelerated disposition.............................. -- 491.0 --
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES AND
PROVISION FOR LOANS HELD FOR ACCELERATED DISPOSITION............................ 955.8 267.0 640.0
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits........................................................... 179.7 67.8 90.7
Foreign exchange trading profits.................................................. 104.9 109.5 95.1
Equity securities gains........................................................... 480.2 204.6 63.0
Investment securities gains (losses).............................................. 0.3 8.6 (3.3)
-------- -------- --------
Market-driven revenue........................................................... 765.1 390.5 245.5
Credit card fee revenue........................................................... 694.2 516.1 411.8
Service charges and commissions................................................... 432.5 381.0 348.7
Fiduciary and investment management fees.......................................... 200.7 189.8 174.8
Net gains from accelerated disposition portfolio activities....................... 60.0 -- --
Other income...................................................................... 49.9 10.8 44.4
-------- -------- --------
Total................................................................... 2,202.4 1,488.2 1,225.2
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits.................................................... 853.9 748.0 722.8
Occupancy expense of premises, net................................................ 147.7 186.0 152.8
Equipment rentals, depreciation and maintenance................................... 110.3 111.2 107.5
Other expense..................................................................... 742.0 719.2 546.9
-------- -------- --------
Subtotal.................................................................. 1,853.9 1,764.4 1,530.0
Provision for other real estate held for accelerated disposition.................. -- 134.0 --
Provision for other real estate................................................... 4.2 56.9 104.3
Restructuring provision........................................................... -- -- 67.0
-------- -------- --------
Total................................................................... 1,858.1 1,955.3 1,701.3
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES................................................. 1,300.1 (200.1) 163.9
Applicable income taxes (benefit)................................................. 495.6 (85.6) 47.6
-------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES........ 804.5 (114.5) 116.3
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES--
VALUATION OF VENTURE CAPITAL INVESTMENT SECURITIES.............................. -- 220.7 --
RECOGNITION OF CREDIT CARD SOLICITATION COSTS................................... -- (12.7) --
-------- -------- --------
NET INCOME........................................................................ $ 804.5 $ 93.5 $ 116.3
======== ======== ========
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY............................ $ 747.5 $ 48.9 $ 78.1
======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
PRIMARY
Income (loss) before cumulative effect of changes
in accounting principles...................................................... $8.78 $(2.08) $1.15
Cumulative effect of changes in accounting principles--
Valuation of venture capital investment securities............................ -- 2.89 --
Recognition of credit card solicitation costs................................. -- (0.17) --
----- ------ -----
Net income........................................................................ $8.78 $ 0.64 $1.15
===== ====== =====
FULLY DILUTED
Income (loss) before cumulative effect of changes in accounting principles...... $8.43 $(2.08) $1.15
Cumulative effect of changes in accounting principles--
Valuation of venture capital investment securities............................ -- 2.89 --
Recognition of credit card solicitation costs................................. -- (0.17) --
----- ------ -----
Net income........................................................................ $8.43 $ 0.64 $1.15
===== ====== =====
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
39
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S
I N S T O C K H O L D E R S ' E Q U I T Y
First Chicago Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------
For the Three Years Ended Treasury
December 31, 1993 Preferred Common Retained Other Stock
(In millions) Stock Stock Surplus Earnings Adjustments (at Cost) Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990........ $ 419 $330 $1,243 $818 $ 4 $ (2) $2,812
Net income...................... -- -- -- 116 -- -- 116
Issuance of common stock........ -- 15 51 -- -- -- 66
Issuance of preferred stock..... 150 -- (5) -- -- -- 145
Cash dividends declared
Preferred stock............... -- -- -- (38) -- -- (38)
Common stock.................. -- -- -- (136) -- -- (136)
Other........................... -- -- 8 -- (1) (2) 5
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991........ $ 569 $345 $1,297 $760 $ 3 $ (4) $2,970
Net income...................... -- -- -- 94 -- -- 94
Issuance of common stock........ -- 67 306 -- -- -- 373
Issuance of preferred stock..... 100 -- (4) -- -- -- 96
Cash dividends declared
Preferred stock............... -- -- -- (44) -- -- (44)
Common stock.................. -- -- -- (89) -- -- (89)
Other........................... -- -- -- -- (2) 3 1
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992........ $ 669 $412 $1,599 $721 $ 1 $ (1) $3,401
Net income...................... -- -- -- 804 -- -- 804
Issuance of common stock........ -- 7 37 -- -- -- 44
Issuance of preferred stock..... 200 -- (4) -- -- -- 196
Redemption of preferred stock... (108) 15 92 -- -- -- (1)
Cash dividends declared
Preferred stock............... -- -- -- (57) -- -- (57)
Common stock.................. -- -- -- (110) -- -- (110)
Treasury stock purchases........ -- -- -- -- -- (8) (8)
Other........................... -- -- -- -- (1) (4) (5)
----- ---- ------ ------ --- ---- ------
BALANCE, DECEMBER 31, 1993........ $ 761 $434 $1,724 $1,358 $-- $(13) $4,264
===== ==== ====== ====== === ==== ======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
40
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
First Chicago Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
For the Year (In millions) 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................... $ 804 $ 94 $ 116
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization...................................... 188 173 158
Combined credit provisions (including accelerated disposition
provision)....................................................... 274 1,107 544
Gain on sale of investment advisory business....................... -- -- (15)
Equity securities gains............................................ (480) (205) (63)
Net gains from accelerated disposition portfolio activities........ (60) -- --
Cumulative effect of changes in accounting principles.............. -- (208) --
Net increase in trading account assets............................. (1,224) (1,346) (628)
Net (increase) decrease in accrued income receivable............... (51) 174 388
Net decrease in other assets....................................... 76 678 442
Other noncash adjustments.......................................... 6 (87) (544)
-------- --------- ---------
Total adjustments.................................................. (1,271) 286 282
Net cash provided by (used in) operating activities.................. (467) 380 398
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold and
securities under resale agreements................................. (1,891) (1,684) 685
Purchases of investment securities................................... (3,068) (1,202) (819)
Proceeds from maturities of debt investment securities............... 3,047 703 623
Proceeds from sales of debt investment securities.................... -- 366 159
Proceeds from sales of equity investment securities.................. 598 244 222
Investment portfolio acquired........................................ -- -- (134)
Net increase in credit card receivables.............................. (3,493) (1,515) (995)
Credit card receivables securitized.................................. 1,700 1,000 1,000
Net decrease in loans of bank subsidiaries........................... 973 1,186 1,597
Loans made to customers and purchased from others
by nonbank subsidiaries............................................ (142) (181) (143)
Principal collected on and proceeds from sale of loans
by nonbank subsidiaries............................................ 302 377 103
Loan portfolio acquired.............................................. -- -- (8)
Loan recoveries...................................................... 97 88 77
Net proceeds from sales of assets held for accelerated disposition... 829 174 --
Purchases of premises and equipment.................................. (213) (151) (175)
Proceeds from sales of premises and equipment........................ 71 63 54
-------- --------- ---------
Net cash provided by (used in) investing activities.................. (1,190) (532) 2,246
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits.......................... 525 1,934 550
Net decrease in time deposits........................................ (1,342) (3,269) (1,409)
Deposits acquired.................................................... 12 -- 1,516
Net decrease in deposits in foreign offices.......................... (687) (978) (602)
Net increase (decrease) in federal funds purchased and
securities under repurchase agreements............................. 1,293 1,817 (1,105)
Net decrease in commercial paper..................................... (8) (54) (11)
Proceeds from other funds borrowed................................... 80,869 110,418 249,896
Repayment of other funds borrowed.................................... (79,024) (109,134) (249,956)
Proceeds from issuance of long-term debt............................. 826 234 334
Repayment of long-term debt.......................................... (471) (257) (43)
Net increase (decrease) in other liabilities......................... 285 (1,102) (578)
Dividends paid....................................................... (158) (145) (172)
Proceeds from issuance of common stock............................... 41 375 52
Proceeds from reissuance of treasury stock........................... 4 6 2
Purchase of treasury stock........................................... (13) (1) --
Proceeds from issuance of preferred stock............................ 196 96 145
Payment for redemption of preferred stock............................ (1) -- --
-------- --------- ---------
Net cash provided by (used in) financing activities.................. 2,347 (60) (1,381)
- ----------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS......... (75) (45) (624)
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 615 (257) 639
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 9,338 9,595 8,956
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................. $ 9,953 $ 9,338 $ 9,595
======== ========= =========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest paid in cash by the Corporation totaled $1.4 billion in 1993, $1.9
billion in 1992 and $2.9 billion in 1991. Income taxes paid in cash by the
Corporation totaled $175 million in 1993, $50 million in 1992 and $47 million in
1991.
The Corporation financed the sale of other real estate in the amount of $2
million, $135 million and $86 million in 1993, 1992 and 1991, respectively. $51
million, $192 million and $222 million in loans were transferred to other real
estate in 1993, 1992 and 1991, respectively.
The accompanying notes to consolidated financial statements are an integral part
of this statement.
41
<PAGE>
- --------------------------------------------------------------------------------
N O T E S T O
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
First Chicago Corporation and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for First Chicago Corporation (the
Corporation) and subsidiaries have been prepared in conformity with generally
accepted accounting principles. A description of those accounting policies of
particular significance follows.
(a) PRINCIPLES OF CONSOLIDATION
The Corporation's consolidated financial statements include the accounts of all
subsidiaries more than 50 percent owned. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(b) INTANGIBLE 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 the value of acquired customer lists, core
deposits and credit card relationships, are amortized using various methods over
the periods benefited, ranging from 5 to 17 years.
(c) INVESTMENT SECURITIES
In 1993, the Corporation prospectively adopted Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, for debt and equity securities not held by its venture capital
subsidiaries. This adoption did not have a material impact on the Corporation's
financial statements.
Debt securities, excluding those held by the venture capital subsidiaries, that
the Corporation intends to and has the ability to hold to maturity, are carried
at historical cost, adjusted for amortization of premiums and accretion of
discounts. Previously, such accounting treatment was applied to debt securities
that were intended to be held for long-term investment. Intent is designated at
the time the security is acquired and is evaluated on an ongoing basis.
Other debt and all equity securities, excluding those held by the venture
capital subsidiaries, are classified as available for sale and are carried at
fair value, with unrealized gains and losses and applicable income taxes
excluded from earnings and reported in other adjustments in stockholders'
equity. Previously, these securities were carried at the lower of cost or fair
value.
Realized gains and losses, and unrealized impairments in value that are not
temporary, are computed using the specific identification method, and are
reported in noninterest income as investment securities gains (losses) for debt
securities and as equity securities gains for equity securities.
The Corporation adopted fair value accounting for investments of its venture
capital subsidiaries on January 1, 1992. Changes in the fair value of such
investments are recognized in noninterest income as equity securities gains.
Previously, such investments were carried at the lower of aggregate cost or fair
value.
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, estimates of fair value have been
made by management that consider the investees' financial results, conditions
and prospects, and the values of comparable public companies.
Because of the nature of these investments, the equity method of accounting is
not used in situations where the Corporation has a greater than 20 percent
ownership interest.
It was not practicable to retroactively develop a valuation process for these
investments for periods prior to January 1, 1992. As a result, pro forma net
income and earnings per share amounts for 1991 are not presented.
(d) TRADING ACCOUNT ACTIVITIES
Trading account assets are stated at market value. Realized and unrealized gains
and losses on trading account activities are reflected in noninterest income as
trading account profits.
(e) DERIVATIVE FINANCIAL INSTRUMENTS
For a discussion of the Corporation's accounting policies for derivative
financial instruments, see the Derivative Financial Instruments section on page
35.
(f) NONPERFORMING LOANS
Loans, including lease-financing receivables, are considered nonperforming when
placed on nonaccrual status, or when terms are renegotiated to yield below
current market rates.
Loans, other than credit card loans, are placed on nonaccrual status when, in
the opinion of management, there are doubts as to collectibility of interest or
principal, or when principal or interest is past due 90 days or more, and the
loan is not well secured and in the process of collection. Interest previously
accrued but not collected is reversed and charged against interest income at the
time the related loan is placed on nonaccrual status. Accrued interest on credit
card loans is charged against interest income when 180 days past due.
Interest payments received on nonaccrual loans are recorded as reductions of
principal if the collection of the remaining carrying amount is doubtful;
otherwise, such payments are recorded as interest income.
Loans are considered to be renegotiated when the yield on the renegotiated
assets is reduced below current market rates by an agreement with the borrower.
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.
42
<PAGE>
- ------------------------------------------------------------------------------
(g) CREDIT CARD SECURITIZATION
The Corporation actively packages and sells credit card receivables as
securities to investors. Since the receivables are sold at par value, no gains
or losses are recorded at the time of sale.
The amount of credit card interest income and fee revenue in excess of
interest paid to certificate holders, credit losses and other trust expenses is
recognized monthly as servicing fees in credit card fee revenue over the term of
the transaction. Other transaction costs are deferred and amortized as a
reduction of servicing fees.
During 1993, the Corporation reclassified the portion of the allowance for
credit losses related to securitized credit card receivables to other assets, to
offset the receivables recognized and to be received from the securitization
trust. This balance sheet reclassification conforms to the more prevalent
industry practice. Prior year amounts have been adjusted to be consistent with
current year presentation.
