<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7127
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FIRST CHICAGO NBD CORPORATION
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(exact name of registrant as specified in its charter)
DELAWARE 38-1984850
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60670
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(Address of principal executive offices) (Zip Code)
312-732-4000
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(Registrant's telephone number, including area code)
NO CHANGE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of October 31, 1997.
Class Number of Shares Outstanding
- ------------------------- ----------------------------
Common Stock $1 par value 290,918,522
<PAGE>
First Chicago NBD Corporation and Subsidiaries
Financial Supplement and Form 10-Q
<TABLE>
<CAPTION>
Contents Page
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<S> <C>
Five-Quarter Summary of Selected Financial Information 1
Business Segments 2
Earnings Analysis 7
Liquidity Risk Management 13
Market Risk Management 14
Credit Risk Management 17
Derivative Financial Instruments 21
Technology Risk--Year 2000 Compliance Issues 22
Capital Management 23
Consolidated Financial Statements 26
Notes to Consolidated Financial Statements 30
Selected Statistical Information 33
Form 10-Q Cover
</TABLE>
<PAGE>
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F I V E - Q U A R T E R S U M M A R Y O F S E L E C T E D
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F I N A N C I A L I N F O R M A T I O N
First Chicago NBD Corporation and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
September 30 June 30 March 31 December 31 September 30
(Dollars in millions, except per share data) 1997 1997 1997 1996 1996
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<S> <C> <C> <C> <C> <C>
Selected Financial Data for the Quarter
Net interest income........................... $ 899 $ 925 $ 876 $ 883 $ 942
Tax-equivalent adjustment..................... 22 26 31 24 25
-------- -------- -------- -------- --------
Net interest income--tax-equivalent basis.... 921 951 907 907 967
Provision for credit losses................... 191 180 187 190 185
Noninterest income............................ 701 644 679 682 597
Operating expense............................. 835 825 800 813 798
FDIC special assessment....................... - - - - 18
Net income.................................... 385 378 380 377 358
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Earnings Per Share
Primary...................................... $ 1.26 $ 1.20 $ 1.18 $ 1.15 $ 1.09
Fully diluted................................ 1.26 1.20 1.17 1.14 1.08
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Net Interest Margin
Reported..................................... 3.88% 4.12% 4.11% 4.11% 4.00%
Adjusted..................................... 4.47 4.70 4.73 4.64 4.51
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At Quarter-End
Assets........................................ $113,306 $112,595 $109,133 $104,619 $106,694
Loans......................................... 67,822 67,510 66,536 66,414 66,602
Deposits...................................... 67,565 68,018 64,927 63,669 63,679
Long-term debt................................ 9,906 9,016 8,514 8,454 7,967
Common stockholders' equity................... 7,792 8,181 8,495 8,563 8,612
Stockholders' equity.......................... 8,082 8,471 8,785 9,007 9,087
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Average Balances
Assets........................................ $108,950 $108,292 $105,133 $102,687 $110,715
Loans......................................... 66,782 66,301 65,177 65,494 65,962
Earning assets................................ 94,104 92,625 89,352 87,896 96,123
Deposits...................................... 64,859 64,586 62,389 61,580 63,482
Common stockholders' equity................... 7,893 8,279 8,517 8,565 8,352
Stockholders' equity.......................... 8,183 8,569 8,936 9,030 8,839
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Financial Ratios
Return on common stockholders' equity......... 19.1% 18.1% 17.8% 17.2% 16.7%
Return on stockholders' equity................ 18.7 17.7 17.2 16.6 16.1
Return on assets.............................. 1.40 1.40 1.47 1.46 1.29
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Capital Data (1)
Common-equity-to-assets ratio................. 7.0% 7.3% 7.9% 8.2% 8.1%
Regulatory leverage ratio..................... 8.2 8.6 9.2 9.3 8.1
Risk-based capital
Tier 1 capital ratio......................... 8.1 8.6 9.1 9.2 8.4
Total capital ratio.......................... 11.9 12.4 13.1 13.3 12.4
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Common Share and Stockholder Data
For the Quarter Ended
Market price
High......................................... $ 78 13/16 $ 65 5/8 $ 63 5/8 $ 58 7/8 $ 45 1/4
Low.......................................... 60 3/4 50 1/2 51 1/2 45 36 5/8
At quarter-end............................... 75 1/4 60 1/2 54 1/8 53 3/4 45 1/4
Book value (at quarter-end)................... 26.62 27.08 27.20 27.31 27.11
Dividends declared per common share........... 0.40 0.40 0.40 0.40 0.36
Dividend payout ratio......................... 31.7% 33.3% 33.9% 34.8% 33.0%
Average number of common and common-equivalent
shares (in millions)......................... 301.6 310.9 316.5 321.4 320.2
Average number of shares, assuming full
dilution (in millions)....................... 301.8 311.3 320.8 327.6 327.5
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</TABLE>
(1) Net of investment in First Chicago Capital Markets, Inc.
1
<PAGE>
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30
Regional Corp. & Inst. Banking Other
(Dollars in millions, Credit Card Banking and Corp. Inv. Activities
except where noted) 1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income...................... $ 92 $ 95 $ 186 $ 165 $ 108 $ 95 $ (1) $ 3
Return on equity................ 27% 34% 20% 18% 15% 11% N/M N/M
Average assets (presecuritized)
(in billions).................. $17.3 $17.8 $39.9 $38.9 $59.7 $60.9 $0.2 $0.3
Average common equity (in
billions)...................... 1.3 1.1 3.6 3.6 2.8 3.2 0.2 0.5
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</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30
Regional Corp. & Inst. Banking Other
Credit Card Banking and Corp. Inv. Activities
(Dollars in millions, ----------- --------- -------------- ----------
except where noted) 1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income...................... $ 232 $ 251 $ 533 $ 472 $ 377 $ 327 $ 1 $ 9
Return on equity................ 23% 30% 20% 18% 18% 13% N/M N/M
Average assets (presecuritized)
(in billions).................. $17.4 $17.5 $39.5 $38.8 $58.7 $66.8 $ 0.3 $ 0.3
Average common equity (in
billions)...................... 1.3 1.1 3.6 3.4 2.8 3.3 0.5 0.4
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</TABLE>
N/M - Not meaningful.
Financial results are reported by major business lines, principally structured
around the customer segments served. These major businesses are: Credit Card,
Regional Banking (retail and middle market), and Corporate & Institutional
Banking and Corporate Investments. Investment management and insurance
activities, while managed separately, serve customers in various business
segments. Therefore, those financial results are captured within respective
business lines. To facilitate analysis of trends, Credit Card results are
presented before the securitization of credit card receivables
("presecuritized"). See the discussion of net interest income beginning on page
7 and a reconciliation of reported to presecuritized results on page 33.
Certain corporate revenues and expenses not allocable to specific lines of
business are included in Other Activities.
Results are derived from internal profitability reporting systems, which use a
detailed funds transfer methodology, and reflect full allocation of all
institutional and overhead items.
Beginning in 1997, the Corporation adopted a revised method of assigning capital
to business units. Common equity is allocated based on two separate risk types:
portfolio risk (potential losses arising from credit, market and investment
risks) and business risk (including operating risk, event risk and technology
risk, as well as goodwill). Under the revised methodology, risk assessment
changed for most lines of business in 1997. The capital at risk for the Credit
Card and Regional Banking segments increased, while the risk profile of
Corporate & Institutional Banking improved, leading to a lower capital
allocation for that business. Line-of-business financial results for 1996 have
been adjusted to reflect the key tenets of the enhanced capital methodology, as
well as for organizational changes.
Capital assigned to the business units reflects a standard corporate structure
composed of a fixed proportion of common (90%) and other (10%) equity. Any
residual equity is held in Other Activities. See page 23 for more information on
the Corporation's capital management practices.
2
<PAGE>
Earnings Contribution by Business Lines
For the Nine Months Ended September 30
[PIE CHARTS APPEAR HERE]
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Corporate & Institutional Banking
and Corporate Investments 33% 31%
Regional Banking 46% 44%
Credit Card 20% 24%
Other Activities 1% 1%
</TABLE>
<TABLE>
<CAPTION>
Credit Card
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(Presecuritized) September 30 September 30
(Dollars in millions, except where noted) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis.............. $384 $381 $1,167 $1,113
Provision for credit losses............................ 291 269 936 750
Noninterest income..................................... 195 174 561 457
Noninterest expense.................................... 139 135 416 421
Net income............................................. 92 95 232 251
Return on equity....................................... 27% 34% 23% 30%
Efficiency ratio (1)................................... 24% 24% 24% 27%
Average loans (in billions)............................ $17.3 $17.8 $17.4 $17.5
Average common equity (in billions).................... 1.3 1.1 1.3 1.1
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</TABLE>
(1) Noninterest expense as a percentage of total revenue.
The Corporation reaches consumers nationally through its Credit Card business,
known as First Card, which is one of the largest issuers of bank credit cards in
the U.S. This segment contributes about one-fifth of the Corporation's earnings.
Net income for Credit Card was $92 million for the third quarter of 1997 and
return on equity was 27%. Net income for the third quarter of 1996 was $95
million. For the first nine months of 1997, net income was $232 million and
return on equity was 23%, down from a 30% return in 1996. The lower returns
reflect both reduced earnings and a higher capital allocation.
Revenue increased 4% for the quarter and 10% for the year-to-date period, driven
primarily by pricing initiatives. Third quarter expense levels were marginally
higher in 1997 due to the timing of advertising expenses. Expenses for the first
nine months, however, were down slightly from a year ago, reflecting lower
overall marketing costs. The positive revenue and expense trends were more than
offset by significantly higher credit costs, up $185 million through September
30, 1997. The rate of increase in credit costs has slowed during 1997, and the
net charge-off rate dropped to 6.7% for the third quarter, from 7.7% for the
second quarter of 1997.
3
<PAGE>
<TABLE>
<CAPTION>
Regional Banking
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions, except where noted) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis.......... $ 559 $ 539 $1,658 $1,579
Provision for credit losses........................ 29 14 87 68
Noninterest income................................. 241 196 673 585
Noninterest expense................................ 472 461 1,386 1,352
Net income......................................... 186 165 533 472
Return on equity................................... 20% 18% 20% 18%
Efficiency ratio (1)............................... 59% 63% 59% 62%
Average loans (in billions)........................ $35.9 $34.6 $ 35.6 $ 34.4
Average assets (in billions)....................... 39.9 38.9 39.5 38.8
Average common equity (in billions)................ 3.6 3.6 3.6 3.4
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</TABLE>
(1) Noninterest expense as a percentage of total revenue.
The Corporation's Regional Banking business serves local consumers, small
businesses and middle market customers through more than 650 offices in
Michigan, Indiana and Illinois in addition to a niche business in Florida. Net
income increased 13% for both the third quarter and year-to-date periods. Return
on equity improved to 20% for both periods. Regional Banking contributed net
income of $533 million, or 46% of the Corporation's earnings, for the nine
months ended September 30, 1997.
Retail Banking
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions, except where noted) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis.......... $ 320 $ 309 $ 955 $ 904
Provision for credit losses........................ 20 11 60 42
Noninterest income................................. 182 147 491 422
Noninterest expense................................ 338 330 989 965
Net income......................................... 88 75 242 201
Return on equity................................... 19% 16% 18% 15%
Efficiency ratio (1)............................... 67% 72% 68% 73%
Average loans (in billions)........................ $17.8 $17.3 $17.6 $17.1
Average assets (in billions)....................... 19.9 19.7 19.7 19.5
Average common equity (in billions)................ 1.8 1.8 1.8 1.7
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</TABLE>
Middle Market Banking
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions, except where noted) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis.......... $ 239 $ 230 $ 703 $ 675
Provision for credit losses........................ 9 3 27 26
Noninterest income................................. 59 49 182 163
Noninterest expense................................ 134 131 397 387
Net income......................................... 98 90 291 271
Return on equity................................... 21% 19% 21% 20%
Efficiency ratio (1)............................... 45% 47% 45% 46%
Average loans (in billions)........................ $18.1 $17.3 $18.0 $17.3
Average assets (in billions)....................... 20.0 19.2 19.8 19.3
Average common equity (in billions)................ 1.8 1.8 1.8 1.7
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</TABLE>
(1) Noninterest expense as a percentage of total revenue.
4
<PAGE>
Retail Banking
Net income for the Retail Banking segment of Regional Banking was $88 million
for the third quarter, for a return on equity of 19%. Year-to-date net income
was $242 million, a 20% increase over a year ago.
