ML20239A004

First Chicago Corp 1986 Annual Rept

ML20239A004
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1986
From:	Mcdonough W, Brian Sullivan, Thomas R FIRST CHICAGO CORP.
To:
Shared Package
ML20239A003	List: ML20239A002 ML20239A004 ML20239A006 ML20239A009 ML20239A011 ML20239A018 ML20239A025 ML20239A121 ML20239A129 ML20239A135
References
NUDOCS 8709170005
Download: ML20239A004 (76)

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' in showand' ys;;+ , dor ', ./ I pe see and isondenc ce dati ~ 1986 1985 Change < l rm r. .

For sne, war '+

Net trAtre r,inceme-tax equivalent basis $1,112.551 $1,145,172 .- 3% 4 Provisicin for loan losses y <'#3 000 411,200 + 7%

Noninterest income 4,30$ 658,011 + 31% .

Noninterest expense 1,105,327 1,109,670 -

Net income 274,202 168,999 + 637 '

Return on assets ,. ' O.7:A 0.43% i Return on common stockholders' equiry IQ'!6 8.33%

At Year End ( ,

Total assets

$39,147,9)(,1 .'/ 38,$92,5(/6, + 1%

Total deposits 27,024,943 1.. 27.147,13.5 ( le ,- <

Loans 25,410,417 \ 24,190,368 gT -{ #f 5% 1  !

3 Stockholders' equity 2.347,377 2 090,044 '

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I l' ,71 ' [' " Net income 5 4.70 $ 2.84 '/4.53W j

' I i 4 e Dividends declared 1.32 1.32 lL

• Common stockholders' equity 36.M 34.10 i +' 8% ",,

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Number of emp'/tyees , 1M,84 14,276 '

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1 irst Chicago made great progress in 1986 toward the accomplishment of our financial and strategic objectives. First, we significantly improved our financial performance-a reflection of our commitment to increasing stockholder value. Also, through the realignment of our large-corporate banking business and continued achievements in our other ommesses, we gained considerable momentum in our drive to be the premier banking company in the Midwest. Each of the Corporation's three major lines of business contributed to our success in 1986. The Global Corporate Bank demon-streted funmnental improvement in its product capabilities, performing particularly well in the trading and venture capital businesses. Our Consumer Bank enhanced its strong reputation in the local and national retail markets. And, our American National Corporation subsidiary-the Middle-Market Bank-continued to excel in providing financial services to middle-market businesses.

The overall financial results for 1986 were the strongest in First Chicago's history.

The Corporation earned net income of $276 million, a substantial improvement from 1985's disappointing level of $169 million. Earnings per common share rose to 54.70, compared with S2.84 in 1985. The return on common equity was 13.32 percent, the highest return in a decade, versus 8.33 percent in 1985. And the return on average assets increased to 0.71 percent from 0.43 percent. The Corporation continued to strengthen its balance sheet in 1986. The year-end primary capital ratio and allowance for loan losses ratio, the principal indicators of balance sheet strength, were among the highest of the money center bank holding companies. Primary capital, defined by regulators to include stockholders' equity, the allowance for loan losses, and mandatory convertible debt securities, is a fundamental source of safety and soundness. At year-end 1986, First Chicago's ratio of primary capital to assets stood at 8.34 percent, a substantial increase from 7.24 percent at December 31,1985. When other long-term debt is included, the Corporation's total capital ratio grew to 9.75 percent, compared with 8.51 percent a year earlier.

The allowance for loan losses at year-end was equal to 2.30 percent of total loans outstanding, compared with 1.78 percent at year-end 1985.

The Corporation's 1986 financial accomplishments were a blend of stable core earnings, improved trading results, higher fee revenues, and outstanding gains on the sale of securities. In 1986, net interest income was 51.142 million, excluding the downward adjustment

($29.5 million) relating to revaluation of the leveraged lease portfolio, only slightly under the 1985 record level of $1,145 million. Average earning assets were slightly lower during the year, and the net interest margin dropped to 3.20 pe-nt from 3.27 percent in 1985. However, excluding the adjustment, the net interest rwein n.nased to 3.29 percent, reflecting the increased proportion of higher yielding assets, nch r credit card loans and middle-market loans, in the loan portfolio.

Noninterest income grew 31 percent to S863 million for 1986. A substantial segment of the year-to-yearincrease was a special gain of $81.7 million resulting from the settlement of a portion of the Corporation's pension plan obligation. This transaction was accomplished through the purchase of an insurance contract that provides for the payment of pension benefits to retirees currently receiving benefits under the plan. The settlement in no way affects the level of benefits payable to current or future retirees. Excluding this gain, noninterest income was up 19 percent from 1985. Excellent trading results, superior performance from venture capital operations, and strength in all other fee categories contributed to this record level of noninterest income.

3 1

_ _ _ _ - _ _ _ _ _ _ - - - _ - - _ _ 1

o Noninterest expense for the year was $1,105 million, compared with $1,110 million in 1985. Excluding the expenses in both years relating to Banco Denasa de Investimento S.A.,

a Brazilian investment bank of which First Chicago had asnmed management control, noninterest expense in 1986 increased 12 percent over 1985. Much of the increase was due to the higher salaries and incentive compensation expenses tied to the Corporation's improved performance, and additional charges relating to restructuring domestic and overseas operations.

Credit quality improvement is critical to the achievement of First Chicago's goals.

In 1986, we continued to refine all of our credit processes, and we expanded our definition of credit exposure to incorporate additional "off-balance sheet" credit risks. As a result of an ongoing review of our exposure to credit risk, we added $153 million to the allowance for loan losses dunng the year. Our assessment of the trans' risk in credits to a number oflesser developed countries, as well as concerns regarding certain sectors of the domestic economy, were the principal factors in this decision.

The allowance for loan losses at year-end was $585 million, or 2.30 percent ofloans outstanding. This level was equal to approximately 68 percent of our total nonperforming assets.

Both of these ratios are among the strongest of the money-center bank holding companies.

Total net charge-offs during 1986 were $268 million. This level was greater than the 1985 net charge-offs of $271 million, as a result of two partially offsetting trends. Net charge-offs on commercial loans were $171 million in 1986, down from $180 million in 1985.

This reflects both the increased quality of the commercialloan portfolio and the improved credit process at First Chicago. Consumer charge-offs, primarily associated with credit card loans, grew from $91 million in 1985 to $117 million in 1986, a predictable and acceptable result of the rapid growth in credit card outstanding during the last few years.

Nonperforming assets, consisting of nonaccrual loans, renegotiated loans, and other real estate owned, were $859 millic:. s December 31,1986, or 3.4 percent of total loans and mal estate owned. At year-end 1985, nonperforming assets were $657 million, or 2.7 percent.

E, 'y in 1986, we placed a small number of energy loans and one real estate credit, the total of which was $288 million, on the nonperforming list. As a result, nonperforming assets totaled

$945 at the end of the first quarter and declined slightly in each subsequent quarter.

An important event in 1986 was the enactment of the new tax law, which will reduce the corporate tax rate from 46 percent to 40 percent in 1987, and 34 percent in 1988 and beyond. We expect that the new tax rates will have positive implications for First Chicago's future tax expense. In the fourth quarter of 1986, we revalued our leveraged lease portfolio for the new tax rates, resulting in a special net credit to earnings of $0.20 per share.

We are pleased with the progress that we made in 1986, yet we understand that formidable challenges face the banking industry and First Chicago. The profitability of traditional wholesale lending activities has been shrinking, as large corporate customers take advantage of their direct access to the financial markets. And, as the entire financial services industry continues to grow and diversify, the regulatory restrictions that inhibit banks from participating fully in investment banking activities have become increasingly burdensome. We intend to overcome these burdens and respond to the changing demands of the marketplace with innovative products and a dedication to customer service, while we continue to press for legishtive change.

The pressures on certain areas of the domestic economy and the credit problems of the lesser developed countries will persist in 1987. These are sources of concern that require i close monitoring. We review our exposure to troubled domestic industries on an ongoing ]

basis, taking appropriate action where necessary. On the intemational side, First Chicago )

is committed to working with the debtor countries, the U.S. Government, and the other )

4 U.S. and foreign banks to negotiate viable solutions to the situation.

4

s.

A key element of First Chicago's pursuit of premier status in the Midwest is to expand through acquisitions of strong middle-market banks. lilinois' regional banking law allows us to acquire banks in those of the six Midwestern states where reciprocal agreements exist. We are continually assessing potential candidates, but we will take action only when it is consistent with our financial objectives.

We believe the acquisition process can also be an effective means of expanding our consumer financial business, both in the local market and in the national credit card market.

Late in 1986, First Chicago signed a definitive agreement to purchase Beneficial National Bank USA of Wilmington, Delaware for $247 million. The primary business of Beneficial National Bank USA is the issuance of Visa and MasterCard credit cards. Its assets are approximately

$1.1 billion. We also agreed, in early 1987, to purchase First United Financial Services, Inc.

First United is a $1.1 billion bank holding company with five banks in the western and l northwestern suburbs of Chicago. Both transactions are expected to be completed later this year, subject to the required regulatory and legal approvals.

Effective cost containment is also a major element in achieving our financial goals.

In a period oflow inflation, First Chicago cannot afford double-digit expense growth. With the reorganization of the Global Corporatc lank and centralization of certain staff activities, we were able to eliminate and consolidate r tions, redeploy staff, and identify other areas of cost savings. A thorough review cf our mrseas operations indicates additional savings opportunities, and appropriate programs are in place. The impact of these actions is expected to be particularly evident in 1987.

First Chicago's 1986 performance signifies a recovery from the setbacks of the prior two years. In recognition of our improved fundamentals, Moody's investors Service raised its l ratings of First Chicago securities in September 1986. And, in the first quarter of 1986, the Office of the Comptroller of the Currency terminated our November 1984 agreement that set standards for capital adequacy, credit process improvement, and funding diversification. All requirements of the agreement were met well ahead of the targeted dates. During 1986, the Corporation also completed the sale of Banco Denasa.

In view of the overall performance in 1986 and the progress it represented for First Chicago, the Board of Directors at theirjanuary 9,1987 meeting declared an increase in the i common stock dividend. The dividend was raised 13.6 percent to 37.5 cents per common share on a quarterly basis, or $1.50 per common share annually, and is effective with the dividend payable on April 1,1987.

We at First Chicago are confident that we have sound strategies in place, and that their successful execution will result in the achievement of our strategic and financial goals within the next few years.

Sincerely, h $00-O Y H W ;ad Barry F. Sullivan Richard L Thomas  :

Chairman President

& . s b William). McDonough Vice Chairman Chicago, Illinois February 13,1987 5

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ - _ - _ _ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ - _ - _ - _ _ = _

.I'  !> c c, l u h a l c' <, , p , e / a n h i

he Global Corporate Bank is the largest element of First Chicago's franchise, representing 78 percent of the Corporation's assets and 56 percent ofits profits. Profitability in this core business has been under pressure due to such factors as heightened competition and l

i greater risks. However, because we see considerable potential in this business, we remain committed to it and intend to pursue it aggressively.

In April 1986, First Chicago carried out a strategic realignment of our large-corporate banking business, which serves the " Fortune 1000" companies or equivalent in the U.S.,

and similar companies and institutions in selected countries around the world. Our anal-yses indicated that a competitive advantage could be achieved through a distinctive approach to this market. As a part of our effort to strengthen our position in this business, we have inte-grated all commercial and investment banking products and services into a single entity:

the Global Corporate Bank.

Global Corporate Bank financial Results (Dollars in millions) 1986 1985 Net interest income, tax equivalent basis $571 $646 l Provision for loan losses 292 270 l Noninterest income 609 451 Noninterest expense 687 606 Loss on affiliate investment 8 131 Net income 156 74 Average assets $30,288 $31,234 Return on assets 0.52% 0.24%

-excluding venture capital subsidiaries 0.23 % (0.05)7 rirst chicago s Noninterest income 1986 1985 close, long.

'" di"9 "'a"a5 Trading account & foreign exchange trading profits $126 5 73 ship with two Fiduciary & investment management fees 47 44 F ""' 500 Equity securities gains 181 147

* * '"

• b d '03 All other 255 187 Total $609 $451 Acquisitions uni to orchestrate The Global Corporate Bank-which consists of three relationship groups, four product 4,m. iron,

• groups, and a customer service group-is managed as a partnership. Individual and collective nubber co.'s commitment to the customer is emphasized, and interaction among all levels of the organization accumition of th is encouraged. An executive vice president / partner heads each group and works with the W d *id'

""* d"*"

Chairman of the Board, who acts as senior partner.

Croup from Daye The basic unit within the Global Corporate Bank is the diretferrict trant. Each team e ,,,, 7 3,, i, ,,,

is led by a relationship manager and includes skilled product specialists. We believe that the .c.ie .. u,,,,ios placed First Chicago in a leae bank position with Armstrong.

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4 First Chicago Leasing Corp.

completed another record year in 1986, arranging the eq uity investmq structure of the Global Corporate Bank enables First Chicago to offer exceptional value to the ,,, ,,,, 3 , 3 g ,;

customer through a collaborative blending of relationship management, customer service, inse,eraged and product delivery, ien es. a 72 In recent years, the large-corporate banking business has undergone dramatic changes: c*rconacr*=q narrowed spreads, greater risks, and intensified competition. The 1986 financial results of the Global Corporate Bank were indicative of the many challenges facing the business. Net income for the year was $156 million, including the contribution of $86 million from the venture capi-7 '['"' ,5, #h

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tal operation. In 1986, its return on equity was 9.3 percent. The financial returns in this business ie,c ,-wp ny can be improved,in the near term, by successfulimplementation of the strategies outlined pr oen , 'nn o.

below and effective management within the Global Corporate Bank. ative orwuct The achievement of First Chicago's goal to be the premier banking company in the d"*'"**-

Midwest depends on a financial turnaround in the Global Corporate Bank. We have identified 9CtmM eleCUTIQ five fundamental principles essential to generating our target return on equity of 15 percent in , ,,.m a n y

tia business. Significant accomplishments were made in each of these areas during 1986, .,,ty amor and continued progress willlead to the required financial return within the next few years. x :i ceramte ha//ent customer service is the highest priority of the Global Corporate Bank. First "M iN 5-Chicago is a relationship bank. We believe that effective servicing of customers' needs in a multi-product environment requires a team approach. Therefore, we have established client service teams and a special customer service group within the Global Corporate Bank, to meet this requirement.