(h) OTHER REAL ESTATE
Other real estate includes assets that have been either acquired in satisfaction
of debt (assets owned) or substantively repossessed (in-substance
foreclosures). In-substance foreclosures occur when the market value of the
collateral is less than the legal obligation of the borrower and the Corporation
expects repayment of the loan to come only from collateral. Other real estate is
recorded at fair value at the date of transfer. Any valuation adjustments
required at the date of transfer are charged to the allowance for credit losses.
Subsequent to acquisition, other real estate is carried at the lower of cost or
fair value, based on periodic evaluations that consider changes in market
conditions, development and disposition costs, and estimated holding periods.
Operating results from assets acquired in satisfaction of debt, including rental
income less operating costs and depreciation, are recorded in other noninterest
income.
(i) 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 from
customer credit exposure resulting from loans, federal funds sold, deposit
placements, and off-balance-sheet credit exposure for credit-related and
derivative financial instruments. The amount of the allowance is based on
management's formal review and analysis of potential credit losses, as well as
prevailing economic conditions. The allowance is increased by provisions for
credit losses, which are charged to earnings, and is reduced by charge-offs
net of recoveries.
(j) ASSETS HELD FOR ACCELERATED DISPOSITION
In 1992, the Corporation segregated certain commercial real estate assets and
related commitments in an accelerated disposition portfolio. The Corporation
transferred assets to the accelerated disposition portfolio at their estimated
disposition values. The assets in this portfolio are carried at the lower of the
initially established carrying values or newly estimated disposition values. The
credit and valuation process related to this portfolio is performed quarterly to
assess the ongoing condition of each individual credit, to determine any
change in credit risk classification, and to determine the need, if any, for
additional valuation adjustments. Income recognition is based on the credit
characteristics of the individual assets in the disposition portfolio. Net
gains as a result of transaction activity related to disposition portfolio
assets are included in noninterest income.
(k) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization, which are computed principally on the straight-line method over
the estimated useful lives of the related assets. Gains and losses on dis-
positions are reflected in other noninterest income. Maintenance and repairs
are charged to noninterest expense as incurred.
(l) FOREIGN CURRENCY TRANSLATION
The Corporation's translation policies are based on a determination of the
primary operating currency (functional currency) for each foreign
installation. If a foreign installation's functional currency is the U.S.
dollar, assets and liabilities carried in local currency are translated to U.S.
dollars at current exchange rates except for premises and equipment, which are
translated at historic rates. Translation effects and results of related hedging
transactions, neither of which is material, are included in other noninterest
income.
If the foreign installation's functional currency is its local currency, all
assets and liabilities are translated at current exchange rates. Translation
adjustments, related hedging results and applicable income taxes are included in
other adjustments within stockholders' equity. If a foreign installation is to
be sold or liquidated, the related accumulated other adjustments balance is
reversed and recognized as part of the gain or loss on disposition.
Operating results of foreign installations are translated at averages of
exchange rates prevailing during the year. The interest element of hedging
transactions is included in interest expense.
(m) INCOME TAXES
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
109 as of January 1, 1992, which had no impact on its financial statements. SFAS
No. 109 requires an asset and liability approach for accounting for income
taxes. Its objective is to recognize the amount of taxes payable or refundable
for the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in a company's financial statements
or tax returns. The measurement of tax assets and liabilities is based on the
provisions of enacted tax laws. Prior to the adoption of SFAS No. 109, the Cor-
poration accounted for income taxes under SFAS No. 96.
(n) FEES RELATED TO LENDING ACTIVITIES
Lending origination fees, net of costs, are deferred and amortized as interest
income over the life of the related loan. Loan commitment fees generally are
deferred and amortized into interest income over the life of any resulting loan.
The deferred fees and costs are netted against outstanding loan balances.
Certain credit-related fees, such as syndication management fees and fees on
unused, available lines of credit, are recorded as service charges and
commissions in noninterest income. Fees on commercial
43
<PAGE>
- ------------------------------------------------------------------------------
letters of credit are recorded as service charges and commissions when earned.
Fees on standby letters of credit and guarantees are recorded as service charges
and commissions on a straight-line basis over the term of the related
agreements.
(o) PENSION, OTHER POSTRETIREMENT AND POSTEMPLOYMENT PLANS
The Corporation maintains noncontributory defined benefit plans covering
substantially all eligible, salaried domestic employees. Retirement benefits are
primarily a function of both an employee's years of service and final levels of
compensation. To the extent that contributions are deductible under existing
federal tax regulations, the Corporation funds the plans according to an
actuarial formula to provide for both current and future benefit payments.
The annual return on investments and amortizations exceeded the normal service
and interest costs, resulting in a net periodic credit to employee benefits
expense. The initial transition asset is being amortized over 17 years. The
period of amortization for experience gains and losses is three years. Vested
former employees may elect to receive lump sum cash payments, which results in
accelerated recognition of the transition asset and experience gains. These
recurring gains are recorded as a component of the net periodic pension credit.
These settlements have no effect on the level of benefits paid to current or
future pensioners.
Employees in foreign offices participate to varying degrees in local pension
plans, the forms of which are often prescribed by local laws and customs.
These plans in the aggregate are not significant.
The Corporation has no material other postretirement or postemployment
obligations.
(p) CASH FLOW REPORTING
The Corporation uses the indirect method to report cash flows from operating
activities. Under this method, net income is adjusted to reconcile it to net
cash flow from operating activities. 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 gross.
Cash flows related to sales of debt investment securities within one month of
the maturity date are classified as maturities in the consolidated statement of
cash flows. Cash and cash equivalents consist of cash and due from banks,
whether interest-bearing or not.
(q) ACCOUNTING FOR CREDIT CARD SOLICITATION COSTS
The Corporation changed its accounting policy in 1992 to expense certain credit
card solicitation costs. Previously, these costs were deferred and amortized
over the estimated life of the account. The Corporation made this change to
reflect the more prevalent industry practice. Retroactively applying this
accounting change to 1991 would have produced a pro forma net income of $105.3
million, or $0.98 per share, as compared with reported earnings of $116.3
million, or $1.15 per share.
(r) OFFSETTING OF AMOUNTS RELATED TO CERTAIN CONTRACTS
FASB Interpretation No. 39, Offsetting of Amounts Related to Certain
Contracts, was issued in March 1992. This interpretation is effective for
financial statements issued for periods beginning after December 15, 1993. It is
applicable to the balance sheet presentation of unrealized gains and losses
recognized for derivative financial instruments. It requires the reporting of
unrealized gains as assets and unrealized losses as liabilities unless a right
of setoff exists. The interpretation does permit the netting of unrealized
gain and loss amounts recognized for derivative financial instruments executed
with the same counterparty under a master netting arrangement.
The Corporation currently reports unrealized gains and losses related to certain
derivative financial instruments on a net basis, which it believes is consistent
with banking industry practice. The adoption of this interpretation for balance
sheet presentation purposes will not affect the net income or capital of the
Corporation. It also will not affect its risk-based capital ratios, which have
historically incorporated the gross unrealized gains on these instruments. If
this interpretation were currently effective, the Corporation's assets and
liabilities as of December 31, 1993, would have increased by approximately $4.9
billion. The balance sheet impact of this interpretation at future dates will
fluctuate as the unrealized gains and losses on these instruments increase or
decrease with changes in remaining maturity and market rates, as well as the
ability to net amounts under master netting arrangements.
(s) ACCOUNTING FOR LOAN IMPAIRMENT
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan. This statement is effective for financial statements
issued for periods beginning after December 15, 1994. SFAS No. 114 addresses the
accounting for loans when it is probable that all principal and interest
amounts that are due on a loan will not be collected in accordance with its
contractual terms (i.e. ``impaired loans''). Pursuant to SFAS No. 114, to the
extent the recorded investment of an impaired loan exceeds the present value of
the loan's expected future cash flows discounted at the loan's effective
interest rate or other measures of value, a valuation allowance is established
for the difference. These SFAS No. 114 valuation allowances are to be considered
in the Corporation's overall allowance for credit losses. See Note 1(i) on page
43 for more information. The Corporation does not expect the adoption of SFAS
No. 114 to have a material impact on the results of operations and financial
position. However, the future impact as of the adoption date is not currently
determinable since it would be based on the existing impaired loans as of that
date.
SFAS No. 114 also changes the definition of In-Substance Foreclosures (ISF),
with the result that a larger portion of currently reported ISFs would be
reclassified as nonaccrual loans. The Corporation intends to adopt this new
ISF definition concurrent with the adoption of the other provisions of SFAS No.
114.
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
N O T E 2 -- EARNINGS PER SHARE
The Corporation presents earnings per share on both a primary and a fully
diluted basis. Earnings per common and common-equivalent share amounts were
computed by dividing net income, after deducting dividends on preferred stock,
by the average number of common and common-equivalent shares outstanding
during the period.
Common-equivalent shares consist of shares issuable under the Employee Stock
Purchase and Savings Plan and outstanding stock options. Fully diluted shares
also include the common shares that would result from the conversion of
convertible preferred stock.
Net income was reduced by preferred stock dividend requirements to compute
primary earnings per share. To compute fully diluted earnings per share, net
income was reduced by preferred stock dividend requirements, except those
related to convertible stock.
The net income, preferred stock dividends and shares used to compute primary and
fully diluted earnings per share are presented in the following table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(Dollars in millions) 1993 1992 1991
- -------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY
Net income...................... $804.5 $ 93.5 $116.3
Preferred stock dividends....... 57.0 44.6 38.2
------ ------ ------
Net income attributable to
common stockholders' equity... $747.5 $ 48.9 $ 78.1
====== ====== ======
Average number of common and
common-equivalent shares...... 85.2 76.5 67.7
FULLY DILUTED
Net income...................... $804.5 N/M N/M
Preferred stock dividends,
excluding convertible Series A
and B....................... 43.7 N/M N/M
------ ------ ------
Fully diluted net income........ $760.8 N/M N/M
====== ====== ======
Average number of shares,
assuming full dilution........ 90.3 N/M N/M
- -------------------------------------------------------------
</TABLE>
N/M--Not meaningful.
For both 1992 and 1991, the calculation of fully diluted earnings per share
would have produced an anti-dilutive result and, therefore, is not shown in the
table above.
- --------------------------------------------------------------------------------
N O T E 3 -- BUSINESS ACQUISITIONS
In November 1993, the Corporation and Lake Shore Bancorp., Inc. (Lake Shore)
signed a definitive agreement providing for the acquisition of Lake Shore by the
Corporation. Lake Shore, with $1.3 billion in assets as of December 31,
1993, and eight offices in the Chicago metropolitan area, is the holding company
for Lake Shore National Bank, Chicago, Illinois, and Bank of Hinsdale, Hinsdale,
Illinois.
The total consideration to be paid for Lake Shore is approximately $323
million of newly issued common stock of the Corporation. The agreement provides
that each share or share equivalent of Lake Shore common stock will be ex-
changed for the Corporation's common stock valued at $31.08. The exchange ratio
will be determined based on the average closing price of the Corporation's
common stock during a 20-day trading period ending just prior to the close of
the transaction, with a minimum price of $37 and a maximum price of $53 per
share. The Corporation expects to account for the transaction as a pooling of
interests.
Lake Shore also has granted the Corporation an option to purchase up to 19.9
percent of the outstanding shares of Lake Shore common stock upon the occurrence
of certain acquisition events with respect to Lake Shore.
Completion of the transaction is subject to the approval of Lake Shore
stockholders and various bank regulatory authorities, and is expected to occur
in mid-1994.
- -------------------------------------------------------------------------------
N O T E 4 -- BUSINESS SEGMENTS
An analysis of the Corporation's results on a line-of-business basis is shown
in the table on page 19. The following table further details results for other
corporate activities that are not specifically allocated to a business segment
(in millions).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Venture Capital Other
Activities Activities (1)
---------------------- -------------------
- ------------------------------------------------------------------------
1993 1992 1991 1993 1992 1991
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income--
tax-equivalent basis... $ (30) $ (37) $(32) $ 20 $ 11 $ (1)
Combined credit
provisions............. -- (1) (1) -- 625 --
Noninterest income....... 371 179 77 58 -- --
Noninterest expense...... 4 12 12 18 92 67
Net income (loss)........ 204 80 19 51 (235) (40)
Average assets........... $1,346 $1,295 $939 $474 $ 308 --
- ------------------------------------------------------------------------
</TABLE>
(1) Includes disposition portfolio activities since initiated in
September 1992, other special corporate expense provisions,
and the cumulative effect of changes in accounting principles.
