<PAGE>
First Chicago NBD Corporation and Subsidiaries
Financial Supplement and Form 10-Q
Contents Page
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Five-Quarter Summary of Selected Financial Information 1
Business Segments 2
Earnings Analysis 7
Liquidity Risk Management 12
Market Risk Management 13
Credit Risk Management 16
Derivative Financial Instruments 20
Technology Risk -- Year 2000 Compliance Issues 21
Capital Management 22
Consolidated Financial Statements 25
Notes to Consolidated Financial Statements 29
Selected Statistical Information 33
Form 10-Q 39
<PAGE>
<TABLE>
<CAPTION>
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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 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
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June 30 March 31 December 31 September 30 June 30
(Dollars in millions, except per-share data) 1998 1998 1997 1997 1997
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarterly Income Statement Summary
Net interest income.......................... $ 884 $ 861 $ 872 $ 899 $ 925
Tax-equivalent adjustment.................... 14 17 16 22 26
--------- -------- -------- -------- ----------
Net interest income--tax-equivalent basis... 898 878 888 921 951
Provision for credit losses.................. 206 179 167 191 180
Noninterest income........................... 842 739 727 701 644
Operating expense............................ 911 848 872 835 825
Net income................................... 408 383 382 385 378
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Earnings Per Share
Basic....................................... $ 1.41 $ 1.32 $ 1.30 $ 1.28 $ 1.22
Diluted..................................... 1.38 1.30 1.28 1.26 1.20
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Financial Performance Ratios
Return on assets............................. 1.40% 1.38% 1.38% 1.40% 1.40%
Return on common stockholders' equity........ 20.1 19.9 19.5 19.1 18.1
Return on stockholders' equity............... 19.8 19.5 19.1 18.7 17.7
Net interest margin
Reported.................................... 3.61 3.67 3.71 3.88 4.12
Adjusted.................................... 4.14 4.25 4.27 4.47 4.70
Operating efficiency ratio................... 52.4 52.4 54.0 51.5 51.7
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Balance Sheet Information (at Quarter-End)
Assets....................................... $ 119,781 $114,804 $114,096 $113,306 $ 112,595
Loans........................................ 72,563 69,590 68,724 67,822 67,510
Deposits..................................... 69,528 68,170 68,489 67,565 68,018
Long-term debt (1)........................... 10,591 10,294 10,088 9,906 9,016
Common stockholders' equity.................. 8,124 7,816 7,770 7,792 8,181
Stockholders' equity......................... 8,314 8,006 7,960 8,082 8,471
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Average Balance Sheet Information
Assets....................................... $ 116,577 $112,914 $109,976 $108,950 $ 108,292
Loans........................................ 69,748 67,773 66,859 66,782 66,301
Earning assets............................... 99,742 96,988 95,009 94,104 92,625
Deposits..................................... 67,723 66,346 66,416 64,859 64,586
Common stockholders' equity.................. 8,059 7,781 7,709 7,893 8,279
Stockholders' equity......................... 8,249 7,971 7,951 8,183 8,569
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Capital Data
Common-equity-to-assets ratio................ 6.8% 6.8% 6.8% 6.9% 7.3%
Regulatory leverage ratio (1)(2)............. 7.6 7.6 7.8 8.2 8.6
Risk-based capital (1)(2)
Tier 1 capital ratio........................ 7.7 7.8 7.9 8.1 8.6
Total capital ratio......................... 11.1 11.4 11.7 11.9 12.4
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Common Share and Stockholder Data
For the Quarter Ended
Market price
High........................................ $101.0000 $91.6250 $85.8750 $78.8125 $ 65.6250
Low......................................... 86.3750 71.0625 67.1250 60.7500 50.5000
At quarter-end.............................. 88.6250 88.1250 83.5000 75.2500 60.5000
Book value (at quarter-end).................. 28.23 27.21 26.87 26.62 27.08
Dividends declared per common share.......... 0.44 0.44 0.44 0.40 0.40
Dividend payout ratio........................ 31.9% 33.8% 34.4% 31.7% 33.3%
Average number of shares (in millions)....... 287.4 288.1 290.3 296.8 306.8
Average number of shares, assuming
full dilution (in millions)................. 292.6 293.0 295.2 301.6 310.9
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</TABLE>
(1) Includes trust preferred capital securities.
(2) December 1997 and subsequent ratios include the activities of FCCM.
1
<PAGE>
BUSINESS SEGMENTS
Financial results are reported by major business lines, principally structured
around the customer segments served: Regional Banking, Corporate Banking,
Corporate Investments, and Credit Card.
<TABLE>
<CAPTION>
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Three Months Ended June 30
Regional Corp. Banking Other
Banking and Corp. Inv. Credit Card Activities
(Dollars in millions, ------------------- ----------------- ---------------- --------------
except where noted) 1998 1997 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income....................... $ 167 $ 193 $ 171 $ 120 $ 70 $ 67 $ - $ (2)
Return on equity................. 19% 21% 24% 17% 20% 20% N/M N/M
Average assets (presecuritized)
(in billions)................... $39.5 $40.7 $66.9 $58.5 $17.6 $17.2 $ 0.7 $ 0.4
Average common equity
(in billions)................... 3.5 3.6 2.8 2.8 1.4 1.3 0.4 0.6
- -----------------------------------------------------------------------------------------------------------------
N/M - Not meaningful.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
Regional Corp. Banking Other
Banking and Corp.Inv. Credit Card Activities
(Dollars in millions, ----------------- -------------- ------------- -------------
except where noted) 1998 1997 1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income....................... $ 348 $ 357 $ 302 $ 272 $ 141 $ 140 $ - $ (11)
Return on equity................. 20% 20% 22% 20% 21% 21% N/M N/M
Average assets (presecuritized)
(in billions)................... $39.0 $39.9 $65.7 $57.8 $17.7 $17.4 $ 0.7 $ 0.4
Average common equity
(in billions)................... 3.5 3.6 2.8 2.8 1.4 1.3 0.2 0.7
- -----------------------------------------------------------------------------------------------------------------
N/M - Not meaningful.
</TABLE>
Earnings Contribution by Business Lines*
For the Six Months Ended June 30
[Pie Charts appear here]
1998 1997
Regional Banking 44% 47%
Corporate Banking
and Corporate Investments 38% 35%
Credit Card 18% 18%
*Excludes the Impact of Other Activities
2
<PAGE>
To facilitate analysis of trends, Credit Card results are presented before the
securitization of credit card receivables ("presecuritized"). For more
information, see the discussion of net interest income beginning on page 8 as
well as the reconciliation of reported to presecuritized results on page 34.
Business segment results are derived from the internal profitability reporting
systems and reflect full allocation of all institutional and overhead items.
These systems use a detailed funds transfer methodology and a capital allocation
based on risk elements. The method for assigning capital to business units can
be found in the "Capital Management" section, beginning on page 22.
Revenues and costs for investment management and insurance products are aligned
with customers and, therefore, are reported within the appropriate business
segments. Certain corporate revenues and expenses, generally unusual or one-time
in nature, are included in "Other Activities."
<TABLE>
<CAPTION>
Regional Banking
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis................ $ 535 $ 561 $1,069 $1,105
Provision for credit losses.............................. 29 25 48 59
Noninterest income....................................... 253 221 494 418
Noninterest expense...................................... 492 445 955 889
Net income............................................... 167 193 348 357
Return on equity......................................... 19% 21% 20% 20%
Operating efficiency ratio............................... 62% 57% 61% 58%
Average loans (in billions).............................. $34.8 $36.0 $ 34.9 $ 35.8
Average assets (in billions)............................. 39.5 40.7 39.0 39.9
Average common equity (in billions)...................... 3.5 3.6 3.5 3.6
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Regional Banking serves four specific customer markets: general consumers,
private banking and investments clients, small businesses, and middle market
companies. These markets are grouped as Retail and Middle Market for financial
reporting. Regional Banking contributed 44% of the Corporation's first half
earnings, with net income of $348 million, and achieved a 20% return on equity.
<TABLE>
<CAPTION>
Retail Banking
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis................ $ 305 $ 327 $ 612 $ 642
Provision for credit losses.............................. 11 23 31 45
Noninterest income....................................... 197 163 378 303
Noninterest expense...................................... 356 317 692 639
Net income............................................... 85 93 166 161
Return on equity......................................... 21% 21% 20% 19%
Operating efficiency ratio............................... 71% 65% 70% 68%
Average loans (in billions).............................. $15.3 $18.0 $15.7 $17.9
Average assets (in billions)............................. 17.9 21.4 18.0 20.7
Average common equity (in billions)...................... 1.6 1.7 1.6 1.7
- ----------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
Net income for the Retail Banking segment was $85 million for the second quarter
of 1998, with a healthy 21% return on equity. For the first six months, net
income was $166 million, up slightly from that of the year-ago period.
Noninterest income rose more than 20% for both periods, reflecting strong fee
income growth, including investment management fees and service charges. In
addition, improved credit quality substantially lowered provision expense.
Noninterest expense increases, particularly in the second quarter, were due to
the funding of important technology and infrastructure investments and to
compensation related to fee-generating activities. Lower spread income and asset
levels were primarily due to mortgage loan sales.
<TABLE>
<CAPTION>
Middle Market Banking
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis........ $ 230 $ 234 $ 457 $ 463
Provision for credit losses...................... 18 2 17 14
Noninterest income............................... 56 58 116 115
Noninterest expense.............................. 135 128 263 250
Net income....................................... 82 100 182 196
Return on equity................................. 17% 21% 19% 20%
Operating efficiency ratio....................... 47% 44% 46% 43%
Average loans (in billions)...................... $19.5 $18.0 $19.2 $17.9
Average assets (in billions)..................... 21.6 19.3 21.0 19.2
Average common equity (in billions).............. 1.9 1.9 1.9 1.9
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net income for the Middle Market segment was $182 million in the first six
months, for a return on equity of 19%. Despite higher loan volume, spread income
was lower due to compressed margins. Increased provision expense in the second
quarter also contributed to the decline in earnings.
<TABLE>
<CAPTION>
Corporate Banking and Corporate Investments
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis........ $ 171 $ 167 $ 337 $ 333
Provision for credit losses...................... 35 1 58 -
Noninterest income............................... 348 229 618 504
Noninterest expense.............................. 243 220 473 427
Net income....................................... 171 120 302 272
Return on equity................................. 24% 17% 22% 20%
Operating efficiency ratio....................... 47% 56% 50% 51%
Average loans (in billions)...................... $25.9 $21.3 $24.7 $20.9
Average assets (in billions)..................... 66.9 58.5 65.7 57.8
Average common equity (in billions).............. 2.8 2.8 2.8 2.8
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Large corporations, institutions and governments are the principal customers of
Corporate Banking, which provides credit instruments, cash management services,
capital markets products and other services. Corporate Investments represents a
variety of functions and businesses, including the investment account, funding,
venture capital, leveraged leasing and tax-advantaged products. Together, these
business lines are analogous to the "global banking" or "wholesale banking"
businesses of other major U.S. banking companies. Their net income for the first
half of 1998 was $302 million, representing 38% of total earnings, and return on
equity was 22%.