The earnings increases for both the third quarter and year-to-date were driven
by strong fundamental revenue growth particularly in deposit spreads. Results
were augmented by branch and asset sales gains, combined with tight expense
control. The increase in the year-over-year provision reflects the deterioration
of consumer credit quality in certain product segments.
Middle Market Banking
Net income for the Middle Market segment was $98 million for the third quarter.
Year-to-date net income was $291 million, a 7% increase over 1996. Return on
equity was a healthy 21% for both the third quarter and year-to-date. This
strong performance resulted from solid revenue growth generated by both higher
loan volume and cash management products. Tight management of expenses also
contributed to the improved financial performance.
<TABLE>
<CAPTION>
Corporate & Institutional Banking and Corporate Investments
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions, except where noted) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis.......... $ 163 $ 181 $ 512 $ 567
Provision for credit losses........................ 20 8 21 49
Noninterest income................................. 230 192 716 676
Noninterest expense................................ 221 219 650 681
Net income......................................... 108 95 377 327
Return on equity................................... 15% 11% 18% 13%
Efficiency ratio (1)............................... 56% 59% 53% 55%
Average loans (in billions)........................ $21.6 $20.6 $21.5 $20.5
Average assets (in billions)....................... 59.7 60.9 58.7 66.8
Average common equity (in billions)................ 2.8 3.2 2.8 3.3
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</TABLE>
(1) Noninterest expense as a percentage of total revenue.
The Corporation manages its corporate and institutional activities in two
distinct business segments: Corporate & Institutional Banking, which includes
customer-based businesses; and Corporate Investments, which comprises activities
such as venture capital, leveraged leasing, funding and arbitrage, and the fixed
income investment account. Together, these segments contributed $377 million, or
about one-third of the Corporation's year-to-date net income.
Earnings for the first nine months of 1997 represent an 15% increase over last
year. The earnings improvement resulted from lower operating expenses, coupled
with reduced credit costs. Return on equity was 18% for the nine-month period.
<TABLE>
<CAPTION>
Corporate & Institutional Banking
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions, except where noted) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis...... $ 142 $ 156 $ 430 $ 483
Provision for credit losses.................... 20 8 21 49
Noninterest income............................. 162 138 479 456
Noninterest expense............................ 209 205 614 639
Net income..................................... 51 53 180 160
Return on equity............................... 9% 7% 11% 7%
Efficiency ratio (1)........................... 69% 70% 68% 68%
Average loans (in billions).................... $20.1 $19.3 $20.1 $19.3
Average assets (in billions)................... 40.2 42.8 40.4 47.0
Average common equity (in billions)............ 2.2 2.7 2.2 2.8
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</TABLE>
(1) Noninterest expense as a percentage of total revenue.
5
<PAGE>
<TABLE>
<CAPTION>
Corporate Investments
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions, except where noted) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis..... $ 21 $ 25 $ 82 $ 84
Provision for credit losses.................... - - - -
Noninterest income............................. 68 54 237 220
Noninterest expense............................ 12 14 36 42
Net income..................................... 57 42 197 167
Return on equity............................... 36% 32% 42% 42%
Average loans (in billions).................... $ 1.5 $ 1.3 $ 1.4 $ 1.2
Average assets (in billions)................... 19.5 18.1 18.3 19.8
Average common equity (in billions)............ 0.6 0.5 0.6 0.5
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Noninterest expense as a percentage of total revenue.
Corporate & Institutional Banking
Net income for the Corporate & Institutional Banking segment was $51 million for
the third quarter of 1997. Revenue growth of 3% was due, in part, to improved
trading and continued strong results from cash management. Return on equity was
9%, up from 7% for the year-ago quarter.
For the first nine months of 1997, Corporate & Institutional Banking earned $180
million, a 13% increase from a year ago. Lower credit costs and operating
expenses drove this improvement. Return on equity increased to 11% from 7% in
1996, due to both higher net income and reduced capital requirements.
Corporate Investments
Corporate Investments earned $57 million, or 15% of consolidated net income, for
the third quarter of 1997. Return on equity was 36%. For year-to-date 1997, net
income was $197 million, for a return on equity of 42%. Higher leasing revenue,
better trading results and more tax-advantaged activities led to the 18% year-
to-date earnings increase. Lower average asset levels reflected the substantial
decline in investment securities and short-term assets resulting from last
year's asset reduction strategy.
The nature of Corporate Investments implies that it will be a more variable
component of earnings going forward than the other business lines. However,
because of the Corporation's expertise in this high-return area, continued
significant earnings contributions are expected.
<TABLE>
<CAPTION>
Other Activities
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Three Months Ended Nine Months Ended
(Dollars in millions, September 30 September 30
except where noted) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss)................... $ (1) $ 3 $ 1 $ 9
Average assets (in billions)........ 0.2 0.3 0.3 0.3
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</TABLE>
Net income from Other Activities includes unallocated revenue and expense as
well as earnings associated with capital not required by specific business
units. Net income in 1996 included the gain from the sale of the Corporation's
Ohio branches.
6
<PAGE>
EARNINGS ANALYSIS
Summary
The Corporation reported record earnings of $1.26 per share for the third
quarter of 1997. Net income was $385 million compared with $358 million, or
$1.08 per share, for the year-ago quarter. Earnings for the first nine months
of 1997 were $1.143 billion or $3.62 per share up from $1.059 billion or $3.19
per share a year ago.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions, except per share data) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis....................... $ 921 $ 967 $2,779 $2,815
Provision for credit losses..................................... 191 185 558 545
Noninterest income.............................................. 701 597 2,024 1,866
Operating expense............................................... 835 798 2,460 2,440
FDIC special assessment......................................... - 18 - 18
Net income...................................................... 385 358 1,143 1,059
Common Share Data
Primary earnings per share................................... $ 1.26 $ 1.09 $ 3.64 $ 3.24
Average common and common-equivalent
shares (in millions)........................................ 301.6 320.2 309.4 319.8
Fully diluted earnings per share............................. $ 1.26 $ 1.08 $ 3.62 $ 3.19
Average shares, assuming full dilution (in millions)......... 301.8 327.5 311.9 327.2
Return on assets................................................ 1.40% 1.29% 1.42% 1.22%
Return on common stockholders' equity........................... 19.1 16.7 18.3 16.9
</TABLE>
Third-quarter 1997 highlights were:
. Adjusted fee-based revenue rose 11% from a year ago, reflecting strong
results from the cash management and investment management product areas as
well as continued growth in credit card fees.
. The provision for credit losses was $191 million, up slightly over the year-
ago period. The net charge-off rate for total managed credit card receivables
dropped to 6.7%, a substantial improvement from the prior two quarters.
. Market-driven revenues were $68 million, up from the year-ago quarter, but
down from the second quarter of 1997. The sale of home mortgage loans and
leasing assets generated additional gains of $22 million, which were included
in other noninterest income.
. Operating expense for the 1997 nine-month period was up less than 1% from the
year-ago period.
. The Corporation repurchased 10 million shares of common stock in the third
quarter. As of September 30, a total of 35.7 million shares had been
repurchased under the 40 million share repurchase program announced in
October, 1996.
. Return on common equity was 19.1% and return on assets was 1.40%, both higher
than results a year ago.
Net Interest Income
Net interest income includes fundamental spreads on earning assets as well as
such items as loan fees, cash interest collections on problem loans, dividend
income, interest reversals, and income or expense on interest rate derivatives
used to manage interest rate risk. Net interest margin measures how efficiently
the Corporation uses its earning assets and its underlying capital.
7
<PAGE>
In order to analyze fundamental trends in net interest margin, it is useful to
adjust for securitization of credit card receivables and the activities of First
Chicago Capital Markets, Inc. (FCCM).
When credit card receivables are sold in securitization transactions, the net
interest income related to these high-yield assets is replaced by fee revenue,
net of related credit losses. The average level of securitized receivables was
$8.1 billion in the third quarter of 1997, compared with $7.2 billion in the
third quarter of 1996.
FCCM is the Corporation's wholly owned subsidiary engaged in permissible
investment banking activities. Because its capital requirements are risk-
exposure driven rather than based on asset levels, FCCM can generate substantial
volumes of relatively riskless, thin-spread earning assets that require little
additional capital. The Corporation's net interest margin trends can be better
analyzed if these earning assets and related margins are excluded.
Adjusted net interest income in the third quarter of 1997 was slightly below
that of a year ago due to sluggish loan demand in all of the Corporation's
banking businesses as well as reduced spreads in the credit card and corporate
banking businesses. As a result, adjusted net interest margin was 4.47%,
slightly below the 4.51% of a year ago.
The following charts illustrate trends in net interest income on a tax-
equivalent ("TEA") basis, both reported and adjusted, as well as net interest
margin over the past five quarters.
<TABLE>
<CAPTION>
Net Interest Income--TEA
In Millions
<S> <C> <C> <C> <C> <C>
3Q96 4Q96 1Q97 2Q97 3Q97
------ ------ ------ ------ ------
Reported $ 967 $ 907 $ 907 $ 951 $ 921
Adjusted $1,115 $1,084 $1,101 $1,135 $1,103
Net Interest Margin
3Q96 4Q96 1Q97 2Q97 3Q97
------ ------ ------ ------ ------
Reported 4.00% 4.11% 4.11% 4.12% 3.88%
Adjusted 4.51% 4.64% 4.73% 4.70% 4.47%
</TABLE>
8
<PAGE>
Provision for Credit Losses
Details of the Corporation's credit risk management and performance during the
quarter ended September 30, 1997, are presented in the Credit Risk Management
section, beginning on page 17.
Noninterest Income
The following table provides a breakdown of the components of noninterest income
for the third quarter and the first nine months of 1997 compared with a year
ago. In order to provide a more meaningful trend analysis, credit card fee
revenue and total noninterest income exclude the amount of net fee revenue
(spread income less credit costs) associated with securitized credit card
receivables.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Percent Nine Months Ended Percent
September 30 Increase September 30 Increase
(Dollars in millions) 1997 1996 (Decrease) 1997 1996 (Decrease)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Combined trading profits (losses)..... $ 32 $(12) N/M% $ 96 $ 46 N/M%
Equity securities gains............... 28 50 (44) 128 184 (30)
Investment securities gains........... 8 2 N/M 37 27 37
---- ---- ------ ------
Market-driven revenue................ 68 40 70 261 257 2
Credit card fee revenue (1)........... 198 183 8 588 489 20
Fiduciary and investment
management fees...................... 102 100 2 306 298 3
Deposit fees (includes
deficient balance fees).............. 111 104 7 332 306 8
Other service charges and
commissions.......................... 124 97 28 343 279 23
---- ---- ------ ------
Adjusted fee-based revenue........... 535 484 11 1,569 1,372 14
Other income.......................... 63 28 N/M 108 71 52
---- ---- ------ ------
Adjusted noninterest income.......... $666 $552 21 $1,938 $1,700 14
==== ==== ====== ======
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net fee revenue related to the securitized receivables, which is excluded
here, totaled $35 million and $45 million for the third quarters of 1997
and 1996, respectively, and $86 million and $166 million for the nine
months ended 1997 and 1996, respectively.
N/M - Not meaningful.
Combined trading activities generated gains of $32 million for the third quarter
of 1997 compared with a loss of $12 million in the year ago quarter. Increased
customer transaction volume and increased market volatility resulted in higher
foreign exchange trading results. Last year's loss of $12 million reflected poor
trading performances in both the global derivatives and foreign exchange trading
businesses.
Equity securities gains were $28 million for the third quarter of 1997, compared
with $50 million for the third quarter of 1996. Minor repositionings in the
investment securities portfolio generated gains of $8 million for the 1997 third
quarter, compared with $2 million a year ago.
Adjusted credit card fee revenue was $198 million for the third quarter of 1997,
up 8% from $183 million for the year-earlier period. The increase primarily
reflects pricing changes instituted during 1996 to mitigate rising credit costs.
Deposit fees increased to $111 million in 1997 from $104 million in 1996. This
growth reflects the successful restructuring of retail deposit-based product
offerings as well as increased cash management fees across the Corporation's
large Corporate and Middle Market customer bases.
9
<PAGE>
Other service charges and commissions increased 28% from the year-ago quarter.
Increased transaction flow in the loan syndication management business, as well
as higher levels of fees from both investment and retail management products in
the retail banking network, contributed to this excellent performance.
Other income in the third quarter of 1997 included gains of $22 million from the
sale of home mortgage loans and leasing assets.
The following chart compares market-driven revenue and the significant
components of fee-based revenue for the past five quarters. Fee-based revenue
continues to be a significant contributor to overall profitability, with some
seasonal effects associated with credit card fee revenue. Credit card fee
revenue and total noninterest income have been adjusted to exclude net fee
revenue associated with securitized credit card receivables in order to provide
a more meaningful trend analysis.