45
<PAGE>
- ------------------------------------------------------------------------------
The Corporation is primarily engaged in the banking business, and with the
continuing globalization of financial markets, the distinction between
international and domestic activities has become less important. The following
table shows the approximate amounts of consolidated revenues, expenses, income
before income taxes, net income and total assets for the three years ended
December 31, 1993, attributable to domestic and foreign operations by geographic
area in accordance with current regulatory reporting requirements (in
millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Income
(Loss)
Before Net
Income Income Total
1993 Revenues(1) Expenses(2) Taxes (Loss) Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic operations............................................ $4,130 $2,966 $1,164 $712 $44,301
Foreign operations
Europe-Middle East-Africa.................................... 399 348 51 32 3,937
Asia-Pacific................................................. 149 156 (7) (5) 2,921
Other........................................................ 148 56 92 65 1,401
------ ------ ------ ---- -------
Total foreign operations..................................... 696 560 136 92 8,259
------ ------ ------ ---- -------
Consolidated................................................... $4,826 $3,526 $1,300 $804 $52,560
====== ====== ====== ==== =======
- --------------------------------------------------------------------------------------------------------------------------------
1992
Domestic operations............................................ $3,620 $3,963 $(343) $(12) $40,163
Foreign operations
Europe-Middle East-Africa.................................... 439 387 52 41 4,496
Asia-Pacific................................................. 160 149 11 7 2,887
Other........................................................ 139 59 80 58 1,735
------ ------ ----- ---- -------
Total foreign operations..................................... 738 595 143 106 9,118
------ ------ ----- ---- -------
Consolidated................................................... $4,358 $4,558 $(200) $ 94 $49,281
====== ====== ===== ==== =======
- --------------------------------------------------------------------------------------------------------------------------------
1991
Domestic operations............................................ $3,903 $4,057 $(154) $(148) $40,034
Foreign operations
Europe-Middle East-Africa.................................... 480 413 67 55 4,079
Asia-Pacific................................................. 240 209 31 21 3,025
Other........................................................ 207 (13) 220 188 1,825
------ ------ ----- ----- -------
Total foreign operations..................................... 927 609 318 264 8,929
------ ------ ----- ----- -------
Consolidated................................................... $4,830 $4,666 $ 164 $ 116 $48,963
====== ====== ===== ===== =======
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest income and noninterest income.
(2) Includes interest expense, provision for credit losses and noninterest
expense.
The 1992 results from domestic operations include $611.3 million of provisions
for assets held for accelerated disposition and $208.0 million related to the
cumulative effect of changes in accounting principles.
Results from foreign operations include provisions for credit losses of $(13)
million in 1993, $(3) million in 1992 and $(93) million in 1991. A reduction in
required reserves for the Corporation's troubled-country debtor portfolio was
the primary reason for the negative provisions in the periods presented.
Because many of the resources employed by the Corporation are common to both
its foreign and domestic activities, it is difficult to segregate assets,
related revenues and expenses into their foreign and domestic components. The
amounts in the preceding table are estimated on the basis of internally
developed assignment and allocation procedures, which to some extent are
subjective. The principal internal allocations used to prepare this information
are described in the following text.
The allocation of corporate overhead expense is based on internal allocations
appropriate to individual activities. Expenses incurred for the benefit of
another geographic area, including certain domestic administrative expenses, are
allocated to the area benefited.
Total assets and revenues reflect the allocation of loans and related interest
income among geographic areas based on the domicile of the customer. Deposit
placements and related revenues are allocated among geographic areas based on
the domicile of the depository institution.
Differences between contractual spreads and actual funding results are
reflected in the earnings of the areas providing the funding. Distribution of
certain fee income among geographic areas is reflected on the basis of ser-
vices rendered. Capital, with the exception of capital at foreign subsidiaries,
has been allocated to domestic operations.
46
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
N O T E 5 -- INVESTMENT SECURITIES
Investment securities in the consolidated balance sheet at December 31, 1993 and 1992, are summarized as follows
(in millions).
- ----------------------------------------------------------------------------------------------------------------------------
Book Cost Unrealized Unrealized Fair
DECEMBER 31, 1993 Value Basis Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government and federal agency
Held to maturity......................................... $ 245 $ 245 $ 2 $ 1 $ 246
Available for sale....................................... 243 243 -- -- 243
------ ------ ---- ---- ------
Total.............................................. 488 488 2 1 489
States and political subdivisions
Held to maturity......................................... 162 162 7 -- 169
Available for sale....................................... -- -- -- -- --
------ ------ ---- ---- ------
Total.............................................. 162 162 7 -- 169
Bonds, notes and debentures
Held to maturity......................................... 4 4 -- -- 4
Available for sale....................................... 15 15 -- -- 15
------ ------ ---- ---- ------
Total.............................................. 19 19 -- -- 19
Equity securities
Venture capital.......................................... 1,465 955 627 117 1,465
Available for sale (1)(2)................................ 122 121 1 -- 122
------ ------ ---- ---- ------
Total.............................................. 1,587 1,076 628 117 1,587
Total investment securities........................ $2,256 $1,745 $637 $118 $2,264
====== ====== ==== ==== ======
- ----------------------------------------------------------------------------------------------------------------------------
Book Cost Unrealized Unrealized Fair
December 31, 1992 Value Basis Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
U.S. government and federal agency
Held for investment...................................... $ 330 $ 330 $ 4 $ -- $ 334
Available for sale....................................... 195 195 -- -- 195
------ ------ ---- ---- ------
Total.............................................. 525 525 4 -- 529
States and political subdivisions
Held for investment...................................... 244 244 6 3 247
Available for sale....................................... -- -- -- -- --
------ ------ ---- ---- ------
Total.............................................. 244 244 6 3 247
Bonds, notes and debentures................................ 134 134 -- -- 134
Equity securities
Venture capital.......................................... 1,386 948 603 165 1,386
Other equity securities (1)(2)........................... 111 111 1 -- 112
------ ------ ---- ---- ------
Total.............................................. 1,497 1,059 604 165 1,498
Total investment securities........................ $2,400 $1,962 $614 $168 $2,408
====== ====== ==== ==== ======
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fair values of certain securities for which market quotations were not
available were estimated. In addition, the fair values reflect liquidity
and other market-related factors.
(2) Includes Federal Reserve stock.
For the years ended December 31, 1993, 1992 and 1991, gross debt investment
securities gains were $1.5 million, $8.6 million and $0.2 million, respectively,
and gross debt investment securities losses were $1.2 million, $17 thousand
and $3.5 million, respectively. The applicable income taxes (benefit) were $0.1
million, $3.2 million and $(1.2) million, respectively.
Gross proceeds from the sales of debt investment securities were $0.2 million,
$366 million and $159 million for the three years ended December 31, 1993, 1992
and 1991, respectively.
47
<PAGE>
- -------------------------------------------------------------------------------
As of December 31, 1993, debt investment securities--held to maturity and
available for sale--had the following maturity characteristics (in millions).
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------ ------------------
Cost Fair Cost Fair
Basis Value Basis Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND FEDERAL AGENCY
Maturing within one year.............................................. $ 73 $ 73 $238 $238
Maturing after one but within five years.............................. 170 171 -- --
Maturing after five but within ten years.............................. -- -- -- --
Maturing after ten years.............................................. 2 2 5 5
---- ---- ---- ----
$245 $246 $243 $243
==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS
Maturing within one year.............................................. $ 13 $ 14 $ -- $ --
Maturing after one but within five years.............................. 59 62 -- --
Maturing after five but within ten years.............................. 40 42 -- --
Maturing after ten years.............................................. 50 51 -- --
---- ---- ---- ----
$162 $169 $ -- $ --
==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------
OTHER BONDS, NOTES AND DEBENTURES
Maturing within one year.............................................. $ 1 $ 1 $ 11 $ 11
Maturing after one but within five years.............................. 2 2 1 1
Maturing after five but within ten years.............................. -- -- -- --
Maturing after ten years.............................................. 1 1 3 3
---- ---- ---- ----
$ 4 $ 4 $ 15 $ 15
==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
N O T E 6 -- LOANS
Following is a breakdown of loans included in the con-
solidated balance sheet as of December 31, 1993 and
1992 (in millions).
- -------------------------------------------------------------
1993 1992
- -------------------------------------------------------------
<S> <C> <C>
Commercial Risk
Domestic
Commercial....................... $ 6,007 $ 7,020
Real estate
Construction................... 315 432
Other.......................... 2,094 2,240
Financial institutions........... 1,292 1,307
Other............................ 2,746 2,712
Foreign (including troubled-
country debtors)................. 1,975 2,109
------- -------
Subtotal..................... 14,429 15,820
- -------------------------------------------------------------
Consumer Risk
Credit cards....................... 5,778 4,135
Secured by real estate
Mortgage......................... 1,469 1,319
Home equity lines................ 780 827
Other.............................. 647 591
------- -------
Subtotal..................... 8,674 6,872
------- -------
Total........................ $23,103 $22,692
======= =======
- -------------------------------------------------------------
</TABLE>
See page 32 for a table setting forth nonaccrual and renegotiated loans.
The amount of interest shortfall (the difference between contractual interest
due and interest actually recorded) related to nonperforming loans at year-end
was $14 million in 1993 and $35 million in 1992.
Credit card receivables are available for sale through the Corporation's credit
card securitization program. Since these receivables are sold at face value,
there would be no impact on the Corporation's financial results upon their sale.
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 percent beneficial interest. At December 31, 1993 and
1992, $295 million and $392 million of such loans to related parties,
respectively, were outstanding. An analysis of the activity during 1993 with
respect to such loans includes additions of $165 million and reductions of $262
million. At December 31, 1993, there were no loans classified as nonperforming,
versus $25 million in 1992.
A former executive of one of the Corporation's subsidiaries is a general
partner in a partnership that received loans from the subsidiary as part of a
compensation arrangement. The loans aggregated $87 million at December 31,
1992, and were included in the total loans to related parties. Subsequent to
December 31, 1992, the executive was no longer an officer of any of the
Corporation's subsidiaries.
48
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
N O T E 7 -- ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for the three years ended December
31, 1993, were as follows (in millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year......... $ 624 $ 759 $ 897
Additions (deductions)
Charge-offs...................... (279) (461) (627)
Recoveries....................... 97 88 77
----- ----- -----
Net charge-offs.................. (182) (373) (550)
Provision for credit losses...... 270 425 440
Provision for loans held for
accelerated disposition........ -- 491 --
Charge-offs of loans upon
transfer to accelerated
disposition portfolio........ -- (636) --
Other, transfers related to
securitized receivables........ (29) (42) (28)
----- ----- -----
Balance, end of year............... $ 683 $ 624 $ 759
===== ===== =====
- --------------------------------------------------------------------
</TABLE>
The portion of the allowance for credit losses that relates to securitized
credit card receivables was reclassified to other assets. See note 1(g) on page
43 for more information. The portion of the allowance related to securitized
receivables totaled $196 million at year-end 1993, $167 million at year-end
1992 and $125 million at year-end 1991.
- --------------------------------------------------------------------------------
N O T E 8 -- PLEDGED AND RESTRICTED ASSETS
Assets carried at $11.9 billion in the consolidated balance sheet at December
31, 1993, were pledged as collateral for borrowings, to secure government and
trust deposits, and for other purposes as required by law.
Based on the types and amounts of deposits received, banks must maintain
noninterest-bearing cash balances in accordance with Federal Reserve Bank
reserve requirements. The average noninterest-bearing cash balance main-
tained to meet reserve requirements was $574 million in 1993 and $525 million in
1992.
- --------------------------------------------------------------------------------
N O T E 9 -- 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 at December 31, 1993, are shown below (in millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C>
1994................................................. $ 63
1995................................................. 62
1996................................................. 58
1997................................................. 58
1998................................................. 50
1999 and beyond...................................... 340
----
Total........................................ $631
====
- --------------------------------------------------------------------
</TABLE>
Occupancy expense has been reduced by rental income from premises leased to
others in the amount of $28.1 million in 1993, $25.0 million in 1992 and $21.2
million in 1991.
- --------------------------------------------------------------------
N O T E 10 -- LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of seven years
or more. Long-term debt at December 31, 1993 and 1992, was as follows (in
millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
3-1/2% notes due 1993............................ $ -- $ 24
8-1/2% notes due 1998............................ 99 99
Subordinated 9% notes due 1999................... 199 199
Subordinated 9-7/8% notes due 2000............... 99 99
Subordinated 9-1/5% notes due 2001............... 5 5
Subordinated 9-1/4% notes due 2001............... 100 100
Subordinated 10-1/4% notes due 2001.............. 100 100
Subordinated 11-1/4% notes due 2001.............. 96 100
Subordinated 8-7/8% notes due 2002............... 100 100
Subordinated 8-1/4% notes due 2002............... 100 100
Subordinated 7-5/8% notes due 2003............... 199 --
Subordinated 6-7/8% notes due 2003............... 200 --
Subordinated floating rate notes due 2003........ 149 --
Equity commitment notes
Subordinated floating rate notes due 1994...... -- 100
Subordinated floating rate notes due 1996...... -- 125
Subordinated 9-7/8% notes due 1999............. 200 200
Equity contract notes
Subordinated floating rate capital
notes due 1996............................... 125 125
Subordinated floating rate capital
notes due 1997............................... -- 199
Other long-term debt............................. 294 30
------ ------
Total.................................... $2,065 $1,705
====== ======
- --------------------------------------------------------------------
</TABLE>
3-1/2% NOTES
These notes were redeemed in full in December 1993. The notes were obligations
of First Chicago Overseas Finance N.V. (FCOF), a wholly owned subsidiary of the
Corporation. The notes were denominated in Swiss francs.
8-1/2% NOTES
These notes are direct, unsecured obligations of the Corporation and are not
subordinated to any other indebtedness of the Corporation. They may not be
redeemed prior to their stated maturity.
SUBORDINATED NOTES
These notes are direct obligations of the Corporation and are subordinated to
other indebtedness of the Corporation. They may not be redeemed prior to their
stated maturity. They have fixed interest rates that range from 6-7/8 percent to
11-1/4 percent and maturities that range from 1999 to 2003. One note has a
floating interest rate priced at the greater of 4-1/4 percent or the three-month
London interbank offered rate plus 1/8 percent. Of the 11-1/4 percent
subordinated notes, $3.4 million in principal was redeemed at a premium in
open market transactions during the third quarter of 1993. The Corporation
incurred a loss of approximately $419 thousand on this transaction.