Currently, First Chicago has 380 client service teams handling our largest customer relationships, each of which benefits from the active involvement of a member of senior management. A team is composed of a relationship manager, who is responsible for the overall knowledge of the customer's business and needs, and product specialists who design and deliver specialized services to the customer. A team's success is measured not by individual performance, but by the quality of service provided to its customers. In this context, the Global Corporate Bank's challenge is to sustain continuity among the client service team members, enabling them to deliver higher quality service to their customers in an effective and efficient manner.

Secondly, we must incrwe our emphasis on the Afidwest. First Chicago is the largest bank holding company headquartered between the two coasts, and approximately 30 percent of the large-corporate target market is based in the Midwest. As the economy of the Midwest gradually improves, we must develop the opportunities available to us in our own region both by seeking the County of '

out new customers and by upgrading our positions in established relationships. In 1986, we i.os ange:es >

established a Regional Corporate Banking Division to address this objective. Specifically it narned First is focused on the Midwest upper middle market. Chicaoo a$ co-A strongrproduct capability is essential to enhancing our performance. As a result, '"*"'*

the Global Corporate Bank is segmented to include four specific product groups in support of - prissue, i the relationship groups. In addition to the traditional credit products provided by the Credit ,,,ying on j 1

First Chicago's) strength as a major med.

evester9 distrip tor of mumcioa(

and ;n. depth presence on th West Coast.

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I Products Group, First Chicago is strengthening the quality of our fee generating products. In the past few years, we have allocated substantial resources to upgrading the quality of the personnel and physical facilities of the Tru Products Group. We have also invested in experienced, innovative people to improve our Financial Products Group, because we must compete succeWy with both commercial banks and powerful, established investment banking firms. I First Chicago's operating products, provided by the Service Products Group, will be refined continually, priced attractively, and delivered efficiently in order to attract new rela- y tionships and enhare existing ones. By strengthening all of our product groups, we also improve &

our customer service and increase our ability to expand in the Midwest market. .

The strategy to raise the returns of the Global Corporate Bank includes a repositiomd ,

innenational busimss. Throughout 1986, we conducted an extensive review of our overseas network that produced the conclusion that we must redeploy our resources in order to improve <

our profitability in this market. First Chicago will continue to serve customers worldwide, but will endeavor to develop the optimum mix of products and services. We will concentrate on (

providing cross-border services, and, at the same time, we will reduce intra-country lending abroad, where we are subject to intense competition from local national banks.

Within this context, First Chicago has the potential to generate greater revenues overseas and reduce expenses through a combination of selected product offerings and centralized operations. As part of the restructuring of the large-corporate business, management councils L were formed for each of our three intemational sectors-Europe / Middle East / Africa: Asia, Pacific; and I.atin America. Each council implements the changes that are necessary to streamline our international operations.

Finally, improudcredit qualitj is required to achieve our 15 percent return on equity goal. The rigorous credit-selection, approval, and review processes put into place at First 1.

Chicago in early 1984 have worked well. Our ability to define risk acceptance criteria, identify ,

problem credits faster, and manage problem credits more effectively, has resulted in a lower rate ,

of commercial net charge-offs during 1986 than in the prior two years. Still, it is our objective to bring the charge offlevel down from 0.87 percent of commercial loans in 1986 to the average a level of our peer grcup, between 0.50 and 0.60 percent. In addition, nonperforming assets of ' '

$859 million at year-end, or 3.4 percent ofloans and real estate owned, must be reduced over u

time if we are to meet our corporate objectives, _ , , ,

These five key thrusts represent not only current goals, but are also areas in which x

the Global Corporate Bank made great progress during 1986. The success of the new organization 2 will be measured by the financial results in 1987 and in future years. However, the performance <

in 1986 included a number of significant accomplishments. '

• The Trading Products Group had record earnings, a result of our strategic emphasis .

on and allocation of resources to the business in the past three years. Total trading account profits , . . . ,

rose to $33.6 million in 1986, from $26.9 million in 1985; foreign exchange (FX) trading profits ...

increased to $92.5 million, compared with $46.3 million a year earlier. This level of FX profits .-

was nearly triple the average earned in the prior few years. v n ,

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Our investment banking capabilities were strengthened further in the domestic and i international capital markets. Total revenues generated from investment banking products, both spread and fees, were $41 million in 1986, compared with 527 million in 1985. New issues of  ;

securities overseas and asset sales recorded substantial year to-year gains. We have gained momen-  ;

tum in our mergers and acquisitions activities, offering customers both advisory services and financing. Increased fees from this business were 84 percent over 1985.

In the international capital markets,1986 was an excellent year. There were particularly noteworthy developments in the Asia / Pacific region: the volume ofinterest-rate swap transactions grew 50 percent over 1985; an asset sales business was opened in Hong Kong; and a bond sales capability was initiated inJapan. In addition, First Chicago ranked among the top 10 banks in 1986 in arranging syndicated loans worldwide.

1 The International Banking Group experienced extraordinary changes in 1986 as a result of restructuring. Total staffing at year-end was down 16 percent from a year earlier, and the number of expatriates was reduced by 33 percent during the year. In spite of these reduc-tions, the group developed significant new business and improved relationships inJapan, the United Kingdom, Korea, France, Hong Kong, China, and Australia.

Fees and deposits generated from operating products continued to be an important source ofincome for the Global Corporate Bank. The Service Products Group contributed fee revenues of $40 million and average balances of $1.7 billion in 1986, compared with $48 million and

$1.4 billion in 1985. The year-to-year decline in fees was due, in part, to the discontinuation of certain operating products. In 1986, this group played a leading role in the development and implementation of a private payment system for the largest domestic automobile manufacturer-allowing it to interchange data electronically with its suppliers. First Chicago continued to enjoy a two-thirds market share of business handled by banks with domestic wholesale lockbox networks. This market position was strengthened by a major contract for providing retail lockbox services to an agency of the U.S. Government.

The First Chicago Clearing Centre celebrated a decade of market leadership in the clear-ing and settling of Eurodollar certificates of deposit. More recently, the Centre became an issuing and paying agent for both Eurocommercial paper and Euronote facilities. The London-based Centre clears over $1 trillion a year in short-term Euromarket instruments. Our strength in the Eurocommercial paper market stems from our ability to originate, distribute, and clear transactions-a result of close interaction between relationship and product groups.

The results of certain specialized activities are included in the financial results of the Global Corporate Bank and deserve special mention for their substantial contributions to the profits of the business. They are the First Chicago venture capital group, First Chicago Invest-ment Advisors, N.A., and First Chicago Leasing Corporation.

The venture capital group is one of the most active and successful operations ofits kind in the banking industry. The group earned net income of $86 million in 1986, resulting primarily from gains on the sale of equity securities totaling $150 million and dividend income of $2 million.

12

Since 1961, First Chicago's venture capital subsidiaries have been leading investors in the U.S. equity capital markets, providing financing principally for new ventures, emerging growth companies, and management buyouts. The returns on such activities can be impressive, but volatility can be high. At December 31,1986, the venture capital group had investments of approximately $425 million at book value in a variety ofindustries, including communications, health care, manufacturing, retailing, and software and systems. The group has a flexible set of investment parameters and is willing to pursue opportunities in virtually any industry. The contributions from venture capital to the Corporation's net income have been substantial in the past several years. Nevertheless, we recognize the risks inherent in the business and expect more moderate gains in the future.

First Chicago Investment Advisors, N.A. (FCIA) offers investment advisory and management services to institutional clients. FCIA manages in excess of $9 billion of employee-benefit and other institutional assets of corporations, states and municipalities, unions, endow-ments, and foundations. FCIA is a multiple-asset class manager, with portfolios invested in domestic and international equities and bonds, real estate, and venture capital. In 1986, assets of $1.5 billion from new business were added to FCIA's management. Revenues increased approximately 38 percent from 1985. In addition, FCIA introduced severd new products during the year, including Living Environments for an Aging America Fund (LEAAF), a closed end real estate fund invested in congregate housing for the elderly.

The performance of First Chicago Leasing Corporation in 1986 reaffirmed its role as a major bank-affiliated leasing company and an industry leader, with the best year in its fourteen year history. During the year, the leasing company arranged the equity investment for equipment, facilities, and real estate valued in excess of $1 billion. This record compares with

$580 million, $285 minion, and $125 million in the prior three years, respectively. Now that the Tax Reform Act has been enacted, the leasing company is positioning itself for continued growth and leadership.

We are confident that the financial results of the Global Corporate Bank in the coming years will reflect the continued success of the strategies we have described above.

13

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l b

irst Chicago provides financial products and services to consumers through the Consumer Bank. We enjoy a reputation as a major participant in both the local and national consumer 1 i markets. This business had loans outstanding of $4.7 billion and deposits of $4.5 billion at year-end 1986. The principal component of the Consumer Bank is the bankcard oper-M6 ation, which issues Visa and MasterCard credit cards under the First Card name to con- ^

sumers nationwide. Bankcard loan outstanding balances at year-end totaled $3.5 billion, I or 74 percent of total Consumer Bank loans, with mortgages and installment credit 3 i constituting most of the remainder.

There are unique characteristics of the consumer financial business that distinguish it from First Chicago's two other primary business lines. The charge-off rates and operating expenses associated with the business are greater than in the large-corporate and middle-market businesses and are key determinants in the pricing of consumer financial products. The inter-est rate and product pricing environment in 1986 was relatively favorable for a consumer-oriented strategy, and the financial results of the Consumer Bank for the year were excellent. Net income grew to $86 million from $66 million in 1985 and represented 31 percent of the Corporation's eartungs.

We do not expect to sustain returns at this level in future years. However, we fully expect the Consumer Bank to continue to be an important, profitable business for First Chicago, exceeding the corporate financial targets.

Consumer Bank Financial Results (Dollars in millions) 1986 1985 Net interest income, tax-equivalent basis $375 $332 ,

Provision for loan losses 133 120 l Noninterest income 198 161 i Noninterest expense 268 239 Net income 86 66 l

Average assets $4,764 $4.550 Return on assets

{

1.81% 1.44 %  ;

{

Noninterest Income 1986 1985 l 1

[J n,m , w . . ,

Credit card fees Fiduciary & investment management fees All other

$127 30 41

$123 26 12 nes m c-x Total $198 $161 l an investment  !

adw.ory re. .n In the national market, First Card is one of the most important and successful of all three First u c

{

First Chicago's products. With an average of 3.2 million accounts and $3.3 billion in average '

Shore Mutual loans, First Chicago's First Card was the fifth largest bankcard operation in the U.S. during 1986.

Fund.. whic h

' i b yeaf, We signed a definitive agreement to purchase Beneficial National Bank USA s $, (BNB USA), a Delaware bank primarily engaged in issuing Visa and MasterCard credit cards.

in.....uno,, The transaction, which is awaiting the required regulatory and legal approvals, should be completed awnas. ment o, in mid 1987. At that time, we expect to add approximately 1.1 million accounts and $1.2 billion

"*' end. in outstanding balances to the credit card totals.

15

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The bankcard product was first offered by First Chicago in 1966 and had grown to 5800 million in outstanding by 1980. Through the acquisition of the Bankers Trust credit card portfolio in 1982 and intensive account solicitation programs in 1983 and 1984, outstanding loans reached 53.3 billion by year-end 1985. Growth in the portfolio during 1986 was more modest, due to a decision to add higher quality accounts through selective marketing and acqui-sition rather than through aggressive solicitation.

As our expertise in this business has grown, its profit contribution has increased.

Bankcard profitability at First Chicago is affected by the yield earned on loans, the cost of fund-ing the loans, the provision for loan losses, and operating expense.

The yield earned on First Card loans consists of the interest rate charged on balances rirst enicago a' carried longer than the 25 day grace period and fees assessed to cardholders and merchants. These coaunue to pu

charges reflect the market demand for the convenience and flexibility of the credit card prod.

,, [* uct. The cost ofliabilities funding the bankcard loan portfolio is also determined by market forces and our own Corporate funding policies. The pool ofliabilities funding the bankcard loans has

)

e.rd business

,,,,gn o,r.ct an average maturity structure well in excess of one year.

.nd selective The loss rates on bankcard loans are significandy higher than those of commercial loans noticitat'oa- or other consumer loans. The provision for loan losses in this business is estimated by a combination

't " " ' * * "

• d of projected cc:aumer pcyment patterns and the volume, source, and age mix of the aggregate

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, ,, portfolio. Rst Chicago's chace-off rate was 3.5 percent in 1986 and 3.0 percent in 1985. The

,,,,, n is, .no year to year increase reflects the anticipated increase in charge-offs that typically follows a period

.cou...iion.. of aggressive expansion. In this case, be new accounts gained in 1983 and 1984 have moved into the highest charge-off phase, which enompasses approximately the fifth through tenth quar- ,

ters of age. Nevertheless, our loss experiente a First Chicago was quite favorable relative to our )

peers. We intend to maintain that performance ti ough continued refinement in our solicitation techniques, credit approval policies, and collection efforts.

The final key element in bankcard economics is operating expense. As a consequence 1 ofissuing cards, approving and processing large numbers of sales transactions, and collecting payments, major investments in capital and personnel are needed to administer a bankcard oper-ation. In this area, First Chicago has proved itself a very cost-efficient processor of credit card I

receivables. Our bankcard centers in Illinois and New York process receivables at a lower than-c industry average unit cost, an accomplishment attributable to our excellent people and well-designed systems and facilities.

In 1986, the combination of all four factors resulted in substantial returns for First Card.