4
<PAGE>
<TABLE>
<CAPTION>
Corporate Banking
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis........ $ 140 $ 137 $ 274 $ 275
Provision for credit losses...................... 34 1 57 -
Noninterest income............................... 212 148 405 328
Noninterest expense.............................. 230 209 448 404
Net income....................................... 54 52 108 130
Return on equity................................. 11% 10% 11% 12%
Operating efficiency ratio....................... 66% 73% 66% 67%
Average loans (in billions)...................... $22.0 $19.7 $21.6 $19.4
Average assets (in billions)..................... 43.5 39.9 43.5 40.1
Average common equity (in billions).............. 2.1 2.1 2.1 2.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Corporate Banking posted net income of $54 million for the second quarter and
$108 million for the first six months. Revenue growth was impressive--
approximately 25% for the quarter and 13% for the first half. Continued
improvement in trading results and strength in syndications, capital raising,
and cash management products contributed to the favorable revenue trends.
Increased provision for credit losses, primarily due to charge-offs related to a
limited number of Asian credits, and technology expenses offset the higher
revenue.
<TABLE>
<CAPTION>
Corporate Investments
- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis........ $ 31 $ 30 $ 63 $ 58
Provision for credit losses...................... 1 - 1 -
Noninterest income............................... 136 81 213 176
Noninterest expense.............................. 13 11 25 23
Net income....................................... 117 68 194 142
Return on equity................................. 59% 42% 51% 45%
Operating efficiency ratio....................... N/M N/M N/M N/M
Average loans (in billions)...................... $ 3.9 $ 1.6 $ 3.1 $ 1.5
Average assets (in billions)..................... 23.4 18.6 22.2 17.7
Average common equity (in billions).............. 0.7 0.7 0.7 0.7
- --------------------------------------------------------------------------------------------------------
</TABLE>
N/M-Not meaningful.
Corporate Investments generated net income of $194 million and return on equity
of 51% for the first half of 1998. Higher leasing and securities gains,
primarily in the second quarter, were key drivers of the strong revenue
performance. In addition, the lower tax rate for this segment reflects the
impact of tax-advantaged investments.
5
<PAGE>
<TABLE>
<CAPTION>
Credit Card
- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(Presecuritized) June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis........ $ 354 $ 398 $ 706 $ 783
Provision for credit losses...................... 292 327 575 645
Noninterest income............................... 218 188 414 382
Noninterest expense.............................. 167 151 317 293
Net income....................................... 70 67 141 140
Return on equity................................. 20% 20% 21% 21%
Operating efficiency ratio....................... 29% 26% 28% 25%
Average loans (in billions)...................... $17.0 $17.2 $17.3 $17.4
Average common equity (in billions).............. 1.4 1.3 1.4 1.3
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation reaches customers 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. Net income of $141 million for the first half of 1998 was approximately
one-fifth of the corporate total. Return on equity remained at 21%.
Credit quality improved, with the net charge-off rate declining to 6.9% for the
second quarter from 7.6% a year ago. Fee income climbed with growth in
interchange fees. Lower spread income, due to increased volumes of introductory
rate products and higher solicitation costs, offset these favorable items.
<TABLE>
<CAPTION>
Other Activities
- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except where noted) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss)................................ $ - $ (2) $ - $(11)
Average assets (in billions)..................... 0.7 0.4 0.7 0.4
- --------------------------------------------------------------------------------------------------------
</TABLE>
Net income from Other Activities includes unallocated revenue and expense as
well as earnings associated with capital not required by specific business
units.
6
<PAGE>
EARNINGS ANALYSIS
Summary
The Corporation reported record earnings of $1.38 per share for the second
quarter of 1998. Net income was $408 million, compared with $378 million, or
$1.20 per share, for the year-ago quarter. Return on common stockholders' equity
was 20.1%, compared with 18.1% a year ago. Earnings for the first six months of
1998 were $791 million, or $2.68 per share, up from $758 million, or $2.37 per
share, a year ago.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except per-share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income--tax-equivalent basis........... $ 898 $ 951 $1,776 $1,858
Provision for credit losses......................... 206 180 385 367
Noninterest income.................................. 842 644 1,581 1,323
Operating expense................................... 911 825 1,759 1,625
Net income.......................................... 408 378 791 758
Earnings Per Share
Basic............................................. $ 1.41 $ 1.22 $ 2.73 $ 2.41
Average shares (in millions)...................... 287.4 306.8 287.8 309.4
Assuming full dilution............................ $ 1.38 $ 1.20 $ 2.68 $ 2.37
Average shares (in millions)...................... 292.6 310.9 292.8 315.9
Return on assets.................................... 1.40% 1.40% 1.39% 1.43%
Return on common stockholders' equity............... 20.1 18.1 20.0 17.9
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Second-quarter 1998 highlights were:
. Adjusted fee-based revenue rose 19% from a year ago, reflecting increases
from all of the Corporation's business lines. Credit card fee revenue was
up significantly from a year ago, a result of pricing changes included in
recent marketing initiatives.
. Market-driven revenues were $145 million, above the targeted range of $80
million to $100 million per quarter. Combined trading profits reached $52
million, the best quarterly result in more than two years. Equity and
investment securities gains totaled $93 million.
. The Corporation's operating efficiency ratio for the quarter was 52.4%,
reflecting continued expense discipline despite increasing project and
technology-driven expenditures.
. The provision for credit losses on a managed receivables basis was $359
million, compared with $327 million in the first quarter and $351 million
for the year-ago quarter. Improvements in Credit Card were offset by higher
charge-offs associated with Asian exposure.
7
<PAGE>
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.
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 for the second quarter of 1998, compared with $8.5 billion for the
second quarter of 1997.
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.
For the second quarter and first six months of 1998, both adjusted net interest
income and the related net interest margin were below those of a year ago.
Reduced spreads in both the Credit Card and Regional Banking businesses
contributed to these declines. Another contributing factor to the year-to-date
comparisons was the effect of the Corporation's share repurchase plan. In
addition, the increase in the average volume of thinly priced earning assets,
including commercial loans and other short-term assets, contributed to the
decline in net interest margin.
The following charts illustrate trends in net interest income on a tax-
equivalent ("TEA") basis, and in net interest margin, both reported and
adjusted, over the past five quarters.
<TABLE>
<CAPTION>
Net Interest Income-TEA
In Millions
2Q97 3Q97 4Q97 1Q98 2Q98
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reported $ 951 $ 921 $ 888 $ 878 $ 898
Adjusted $1,135 $1,103 $1,068 $1,052 $1,058
</TABLE>
<TABLE>
<CAPTION>
Net Interest Margin
2Q97 3Q97 4Q97 1Q98 2Q98
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Reported 4.12% 3.88% 3.71% 3.67% 3.61%
Adjusted 4.70% 4.47% 4.27% 4.25% 4.14%
</TABLE>
8
<PAGE>
Provision for Credit Losses
Details of the Corporation's credit risk management and performance during the
quarter ended June 30, 1998, are presented in the Credit Risk Management
section, beginning on page 16.
Noninterest Income
The following table provides a breakdown of the components of noninterest income
for both the second quarter and first six months of 1998 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 Six Months Ended Percent
June 30 Increase June 30 Increase
(Dollars in millions) 1998 1997 (Decrease) 1998 1997 (Decrease)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Combined trading profits......................... $ 52 $ 36 44% $ 98 $ 64 53%
Equity securities gains.......................... 87 46 89 145 100 45
Investment securities gains...................... 6 4 50 16 29 (45)
---- ---- ------ ------
Market-driven revenue........................... 145 86 69 259 193 34
Credit card fee revenue (1)...................... 223 191 17 427 390 9
Fiduciary and investment management fees......... 108 99 9 214 204 5
Deposit fees (includes deficient balance fees)... 123 112 10 231 221 5
Other fee-based income........................... 160 115 39 303 219 38
---- ---- ------ ------
Adjusted fee-based revenue...................... 614 517 19 1,175 1,034 14
Other income..................................... 72 25 N/M 106 45 N/M
---- ---- ------ ------
Adjusted noninterest income..................... $831 $628 32 $1,540 $1,272 21
==== ==== ====== ======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net fee revenue related to the securitized receivables, which is excluded
here, totaled $11 million and $16 million for the second quarters of 1998
and 1997, respectively, and $41 million and $51 million for the six months
ended 1998 and 1997, respectively.
Combined trading activities generated gains of $52 million for the second
quarter of 1998, compared with gains of $36 million for the year-ago quarter.
This is the best quarterly result in more than two years. Trading gains were $98
million for the first six months of 1998, compared with $64 million a year ago.
Derivative and foreign-exchange trading activities contributed to the majority
of the increase for both periods.
Equity securities gains were $87 million for the second quarter of 1998,
compared with $46 million for the second quarter of 1997. Equity securities
gains increased $45 million for the first six months of 1998 from the year-ago
period. Second quarter 1998 results included a $65 million gain on the sale of a
single investment in the Corporation's venture capital portfolio.
Adjusted credit card fee revenue was $223 million for the second quarter of
1998, up 17% from $191 million for the year-earlier period, and reflected
pricing changes included in recent marketing initiatives.
Other fee-based income increased significantly for both the second quarter and
first six months of 1998. Strong results from loan syndication activities, cash
management and consumer banking activities contributed to this solid
performance.
Other income in the 1998 second quarter included gains of $35 million related to
the sale of leasing assets and certain retail banking facilities.
9
<PAGE>
The following chart presents market-driven revenue and the major 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.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Noninterest Income
In Millions 2Q97 3Q97 4Q97 1Q98 2Q98
<S> <C> <C> <C> <C> <C>
Market-Driven Revenue 86 68 45 114 145
Adjusted Credit Card Fees 191 198 207 204 223
Serv. Chgs. & Commissions 227 235 261 251 283
Fiduciary & Inv. Mgmt. Fees 99 102 101 106 108
Other Revenue 25 63 90 34 72
Total 628 666 704 709 831
</TABLE>
Operating Expense
Operating expense was $911 million for the second quarter of 1998, up 10%
percent from $825 million in the year-earlier period. For the first six months
of 1998, the year-over-year percentage increase was 8%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Operating Expense Three Months Ended Percent Six Months Ended Percent
June 30 Increase June 30 Increase
(Dollars in millions) 1998 1997 (Decrease) 1998 1997 (Decrease)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits
Salaries.......................... $399 $354 13% $ 761 $ 704 8%
Employee benefits................. 78 72 8 156 147 6
---- ---- ------ ------
Total salaries and benefits..... $477 $426 12 $ 917 $ 851 8
---- ---- ------ ------
Other operating expense
Net premises and equipment expense $117 $115 2% $ 232 $ 235 (1)%
Purchased services................ 92 75 23 169 138 22
Marketing and public relations.... 40 34 18 67 58 16
Amortization of intangible assets. 11 18 (39) 23 36 (36)
Telephone......................... 24 24 - 49 47 4
Freight and postage............... 23 19 21 47 42 12
Travel and entertainment.......... 12 14 (14) 24 26 (8)
Stationery and supplies........... 16 14 14 31 26 19
Software expense.................. 14 11 27 27 20 35
Other............................. 85 75 13 173 146 18
---- ---- ------ ------
Total other operating expense... $434 $399 9 $ 842 $ 774 9
---- ---- ------ ------
Total operating expense......... $911 $825 10% $1,759 $1,625 8%
==== ==== ====== ======
- --------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Several factors contributed to the year-over-year increase in operating expense
for the second quarter and first six months of 1998:
. Continued project work related to the Corporation's Year 2000 compliance
efforts as well as system integration and business reengineering
initiatives.
. Increased marketing costs in the Credit Card business.
. Higher compensation expense, including bonuses and commissions related to
increased fee generation, primarily in the retail and investment management
businesses.
Intangible amortization expense declined in both the second quarter and first
six months of 1998 as certain credit card customer lists became fully amortized.