Noninterest Income
(In millions)
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
3Q96 4Q96 1Q97 2Q97 3Q97
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Market-Driven Revenue $ 40 $ 83 $107 $ 86 $ 68
Adjusted Credit Card Fees $183 $205 $199 $191 $198
Serv. Chgs. & Commissions $201 $218 $213 $227 $235
Fiduciary & Inv. Mgmt. Fees $100 $102 $105 $ 99 $102
Other Revenue $ 28 $ 20 $ 20 $ 25 $ 63
---- ---- ---- ---- ----
Total $552 $628 $644 $628 $666
</TABLE>
10
<PAGE>
Noninterest Expense
Operating expense for the third quarter of 1997 was $835 million, compared with
$798 million for the third quarter of 1996. For the first nine months of 1997,
operating expense was up less than 1% from a year ago. In addition, the
operating efficiency ratio improved for 1997's first nine months to 51.2% from
52.1% in 1996.
Overall operating expense levels and operating efficiency ratios are reflected
in the following charts.
Operating Expense
[BAR CHART APPEARS HERE]
In Millions
Salaries & Other
Benefits Operating Total
3Q96* $419 $379 $798
4Q96 $426 $387 $813
1Q97 $425 $375 $800
2Q97 $426 $399 $825
3Q97 $440 $395 $835
*Excludes FDIC Special Assessment of $18 million.
Operating Efficiency(1)
[GRAPH APPEARS HERE]
3Q96 51.0%
4Q96 51.2%
1Q97 50.4%
2Q97 51.7%
3Q97 51.5%
(1)Operating expense as a percentage of total revenue.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Salaries and Employee Benefits Three Months Ended Percent Nine Months Ended Percent
September 30 Increase September 30 Increase
(Dollars in millions) 1997 1996 (Decrease) 1997 1996 (Decrease)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries.......................... $ 372 $ 354 5% $ 1,076 $ 1,065 1%
Employee benefits................. 68 65 5 215 216 N/M
------- ------- ------- -------
Total............... $ 440 $ 419 5 $ 1,291 $ 1,281 1
======= ======= ======= =======
Average full-time-equivalent
employees....................... 33,727 33,617 N/M 33,645 34,293 (2)
======= ======= ======= =======
- ------------------------------------------------------------------------------------------------
</TABLE>
N/M-Not meaningful.
Overall salary and benefit costs for 1997's first nine months were up 1% over
1996 levels. Annual salary increases were partially offset by reduced staff
levels, resulting from the implementation of both merger-related and ongoing
business reengineering initiatives. The increased cost of stock compensation
programs contributed to the rise in salaries and employee benefits, partially
linked to the increase in the Corporation's common stock value.
11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Other Noninterest Expense Three Months Ended Percent Nine Months Ended Percent
September 30 Increase September 30 Increase
(Dollars in millions) 1997 1996 (Decrease) 1997 1996 (Decrease)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Occupancy expense of premises, net.............. $ 63 $ 64 (2)% $ 192 $ 195 (2)%
Equipment rentals, depreciation
and maintenance............................... 53 56 (5) 159 166 (4)
Marketing and public relations.................. 34 26 31 92 96 (4)
Amortization of intangible assets............... 13 20 (35) 49 59 (17)
Telephone....................................... 23 23 N/M 70 63 11
Freight and postage............................. 21 22 (5) 63 66 (5)
Consulting...................................... 14 11 27 38 26 46
Travel and entertainment........................ 14 13 8 40 39 3
Stationery and supplies......................... 12 13 (8) 38 36 6
Other........................................... 148 131 13 428 413 4
---- ---- ------ ------
Other operating expense................... 395 379 4 $1,169 $1,159 1
FDIC special assessment......................... - 18 N/M - 18 N/M
---- ---- ------ ------
Total..................................... $395 $397 (1) $1,169 $1,177 (1)
==== ==== ====== ======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
N/M - Not meaningful.
Other operating expense was $395 million for the third quarter of 1997, compared
with $379 in 1996. Increased marketing costs in the Credit Card and Regional
Banking businesses contributed to this increase. For the nine-month period,
other operating expense was up 1% from a year ago. Merger and reengineering
business savings continued to be channeled into investments in technology and
used to fund growth in selected business units.
Intangible amortization expense declined in the third quarter of 1997 as certain
purchased account relationships associated with the Credit Card business became
fully amortized.
The increase in other operating expense in the third quarter also reflected
corporate expense accruals primarily related to certain litigation issues.
<TABLE>
<CAPTION>
Applicable Income Taxes
- ----------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes........... $ 574 $ 538 $1,706 $1,600
Applicable income taxes.............. 189 180 563 541
Effective tax rate................... 32.9% 33.5% 33.0% 33.8%
- ----------------------------------------------------------------------------------------------
</TABLE>
Tax expense in both periods included benefits from tax-exempt income and general
business tax credits partially offset by the effect of nondeductible expenses,
including goodwill.
12
<PAGE>
LIQUIDITY RISK MANAGEMENT
Liquidity risk is the possibility of being unable to meet all present and future
financial obligations in a timely manner. The Corporation considers strong
capital ratios, credit quality and core earnings essential to retaining high
credit ratings and, thereby, cost-effective access to market liquidity.
The Statement of Cash Flows, on page 29, presents data on cash and cash
equivalents provided and used in operating, investing and financing activities.
The Corporation's ability to attract wholesale funds on a regular basis and at a
competitive cost is fostered by strong ratings from the major credit rating
agencies. As of September 30, 1997, the parent company and the major banking
subsidiaries had the following long- and short-term debt ratings.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Long-Term Debt Short-Term Debt
- ----------------------------------------------------------------------------------------------------
S&P Moody's S&P Moody's
<S> <C> <C> <C> <C>
First Chicago NBD Corporation (parent)................... A+ A1 A-1 P-1
The Principal Banks...................................... AA- Aa3 A-1+ P-1
- ----------------------------------------------------------------------------------------------------
</TABLE>
A large customer deposit base is one of the significant strengths of the
Corporation's liquidity position. The Corporation has established a 35% limit
on the use of wholesale funds for funding core assets. As of September 30,
1997, its major banking subsidiaries collectively funded 76% of core assets with
core liabilities, accessing the wholesale market for only 24% of core asset
funding needs.
The following table shows the total funding source mix for the past five
quarters.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Deposits and Other Purchased Funds
At period end September 30 June 30 March 31 December 31 September 30
(In millions) 1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic offices
Demand............................. $16,548 $17,142 $15,016 $15,702 $16,242
Savings............................ 21,097 21,154 21,381 21,722 20,882
Time
Under $100,000................... 9,610 9,775 9,788 9,851 9,944
$100,000 and over................ 5,517 5,205 5,290 5,143 5,900
Foreign offices........................ 14,793 14,742 13,452 11,251 10,711
------- ------- ------- ------- -------
Total deposits................ 67,565 68,018 64,927 63,669 63,679
- --------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities
under repurchase agreements........... 9,650 10,053 9,656 7,859 8,193
Commercial paper....................... 1,344 876 830 762 864
Other short-term borrowings............ 9,389 8,972 7,687 6,810 8,966
Long-term debt......................... 9,906 9,016 8,514 8,454 7,967
------- ------- ------- ------- -------
Total other purchased funds... 30,289 28,917 26,687 23,885 25,990
------- ------- ------- ------- -------
Total......................... $97,854 $96,935 $91,614 $87,554 $89,669
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
MARKET RISK MANAGEMENT
Overview
Market risk arises from changes in interest rates, exchange rates, commodity
prices and equity prices. The Corporation maintains risk management policies to
monitor and limit exposure to market risk. Through its trading activities, the
Corporation strives to take advantage of profit opportunities available in
interest rate, exchange rate, and other market movements. In asset and
liability management activities, policies are in place to minimize structural
interest rate and foreign exchange rate risk. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified.
Trading Activities
The Corporation takes active trading positions in a variety of markets and
instruments, including U.S. government, municipal and money market securities.
It also maintains positions in derivative products associated with these markets
and instruments, such as interest rate and currency swaps, and commodity and
equity index options.
The Corporation's trading activities are primarily customer-oriented, and
trading positions are established as necessary for customers. In order to
accommodate customer demand for such transactions, an inventory in capital
markets instruments is carried, and access to market liquidity is maintained by
making bid-offer prices to other market makers. Although these two activities
constitute proprietary trading, they are essential to providing customers with
capital markets products at competitive prices.
Value at risk is intended to measure the maximum amount the Corporation could
lose, given a specified confidence level, over a given period of time. Risk
points measure the market risk (potential overnight loss) in a capital markets
product. Value at risk is monitored in each significant trading portfolio on a
daily basis. The following tables show average, maximum and minimum daily value
at risk for the third quarter of 1997 and the preceding four quarters, and the
actual trading revenue for each quarter.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Daily Value at Risk September 30 June 30 March 31 December 31 September 30
(In millions) 1997 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average................. $25 $24 $21 $24 $26
Maximum................. 28 27 25 27 30
Minimum................. 20 21 18 21 23
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Quarter Ended September 30 June 30 March 31 December 31 September 30
(In millions) 1997 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------
Trading revenue*........ $54 $58 $54 $33 $19
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Includes trading profits and related net interest income.
Value at risk is estimated using statistical models calibrated at a three-
standard-deviation confidence interval. The reported value at risk remains
somewhat overstated because all offsets and correlations across different
trading portfolios are not fully considered in the calculation.
Structural Interest Rate Risk Management
Movements in interest rates can create fluctuations in net interest income and
economic value due to an imbalance in the repricing or maturity of assets and
liabilities. Asset and liability positions are actively managed with the goal
of minimizing the impact of interest rate volatility on current earnings and on
the market value of equity.
The following table details the Corporation's interest rate gap position as of
September 30, 1997. Interest rate risks in trading and overseas asset and
liability positions are assumed to be matched and are managed principally as
trading risks. Credit card securitizations, which subject fee revenue to
interest rate risk, are included in the gap analysis measure.
14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Interest Rate Sensitivity
September 30, 1997 0-90 91-180 181-365 1-5 Beyond
(Dollars in millions) days days days years 5 years Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans................................ $46,272 $ 3,254 $ 4,338 $13,027 $ 3,059 $ 69,950
Investment securities................ 1,760 337 1,385 3,489 1,290 8,261
Other earning assets................. 24,100 54 16 104 - 24,274
Nonearning assets.................... 15,322 113 152 1,440 1,641 18,668
------- ------- -------- ------- ------- --------
Total assets.................... $87,454 $ 3,758 $ 5,891 $18,060 $ 5,990 $121,153
- --------------------------------------------------------------------------------------------------
Deposits............................. $28,086 $ 3,699 $ 5,155 $14,377 $ 1,027 $ 52,344
Other interest-bearing liabilities... 43,911 2,682 1,560 2,225 2,954 53,332
Noninterest-bearing liabilities...... 6,509 12 17 114 742 7,394
Equity............................... 485 195 390 3,117 3,896 8,083
------- ------- -------- ------- ------- --------
Total liabilities and equity.... $78,991 $ 6,588 $ 7,122 $19,833 $ 8,619 $121,153
- --------------------------------------------------------------------------------------------------
Balance sheet sensitivity gap........ $ 8,463 $(2,830) $ (1,231) $(1,773) $(2,629) -
- --------------------------------------------------------------------------------------------------
Cumulative gap as a % of total assets 7.0% 4.6% 3.6% 2.2% - -
- --------------------------------------------------------------------------------------------------
Effect of off-balance-sheet ALM -
derivative transactions: -
Specific transactions: $(4,082) $ 1,264 $ 913 $ 402 $ 1,503 -
Specific asset or liability pools (2,493) (39) 667 1,776 89 -
- --------------------------------------------------------------------------------------------------
Interest rate sensitivity gap........ $ 1,888 $(1,605) $ 349 $ 405 $(1,037) -
- --------------------------------------------------------------------------------------------------
Cumulative gap....................... $ 1,888 $ 283 $ 632 $ 1,037 - -
- --------------------------------------------------------------------------------------------------
Cumulative gap as a % of total assets 1.6% 0.2% 0.5% 0.9% - -
- --------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's policy is to limit the cumulative one-year gap position,
including asset and liability management ("ALM") derivatives, to within 4% of
total assets. As of September 30, 1997, the cumulative one-year gap position
was 0.5% of total assets. The Corporation uses off-balance-sheet transactions,
principally interest rate swaps, to adjust the interest rate sensitivity of
specific transactions, as well as pools of assets or liabilities, to remain
structurally neutral to interest rate changes. As shown in the table above, the
net result of ALM derivatives was to reduce the cumulative one-year gap position
from 3.6% to 0.5% of total assets.