Profitability is likely to decline from these levels, due to competitive and financial considerations that may affect our pricing and funding decisions. First Chicago is committed to the bankcard business and will continue to pursue growth through direct solicitation of select groups of con-sumers, strengthened retention programs for current accounts, and acquisitions. Industry trends rh. Priv i. s.nk, Point toward consolidation of the business among the larger issuers, which are more able to j

. a.v6sion o, m. effect economies of scale, withstand the competitive pressures, and weather interest rate cycles Person.1 Fin.n. and fluctuations. First Chicago intends to be a leader in this development, as demonstrated by ciis m e.. our proposed acquisition of the BNB USA portfolio. Ownership of this Delaware bank will give

.i[ [,,[,], m h gW m h4 m Mk M se d @t h d & dm & b n,,,,,,,,,,,,,,, proved to be an outstanding product both for the customer and for First Chicago.

e.ntnn.nci., In the local Chicago retail market, the goal of the Consumer Bank is to maintain movre.. .no its position as the premier banking institution. We will reinforce this status by continuing to j uphistie.t.o banking

' '*4uhoment s. 17

• ,i

, i

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expand the number of core banking relationships, broadening customer relationships with ,!

multiple products, increasing efficiency, and promoting a reputation for customer service and {

product excellence. 1

'Ibral deposits in the Consumer Bank were 54.5 billion at year-end, representing four percent growth from the level of $4.3 billion a year earlier. Despite the limitations imposed by j lilinois law on bank branching, we have the second largest share of consumer deposits in the l metropolitan area We are exceeded only by one savings and loan institution that has an exten-sive branch network. As sources of stable, inexpensive funds, these deposits-demand deposits, Negotiable Order of Withdrawal (NOW) accounts, passbook savings, money market accounts, Individual Retirement Accounts (! ras), and certificates of deposit-add diversity and liquidity to the overall corporate funding base. The Consumer Bank's deposits included $859 million in Individual Retirement Accounts at December 31,1986, up from $764 million at year-end 1985.

This positions E st Chicago as the fourth largest IRA bank in the country.

Ambitious and effective marketing campaigns were responsible for this performance, which is especially impressive given that deposits were gathered at only three locations. Although the changes in the tax laws restrict the deductibility of contributions in 1987 and beyond, IRAs are still attractive to consumers and continue to be promoted actively at First Chicago.

Another provision of the revised tax code eliminates the deductibility of many types of consumer interest expense. We do not believe this will noticeably affect First Chicago's con-sumer lending products. In fact, the law paves the way for growth in home equity credit lines and provides an incentive for the development of new products.

Besides bankcard, our other main consumer lending products are home mortgages and installment credit loans, which averaged $718 million in assets during the year. In 1986, the home mortgage loan unit produced the largest dollar amount of first-time mortgages in over 10 years. The Consumer Bank also continued to serve local consumers in the upper-income brackets through The Private Bank and the Executive and Professional Banking Center.

The Consumer Bank's personal trust business was also a noteworthy contributor to earnings in 1986. As a result ofgrowth in fee revenue and tight control of expenses, this unit has achieved excellent profitability in the last three years.

First Chicago's retail distribution capabilities are enhanced by participation in Cash Station, a network of automated teller machines (ATMs)in the Chicago metropolitan area shared by 201 banks, and by participation in the national CIRRUS network. During 1986, Cash Station and Money Network, a strong local competitor, agreed to merge, creating an expanded network of 285 banks and accessibility at over 450 ATM locations. In addition, the Consumer Bank plans to expand its customer base and distribution abilities by increasing its physical presence in Chicago and in the suburbs by purchasing banks and setting up limited service facilities.

We have made a move in this direction with the agreement to purchase First United Financial Services, Inc., the holding company of five banks in Chicago's western and northwestern l suburbs. Upon completion of the transaction, expected in the second half of this year, First United will become an important element of the Consumer Bank's strategy for growth.

j We are proud of the fine reputation that has been earned by our Consumer Bank,

! and we expect that its strong financial performance, product excellence, and dedicated customer service will continue to contribute to the achievement of the Corporation's strategic goals.

l 18 f

E__

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l l

he principal thrust of First Chicago's American National Corporation subsidiary is to serve the banking needs of mid sized businesses in the greater Chicago area. Companies with l'

annual sales ranging from $5 million to $115 million are generally included in the middle market. We made a strategic commitment to serve this important sector in May 1984 with the purchase of American National, which already was a prominent business bank. Since then, American National has expanded its presence and has become an important part of First Chicago Corporation, consistently contributing superior earnings.

(

. American National Corporation is the $4.4 billion holding company for American

]

National Bank & Trust Company of Chicago and four suburban banks. Regulatory approval to  !

purchase four additional banks, which will increase the number of bank subsidiaries to nine,

{

is expected in early 1987.

Middle-Market Bank Financial Results (Dollars in millions) 1986 1985 Contri- Contri-ANC bution ANC bution Legal to Legal to Entity FCC* Entity FCC*

Net interest income. 5171 $167 $172 5167 tax-equivalent basis '

Provision for loan losses 15 15 21 21 Noninterest income $6 56 46 46 l

Noninterest expenses 125 142 117 134 Net income 45 34 42 29 Average assets $3,717 $3,801 $3,700 $3,788 Return on assets 1.22W 0.89% 1,13 % 0.777 Noninterest income 1986 1985 Bond trading & foreign exchange trading profits $4 $3 Fiduciary & investment management fees 24 20 All other 28 23 Total 556 546

• American Nationars reported results have been adjusted to reflect necessary purchase accounting adjustments and related costs of acquisition.

Consolidated net income for American National Corporation was $45 million in 1986, up from $42 million in 1985. Return on average assets was 1.22 percent, and return on j average equity was 19.75 percent. After First Chicago's accounting adjustments associated

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with the acquisition of American National are made, the return on our investment becomes j 14.8 percent in 1986.

l 19

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American National's financial performance in 1986, as in prior years, illustrates its comprehensive understanding ofits market. Smaller companies generally rely on one or two banks to serve their financial needs, rather than the several tiers of banks employed by large cor-potations. Serving them demands a close working relationship between the customer and the bank. This must be backed by careful attention to all of the customer's financial needs,includ-ing the personal requirements of managers and employees. American National has achieved great success in establishing such solid and enduring relationships, and strong customer commitment is practiced at all levels of the organization. l In addition to traditional loan and deposit products, American National offers a full l line of non-credit services for small and mid-sized businesses. Cash management, corporate finance, l I

and international transaction services are designed to allow account officers the flexibility to tailor programs to the needs ofindividual companies.

As a full-service commercial bank, American National also offers specialized products to a broad array of customers. A key business is investment management. American National, which is known for pursuing diversification through passive management, oversees more than

$11 billion in institutional assets, ranging from the pension plans of Chicago-area firms to the multi million dollar funds of"Fortunt 500" companies.

In addition, American National has built an impressive network of correspondent banks throughout the Midwest. These banks, generally with assets ofless than $250 million, main-tained $275 million in deposits with American National in 1986, representing an important source of earnings.

American National's affiliated banks are located, for the most part, in fast growing, commercially oriented suburbs around Chicago. These banks utilize American National's busi-ness approach in serving smaller companies and entrepreneurial enterprises in their local areas.

l As in the past, The First National Bank of Chicago will work closely with American i

National to coordinate strategic efforts for the entire Midwest middle market, particularly for the larger middle-market companies served by the Global Corporate Bank. We are certain that l

p , ,,, ,,, , American National will continue to flourish in coming years as a leader in its marketplace.

w ai,c n a o.n r a . The middle market offers First Chicago excellent opportunities for growth in the i.on coni.ne. o to Midwest. Illinois law now allows lilinois bank holding companies to purchase banks through-introo w c. m o.

out the state and in those of the six surrounding states-Wisconsin, Michigan, Indiana, Ken-im h "" """

tucky, Missouri, and Iowa-where reciprocal agreements exist. In those states, First Chicago is I i$.i$a ] ' seeking to purchase well performing banks with solid middle-market customers and a significant

? presence in the consumer market.

! n.noosi,w

u. dano. ~no .... . In evduating potential acquisitions, our primary concerns are financial. Any investment

, .eaabica Fwilereon must be capabe of contributing to the achievement of the Corporation's return on equity goal

! wt.scomoa"v of 14-16 percent and, at the same time, must result in minimal dilution to stockholders' eamings.

.$.N..ari Acc rdingly, the price paid for any bank must reasonably satisfy these considerations.

, proc.mn, n o,.. First Chicago also favors a high degree of autonomy in affiliate bank relationships, m.nuor ,i, as we have promoted with American National. Therefore, strong and successful management ch.c.go.,... teams are especially important for an acquired bank.

6aad st**l We will continue our assessment of the marketplace for Midwest bank acquisitions and we intend to move promptly when appropriate situations are identified.

(

21

b Barr> F. Sullisan Jerry K. Pearlman* Director Nominee Chairman of the Board Charman. Preudent. anJ Mnhael A. Miles hnt Chnago Corporanon and Chief Execunve Otfner Preudent and Chief Opentme Offner The hnt Nanonal bank or Chuago Zenah Eleuromts Corporanon Knft. Inc.

manutatturer and Jntnbutor of a mulananonal manutatturer ut Richard Thomas diverufied line ut cleuronics - tuniumer tixal produas President produst5 and bartenes hnt Chnago Corponnon and The hnt Nanonal bank of Chicago Erneuine Ractin" Charram of the baard WilliamJ. McDonough ist Source Corporanon Vue Ch.urman of the board a bank hokhng comp mv brst Chnago Corporanon and Three members of the BoarJ of The Erst Nanonal Bank of Chaago Patrn k G. Ry an Directors are not standmg for PreuJent and Chef Execunve Officer reelecuon in 1987 John H. Bryan.Jr. Combined Internanonal Corporanon Chairman of the Board and a broa* based msurance William B. Graham n Semor Ch.urman Chief Execunvc OtIncr holdmg company of Baxter Travenol Laboratones. inc. He Sara Lee Corporanon has been a director smte 1%9 baxter manutxturer and dnmburor of George A. Schaefer Tr.nenol Laborarones Inc. is a manutae i a diverufied hne of consumer Charman and Chief Execunvc Otfner rurer of health are product products and a m.uor suppher to Caterpillar Inc.

the food semce mJt.stry manufacturer of a wide range ut JohnJ. N. enn is Charman. Preu.-

dent, and Chief Execurne Otfner of construcnon, earthmoving.

Frank W. Considine The Firestane Tire A Rubber Compam and matenal handhng equ pment Ch.urman of the Board. Preudent, and and engmes He has ban a direuor unte M Tht Chief Execunve OtTuer breuune Tire A Rubber Company Nanonal Can Corporanon Roger W. Stone. n a manutaturer ut nres and relateJ pxkagmg manutauurer pmduas Charman of the Board and Chiet Execunvc Othcer Wilham Wood Prince' n Vnc St<ane Contamer Corporanon JamesJ. Hartigan{Execunve Offner Chairman at I H Pnnte A Co. Int Preudent and Chiet manutxturer of paper, paper- He Ls been a Jireuor unu 1955 t rnred Air Ljnes. Inc related proJucts. and packapng F. H Pnnte A Co . Inc. is an Jiverutied transportanon sermes systems equipment insestment and real estate firm.

Donald PJacobs fred L Turner These three directon h se sened Ent Dean of the). L Kellogg Graduate School Charman of the Board and Chnago well for mans >ean Mesan of Management Execunve Committee Graham and Wood Prmte have been Northwestern Umvenay Mcdonald's Corporanon directors of the Corporanon unte its educanon and researt h restaurant hcensor mcepnon m 1%% and Mr LJ Prmai 32 gar tenure on the board n the Charles 5. Len.ke longest m the hutory of the Corporanon Chairman of the board and Che Exetuove Offner bnt Chnago mould hke to extenJ its Morton Thiokol. Int. appreuanon to Messn Graham. Neun, manufacturer and marketer of and hJ Pnnte. allof whom have serscJ propuluon systems. speualry hnt Chaago wah d:dnanon and turn chemnals, and salt mament throughout their tenurc.

Walter E. Massey Vnc President of The Umversity of Chnago for Research and for Argonne Nanonal Laboratory educanon and research Rxhard M. Morrow Chairman and Chiet E xecunve OtIncr Amoco Corporanon explonng tot, producmg.

purchaung, manufacrunng, transpornng, and markenng of petroleum and petroleum products 22 ' member of the Auda Cornmarce

. In d ex t o Fi n a n c ia l R e t'ie tt-Financial Performance by .

Major Business Lines. 24 Earnings Analysis Summary . , .25 Net Interest Income. . .26 Provision for Loan Losses . .27 Noninterest Income. .27 Noninterest Expense. 28 Applicable income Taxes. . 28 Risk Management Overview. . . . .29 Credit Risk Management Risk Analysis Process. . 29 Portfolio Concentrations. . 30 Credit Exposure. 30-Allowance for Loan Losses. . 31 Nonperforming Assets. 31 Asset and Liability Management Liquidity Management. 32 Interest Rate Sensit'vity Management. 33 Trading Risk Management. .33 Capital Management. 33 Foreign Outstanding. 35 i

i 23

Financial Perforrnance by Major Business Lines For strategic purposes, First Chicago Corporation is organized losses and noninterest expense in the Global Corporate Bank con-

< , into three segments that represent its fundamental businesses: the tributed to a weakness in the profitability ratios. In 1986, large Global Corporate Bank, the Consumer Bank, and the Middle Market additions to the allowance for loan losses were deemed to be war-

! Bank. The 1986 and 1985 financial results for each of these busi- ranted by management, and expenses were accrued for restructuring

ness lines, aggregated to the Corporation's consolidated results, domestic and overseas operations. These negative impacts on the are presented in the following table. net income of the Global Corporate Bank were partially offset by l

Financial Performance by Major Business Line (Do lars in millions) l Global Corporate Bank Consurner Bank %ddle Market Bank brst Chicago Corporacon 1986 1985 1986 1985 1986 1985 19n6 1985 Net interest income, tax equivalent basis $ 571 5 646 $ 375 $ 332 $ 167 $ 167 $ 1,113 $ 1,145 Provision for loan losses 292 270 133 120 15 21 440 411 Noninterest income 609 451 198 161 56 46 863 658 Noninterest expense 687 606 268 239 (42 134 1,097 979 Loss on affiliate investment 8 131 - - - -

8' 131 Net income 156 74 86 66 34 29 276 169 Average assets $30,288 $31,234 $4,764 $4,550 $3,801 $3,788 $38,853 $39,572 Retum on assets 0.52% 0.24 % 1.81% 1.44 % 0.89% 0.77% 0.71% 0.434 The line-of business financial results were derived from the the following special items: the allocation of the gain on the settle-Corporation's intemal profitability reporting system. This methodol- ment of a portion of the pension plan obligation; a higher lesel of ogy allocates every income statement and balance sheet item to a venture capital gains; and the income tax portion of the leveraged specific business. lease adjustment.