49
<PAGE>
- -------------------------------------------------------------------------------
EQUITY COMMITMENT NOTES
The subordinated notes maturing in 1994 issued by FCOF were redeemed in full,
prior to stated maturity, in August 1993. The subordinated notes maturing in
1996 were redeemed in full, prior to stated maturity, in July 1993. The
subordinated notes maturing in 1999 are direct obligations of the Corporation.
Such notes are subordinated to other indebtedness of the Corporation. The
subordinated notes maturing in 1999 have a fixed interest rate of 9-7/8 per-
cent and may not be redeemed prior to their stated maturity.
The agreements under which these notes were issued require the Corporation,
prior to maturity, to issue common stock, perpetual preferred stock or other
forms of equity approved by the Federal Reserve Board in an amount equal to the
original aggregate principal amount of the notes. As of December 31, 1993, the
Corporation had issued all of the equity securities required by the agreements.
EQUITY CONTRACT NOTES
The subordinated floating rate capital notes maturing in 1996 are a direct
obligation of the Corporation and are subordinated to other indebtedness of
the Corporation. The interest rate on these notes is reset quarterly at 3/16
percent over the average offered rate quoted in the London interbank market
for three-month Eurodollar deposits. The effective interest rate on this issue
as of December 31, 1993, was 3.79 percent. The subordinated floating rate
capital notes maturing in 1997 were redeemed in full, prior to stated maturity,
in August 1993.
OTHER LONG-TERM DEBT
Other long-term debt of $294 million includes various notes with maturities
ranging from 1994 to 2026 and interest rates at December 31, 1993, ranging
from 3.9 percent to 13 percent. Of this amount, $267 million relates to the sale
and leaseback of certain bank properties. The effective interest rate related to
this transaction is 9.1 percent, with expected maturity in 2018.
Original issue discount and deferred issuance costs are amortized over the terms
of the related notes.
- --------------------------------------------------------------------------------
N O T E 11 -- PREFERRED STOCK
The Corporation currently is authorized to issue 15 million 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.
In December 1988, the Corporation paid a dividend of one Preferred Share
Purchase Right (a Right) for each outstanding share of common stock of the
Corporation. Similar Rights are issued by the Corporation with each share of
the Corporation's common stock issued after December 2, 1988, subject to
adjustment. Until a person or group acquires beneficial ownership of, or begins
a tender or exchange offer for, 20 percent or more of the Corporation's common
stock, the Rights will not be exercisable and will be transferred upon the
transfer of shares of the Corporation's common stock. Upon the occurrence of
certain events, each Right entitles the holder to purchase one one-hundredth
of a share of Series A Junior Participating Preferred Stock, without par value,
of the Corporation at a price of $130.
Under certain other circumstances, the holder of a Right may have the right to
receive upon payment of the Right's $130 exercise price (i) common stock of a
company acquiring control of the Corporation that has a market value of two
times the exercise price of the Right, or (ii) common stock of the Corporation
having a market value of two times the exercise price of the Right.
The Rights, which expire December 2, 1998, are redeemable in whole, but not in
part, at the Corporation's option prior to the time they are exercisable, for a
price of $.01 per Right.
The Corporation has three series of adjustable-rate cumulative preferred stock
outstanding, designated Series A, Series B and Series C. The dividend rate on
each 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 Corporation
issued 6 million shares of 10 percent Cumulative Preferred Stock, Series D, in
May 1991, and 4 million depositary shares each representing a one twenty-fifth
interest in a share of 8.45 percent Cumulative Preferred Stock, Series E, in
November 1992. In March 1993, the Corporation issued 4 million depositary
shares each representing a one-hundredth interest in a share of 5-3/4 percent
Cumulative Convertible Preferred Stock, Series B. All preferred shares rank
prior to common shares both as to dividends and liquidation, but have no general
voting rights.
The Series A Adjustable-Rate Preferred Stock is subject to a minimum and maximum
dividend rate of 7 percent and 15 percent, respectively. The dividend rate for
the quarterly dividend period ended March 31, 1994, is 7 percent. Shares of
this series are redeemable, at the option of the Corporation, at their stated
value of $50 per share plus accrued and unpaid dividends.
The Series B Adjustable-Rate Preferred Stock is subject to a minimum and maximum
dividend rate of 6 percent and 12 percent, respectively. The dividend rate for
the quarterly period ended February 28, 1994, was 6 percent. Shares of this
series are redeemable, at the option of the Corporation, at their stated value
of $100 per share plus accrued and unpaid dividends.
50
<PAGE>
- --------------------------------------------------------------------------------
The Series C Adjustable-Rate Preferred Stock is subject to a minimum and maximum
dividend rate of 6.5 percent and 12.5 percent, respectively. The dividend rate
for the quarterly period ended February 28, 1994, was 6.5 percent. Shares of
this series are redeemable, at the option of the Corporation, at their stated
value of $100 per share plus accrued and unpaid dividends.
The annual dividend rate for the Series D Cumulative Preferred Stock is $2.50,
or 10 percent of stated value, and was fixed at the date of issue. Shares of
this series are redeemable at any time on or after June 1, 1994, at the option
of the Corporation, at a redemption price equal to $25.75 per share during the
12-month period ending May 31, 1995, at a redemption price equal to $25.375 per
share during the 12-month period ending May 31, 1996, and thereafter at their
stated value of $25 per share plus accrued and unpaid dividends.
The annual dividend rate for the Series E Cumulative Preferred Stock is
$52.81, or 8.45 percent of stated value, and was fixed at the date of issue. For
each related depositary share, the dividend rate is $2.11. Shares of this series
are redeemable at any time on or after November 16, 1997, at the option of the
Corporation, at their stated value of $625 per share or $25 per depositary share
plus accrued and unpaid dividends.
All shares of the Corporation's Series A Cumulative Convertible Preferred
Stock were called for redemption on September 2, 1993. Each Series A share was
convertible into 1.391 shares of the Corporation's common stock at the option of
the stockholder, and approximately 2.1 million shares of the stock were so
converted into approximately 3 million shares of common stock. Resultant
fractional shares were paid in cash. On September 2, 1993, the Corporation
redeemed the remaining shares of the Series A Convertible Preferred at the
redemption price of $51.50 per share plus accrued and unpaid dividends.
The Series B Cumulative Convertible Preferred Stock was issued in March 1993 and
ranks on a parity with the Series A, B, C, D and E preferred stock. The annual
dividend rate is $287.50, or 5.75 percent of stated value, and was fixed at
the date of issue. For each related depositary share, the dividend rate is
$2.875. Shares of this stock may be converted into shares of the Corporation's
common stock at the option of the stockholders at any time at the conversion
price of $53.625. For each depositary share, the equivalent conversion rate is
.9324 share of common stock. Resultant fractional interests are paid in cash.
Shares of this series are redeemable beginning April 1, 1997, at the option of
the Corporation, at an original redemption price of $5,172.50 ($51.725 per
depositary share), with the redemption price decreasing annually over the
remaining period until the shares are redeemable on or after April 1, 2003, at
their stated value of $5,000 per share ($50 per depositary share) plus accrued
and unpaid dividends.
- --------------------------------------------------------------------------------
N O T E 12 -- INCOME TAXES
Total applicable income taxes (benefits) reported in the consolidated income
statement for the years ended December 31, 1993, 1992 and 1991, included the
following components (in millions).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1993 1992 1991
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal........................ $177.3 $ (1.9) $(15.3)
Foreign........................ 29.1 20.5 26.3
State.......................... 42.6 4.9 4.7
------ ------- ------
Total.................... 249.0 23.5 15.7
Deferred tax expense (benefit)
Federal........................ 230.0 (101.3) 25.7
State.......................... 16.6 (7.8) 6.2
------ ------- ------
Total.................... 246.6 (109.1) 31.9
------ ------- ------
Applicable income taxes
(benefit)...................... $495.6 $ (85.6) $ 47.6
====== ======= ======
- ----------------------------------------------------------------
</TABLE>
Not included in the preceding table are tax benefits credited directly to
stockholders' equity. These taxes were $4.7 million, $0.4 million and $1.4
million in 1993, 1992 and 1991, respectively. Also excluded from the table are
1992 taxes related to the cumulative effect of changes in accounting principles
of $122.6 million.
Temporary differences between the amounts reported in the financial statements
and the tax bases of liabilities and assets result in deferred taxes. Deferred
tax liabilities and assets for the years ended December 31, 1993 and 1992, were
as follows (in millions).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1993 1992
- ----------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Deferred income on lease financing..... $ 745.3 $ 719.8
Appreciation of venture capital
investments.......................... 181.9 159.8
Prepaid pension asset.................. 133.1 124.0
Other.................................. 145.6 156.0
-------- --------
Gross deferred tax liabilities......... 1,205.9 1,159.6
-------- --------
DEFERRED TAX ASSETS
Tax net-operating loss carryforwards... -- 230.1
Allowance for credit losses............ 292.5 303.1
Valuation of other real estate......... 22.4 107.3
Securitization of credit card
receivables.......................... 65.5 58.4
Alternative minimum tax credit
carryforward......................... 115.9 41.3
Other.................................. 233.5 187.8
-------- --------
Gross deferred tax assets.............. 729.8 928.0
Valuation allowance.................... -- --
-------- --------
Gross deferred tax assets,
net of valuation allowance........... 729.8 928.0
-------- --------
Net deferred tax liability............. $ 476.1 $ 231.6
======== ========
- ----------------------------------------------------------------
</TABLE>
51
<PAGE>
- -------------------------------------------------------------------------------
The reasons for the differences between applicable income taxes and the amounts
computed at the applicable regular federal tax rates of 35 percent in 1993 and
34 percent in 1992 and 1991 were as follows (in millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------
<S> <C> <C> <C>
Taxes at statutory federal income
tax rate........................... $455.0 $(68.0) $ 55.7
Increase (decrease) in taxes
resulting from
Tax-exempt income (net)............ (12.0) (13.8) (17.2)
State income taxes, net of
federal income taxes............. 31.8 (1.9) 7.2
Goodwill........................... 7.5 3.4 3.0
Other.............................. 13.3 (5.3) (1.1)
------ ------ ------
Applicable income taxes (benefit).... $495.6 $(85.6) $ 47.6
====== ====== ======
- --------------------------------------------------------------------
</TABLE>
The Corporation had an alternative minimum tax credit carryforward for tax
purposes of $115.9 million at December 31, 1993, and $41.3 million at both
December 31, 1992 and 1991.
The Corporation had foreign tax credit (FTC) carryforwards of $3.7 million and
$42.9 million at December 31, 1993 and 1992, respectively. The 1993 FTC
carryforward will expire in 1997 if not utilized. The Corporation also had a
federal tax return net-operating loss carryforward of $644.4 million at December
31, 1992, which was fully utilized in 1993.
- --------------------------------------------------------------------------------
N O T E 13 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS
(a) PENSION PLANS
Net periodic pension credit was $18 million in 1993, $31.5 million in 1992 and
$25.8 million in 1991.
In determining the projected benefit obligation, the weighted-average assumed
discount rate used was 7.5 percent in 1993 and 8.5 percent in 1992, while the
assumed rate of increase in future salary levels was approximately 4.5 percent
in 1993 and 5.0 percent in 1992. The projected benefit obligation represents the
actuarial present value of all benefits attributed by the pension benefit
formula to employee service rendered prior to that date measured using
assumptions as to future compensation levels. This measurement assumes that the
present workforce will shrink over time due to attrition. There is no assumption
for replacing the workforce nor is the future service of the existing workforce
taken into consideration. The reported excess of plan assets over the pension
benefit obligation would be reduced if these assumptions were included in the
liability computation.
At December 31, 1993, the plans' assets included shares of the Corporation's
common stock with a market value of $17.9 million.
The following table sets forth the plans' funded status at December 31, 1993,
and at December 31, 1992 (in millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1993 1992
- --------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation:
Vested benefits............................ $(430.6) $(355.7)
Nonvested benefits......................... (60.9) (48.0)
------- -------
Accumulated benefit obligation............. (491.5) (403.7)
Effect of projected future compensation
levels................................... (99.3) (85.9)
------- -------
Projected benefit obligation................. (590.8) (489.6)
Plans' assets at fair value.................. 968.4 905.9
------- -------
Plans' assets in excess of projected
benefit obligation......................... 377.6 416.3
Unrecognized net gain due to experience
different from assumptions................. (37.4) (105.7)
Unrecognized net transition asset............ (37.2) (42.2)
Unrecognized prior service cost.............. 74.6 81.9
------- -------
Prepaid pension cost......................... $ 377.6 $ 350.3
======= =======
- --------------------------------------------------------------------
</TABLE>
Net periodic pension credit for the years ended December 31, 1993, 1992 and
1991, included the following (in millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service costs--benefits earned
during period...................... $ 22.3 $ 20.9 $ 21.8
Interest cost on projected benefit
obligation......................... 43.8 41.5 24.5
Return on plan assets................ (109.6) (80.1) (126.0)
Net amortization, deferral
and other.......................... 25.5 (13.8) 53.9
------- ------ -------
Net periodic pension credit.......... $ (18.0) $(31.5) $ (25.8)
======= ====== =======
- --------------------------------------------------------------------
</TABLE>
The expected long-term rate of return on assets used in determining net periodic
pension credit was 9.5 percent in 1993 and 1992 and 10.0 percent in 1991.