Despite the increase in operating expense, the operating efficiency ratio for
the first six months of 1998 remained at 52.4%. Overall operating expense levels
and operating efficiency ratios are reflected in the following charts.
[GRAPHS APPEAR HERE]
<TABLE>
<CAPTION>
Operating Expense
In Millions
2Q97 3Q97 4Q97 1Q98 2Q98
<S> <C> <C> <C> <C> <C>
Salaries & Benefits $426 $440 $457 $440 $477
Other Operating $399 $395 $415 $408 $434
Total $825 $835 $872 $848 $911
</TABLE>
<TABLE>
<CAPTION>
Operating Efficiency (1)
2Q97 3Q97 4Q97 1Q98 2Q98
<S> <C> <C> <C> <C> <C>
51.7% 51.5% 54.0% 52.4% 52.4%
</TABLE>
(1) Operating expense as a percentage of total revenue.
Applicable Income Taxes
The Corporation's income tax expense and related effective tax rate are shown in
the table below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes.............. $ 609 $ 564 $1,182 $1,132
Applicable income taxes................. 201 186 391 374
Effective tax rate...................... 33.0% 33.0% 33.1% 33.0%
- -------------------------------------------------------------------------------------
</TABLE>
Tax expense included benefits from tax-exempt income and general business tax
credits partially offset by the effect of nondeductible expenses, including
goodwill.
11
<PAGE>
LIQUIDITY RISK MANAGEMENT
Liquidity risk management encompasses the ability to meet all current and future
financial obligations in a timely manner. The Corporation considers strong
capital ratios, credit quality and core earnings as essential to retaining high
credit ratings and, consequently, cost-effective access to market liquidity.
The Statement of Cash Flows, on page 28, 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 June 30, 1998, 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> <C> <C> <C> <C>
S&P Moody's S&P Moody's
- ------------------------------------------------------------------------------------------------------------------------
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 purchased funds for funding core assets. As of June 30,
1998, its major banking subsidiaries collectively funded 75% of core assets with
core liabilities, accessing the wholesale market for only 25% of core asset
funding needs. By limiting dependence on the wholesale market, the risk of a
disruption to the lending business from an adverse liquidity event is minimized.
The following table shows the total funding source mix for the periods
indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Deposits and Other Purchased Funds
At period end June 30 March 31 December 31 September 30 June 30
(In millions) 1998 1998 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic offices
Demand................................ $ 17,038 $ 16,440 $ 16,069 $ 16,548 $ 17,142
Savings............................... 21,432 21,681 21,437 21,097 21,154
Time
Under $100,000...................... 9,263 9,378 9,507 9,610 9,775
$100,000 and over................... 5,993 5,972 5,671 5,517 5,205
Foreign offices.......................... 15,802 14,699 15,805 14,793 14,742
-------- -------- -------- -------- --------
Total deposits.................. 69,528 68,170 68,489 67,565 68,018
- -----------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities
under repurchase agreements............. 9,869 10,176 9,271 9,650 10,053
Commercial paper......................... 1,253 1,342 1,089 1,344 876
Other short-term borrowings.............. 11,419 9,116 8,621 9,389 8,972
Long-term debt (1)....................... 10,591 10,294 10,088 9,906 9,016
-------- -------- -------- -------- --------
Total other purchased funds..... 33,132 30,928 29,069 30,289 28,917
-------- -------- -------- -------- --------
TOTAL $102,660 $ 99,098 $ 97,558 $ 97,854 $ 96,935
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes trust preferred capital securities.
12
<PAGE>
MARKET RISK MANAGEMENT
Overview
Market risk arises from changes in interest rates, exchange rates, equity prices
and commodity prices. The Corporation has risk management policies to monitor
and limit exposure to market risk. Through its trading activities, the
Corporation strives to take advantage of profit opportunities available in
interest rate and exchange rate movements. In asset and liability management
activities, policies are in place that are designed to minimize structural
interest rate and foreign-exchange rate risk. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified.
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 equity index and
commodity options.
Trading activities are primarily customer-oriented, and trading positions are
established as necessary for customers. In order to accommodate customer demand,
an inventory in capital markets instruments is carried, and access to market
liquidity is maintained by making bid-offer prices to other market makers.
Although these two activities constitute proprietary trading business, they are
essential to providing customers with capital markets products at competitive
prices.
Many trading positions are kept open for brief periods of time, often less than
one day. Other trading positions are held for longer periods, and these
positions are valued at prevailing market rates on a present value basis.
Realized and unrealized gains and losses on these positions are included in
noninterest income as combined trading profits.
The Corporation manages its market risk through a value-at-risk measurement and
control system, and through dollar limits imposed on trading desks and
individual dealers. Value-at-risk is intended to measure the maximum amount of
potential loss in a particular position, given a specified confidence level over
a given period of time. The overall market risk that any business can assume, as
measured by value-at-risk, is approved by the Risk Management Committee of the
Board of Directors. Value-at-risk limits and exposures are monitored in each
significant trading portfolio on a daily basis.
The following table shows the value-at-risk at June 30, 1998, for trading
activities and other activities, primarily certain investment securities
classified as available-for-sale, that are monitored like trading risk.
Value-At-Risk
<TABLE>
<CAPTION>
<S> <C>
June 30, 1998 (In millions)
Individual market risks
Interest rate...................................................................................... $26
Exchange rate...................................................................................... 2
Equity price....................................................................................... 3
Commodity price.................................................................................... -
Risk reduction (due to diversification)............................................................ (3)
---
Aggregate portfolio market risk..................................................................... $28
===
</TABLE>
Trading revenue, which totaled $84 million for the second quarter of 1998 and
$58 million for the year-ago period, includes trading profits and net interest
income.
The value-at-risk calculation measures potential losses in fair value and is
based on a methodology that uses a one-day holding period and a 99.87%
confidence level. Value-at-risk is calculated using various statistical models
and techniques for cash and derivative positions, including options. Through the
use of observed statistical correlations, the Corporation has made attempts to
recognize offsets across different trading portfolios. However, the reported
value-at-risk remains somewhat overstated because not all offsets and
correlations are fully considered in the calculation.
13
<PAGE>
Structural Interest Rate Risk Management
Interest rate risk exposure from the Corporation's non-trading activities is
actively managed, with the goal of minimizing the impact of interest rate
volatility on current earnings and on the market value of equity. The
measurement tools used to monitor the overall interest rate risk exposure of
both the on- and off-balance-sheet positions include static gap analysis,
earnings sensitivity modeling and market value sensitivity (value-at-risk)
analysis.
Static gap analysis is a representation of the net difference between the amount
of assets, liabilities, equity and off-balance-sheet instruments repricing
within a cumulative calendar period. Earnings simulation analysis and value-at-
risk are more dynamic measures designed to capture the interest rate risk of the
embedded option positions that cannot be measured through static gap analysis.
The embedded options include interest rate, prepayment and early withdrawal
options, lagged interest rate changes, administered interest rate products, and
certain off-balance-sheet sensitivities. These positions are complex risk
positions that are difficult to offset completely and, thus, represent the
primary risk of loss to the Corporation.
Earnings sensitivity analysis measures the estimated change to pretax earnings
of various interest rate movements. The Corporation is modeled as an ongoing
business, including assumptions on anticipated changes in balance sheet mix,
planned growth, asset sales and/or asset securitizations. The base case scenario
is established using current market interest rates. The comparative scenarios
assume an immediate parallel shock of the current yield curve in increments of
(plus/minus) 100 basis point and (plus/minus) 200 basis point rate movements.
The comparative interest rate scenarios are used for analytical purposes and do
not necessarily represent management's view of future market movements.
Estimated earnings for each scenario are calculated over a forward-looking 12-
month horizon.
For residential mortgage whole loans and mortgage-backed securities, the
earnings simulation modeling captures the changing prepayment behavior under
changing interest rate environments. Industry estimates are used to dynamically
model the prepayment speeds of the various coupon segments of the portfolio.
Additionally, the model measures the impact of interest rate caps and floors on
adjustable-rate mortgage products.
Management assumptions regarding the level of interest rate or balance changes
on indeterminate maturity deposit products (passbook savings, money market, NOW
and demand deposits) for a given level of market rate changes have been
developed through a combination of historical analysis and future expected
pricing behavior. Interest rate caps and floors on all products are included to
the extent that they are exercised in the 12-month simulation period.
Sensitivity of service fee income to market interest rate levels, such as those
related to securitized credit card receivables, cash management products and
mortgage servicing, is included as well. Interest rate risk in trading
activities and other activities, primarily certain investment securities
classified as available-for-sale, is managed principally as trading risk.
The Corporation's policy is to limit the change in annual pretax earnings to
$100 million from an immediate parallel change in interest rates of 200 basis
points. As of June 30, 1998, 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........................... $31 $(19)
- --------------------------------------------------------------------------------------------
</TABLE>
While the earnings sensitivity analysis includes management's best estimate of
interest rate and balance sheet reaction to various market rate movements, the
actual behavior will likely differ from that projected. Recalibration of the
assumptions and adjustments to the modeling techniques are made as needed to
improve the accuracy of the risk measurement results. Interpretation of the
results must also consider that the actual movements of the market interest
rates can include changes in the shape of the yield curve and changes in the
basis relationship between various market rates, neither of which is captured in
the sensitivity measure. Finally, for some embedded option positions, the risk
exposure occurs at a time period beyond the 12 months captured in the earnings
sensitivity analysis. Management utilizes the value-at-risk technique to measure
these longer-term risk positions.
14
<PAGE>
Access to the derivatives market is an important element in maintaining the
Corporation's interest rate risk position within policy guidelines. In general,
the assets and liabilities generated through ordinary business activities do not
naturally create offsetting positions with respect to repricing or maturity
characteristics. Using off-balance-sheet instruments, principally interest rate
swaps (asset and liability management ["ALM"] derivatives), the interest rate
sensitivity of specific on-balance-sheet transactions, as well as pools of
assets or liabilities, is adjusted to maintain the desired interest rate risk
profile. At June 30, 1998, the notional value of ALM interest rate swaps
totaled $8.488 billion, including $4.737 billion against specific transactions
and $3.751 billion against specific pools of assets or liabilities.
<TABLE>
<CAPTION>
Asset and Liability Management Derivatives--Notional Principal
- ------------------------------------------------------------------------------------------------------
June 30, 1998 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................................ $ - $ 461 $ 70 $ - $ - $ 531
Investment securities................ - - 203 - - 203
Deposits............................. 20 2,488 - - - 2,508
Funds borrowed (including
long-term debt).................... 4,069 - 375 100 702 5,246
------ ------ ---- ---- ---- ------
Total............................ $4,089 $2,949 $648 $100 $702 $8,488
====== ====== ==== ==== ===== ======
Other ALM Contracts (1)....................................................................... $2,161
======
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Primarily reflects the use of forward contracts.
Swaps used to adjust the interest rate sensitivity of specific transactions will
not need to be replaced at maturity since the corresponding asset or liability
will mature along with the swap. However, swaps against the asset and liability
pools will have an impact on the overall risk position as they mature and may
need to be reissued to maintain the same interest rate risk profile. These
swaps could create modest earnings sensitivity to changes in interest rates.
Substantially all ALM interest rate swaps are standard swap contracts.