The financial results for the Middle-Market Bank are based on The Consumer Bank markets local retail products and services, the legal entity statements of the American National Corporation, and the nationwide bankcard product. This business continued its adjusted for purchase accounting and other acquisition-related items. strong financial performance in 1986, as net income grew 30 percent from the 1985 level. Most of the increase was due, however, to the in the case of the Global Corporate and Consumer Banks, First allocation of approximately $23 million to the noninterest income Chicago's internal allocation system emphasizes the matching of of the Consumer Bank in 1986. This amount re, msented its share assets and liabilities with similar maturity and interest-rate character- of the gain on the settlement of a portion of the pens >n plan istics. Net interest income is determined by assigning credits for obligation. Higher net interest income resulted from a moc favor-funds provided and charges for funds used. The rates for these credits able pricing and funding environment for consumer products. At and charges are based on the Corporation's actual rates or prevailing the same time, the provision for loan losses, and operating expenses, (narket interest rates. All costs of the Corporation, including over- grew 11 percent and 12 percent, respectively.

head, are passed on to the business lines. While this methodology is undergoing refinement, no significant changes occurred in 1986 As noted above, the Middle Market Bank financial results are those that would materially affect year-to year comparisons. of American National Corporation, adjusted for purchase accounting and other acquisition-related items. The resulting return on assets The Global Corporate Bank's financial performance includes the of 0.89 percent is comparable to a 15 percent terum on First Chicago's results of providing traditional commercial banking services to large investment in American National. Although net interest income in customers, investment banking services, trading operations, financial 1986 was relatively unchanged from the previous year, the net income and noncredit products, and specialized services such as venture of the business grew 17 percent from 1985. This was due to strict capital, investment management, and leasing. Net income for the controls that held the increase in American Nationafs expenses to Global Corporate Bank in 1986 was significandy higher than in 1985, only 6 percent, a healthy increase in its noninterest income, and a when the loss of $131 million on an affiliate investment in Brazil year-to year reduction in its provision for loan losses.

?

depressed earnings. Continued pressure on interest margins caused a decline in net interest income, which included a $30 million re- .

l duction because of the revaluation of the leveraged lease portfolio l in accordance with the new tax laws and the accounting rules gov- i erning leveraged leases. The high levels of the provision for loan i 4

s 24

First Chicago Corporation and Subsidiaries -

Five Year Surnmary of Selected Financial Information (Wilars in mdhons. except per share and nonfmancial data) 1986- 1985 1984 1983 1982 5 elected financial Data for the Year Net interest income $1,037.6 $1,053.0 $895.0 $709.1 $615.8 Tax-equivalent adjustment 75.0 92.2 95.0 76.0 65.3 i Ret interest income-tax equivalent basis 1.112.6 1,145.2 990.0 785.1- 681.1 i Provision for loan losses 440.0 411.2 464.8 150.0 112.5 Net income .

276.2 169.0 86.4 183.5 136.8 Earnings per common share 4.70 2.84 1.19 3.92 3.33 Dividends declared per common share 1.32 1.32 1.32 1.26 1.20 At Year-End Total assets $39,148 $38,893 $39,846 - $36,323 $35,876 Total deposits 27,025 27,148 28,592 27,680 27,419

. Loans 25,410 24,190 25,576 22,250 22,192

.Long-term debt 953 842 431 298 311 Stockholders' equity 2,347 2,090 1,924 1,742 1,491 Primary capital 3.312 2,846 2,441 2,060 1,795-Average Balances .

Total assets - $38,853 $39,572 $38,551 $34,543 $34,733 Earning assets. 34,729 34,979 34,206 30,502 30,548

-Loans 23,905 24,976 23,901 21,499 20,588

' Total deposits 26,545 27,704 26,958 23,395 24.662 Common stockholders' equity 1,906 1,677 1,604 1,428 1,319 Stockholders' equity 2,231 2,002 1,917 1,658 1.342 Financial Ratios - j Return on stockholders' equity 12.38 % 8.44W 4.51% 11.07W 10.197 Rerum on common stockh'olders' equity 13.32% 8.33% 3.38 % 11.37W 10.18W Return on assets 0.71% 0.43W 0.22 % 0.53 % 0.394 Primary Capital at Year-End l

As a percentage of adjusted total assets 8.34W .7.24W 6.08 % 5.64W 4.989 Common Stock and Stockholder Data Market price, end of year $ 28% $ 29:2 $ 21% $ 25% $ 18ta Book value, end of year 36,91 34.10 34.12 35.80 33.$5 Common dividends 71.4 65.3 61.0 52.1 48.4 Preferred dividends 22.4 29.3 32.1 21.2 2.5

. Dividend payout ratio 28.09% 46.48W 110.92 % 32.14W 36.04W  !

Number of common stockholders 12.415 14,458 14,529 14,462 14,003 Average common and common equivalent j shares outstanding 53,998,812 49,220,034 45,663,244 41,399,116 40,166.448 ,

Earnings' Analysis .

\

Summary j First Chicago Corporation's 1986 net income of $276.2 million was pcent in 1984. Similarly, the return on common stockholders'  !

a substantial improvement from $169.0 million in 1985 and $86.4 million in 1984. The earnings in each of these prior two years were i

equni ncreased to 13.32 percent from 8.33 percent and 3.38 percent a the prior years, respectively.

)

i adversely affected by major events: the $131.1 million expense in  !

i 1985 relating to the loss on a Brazilian affiliate investment, Banco Denasa de Investimento S.A., and the high provision for loan For Year Er.ded December 31 losses in 1984. In addition,1984 results included American (ooit,rs in miinons, excep, 1 National Corporation for the eight months after its acquisition per share a nounts) 1986 1985 1984 by First Chicago on May 1,1984.

Net income per common share grew to $4.70 in 1986, up from Eammgs pu c mm o share 4.70 2.84 W

$2.ti4 in 1985 and $1.19 in 1984. Per share amounts are computed Return on assets 0.71W - 0.4M 0.227 by dividing net income less dividends on preferred stock by the aver. Return on common stockholders' equiry 13,324 8.39 3 387

]

age number of common and common equivalent shares outstanding.

The profitability ratios for 1986 reflected First Chicago's improved performance from 1985 and 1984. The return on assets for the year j was 0.71 percent, compared with 0.43 percent in 1985 and 0.22 l

l l

1 25 L ____ _ _ ______

y y Tbc earnings performance in 1986, compared with 1985, was First Chicago's average assets decreasch 2 percent in 1986 td8.

characterized by the following key factors

billion, from $39.6 billion in 1985. "1he Corporation, through Mye y . management of the balance sheet, continued the trend of shifting,1 e stable net interest income, with an increase in domestic spread the composition of earning assets from those with narrow spreadsh ) 1 offset by lower overseas spread; to those with more profitable returns. The followmg factors e revaluation of the leveraged lease portfolio because of the new tax c neributed to the changes in the average balance sheet during 1986:

laws, resulting in reductions of net interest income and tax

• modest growth in the average volume of credit card loans and e expense, for a net addition to earnings of $0.20 per common share; middle-tnarket loans of American National Corporation, partially >

. ffset by declining levels of domestic commercial loans; o an increase in the provision for loan losses to build further the allowance for loan losses;

• continued decline in the level of the Corporation's foreign loans, as well as related funding instruments; '

osubstannal growth m. total noninterest income, consisting principally ofincreased trading and foreign exchange profits, exceptional e a stable level of domestic depenics; and gains on the sales of equity and investment securities, and a gain .

of $81.7 million from the settlement of a portion of the '8f *th f14 ercentP in average common equity.

Corporation's pension plan obligation; and The Corporation's asser and liability management principles and a e higher noninterest expense, excluding the loss on Banco Denasa, more detailed review of the balance sheet components are presented resulting principally from increases in incentive compensation and in the Asset and Liability Management section on pages 32 34. The profit sharing based on improved corporate performance, as well following section summarizes the 1986 results for the maior line as costs related to the restructuring of the Corporation's domestic items of the income statement. O and overseas operations.

Net Interest Income :

The Corporation's performance also reflected the continued strength- Net interest income on a tax-equivalent basis includes both the ening of the balance sheet in 1986. During the year, the allowance fundamental percentage spreads on earning assets and other items for loan losses grew by $153.4 million to $$85.0 rnillion, and the such as loan fees, cash interest collections on problem loans, resulting ratio of the allowance for loan losses to loans outstanding dividend income, and interest reversals. Over the past five years, net at year end was 2.30 percent, up from 1.78 percent in 1985 and interest income has been a reliable and consistent source of earnings 1.14 percent in 1984. The Corporation's ratio of primary capital to for the Corporation. In 1986, net interest income was $1.142 assets increased as well, to 8.34 percent at year-end 1986 from 7.24 billion, excluding the downward adjustment of $29.5 million resulting

. percent and 6.08 percent in the previous years, respectively. The from the revaluation of the leveraged lease portfolio. This figure for continued improvement in these ratios enhances the underlying 1986 was only slightly under the 1985 record level of $1.145 billion, safety and soundness of the Corporation. which was 16 percent ab<pe the 1984 level.

s The new tax act signed into law by President Reagan on October Net Interest Income <

22,1986, contains many provisions that affect the banking industry. M*g B" The major element of the new tax bill is a reduction of the corporate suoo

tax rate from the current 46 percent to 40 percent in 1987, and 8U 34 percent in 1988 and beyond. The tax rate reduction is expected uoo a su42a gg to have posmve imphcat ons for First Chicago's provision for mcome ---

3, taxes starting in 1987. J ,

, -1.000 Deferred tax assets and liabilities on the balance sheet will be affected / 8990 0 by the lower tax rates. Present accounting rules for leveraged leases, 900 /

which generate the majority of First Chicago's deferred tax liabilities,- _f require that an adjustment be made at the time ofimportant 800 /

changes in assumptions. Therefore, the revaluation of deferred taxes on leveraged leases occurred in the fourth quarter of 1986 and fg 700 f s resulted in a special credit to earnings, net of an adjustment to r net interest income as part of the overall leveraged lease revaluation.

The rules for accounting for the other deferred tax items are under 600 Y" review by the Financial Accounting Standards Board. If the Board's 1982 '83 '84 '85 '86 present proposals are adopted, the Corporation's remaining net deferred tax assets would be revalued at the lower tax rates, result-ing in a charge that could more than offset the special credit to earnings in the fourth quarter of 1986.

I i

-26

Net. interest income is a functiorbof the net interest margin and Noninterest income earning asset volume. Average earning assets for 1986 were $34.7 Firs: Chicago s noninterest income was $863.3 midion in 1986. up

. billion, down slighdy from $35.0 billion in 1985, but up from from $658.0 million in 1985 and $472.2 million in 1984. The 1986

$34.2 billion in 1984. figure mcludes a gain of $81.7 million from the serdement of a 4 portion of the Corporation's pension plan obligation. Excluding The net interest margin for the Corporation, without the adjustment this gain, noninterest income in 1986 was 19 percent greater than for leveraged leases, averaged 3.29 percent in 1986, compared with in G85. The year's performance also reflects the fundamental 3.27 percent in 1985 and 2.89 percent in 1984. imy rowment in the Corporation's fee generating and global trading .

L

- % sir. esses, and higher gains on the sales of equity and investment The following factors contributed to maintaining this level of net securities.

interest rnargin:

o continued shift in domestic earning asset mix towards more g, gg,) ,9g 39,3 ,,

profitable earning assets: ---

Tradog account profin s 36.5 s 29 0 s 12.2 3 e declining funding costs on credit card loans; Foreign exchange trading 9 profin 94.0 47.2 23 $

y ean increase in average available demand deposits; and Fiduciary and investment o higher avecage levels of available capital funds.

cr ard fe 123 1

< 8 '

Other service revenues 9 A higher average bel of nonperfo.rmmg loans in 1986 y!rr.ially and fees 114.9 io6 5 77 9 offset these posidue factors. Internanonal fees 70.1 68 4 r8 o Equiry secunnes Approximately 88 percent of total net interest income in 1986 was 8 '"' O "*5) 38EI I 4" *7 h* generated from the Corporation's domestic operations. Domestic I"*'.g$o',',,""' 27.6 10 -

net interest income grew 3 percent from the previous year, exclu Jing other 20.7 45A 32 2 the adjustment for leveraged leases, as a result of the shift in the '

subrotal 781.6 658 0 c22 mix ofdomestic eaming assets. In addinon, domestic loan fees W reased Gain on parnal settlement of 19 percent from 1985. Overseas net interest income declined 21 pension obhganon a t.7 - -

percent in 1986 due to a lower volume of overseas earning amts.

.,.g ,g3, ,,, 3 Provision for Loan Losses The changes in the allowance for loan losses are presented in .the Equity securities gains of $187.1 million were the largest component

, fouowing table: of noninterest income in 1986. This record level included gains of

$155.8 million from the venture capital group and $31.3 million mollars in mdlions) 1986 1985 1984 from the sales of equity securities held in The First National Bank Allowance for loan losses. of Chicago and American National Bank. Equity securities gains at beginnmg of year $431.6 $291.7 s218 0 were $146.7 million in 1985, including a gain of $48.7 million from Charge oth 340.0 309:0 438 0 a single transaction. The success of the venture capital operation Recovenes $2.3 373 23.1 was aided by the very active stock market in 1986 and an unusual Net charge offs 287.7 2713 414.9 number of corporate restructuring undertaken at year-end for tax Puwuion for loan losses 440.0 41l.2 Atomsmorn arid dnpounons 464 8 considerations.

1.1 -

23 8 Net addioons to allowance 153.4 139 9 73 7 Profits from the trading businesses increased significandy in 1986.

pU Allowance for loan ioE s Trading account profits grew 26 percent to $36.5 midion from

-at year end s$a$a $451.6 s;913 $29.0 million in 1985. Trading account profits were $12.2 million

-as a pertentve of loans outstanding in 1984. Foreign exchange trading profits of $94.0 million in 1986 2304 1389 i 14w were nearly double the level of $47.2 million in 1985, and consider-

~

ably greater th2n the $25.5 million figure in 1984. The performance  ;

The provision for loan losses was $440.0 mdlion in 1986, compared in both trading areas was attributable to established teams of experi- '

with $411.2 million in 1985 and $464.8 million in 1984. Net enced professionals capitalizing on market opportunities. The charge-offs were $287.7 million in 1986, compared with $271.3 vo;ame of trading account assets averaged $2.3 billion in 1986, million in 1985 and $414.9 million in 1984. compared with $1.2 billion in 1985, reflecting the Corporation's increased activity in this business during the year. The Corporation's The allouance for loan losses increased to $585.0 million, or 2.30 foreign exch.tnge trading positions, which anticipated the general percent ofloans outstandmg at December 31,1986, compared with weakness in the value of the douar against foreign currencies, and

$431.6 hi&n, or 1.78 percent at year-end 1985, and $291.7 the introduction of a variety of new products, contributed to the million; or 1.14 percent at year end 1984, higher t>rofits in foreign exchange in 1986.