(b) SAVINGS INCENTIVE PLAN
The Corporation and its subsidiaries maintain the Savings Incentive Plan, a
qualified 401(k) program. The plan is available to all U.S.-based salaried
employees of The First National Bank of Chicago and certain other subsidiaries
of the Corporation. Participation is completely voluntary, and participants may
contribute from 1 to 6 percent of their salary on a pretax basis, and an
additional 1 to 10 percent of salary on an after-tax basis. Beginning in 1992,
the Corporation's contribution to the plan was determined as 100 percent of the
first $500 of pretax contributions made by participants and 50 percent of any
pretax contributions in excess of $500. The plan was amended in 1993 to allow
the Board of Directors to make a supplemental profit-based contribution to the
plan. For 1993, that contribution is $350 for each eligible full-time employee
and $175 for each eligible part-time employee. All participants are 100 percent
vested in their account balances and are able to direct the investment of their
savings into several investment options.
Expense under this plan, included in noninterest expense as employee benefits
expense, was $19.6 million in 1993, $13.0 million in 1992 and $8.6 million in
1991.
52
<PAGE>
- -------------------------------------------------------------------------------
(c) EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN
Eligible employees participating in the Employee Stock Purchase and Savings Plan
authorize payroll deductions for deposit in savings accounts during a savings
period of up to two years. At the end of the period, employees may receive their
savings balances in cash or use them to purchase shares of the Corporation's
common stock at a price fixed under the plan.
During 1992, 2,082,510 shares of common stock were purchased by 4,458
employees under the October 1990 offering at a price of $14.013 per share. In
addition, 41,565 shares of common stock were purchased by 244 employees under
the July 1990 offering at a price of $30.412.
During 1992, employees were offered an opportunity to enroll in a new offering
under the plan. The offering has a stock purchase price of $34.20 per share. As
of December 31, 1993, approximately 4,500 employees were participating in
the plan, and the level of savings deposits and payroll deductions for the
current savings periods, including projected interest thereon, represented the
potential purchase of approximately 795,000 shares of common stock. The maximum
number of shares authorized under the plan is limited to 6,000,000, of which
3,664,802 shares have been issued. The Corporation makes no charge to expense in
connection with this plan, other than interest on savings accounts.
(d) OTHER INCENTIVE PLANS
The Corporation maintains various cash incentive, stock incentive and stock
option plans.
Cash incentive plans, including certain specialized business unit incentives,
are based on attainment of certain financial goals and a combination of business
unit and corporate objectives.
A new Stock Incentive Plan was approved on April 12, 1991. Under the plan, the
Corporation may grant stock options, restricted shares or other stock-based
awards. This plan provides that, in any year, the total number of shares of the
Corporation's common stock that may be granted to eligible employees as awards
may not exceed 2 percent of the Corporation's outstanding shares of common
stock. Any portion of the 2 percent limit not granted in previous years may be
awarded prospectively.
The 1983 Stock Option Plan and the Strategic Stock Incentive Plan were
terminated on April 12, 1991. Shares still outstanding from awards under these
plans are included in the following disclosures.
Stock incentives outstanding at December 31, 1993, included grants of shares
of the Corporation's common stock to key officers, restricted as to sale based
upon continued employment for periods ranging from one to seven years from the
date of the original grant. The market value of restricted shares as of the date
of grant is amortized to salaries expense over the restriction period. As of
December 31, 1993, 1,031,334 restricted shares were outstanding.
The following table summarizes 1993 activity under the Stock Incentive Plan and
the 1983 Stock Option Plan and their status as of December 31, 1993.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Outstanding Options Exercisable Options
------------------------------ ----------------------------
Option Option
(Shares in thousands) Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992......... 4,997 $15 - $44-1/4 3,327 $15 - $44-1/4
Granted............................ 809 $36-13/16 - $49-1/8 -- --
Became exercisable................. -- -- 880 $24 - $44-1/4
Exercised.......................... 968 $15 - $38-3/4 968 $15 - $38-3/4
Expired or canceled................ 99 $23-1/8 - $44-1/4 11 $23-1/8 - $44-1/4
- ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993....... 4,739 $18-1/2 - $49-1/8 3,228 $18-1/2 - $43-5/8
- ------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
N O T E 14 -- FIRST CHICAGO CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------------
December 31 (In millions) 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S>
ASSETS <C> <C>
Cash and due from banks
Bank subsidiaries--noninterest-bearing............................................ $ 21 $ 12
Bank subsidiaries--interest-bearing............................................... 156 32
Other interest-bearing............................................................ 348 249
Investment securities............................................................... 14 11
Loans............................................................................... 1 1
Investment in and advances to subsidiaries
Bank subsidiaries................................................................. 5,278 4,591
Nonbank subsidiaries.............................................................. 1,728 1,840
Other assets........................................................................ 124 134
------ ------
Total assets................................................................ $7,670 $6,870
====== ======
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Commercial paper and other notes payable
Nonbank subsidiaries.............................................................. $ 29 $ 188
Other............................................................................. 1,378 1,567
Long-term debt...................................................................... 1,796 1,579
Other liabilities................................................................... 203 135
------ ------
Total liabilities........................................................... 3,406 3,469
====== ======
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY................................................................ 4,264 3,401
------ ------
Total liabilities and stockholders' equity.................................. $7,670 $6,870
====== ======
- ---------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT
- ---------------------------------------------------------------------------------------------------------------------------
For the Year (In millions) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Dividends
Bank subsidiaries................................................................. $129.0 $ 89.7 $ 87.6
Nonbank subsidiaries.............................................................. 68.9 197.2 68.2
Interest income
Bank subsidiaries................................................................. 110.8 104.2 97.6
Nonbank subsidiaries.............................................................. 76.7 96.4 110.9
Other............................................................................. 13.9 15.8 26.8
Other income (loss)................................................................. (2.4) 1.9 13.2
------ ------- ------
Total....................................................................... 396.9 505.2 404.3
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE
Interest expense
Nonbank subsidiaries.............................................................. 3.8 5.6 7.2
Other............................................................................. 233.7 250.0 272.8
Other expense....................................................................... 6.4 23.7 5.6
------ ------- ------
Total....................................................................... 243.9 279.3 285.6
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES.......................................................... 153.0 225.9 118.7
Applicable income tax benefit..................................................... (18.6) (22.8) (13.5)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES.......................................................... 171.6 248.7 132.2
Equity in undistributed net income (loss) of subsidiaries before
cumulative effect of changes in accounting principles
Bank subsidiaries............................................................... 471.7 (230.0) 42.1
Nonbank subsidiaries............................................................ 161.2 (133.2) (58.0)
------ ------- ------
Income (loss) before cumulative effect of changes in accounting principles.......... 804.5 (114.5) 116.3
Equity in cumulative effect of changes in accounting principles..................... -- 208.0 --
------ ------- ------
NET INCOME.......................................................................... $804.5 $ 93.5 $116.3
====== ======= ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Parent Company Only Statement of Changes in Stockholders' Equity is the same
as the Consolidated Statement of Changes in Stockholders' Equity (see page 40).
54
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
For the Year (In millions) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 804 $ 94 $ 116
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income (loss) of subsidiaries before cumulative
effect of changes in accounting principles................................. (831) 76 (140)
Equity in cumulative effect of changes in accounting principles.............. -- (208) --
(Increase) decrease in accrued income receivable............................. 7 (1) (1)
Increase (decrease) in accrued interest payable.............................. (3) (4) 4
Dividends received from subsidiaries......................................... 195 288 127
Net decrease in other assets................................................. 28 15 20
Other noncash adjustments.................................................... (26) (5) (26)
------- ------- -------
Total adjustments............................................................ (630) 161 (16)
------- ------- -------
Net cash provided by operating activities...................................... 174 255 100
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on loans to subsidiaries................................... 2,410 4,179 4,689
Loans made to subsidiaries..................................................... (2,172) (4,443) (4,919)
Capital investments in subsidiaries............................................ (161) (571) (83)
------- ------- -------
Net cash provided by (used in) investing activities............................ 77 (835) (313)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in commercial paper.................................... 5 (67) 9
Proceeds from other funds borrowed............................................. 53 533 496
Repayment of other funds borrowed.............................................. (407) (560) (475)
Proceeds from issuance of long-term debt....................................... 557 234 334
Repayment of long-term debt.................................................... (344) (248) (35)
Net increase (decrease) in other liabilities................................... 48 (23) 20
Dividends paid................................................................. (158) (145) (172)
Proceeds from issuance of common stock......................................... 41 375 52
Proceeds from reissuance of treasury stock..................................... 4 6 2
Purchase of treasury stock..................................................... (13) (1) --
Proceeds from issuance of preferred stock...................................... 196 96 145
Payment for redemption of preferred stock...................................... (1) -- --
------- ------- -------
Net cash provided by (used in) financing activities............................ (19) 200 376
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 232 (380) 163
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................. 293 673 510
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................................... $ 525 $ 293 $ 673
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------
</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 then on hand'' less the amount of bad debts, as defined, in
excess of the allowance for credit losses. In addition, a national bank cannot
declare a dividend, without regulatory approval, in an amount in excess of its
net profits, as defined, for the current year combined with the retained net
profits for the preceding two years.
Based on these statutory requirements, the Corporation's bank subsidiaries
could, in the aggregate, have declared additional dividends of up to
approximately $445 million without regulatory approval at December 31, 1993. 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, 1993, all of the
Corporation's banking subsidiaries significantly exceeded the regulatory
guidelines for ``well-capitalized'' status.
Federal banking law also restricts each bank subsidiary from extending credit to
First Chicago Corporation as the parent bank holding company (the Parent
Company) in excess of 10 percent of the subsidiary's capital stock and surplus,
as defined. Any such extensions of credit are subject to strict collateral
requirements.
In connection with issuances of commercial paper, the Corporation has agreements
providing future credit availability (back-up lines of credit) with various
banks. The agreements with nonaffiliated banks aggregated $100 million at
December 31, 1993, and $200 million at December 31, 1992. The Corporation also
had agreements for back-up lines of credit with The First National Bank of
55
<PAGE>
- -------------------------------------------------------------------------------
Chicago aggregating $150 million at December 31, 1993 and 1992. In 1993, the
Corporation had agreements to pay a 0.125 percent annual commitment fee on any
unused lines. The back-up lines of credit, together with overnight money market
loans, short-term investments and other sources of liquid assets, exceeded the
amount of commercial paper issued at December 31, 1993.
The Parent Company paid interest of $262 million in 1993, $272 million in 1992
and $276 million in 1991. The Parent Company received income tax payments from
its subsidiaries that exceeded its total income tax payments by $82 million in
1993 and $21 million in 1991. The Parent Company made income tax payments to its
subsidiaries that exceeded its total income tax payments by $20 million in
1992.
- --------------------------------------------------------------------------------
N O T E 15 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Corporation is a party to financial
instruments containing credit and market risks that are not required to be
reflected in a balance sheet. These financial instruments include commitments to
extend credit, letters of credit and derivative financial instruments. The
Corporation maintains risk management policies that monitor and limit exposure
to credit, liquidity and market risks. For a further discussion of these risks,
which is not included as part of these audited financial statements, see the
Risk Management section beginning on page 24.
(a) CREDIT RISK
The following disclosures represent the Corporation's credit exposure should
every counterparty to financial instruments with off-balance-sheet credit risk
fail to perform completely according to the terms of the contracts and should
the collateral and other security, if any, prove to be of no value to the
Corporation.
(b) MARKET RISK
This note does not address the amounts 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 associated with financial instruments is meaningful only when all
related and offsetting on-and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified.
(c) COLLATERAL AND OTHER SECURITY ARRANGEMENTS
The credit risk of both on-and off-balance-sheet financial instruments varies
based on many factors, including the value of collateral held and other security
arrangements. To mitigate credit risk, the Corporation generally determines
the need for specific covenant, guarantee and collateral requirements on a
case-by-case basis, depending on the nature of the financial instrument and the
customer's creditworthiness. The Corporation may also receive comfort letters
and oral assurances. The amount and type of collateral held to reduce credit
risk varies but may include real estate, machinery, equipment, inventory and
accounts receivable, as well as cash on deposit, stocks, bonds and other
marketable securities that are generally held in the Corporation's possession or
at another appropriate custodian or depository. This collateral is valued and
inspected on a regular basis to ensure both its existence and adequacy. The
Corporation requests additional collateral when appropriate.
(d) COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
Commercial 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 by the the Corporation to
ensure payment of its 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 Corporation's risk associated
with these contracts.
The table on page 26 summarizes the Corporation's credit-related financial
instruments, including both commitments to extend credit and letters of
credit.
Standby letters of credit and foreign office guarantees are issued in connection
with agreements made by the Corporation's 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 drawn
upon. At December 31, 1993 and 1992, the Corporation had issued standby letters
of credit and guarantees for the following purposes (in millions).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
December 31 1993 1992
- -----------------------------------------------------------------
<S> <C> <C>
Commercial paper........................... $ 815 $1,588
Tax-exempt securities...................... 1,130 1,102
Bid or performance guarantees.............. 534 476
Commodity/margin support................... 570 628
Insurance-related.......................... 765 1,001
Other...................................... 857 1,359
------ ------
Total...................................... 4,671 6,154
Less: Cash collateral deposits............. 109 160
Participations to other
financial institutions............... 359 501
------ ------
Total, net................................. $4,203 $5,493
====== ======
- -----------------------------------------------------------------
</TABLE>
At December 31, 1993, standby letters of credit and guarantees issued to back
commercial paper and tax-exempt securities had a weighted-average original
maturity of approximately five years and a weighted-average remaining maturity
of approximately two years. All other standby letters of credit generally expire
within three years.