In addition to static gap analysis, an earnings simulation analysis and a value-
at-risk measure are performed to identify more dynamic interest rate risk
exposures of the businesses, including embedded option positions. The earnings
simulation analysis estimates the effect that specific interest rate changes
would have on pretax earnings. The Corporation's policy is to limit the change
in annual pretax earnings to $100 million from an immediate parallel change in
interest rates of 200 basis points. As of September 30, 1997, the estimated
earnings sensitivity profile was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Immediate Change in Rates
-------------------------------------
(In millions) +200 bp -200 bp
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Pretax earnings change......................... $13 $9
- -------------------------------------------------------------------------------------------
</TABLE>
Access to the derivatives market is an important element in maintaining the
interest rate risk position within policy guidelines. At September 30, 1997,
the notional principal amount of ALM interest rate swaps totaled $9.9 billion,
including $5.2 billion against specific transactions and $4.7 billion against
specific pools of assets or liabilities. The following table summarizes the
interest rate swaps used for asset and liability management purposes.
15
<PAGE>
<TABLE>
<CAPTION>
Asset and Liability Management Swaps--Notional Principal
- ------------------------------------------------------------------------------------------------------
September 30, 1997 Receive Fixed Pay Fixed Basis
(In millions) Pay Floating Receive Floating Swaps Total
- ------------------------------------------------------------------------------------------------------
Specific Pool Specific Pool Pool
-------- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Swaps associated with:
Loans.................................. $ 32 $ 581 $ 37 $ - $ - $ 650
Investment securities.................. - - 203 - - 203
Securitized credit card receivables.... - 208 - - - 208
Deposits............................... 50 2,750 - - - 2,800
Funds borrowed (including
long-term debt)...................... 4,687 - 250 75 1,040 6,052
------ ------ ---- --- ------ ------
Total.............................. $4,769 $3,539 $490 $75 $1,040 $9,913
====== ====== ==== === ====== ======
- ------------------------------------------------------------------------------------------------------
</TABLE>
Substantially all ALM interest rate swaps are standard swap contracts.
Contractual maturities and weighted average pay and receive rates for the ALM
swap position at September 30, 1997, are summarized below. The variable interest
rates, which generally are the one-month, three-month and six-month LIBOR rates
in effect on the date of repricing, are assumed to remain constant. However, the
variable interest rates will change and would affect the related weighted
average information presented in the table.
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1998 1999 2000 2001 Thereafter Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay
floating swaps
Notional amount....... $704 $3,447 $637 $773 $771 $1,976 $8,308
Weighted average
Receive rate........ 6.21% 6.16% 6.23% 6.17% 7.17% 6.87% 6.43%
Pay rate............ 5.88% 5.83% 5.91% 5.84% 5.86% 5.86% 5.85%
Pay fixed/receive
floating swaps
Notional amount....... $ 1 $ 57 $ 83 $110 $ 25 $ 289 $ 565
Weighted average
Receive rate........ 5.76% 6.01% 5.86% 5.87% 5.96% 5.82% 5.86%
Pay rate............ 6.96% 8.07% 7.99% 7.74% 8.01% 6.58% 7.23%
Basis swaps
Notional amount....... - $1,015 $ 25 - - - $1,040
Weighted average
Receive rate........ - 5.88% 5.91% - - - 5.88%
Pay rate............ - 5.82% 5.83% - - - 5.82%
- ---------------------------------------------------------------------------------------
Total notional amount.... $705 $4,519 $745 $883 $796 $2,265 $9,913
- ---------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
CREDIT RISK MANAGEMENT
The Corporation has developed policies and procedures to manage the level and
composition of risk in its credit portfolio. The objective of this credit risk
process is to quantify and manage credit risk on a portfolio basis as well as
reduce the risk of a loss resulting from a customer's failure to perform
according to the terms of a transaction.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Selected Statistical Information
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At period-end
Loans outstanding............................... $67,822 $67,510 $66,536 $66,414 $66,602
Nonperforming loans............................. 330 329 257 262 309
Other real estate, net.......................... 15 14 28 28 26
Nonperforming assets............................ 345 343 285 290 335
Allowance for credit losses..................... 1,408 1,408 1,408 1,407 1,447
Nonperforming assets/loans outstanding
and other real estate, net..................... 0.5% 0.5% 0.4% 0.4% 0.5%
Allowance for credit losses/loans
outstanding.................................... 2.1 2.1 2.1 2.1 2.2
Allowance for credit losses/nonperforming
loans.......................................... 427 428 548 537 468
For the quarter ended
Average loans................................... $66,782 $66,301 $65,177 $65,494 $65,962
Net charge-offs................................. 191 180 186 190 182
Net charge-offs/average loans................... 1.1% 1.1% 1.2% 1.2% 1.1%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
For analytical purposes, the Corporation's portfolio is divided into commercial
(domestic and foreign) and consumer (credit card and other consumer) segments.
<TABLE>
<CAPTION>
Loan Composition September 30 June 30 March 31 December 31 September 30
(In millions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial risk
Domestic
Commercial.................................... $27,685 $27,851 $28,181 $27,718 $27,537
Real estate
Construction................................ 1,292 1,272 1,159 1,057 1,094
Other....................................... 5,269 5,309 5,159 5,103 5,446
Lease financing............................... 2,003 1,954 1,848 1,820 1,683
Foreign......................................... 4,168 4,362 4,022 3,656 3,587
------- ------- ------- ------- -------
Total commercial.......................... 40,417 40,748 40,369 39,354 39,347
------- ------- ------- ------- -------
Consumer risk
Credit cards.................................... 9,720 9,031 8,668 9,601 9,888
Secured by real estate (1)...................... 9,715 9,698 9,483 9,406 9,334
Automotive...................................... 4,203 4,306 4,342 4,423 4,411
Other........................................... 3,767 3,727 3,674 3,630 3,622
------- ------- ------- ------- -------
Total consumer............................ 27,405 26,762 26,167 27,060 27,255
------- ------- ------- ------- -------
Total............................................ $67,822 $67,510 $66,536 $66,414 $66,602
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes home equity loans.
17
<PAGE>
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that in management's
judgment is adequate to provide for estimated probable credit losses inherent in
on- and off-balance-sheet credit exposure attributable to various financial
instruments. The amount of the allowance is based on formal review and analysis
of potential credit losses, as well as prevailing economic conditions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses September 30 June 30 March 31 December 31 September 30
(In millions) 1997 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of quarter..... $1,408 $1,408 $1,407 $1,447 $1,430
- ------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses....... 191 180 187 190 185
- ------------------------------------------------------------------------------------------------------------------------------
Charge-offs
Commercial
Domestic
Commercial.................. 39 33 21 20 30
Real estate................. 3 4 2 7 2
Lease financing............. 2 - 2 - 3
Foreign....................... - - - - 2
Consumer
Credit card................. 159 170 168 163 159
Other....................... 29 27 31 42 22
------ ------ ------ ------ ------
Total charge-offs......... 232 234 224 232 218
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries
Commercial
Domestic
Commercial.................. 9 21 10 11 13
Real estate................. 7 6 4 4 6
Lease financing............. - 1 - - 1
Foreign....................... 1 - 2 11 1
Consumer
Credit card................. 15 15 11 10 6
Other....................... 9 11 11 6 9
------ ------ ------ ------ ------
Total recoveries.......... 41 54 38 42 36
- ------------------------------------------------------------------------------------------------------------------------------
Net charge-offs................... 191 180 186 190 182
Other, net.................. - - - (40) 14
Balance, end of quarter........... $1,408 $1,408 $1,408 $1,407 $1,447
====== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Consumer Risk Management
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Consumer Loans September 30 June 30 March 31 December 31 September 30
(In millions) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Credit card loans............................ $ 9,720 $ 9,031 $ 8,668 $ 9,601 $ 9,888
Securitized credit card receivables.......... 7,847 8,221 8,596 8,888 8,039
------- ------- ------- ------- -------
Total managed credit card receivables....... 17,567 17,252 17,264 18,489 17,927
Other consumer loans
Secured by real estate (1).................. 9,715 9,698 9,483 9,406 9,334
Automotive.................................. 4,203 4,306 4,342 4,423 4,411
Other....................................... 3,767 3,727 3,674 3,630 3,622
------- ------- ------- ------- -------
Other consumer loans....................... 17,685 17,731 17,499 17,459 17,367
------- ------- ------- ------- -------
Total managed consumer loans................ $35,252 $34,983 $34,763 $35,948 $35,294
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes home equity loans.
Consumer risk management focuses on the credit card segment separately from
other parts of the portfolio. For the credit card segment, loss potential is
tested using statistically expected levels of losses based on delinquencies and
on the source, age and other characteristics of the portfolio.
For the other segments of the consumer portfolio, reserve factors are based on
historical loss rates.
Credit card receivables represent the most significant risk element in the
consumer portfolio. The net charge-off rate for credit card receivables was
6.7% for the third quarter of 1997 representing a decrease from the prior two
quarters. While this is an encouraging sign, the Corporation continues to
aggressively manage its credit and collection policies in this business.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Credit Card Receivables For the Quarter Ended
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average balances:
Credit card loans....................... $ 9,147 $ 8,613 $ 8,673 $ 9,421 $10,497
Securitized credit card receivables..... 8,092 8,460 8,816 8,058 7,219
------- ------- ------- ------- -------
Total average managed credit card
receivables......................... $17,239 $17,073 $17,489 $17,479 $17,716
======= ======= ======= ======= =======
Total net charge-offs (including
securitizations)...................... $ 293 $ 326 $ 319 $ 294 $ 265
======= ======= ======= ======= =======
Net charge-offs/average total managed
receivables........................... 6.7% 7.7% 7.4% 6.7% 5.9%
======= ======= ======= ======= =======
Credit Card Delinquency Rate--Managed
Receivables-Period End
30 or more days..................... 4.5% 4.3% 4.4% 4.5% 4.3%
90 or more days..................... 1.8 1.7 1.9 1.8 1.6
- --------------------------------------------------------------------------------------------------------
</TABLE>
Credit card receivables generally are charged off no later than 180 days past
due, or earlier in the event of bankruptcy.
19
<PAGE>
Commercial Risk Management
The commercial risk portfolio includes all domestic and foreign commercial
credit exposure. Credit exposure includes the credit risks associated with both
on- and off-balance-sheet financial instruments.
Commercial loans totaled $40.4 billion at September 30, 1997, up 3% from
December 31, 1996, and September 30, 1996.
In the commercial portfolio, credit quality is rated according to defined levels
of credit risk. The lower categories of credit risk are generally equivalent to
the four bank regulatory classifications: Special Mention, Substandard,
Doubtful and Loss. These categories define levels of credit deterioration at
which it may be increasingly difficult for the Corporation to be fully paid
without restructuring the credit.
Each quarter, the Corporation conducts a review of significant lower-rated
credit or country exposures. Potential losses are identified during this
review, and reserves are adjusted accordingly.
During the third quarter, charge-offs net of recoveries were $27 million in the
commercial portfolio, compared with $9 million in the second quarter .
Nonperforming commercial assets totaled $345 million at September 30, 1997,
compared with $343 million at June 30, 1997, and $290 million at year-end 1996.
Commercial Real Estate
Commercial real estate loans include loans secured by real estate as well as
certain loans that are real estate-related. A loan is categorized as real
estate-related when 80% or more of the borrower's revenues are derived from real
estate activities and the loan is not collateralized by cash or marketable
securities.
Commercial real estate loans totaled $6.6 billion at September 30, 1997,
compared with $6.5 billion a year ago and $6.2 billion at year-end 1996.
During the third quarter, net recoveries in the commercial real estate portfolio
were $4 million. Nonperforming commercial real estate assets, including other
real estate, totaled $92 million at September 30, 1997, compared with $85
million at June 30, 1997, and $128 million at year-end 1996.
20
<PAGE>
Nonperforming Assets
Nonperforming assets at September 30, 1997, were $345 million, or 0.5% of total
loans and other real estate, compared with $343 million, or 0.5%, at June 30,
1997 and $290 million, or 0.4%, at year-end 1996. The following charts
illustrate the trends in this area over the last five quarters.