The Credit Risk $tanagement section on pas ~5 29-31 provides the Corporanon's views and policies on allomace adeq' acy, charge-

ofis, and other credit related issues.

t 27 i i

Credit card fees totaled $128.8 million for the year, compared with

$123.6 million in 1985 and $112.3 million in 1984. The increase in (in mahuno 1986 1985 1984

'i both years was due principally to a larger base of cardholders satanes and employee against which annual fees are assessed. Interchange fees, which are bene 6ts s 575.5 s 505.6 5423 6 associated with the level of credit card usage, grew slightly in 1986. occupancy expense of premises. net 109.2 102.8 89 5 Fiduciary and investment management fees for the Corporation were Eqwpment rentals. j

$101.9 million for the year, including $24.0 million from American n E*'e'n'[n"c"e' '" 75.1 65.7 53 4 National. The increase in fees from $90.2 million in 1985 and loss from an affaiare

$77.4 million in 1984 resulted from growth in the value of personal m"ument s.o 13u -

Other 337.5 304.5 275.5 trust and institutional assets under management.

Tural $1.105.3 31.109 7 $842.0 Other service charges and fees were generated from deposit balances, operating products and services, and other financial products and increased salary and employee benefits expense was the primary services, such as investment bankmg activities. Fees from these contributor to this growth in both 1986 and 1985 for the following important domestic businesses were $114.9 milhon m 1986, up 8 reasons:

percent from $106.5 million in 1985 and substantially higher than

$77.9 million in 1984.

• higher incentive compensation and profit sharing expense, reflecting the Corporation's improved performance; international fees of $70.1 million for the year were slightly higher than $68.4 million in 1985, and down from $78.0 million in 1984.

• employee-separation costs related to the restructuring of the The decline from the 1984 level is due primarily to lower docu- C rp rati n's d meso'c and overseas operations; and mentary fees.

• increased salaries, higher payroll taxes, and medical costs.

More active management of First Chicago's investment account and Occupancy (xpense rose due to increased costs associated with improved market conditions in 1986 led to investment securities renewed lease contracts and the rental of new facilities. In addition, gains of $27.6 million, compared with $1.0 million in 1985. existing facilities have been continually upgraded t > achieve a long-term stabilization of occupancy costs.

Finally, other income includes a $2.2 million gain on the sale of leased assets in 1986, compared with $19.2 million in 1985 and Equipment costs also increased, reflecting continued strong invest-

$13.8 million in 1984. ment in data processing, communications, and other equipment.

Noninterest income General operating expense, such as marketing, consulting services,

(*""'a" communications, and travel, grew in both 1986 and 1985, resulting 81 000 from increased business activity and higher costs for such ser ices.

900 Applicable income Taxes 800 /ss69 The following table shows the Corporation's income before income

//,. sm 6 pem*=

m%pa taxes, applicable income taxes, and etTective tax rate for each of the 700 last thret years ended December 31.

600 58 0

/ (Dollars in mdbons)

Year Ended December 31 1986 1985 1984 400 4712 Income before gg mcome taxes $355.6 31901 3 60.4

- Applicable income 82974 $ 79.4 3 21.1 200 taxes (benefit) $(26 0) 39g2 .g3 .g4 .g$ 86 Mecow tax me 22.3 % 1m *

• nor meanmgful Noninterest Expense EfTective control of expense growth is essential to the Corporation's The effective tax rate in 1986 was 22.3 percent, up from 11.1 percent profitabihty. Management is willing, however, to incur certain expenses in 1985. A significantly lower proportior of tax exempt income to in current periods as investments in future earnings potential, totalincome in 1986, compared with 1985, was the primary factor -

contributing to this increase. Partially offsetting this factor were The Corporation's total noninterest expense was $1.105 billion for long-term equity securities gains, w hich are taxed at lower rates, as the year, or approximately 12 percent greater than for 1985, after well as the impact of the revaluation of the Corporation's leveraged excluding the Banco Denasa expenses of $8 million in 1986 and lease portfolio due to the new tax isw's lower rates.

$131.1 million in 1985. Noninterest expense was $842 million in 1984. .

The increase in income before income taxes and higher levels of ,

tax-exempt income in 1985 were the primary reasons for the change in the tax provision from a tax benefit of $26.0 million in 1984 to  :

a tax expense of $21.1 million in 1985.

i 28

.2 ,

c Risk Management; The Credi: Products' Group monitors adherence to there guidelines.9' At First Chicago, the relaconship manager is responsiby (w  :

3 . . i, evaluating the credit quality of his or her client. The Cre6t Products

,< Overview, 5 Group has responsibility for ensuring the qua!!ry of the specific The (3ancial objective of First Chicago Corporation 'is t ghieve a products being provided. The Credit Process Review Depx.tment return on common equ ry m the range of 14 to 16 percent yhile conducts audits to monitor compliance with poliel, to confirm maintainmg a (mancial secength thatis compuAte to the typ half of Fint Chicago's peer groop. Risk mangement is the me surement, . credit facdity risk ratings, and to initiate changes in cthose ratings assessment, and balancing of risks that must be anurned . rder where appr@riate. CRESCO, an a quartedy basis, monitors thos~e to achieve this objective. facilities and relatPmhips that do not meet establishd quality

'r standards. Througz this process, CRESCO assesse .ye expesure to' risk and theadequacy of the Corporation *; allowance for During the last several years, First Chicago has developed an effeco. ve g gosgs, x '

risk managemer1 process. This process ensures that pohcies and

. procedures are iri place to measure, evaluate, and, where necessary, control risk and exposure m light of the expected returns from in 1986, the credit risk management process at first Chicago con-L taking such risks. First Chicago has also establish 6d a strong capital (- tinued to improve significantly.The following three ac'cor plishments were particularly important:

structure to support the nsk pyofile that has emerged from these ,

processes.

• establishment of formal target marker definitiontano t!sk' /

acceptance criteria for all credit products and custmer segrrants;

' The major risks with which the Corporation is concerneo# art credit, hquidity, market, and operaung nsks. The Credit Straten Commit-o creation within the Glcbal Corporate Bank of the Credit INicts Group, which is responsible for the effective implementation of tee (CRESCO) esta%$es,appropnate policies and measars acd , .

assesses exposure for actnues that ectate credit nsk. The Asser an% g.; standards for all commercial product offerings; and

• - Liability Management CommAte:(ALCO) measures and assesses (

• wriwn darificar on of the Corporation's credit peticies through i exposure for activities thr.t generate liquidity and market risk. a corrprehensive revision of the Credit Policy @uW >

ALCO also establishes the appropriate capital management policies. g 'f <

Individual operating bits have responsibility to establish procedures first CLicaga belieds that attention to "off-balance sheet" exposure and policies to cortrm9enicing thks The Audit Department is appropriate, and that management of the cr-di .r,k in this form assumes responsibility for ensuring that such procedures and policies of expos.<re is necessary and prudent. A new credVinforrnation for dealing with operating t sk are adequate and are being followed. system that aggregates exposure under all comcrercN credd Lteilities The Examining Committee and the Audit Committee of the Board was developed during the year to support this uedh risk manage- ,

of Directors evaluate these policies and procedures.' ment process. , 1' '

The following is a discussion of credit, liquidity, and market risk Risk Analysis Process , , /

management, as well as capital adequay, for First Chicago. In addi- The Corporation pursues a 5:rategy of divershication in its credit tion, the approach and meJtodology that CRESCO and ALCO use exposure by geographic area, industry, ar/d irdvidual customer. .

to establish risk management policies are presented. CRESCO and its supportive councils ms. sage this effort through &

t ,

,oinual evaluation of the credit porr' olio. The Economic Council Credit Risk Management

[J Ovem.e'

&. tops macroeconomic and finarwial scenarins for this purpose,

. aentifying the most probable environment over the medium term and This sectw of the financial review addresses management of the a variety of downside scenarios as possible alternative environments.

risks the Corporation assumes in providing ce $it products d cus-comers. Credit nsk management begins with a defimuon of acceptable These macroscenarios are applied to specific industries and countries, and exposure targets or limits are established. Particular nskIreturn crheria and cc nunues through the credit procm by establishing pohcies and procedures r:lating to initiation, documenta- scenarios (such a.s declining energy prices) that would affect a tion and disbursement, monitonng, and portfolio evaluanon. number ofindustries and/or broad geographic concentrations an:

The risk management process also reviews and measures compliance also analyzed in view of this diversification, objecove. Furtherm selected portfolios are subjected to a pmcess known as "nress test-mth these pohcies. The Corporanon's policies require that every customer be qualifiej withm a target market. Each target market ing," in which the sensitivity of an ichty to increased dornside has exphcit nsk acaptance criteria against which each customer risk is assessed. This results in the identificanon of possibicaceas for de emphasis or disinvestment. -

or potential customer is evaluated. This pobcy appbes whether or not the products to be offered contain credit risk.

CRESCO meets at least quarterly to asse che adequacy of the CRESCO has ultimate management responsibu...ity for strategic Corporation's allowance for loan losses. In maintaining the allowance, direction and oversy;ht of First Chicago's credit nsk management . the Corporation estimates potentiallosses resulting from credit risk process. CRESCO is chaired by the Corporation's chief credit

, undertaken by the Corporation. Identified losses deemed certain to

.obcur are charged-offin the quarter in which such determina<: ion officer and includes the three pnncipal officers of the Corporan. on.

Amade.

Operating through the Industry Risk Management Council and '

Country Risk Management Council, CRESCO establishes diversifica- ,r non guidelines with specific credit exposure policy limits. These 1 x limits are established by chent and, where appropriate, by industry t and geographic area. i 6 4

h

\

P 29

r The potential for loss m the Corporation's commercial portfolio . Loans-Composition is based on a specific credit by credit review. Potentiallosses identified

• December si <in mano 1986 W85 m enher the most probable or the downside scenarios in this process are reserved against at levels that the Corporation deems adequate. Domesoc corporm Commercul , . $ 7,419 3 6465 For the sovereign and transfer risk portfolios, the Country Risk secured by reas estate . . .2.992 2.486 nnancui muunons .2,133 1.437 Management Council identifies those countries that may experience

u. .2 m 2Acn .

difficulties in generating foreign exchange or acquiring new financing to meet their contractual debt repayment schedules. Potential short. subroul 14.s92 12.887 falls on indebtedness to First Chicago are estimated for these countries ro,,,

and mnsidered in the overall assessment of reserve adequacy. Commercul . .2,763 3.156 Sovereign risk is tested in a manner similar to that used for commer- Govemments and official nsatunons . . .1.157 l.255 cial risk. Nnks and other financialinsatunons . .1,537 1.965 l _

Other . . . . 337 284 i The potential for loss in the Corporation's consumer portfolio, subtotal 5.774 6.660 l

excludmg credit card, is treated m simdar fashion to the commercial

portfolio. Loss potential ir, the credit card portfolio is tested using . Domesoc Consumer l the statistically expected level oflosses based on the portfolio's age C' eda cards , , .. 3.506 3.363 and mix. secured by real estate. . . . . 8% 895 l Other . 382 387 l' The Corporanon also reserves for potentiallosses that are not subtotal 4.744 4.643 specifically identified by the methods discussed above. Reserves Lean ans s25.410 s2m ce established for these potential losses based upon analyses of I risk factors for credit exposure not specifically identified and by senior management's assessment of the Corporation's overall credit The Corporation continues to emphasize growth in consume e loans, risk, and their judgment of economic and other factors that may primanly credit card outstanding, the second largest segment affect the level of the Corporation's potential losses. This review of the domestic loan portfolio. Consumer loans were $4.7 billion incorporates the Corporation's credit risk associated with certain at December 31,1986, of which $3.5 billion were credit card off-balance sheet items-standby and commercial letters of credit, outstanding. Significant increases in this portfolio segment are binding unfunded commitments, and long term interest-rate swap anticipated in 1987, resulting from the acquisitions of Beneficial agreements and foreign exchange contracts. National Bank USA and First United Financial Services, and business generation efforts.

Portfolio Concentrations The emphasis in the domestic corporate portfolio management is Credit Exposure reasonable diversification among various industries and geographic Domestic Corporate Portfolio

[ areas. At year-end 1986, First Chicago's largest industry exposure in 1986, domestic corporate net charge-offs totaled $77.3 million, I was in real estate, comprised of mortgages on commercial properties $18.2 million less than in 1985. Approximately $31.7 million of net and construcdon loans, which totaled $3.0 billion. Domestic finan- commercial charge-offs involved energy-related obligors. While the cial institutions and energy-related exposure ranked next with recent increases in oil prices are providing some relief, energy expo-

$2.1 billion and $1 A billion, respectively. Energy-related exposure sure will be vulnerable to financial erosion in 1987. Energy prices has been reduced from $1.9 billion at December 31,1985, and the must rise further and display sustainability and greater predictability majority of the Corporation's remaining energy portfolio represents before a resurgence will develop in exploration and development credit to the largest vertically integrated and fm' ancially sound activities. The Corporation continues to have a high level of problem members of the industry, loans ie this area that may result in higher charge-offs in 1987.

The foreign portfolio totaled $5.8 billion at year end. Management Analysis of Net Charge-Offs

, assesses this portfolio in two maior segments: exposure primarily December 31 (in mitiions) 1986 1985 l involving business nsk and exposure primarily related to sovereign and transfer risk, whether from the private or public sectors. D **5"' corporate commacial . 5 52.5 5 889 The sovereign and designated transfer risk segment totaled $3.3 billion at year end. It is management's intention to selectively reduce exposure in this segment, while aggressively seeking

[ N opportunities to increase business with major trading partners. subrotal 7.3 95.5 Foreign . .93.3 84.2 Domesoc Consumer i

l- Credit cards .115.7 90.7 Real estate . 0.1 0.2 Other . .1.3 07 subrotal 117.1 91 6 l Net charge offs $287.7 $2713 30

Theprecipitous decline in energy pricet during the first half of 1986 Allowance for Loan Losses had a dramanc effect on other segments of the domestic corporate m y,m,namno m m ws m n82

• portfolio, particularly the real estate and fmancial services sectors.