56
<PAGE>
- -------------------------------------------------------------------------------
(e) DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into a variety of derivative financial instruments in
its trading activities, and in the management of its interest rate and foreign
currency exposure. These financial instruments offer customers protection from
rising or falling interest or exchange rates. They can either reduce or increase
the Corporation's exposure to changing interest and/or exchange rates.
The Corporation's balance sheet exposure for interest rate and foreign exchange
contracts includes the amount of recognized gains in the market valuation of
those contracts. Those amounts fluctuate as a function of maturity, interest
rates and foreign exchange rates. The amounts are overstated because the
information necessary to reflect the offsetting of losses with the same
counterparties based on legally enforceable termination and netting rights is
not readily available. Gross balance sheet exposures are presented below (in
billions).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
December 31 1993 1992
- ----------------------------------------------------------------
<S> <C> <C>
Interest rate forwards, swaps and
forward rate agreements (1)................. $3.6 $2.4
Spot and forward foreign exchange
contracts................................... 2.0 4.7
Options, caps and floors purchased............ 0.6 0.7
- ----------------------------------------------------------------
</TABLE>
(1) These amounts include accrued net swap settlement receivables (included
in other assets) of $664 million and $527 million at December 31, 1993
and 1992, respectively.
Not all derivative financial instruments have off-balance-sheet credit and/or
market risk. The credit and market risk associated with options purchased and
caps and floors purchased is recorded on the balance sheet. The credit risk
associated with exchange-traded futures contracts is limited to the relevant
clearing house and is also recorded on the balance sheet. 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 is or may be obligated to acquire and/or is due to settlement
exposure, i.e. 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.
For derivative financial instruments with off-balance-sheet credit and/or market
risk, the amounts reported in the following table represent the gross notional
principal or contractual amounts. These amounts do not represent the market or
credit risk associated with those contracts, but rather give an indication of
the volume of the transactions. The amounts exceed the credit risk associated
with these contracts and do not reflect the netting of offsetting transactions
(in billions).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
December 31 1993 1992
- ----------------------------------------------------------------
<S> <C> <C>
Interest Rate Contracts
Forwards and futures................... $ 17.3 $ 16.4
Swaps.................................. 114.9 84.5
Options written........................ 7.7 6.8
Caps and floors written................ 9.6 11.2
Forward rate agreements................ 44.2 63.4
Foreign Exchange Contracts
Spot, forwards and futures............. 173.5 181.6
Options written........................ 24.1 27.5
- ----------------------------------------------------------------
</TABLE>
Interest rate forward and futures contracts represent commitments either to
purchase or sell at a specified future date a financial instrument 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 float-
ing rate index. Certain agreements are combined interest rate and foreign
currency swap transactions.
Interest rate options are contracts that grant the purchaser, for a premium
payment, the right to either purchase or sell a financial instrument at a
specified price within a specified period of time or on a specified date from
the writer of the option. Most of the Corporation's written option contracts are
listed on major exchanges. The above amounts include the underlying notional
principal amounts of options to enter into interest rate swap agreements.
Interest rate caps and floors are contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser if
a specified market interest rate exceeds the fixed cap rate or falls below the
fixed floor rate on specified future dates.
Forward rate agreements are contracts with notional principal amounts that
settle in cash at a specified future date based on the differential between a
specified market interest rate and a fixed interest rate.
Foreign exchange contracts represent spot, forward, futures and option contracts
to exchange currencies, with most maturing within three months.
57
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
N O T E 16 -- CONCENTRATIONS OF CREDIT RISK
The Corporation's credit policies and processes emphasize diversification of
risk among industries, geographic areas and borrowers. The following information
presents the credit risk associated with products described elsewhere in the
financial statements and footnotes broken out by concentrations across all
financial instruments. The amounts represent gross credit exposure in that they
do not consider collateral or other security or the netting of offsetting
exposures. Concentrations of credit risk are presented below (in billions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------
December 31 1993 1992
- --------------------------------------------------------------
<S> <C> <C>
Consumer................................ $56.8 $43.7
U.S. government......................... 9.6 8.0
Japanese banks.......................... 5.8 4.6
U.S. commercial banks................... 3.5 4.1
Commercial real estate.................. 2.8 4.1
- --------------------------------------------------------------
</TABLE>
Consumer risk results principally from credit cards. Other major components
include home mortgage, home equity and other installment credit. U.S. government
risk consists primarily of U.S. government securities and balances due from
the Federal Reserve. Credit exposure to Japanese banks is primarily short-term
deposit placements. Credit exposure to U.S. commercial banks consists
principally of federal funds sold, balances due from banks, derivative financial
instruments and credit exposure participated out to banks. Commercial real
estate credit exposure includes loans, unused loan commitments and the credit
exposure of the accelerated asset disposition portfolio.
Geographic concentrations of credit risk are presented below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
December 31 (Dollars in billions) 1993 1992
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. ......................... $118 87% $105 86%
Foreign....................... 17 13 17 14
- --------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
N O T E 17 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures do not attempt to estimate the
fair value of the Corporation as a whole. Rather, the disclosures are limited to
the reasonable estimates of the fair value of only the Corporation's financial
instruments. This includes financial instruments recognized as assets and
liabilities on the balance sheet as well as those not required to be recognized
in a traditional balance sheet. The disclosures do not address the value of
the Corporation's recognized and unrecognized nonfinancial assets and
liabilities or the value of anticipated future business. The Corporation does
not plan to sell most of its assets or settle most of its liabilities at these
estimated fair values.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. The estimated fair value amounts were
determined using available market information, current Corporation pricing
information and various valuation methods. If quoted market prices were not
readily available for a financial instrument, management determined an
estimated fair value. Accordingly, the estimates may not be indicative of the
amounts the financial instruments could be exchanged for in a current or future
market transaction. Due to the uncertainty of expected cash flows resulting from
financial instruments, the use of different assumptions and valuation methods
may have a significant effect on the derived estimated fair value amounts.
Except for loans held for accelerated disposition, the estimated amounts
disclosed do not include any premium or discount that could result from offering
to sell or settle the Corporation's entire holdings of a particular type of
financial instrument at one time. The estimated amounts disclosed also do not
include potential taxes and other expenses that would be incurred in an actual
sale or settlement transaction.
58
<PAGE>
- -------------------------------------------------------------------------------
The following table summarizes the carrying amounts and estimated fair values
of financial instruments as of December 31, 1993 and 1992 (in millions).
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992
--------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks--noninterest-bearing............................... $3,916 $3,916 $ 3,222 $ 3,222
Due from banks--interest-bearing........................................... 6,037 6,034 6,116 6,114
Federal funds sold and securities under resale agreements.................. 8,783 8,783 6,892 6,892
Trading account assets..................................................... 4,536 4,536 3,312 3,312
Investment securities...................................................... 2,256 2,264 2,400 2,408
Total loans, net........................................................... 22,420 22,673 22,068 22,134
Assets held for accelerated disposition (1)................................ 36 36 619 619
Accrued income receivable.................................................. 407 407 356 356
Customers' acceptance liability............................................ 517 517 560 560
Currency options purchased................................................. 536 536 622 622
Off-balance-sheet items
Other derivative financial instruments, net.............................. 380 586 76 249
LIABILITIES
Deposits
Demand................................................................... 8,184 8,184 7,575 7,575
Savings.................................................................. 7,541 7,541 7,618 7,618
Time..................................................................... 4,925 4,984 6,262 6,325
Foreign offices.......................................................... 7,536 7,538 8,285 8,285
------- ------- ------- -------
Total deposits..................................................... 28,186 28,247 29,740 29,803
Federal funds purchased and securities under repurchase agreements......... 8,255 8,255 6,962 6,962
Commercial paper........................................................... 164 164 172 172
Other funds borrowed....................................................... 5,843 5,886 3,997 4,046
Long-term debt............................................................. 2,065 2,296 1,705 1,826
Acceptances outstanding.................................................... 517 517 560 560
Currency options written................................................... 501 501 612 612
Off-balance-sheet exposure--nonfinancial instruments
Credit card securitizations, net......................................... 242 191 182 158
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes other real estate held for accelerated disposition.
The following methods and assumptions were used to estimate the fair value of
financial instruments:
(a) CERTAIN SHORT-TERM FINANCIAL INSTRUMENTS
For the following financial instruments, which have relatively short-term
maturities or no defined maturities but are payable on demand, the carrying
amounts recognized in the balance sheet were determined to be a reasonable
estimate of their fair values:
. Cash and due from banks--noninterest-bearing
. Federal funds sold and securities under resale agreements
. Accrued income receivable
. Customers' acceptance liability
. Federal funds purchased and securities under repurchase agreements
. Commercial paper
. Acceptances outstanding
. Other types of short-term financial instruments recognized in other asset
and liability balance sheet line classifications
(b) CERTAIN FLOATING RATE FINANCIAL INSTRUMENTS
For floating rate financial instruments with no significant change in credit
risk and no significant values of embedded interest rate caps or floors, the
carrying amounts recognized in the balance sheet were determined to be a rea-
sonable estimate of their fair values.
(c) DUE FROM BANKS--INTEREST-BEARING
For medium-term fixed-rate time deposit placements, the estimated fair values
were calculated using the discounted cash flow method. The current interest
rates that would be charged for similar deposit placements with the same
remaining maturities were used as the discount rates, taking into account the
creditworthiness of the banks.
59
<PAGE>
- -------------------------------------------------------------------------------
(d) TRADING ACCOUNT ASSETS AND INVESTMENT SECURITIES
For trading account securities, the estimated fair values, which are also the
carrying amounts recognized on the balance sheet, were generally based on quoted
market prices or dealer quotes. The estimated fair values of debt investment
securities were also generally based on quoted market prices or dealer quotes.
See Notes 1 and 5 for information regarding methods for estimating the fair
value of equity investment securities, including those held by venture capital
subsidiaries.
(e) LOANS
Various methods were used to value different groupings of loans, including loans
held for accelerated disposition.
For commercial real estate loans held for accelerated disposition, the
estimated fair values are based on the estimated liquidation values.
Other commercial loans that have significantly deteriorated in credit quality,
including loans to troubled-country debtors, were separately valued. Estimated
fair values were based on a combination of quoted market prices for distressed
loans and troubled-country debtor loans, a discounted cash flow method based
on anticipated cash flows and risk-adjusted interest rates, and estimated fair
values of loans with similar credit quality characteristics.
Credit card receivables are available for sale through the Corporation's credit
card securitization program. Since these receivables are sold at face value,
that amount was used as the estimated fair value of these loans. The amount does
not consider the estimated fair value of the Corporation's credit card
relationships, most of which is a significant unrecognized asset of the
Corporation.
For consumer mortgage loans including those held for sale, the estimated fair
values were based on committed sales prices and a valuation model using current
market information.
For other types of medium- and long-term fixed-rate commercial and consumer
loans, the estimated fair values were calculated using the discounted cash flow
method. The current interest rates offered, or estimated market interest rates
that reflect the credit and interest rate risk inherent in the loans, were used
as the discount rates. Consumer interest rates were used for consumer loans, and
commercial interest rates were used for commercial loans.
The estimated fair values of leases are not required to be disclosed. Therefore,
the estimated fair value amount for loans includes the carrying amount of leases
rather than an estimated fair value amount.
(f) DEPOSIT LIABILITIES
The estimated fair values of demand and savings deposits are defined as the
amounts payable on demand at the reporting date, i.e. the amounts recognized in
the balance sheet. Those amounts do not consider the estimated fair value of the
Corporation's core deposit intangible, most of which is a significant
unrecognized asset of the Corporation.
For medium- and long-term fixed-rate time deposit liabilities, the estimated
fair values were calculated using the discounted cash flow method. The current
interest rates offered for similar deposits with the same remaining maturities
were used as the discount rates. Retail interest rates were used for retail
deposits. Wholesale interest rates were used for wholesale deposits.
(g) OTHER FUNDS BORROWED AND LONG-TERM DEBT
For securities sold but not yet purchased in trading activities, the estimated
fair values, which are also the carrying amounts recognized on the balance
sheet, are based on quoted market prices or dealer quotes.
For fixed-rate medium-term other funds borrowed and long-term debt, the
estimated fair values were calculated using the discounted cash flow method. The
current interest rates that would be offered for similar types of debt
instruments with the same remaining maturities were used as the discount rates.
Bank interest rates were used for subsidiary bank issuances, and the
Corporation's senior interest rates or subordinated interest rates were used for
the Corporation's issuances.
For floating-rate long-term debt issuances, the discounted cash flow method was
used to calculate the value of the difference between current market and
contractual fixed spreads to be added to the floating base rate upon each rate
setting. The current interest rates that would be offered on the Corporation's
subordinated fixed-rate debt were used as the discount rates. Also, an option
pricing model, using current market information, was used to calculate the value
of any embedded interest rate floors.
(h) DERIVATIVE FINANCIAL INSTRUMENTS
The estimated fair values of derivative financial instruments were based on
quoted market prices as well as pricing and valuation models on a present
value basis using current market information.