Nonperforming Assets--Period End
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
In Millions 3Q96 4Q96 1Q97 2Q97 3Q97
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans $309 $262 $257 $329 $330
OREO $ 26 $ 28 $ 28 $ 14 $ 15
---- ---- ---- ---- ----
Total $335 $290 $285 $343 $345
</TABLE>
Nonperforming Assets as a Percentage of
Loans and Other Real Estate--Period End
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
3Q96 0.5%
4Q96 0.4%
1Q97 0.4%
2Q97 0.5%
3Q97 0.5%
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses a variety of derivative financial instruments in its
trading, asset and liability management, and Corporate Investment activities.
These instruments include interest rate, currency, commodity and equity swaps,
forwards, spot, futures, options, caps, floors, forward rate agreements and
other conditional or exchange contracts, and include both exchange-traded and
over-the-counter contracts.
The Corporation uses interest rate derivative financial instruments to reduce
structural interest rate risk and the volatility of net interest margin. The
trend in net interest margin reflects the effective use of these derivatives.
Without their use, net interest income would have been lower by $3.2 million for
the third quarter of 1997 and by $12.2 million for the third quarter of 1996.
The sale of fixed- and floating-rate credit card receivables as securities to
investors subjects fee revenue to interest rate risk. Therefore, interest rate
derivatives, whose terms match those of the credit card securitizations, are
used to reduce this volatility. Without the use of these instruments, net fee
revenue would have been lower by $0.3 million for the third quarter of 1997 and
by $2.4 million for the third quarter of 1996.
21
<PAGE>
Credit exposure from derivative financial instruments arises from the risk of a
customer default on the derivative contract. The amount of loss created by the
default is the replacement cost or current fair value of the defaulted contract.
The Corporation utilizes master netting agreements whenever possible to reduce
its credit exposure from customer default. These agreements allow the netting of
contracts with unrealized losses against contracts with unrealized gains to the
same customer, in the event of a customer default. The table below shows the
impact of these master netting agreements at September 30, 1997, and December
31, 1996:
<TABLE>
<CAPTION>
September 30 December 31
(In billions) 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross replacement cost........................................... $13.7 $14.9
Less: Adjustment due to master netting agreements.............. 9.9 9.8
----- -----
Current credit exposure.......................................... 3.8 5.1
Less: Unrecognized net gains due to nontrading activity........ 0.1 0.1
----- -----
Balance sheet exposure........................................... $ 3.7 $ 5.0
===== =====
- ------------------------------------------------------------------------------------------------------
</TABLE>
The $3.8 billion of total current credit exposure at September 30, 1997,
represents the total loss that the Corporation would have suffered had every
counterparty been in default on that date. This amount is reduced by any
unrealized and unrecognized gains on derivatives used to manage interest rate
exposures to arrive at the balance sheet exposure.
Since a derivative's replacement cost, measured by its fair value, is subject to
change over the contract's life, the Corporation's evaluation of credit risk
incorporates potential increases to the contract's fair value. Potential
exposure is calculated with a statistical model that estimates changes over time
in exchange rates, interest rates and other relevant factors using a 95%
confidence level. This potential credit exposure is calculated on a portfolio
basis, incorporating master netting agreements as well as any natural offsets
that exist between contracts within the customer's portfolio. In total, the
potential credit exposure was approximately $6.2 billion higher than the current
exposure at September 30, 1997.
For the first nine months of 1997, there were no charge-offs associated with
derivative financial instruments.
TECHNOLOGY RISK--YEAR 2000 COMPLIANCE ISSUES
The Corporation has established an overall plan to address systems-related Year
2000 issues. The plan calls for either system modification to, or replacement
of, approximately 700 existing business system applications. The cost of this
Year 2000 compliance program related to system modifications is estimated at
approximately $100 million of which approximately $45 million will be incurred
by the end of 1997. Such costs will be charged to expense as incurred. The
Corporation currently anticipates that substantially all of the remaining work
under this program, including the testing of critical systems, will be completed
by the end of 1998.
A contingency plan has been established for critical business system
applications to mitigate potential problems/delays associated with either new
system replacements or established vendor delivery dates.
The Corporation, however, continues to bear some risk related to the Year 2000
issue and could be adversely affected, if other entities (i.e., vendors) not
affiliated with the Corporation do not appropriately address their own Year 2000
compliance issues.
22
<PAGE>
CAPITAL MANAGEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Selected Capital Ratios September 30 June 30 March 31 December 31 September 30 Corporate
1997 1997 1997 1996 1996 Guideline
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common equity/total assets (1).......... 7.0% 7.3% 7.9% 8.2% 8.1% N/A
Tangible common equity ratio (1)........ 6.6 7.1 7.6 7.8 7.7 N/A
Stockholders' equity/total assets....... 7.1 7.5 8.0 8.6 8.5 N/A
Risk-based capital ratios (1)(2)(3)
Tier 1................................ 8.1 8.6 9.1 9.2 8.4 7-8%
Total................................. 11.9 12.4 13.1 13.3 12.4 11-12%
Regulatory leverage ratio (1)(2)(3)..... 8.2 8.6 9.2 9.3 8.1 5.5-7.0%
Double leverage ratio (2)............... 118 111 106 105 113 less than
or equal
to 120%
Dividend payout ratio................... 31.7 33.3 33.9 34.8 33.0 30-40%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of investment in FCCM.
(2) Includes trust preferred capital securities.
(3) As a result of a recent regulatory change, beginning in October 1997, the
risk-based and regulatory leverage ratios will include the activities of
FCCM. On a pro forma basis, the September 30, 1997 Tier 1, Total Capital
and Regulatory Leverage Ratios would have been 8.1%, 12.0% and 8.0%,
respectively.
N/A - Not Applicable.
Capital represents the stockholders' investment on which the Corporation strives
to generate attractive returns. It supports business growth and provides
protection to depositors and creditors. Management believes that capital is the
foundation of a cohesive risk management framework because it links return with
risk. Capital adequacy objectives have been developed for the Corporation and
its major banking subsidiaries to meet these needs and also to maintain a well-
capitalized regulatory position.
Economic Capital
An economic capital framework is used to allocate capital to lines of business,
products and customers based on the level and type of risk inherent in the
activities. Return on economic capital is a key decision-making tool for
managing risk-taking activities, as well as for ensuring that capital is
efficiently and profitably employed. The Corporation's economic capital model
was revised in the first quarter of 1997 as referenced in the Business Segments
section, on page 2. Enhancements to the model incorporate a more complete and
up-to-date assessment of risk based on the evolving nature of the Corporation's
activities.
Capital is allocated for two types of risk: portfolio and business. Portfolio
risk capital covers the potential for loss of value arising from credit, market
and investment risks. The amount of such capital is calculated to absorb losses
to a desired level of statistical confidence. Business risk capital is
determined by identifying publicly traded companies with activities comparable
with the Corporation's, where possible, and applying their capital structures to
the business units. This approach incorporates hard-to-quantify risks such as
event, technology and operating margin risks.
The Corporation has established a Tier 1 capital target necessary to provide
management flexibility while maintaining an adequate capital base for its
overall risk profile, as measured by the economic capital framework. The long-
term target for the Tier 1 ratio is 7% to 8%. This ratio is currently managed to
8%, which is used for line of business capital allocations. Excess capital,
defined as common equity above that required for the 8% Tier 1 target, is
available for investments and acquisitions. If attractive long-term
opportunities are not available over time in core businesses, management intends
to return excess capital to stockholders, typically by way of stock repurchase
programs and/or dividend increases.
Other Capital Activities
In October 1996, the Board of Directors authorized the purchase of up to 40
million shares of the Corporation's common stock over the subsequent two to
three years. Purchases occur periodically in open market or private
transactions. Through September 30, approximately 35.7 million shares had been
repurchased under this program.
23
<PAGE>
In February 1997, the Corporation authorized the redemption on April 1 of all
shares outstanding of its 5 3/4% Cumulative Convertible Preferred Stock, Series
B, and the corresponding redemption of the related depositary shares, each
representing a one-hundredth interest in a share of the Convertible Preferred
Stock. Essentially all of the Series B Preferred Stock has been converted to
shares of the Corporation's common stock.
In October 1997, the Board of Directors authorized the redemption on November
17, 1997, of all shares outstanding of its 8.45% Cumulative Preferred Stock,
Series E, and the corresponding redemption of the related depositary shares,
each representing a one-twenty-fifth interest in a share of the Series E
Preferred Stock. The redemption price is $25.27 per depositary share, which
includes accrued and unpaid dividends of $0.27 per depositary share.
Regulatory Capital
The Corporation endeavors to maintain regulatory capital ratios, including those
of the major banking subsidiaries, in excess of the well-capitalized guidelines.
To ensure this goal is met, target ranges of 7% to 8% have been established for
Tier 1 capital and 11% to 12% for total risk-based capital. The Corporation's
risk-based capital ratios for Tier 1 and total capital exceeded the regulatory
well-capitalized guidelines of 6% and 10%, respectively.
Tier 1 and Total Capital Ratios--Period End
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
9/30/96 12/31/96 9/30/97
------- -------- -------
<S> <C> <C> <C>
Tier 1 8.4% 9.2% 8.1%
Total 12.4% 13.3% 11.9%
Tier 1 Regulatory Guidelines 6.0% 6.0% 6.0%
Total Regulatory Guidelines 10.0% 10.0% 10.0%
</TABLE>
Trust preferred securities issued on behalf of the Corporation totaled $1
billion at September 30, 1997. These securities are tax-advantaged issues that
qualify for Tier 1 capital treatment and are included in long-term debt in the
Corporation's balance sheet. Tier 1 Capital at September 30, 1997 totaled $8.5
billion, a decline from the $9.2 billion at year-end 1996. The decrease in Tier
1 Capital is attributed to the Corporation's repurchases of common shares
throughout the year made under the stock repurchase program.
The following table shows the components of the Corporation's regulatory risk-
based capital and risk-weighted assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(In millions) 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------
Regulatory Risk-Based Capital
<S> <C> <C> <C>
Tier 1 capital........................................... $ 8,519 $ 9,186 $ 8,530
Tier 2 capital and other adjustments..................... 3,956 4,146 4,036
-------- -------- --------
Total capital...................................... $ 12,475 $ 13,332 $ 12,566
======== ======== ========
Regulatory Risk-Weighted Assets
Balance sheet risk-weighted assets....................... $ 74,138 $ 71,177 $ 71,577
Off-balance-sheet risk-weighted assets................... 31,033 29,078 29,763
-------- -------- --------
Total risk-weighted assets......................... $105,171 $100,255 $101,340
======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Intangible Assets September 30 December 31 September 30
(In millions) 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill................................................. $ 373 $ 397 $ 404
Other nonqualifying intangibles.......................... 3 3 4
----- ----- -----
Subtotal................................................ 376 400 408
Qualifying intangibles................................... 55 69 75
----- ----- -----
Total intangibles....................................... $ 431 $ 469 $ 483
===== ===== =====
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Tier 1 and total capital have been reduced by goodwill and other nonqualifying
intangible assets, which totaled $376 million at September 30, 1997, $400
million at December 31, 1996, and $408 million at September 30, 1996.
The Corporation's major banking subsidiaries exceed the regulatory well-
capitalized guidelines as shown in the following tables. Major banking
subsidiaries include: The First National Bank of Chicago (FNBC), NBD Bank
(Michigan), FCC National Bank (FCCNB), American National Bank and Trust Company
of Chicago (ANB), and NBD Bank, N.A. (Indiana). By maintaining well-capitalized
regulatory status, these banks benefit from lower FDIC deposit premiums.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NBD NBD
FNBC Michigan FCCNB ANB Indiana
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 1997
Risk-based capital ratios
<S> <C> <C> <C> <C> <C>
Tier 1 capital................... 7.9% 9.9% 10.9% 8.6% 10.1%
Total capital.................... 11.4 14.4 13.5 11.8 11.3
Regulatory leverage ratio.......... 7.6 10.3 12.0 9.2 9.2
- ------------------------------------------------------------------------------------------------------------------------------
NBD NBD
FNBC Michigan FCCNB ANB Indiana
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1996
Risk-based capital ratios
Tier 1 capital................... 7.8% 9.3% 10.6% 8.7% 9.7%
Total capital.................... 11.2 13.5 13.5 11.5 11.0
Regulatory leverage ratio.......... 7.6 9.6 10.6 9.4 8.9
- ------------------------------------------------------------------------------------------------------------------------------
NBD NBD
FNBC Michigan FCCNB ANB Indiana
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 1996
Risk-based capital ratios
Tier 1 capital................... 7.8% 9.1% 8.9% 8.5% 10.7%
Total capital/................... 11.0 12.9 11.8 11.3 12.0
Regulatory leverage ratio.......... 6.8 10.1 8.4 9.4 9.4
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In September 1996, the U.S. bank regulators amended their risk-based capital
requirements to incorporate a measure for market risk inherent in the trading
portfolio. Under the new market risk requirements, capital will be allocated to
support the amount of market risk related to the Corporation's ongoing trading
activities. The market risk rules are not effective until 1998 and will apply
only to institutions with significant trading activities. It is anticipated
that both the Corporation and FNBC will be subject to these new rules. At this
time, it is estimated that the rules will not significantly affect the risk-
based capital ratios of either entity.