Contractual maturities and weighted average pay and receive rates for the ALM
swap position at June 30, 1998, are summarized below. The variable interest
rates--which generally are the prime rate, federal funds rate or the one-month,
three-month and six-month London interbank offered rates ("LIBOR") in effect on
the date of repricing--are assumed to remain constant. However, the variable
interest rates will change and consequently will affect the related weighted
average information presented in the table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Asset and Liability Management Swaps--Maturities and Rates
(Dollars in millions) 1998 1999 2000 2001 2002 Thereafter Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay
floating swaps
Notional amount....... $ 867 $2,127 $ 779 $1,210 $ 386 $1,669 $7,038
Weighted average
Receive rate........ 6.21% 5.99% 6.17% 6.68% 7.56% 6.62% 6.39%
Pay rate............ 5.78% 5.78% 5.80% 5.80% 5.83% 5.80% 5.79%
Pay fixed/receive
floating swaps
Notional amount....... $ 50 $ 87 $ 241 $ 37 $ 291 $ 42 $ 748
Weighted average
Receive rate........ 5.84% 5.81% 5.72% 5.81% 5.77% 5.78% 5.76%
Pay rate............ 8.15% 7.91% 6.56% 7.46% 6.48% 7.34% 6.88%
Basis swaps
Notional amount......... $ 150 $ 355 $ 197 $ - $ - $ - $ 702
Weighted average
Receive rate.......... 5.79% 5.79% 5.78% - - - 5.79%
Pay rate.............. 5.78% 5.77% 5.78% - - - 5.77%
- --------------------------------------------------------------------------------------------
Total notional amount..... $1,067 $2,569 $1,217 $1,247 $ 677 $1,711 $8,488
- --------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Foreign Exchange Risk Management
Whenever possible, foreign currency-denominated assets are funded with liability
instruments denominated in the same currency. If a liability denominated in the
same currency is not immediately available or desired, a forward foreign
exchange contract is used to fully hedge the risk due to cross-currency funding.
To minimize the earnings and capital impact of translation gains or losses
measured on an after-tax basis, the Corporation uses forward foreign exchange
contracts to hedge the exposure created by investments in overseas branches and
subsidiaries.
CREDIT RISK MANAGEMENT
The Corporation has developed policies and procedures to manage the level and
composition of risk in its credit portfolio. The objective of this process is
to quantify and manage credit risk on a portfolio basis as well as to reduce the
risk of a loss resulting from a customer's failure to perform according to the
terms of a transaction.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Selected Statistical Information June 30 March 31 December 31 September 30 June 30
(Dollars in millions) 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At period-end
Loans outstanding............................. $72,563 $69,590 $68,724 $67,822 $67,510
Nonperforming loans........................... 293 352 311 330 329
Other real estate, net........................ 13 12 15 15 14
Nonperforming assets.......................... 306 364 326 345 343
Allowance for credit losses................... 1,408 1,408 1,408 1,408 1,408
Nonperforming assets/loans outstanding
and other real estate, net................... 0.4% 0.5% 0.5% 0.5% 0.5%
Allowance for credit losses/loans
outstanding.................................. 1.9 2.0 2.0 2.1 2.1
Allowance for credit losses/nonperforming
loans........................................ 481 400 453 427 428
For the quarter ended
Average loans................................. $69,748 $67,773 $66,859 $66,782 $66,301
Net charge-offs............................... 206 179 167 191 180
Net charge-offs/average loans................. 1.2% 1.1% 1.0% 1.1% 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>
- ------------------------------------------------------------------------------------------------------------------------------
June 30 March 31 December 31 September 30 June 30
Loan Composition (In millions) 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial risk
Domestic
Commercial......................... $31,638 $30,020 $28,939 $27,685 $27,851
Real estate
Construction..................... 1,480 1,402 1,380 1,292 1,272
Other............................ 5,315 5,257 5,324 5,269 5,309
Lease financing.................... 2,204 2,192 2,144 2,003 1,954
Foreign.............................. 4,971 5,060 4,515 4,168 4,362
------- ------- ------- ------- -------
Total commercial............... 45,608 43,931 42,302 40,417 40,748
------- ------- ------- ------- -------
Consumer risk
Credit cards......................... 9,246 8,952 9,693 9,720 9,031
Secured by real estate (1)........... 10,363 9,192 8,911 9,715 9,698
Automotive (2)....................... 3,558 3,814 4,040 4,203 4,306
Other................................ 3,788 3,701 3,778 3,767 3,727
------- ------- ------- ------- -------
Total consumer................. 26,955 25,659 26,422 27,405 26,762
------- ------- ------- ------- -------
Total.......................... $72,563 $69,590 $68,724 $67,822 $67,510
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes home equity loans.
(2) Includes auto-lease receivables.
16
<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 on prevailing economic conditions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses June 30 March 31 December 31 September 30 June 30
(In millions) 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of quarter...... $1,408 $1,408 $1,408 $1,408 $1,408
- ------------------------------------------------------------------------------------------------------------------------
Provision for credit losses........ 206 179 167 191 180
- ------------------------------------------------------------------------------------------------------------------------
Charge-offs
Commercial
Domestic
Commercial................... 32 30 31 39 33
Real estate.................. 2 1 1 3 4
Lease financing.............. 2 2 1 2 -
Foreign........................ 30 10 - - -
Consumer
Credit card.................... 162 160 161 159 170
Other.......................... 24 30 32 29 27
------ ------ ------ ------ ------
Total charge-offs............ 252 233 226 232 234
- ------------------------------------------------------------------------------------------------------------------------
Recoveries
Commercial
Domestic
Commercial................... 8 15 23 9 21
Real estate.................. 3 4 4 7 6
Lease financing.............. 1 - - - 1
Foreign........................ - - 9 1 -
Consumer
Credit card (1)................ 24 25 14 15 15
Other.......................... 10 10 9 9 11
------ ------ ------ ------ ------
Total recoveries............. 46 54 59 41 54
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs.................... 206 179 167 191 180
------ ------ ------ ------ ------
Balance, end of quarter............ $1,408 $1,408 $1,408 $1,408 $1,408
====== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes amounts related to the sale of recovery rights for both the first
and second quarter of 1998. Second quarter 1998 results include $5 million,
and first quarter 1998 includes $12 million of such sales.
17
<PAGE>
Nonperforming Assets
Nonperforming assets at June 30, 1998, were $306 million, or 0.4% of total loans
and other real estate, compared with $326 million, or 0.5% at December 31, 1997.
The following charts illustrate the trends in this area for the periods
indicated.
Nonperforming Assets-Period End
(IN MILLIONS)
[Bar Chart Appears Here]
6/30/97 9/30/97 12/31/97 3/31/98 6/30/98
.Loans $329 $330 $311 $352 $293
.OREO $ 14 $ 15 $ 15 $ 12 $ 13
.Total $343 $345 $326 $364 $306
Nonperforming Assets as a Percentage of
Loans and Other Real Estate-Period End
[Bar Chart Appears Here]
6/30/97 0.5%
9/30/97 0.5%
12/31/97 0.5%
3/31/98 0.5%
6/30/98 0.4%
Consumer Risk Management
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Consumer Loans June 30 March 31 December 31 September 30 June 30
(In millions) 1998 1998 1997 1997 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Credit card loans............................ $ 9,246 $ 8,952 $ 9,693 $ 9,720 $ 9,031
Securitized credit card receivables.......... 7,914 8,264 8,639 7,847 8,221
------- ------- ------- ------- -------
Total managed credit card receivables..... 17,160 17,216 18,332 17,567 17,252
Other consumer loans
Secured by real estate (1).................. 10,363 9,192 8,911 9,715 9,698
Automotive (2).............................. 3,558 3,814 4,040 4,203 4,306
Other....................................... 3,788 3,701 3,778 3,767 3,727
------- ------ ------- ------- -------
Other consumer loans...................... 17,709 16,707 16,729 17,685 17,731
------- ------- ------- ------- ------
Total managed consumer loans................ $34,869 $33,923 $35,061 $35,252 $34,983
======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes home equity loans.
(2) Includes auto-lease receivables.
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 6.9%
for the second quarter of 1998, down from 7.6% for the year-ago quarter but up
seasonally from 6.7% for the first quarter of 1998. The Corporation continues to
aggressively manage its credit and collection policies in this business.
18
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Credit Card Receivables Three Months Ended
June 30 March 31 December 31 September 30 June 30
(Dollars in millions) 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average balances:
Credit card loans............................ $ 8,992 $ 9,081 $ 8,894 $ 9,147 $ 8,613
Securitized credit card receivables.......... 8,136 8,501 8,505 8,092 8,460
------- ------- ------- ------- -------
Total average managed credit card
receivables............................ $17,128 $17,582 $17,399 $17,239 $17,073
======= ======= ======= ======= =======
Total net charge-offs (including
securitizations)........................... $ 292 $ 283 $ 308 $ 293 $ 326
======= ======= ======= ======= =======
Net charge-offs/average total managed
receivables (1)............................ 6.9% 6.7% 7.1% 6.8% 7.6%
======= ======= ======= ======= =======
Credit Card Delinquency Rate--
Managed Receivables-Period End
30 or more days.......................... 3.7% 4.1% 4.3% 4.5% 4.3%
90 or more days.......................... 1.5 1.8 1.7 1.8 1.7
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) June 30, 1998, and March 31, 1998, excludes $5 million and $12 million,
respectively, from the sale of recovery rights related to charged-off
accounts.
Credit card receivables generally are charged off no later than 180 days past
due, or earlier in the event of bankruptcy.
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 $45.6 billion at June 30, 1998, up 8% from December 31,
1997, and up 12% from June 30, 1997.
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 second quarter, net charge-offs in the commercial portfolio were $54
million, a portion of which was due to Asian-related exposure. Nonperforming
commercial assets totaled $306 million at June 30, 1998, compared with $343
million a year ago and $326 million at year-end 1997.
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 $6.8 billion at June 30, 1998, compared
with $6.6 billion a year ago and $6.7 billion at year-end 1997.
During the second quarter, net recoveries in the commercial real estate
portfolio were $1 million. Nonperforming commercial real estate assets,
including other real estate, totaled $72 million at June 30, 1998, compared with
$85 million a year ago and $77 million at year-end 1997.
19
<PAGE>
Foreign Outstandings
The table below presents a breakout of foreign outstandings for June 30, 1998,
and December 31, 1997, where such outstandings exceed 1.0% of total assets. The
amounts have been prepared using the Federal Financial Institutions Examination
Council's reporting guidelines. Under these guidelines, local country claims,
which include both local and nonlocal currency activity, are reported net of
local country liabilities. Included in claims are loans, balances with banks,
acceptances, securities, equity investments, current credit exposure under
derivative contracts - net of master netting agreements, accrued interest, and
other monetary assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Cross-Border Claims
-------------------------------------------
Total Cross
Governments Net Local Border & Net
& Official Country Local Country
(In millions) Banks Institutions Other Claims Claims
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan (1)....... June 30, 1998 $2,317 $ - $465 $ - $2,782
Dec. 31, 1997 4,225 - 386 - 4,611
France.......... June 30, 1998 1,775 233 164 - 2,172
Dec. 31, 1997 1,137 231 249 - 1,617
Germany (2)..... June 30, 1998 926 305 120 - 1,351
Dec. 31, 1997 * * * * *
Korea (3)....... June 30, 1998 * * * * *
Dec. 31, 1997 570 10 685 256 1,521
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At June 30, 1998, and December 31, 1997, net local country claims were
reduced by local country liabilities of $132 million and $83 million,
respectively.
(2) At June 30, 1998, net local country claims were reduced by local country
liabilities of $121 million.
(3) At December 31, 1997, net local country claims were reduced by local
country liabilities of $31 million.
* Represents less than 1% of total assets.