Net charge-offs were $10.5 million and $6.6 million, respecovely, in hemnmx of the year allo *4nce these industries. There continues to be substantial overbuilding in "*'""". 8 +3i.6 s 29i.7 s 216 0 s 20s i s 185 1 Proven br loan lones . 440.0 411 2 464 8 150 0 112 5 many areas of the United States. There is also further weakening in the economica of some of these locations. The resulting vulnerabilir/ N" "*"' '"hnen . . 2su 27:3 4to in 3 ion could resub in an increase in nonperforming real estate assets, ["j,""j"; ni . . a.: -

23 8 u2 92 although high levels of charge offs are not anocipated in either of g, g,n io,,,, . .,,,,, 43g 33g 5

29i , 203 i these sectors in 1987. l. cans outstandmg ar yeu end . .25.410 24.190 25.576 22.250 22.lW Average loans outstandmg for the year. 23.90$ 24,976 23,901 21,499 20.588 forejgn portfolio Allowance for Imn loued in 1986, total foreign net charge-offs increased to $93.3 million from luni oursundmg . .2.30s 178* 1 14* 0 984 0 92w

$84.2 million in 1985. Net charge offs relaung to the business risk Net chexe otV5/ average loans . .1.20 5 1 094 1742 06n 0 504 portion of the portfolio were $73.7 million, up $3.5 million from i 1985. This exposure was primarily concentrated in energy-producing Nonperforming Assets I countries and resulted from detenoration in the business climate. Nonperforming assets include loans on which the Corporation

! Losses in this category involved the construction and financial does not accrue interest ("nonaccrual loans"); loans that bear a rate services industries. Lower net charge-offs are anticipated in this ofinterest that has been reduced below market rates due to the segment in 1987. deteriorating fmancial condition of the borrower (" renegotiated loans"); and real estate assets acquired in satisfaction of debt The sovereign and transfer risk portfolio is ofgrowing concern ("other real estate").

and complexity. Two occurrences in 1986 significandy affected this exposure. They were the decline in energy pnces and the increasingly Total nonperforming assets increased $202 million from year end arduous nature of negotiations between certain countnes and their 1985 to $859 million at year end 1986. Due to deterioration creditors in restructuring debt recayment programs. In the third in a small number of energy credits and one real estate credit, quarter of 1986, management substantially increased the reserves for nonperforming assets peaked at $945 million in the first quarter such risk exposure. This sector of the Corporation's business will of 1986, before declining in each subsequent quarter.

require close attention. Notwithstanding this caution, management does not expect a substantial deterioration in wodd debt markets in Nonperforming Assets 1987. In 1986, the Corporation recorded $19.6 million in net 9,c,mt,er n (It millions) 1986 1985 1984 1983 1982 charge-offs related to transfer risk and expects a similar levelin 1987.

Nonaccrual loans $815 $636 $691 s800 $693 Consumer Portfolio Renegonated loans 4 4 9 12 85 Domestic consumer loans are composed primarily of credit card Nonperformmg loans 819 640 700 812 7-'8 outstanding. As expected, net charge-offs associated with credit Other real estate 40 17 58 42 69 cards were higher in 1986 than in 1985. Net charge-offs of $115.7 million or 3.5 percent of average outstanding credit card balances.

N npen rnung anets gay g g g g reflected the age and mix of the Corporation's portfolio. Both the Neperformmg usets as a dollar level and rate of consumer net charge-offs are likely Pc'cenuFr ofloans and to increase in 1987. This is primarily due to growth in credit card "5h" al """ Mgggg loans through solicitation and the acquisition of Beneficial National Bank USA. However, the charge off rate will remain well within wmpective standards. Management anticipates that nonperforming assets will remain reasonably stable in 1987 in a range approximating that of 1986.

Allowance for Loan losses For the full year, the provision for loan losses was $440.0 million, compared with $411.2 million in 1985. After deducting net charge-offs and considering acquisitions and dispositions, the addition to the allowance in 1986 was $153.4 million. At year-end, the allowance was $585.0 million, up 36 percent from $431.6 million at year end 1985. The allowance represented 2.30 percer t of outstanding loans and 681 percent of nonperforming assets at December 31,1986.

This compares with 1.78 percent of outstanding loans and 65.7 percent of nonperforming assets at December 31,1985.

31

The following table shows the foreign and domestic components Assets of nonperforming assets for the years ended December 31,1986 - The Corporation's target is to maintain approximately 20 percent of

. and 1985, the total balance sheet in liquid assets. The cost of maintaining this level oflow yield liquid assets has been carefully balanced against k the benefit that these assets provide to the Corporation's overall J n86 W85

- funding strategy. These short term or readily marketable assets (in mdhom) Domestic Foreign Toul Domunc Forewn Toul include deposit placements, Federal funds sold and secunties under res le agreements. and trading account assets. During 1986, the Nonaurual loans $544 $271 sal 5 $351 s285 5636 nenegouated loans 3 1 4 4 - 4 Corporacon cons,stendy i met the 20 percent objecove. This high degree ofliquidity, relative to First Chicago's peer grcap, provides 4 Nonperturming loans $47 272 819 355 285 640 greater flexibility in balancing fie fluctuating borrowing require-Other real estate 39 1 40 17 - 17 ments of customers against the Corporation's daily funding capacity.

Nonpertornung assets $586 s273 s859 sm s285 ss57 Liquid assets data are shown in the table below:

= ==

" ^ ""* 5 For nonperforming loans at year end 1986 and year-end 1985, interest at original contract rates (based on average outstanding A-(in mdbom) 1986 W85 iwa balances) and interest actually recorded for those periods were Due4 rom banks-mteresi as follows: beanns ss.271 $4368 55.611 Federal funds sold and secunnes under 1986 M85 resale agreements 1.382 2.067 1.596 (in mdhuns) Domestic foreign Total Domesuc Foreign Tuul Tout 58.945 $8.267 s?.M5 Interest at ongmal contract rates s65 s34 $99 s48 s35 s83 The investment securities portfolio provides a secondary source of Interni actually liquidity to the balance sheet and is shown below; recogndeo 7 8 15 8 10 18 loterest shortfall. before investment Securitic's mcome tax effect g s g s84 s,40 $2,,5 s, 6, ,5 Detember 31 (in mdlions) 1986 W85 tw4

. . Debt se:unces Loans that were 90 days or more past due and soll accruing interest us Government and at December 31,1986, amounted to $75.4 million, of which $17.2 Federal Agency s 861 s wo s 570 State 5 andPohocal million were foreign loans. This compares with a total of $52.7 million at year end 1985, of which $10.4 million were foreign loans. g ,j,L,"' nows and debentures 117 IM 137 At December 31,1986 and 1985, the Corporation was committed Total debt secunties 1.524 t.$oo t.297 to lend additional funds of approximately $21 million and $14 million, gqu,,y ,,cyno,, 3,9 306 ay respecuvely, in connection with nonperforming loans.

Toul s2.045 $ 2.012 stNo Finally, First Chicago has developed the capability to sell loans in Asset and Liability Managernent order to continue accommodating important corporate customers' borrowing needs while meeting the Corporation's profitability and Liquidity Management balance sheet targets. The loans sold generally are of high credit Liquidity is the ability to meet all present and future fmancial quality and narrow interest spreads. This loan-selling capability obligations in a timely manner. The Corporation's goal is to adds to the flexibility of the Corporation's liquidity management maintain a high degree ofliquidity in the balance sheet through practices.

active management of both assets and liabilities. The Corporation's asset management policies determine the proportion of total assets Liabilities that is composed of readily marketable assets. Its liability manage- First Chicago Corporation's mix ofliabilities represents a diversifica-ment policies focus on continuing the Corporation's direct access to tion ofinstruments, maturities, and depositors. This diversification money ma:kets and monitoring the level of future funding require- intends to minimize the expense ofgathering funds, while matching ments. ALCO sets these policies, which are reviewed by the Board's anticipated cash needs with funding sources.

Examining Committee.

The First National Bank of Chicago and American National Corporation's bank subsidiaries have direct access to the Chicago-area retail market as a source of funds. Despite Illinois state banking laws limiting the number of branch facilities, the Corporation's consumer deposits continued to grow in 1986.

The majonty ofliabilities funding The First National Bank of Chicago is raised from nonretail sources. The availability of these

" purchased funds" is generally considered to be more uncertain than that of retail sources. However, management has enhanced the stabihty ofits wholesale deposit gathering through direct distnbu-tion and diversification of funding sources.

32

The 15rst National Bank of Chicago creates direct relauenships with concept, so that an asset yield is viewed in relation to the cost of -

lage institutional depositors through its established distribudon the corresponding liabihty. Certain assets of the portfolio have

• network. Domestically and internationally, money market traders indefmite maturities or interest rate sensiovities that are not readily a nd salespeople raise funds through direct contact with customers, matched with specific liability instruments. In these instances, rather than through brokers. This approach has proved successful primarily in domestic floating-rate and credit card loans, a target in creating reliable sources of funds. In 1986, over 85 percent of liability pool is created based on estimates of maturities and interest-nonretail certificates of deprit and 90 percent of Federal funds pur- rate fluctuations. The composition of each liability poolis tracked chased from domestic sources were raised direcdy. Overseas, liability daily and adjusted as needed. This matched funding strategy has instruments are distributed predominantly to corporations, central resulted in a higher, more stable net interest margin for the banks and official institudons, rather than within the interbank market. Corporation.

The First National Bank of Chicago benefits from a diversified Trading Risk Management institutional customer base. The Bank's purchased funds customer While generally attempting to eliminate structural interest-rate list includes more than 4,000 institutions. Industry and geographic risk, the Corporation aggressively strives to take advantage of the concentrations among funding sources are closely monitored to profit opportunities available in short-term interest and exchange achieve the optimum diversification. rate movements. The Corporation maintains active trading positions in a variety of markets and instruments, including U.S. government, The First National Bank of Chicago and American National municipal, money market, and Euromarket securities, and various Corporation's bank subsidiaries obtain demand deposits from large foreign exchange instruments.

corporations, middle-market customers, and individual consumers.

Federal funds purchased and secunties under repurchase agreements, The risks in these positions are carefully controlled within the and commercial paper are other major nonretail sources of short- Corporation's disciplined system of risk control guidelines. A stan-term funds. Other funds borrowed and long term debt, defined dardized measurement of volatility for all trading activities, called risk as borrowings with an original maturity of seven years or more, points, has been developed and used by First Chicago over the last provide additional funding. several years to help manage, limit, and diversify trading risk across the various instruments and markets. In addition, the Corporation has A table showing First Chicago Corporation's deposita and other established internal guidelines that limit the degree of quarter to-purchased funds appears below: quarter volatility in trading revenues, the level of aggregate trading exposure, and the level of exposure to any one customer.

Deposits and Other Purchased Funds

. December 31 (in mdimne 1986 1985 1984 Capital Management

- First Chicago's capital account serves several purposes: it supports

"$*End s 5,42i gmwth, pmvides protection to depositors, and represents the s 6.083 s 4.696 smnp 3.066 2.542 2,328 mvestment of stockholders, on which management has the respon-Time sibility to achieve adequate retums. The capital adequary objectives "NrNN h,fo [@ j% f the Corporation and its principal bank subsidiaries have been n,,,,gn o,ge, developed to meet these needs. These objectives have been devel-hanh m foreign counenes 3,292 4.408 5,558 oped in coordination with the Corporation's risk management i

)

n$"dEcu*n*o 790 1,597 1,194 pqs,5 as m mme eExM sa% h Nagds med Cther time and smngs 7,740 6,469 7,009 tinancial goals.

Other demand 284 234 294 Taat Denom 27.025 27.i4s 28.592 The principal capital adequacy objective is to achieve strong capital Federal funds pur based and rados reladve to die average of First Chicago's peer group and munnes under repur hase regulatory capital guidelines. Management believes that although a agreemenu 4.539 5,168 4.797 stronger capital position may reduce returns to stockholders in the bEtuYsCed Lonrrerm debt

$ 953 IN842 1,@ shon run, continued achievement of this goal will enhance stock-431 holder retums over the long term. ,

1 1

Total Other Purchased funds 8.152 7.839 7.311 To help accomplish these objectives, ALCO, which develops and Tual sn.m s 54m snm reviews the capital goals of the Corporation, has established capital management policies. These policies ensure that the consolidated 4 Interest Rate Sensitivity Management enoty and each ofits subsidiaries have capital structures consistent A key element of the Corporation's asset and liability management with prudent financial management principles and regulatory l

I is the effective management ofinterest rate risk. Over the past requirements.

I several years, the Corporanon has instituted policies and procedures designed to minimize the impact of changes in interest rates on earnings. This has been achieved through both asset-pricing strate-i gies and disciplined funding procedures.

1 Whenever possible, assets are funded with liability instruments of similar maturity structure and interest-rate sensitivity. This " match-ing" of assets and liabilities enhances liquidity and stabilizes retums.

Pricing policies have been developed to facilitate this matching 33

Selected Capital Ratios December 31 1986 1985 1984 1983 1982 Common Equity / Assets 5.09W 4.49W 3.98% (08% 3.7cn Stockholders' Equiry/ Assets 5.91 5.31 4.79 4.77 4.13 Primary Capital / Assets 8.34 7.24 6.08 $.64 4.98 Total Capital / Assets 9.75 8.51 6.56 6.14 5.53 Double 1.everage Ratio 98.04 100.44 98.07 91.89 99.22 Dividend payout Ratio 28.09 46.48 110.92 32.14 36.04 Assets are a4usted in accordance with the Federal Reserve's regulatory capital guidehnes.