25
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Consolidated Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(Dollars in millions) 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and due from banks..................................................... $ 7,929 $ 7,823 $ 7,706
Interest-bearing due from banks............................................. 7,721 5,474 5,695
Federal funds sold and securities under resale agreements................... 7,671 4,197 5,640
Trading assets.............................................................. 4,632 4,812 5,226
Derivative product assets................................................... 3,717 4,974 4,645
Investment securities....................................................... 9,025 7,178 7,140
Loans (net of unearned income--$925, $764 and $681, respectively)........... 67,822 66,414 66,602
Less allowance for credit losses......................................... (1,408) (1,407) (1,447)
------------ ------------ ------------
Loans, net............................................................... 66,414 65,007 65,155
Premises and equipment...................................................... 1,406 1,415 1,424
Customers' acceptance liability............................................. 694 577 705
Other assets................................................................ 4,097 3,162 3,358
------------ ------------ ------------
Total assets............................................................. $ 113,306 $ 104,619 $ 106,694
============ ============ ============
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Demand................................................................... $ 16,548 $ 15,702 $ 16,242
Savings.................................................................. 21,097 21,722 20,882
Time..................................................................... 15,127 14,994 15,844
Foreign offices.......................................................... 14,793 11,251 10,711
------------ ------------ ------------
Total deposits........................................................... 67,565 63,669 63,679
Federal funds purchased and securities under repurchase agreements.......... 9,650 7,859 8,193
Other short-term borrowings................................................. 10,733 7,572 9,830
Long-term debt.............................................................. 9,906 8,454 7,967
Acceptances outstanding..................................................... 694 577 705
Derivative product liabilities.............................................. 3,716 4,753 4,589
Other liabilities........................................................... 2,960 2,728 2,644
------------ ------------ ------------
Total liabilities........................................................ 105,224 95,612 97,607
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock............................................................. 290 444 475
Common stock--$1 par value.................................................. 320 320 319
Sept. 30, 1997 Dec. 31, 1996 Sept. 30, 1996
-------------- ------------- --------------
Number of shares authorized..... 750,000,000 750,000,000 750,000,000
Number of shares issued......... 319,509,114 319,509,189 318,920,332
Number of shares outstanding.... 292,647,413 313,473,520 317,699,166
Surplus..................................................................... 1,986 2,149 2,179
Retained earnings........................................................... 7,195 6,433 6,189
Fair value adjustment on investment securities available-for-sale........... 43 38 23
Deferred compensation....................................................... (87) (58) (57)
Accumulated translation adjustment.......................................... 5 7 7
Treasury stock at cost--26,861,701; 6,035,669; and 1,221,166 shares,
respectively............................................................... (1,670) (326) (48)
------------ ------------ ------------
Stockholders' equity..................................................... 8,082 9,007 9,087
------------ ------------ ------------
Total liabilities and stockholders' equity............................. $ 113,306 $ 104,619 $ 106,694
============ ============ ============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
First Chicago NBD Corporation and Subsidiaries
Consolidated Income Statement
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(In millions, except per share data) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees....................................................... $1,491 $1,482 $4,376 $4,310
Bank balances............................................................... 120 112 330 381
Federal funds sold and securities under resale agreements................... 79 113 221 453
Trading assets.............................................................. 67 96 203 323
Investment securities--taxable.............................................. 97 82 264 285
Investment securities--tax-exempt........................................... 27 23 81 70
------ ------ ------ ------
Total.................................................................. 1,881 1,908 5,475 5,822
- -------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits.................................................................... 560 527 1,603 1,664
Federal funds purchased and securities under repurchase agreements.......... 134 149 372 564
Other short-term borrowings................................................. 125 156 348 448
Long-term debt.............................................................. 163 134 452 409
------ ------ ------ ------
Total.................................................................. 982 966 2,775 3,085
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income......................................................... 899 942 2,700 2,737
Provision for credit losses................................................. 191 185 558 545
------ ------ ------ ------
Net Interest Income After Provision for Credit Losses....................... 708 757 2,142 2,192
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Combined trading profits (losses)........................................... 32 (12) 96 46
Equity securities gains..................................................... 28 50 128 184
Investment securities gains................................................. 8 2 37 27
------ ------ ------ ------
Market-driven revenue.................................................. 68 40 261 257
------ ------ ------ ------
Credit card fee revenue..................................................... 233 228 674 655
Fiduciary and investment management fees.................................... 102 100 306 298
Service charges and commissions............................................. 235 201 675 585
------ ------ ------ ------
Fee-based revenue...................................................... 570 529 1,655 1,538
------ ------ ------ ------
Other income................................................................ 63 28 108 71
------ ------ ------ ------
Total.................................................................. 701 597 2,024 1,866
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and employee benefits.............................................. 440 419 1,291 1,281
Occupancy expense of premises, net.......................................... 63 64 192 195
Equipment rentals, depreciation and maintenance............................. 53 56 159 166
Amortization of intangible assets........................................... 13 20 49 59
Other....................................................................... 266 257 769 757
------ ------ ------ ------
Total.................................................................. 835 816 2,460 2,458
- -------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes.................................................. 574 538 1,706 1,600
Applicable income taxes..................................................... 189 180 563 541
------ ------ ------ ------
Net Income.................................................................. $ 385 $ 358 $1,143 $1,059
====== ====== ====== ======
Net Income Attributable to Common Stockholders' Equity...................... $ 380 $ 350 $1,126 $1,035
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share
Primary................................................................... $1.26 $1.09 $3.64 $3.24
Fully Diluted............................................................. $1.26 $1.08 $3.62 $3.19
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
(In millions) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Preferred Stock
Balance, beginning of period........................................................ $ 444 $ 489
Conversion of preferred stock....................................................... (154) (14)
------- ------
Balance, end of period.............................................................. 290 475
------- ------
Common Stock
Balance, beginning of period........................................................ 320 319
Issuance of stock................................................................... - -
------- ------
Balance, end of period.............................................................. 320 319
------- ------
Capital Surplus
Balance, beginning of period........................................................ 2,149 2,185
Issuance of treasury stock.......................................................... (85) (45)
Conversion of preferred stock....................................................... (138) (5)
Other............................................................................... 60 44
------- ------
Balance, end of period.............................................................. 1,986 2,179
------- ------
Retained Earnings
Balance, beginning of period........................................................ 6,433 5,497
Net income.......................................................................... 1,143 1,059
Cash dividends declared on common stock............................................. (364) (343)
Cash dividends declared on preferred stock.......................................... (17) (24)
------- ------
Balance, end of period.............................................................. 7,195 6,189
------- ------
Fair Value Adjustment on Investment Securities Available-for-Sale
Balance, beginning of period........................................................ 38 112
Change in fair value (net of taxes) and other....................................... 5 (89)
------- ------
Balance, end of period.............................................................. 43 23
------- ------
Deferred Compensation
Balance, beginning of period........................................................ (58) (39)
Awards granted, net................................................................. (42) (31)
Amortization of deferred compensation............................................... 34 18
Other............................................................................... (21) (5)
------- ------
Balance, end of period.............................................................. (87) (57)
------- ------
Accumulated Translation Adjustment
Balance, beginning of period........................................................ 7 8
Translation gain (loss), net of taxes............................................... (2) (1)
------- ------
Balance, end of period.............................................................. 5 7
------- ------
Treasury Stock
Balance, beginning of period........................................................ (326) (121)
Purchase of common stock............................................................ (1,764) (17)
Conversion of preferred stock....................................................... 292 -
Issuance of stock................................................................... 128 90
------- ------
Balance, end of period.............................................................. (1,670) (48)
------- ------
Total Stockholders' Equity, end of period.............................................. $ 8,082 $9,087
======= ======
</TABLE>
28
<PAGE>
First Chicago NBD Corporation and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
(In millions) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................................................ $ 1,143 $ 1,059
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization.......................................................... 178 187
Provision for credit losses............................................................ 558 545
Equity securities gains................................................................ (128) (184)
Net (increase) decrease in net derivative product balances............................. 220 (66)
Net decrease in trading assets......................................................... 105 2,939
Net (increase) decrease in loans held for sale......................................... 287 (157)
Net decrease in accrued income receivable.............................................. 13 83
Net increase (decrease) in accrued expenses payable.................................... 337 (12)
Net (increase) in other assets......................................................... (867) (233)
Other noncash adjustments.............................................................. (77) (41)
------- --------
Total adjustments...................................................................... 626 3,061
Net cash provided by operating activities................................................. 1,769 4,120
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net (increase) decrease in federal funds sold and securities under resale agreements...... (3,474) 6,058
Purchase of investment securities--available-for-sale..................................... (9,201) (3,980)
Purchase of equity securities--fair value................................................. (65) (95)
Proceeds from maturities of debt securities--available-for-sale........................... 946 2,107
Proceeds from sales of investment securities--available-for-sale.......................... 6,415 4,067
Proceeds from sales of equity securities--fair value...................................... 171 98
Credit card receivables securitized....................................................... - 1,029
Net (increase) in loans................................................................... (2,716) (3,827)
Proceeds from sales of loans.............................................................. 371 -
Loan recoveries........................................................................... 132 102
Net proceeds from sales of assets held for accelerated disposition........................ 2 24
Purchases of premises and equipment....................................................... (145) (206)
Proceeds from sales of premises and equipment............................................. 24 63
Net cash and cash equivalents due to acquisitions and dispositions........................ - (225)
------- --------
Net cash provided by (used in) investing activities....................................... (7,540) 5,215
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in deposits....................................................... 3,924 (4,888)
Net increase (decrease) in federal funds purchased and securities under repurchase
agreements.............................................................................. 1,789 (7,518)
Net increase in other short-term borrowings............................................... 3,161 29
Proceeds from issuance of long-term debt.................................................. 10,690 1,442
Repayment of long-term debt............................................................... (9,148) (1,670)
Net (decrease) in other liabilities....................................................... (69) (463)
Dividends paid............................................................................ (386) (366)
Proceeds from issuance of common and treasury stock....................................... - 22
Repurchase of common stock................................................................ (1,764) (17)
------- --------
Net cash provided by (used in) financing activities....................................... 8,197 (13,429)
- -------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents.............................. (73) (43)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents...................................... 2,353 (4,137)
Cash and cash equivalents at beginning of period.......................................... 13,297 17,538
------- --------
Cash and cash equivalents at end of period................................................ $15,650 $ 13,401
======= ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of this statement, cash and cash equivalents consist of cash and
due from banks, whether interest-bearing or not. In the first nine months of
1997, $154 million of the Corporation's 5 3/4% Cumulative Convertible Preferred
Stock, Series B, was converted into common stock.
29
<PAGE>
Notes to Consolidated Financial Statements
Note 1
- ------
The consolidated financial statements for the Corporation, including its
subsidiaries, have been prepared in conformity with generally accepted
accounting principles. Such preparation requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Although the interim amounts are unaudited, they do reflect all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results of operations for the interim periods. All such adjustments are of a
normal, recurring nature. Because the results from commercial banking operations
are so closely related and responsive to changes in economic conditions, fiscal
policy and monetary policy, and because the results for the investment security
and trading portfolios are largely market-driven, the results for any interim
period are not necessarily indicative of the results that can be expected for
the entire year.
Note 2
- ------
The Corporation presents earnings per share on both a primary and a fully
diluted basis. Primary earnings per share were computed by dividing net income,
after deducting dividends on preferred stock, by the average number of common
and common-equivalent shares outstanding during the period.
Common-equivalent shares consist of shares issuable under the Employee Stock
Purchase and Savings Plan and outstanding stock options. Fully diluted shares
also include the common shares that would result from the conversion of
convertible preferred stock.
To compute fully diluted earnings per share, net income was reduced by preferred
stock dividend requirements, except those related to convertible stock.