At June 30, 1998, the only countries for which cross-border and net local
country claims totaled between 0.75% and 1.0% of total assets were the United
Kingdom and Korea. Such outstandings totaled $1.958 billion.
At December 31, 1997, the only country for which cross-border and net local
country claims totaled between 0.75% and 1.0% of total assets was the
Netherlands. Such outstandings totaled $1.114 billion.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses a variety of derivative financial instruments in its
trading, asset and liability management, and Corporate Investment activities.
These instruments include interest rate, currency, equity and commodity swaps,
forwards, spot, futures, options, caps, floors, forward rate agreements, and
other conditional or exchange contracts, and include both exchange-traded and
over-the-counter contracts.
The Corporation uses interest rate derivative financial instruments to reduce
structural interest rate risk and the volatility of net interest margin. The net
interest margin reflects the effective use of these derivatives. Without their
use, net interest income would have been lower by $5 million for the second
quarter of 1998 and by $10 million for the second quarter of 1997.
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.
20
<PAGE>
The table below shows the impact of these master netting agreements at June 30,
1998, and December 31, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
June 30 December 31
(In millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross replacement cost................................................... $14,905 $14,675
Less: Adjustment due to master netting agreements....................... 10,572 10,035
------- -------
Current credit exposure.................................................. 4,333 4,640
Less: Unrecognized net gains due to nontrading activity................. 83 93
------- -------
Balance sheet exposure................................................... $ 4,250 $ 4,547
======= =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The $4.3 billion of total current credit exposure at June 30, 1998, 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 in asset and liability management
activities to arrive at the balance sheet exposure.
Since a derivative's replacement cost, measured by its fair value, is subject to
change over the contract's life, the Corporation's evaluation of credit risk
incorporates potential increases to the contract's fair value. Potential
exposure is calculated with a statistical model that estimates changes over time
in 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 $8.0 billion higher than the current
exposure at June 30, 1998, and $6.9 billion higher at December 31, 1997.
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, nearly 800 existing business system applications. The cost of the Year 2000
compliance program is estimated at $125 million, of which approximately $79
million was incurred by June 30, 1998. Such costs are charged to expense as
incurred. The Corporation currently anticipates that substantially all of the
remaining systems remediation, including testing and returning applications to
production, will be completed by the end of 1998. Testing of internal and
external systems interfaces started in mid 1998 and will continue into 1999.
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 (e.g., vendors and customers) not
affiliated with the Corporation do not appropriately address their Year 2000
compliance issues. The Corporation is working extensively with outside entities
to ensure that their systems will be Year 2000 compliant.
21
<PAGE>
CAPITAL MANAGEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Selected Capital Ratios June 30 March 31 December 31 September 30 June 30 Corporate
1998 1998 1997 1997 1997 Guideline
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common equity/total assets............ 6.8% 6.8% 6.8% 6.9% 7.3% N/A
Tangible common equity ratio.......... 6.4 6.5 6.5 6.5 6.9 N/A
Stockholders' equity/total assets..... 6.9 7.0 7.0 7.1 7.5 N/A
Risk-based capital ratios (1)(2)
Tier 1............................ 7.7 7.8 7.9 8.1 8.6 7-8%
Total............................. 11.1 11.4 11.7 11.9 12.4 11-12%
Regulatory leverage ratio (1)(2)...... 7.6 7.6 7.8 8.2 8.6 5.5-7%
Double leverage ratio (2)............. 116 117 117 118 111 less than or equal to 120%
Dividend payout ratio................. 31.9 33.8 34.4 31.7 33.3 30-40%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) December 1997 and subsequent ratios include activities of FCCM.
(2) Includes trust preferred capital securities.
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.
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, currently managed to
average 8% over the course of a year, 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
On April 10, 1998, the Corporation rescinded its stock repurchase program due to
the pending merger with BANC ONE CORPORATION.
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 that this goal is met, target ranges of 7% to 8% have been established
for Tier 1 capital and 11% to 12% for total risk-based capital. The
Corporation's risk-based capital ratios for Tier 1 and total capital exceeded
the regulatory well-capitalized guidelines of 6% and 10%, respectively.
22
<PAGE>
Tier 1 and Total Capital Ratios--Period End
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
6/30/97 12/30/97 6/30/98
------- -------- -------
<S> <C> <C> <C>
Tier 1.......................... 8.6% 7.9% 7.7%
Total........................... 12.4% 11.7% 11.1%
Regulatory Guidelines (Tier 1).. 6.0% 6.0% 6.0%
Regulatory Guidelines (Total)... 10.0% 10.0% 10.0%
</TABLE>
The following table shows the components of the Corporation's regulatory risk-
based capital and risk-weighted assets for the periods indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
June 30 December 31 June 30
(In millions) 1998 1997 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Regulatory Risk-Based Capital
Tier 1 capital................................ $ 8,848 $ 8,541 $ 8,930
Tier 2 capital and other adjustments.......... 3,930 4,118 4,009
-------- -------- --------
Total capital................................ $ 12,778 $ 12,659 $ 12,939
======== ======== ========
Total risk-weighted assets.................... $114,772 $108,583 $104,095
======== ======== ========
- -----------------------------------------------------------------------------------
</TABLE>
Included in Tier 1 capital are trust preferred capital securities totaling $996
million for each of the periods shown above.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Intangible Assets June 30 December 31 June 30
(In millions) 1998 1997 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill...................................... $ 401 $ 365 $ 381
Other nonqualifying intangibles............... 2 3 3
----- ----- -----
Subtotal..................................... 403 368 384
Qualifying intangibles........................ 72 64 52
----- ----- -----
Total intangibles............................ $ 475 $ 432 $ 436
===== ===== =====
- ----------------------------------------------------------------------------------
</TABLE>
Tier 1 and total capital have been reduced by goodwill and other nonqualifying
intangible assets, which totaled $403 million at June 30, 1998, $368 million at
December 31, 1997, and $384 million at June 30, 1997.
23
<PAGE>
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
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 1998
Risk-based capital ratios
Tier 1 capital................... 7.6% 8.1% 12.7% 8.2% 8.7%
Total capital.................... 11.2 11.7 15.2 11.2 11.7
Regulatory leverage ratio........... 7.5 8.0 13.3 8.9 8.0
- ------------------------------------------------------------------------------------------------------------
NBD NBD
FNBC Michigan FCCNB ANB Indiana
- ------------------------------------------------------------------------------------------------------------
December 31, 1997
Risk-based capital ratios
Tier 1 capital................... 7.7% 9.0% 11.6% 8.5% 8.4%
Total capital.................... 11.0 13.5 14.3 11.7 11.3
Regulatory leverage ratio........... 7.6 8.9 12.6 9.3 7.8
- ------------------------------------------------------------------------------------------------------------
NBD NBD
FNBC Michigan FCCNB ANB Indiana
- ------------------------------------------------------------------------------------------------------------
June 30, 1997
Risk-based capital ratios
Tier 1 capital.................... 7.6% 9.9% 11.7% 8.4% 9.8%
Total capital..................... 11.3 14.3 14.5 11.6 11.1
Regulatory leverage ratio........... 7.4 10.0 12.2 9.2 9.0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Amendments to the risk-based capital requirements, incorporating market risk,
became effective January 1, 1998. Under the new market risk requirements,
capital is allocated to support the amount of market risk related to ongoing
trading activities. The June 30, 1998, capital ratios for the Corporation and
FNBC have been prepared using the new market risk rules. The other banking units
were not subject to the market risk rules, due to their limited trading
activities.
24
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Consolidated Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30
(Dollars in millions) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and due from banks..................................................... $ 8,049 $ 7,223 $ 7,969
Interest-bearing due from banks............................................. 5,588 6,904 7,705
Federal funds sold and securities under resale agreements................... 7,982 8,501 8,185
Trading assets.............................................................. 4,128 4,198 4,752
Derivative product assets................................................... 4,250 4,547 3,761
Securities available for sale............................................... 12,604 9,330 8,265
Loans (net of unearned income--$937, $961 and $954, respectively)........... 72,563 68,724 67,510
Less allowance for credit losses......................................... (1,408) (1,408) (1,408)
------------ ------------ ------------
Loans, net............................................................... 71,155 67,316 66,102
Premises and equipment...................................................... 1,448 1,439 1,407
Customers' acceptance liability............................................. 366 708 661
Other assets................................................................ 4,211 3,930 3,788
------------ ------------ ------------
Total assets.......................................................... $ 119,781 $ 114,096 $ 112,595
============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Demand................................................................... $ 17,038 $ 16,069 $ 17,142
Savings.................................................................. 21,432 21,437 21,154
Time..................................................................... 15,256 15,178 14,980
Foreign offices.......................................................... 15,802 15,805 14,742
------------ ------------ ------------
Total deposits........................................................ 69,528 68,489 68,018
Federal funds purchased and securities under repurchase agreements.......... 9,869 9,271 10,053
Other short-term borrowings................................................. 12,672 9,710 9,848
Long-term debt.............................................................. 9,595 9,092 8,020
Guaranteed preferred beneficial interest in the Corporation's junior 996 996 996
subordinated debt..........................................................