The primary goal within the capital management objectives of peers. At year-end, the Corporation had a double .'everage ratio of First Chicago is to enhance capital adequacy through internal capital 98 percent, which indicates that the parent compan) had some equity generation and effec:ive balance sheet management. This has been that was uninvested in subsidiaries at the time. This -apacity is evidenced by the significant improvement in the ratios of common expected to be used for acquisitions in 1987. The doi.ble leverage equity to-assets and stockholders' equity to-assets over the last ratio of First Chicago has always been low relative to tre average five years, as shown in the table above. To further support this goal, of peer bank holding companies.

the Corporation has established a dividend policy for its common stock, with a target payout ratio over the long term of 20 to 30 percent Under these policies, the Corporation's capital position has contin-ofearnings available to common shareholders. This approximates the ued to improve over the last five years. At December 31,1986, total average payour ratio of the Corporation's peer group. This dividend consolidated assets had increased slighdy, with significant increases policy is augmented by a dividend reinvestment plan for share- in retained camings and the allowance for loan losses. In addition, holders, offering a 5 percent discount from the market price of the in the fourth quarter of 1986, the Corporation issued $125 million Corporation's stock for reinvested dividends. of equity contract notes, which qualify as primary capital for regulatory capital purposes. Also during 1986, the Corporation Other sources of capital, such as equity commitment and contract issued $100 million oflong-term debt, which qualifies as secondary notes, are important for regulatory capital management, but do not capital. At December 31,1986, the Corporation's primary capital provide the fundamental capital base for supporting growth oppor- ratio was 8.34 percent, one of the highest among money-center tunities of the Corporation. Under existing regulatory guidelines, bank holding companies, compared with 7.24 percent a year earlier.

First Chicago can issue an additional $300 million of such debt The total capital ratio at year-end 1986 was 9.75 percent, compared securities, which would qualify as primary capital. with 8.51 percent at year-end 1985.

Primary Capital Components Primary and Total Capital Ratios at year-end (Percentage of Assets)

(Dollars in mdhons) 1GW Key December 31 1986 1985 1984 1983 1982 9 I I Preferred Stock $ 325 $ 325 $ 325 $ 250 $ 125 8

E4 "' t 2.022 8 ,nd $' t Common Equiry 1.765 1.599 1.492 1.366 724 Net 7 Total Stockholders' Equity 2,347 2.090 1,924 1.742 1..i91 6 5 64 6 OH g Allowance for loan losses $85 432 292 218 203 g Equiry contract notes 324 199 - - -

4 98 Equity comnutment notes. ner* 55 124 224 100 5 1.oan Losses 100 Minonty interest 1 1 1 1 1 4,

p,,g,g g,g Pnmary Capital 3.312 2.846 2.441 2.061 1.79s

)

floaang Rate Subordinated 2

Retamed Earnings

• "' # # ~ ~ -

1 Bb4 Notes due 1998 99 - - - -

0

"' ~

I' ' '# '5 Common Stock 3%W Notes due 1993 38 31 26 32 35 1982 '83 '84 and Surplus Otherlong term debt 226 147 40 27

'85 '86 39 Total Capital $3.874 $3.348 82.632 $2.245 $1.994 The Corporation also adheres to the " building block" approach to Pnmary Capital Raao 8]fW 7_23W 638W

_ @ y the capitalization of nonbank subsidiaries. Specifically, each subsid- Total Capital Rano a 9.75 % 8.51% 6 56% 614W 5SW

--- ~

iary's capital structure is to be comparable to what the market would s require ifit were an independent, yet similar company. This 'In 1986, the Corporaoon dedicated $70 mdhon of comnat stock proceeds issued philosophy represents prudent management of the financial risk dunng the year to parnally fulfill the note fund requirements ofits outstandmg equiry of these subsidiaries in relation to the parent company and its '*"""""""'"**"*dd*".h'8 ""Ih " *l*d d'dd

• Y 1985 from proceeds of common stock issued smcc 1982. This reduccon in long term bank subsidianes.

debt quahfying as pnmary capital is reclassified as secondary capital for regulatory

repomng purposes. I j

la the capitalization of all subsidiaries, it is the Corporation's policy ** Total capital and the related racos pnor to 1985 have been restated based on current ,

to limit the use of double leverage, which is the u;c of holding regulamry guidehnes. t company debt to finance equity investments in its subsidiaries, t about 120 percent of the Corporanon's stockholders equity, which The federal bank regulators have proposed new risk-based capital is approximately the average of the Corporanon,s money center guidelines for banks and bank holding companies. The Corporanon .

has a relatively high level ofliquid assets and has established conservuive polices on off-balance sheet exposure. Accordingly, i First Chicago expects to continue to maintain a strong capital position i under these proposed standards.

34

I Fe> reign Outstanding 5everal wuntnes are expenenung formgn exchange liquidity prob-lems, which have disrupted the omely payment by private and public The Corporation's cross border ourandings, couisting ofloans sector borrowers in those countries of principal and interest on

! (including accrued interest), acceptaces, int..:st bearing deposits loans from the Corporation and its subsidianes. The aggregate

! with other banks, other interest-bearing investments, and other amount of outstanding extended by the Corporation and its

!' nonlocal currency monetary assets, to countries where such out. subsidiaries to public and private sector obligors in each country standings exceeded 1.0 percent of the Corporacon's total assets that is experiencing liquidity problems is less than 1.0 percent of

($391 million as of December 31,1986, $388 million as of the Corporation's total assets at December 31,1986, with the

' December 31,1985, and $398 million as of December 31,1984) exception of Mexico and Brazil. Shown in the table below is a are shown in the following table (in millions): summary of the changes during 1986 in aggregate outstanding for Mexico and Brazil.

Banks and Total Govemment Other Commeru.d (In mdlions) Menco Braad Cross-border and Otfiaal Financial and Country Dnember 31 Outstandmgs insatunons Insatunons Indusmal Other at December 31,1985 $912 5794

,lapan 1986 52.111 $- $1.992 $l14 5 5 Net change in short term 19H5 $1.829 5- $1/>87 5135 5 7 outstandmys

$1,824 3 (10) 1984 5- $1.530 $292 $ 2 Changes in other outstand ngs:

Menco 1986 8 907 $2'O $ 225 $399 $ 13 Addmonal outstandmgs 14 -

1985 5 912 $206 $ 2'i $429 $ 3 Interest income accrued 66 61 19H4 $ 926 $205 $ 354 5366 $ 1 Collections:

Pnncipal

.{

Brazil 1986 $ 733 $ 76 5 386 $271 $- (11) (2) 1985 $ 794 $N $ 408 $318 $ 4 Accrued interest (70) (N)

Other changes 1984 $ 846 $ 88 5 416 $142 $- (7) (46)

Umred 1986 s 484 $ 31 $ 308 5 69 $ 76 Aggregate outstandmgs Kmgdom 1985 5 516 5 53 $ 269 5 85 $109 at December 31,1986 Sw? 5'M

~ ~

19H4 5 570 $ 4 $ 365 $195 $ 6 ltaly PercentaFe of outstandmgs to 1986 8 501 5 2 5 482 $ 15 $ 2

$ 689 pu c sector oblutors 7yy 77 7 1985 $- $ 662 $ 19 $ 8 1984 $ 544 $ 18 $ 475 $ 51 $-

Canada 1986 $+ $* s+ s- $. Total outstanding in Mexico at December 31,1986, represented 1985 5 530 $ 7 $ 403 $109 $ 11 approximately 2.3 percent of the Corporation's total assets. Out-1984 $1017 5 4 $ 806 5185 $ 22 standings included approximately $662 million of term loans, and South 1986 5 423 $110 $ 179 $130 $ 4 approximatdy $236 million of short term outstr.ndings (including i Korea 1985 $ 413 $ 95 5 148 $165 $ $ short-term advances, bankers' acceptances, interbank deposit f 1984 $ 488 $121 $ 116 $250 $ 1 placements, and other investments). Approximately $14 million France 1986 $+ s- $+ $- $. f such outstanding were classified as nonperforming at year-end 1985 f 400 $ 10 $ 344 $ 41 s5 1986, and no loans were past due 90 days or more and soll accruing 1984 $ 687 5 12 s 591 $ 70 $ 14 interest. Other changes during 1986 represented a $7 million

'Outstandmp less than I percent.

At December 31,1986, the only countries for which cross border During 1986, Mexico obtained substantial agreement from its creditor banks to restructure certain Mexican public sector term outstand (ngs totaled between 0.75 percent and 1.0 percent of the Corporanon s total assets were france and Canada. Such cross- loans aggregating $52.5 billion, and to provide new loans to the border outstanding aggregated $621 million. At year-end 1985 and Mexican public sector of up to approximately $7.7 billion, subject to 1984, no countnes had total cross-border outstandmgs between certain economic and other conditions. The Corporation, under 0.75 percent and 1.0 percent of the Corporation's total assets. this plan, would restructure existing Mexican public sector term loans totaling $425 million and provide new loans of up to $112 million, of which $11 million would be guaranteed by the World Bank. The weighted average year of maturity of these restructured ,

loans is 1998. The Corporation has accepted Mexico's request, )

subject to the execution of satisfactory loan documentation and I certain other conditions. Pending completion of this refinancing, the Corporation extended a bridge loan to Mexico of $9.5 million. ,

This bridge loan is repayable from advances to be made under 4 the new financing agreements.

35

. Following is a summary of the effect of the proposed restructure on Following is a summary of the effect of Braz:rs 1986 restructure the Corporation's affected Mexican public sector outstandmgs: agreement on the Corporation's affected term loans in Brazil:

Amount Restructured Marunty Schedule of Loans Restructured amnry ue am espm Amount Restructured On nem) before Resmmnng Afm hmnng (in milhons) Bef , Restructunng Afcer Restrucrunng -

$48 1985 1991 1993

$318 1987 1998 1994 2005 t$ 1986 Demand notes 95 1969 1994 1989 1994 12 1985 1989 1994 Amount Restructured E"C'ng iLoans Restructured (in milhons) Before Restrucrunng After Restructunng*

Amount Restructured

$48 13/47 over Pnme 11/87 over UBOR (in milbons) Defore Restructunng After Restrucrunng* g3 g.3/49 over Pnme 11/84 over LIBOR

$318 7/8 4 over ubOR" 13/16W over uBOR *Effecovejanuary 18,1985 93 1-1/8 W over Pnme 13/164 overLIBOR 12 11/8 9 over Pnme 13/169 over UBOR The refinancing arrangements discussed above are intended to assist DYecoveJanuary 1,1987 Mexico and Brazil in alleviating their liquidity problems. Continuing "UDOR is the London interbank OtTered Race uncertainties in Mexico, Brazil, and other foreign (ountries that have experienced liquidity probkms, however, make it possible that Total outstanding in Brazil at December 31,1986, represented further deterioration could occur, and that additional loans could approximately 1.9 percent of the Corporation's total assets. Out. be classified as nonperforming, resulting in an adverse impact on standings included approximately $396 million of term loans and the Corporanon's earnings.

approximately $326 million of short-term outstanding. As of December 31,1986, outstanding totaling $4 million were non- ,

performing, and $10 million were past due 90 days or more and l

soll accruing interest.

Term loans to Brazilian obligors decreased by approximately $48 million during 1986. Of this amount, $2 million represented j principal repayments. The remaining $46 million consisted of a '

53 million capitalization of an existmg term loan, charge-offs of

$2 million, and loans redeemed by the central bank aggregating

$41 million.

During 1986, Brazil signed an agreement with its creditor banks that completed the 19851986 Brazilian public-sector term loan restructure prograrr. Under the agreement, $48 million in erm loans from the Corporation to Brazilian obligors, initially maturing in 1985, are to be repaid by the Brazilian central bank between 1991 and 1993, while $15 million in term loans maturing in 1986 are

, repayable by the Brazilian central bank on demand, but are ex-pected to be rescheduled as part of Brazil's 1987 restructure program.

In addition, the agreement requires the Corporation to maintain through March 1987, a combined level of trade finance and deposit placement facilines with Brazilian banks of $355 million, which represents no increase in Brazilian cross border commitments for these financing acovities.

In December 1986, the Bank Advisory Committee for Brazil agreed to a request to extend term loan maturities due in the first quarter l l of 1987 until March 31,1987, pending negotiations of a possible rescheduling of 1987 maturities. The Corporation has agreed to postpone repayment of $3.3 million in term loan maturities falling due during the first quarter of 1987. Further, Brazil has commenced discussions concerning its 1987 financing program with the Bank Advisory Committee for Brazil. On February 20,1987 the Brazilian L l government announced the indefinite suspension ofinterest payments on term loans from foreign pnvate finarcial insatutions (including l- the Corporation) to Brazilian obligors, pending completion of an l

acceptable refinancing plan. As of this date, no agreement in principle has been reached conceming Brazil's 1987 financing requirements.

1 36 l

In dex t'o the Fin a n cial Sec tio n ;

f First Chicago Corporation and Subsidiaries Consolidated Balance Sheet ,, .38 Consolidated Income Statement 39' Consolidated Statement of Changes in Stockholders

• Equity . . .40 Consolidated Statement of Changes in Financial Position . . .41 Notes to Consolidated Financial Statements ,42 Auditors' Report - .55 Selected StatisticalInformation Investment Securities .56 Loans .57 Deposits - .

.58 Funds Borrowed , , . . .59 Financial Ratios , , , .60 Common Stock and Stockholder Data .60 Quarterly Data . . , ,61 Average Balances / Interest Differential / Rates . .62 Analysis of Changes in Interest Differential .64 37

First Chicago Corporation and Subsidiaries Cons <>lidated Balance Sheet December 31 (in thousando 1986 19x5 Assets

. Cash and due from banks-noninterest bearing $ 2,834,675 5 2,408,621 Due from banks-interest bearing 4,710,425 4,743,061 Federal funds sold and securities under resale agreements 431,646 1,294,404 Trading account assets 2,164,085 2,187,146 Investment securities (market values-52,179.124 in 1986 and $2,053,393 in 1985) 2,043,425 2,011,694 Loans 25,410,417 24,190,368 Less Allowance for loan losses 585,019 431,643 Loans, net 24,825,398 23,758,725 Premises and equipment 458,234 462.375 Accrued income receivable 431,427 409,504 3stomers' acceptance liability 509,777 850,306 Other assets 738,904 766,670

'iatal assets $39,147p6 538.892,506 Liabilities Deposits Demand $ 6,082,709 $ 5,420,424 Savings 3,065,565 2,541.630 Time 5,770,569 6,477,086 Foreign offices 12,106.100 12,708.395 Total deposits 27,024,943 27,147,535 Federal funds purchased and secucities under repurchase agreements 4.538,950 5,167,931 Commercial paper 1,173,501 362,399 l Other funds borrowed 1,486,327 1,467,307 ,

Long term debt 953,498 841,690 ,.