The net income, preferred stock dividends and shares used to compute primary and
fully diluted earnings per share are presented in the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(In millions) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary
Net income......................................................... $ 385 $ 358 $1,143 $1,059
Preferred stock dividends.......................................... 5 8 17 24
------ ------ ------ ------
Net income attributable to common stockholders' equity............. $ 380 $ 350 $1,126 $1,035
====== ====== ====== ======
Average number of common and common-equivalent shares.............. 301.6 320.2 309.4 319.8
====== ====== ====== ======
Fully diluted
Net income......................................................... $ 385 $ 358 $1,143 $1,059
Preferred stock dividends, excluding convertible Series B.......... 5 5 15 15
------ ------ ------ ------
Fully diluted net income........................................... $ 380 $ 353 $1,128 $1,044
====== ====== ====== ======
Average number of shares, assuming full dilution................... 301.8 327.5 311.9 327.2
====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share," which becomes effective for the 1997 Annual
Report. Earlier application is not permitted; however, restatement of all prior
periods presented is required. The Statement replaces primary earnings per share
(EPS) with earnings per common share (Basic EPS). Basic EPS is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. The Statement also requires
presentation of EPS assuming full dilution which is similar to the computation
for fully diluted EPS under current reporting conventions. Under SFAS No. 128
earnings per common share would have been $1.28 and earnings per share assuming
dilution would have been $1.26. Similarly, earnings per common share for the
third quarter of 1996 would have been $1.10 and earnings per share assuming
dilution would have been $1.08. Earnings per common share for the nine months
ended September 30, 1997 would have been $3.69 and earnings per share assuming
dilution would have been $3.63. Earnings per common share for the nine months
ended September 30, 1996, would have been $3.27 and earnings per share assuming
dilution would have been $3.20.
30
<PAGE>
Note 3
At September 30, 1997, credit card receivables aggregated $9.7 billion. These
receivables are available for sale through credit card securitization programs.
Note 4
- ------
Nonperforming loans are generally identified as "impaired loans." At September
30, 1997, the recorded investment in loans considered impaired was $330 million,
which required a related allowance for credit losses of $49 million.
Substantially all of the $330 million in impaired loans required the
establishment of an allocated reserve. The average recorded investment in
impaired loans was approximately $334 million for the quarter ended September
30, 1997. The Corporation recognized interest income associated with impaired
loans of $7 million during the quarter.
Note 5
- ------
Derivative financial instruments used in trading activities are carried at
estimated fair value. Such instruments include swaps, forwards, spot, futures,
options, caps, floors and forward rate agreements in the interest rate, foreign
exchange, commodity and equity markets. The estimated fair values are based on
quoted market prices or pricing and valuation models on a present value basis
using current market information. Realized and unrealized gains and losses are
included in noninterest income as combined trading profits. Where appropriate,
compensation for credit risk and ongoing servicing is deferred and recorded as
income over the term of the derivative financial instrument.
Derivative financial instruments used in asset and liability management ("ALM")
activities, principally interest rate swaps, are required to meet specific
criteria. Such interest rate swaps are designated as ALM derivatives; are linked
to and adjust the interest rate sensitivity of a specific asset, liability, firm
commitment, or anticipated transaction or a specific pool of transactions with
similar risk characteristics; and have the effect of reducing the Corporation's
structural interest rate risk at inception. Interest rate swaps that do not meet
these criteria are designated as derivatives used in trading activities and are
accounted for at estimated fair value.
Income or expense on most ALM derivatives used to manage interest rate exposure
is recorded on an accrual basis, as an adjustment to the yield of the linked
exposures over the periods covered by the contracts. This matches the income
recognition treatment of the linked exposure, generally assets or liabilities
carried at historical cost, which are recorded on an accrual basis. If an
interest rate swap is terminated early, any resulting gain or loss is deferred
and amortized as an adjustment of the yield on the linked interest rate exposure
position over the remaining periods originally covered by the terminated swap.
If all or part of a linked position is terminated, e.g., a linked asset is sold
or prepaid, or if the amount of an anticipated transaction is likely to be less
than originally expected, the related pro rata portion of any unrecognized gain
or loss on the swap is recognized in earnings at that time and the related pro
rata portion of the swap is subsequently accounted for at estimated fair value.
Purchased option, cap and floor contracts are reported in derivative product
assets, and written option, cap and floor contracts are reported in derivative
product liabilities. For other derivative financial instruments, an unrealized
gain is reported in derivative product assets and an unrealized loss is reported
in derivative product liabilities. However, fair value amounts recognized for
derivative financial instruments executed with the same counterparty under a
legally enforceable master netting arrangement are reported on a net basis. Cash
flows from derivative financial instruments are reported net as operating
activities.
Note 6
- ------
In June 1996, "FASB" issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
generally became effective on a prospective basis beginning January 1, 1997. In
October 1996, the FASB tentatively decided to delay the effective date of
certain provisions until January 1, 1998. The new Statement primarily
establishes criteria based on legal control to determine whether a transfer of a
financial asset is a sale or a secured borrowing. Implementation of this
Statement did not have a material effect on the results of operations.
31
<PAGE>
Note 7
- ------
The ratio of income to fixed charges for the nine months ended September 30,
1997, excluding interest on deposits was 2.4x, and including interest on
deposits was 1.6x. The ratio has been computed on the basis of the total
enterprise (as defined by the Securities and Exchange Commission) by dividing
income before fixed charges and income taxes by fixed charges. Fixed charges
consist of interest expense on all long- and short-term borrowings, excluding or
including interest on deposits.
Note 8
- ------
The Corporation and certain of its subsidiaries are defendants in various
lawsuits, including certain class actions, arising out of the normal course of
business, and the Corporation has received certain tax deficiency assessments.
Since the Corporation and certain of its subsidiaries, which are regulated by
one or more federal and state regulatory authorities, also are the subject of
numerous examinations and reviews by such authorities, the Corporation is and
will, from time to time, normally be engaged in various disagreements with
regulators, related primarily to banking matters. In the opinion of management
and the Corporation's general counsel, the ultimate resolution of the matters
referred to in this note will not have a material effect on the consolidated
financial statements.
32
<PAGE>
First Chicago NBD Corporation and Subsidiaries
Selected Statistical Information
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Investment Securities--Available-for-Sale
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
September 30, 1997 (In millions) Cost Gains Losses (Book Value)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury................................ $3,049 $ 22 $ 2 $3,069
U.S. government agencies
Mortgage-backed securities................. $2,059 26 8 2,077
Collateralized mortgage obligations........ 475 - - 475
Other...................................... 752 9 - 761
States and political subdivisions............ 785 36 - 821
Other debt securities........................ 769 - 1 768
Equity securities (1)........................ 940 145 31 1,054
------ ---- --- ------
Total.................................. $8,829 $238 $42 $9,025
====== ==== === ======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes investments accounted for at fair value, in keeping with
specialized industry practice.
The fair values of certain securities for which market quotations were not
available were estimated.
In addition, the fair values of certain securities reflect liquidity and
other market-related factors.
Impact of Credit Card Securitization
For analytical purposes only, the following table shows income statement line
items adjusted for the net impact of securitization of credit card receivables.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1997 Three Months Ended September 30, 1996
------------------------------------- -------------------------------------
Credit Card Credit Card
(In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income--
tax-equivalent basis..... $ 921 $ 184 $ 1,105 $ 967 $ 151 $ 1,118
Provision for credit
losses................... 191 149 340 185 106 291
Noninterest income......... 701 (35) 666 597 (45) 552
Noninterest expense........ 835 - 835 816 - 816
Net income................. 385 - 385 358 - 358
Assets--quarter-end........ $113,306 $7,847 $121,153 $106,694 $8,039 $114,733
--average............ 108,950 8,092 117,042 110,715 7,219 117,934
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1997 Nine Months Ended September 30, 1996
------------------------------------ ------------------------------------
Credit Card Credit Card
(In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income--
tax-equivalent basis..... $ 2,779 $ 568 $ 3,347 $ 2,815 $ 487 $ 3,302
Provision for credit
losses................... 558 482 1,040 545 321 866
Noninterest income......... 2,024 (86) 1,938 1,866 (166) 1,700
Noninterest expense........ 2,460 - 2,460 2,458 - 2,458
Net income................. 1,143 - 1,143 1,059 - 1,059
Assets--quarter-end........ $113,306 $7,847 $121,153 $106,694 $8,039 $114,733
--average............ 107,472 8,454 115,926 115,882 7,542 123,424
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
First Chicago NBD Corporation and Subsidiaries
Five-Quarter Consolidated Income Statement
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended
Sept. 30 June 30 March 31 Dec. 31 Sept. 30
(Dollars in millions, except per share data) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income
Loans, including fees........................................... $1,491 $1,484 $1,401 $1,435 $1,482
Bank balances................................................... 120 114 96 82 112
Federal funds sold and securities under resale agreements....... 79 77 65 57 113
Trading assets.................................................. 67 67 69 71 96
Investment securities--taxable.................................. 97 89 78 79 82
Investment securities--tax-exempt............................... 27 29 25 23 23
------ ------ ------ ------ ------
Total....................................................... 1,881 1,860 1,734 1,747 1,908
- ----------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits........................................................ 560 544 499 511 527
Federal funds purchased and securities under repurchase
agreements..................................................... 134 124 114 107 149
Other short-term borrowings..................................... 125 121 102 104 156
Long-term debt.................................................. 163 146 143 142 134
------ ------ ------ ------ ------
Total....................................................... 982 935 858 864 966
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income............................................. 899 925 876 883 942
Provision for credit losses..................................... 191 180 187 190 185
------ ------ ------ ------ ------
Net Interest Income After Provision for Credit Losses........... 708 745 689 693 757
- ----------------------------------------------------------------------------------------------------------------
Noninterest Income
Combined trading profits (losses)............................... 32 36 28 12 (12)
Equity securities gains......................................... 28 46 54 71 50
Investment securities gains..................................... 8 4 25 - 2
------ ------ ------ ------ ------
Market-driven revenue......................................... 68 86 107 83 40
------ ------ ------ ------ ------
Credit card fee revenue......................................... 233 207 234 259 228
Fiduciary and investment management fees........................ 102 99 105 102 100
Service charges and commissions................................. 235 227 213 218 201
------ ------ ------ ------ ------
Fee-based revenue............................................. 570 533 552 579 529
------ ------ ------ ------ ------
Other income.................................................... 63 25 20 20 28
------ ------ ------ ------ ------
Total....................................................... 701 644 679 682 597
- ----------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and employee benefits.................................. 440 426 425 426 419
Occupancy expense of premises, net.............................. 63 63 66 64 64
Equipment rentals, depreciation and maintenance................. 53 52 54 61 56
Amortization of intangible assets............................... 13 18 18 20 20
Other........................................................... 266 266 237 242 257
------ ------ ------ ------ ------
Total....................................................... 835 825 800 813 816
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes...................................... 574 564 568 562 538
Applicable income taxes......................................... 189 186 188 185 180
------ ------ ------ ------ ------
Net Income...................................................... $ 385 $ 378 $ 380 $ 377 $ 358
====== ====== ====== ====== ======
Net Income Attributable to Common Stockholders' Equity.......... $ 380 $ 373 $ 373 $ 370 $ 350
====== ====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------
Earnings Per Share
Primary....................................................... $1.26 $1.20 $1.18 $1.15 $1.09
Fully Diluted................................................. $1.26 $1.20 $1.17 $1.14 $1.08
- ----------------------------------------------------------------------------------------------------------------
Average number of common and common-equivalent shares (in 301.6 310.9 316.5 321.4 320.2
millions)......................................................