Acceptances outstanding..................................................... 366 708 661
Derivative product liabilities.............................................. 4,307 4,616 3,844
Other liabilities........................................................... 4,134 3,254 2,684
------------ ------------ ------------
Total liabilities..................................................... 111,467 106,136 104,124
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock............................................................. 190 190 290
Common stock--$1 par value.................................................. 320 320 320
June 30, 1998 Dec. 31, 1997 June 30, 1997
------------- ------------- -------------
Number of shares authorized....... 750,000,000 750,000,000 750,000,000
Number of shares issued........... 319,508,976 319,509,114 319,509,163
Number of shares outstanding...... 287,743,039 289,137,449 302,064,635
Surplus..................................................................... 1,948 1,966 1,985
Retained earnings........................................................... 7,977 7,446 6,933
Accumulated other adjustments to stockholders' equity....................... 66 55 24
Deferred compensation....................................................... (112) (79) (87)
Treasury stock at cost--31,765,937; 30,371,665; and 17,444,528 shares, (2,075) (1,938) (994)
respectively............................................................... ------------ ------------ ------------
Stockholders' equity.................................................. 8,314 7,960 8,471
------------ ------------ ------------
Total liabilities and stockholders' equity............................ $ 119,781 $ 114,096 $ 112,595
============ ============ ============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Consolidated Income Statement
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(In millions, except per-share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees..................................................... $1,501 $1,484 $2,961 $2,885
Bank balances............................................................. 85 114 186 210
Federal funds sold and securities under resale agreements................. 99 77 188 142
Trading assets............................................................ 68 67 139 136
Securities available for sale--taxable.................................... 133 89 253 167
Securities available for sale--tax-exempt................................. 25 29 48 54
------ ------ ------ ------
Total................................................................ 1,911 1,860 3,775 3,594
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits.................................................................. 562 544 1,120 1,043
Federal funds purchased and securities under repurchase agreements........ 141 124 283 238
Other short-term borrowings............................................... 154 121 285 223
Long-term debt............................................................ 170 146 342 289
------ ------ ------ ------
Total................................................................ 1,027 935 2,030 1,793
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income....................................................... 884 925 1,745 1,801
Provision for credit losses............................................... 206 180 385 367
------ ------ ------ ------
Net Interest Income After Provision for Credit Losses..................... 678 745 1,360 1,434
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Combined trading profits.................................................. 52 36 98 64
Equity securities gains................................................... 87 46 145 100
Investment securities gains............................................... 6 4 16 29
------ ------ ------ ------
Market-driven revenue................................................ 145 86 259 193
------ ------ ------ ------
Credit card fee revenue................................................... 234 207 468 441
Fiduciary and investment management fees.................................. 108 99 214 204
Service charges and commissions........................................... 283 227 534 440
------ ------ ------ ------
Fee-based revenue.................................................... 625 533 1,216 1,085
------ ------ ------ ------
Other income.............................................................. 72 25 106 45
------ ------ ------ ------
Total................................................................ 842 644 1,581 1,323
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and employee benefits............................................ 477 426 917 851
Net premises and equipment expense........................................ 117 115 232 235
Other..................................................................... 317 284 610 539
------ ------ ------ ------
Total................................................................ 911 825 1,759 1,625
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes................................................ 609 564 1,182 1,132
Applicable income taxes................................................... 201 186 391 374
------ ------ ------ ------
Net Income................................................................ $ 408 $ 378 $ 791 $ 758
====== ====== ====== ======
Net Income Attributable to Common Stockholders' Equity.................... $ 404 $ 373 $ 785 $ 746
====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic................................................................ $1.41 $1.22 $2.73 $2.41
Diluted.............................................................. $1.38 $1.20 $2.68 $2.37
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Preferred Stock
Balance, beginning of period......................................................... $ 190 $ 444
Conversion of preferred stock........................................................ - (154)
------- -------
Balance, end of period............................................................... 190 290
------- -------
Common Stock
Balance, beginning of period......................................................... 320 320
Issuance of stock.................................................................... - -
------- -------
Balance, end of period............................................................... 320 320
------- -------
Capital Surplus
Balance, beginning of period......................................................... 1,966 2,149
Issuance of treasury stock........................................................... (48) (55)
Conversion of preferred stock........................................................ - (138)
Other................................................................................ 30 29
------- -------
Balance, end of period............................................................... 1,948 1,985
------- -------
Retained Earnings
Balance, beginning of period......................................................... 7,446 6,433
Net income........................................................................... 791 758
Cash dividends declared on common stock.............................................. (254) (246)
Cash dividends declared on preferred stock........................................... (6) (12)
------- -------
Balance, end of period............................................................... 7,977 6,933
------- -------
Accumulated Other Adjustments To Stockholders' Equity
Fair Value Adjustment on Securities Available for Sale
Balance, beginning of period......................................................... 49 38
Change in fair value (net of taxes) and other........................................ 11 (20)
------- -------
Balance, end of period............................................................... 60 18
------- -------
Accumulated Translation Adjustment
Balance, beginning of period......................................................... 6 7
Translation gain (loss), net of taxes................................................ - (1)
------- -------
Balance, end of period............................................................... 6 6
------- -------
Total Accumulated Other Adjustments To Stockholders' Equity............................. 66 24
------- -------
Deferred Compensation
Balance, beginning of period......................................................... (79) (58)
Awards granted, net.................................................................. (56) (42)
Amortization of deferred compensation................................................ 29 19
Other................................................................................ (6) (6)
------- -------
Balance, end of period............................................................... (112) (87)
------- -------
Treasury Stock
Balance, beginning of period......................................................... (1,938) (326)
Purchase of common stock............................................................. (229) (1,056)
Conversion of preferred stock........................................................ - 292
Issuance of stock.................................................................... 92 96
------- -------
Balance, end of period............................................................... (2,075) (994)
------- -------
Total Stockholders' Equity, end of period............................................... $ 8,314 $ 8,471
======= =======
Total Net Income and Accumulated Other Adjustments To Stockholders' Equity.............. $ 802 $ 737
======= =======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
(In millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................................................. $ 791 $ 758
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................................... 95 123
Provision for credit losses............................................................. 385 367
Equity securities gains................................................................. (145) (100)
Net (increase) decrease in net derivative product balances.............................. (12) 304
Net (increase) decrease in trading assets............................................... 4 (16)
Net (increase) decrease in loans held for sale.......................................... (146) 60
Net (increase) decrease in accrued income receivable.................................... 17 (36)
Net increase (decrease) in accrued expenses payable..................................... 823 (50)
Net (increase) decrease in other assets................................................. 50 (471)
Other noncash adjustments............................................................... (34) (36)
-------- -------
Total adjustments....................................................................... 1,037 145
Net cash provided by operating activities.................................................. 1,828 903
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net (increase) decrease in federal funds sold and securities under resale agreements....... 519 (3,988)
Purchase of investment securities--available-for-sale...................................... (10,026) (5,220)
Purchase of equity securities--fair value.................................................. (1,165) (51)
Proceeds from maturities of debt securities--available-for-sale............................ 995 639
Proceeds from sales of investment securities--available-for-sale........................... 5,945 3,478
Proceeds from sales of equity securities--fair value....................................... 1,174 126
Net (increase) in loans.................................................................... (4,362) (1,600)
Loan recoveries............................................................................ 101 92
Net proceeds from sales of assets held for accelerated disposition......................... - 1
Purchases of premises and equipment........................................................ (121) (88)
Proceeds from sales of premises and equipment.............................................. 72 9
Net cash and cash equivalents due to acquisitions and dispositions......................... (27) -
-------- -------
Net cash (used in) investing activities.................................................... (6,895) (6,602)
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase in deposits................................................................... 799 4,367
Net increase in federal funds purchased and securities under repurchase
agreements.............................................................................. 597 2,193
Net increase in other short-term borrowings................................................ 2,962 2,276
Proceeds from issuance of long-term debt................................................... 9,908 5,578
Repayment of long-term debt................................................................ (9,411) (4,922)
Net (decrease) in other liabilities........................................................ (194) (47)
Dividends paid............................................................................. (271) (265)
Repurchase of common stock................................................................. (229) (1,056)
-------- -------
Net cash provided by financing activities.................................................. 4,161 8,124
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents............................... 416 (48)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents....................................... (490) 2,377
Cash and cash equivalents at beginning of period........................................... 14,127 13,297
-------- -------
Cash and cash equivalents at end of period................................................. $ 13,637 $15,674
======== =======
- --------------------------------------------------------------------------------------------------------------------------
</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 quarter of 1997,
$154 million of the Corporation's 53/4% Cumulative Convertible Preferred Stock,
Series B, was converted into common stock; such issuance was redeemed in April
1997.
28
<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
- ------
In December 1997, the Corporation adopted SFAS No. 128 "Earnings Per Share," as
required, and all prior periods presented were restated. Basic EPS is computed
by dividing income available to common stockholders by the average number of
common shares outstanding for the period. The Statement also requires
presentation of EPS assuming full dilution. The diluted EPS calculation
includes net shares that may be issued under the Employee Stock Purchase and
Savings Plan, outstanding stock options, and common shares that would result
from the conversion of convertible preferred stock. In the diluted calculation,
income available to common stockholders is not reduced by preferred stock
dividend requirements related to convertible preferred stock, since such
dividends would not be paid if the preferred stock were converted to common
stock.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in millions, except per-share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic
Net income................................................... $ 408 $ 378 $ 791 $ 758
Preferred stock dividends.................................... (4) (5) (6) (12)
-------- -------- -------- --------
Net income attributable to common stockholders' equity....... $ 404 $ 373 $ 785 $ 746
======== ======== ======== ========
Diluted
Net income................................................... $ 408 $ 378 $ 791 $ 758
Preferred stock dividends, excluding convertible Series B,
where applicable............................................ (4) (5) (6) (10)
-------- -------- -------- --------
Diluted income available to common stockholders.............. $ 404 $ 373 $ 785 $ 748
======== ======== ======== ========
(In thousands)
Average shares outstanding.................................... 287,444 306,754 287,783 309,425
Dilutive Shares
Employee Stock Purchase and Savings Plan..................... 1,401 788 1,335 784
Stock options................................................ 3,736 3,387 3,703 3,532
Convertible preferred stock.................................. - - - 2,118
Average shares outstanding assuming full dilution............. 292,581 310,929 292,821 315,859
======== ======== ======== ========
Basic........................................................ $ 1.41 $ 1.22 $ 2.73 $ 2.41
======== ======== ======== ========
Diluted...................................................... $ 1.38 $ 1.20 $ 2.68 $ 2.37
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Note 3
- ------
At June 30, 1998, credit card receivables aggregated $9.2 billion. These
receivables are available for sale through credit card securitization programs.
Note 4
- ------
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. The Statement defines comprehensive income as including net
income and certain other items that affect stockholders' equity. The other
items include "fair value adjustment on investment securities available for
sale" and "accumulated translation adjustment," which are reported in
"Accumulated other adjustments to stockholders' equity" on the Corporation's
Consolidated Balance Sheet. The Corporation has elected to disclose these items
in its Consolidated Statement of Stockholders' Equity. Since the Statement
solely relates to display and disclosure requirements, it has no effect on the
Corporation's financial results.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes new accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those derivatives at fair value.
The accounting for the gains or losses resulting from changes in the value of
those derivatives will depend on the intended use of the derivative and whether
it qualifies for hedge accounting. This Statement will significantly change the
accounting treatment for derivatives the Corporation uses in its asset and
liability management activities. The Corporation is required to adopt this
Statement on January 1, 2000. The Corporation is in the process of evaluating
the impact of this new Statement.
Note 5
- ------
The carrying values and estimated fair values of financial instruments as of
June 30, 1998, have not materially changed on a relative basis from the carrying
values and estimated fair values of financial instruments disclosed as of
December 31, 1997, in the Corporation's Annual Report.
Note 6
- ------
Nonperforming loans are generally identified as "impaired loans". The recorded
investment in loans considered impaired was $293 million and $329 million at
June 30, 1998, and June 30, 1997, respectively. The required allowance for
credit losses related to these loans was $57 million and $46 million at June 30,
1998, and June 30, 1997, respectively. Substantially all of the impaired loans
on both dates required the establishment of an allocated reserve.
The following table summarizes additional information related to impaired loans.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(In millions) June 30 June 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans average balance........................ $334 $267 $341 $262
Interest income recognized on impaired loans.......... 4 4 9 9
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Note 7
- ------
Derivative financial instruments used in trading activities are valued at
estimated fair value. Such instruments include swaps, forwards, spot, futures,
options, caps, floors and forward rate agreements in the interest rate, foreign
exchange, equity and commodity markets. The estimated fair values are based on
quoted market prices or pricing and valuation models on a present value basis
using current market information. Realized and unrealized gains and losses are
included in noninterest income as combined trading profits. Where appropriate,
compensation for credit risk and ongoing servicing is deferred and recorded as
income over the terms of the derivative financial instruments.
Derivative financial instruments used in ALM activities, principally interest
rate swaps, are required to meet specific criteria. Such interest rate swaps
are designated as ALM derivatives; are linked to and adjust the interest rate
sensitivity of a specific asset, liability, firm commitment, or anticipated
transaction or a specific pool of transactions with similar risk
characteristics; and are effective in reducing the Corporation's structural
interest rate risk 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 that exposure, generally assets or liabilities carried
at historical cost, which are recorded on an accrual basis. If an interest rate
swap is terminated early, any resulting gain or loss is deferred and amortized
as an adjustment of the yield on the linked interest rate exposure position over
the remaining periods originally covered by the terminated swap. If all or part
of a linked position is terminated, e.g., a linked asset is sold or prepaid, or
if the amount of an anticipated transaction is likely to be less than originally
expected, the related pro rata portion of any unrecognized gain or loss on the
swap is recognized in earnings at that time, and the related pro rata portion of
the swap is subsequently accounted for at estimated fair value.