The differences between the net carrying amounts and the net estimated fair
values of derivative financial instruments are generally due to interest rate
swap agreements used by the Corporation to manage interest rate exposure. For
derivative financial instruments used in trading activities, the estimated
fair values are also the carrying amounts recognized on the balance sheet.
60
<PAGE>
- -------------------------------------------------------------------------------
(i) COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
For commitments to extend credit and letters of credit, the carrying amounts for
related accruals and deferred income recognized on the balance sheet were
determined to be a reasonable estimate of their fair values.
(j) CREDIT CARD SECURITIZATIONS (OFF-BALANCE-SHEET EXPOSURE)
The Corporation has sold floating- and fixed-rate credit card receivables as
securities to investors. Neither the credit card receivables sold nor the
securities outstanding are defined as financial instruments of the Corporation.
These securitizations subject the Corporation to interest rate risk as the
amount of anticipated excess servicing fee income varies with changes in
interest rates. The Corporation uses derivative financial instruments ((h)
above) to reduce this risk. Therefore, the Corporation has included the
difference between the par value and the quoted market value of the related
securities outstanding along with its financial instruments. The carrying amount
for this item represents the reserve for credit losses related to securitized
credit card receivables and net deferred income.
- --------------------------------------------------------------------------------
N O T E 18 -- CONTINGENCIES
The Corporation and certain of its subsidiaries are defendants in various
lawsuits, including certain class actions, arising out of normal corporate
activities, and the Corporation has received certain tax deficiency
assessments. Since the Corporation and certain of its subsidiaries, which are
regulated by one or more federal and state regulatory authorities, also are the
subject of numerous examinations and reviews by such authorities, the
Corporation is and will, from time to time, normally be engaged in various dis-
agreements with regulators, primarily related to banking matters. In the opinion
of management and the Corporation's general counsel, the ultimate resolution
of the matters referred to in this note will not have a material effect on the
Corporation's consolidated financial statements.
61
<PAGE>
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R E P O R T O F M A N A G E M E N T O N R E S P O N S I B I L I T Y
F O R F I N A N C I A L R E P O R T I N G
First Chicago Corporation and Subsidiaries
- -------------------------------------------------------------------------------
To the Stockholders of First Chicago Corporation:
FINANCIAL STATEMENTS
The Management of First Chicago Corporation and its subsidiaries is responsible
for the preparation, integrity and objectivity of the financial statements and
footnotes contained in this Annual Report. 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 the Annual
Report 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 &
Co., 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 & Co. all of the Corporation's financial
records and related data. Furthermore, Management believes that all
representations made to Arthur Andersen & Co. during their audit were valid
and appropriate.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management is also responsible for establishing and maintaining the
Corporation's internal control structure that provides reasonable, but not
absolute, assurance as to the integrity and reliability of the financial
statements. Management continually monitors the internal control structure for
compliance with established policies and procedures. The Corporation maintains a
strong internal auditing program that independently assesses the effectiveness
of the internal control structure. The Audit Committee of the Board of
Directors, composed entirely of outside Directors, oversees the Corporation's
financial reporting process on behalf of the Board of Directors and has
responsibility for recommending the independent public accountants for the
Corporation who are appointed by the Board of Directors. The Audit Committee
reviews with the independent public accountants the scope of their audit and
audit reports and meets with them on a scheduled basis to review their
findings and any action to be taken thereon. In addition, the 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 Committee without Management being present.
Management also recognizes its responsibility for fostering a strong ethical
climate so that its affairs are conducted according to the highest standards of
personal and corporate conduct. This responsibility is characterized and
reflected in the Corporation's integrity policy, which is publicized throughout
the Corporation. The policy addresses, 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
relating 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 struc-
ture 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.
The Corporation assessed its internal control structure over financial reporting
as of December 31, 1993, in relation to the criteria described in the ``Internal
Control--Integrated Framework'' issued by the Committee of Sponsoring Orga-
nizations of the Treadway Commission. Based on this assessment, the Corporation
believes that as of December 31, 1993, in all material respects, the Corporation
maintained an effective internal control structure over financial reporting.
/s/ Richard L. Thomas
Richard L. Thomas
Chairman and Chief Executive Officer
/s/ Robert A. Rosholt
Robert A. Rosholt
Executive Vice President and
Chief Financial Officer
62
<PAGE>
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R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S
- -------------------------------------------------------------------------------
To the Stockholders and the Board of Directors of First Chicago Corporation:
We have audited the accompanying consolidated balance sheet of First Chicago
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of First Chicago Corporation and
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As explained in Note 1(c) and 1(q) to the consolidated financial statements,
effective January 1, 1992, the Corporation changed its methods of accounting
for the valuation of venture capital investment securities and recognition of
certain credit card solicitation costs.
/s/ Arthur Andersen & Co.
Chicago, Illinois
January 13, 1994
63
<PAGE>
- -------------------------------------------------------------------------------
S E L E C T E D S T A T I S T I C A L I N F O R M A T I O N
First Chicago Corporation and Subsidiaries
- -------------------------------------------------------------------------------
SECURITIZATION OF CREDIT CARD RECEIVABLES
Since 1987, the Corporation has actively packaged and sold credit card assets as
securities to investors. The securitization of credit card receivables is an
effective balance sheet management tool since capital is freed for other uses.
In addition, while such securitizations affect net interest income, the
provision for credit losses and noninterest income,the Corporation's net income
is essentially unaffected.
The Corporation's First Card unit continues to service the related credit card
accounts even after receivables are securitized. The Corporation no longer
recognizes net interest income and certain fee revenue on the securitized
portfolio; however, this is offset by servicing fees, as well as by lower
provisions for credit losses.
At year-end 1993, $5.0 billion in credit card receivables was securitized,
compared with $4.5 billion at year-end 1992.
For analytical purposes only, the following table shows income statement line
items for the Corporation adjusted for the net impact of securitization of
credit card receivables.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1993 1992
CREDIT CARD Credit Card
(In millions) REPORTED SECURITIZATIONS ADJUSTED Reported Securitizations Adjusted
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income--
tax-equivalent basis.......... $ 1,264 $ 471 $ 1,735 $ 1,217 $ 359 $ 1,576
Provision for credit losses..... 270 234 504 425 205 630
Provision for assets held for
accelerated disposition....... -- -- -- 625 -- 625
Noninterest income.............. 2,202 (237) 1,965 1,488 (154) 1,334
Noninterest expense............. 1,858 -- 1,858 1,821 -- 1,821
Net income...................... 804 -- 804 94 -- 94
Assets--year-end................ $52,560 $4,958 $57,518 $49,281 $4,500 $53,781
--average................. 56,854 4,839 61,693 54,768 3,918 58,686
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMON STOCK AND STOCKHOLDER DATA
Market price
High for the year................................ $50-5/8 $37-3/4 $28-3/4 $38-1/4 $49-5/8
Low for the year................................. 35-1/2 22-7/8 15-5/8 13-1/8 29-1/4
At year-end...................................... 43-1/4 36-3/4 24-5/8 16-1/2 37-1/8
Dividend payout ratio.............................. 15% 188% 174% 60% 35%
Price/earnings multiple (year-end market).......... 4.9 57.4 21.4 4.9 7.3
Book value (at year-end)........................... $40.55 $33.19 $34.90 $36.27 $34.82
Market price/book value (at year-end).............. 107% 111% 71% 45% 107%
Number of common stockholders of record............ 15,034 15,995 13,089 12,445 12,855
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Record Cents
Common Dividends Declared Date Payable Per Share
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
2/11/94 3/4/94 4/1/94 40
11/12/93 12/3/93 1/1/94 40
7/9/93 9/3/93 10/1/93 30
5/14/93 6/4/93 7/1/93 30
2/12/93 3/5/93 4/1/93 30
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Record Cents
Common Dividends Declared Date Payable Per Share
- ---------------------------------------------------------------
11/13/92 12/11/92 1/1/93 30
7/10/92 9/11/92 10/1/92 30
5/8/92 6/5/92 7/1/92 30
1/10/92 3/6/92 4/1/92 30
11/8/91 12/6/91 1/1/92 50
- ---------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
QUARTERLY DATA
Quarterly Earnings and Market Price Summary
- --------------------------------------------------------------------------------------------------------------------------
Stock Market Price/Earnings
Net Income (Loss) Price Range (1) Multiple Range (2)
- --------------------------------------------------------------------------------------------------------------------------
Amount Per
(In millions) Share Low High Low High
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993
FIRST QUARTER...................... $ 179.1 $ 1.97 $36 $44-3/4 N/M N/M
SECOND QUARTER..................... 168.5 1.81 35-1/2 45-3/8 62.3 79.6
THIRD QUARTER...................... 284.1 3.14 40-7/8 49-1/4 4.8 5.8
FOURTH QUARTER..................... 172.8 1.81 40-7/8 50-5/8 4.7 5.8
YEAR....................... 804.5 8.78 35-1/2 50-5/8 4.0 5.8
- --------------------------------------------------------------------------------------------------------------------------
1992
First quarter...................... $ 294.8 $ 4.06 $22-7/8 $32-5/8 5.0 7.1
Second quarter..................... 34.5 0.32 27-1/8 36-1/4 6.5 8.7
Third quarter...................... (372.4) (4.74) 29-1/2 37-3/8 N/M N/M
Fourth quarter..................... 136.6 1.53 29-1/8 37-3/4 24.9 32.3
Year....................... 93.5 0.64 22-7/8 37-3/4 35.7 59.0
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The principal market for First Chicago Corporation common stock is the New
York Stock Exchange.
(2) Computation made by dividing market prices by the per share earnings of the
latest 12-month period ending with the current quarter.
N/M--Not meaningful.
<TABLE>
<CAPTION>
CONSOLIDATED SUMMARY OF QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------------------------------------------------
1993 (In millions, except per share data) December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME.................................................... $647.7 $668.7 $648.5 $659.2
NET INTEREST INCOME................................................ 300.7 323.1 303.2 298.8
PROVISION FOR CREDIT LOSSES........................................ 70.0 65.0 70.0 65.0
NONINTEREST INCOME (1)............................................. 522.1 686.2 503.3 490.5
INVESTMENT SECURITIES GAINS (LOSSES)............................... 0.9 (0.8) 0.2 --
NONINTEREST EXPENSE (2)............................................ 480.7 474.0 465.6 433.6
PROVISION FOR OTHER REAL ESTATE.................................... 1.2 1.5 1.0 0.5
NET INCOME......................................................... 172.8 284.1 168.5 179.1
EARNINGS PER SHARE
PRIMARY............................................................ $1.81 $3.14 $1.81 $1.97
FULLY DILUTED...................................................... 1.77 2.97 1.72 1.91
- --------------------------------------------------------------------------------------------------------------------------
1992 (In millions, except per share data) December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------------------------------------------------
Interest income.................................................... $687.2 $ 689.7 $737.7 $755.0
Net interest income................................................ 320.6 287.0 290.1 285.3
Provision for loans held for accelerated disposition............... -- 491.0 -- --
Provision for credit losses........................................ 80.0 145.0 105.0 95.0
Noninterest income (1)............................................. 436.0 384.7 285.6 373.3
Investment securities gains........................................ -- 0.1 2.2 6.3
Noninterest expense (2)............................................ 461.2 485.4 403.1 414.7
Provision for other real estate held for accelerated disposition... -- 134.0 -- --
Provision for other real estate.................................... 1.5 10.4 22.0 23.0
Income (loss) before cumulative effect of changes in
accounting principles............................................ 136.6 (372.4) 34.5 86.8
Cumulative effect of changes in accounting principles.............. -- -- -- 208.0
Net income (loss).................................................. 136.6 (372.4) 34.5 294.8
Earnings per share
Primary
Income (loss) before cumulative effect of changes in
accounting principles.......................................... $1.53 $(4.74) $0.32 $1.08
Cumulative effect of changes in accounting principles............ -- -- -- 2.98
Net income (loss)................................................ 1.53 (4.74) 0.32 4.06
Fully diluted
Income (loss) before cumulative effect of changes in
accounting principles.......................................... 1.49 (4.74) 0.32 1.06
Cumulative effect of changes in accounting principles............ -- -- -- 2.85
Net income (loss)................................................ 1.49 (4.74) 0.32 3.91
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes investment securities gains (losses).
(2) Excludes provisions for other real estate.