Average number of shares, assuming full dilution (in millions).. 301.8 311.3 320.8 327.6 327.5
</TABLE>
34
<PAGE>
First Chicago NBD Corporation and Subsidiaries
Selected Statistical Information
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Average Balances/Net Interest Margin/Rates
- --------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1997 June 30, 1997
- --------------------------------------------------------------------------------------------------------------
(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
Interest-bearing due from banks.................. $ 7,789 $ 120 6.13% $ 7,754 $ 114 5.90%
Federal funds sold and securities under resale
agreements...................................... 5,984 79 5.24 5,902 76 5.20
Trading assets................................... 4,976 67 5.34 4,797 67 5.62
Investment securities
U.S. government and federal agency............. 5,589 92 6.50 4,979 82 6.57
States and political subdivisions.............. 835 18 8.71 941 21 9.02
Other.......................................... 2,149 31 5.81 1,951 36 7.31
-------- ------ ---- -------- ------ ----
Total investment securities................. 8,573 141 6.54 7,871 139 7.05
Loans (1)(2)
Domestic offices............................... 62,529 1,428 9.18 62,247 1,429 9.33
Foreign offices................................ 4,253 68 6.38 4,054 61 6.06
-------- ------ ---- -------- ------ ----
Total loans................................... 66,782 1,496 9.00 66,301 1,490 9.13
-------- ------ ---- -------- ------ ----
Total earning assets (3)...................... 94,104 1,903 8.02 92,625 1,886 8.17
Cash and due from banks.......................... 6,398 6,594
Allowance for credit losses...................... (1,401) (1,388)
Other assets..................................... 9,849 10,461
-------- --------
Total assets................................ $108,950 $108,292
======== ========
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits--interest-bearing
Savings........................................ $ 9,158 $ 52 2.25% $ 9,429 $ 52 2.22%
Money market................................... 11,715 101 3.43 11,792 101 3.44
Time........................................... 15,154 215 5.63 15,072 210 5.58
Foreign offices................................ 14,616 192 5.21 14,055 181 5.16
-------- ------ ---- -------- ------ ----
Total deposits--interest-bearing............ 50,643 560 4.39 50,348 544 4.33
Federal funds purchased and securities under
repurchase agreements........................... 9,877 134 5.37 9,393 124 5.32
Other short-term borrowings...................... 9,045 125 5.49 8,749 121 5.54
Long-term debt................................... 9,620 163 6.74 8,853 146 6.61
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities.......... 79,185 982 4.92 77,343 935 4.85
Demand deposits.................................. 14,216 14,238
Other liabilities................................ 7,366 8,142
Preferred stock.................................. 290 290
Common stockholders' equity...................... 7,893 8,279
-------- --------
Total liabilities and stockholders' equity.. $108,950 $108,292
======== ========
- --------------------------------------------------------------------------------------------------------------
Interest income/earning assets (3)............... $1,903 8.02% $1,886 8.17%
Interest expense/earning assets.................. 982 4.14 935 4.05
------ ---- ------ ----
Net interest margin.............................. $ 921 3.88% $ 951 4.12%
====== ==== ====== ====
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average lease-financing receivables are reduced by related deferred tax
liabilities in calculating the average rate.
(2) Nonperforming loans are included in average balances used to determine the
average rate.
(3) Includes tax-equivalent adjustments based on a 35% federal income tax rate.
35
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
March 31, 1997 December 31, 1996 September 30, 1996
- ----------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6,721 $ 96 5.78% $ 5,664 $ 82 5.76% $ 7,891 $ 112 5.65%
5,157 66 5.15 4,330 57 5.24 8,402 113 5.35
5,016 69 5.57 5,297 72 5.41 6,577 96 5.81
4,604 71 6.30 4,523 73 6.42 4,778 78 6.49
1,101 25 9.15 1,231 27 8.73 1,265 29 9.12
1,576 32 8.19 1,357 20 5.86 1,248 17 5.42
- -------- ------ ---- -------- ------ ---- -------- ------ ----
7,281 128 7.14 7,111 120 6.71 7,291 124 6.77
61,462 1,350 9.02 62,067 1,384 8.98 62,384 1,429 9.23
3,715 56 6.14 3,427 56 6.50 3,578 59 6.56
- -------- ------ ---- -------- ------ ---- -------- ------ ----
65,177 1,406 8.85 65,494 1,440 8.85 65,962 1,488 9.08
- -------- ------ ---- -------- ------ ---- -------- ------ ----
89,352 1,765 8.00 87,896 1,771 8.02 96,123 1,933 8.00
6,556 6,229 6,352
(1,386) (1,417) (1,455)
10,611 9,979 9,695
- -------- -------- --------
$105,133 $102,687 $110,715
======== ======== ========
- -------------------------- ---------- --------------------- ---------- ----------- ---------- -------
$ 9,980 $ 53 2.20% $ 10,371 $ 60 2.30% $ 10,940 $ 61 2.22%
11,423 99 3.52 10,880 97 3.55 10,166 92 3.60
15,029 201 5.41 15,482 220 5.65 15,736 213 5.38
12,098 146 4.90 10,913 134 4.88 12,898 161 4.97
- -------- ------ ---- -------- ------ ---- -------- ------ ----
48,530 499 4.17 47,646 511 4.27 49,740 527 4.22
8,849 114 5.20 8,038 107 5.30 11,227 149 5.28
8,001 102 5.16 7,959 104 5.20 11,773 156 5.27
8,526 143 6.83 8,293 142 6.81 8,122 134 6.56
- -------- ------ ---- -------- ------ ---- -------- ------ ----
73,906 858 4.71 71,936 864 4.78 80,862 966 4.75
13,859 13,934 13,742
8,432 7,787 7,272
419 465 487
8,517 8,565 8,352
- -------- -------- --------
$105,133 $102,687 $110,715
======== ======== ========
- -------------------------- ---------- --------------------- ---------- ----------- ---------- -------
$1,765 8.00% $1,771 8.02% $1,933 8.00%
858 3.89 864 3.91 966 4.00
------ ---- ------ ---- ------ ----
$ 907 4.11% $ 907 4.11% $ 967 4.00%
====== ==== ====== ==== ====== ====
- -------------------------- ---------- --------------------- ---------- ----------- ---------- -------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Selected Statistical Information
- ----------------------------------------------------------------------------------------------------------------------
Average Balances/Net Interest Margin/Rates
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1997 September 30, 1996
- ----------------------------------------------------------------------------------------------------------------------
(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
Interest-bearing due from banks.................. $ 7,425 $ 330 5.95% $ 8,778 $ 381 5.80%
Federal funds sold and securities under resale
agreements...................................... 5,684 221 5.19 11,366 453 5.32
Trading assets................................... 4,930 203 5.51 7,558 325 5.74
Investment securities
U.S. government and federal agency............. 5,061 245 6.46 5,380 270 6.70
States and political subdivisions.............. 958 64 8.98 1,349 91 9.01
Other.......................................... 1,894 99 6.98 1,226 52 5.67
-------- ------ ---- -------- ------ ----
Total investment securities.................. 7,913 408 6.89 7,955 413 6.93
Loans (1)(2)
Domestic offices............................... 62,083 4,206 9.18 61,231 4,148 9.16
Foreign offices................................ 4,010 186 6.20 3,535 180 6.80
-------- ------ ---- -------- ------ ----
Total loans.................................. 66,093 4,392 9.00 64,766 4,328 9.03
-------- ------ ---- -------- ------ ----
Total earning assets (3)..................... 92,045 5,554 8.07 100,423 5,900 7.84
Cash and due from banks.......................... 6,515 6,254
Allowance for credit losses...................... (1,392) (1,389)
Other assets..................................... 10,304 10,594
-------- --------
Total assets................................. $107,472 $115,882
======== ========
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits--interest-bearing
Savings........................................ $ 9,519 $ 157 2.21% $ 11,131 $ 184 2.21%
Money market................................... 11,645 302 3.46 9,576 267 3.72
Time........................................... 15,085 625 5.54 16,184 660 5.45
Foreign offices................................ 13,599 519 5.10 14,305 553 5.16
-------- ------ ---- -------- ------ ----
Total deposits--interest-bearing............. 49,848 1,603 4.30 51,196 1,664 4.34
Federal funds purchased and securities under
repurchase agreements........................... 9,377 372 5.30 14,297 564 5.27
Other short-term borrowings...................... 8,602 348 5.40 11,499 448 5.20
Long-term debt................................... 9,003 452 6.72 8,133 409 6.72
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities........... 76,830 2,775 4.83 85,125 3,085 4.84
Demand deposits.................................. 14,106 13,654
Other liabilities................................ 7,976 8,417
Preferred stock.................................. 333 489
Common stockholders' equity...................... 8,227 8,197
-------- --------
Total liabilities and stockholders' equity... $107,472 $115,882
======== ========
- ----------------------------------------------------------------------------------------------------------------------
Interest income/earning assets (3)............... $5,554 8.07% $5,900 7.84%
Interest expense/earning assets.................. 2,775 4.03 3,085 4.10
------ ---- ------ ----
Net interest margin.............................. $2,779 4.04% $2,815 3.74%
====== ==== ====== ====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average lease-financing receivables are reduced by related deferred tax
liabilities in calculating the average rate.
(2) Nonperforming loans are included in average balances used to determine the
average rate.
(3) Includes tax-equivalent adjustments based on a 35% federal income tax rate.
37
<PAGE>
Form 10-Q Cross-Reference Index
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
ITEM 1. Financial Statements
- ----------------------------
Page
----
<S> <C>
Consolidated Balance Sheet --
September 30, 1997 and 1996, and December 31, 1996 26
Consolidated Income Statement --
Three and Nine months Ended September 30, 1997 and 1996 27
Consolidated Statement of Stockholders' Equity --
Nine months Ended September 30, 1997 and 1996 28
Consolidated Statement of Cash Flows --
Nine months Ended September 30, 1997 and 1996 29
Notes to Consolidated Financial Statements 30-32
Selected Statistical Information 1,
17-21,
33-37
ITEM 2. Management's Discussion and Analysis of Financial
- ---------------------------------------------------------
Condition and Results of Operations 2-25
-----------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings 39
- -------------------------
ITEM 2. Changes in Securities 39
- -----------------------------
ITEM 3. Defaults Upon Senior Securities 39
- ---------------------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders 39
- -----------------------------------------------------------
ITEM 5. Other Information 39
- -------------------------
ITEM 6. Exhibits and Reports on Form 8-K 39
- ----------------------------------------
Signatures 40
</TABLE>
38
<PAGE>
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. Legal Proceedings
- -------------------------
None
ITEM 2. Changes in Securities
- -----------------------------
None
ITEM 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
ITEM 5. Other Information
- -------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibit 12 Statement re computation of ratio
Exhibit 27 Financial Data Schedule
(b) The Registrant filed the following Current Reports on Form 8-K during the
quarter ended September 30, 1997.
Date Item Reported
-------- -------------
7/14/97 The Registrant's earnings for the quarter ended June 30, 1997.
39
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHICAGO NBD CORPORATION
-----------------------------
Date November 13, 1997 Verne G. Istock
-------------------------------------- -----------------------------
Verne G. Istock
Principal Executive Officer
Date November 13, 1997 William J. Roberts
-------------------------------------- -----------------------------
William J. Roberts
Principal Accounting Officer
40
<PAGE>
(Registrant)
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
- -------------- ----------------------
12 - Statement re computation of ratio
27 - Financial Data Schedule
41
<PAGE>
Exhibit 12
COMPUTATION OF RATIO OF INCOME TO FIXED CHARGES
The computation of the ratio of income to fixed charges is set forth in
Note 7 of Notes to Consolidated Financial Statements on page 32 of the Form
10-Q.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
Form 10-Q for the period ended September 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,929
<INT-BEARING-DEPOSITS> 7,721
<FED-FUNDS-SOLD> 7,671
<TRADING-ASSETS> 4,632
<INVESTMENTS-HELD-FOR-SALE> 9,025
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 67,822
<ALLOWANCE> 1,408
<TOTAL-ASSETS> 113,306
<DEPOSITS> 67,565
<SHORT-TERM> 20,383
<LIABILITIES-OTHER> 6,676
<LONG-TERM> 9,906
<COMMON> 320
0
290
<OTHER-SE> 7,472<F1>
<TOTAL-LIABILITIES-AND-EQUITY> 113,306
<INTEREST-LOAN> 4,376
<INTEREST-INVEST> 345
<INTEREST-OTHER> 754
<INTEREST-TOTAL> 5,475
<INTEREST-DEPOSIT> 1,603
<INTEREST-EXPENSE> 2,775
<INTEREST-INCOME-NET> 2,700
<LOAN-LOSSES> 558
<SECURITIES-GAINS> 37<F2>
<EXPENSE-OTHER> 2,460<F3>
<INCOME-PRETAX> 1,706
<INCOME-PRE-EXTRAORDINARY> 1,706
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,143
<EPS-PRIMARY> 3.64
<EPS-DILUTED> 3.62
<YIELD-ACTUAL> 4.04
<LOANS-NON> 330
<LOANS-PAST> 0<F4>
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,408
<CHARGE-OFFS> 232
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 1,408
<ALLOWANCE-DOMESTIC> 0<F4>
<ALLOWANCE-FOREIGN> 0<F4>
<ALLOWANCE-UNALLOCATED> 0<F4>
<FN>
<F1>Treasury stock of $1,670 million is included as a reduction of other
stockholder's equity.
<F2>Investment securities gains/losses do not include the Corporation's equity
securities gains which totaled $128 million.
<F3>Other expense includes: Salaries and employee benefits of $1,291 million,
Occupancy of $192 million, equipment rentals, depreciation and maintenance
of $159 million, amortization of intangible assets of $49 million, and other
expenses which totaled $769 million.
<F4>Items are only disclosed on an annual basis in the Corporation's Form 10K,
and are, therefore, not included in this Financial Data Schedule.
</FN>
</TABLE>