Purchased option, cap and floor contracts are reported in derivative product
assets, and written option, cap and floor contracts are reported in derivative
product liabilities. For other derivative financial instruments, an unrealized
gain is reported in derivative product assets, and an unrealized loss is
reported in derivative product liabilities. However, fair value amounts
recognized for derivative financial instruments executed with the same
counterparty under a legally enforceable master netting arrangement are reported
on a net basis. Cash flows from derivative financial instruments are reported
net as operating activities.
Note 8
- ------
The ratio of income to fixed charges for the six months ended June 30, 1998,
excluding interest on deposits, was 2.3x, 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.
31
<PAGE>
Note 9
- ------
On April 10, 1998, the Corporation and BANC ONE CORPORATION ("ONE") entered
into an Agreement and Plan of Reorganization (as amended, the "Agreement"),
pursuant to which, subject to the conditions and upon the terms stated therein,
the Corporation and ONE will each merge into a new company, BANK ONE CORPORATION
("BANK ONE") organized to effect the merger (such mergers, collectively, the
"Merger").
It is anticipated that the Merger will be accounted for as a pooling-of-
interests and that it will be consummated during the second half of 1998,
pending necessary approvals of the Corporation's and ONE's respective
stockholders, regulatory bodies, and other customary conditions of closing. As
a result of the pending Merger, the Corporation's stock repurchase program was
rescinded.
In accordance with the Agreement, each share of ONE's common stock, without par
value, ("ONE Common Stock") outstanding immediately prior to the effective time
of the Merger (the "Effective Time") will at the Effective Time be converted
into one share of the common stock, with par value $0.01 per share, of BANK ONE
("BANK ONE Common Stock"), and each share of the Corporation's common stock, par
value $1.00 per share, ("FCN Common Stock") outstanding immediately prior to the
Effective Time will at the Effective Time be converted into the right to receive
1.62 shares of BANK ONE Common Stock. In addition, each share of the
Corporation's Preferred Stock with Cumulative and Adjustable Dividends, Series
B, and Preferred Stock with Cumulative and Adjustable Dividends, Series C, in
each case outstanding immediately prior to the Effective Time, will be converted
into the right to receive one share of a series of corresponding preferred stock
of BANK ONE with substantially the same terms.
The Corporation and ONE have scheduled a special meeting of stockholders for
September 15, 1998, at which their respective stockholders are expected to
consider and vote on the Merger.
Note 10
- -------
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>
- ---------------------------------------------------------------------------------------------------------------------------
Securities Available for Sale
- ---------------------------------------------------------------------------------------------------------------------------
June 30 March 31 December 31 September 30 June 30
(In millions) 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury..................................... $ 2,508 $ 3,117 $3,037 $3,069 $3,007
U.S. government agencies
Mortgage-backed securities...................... 2,205 2,228 1,736 2,077 1,867
Collateralized mortgage obligations............. 473 279 186 475 296
Other........................................... 1,399 1,353 878 761 439
States and political subdivisions................. 757 757 767 821 896
Other debt securities............................. 4,066 2,622 1,538 768 704
Equity securities (1)............................. 1,196 1,238 1,188 1,054 1,056
------- ------- ------ ------ ------
Total....................................... $12,604 $11,594 $9,330 $9,025 $8,265
======= ======= ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Securities Available for Sale
- ------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
June 30, 1998 (In millions) Cost Gains Losses (Book Value)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury............................................. $ 2,486 $ 22 $ - $ 2,508
U.S. government agencies
Mortgage-backed securities.............................. 2,193 14 2 2,205
Collateralized mortgage obligations..................... 472 1 - 473
Other................................................... 1,392 7 - 1,399
States and political subdivisions......................... 730 28 1 757
Other debt securities..................................... 4,065 4 3 4,066
Equity securities (1)..................................... 1,112 134 50 1,196
------- ---- --- -------
Total............................................... $12,450 $210 $56 $12,604
======= ==== === =======
- ------------------------------------------------------------------------------------------------------------
</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.
33
<PAGE>
Impact of Credit Card Securitization
Credit Card continues to service credit card accounts even after receivables are
securitized. Net interest income and certain fee revenue on the securitized
portfolio are not recognized; however, these are offset by servicing fees as
well as by lower provisions for credit losses.
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 June 30, 1998 Three Months Ended June 30, 1997
-------------------------------- --------------------------------
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........ $ 898 $ 164 $ 1,062 $ 951 $ 187 $ 1,138
Provision for credit losses.. 206 153 359 180 171 351
Noninterest income........... 842 (11) 831 644 (16) 628
Noninterest expense.......... 911 - 911 825 - 825
Net income................... 408 - 408 378 - 378
Assets--average.............. $116,577 $8,136 $124,713 $108,292 $8,460 $116,752
--quarter-end.......... 119,781 7,914 127,695 112,595 8,221 120,816
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
------------------------------ ------------------------------
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........ $ 1,776 $ 342 $ 2,118 $ 1,858 $ 384 $ 2,242
Provision for credit losses.. 385 301 686 367 333 700
Noninterest income........... 1,581 (41) 1,540 1,323 (51) 1,272
Noninterest expense.......... 1,759 - 1,759 1,625 - 1,625
Net income................... 791 - 791 758 - 758
Assets--average.............. $114,756 $8,317 $123,073 $106,721 $8,637 $115,358
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Five-Quarter Consolidated Income Statement
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30 March 31 Dec. 31 Sept. 30 June 30
(Dollars in millions, except per-share data) 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income
Loans, including fees........................................... $1,501 $1,460 $1,473 $1,491 $1,484
Bank balances................................................... 85 101 121 120 114
Federal funds sold and securities under resale agreements....... 99 89 83 79 77
Trading assets.................................................. 68 71 74 67 67
Investment securities--taxable.................................. 133 120 105 97 89
Investment securities--tax-exempt............................... 25 23 16 27 29
------ ------ ------ ------ ------
Total...................................................... 1,911 1,864 1,872 1,881 1,860
- ----------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits........................................................ 562 558 575 560 544
Federal funds purchased and securities under repurchase
agreements..................................................... 141 142 126 134 124
Other short-term borrowings..................................... 154 131 132 125 121
Long-term debt.................................................. 170 172 167 163 146
------ ------ ------ ------ ------
Total...................................................... 1,027 1,003 1,000 982 935
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income............................................. 884 861 872 899 925
Provision for credit losses..................................... 206 179 167 191 180
------ ------ ------ ------ ------
Net Interest Income After Provision for Credit Losses........... 678 682 705 708 745
- ----------------------------------------------------------------------------------------------------------------
Noninterest Income
Combined trading profits (losses)............................... 52 46 (15) 32 36
Equity securities gains......................................... 87 58 54 28 46
Investment securities gains..................................... 6 10 6 8 4
------ ------ ------ ------ ------
Market-driven revenue........................................ 145 114 45 68 86
------ ------ ------ ------ ------
Credit card fee revenue......................................... 234 234 230 233 207
Fiduciary and investment management fees........................ 108 106 101 102 99
Service charges and commissions................................. 283 251 261 235 227
------ ------ ------ ------ ------
Fee-based revenue............................................ 625 591 592 570 533
------ ------ ------ ------ ------
Other income.................................................... 72 34 90 63 25
------ ------ ------ ------ ------
Total...................................................... 842 739 727 701 644
- ----------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and employee benefits.................................. 477 440 457 440 426
Net premises and equipment expense.............................. 117 115 111 116 115
Other........................................................... 317 293 304 279 284
------ ------ ------ ------ ------
Total...................................................... 911 848 872 835 825
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes...................................... 609 573 560 574 564
Applicable income taxes......................................... 201 190 178 189 186
------ ------ ------ ------ ------
Net Income...................................................... $ 408 $ 383 $ 382 $ 385 $ 378
====== ====== ====== ====== ======
Net Income Attributable to Common Stockholders' Equity.......... $ 404 $ 381 $ 378 $ 380 $ 373
====== ====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic........................................................ $1.41 $1.32 $1.30 $1.28 $1.22
Diluted...................................................... $1.38 $1.30 $1.28 $1.26 $1.20
- ----------------------------------------------------------------------------------------------------------------
Average number of shares (in millions).......................... 287.4 288.1 290.3 296.8 306.8
Average number of shares, assuming full dilution (in millions).. 292.6 293.0 295.2 301.6 310.9
</TABLE>
35
<PAGE>
First Chicago NBD Corporation and Subsidiaries
Selected Statistical Information
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Average Balances/Net Interest Margin/Rates
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1998 March 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
(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............................. $ 5,875 $ 85 5.82% $ 6,690 $ 101 6.13%
Federal funds sold and securities under resale agreements... 7,694 99 5.15 7,077 89 5.13
Trading assets.............................................. 4,741 68 5.73 5,286 71 5.48
Securities available for sale
U.S. government and federal agencies....................... 6,468 104 6.50 6,273 102 6.56
States and political subdivisions.......................... 736 14 7.95 730 16 8.68
Other...................................................... 4,480 49 4.39 3,159 38 4.80
-------- ------ ---- --------- ------ ----
Total securities available for sale..................... 11,684 167 5.78 10,162 156 6.16
Loans (1)(2)
Domestic offices........................................... 64,898 1,425 8.93 63,303 1,391 9.04
Foreign offices............................................ 4,850 81 6.68 4,470 73 6.64
-------- ------ ---- --------- ------ ----
Total loans............................................. 69,748 1,506 8.78 67,773 1,464 8.88
-------- ------ ---- --------- ------ ----
Total earning assets (3)................................ 99,742 1,925 7.74 96,988 1,881 7.86
Cash and due from banks..................................... 7,314 6,653
Allowance for credit losses................................. (1,397) (1,402)
Other assets................................................ 10,918 10,675
-------- ---------
Total assets............................................ $116,577 $ 112,914
======== =========
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits--interest-bearing
Savings.................................................... $ 9,534 $ 48 2.02% $ 9,393 $ 49 2.12%
Money market............................................... 11,816 98 3.32 12,062 103 3.47
Time....................................................... 15,375 216 5.63 15,108 212 5.68
Foreign offices............................................ 15,234 200 5.26 15,144 194 5.20
-------- ------ ---- -------- ------ ----
Total deposits--interest-bearing........................ 51,959 562 4.34 51,707 558 4.38
Federal funds purchased and securities under
repurchase agreements...................................... 10,791 141 5.25 10,816 142 5.34
Other short-term borrowings................................. 11,694 154 5.29 9,869 131 5.37
Long-term debt (4).......................................... 10,443 170 6.53 10,368 172 6.72
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities...................... 84,887 1,027 4.85 82,760 1,003 4.91
Demand deposits............................................. 15,764 14,639
Other liabilities........................................... 7,677 7,544
Preferred stock............................................. 190 190
Common stockholders' equity................................. 8,059 7,781
-------- --------
Total liabilities and stockholders' equity.............. $116,577 $112,914
======== ========
- ---------------------------------------------------------------------------------------------------------------------------
Interest income/earning assets (3).......................... $ 1,925 7.74% $ 1,881 7.86%
Interest expense/earning assets............................. 1,027 4.13 1,003 4.19
-------- ---- -------- ----
Net interest margin......................................... $ 898 3.61% $ 878 3.67%
======== ==== ======== ====
- --------------------------------------------------------------------------------------------------------------------------
</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.
(4) Includes trust preferred capital securities.