65
<PAGE>
- -------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST MARGIN/RATES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
(Income and rates on tax-equivalent basis) AVERAGE AVERAGE Average Average
(Dollars in millions) BALANCE INTEREST RATE Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Due from banks--interest-bearing (1).............. $ 7,441 $ 298.0 4.00% $ 7,376 $ 358.0 4.85%
Federal funds sold and securities under
resale agreements............................... 11,589 344.8 2.98 8,202 284.8 3.47
Trading account assets............................ 4,729 223.7 4.73 4,339 260.2 6.00
Investment securities
U.S. government and federal agency.............. 725 29.7 4.10 521 30.4 5.83
States and political subdivisions............... 216 19.7 9.12 270 25.0 9.26
Other........................................... 1,537 33.8 2.20 1,452 31.1 2.14
------- -------- ----- ------- -------- -----
Total investment securities................... 2,478 83.2 3.36 2,243 86.5 3.86
Loans (2)(3)
Domestic offices................................ 19,935 1,539.5 7.95 21,735 1,689.4 7.95
Foreign offices................................. 2,062 145.3 7.05 2,612 207.2 7.93
------- -------- ----- ------- -------- -----
Total loans............................... 21,997 1,684.8 7.86 24,347 1,896.6 7.95
Assets held for accelerated disposition (4)....... 283 27.8 9.82 199 17.5 8.79
------- -------- ----- ------- -------- -----
Total earning assets (5).......................... 48,517 2,662.3 5.49 46,706 2,903.6 6.22
Cash and due from banks--noninterest-bearing...... 3,812 3,338
Allowance for credit losses....................... (628) (709)
Other assets...................................... 5,153 5,433
------- -------
Total assets.............................. $56,854 $54,768
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits--interest-bearing
Savings......................................... $ 8,093 $ 162.8 2.01% $ 7,634 $ 202.2 2.65%
Time............................................ 5,401 143.9 2.66 7,567 307.0 4.06
Foreign offices (6)............................. 9,203 337.4 3.67 10,357 464.5 4.48
------- -------- ----- ------- -------- -----
Total deposits--interest-bearing.......... 22,697 644.1 2.84 25,558 973.7 3.81
Federal funds purchased and securities
under repurchase agreements..................... 10,112 308.1 3.05 9,905 345.3 3.49
Commercial paper.................................. 194 6.1 3.14 231 8.8 3.81
Other funds borrowed.............................. 6,849 289.7 4.23 4,041 231.9 5.74
Long-term debt.................................... 2,057 150.3 7.31 1,735 126.9 7.31
------- -------- ----- ------- -------- -----
Total interest-bearing liabilities........ 41,909 1,398.3 3.34 41,470 1,686.6 4.07
Demand deposits................................... 6,980 6,136
Other liabilities................................. 4,079 3,848
Preferred stock................................... 794 581
Common stockholders' equity....................... 3,092 2,733
------- -------
Total liabilities and
stockholders' equity.................... $56,854 $54,768
======= =======
Interest income/earning assets (5)................ $2,662.3 5.49 $2,903.6 6.22
Interest expense/earning assets................... 1,398.3 2.88 1,686.6 3.61
-------- ----- -------- -----
Net interest margin............................... $1,264.0 2.61% $1,217.0 2.61%
======== ===== ======== =====
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Principally balances in overseas offices.
(2) Rates are calculated on average lease-financing receivable balances
reduced by deferred liability for taxes.
(3) Nonperforming loans are included in average balances used to determine
rates.
66
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6,543 $ 476.2 7.28% $ 5,988 $ 524.4 8.76% $ 6,248 $ 583.0 9.33%
5,683 329.3 5.79 4,531 368.6 8.14 3,280 295.4 9.01
3,159 230.9 7.31 2,261 188.3 8.33 1,335 117.0 8.76
447 34.1 7.63 552 44.3 8.03 646 53.7 8.31
324 30.2 9.32 529 50.0 9.45 583 55.4 9.50
1,075 44.3 4.12 1,032 37.5 3.63 959 53.5 5.58
- ------- -------- ----- ------- -------- ----- ------- -------- -----
1,846 108.6 5.88 2,113 131.8 6.24 2,188 162.6 7.43
24,027 2,202.1 9.38 26,522 2,868.2 11.04 24,723 2,904.0 11.97
3,254 295.4 9.08 4,087 435.9 10.67 4,516 446.2 9.88
- ------- -------- ----- ------- -------- ----- ------- -------- -----
27,281 2,497.5 9.35 30,609 3,304.1 10.99 29,239 3,350.2 11.64
-- -- -- -- -- -- -- -- --
- ------- -------- ----- ------- -------- ----- ------- -------- -----
44,512 3,642.5 8.18 45,502 4,517.2 9.93 42,290 4,508.2 10.66
2,961 2,787 2,628
(836) (962) (1,284)
6,018 5,770 4,900
- ------- ------- -------
$52,655 $53,097 $48,534
======= ======= =======
$ 6,005 $ 265.3 4.42% $ 4,902 $ 277.1 5.65% $ 4,279 $ 249.2 5.82%
10,164 678.6 6.68 9,563 763.5 7.98 10,089 888.4 8.81
11,415 770.0 6.75 14,567 1,251.4 8.59 13,028 1,205.5 9.25
- ------- -------- ----- ------- -------- ----- ------- -------- -----
27,584 1,713.9 6.21 29,032 2,292.0 7.89 27,396 2,343.1 8.55
7,438 428.2 5.76 7,240 593.2 8.19 4,860 439.2 9.04
210 13.8 6.57 719 59.7 8.30 1,360 122.9 9.04
3,310 240.4 7.26 2,565 207.3 8.08 2,379 200.1 8.41
1,589 128.3 8.07 1,380 123.2 8.93 1,260 119.8 9.51
- ------- -------- ----- ------- -------- ----- ------- -------- -----
40,131 2,524.6 6.29 40,936 3,275.4 8.00 37,255 3,225.1 8.66
5,235 5,181 5,024
4,351 4,218 3,717
507 419 419
2,431 2,343 2,119
- ------- ------- -------
$52,655 $53,097 $48,534
======= ======= =======
$3,642.5 8.18 $4,517.2 9.93 $4,508.2 10.66
2,524.6 5.67 3,275.4 7.20 3,225.1 7.63
-------- ----- -------- ----- -------- -----
$1,117.9 2.51% $1,241.8 2.73% $1,283.1 3.03%
======== ===== ======== ===== ======== =====
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Excludes other real estate held for accelerated disposition.
(5) Includes tax-equivalent adjustments based on 35 percent federal income tax
rate of $38.2 million for 1993, and tax-equivalent adjustments based on
34 percent federal income tax rate of $34.0 million for 1992, $37.9 million
1991, $44.2 million for 1990, and $48.1 million for 1989.
(6) Includes International Banking Facilities' deposit balances in domestic
offices and balances of Edge Act and overseas offices.
67
<PAGE>
E X E C U T I V E O F F I C E R S O F T H E C O R P O R A T I O N
-------------------------------------------------------------------------
Richard L. Thomas Sherman I. Goldberg
Chairman of the Board and Chief Executive Vice President, General
Executive Officer Counsel and Secretary
Leo F. Mullin Donald R. Hollis
President and Chief Operating Executive Vice President, Corporate
Officer and Institutional Banking
David J. Vitale W.G. Jurgensen
Vice Chairman of the Board and Head, Executive Vice President and Head,
Corporate and Institutional Banking Community Banking
Marvin James Alef, Jr. Scott P. Marks, Jr.
Executive Vice President and Head, Executive Vice President and Head,
Human Resources First Card
John W. Ballantine Robert A. Rosholt
Executive Vice President and Chief Executive Vice President and
Credit and Market Risk Officer Chief Financial Officer
Jerry C. Bradshaw J. Mikesell Thomas
Executive Vice President, Executive Vice President, Corporate
Community Banking and Institutional Banking
68
<PAGE>
U. S. O F F I C E S A N D I N T E R N A T I O N A L F A C I L I T I E S
- -------------------------------------------------------------------------------
COMMUNITY BANKING GROUP
The First National Bank of Chicago
Locations
Antioch Evanston Orland Park
Arlington Heights Glendale Heights Palatine
Aurora Glenview Park Ridge
Batavia Highland Park River Forest
Berwyn Hoffman Estates Romeoville
Bloomingdale Lake Forest Schiller Park
Bolingbrook Lake Zurich St. Charles
Carol Stream Lansing Warrenville
Chicago Mount Prospect Wheaton
Deerfield Naperville Willowbrook
Downers Grove Niles Wilmette
Elgin Northbrook Winnetka
Elk Grove Village Oak Brook Worth
Elmhurst Oak Lawn
Elmwood Park Oak Park
MORTGAGE SERVICING
Oakbrook Terrace, Ill.
............................................................
AMERICAN NATIONAL CORPORATION
BANKING SUBSIDIARIES
American National Bank and Trust Company of Chicago
American National Bank of Libertyville
American National Bank and Trust Company of Wisconsin
Locations
Arlington Heights Libertyville Genoa City, Wis.
Bensenville Lisle Milwaukee, Wis.
Chicago Matteson Pell Lake, Wis.
Deerfield Melrose Park Grand Cayman
Des Plaines Skokie
Elgin Willowbrook
FIRST CARD
FCC NATIONAL BANK
Operations Centers
Elgin, Ill. Uniondale, N.Y. Wilmington, Del.
............................................................
CORPORATE TRUST OFFICES
Chicago London New York
DEBT TRADING OFFICES
London New York
EDGE ACT OFFICES
Chicago Los Angeles New York
INTERNATIONAL BANKING LOCATIONS
Beijing London Sydney
Cayman Islands New York Tokyo
Chicago Seoul
Hong Kong Singapore
LEASING OFFICE
Chicago
NATIONAL PROCESSING CENTERS
Charlotte, N.C. Dallas Secaucus, N.J.
Chicago Pasadena
REGIONAL OFFICES
Atlanta Houston Washington, D.C.
Boston Los Angeles
Cleveland New York
69
<PAGE>
C O R P O R A T E I N F O R M A T I O N
- --------------------------------------------------------------------------------
FIRST CHICAGO CORPORATION, a multibank holding company incorporated in Delaware
in 1969, provides a broad range of banking, fiduciary, financial and other
services domestically and overseas. It holds leading positions in its key
banking activities:
. Its principal subsidiary, The First National Bank of Chicago, chartered in
1863, is the foremost consumer bank in the Chicago metropolitan area.
. Its American National Corporation subsidiary has the largest share of the
Chicago-area middle market.
. Its First Card unit is one of the top four U.S. issuers of bank credit cards.
. In corporate banking relationships, First Chicago ranks first in Chicago and
the Midwest and among the leading banks nationwide.
. The Corporation is an innovator in cash management and risk management
products and is the country's largest provider of shareholder services.
First Chicago's nonbank activities include a premier venture capital operation
and a leasing business.
HEADQUARTERS
One First National Plaza, Chicago, IL 60670.
(312) 732-4000.
ANNUAL MEETING
The Annual Meeting of Stockholders of First Chicago Corporation will be held on
Friday, April 8, 1994, at 9:30 a.m. (Chicago time) in the First Chicago Center,
One First National Plaza. The Center offers special access for people in
wheelchairs and headsets for the hearing-impaired. Stockholders who wish to
arrange for either of these services are invited to call (312) 732-3150 by
Wednesday, April 6.
STOCK LISTING
First Chicago Corporation common stock is listed on the Chicago (formerly
Midwest), New York, Pacific and London stock exchanges. Symbol: FNB.
STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, NJ
07303-2500. 1-800-446-2617.
STOCKHOLDER INQUIRIES
Stockholders who have questions about stock transfers, changes of address,
dividend payments or lost certificates should contact First Chicago Trust
Company of New York.
DIVIDEND DIRECT DEPOSIT
First Chicago offers common stockholders the convenience of having dividends
electronically deposited without charge into their checking, savings or money
market account at most U.S. financial institutions. To obtain an enrollment
card, contact First Chicago Trust Company of New York.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Stockholders can increase their ownership in the Corporation without brokerage
commissions or service fees through the Dividend Reinvestment and Stock Purchase
Plan. For a prospectus and an enrollment card, contact First Chicago Trust
Company of New York.
FORM 10-K AND OTHER FINANCIAL REPORTS
Additional copies of this Annual Report, the Corporation's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission, and Quarterly
Reports may be obtained from Corporate Communications, First Chicago
Corporation, Mail Suite 0358, Chicago, IL 60670-0358. (312) 732-6204.
INVESTOR RELATIONS
Analysts and investors seeking additional financial information should contact
Investor Relations, First Chicago Corporation, Mail Suite 0460, Chicago, IL
60670-0460. (312) 732-4812 or (312) 732-8013.
INDEPENDENT ACCOUNTANTS
Arthur Andersen & Co., 33 W. Monroe St., Chicago, IL 60603-5385.
(c) 1994 First Chicago Corporation
Printed in the U.S.A. on recycled paper (recycle symbol here)
70
<PAGE>
(LOGO) FIRST CHICAGO
CORPORATION
ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60670
<PAGE>
Appendix to First Chicago Corporation 1993 Annual Report to Stockholders
(Electronic Format)
Descriptions of Photographs
Page 3 Photograph of top management. From left: Leo F. Mullin, president;
Richard L. Thomas, chairman; David J. Vitale, vice chairman.
Page 4 Photograph of hand holding First Card Visa Gold card.
Page 5 Photo-collage, including retail investment brochures, appointments
calendar, calculator, pen.
Page 6 Photograph of personal computer displaying FirstWindow 2000 log-on
screen.
Page 8 Top: Photograph of main banking floor at American National Bank.
Center left: Photograph of hand holding First Chicago Banking Card;
groceries in background.
Bottom: Photgraph of two men in front of large globe.
Right: Photograph of woman withdrawing money from Cash Station
automatic teller machine.
Page 11 Top left: Photograph of baker making bread in commercial bakery.
Top right: Photograph of Mileage Plus First Card, United Airlines
ticket and timetable.
Center right: Photograph of two men in discussion across desk.
Bottom: Photograph of automobile assembly plant.
Page 12 Top: Photograph of main trading floor at First Chicago.
Center left: Photograph of First Chicago supermarket branch.
Center right: Photograph of doctor examining boy.
Bottom: Photograph of printing plant.
Page 15 Top left: Photograph of miscellaneous office supplies.
Top right: Photograph of family with dog on front steps of new home.
Bottom left: Photograph of four people in meeting around conference
table.
Bottom right: Photograph of a handshake.