36
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
December 31, 1997 September 30, 1997 June 30, 1997
- ------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 7,954 $ 121 6.02% $ 7,789 $ 120 6.13% $ 7,754 $ 114 5.90%
6,225 83 5.30 5,984 79 5.24 5,902 76 5.20
4,915 75 6.03 4,976 67 5.34 4,797 67 5.62
5,817 107 7.26 5,589 92 6.50 4,979 82 6.57
796 18 9.04 835 18 8.71 941 21 9.02
2,443 7 1.09 2,149 31 5.81 1,951 36 7.31
- -------- ------ ---- -------- ------ ---- -------- ------ ----
9,056 132 5.76 8,573 141 6.54 7,871 139 7.05
62,592 1,408 9.06 62,529 1,428 9.18 62,247 1,429 9.33
4,267 69 6.46 4,253 68 6.38 4,054 61 6.06
- -------- ------ ---- -------- ------ ---- -------- ------ ----
66,859 1,477 8.89 66,782 1,496 9.00 66,301 1,490 9.13
- -------- ------ ---- -------- ------ ---- -------- ------ ----
95,009 1,888 7.88 94,104 1,903 8.02 92,625 1,886 8.17
6,545 6,398 6,594
(1,402) (1,401) (1,388)
9,824 9,849 10,461
- -------- -------- --------
$109,976 $108,950 $108,292
======== ======== ========
- ------------------------------------------------------------------------------------------
$ 8,930 $ 52 2.30% $ 9,158 $ 52 2.25% $ 9,429 $ 52 2.22%
12,080 105 3.46 11,715 101 3.43 11,792 101 3.44
15,122 212 5.57 15,154 215 5.63 15,072 210 5.58
15,580 206 5.25 14,616 192 5.21 14,055 181 5.16
- -------- ------ ---- -------- ------ ---- -------- ------ ----
51,712 575 4.42 50,643 560 4.39 50,348 544 4.33
8,982 126 5.57 9,877 134 5.37 9,393 124 5.32
9,705 132 5.39 9,045 125 5.49 8,749 121 5.54
9,983 167 6.61 9,620 163 6.74 8,853 146 6.61
- -------- ------ ---- -------- ------ ---- -------- ------ ----
80,382 1,000 4.93 79,185 982 4.92 77,343 935 4.85
14,704 14,216 14,238
6,939 7,366 8,142
242 290 290
7,709 7,893 8,279
- -------- -------- --------
$109,976 $108,950 $108,292
======== ======== ========
- ------------------------------------------------------------------------------------------
$1,888 7.88% $1,903 8.02% $1,886 8.17%
1,000 4.17 982 4.14 935 4.05
------ ---- ------ ---- ------ ----
$ 888 3.71% $ 921 3.88% $ 951 4.12%
====== ==== ====== ==== ====== ====
- ------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
First Chicago NBD Corporation and Subsidiaries
Selected Statistical Information
- ---------------------------------------------------------------------------------------------------------------
Average Balances/Net Interest Margin/Rates
- ---------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Income and rates on tax-equivalent basis) Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing due from banks................... $ 6,280 $ 186 5.98% $ 7,240 $ 210 5.84%
Federal funds sold and securities under resale
agreements....................................... 7,387 188 5.14 5,532 142 5.17
Trading assets.................................... 5,012 139 5.60 4,906 136 5.60
Securities available for sale
U.S. government and federal agencies............ 6,371 206 6.53 4,793 153 6.44
States and political subdivisions............... 733 30 8.31 1,020 46 9.09
Other........................................... 3,823 87 4.56 1,764 67 7.70
-------- ------ ---- -------- ------ ----
Total securities available for sale.......... 10,927 323 5.96 7,577 266 7.09
Loans (1)(2)
Domestic offices................................ 64,105 2,816 8.99 61,857 2,779 9.18
Foreign offices................................. 4,661 154 6.66 3,885 117 6.10
-------- ------ ---- -------- ------ ----
Total loans.................................. 68,766 2,970 8.83 65,742 2,896 8.99
-------- ------ ---- -------- ------ ----
Total earning assets (3)..................... 98,372 3,806 7.80 90,997 3,650 8.09
Cash and due from banks........................... 6,986 6,575
Allowance for credit losses....................... (1,400) (1,387)
Other assets...................................... 10,798 10,536
-------- --------
Total assets................................. $114,756 $106,721
======== ========
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits--interest-bearing
Savings......................................... $ 9,463 $ 97 2.06% $ 9,703 $ 105 2.19%
Money market.................................... 11,939 201 3.40 11,609 200 3.48
Time............................................ 15,243 428 5.66 15,050 410 5.50
Foreign offices................................. 15,189 394 5.23 13,082 327 5.04
-------- ------ ---- -------- ------ ----
Total deposits--interest-bearing............. 51,834 1,120 4.36 49,444 1,042 4.25
Federal funds purchased and securities under
repurchase agreements............................ 10,804 283 5.29 9,123 238 5.26
Other short-term borrowings....................... 10,787 285 5.33 8,377 223 5.36
Long-term debt (4)................................ 10,405 342 6.63 8,690 289 6.72
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities........... 83,830 2,030 4.88 75,634 1,792 4.78
Demand deposits................................... 15,204 14,050
Other liabilities................................. 7,611 8,286
Preferred stock................................... 190 354
Common stockholders' equity....................... 7,921 8,397
-------- --------
Total liabilities and stockholders' equity... $114,756 $106,721
======== ========
- ---------------------------------------------------------------------------------------------------------------
Interest income/earning assets (3)................ $3,806 7.80% $3,650 8.09%
Interest expense/earning assets................... 2,030 4.16 1,792 3.97
------ ---- ------ ----
Net interest margin............................... $1,776 3.64% $1,858 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.
(4) Includes trust preferred capital securities.
38
<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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-7127
FIRST CHICAGO NBD CORPORATION
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
DELAWARE 38-1984850
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60670
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312-732-4000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NO CHANGE
- --------------------------------------------------------------------------------
(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 July 31, 1998.
Class Number of Shares Outstanding
- ------------------------- ----------------------------
Common Stock $1 par value 287,934,662
39
<PAGE>
Form 10-Q Cross-Reference Index
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
ITEM 1. Financial Statements
- ----------------------------
Page
----
<S> <C>
Consolidated Balance Sheet --
June 30, 1998 and 1997, and December 31, 1997 25
Consolidated Income Statement --
Six Months Ended June 30, 1998 and 1997 26
Consolidated Statement of Stockholders' Equity --
Six Months Ended June 30, 1998 and 1997 27
Consolidated Statement of Cash Flows --
Six Months Ended June 30, 1998 and 1997 28
Notes to Consolidated Financial Statements 29
Selected Statistical Information 1,
16-19
33-38
ITEM 2. Management's Discussion and Analysis of Financial
- ---------------------------------------------------------
Condition and Results of Operations 2-24
-----------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings 41
- -------------------------
ITEM 2. Changes in Securities 41
- -----------------------------
ITEM 3. Defaults Upon Senior Securities 41
- ---------------------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders 41
- -----------------------------------------------------------
ITEM 5. Other Information 41
- -------------------------
ITEM 6. Exhibits and Reports on Form 8-K 42
- ----------------------------------------
Signatures 43
</TABLE>
40
<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
- -----------------------------------------------------------
First Chicago NBD Corporation held its Annual Meeting of Stockholders on
Friday, May 8, 1998. A total of 245,882,387 shares were present in person
or by proxy, or nearly 86% of the total shares outstanding.
Stockholders elected the six Class III Director nominees named in the
Proxy Statement. Each of the nominees received more than 243.2 million
votes, in excess of 98% of the shares voted at the meeting.
The particulars are:
<TABLE>
<CAPTION>
<S> <C> <C>
For Withheld
Terence E. Adderley 243,654,863 2,227,524
James K. Baker 243,600,356 2,282,031
James S. Crown 243,474,746 2,407,641
Thomas H. Jeffs II 243,548,197 2,334,190
Richard A. Manoogian 243,629,405 2,252,982
Richard L. Thomas 243,288,454 2,593,933
</TABLE>
Stockholders ratified the appointment of Arthur Andersen LLP as the
Company's independent public accountants for 1998. Of the shares present
and entitled to vote, 244,691,957 (99.5%) were voted for; 557,482 (0.2%)
were voted against; and 632,948 (0.3%) abstained.
Stockholders rejected a stockholder proposal concerning the separation of
the offices of Chairman and President and the offices of Secretary and
Treasurer. Of the shares present and entitled to vote, 38,794,833 (17.4%)
were voted for; 179,113,312 (80.2%) were voted against; and 5,313,131
(2.4%) abstained. There were 22,661,111 broker non-votes.
ITEM 5. Other Information
- -------------------------
None
41
<PAGE>
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 June 30, 1998.
Date Item Reported
---- -------------
4/13/98 The Registrant's earnings for the quarter ended March 31, 1998.
4/14/98 The Registrant's announcement of its planned merger with BANC
ONE CORPORATION.
4/21/98 Pro forma financial statements and exhibits related to the
Registrant's planned merger with BANC ONE CORPORATION.
5/19/98 Pro forma financial statements, as of March 31, 1998, related to
the Registrant's planned merger with BANC ONE CORPORATION.
42
<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 August 13, 1998 Verne G. Istock
----------------------------- -----------------------------
Verne G. Istock
Principal Executive Officer
Date August 13, 1998 William J. Roberts
----------------------------- -----------------------------
William J. Roberts
Principal Accounting Officer
43
<PAGE>
(Registrant)
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
- -------------- ----------------------
12 - Statement re computation of ratio
27 - Financial Data Schedule
44
<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 8 of Notes to Consolidated Financial Statements on page 31 of the Form
10-Q.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
Form 10-K for the period ended June 30, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,049
<INT-BEARING-DEPOSITS> 5,588
<FED-FUNDS-SOLD> 7,982
<TRADING-ASSETS> 4,128
<INVESTMENTS-HELD-FOR-SALE> 12,604
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 72,563
<ALLOWANCE> 1,408
<TOTAL-ASSETS> 119,781
<DEPOSITS> 69,528
<SHORT-TERM> 22,541
<LIABILITIES-OTHER> 8,441
<LONG-TERM> 10,591<F1>
<COMMON> 0
190
320
<OTHER-SE> 7,804<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 119,781
<INTEREST-LOAN> 2,961
<INTEREST-INVEST> 301
<INTEREST-OTHER> 513
<INTEREST-TOTAL> 3,775
<INTEREST-DEPOSIT> 1,120
<INTEREST-EXPENSE> 2,030
<INTEREST-INCOME-NET> 1,745
<LOAN-LOSSES> 385
<SECURITIES-GAINS> 16<F3>
<EXPENSE-OTHER> 1,759<F4>
<INCOME-PRETAX> 1,182
<INCOME-PRE-EXTRAORDINARY> 791
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 791
<EPS-PRIMARY> 2.73<F5>
<EPS-DILUTED> 2.68
<YIELD-ACTUAL> 3.64
<LOANS-NON> 293
<LOANS-PAST> 235
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,408
<CHARGE-OFFS> 485
<RECOVERIES> 100
<ALLOWANCE-CLOSE> 1,408
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt of $996 million is included in long term debt.
<F2> Treasury stock of $2,075 million is included as a reduction of other
stockholder's equity.
<F3> Investment securities gain/losses do not include the Corporation's equity
securities gains which totaled $145 million.
<F4> Other expense includes: salaries and employee benefits of $917 million; net
premises and equipment expense of $232 million; and other expenses which
totaled $610 million.
<F5> Primary earnings per share represents Basic earnings per share.
</FN>
</TABLE>