Acceptances outstanding 510,025 850.306 Other liabilities 1,113.375 965.294 Total liabilities 36,800,619 36,802a62 Stockholders' Equity Preferred stock-withi>ut par value, authorized 10,000,000 shares l Issued and outstanding:

Series A ($50 stated value) - 2,500,000 shares 125,000 125,000 Series B ($100 stated value)- 1.250,000 shares 125,000 125,000 Series C ($100 stated value)- 750,000 shares 75,000 75.000 Common stock-55 par value 275,257 259,792 1986 1985 Number of shares authorized 80,000,000 80,000,000 Number of shares issued 55,051,434 51,958,347 Number of shares outstanding 54,787,078 51,764,586 Surplus 948,843 881,309 Retained earnings 825,079 642,718 Translation adjustments (21,693) (15.328)

Total 2,352,486 2,093,491 Less Treasury stock at cost,264,356 shares in 1986 and 193,761 shares in 1985 5,109 3,447 Stockholders' equity 2.347,377 2,090.044 Total liabilities and stockholders' equity 539,147,9 % 538.892,506 The accompanying notes to consolidated financial statements are an integral part of this balance sheet.

38 1

First Chicago Corporation and Subsidiaries Consolidated Income Statement Ivr the Year (In thousands) 1986 1985 1984 Interest income Interest and fees on loans $2,448,280 $2,856,739 $3,004,399 Interest on bank balances 383,507 444,586 608,976 Interest on Federal funds sold and securities under resale agreements 92,475 173,273 171,746 Interest on trading account assets 180,580 107,504 69.306 Intercst on mvestment secunces United States Government and Federal Agency 49,639 56,462 116,933 States and political subdivisions 34,011 34,536 43,013 Other (including dividends) 31,025 39,199 39,125 Total 3,219,517 3,712.299 4.053,498 Interest Expense Interest on deposits 1,601,853 1,995,597 2,376,495 Interest on Federal funds purchased and securities under repurchase agreements 352,090 421,073 542,232 Interest on commercial paper 39,656 33,831 44,462 Interest on other funds borrowed 119,428 143,810 161,048 Interest on long term debt 68,866 65,030 34,290 Total 2,181,893 2,659,341 3,158,527 Net Interest income 1,037,624 1,052,958 894,971 Provision for loan losses 440,000 411,200 464,800 Net Inteirst Income After Provision For Loan Losses $97,624 641,758 430,171 Noninterest Income Trading account profits 36,471 29,005 12.234 Foreign exchange trading profits 93,981 47,200 25,476 Fiduciary and investment management fees 101,851 90,186 77,421 Credit card fees 128,815 123,593 112,331 Service charges and commissions 184,991 174,953 155,910 Equity secunces gams (losses) 187,062 146,738 56,679 investment secunties gains (losses) 27,626 964 (34)

Gain on partial settlement of pension obligation 81,679 - -

Other income 20,829 45,372 32,161 Total 863,305 658,011 472,178 Noninterest Expense Salaries 490,624 439,372 366,316 Employee benefits 84,892 66,228 57,267 Occupancy expense of premises, net 109.216 102,795 89,540 Equipment rentals, depreciation and maintenance 75,090 65,656 53,411 Loss from an affiliate investment 8,000 131,100 -

- Other expense 337,505 304,519 275,446 Total 1,105,327 1,109,670 841,980 Income 13efore income Taxes 355,602 190,099 60,369 Applicable income taxes (benefit) 79,400 21,100 (26,000)

Net Income $ 276,202 $ 168,999 $ 86.369

==r Net income Attributable 'Io Common 5:ockholders' Equity $ 253,812 $ 139,743 $ 54.226 Earnings Per Common And Common Equivalent Share $4,70 $2.84 51.19 Average Number of Common and Common Equivalent Shares Outstanding 53,998,812 49,220,034 45,663,244 The accompanying notes to consolidated fins al v.n' nents are an integral part of this statement.

39

. First Chicago Corporation and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity For each of the Three Years Ended Trer.ury December 31.1986 Preferred Common Retained Translacon Sccu.k (in thousands) Stock Srock Surplus Earnmgs Adjustments (at Cust) Tcstal Balance. December 31,1983 $250,000 $208,961 $h5,534 5574,992 8 (5,614) $(1,803) $1,742,070 Net income - - -

86,369 - - 86,369 issuance of preferred stock 75,000 -

(1,621) - - - 73,379

. Issuance of common stock - 26,117 91,165 - - -

117,282 I Cash dividends declared i Preferred stock - - -

(32,143) - -

(32,143) l Common stock - - -

(60,969) - -

(60,969) l Translation adjustments - - - -

(1,462) -

(1,462)

Other - -

232 - -

(599) (367) l l Balance, December 31,1984 325,000 235,078 805,310 568,249 (7,076) (2,402) 1,924,159 Net ir.come - - - 168,999 - -

168,999 Issuance of common stock -

24,714 76,004 - - -

100,718 Cash dividends declar-d Preferred stock - - -

(29.256) - -

(29,256)

Common stock - - -

(65,274) - -

(65,274)

Translation adjustments - - - -

(8,252) -

(8,252)

Other - -

(5) - - (1,045) (1,0$0)

Balance, December 31,1985 325,000 259,792 881,309 642,718 (15,328) (3,40) 2,090,044 Net income - - - 276,202 - -

276.202 Issuance of common stock -

15,465 67,534 - - -

82,999 Cash dividends declared Preferred stock - - -

(22,390) - -

(22,390)

Common stock - - -

(71,451) - -

(71,451)

Translation adjustments - - - -

(6,365) -

(6.365)

Dther - - - - -

(1,662) (1,662)

Balance, December 31,1986 $325,000 $275.257 $948,843 $825.079 $(21,693) $(5,109) $2,347,377 The accompanying notes to consolidated financial statements are an integral part of this statement.

40

First Chicago Corporation and Subsidiaries ,

Consolidated Statement of Changes in Financial Position e

for the Year On thouunds) 1986 19535 1984

~ Financial Resources aere provided by:

Operations Net income $ 276,202 $ 168,999 $ 86,369 h Noncash charges Provision for loan losses, depreciation, amortization, deferred income taxes 537,277 454,031 470,279 Financial resourceprovided by operations 813,479 623,030 556.648 Cash di.kiends declared (93,841) (94,530) (93.112)

Net financial resources providd by operations 719.638 528,500 463,536 Deposits and other financing activines Deposits (122,592) (1,444,382) 911,877 federal funds purchased and securities under repurchase agreements (628,981) 370,842 2,473,791 Commercial paper 811,102 (6,783) (81,473)

Other funds borrowed 19,020 (246,257) 129,303 Long term debt 111,808 410,259 133,233 Stock issued 82,999 100,718 190,661 Total financial resources provided by (applied to) deposits and other financing activmes 273,356 (815,603) 3,757,392 Noncarning assets and liabilities Cash and due from banks (426,054) (134,059) (696,316)

Premises and equipment, net (55,572) (66,807) (168,043)

Other, ner 108,581 (70,880) (117,920)

Total financial resources provided by (applied to) nonearning assets (373,045) (271,746) (982,279)

Increase (decrease) in financial resources invested in earning assets s 619,949 $ (558.849) $3.238.649 ,

increase (decrease) in earning assets: '

Due from banks-interest bearing $ (32,636) $ (58,695) $ (912,209)

Federal funds sold and securities under resale agreements (862,758) (F33,226) 410,322 Trading account assets 1,185,983 247,843 (23.061)

Investment securities 31,731 261,216 (223,833)

Loans, net 1,506,673 (1,114,127) 3,716,526 Increase (decrease) in earning assets $ 619,949 53,238.649

$ (558.849) l The accompanying notes to consolidated financial statements are an integral part of this statement.

41

, First Chicago Comoration and Subsidiaries (g)lnierest. Rate Sv.ap Agreements Notes to Consolidated Financial Statements The Corporation enters into interest rate swap agreements as a

, financial intermediary to produce fee revenue and, as a pnncipal, to Note 1-Summary of Significant Accounting Policies manage its own interest rate exposure.

The consolidated financial statements for First Chicazo Corporation (the Corporation) and subsidianes, have been prepare'd in conformity As a financial intermediary, the Corporation's policy is to limit its with generally accepted accounting pHnciples. A descripoon of exposure by matching offsetting swap agreements. Until matched, those accounting policies of particular significance follows: the agreements are marked to market value, with changes in value reflected in trading account profits. When matched, the Corporation (a) Principles of Consolidation identifies the resulnny income stream and defers amounts for its The consolidated financial statements of the Corporation include fees relating to credit risk and ongoing servicing, which are taken the accounts of all subsidiaries more than 50 percent owned, except into income over the term of the matched swap agreements. The where there is a plan of disposition (see Note 2 on page 43). balance of the income stream is recorded currendy in noninterest American National Corporation was acquired in a purchase trans. mcome.

action as of May 1,1984. All significant intercompany accounts and transactions have been eliminated in consolidation. Income or expense on interest-rate swap agreements used to manage interest rate exposure is recorded as an adjustment to the (b) Investments in Affiliated Companies yield of the underlying assets or liabilities.

Investments in affiliated (20 percent to 50 percent owned) companies where the Corporation has significant in0uence are accounted for (h) Nonperforming Loans by the equity method of accounting. The amount of undistnbuted Loans, including lease financing, are considered nonperforming <

arnings of these companies that is included in stockholders' equity when placed on nonaccrual status or when terms are renegotiated iggregated $26 million at December 31,1986. to below current market rates.

L l (c) Intangible Assets Loans, other than credit card loans, are placed on nonaccrual status I Goodwill rep.esenting the cost ofinvestments in subsidiaries and when principal or interest is past due 90 days or more, and the loan affiliated companies in excess of the fair value of net assets acquired is not well secured and in the process of collection, or when, in the at acquisition, is amortized over periods ranging from 15 to 40 years. OPi nion of management, there are significant doubts as to collecubihty, Interest previously accrued but not collected is reversed and charged Other acquired intangible assets, such as the value of customer lists, against income at the time the related loan is placed on nonaccrual core deposits, and credit card relationships, are amortized over the status. Principal and accrued interest on credit card loans are periods benefited, ranging from 5 to 15 years. charged to the allowance for loan losses when 180 days past due.

(d) Investment Securities Interest payments received on nonaccrual loans identified as having Investment securines include both debt and equiry securities. Debt doubtful principal repayment are recorded as reductions of principal.

securities are stated at cost, adjusted for amoruzation of premium and accretion of discount. Gains and losses are computed using the Loans are considered to be renegotiated when their mterest rates are ,

specific identification method. reduced below current market rates by an agreement with the borrower because the cash flow of the borrower was insutTicient to Equity securities (which include both venture capital securities and service the loan under its original terms. Subject to the above securities acquired in satisfaction of debt) are stated at the lower of nonaccrual policy, interest on these loans is accrued at the reduced cost or market. Unrealized valuation adjustments and realized gains rates.

and losses are included in noninterest income in the consolidated income statement.

(e) Trading Account Assets Trading account assets are stated at market value. Realized and unrealized gains and losses on trading account assets are reflected in trading account profits.

(O Futures Contracts The Corporation utilizes interest rate and other futures contracts in connection with trading account activities and to hedge interest rate risk positions created by existing assets and liabilities.

Changes in the market value of futures contracts used in connection with trading account activities are reRected currently in trading account profits.

Changes in the market value of futures contracts identified as hedges are deferred and amortized as interest income or interest expense over the lives of the hedged assets and I; abilities.

42

(ifAllowance for Loan Losse (m) Income Taxes The allowance for loan losses is maintained at a level that in manage- Certain income and expense items are accounted for in different ment's judgment is adequate to provide for potential credit losses in time periods for finandal reporting purposes than for income tax the loan portfolio, and off balance sheet credit exposure for standby purposes. Appropriate provisions are made in the financial statements letters of credit, long term interest rate swap agreements and foreign for deferred taxes in recognition of these timing differences.

exchange contracts, and unfunded binding loan commitments. The amount of the allowance is based on management's formal review Foreign tax credits are applied, as permitted, to reduce Federal and analysis of potential credit losses, as well as prevailing and income tax.

anticipated economic conditions. The allowance is increased by provisions charged to earnings and reduced by charge-offs, net Investment tax credits related to leasing transactions are accounted ofrecoveries. kr by the deferral method. Available investment tax credits arising from acquisitions of premises and equipment are used to reduce the (j) Premises and Equipment current year's provision for income taxes.

Prermses and equipment are stated at cost less accumulated deprecia-tion and amoruzation, which are computed essentially on the straight- (n) Earnings Per Share line method over the estimated useful lives of the related assets. Earnings per share amounts are computed by dividing net income, Gains and losses on dispositions are reflected in other income. after deducting dividends on preferred stock, by the average number Maintenance and repairs are charged to expense as incurred. of common and common equivalent shares outstanding.

(!c) Foreign Currency Translation Common equivalent shares consist of shares issuable under the l.

The Corporation's translation policies are based on a determination employee stock purchase plan, outstanding stock options, per-of the pnmary operating currency (" functional currency") for each formance share grants, and restricted shares.

foreign installation. If a foreign installation's functional currency is I the U.S. dollar, assets and liabilities carried in local currency are Note 2-Loss from an Affiliate Investment translated to U.S. dollars at current exchange rates, except for In 1986, the Corporation sold its investment in Banco Denasa premises and equipment, which are translated at historic rates, de Investimento S.A., a Brazilian investment bank of which the Translation effects und results of related hedging transactions are Corpoetion had assumed management control and established a plan included in other income, of disposition in 1985. The sale resulted in a loss of 58.0 million in 1986, in addition to the 1985 charge of $131.1 million when the if the foreign installation's functional currency is local currency, all plan of disposition was established. The $8.0 million loss was more assets and liabilities are translated at current exchange rates. Translation than offset by related tax benefits, producing a small positive impact adjustments, related hedging results, and applicable income taxes on the Corporation's net income in 1986. In 1985, on an after tax are included in the translation adjustments account within stock- basis, the loss was $70.8 million, or $1.44 per common share.

holders' equity. When a foreign installation is sold or liquidated, the re!ated accumulated translation adjustment balance is transferred to other noninterest income and applicable income taxes.

Operating results of foreign installations are translated at weighted averages of rates prevailing during the year. The interest element of hedging transactions is included m interest expense.

Active trading in many currencies is an integral part of the Corporation's international operations. Open trading positions in these currencies are valued at the prevailing rates of exchange.

Unrealized gams and losses pertaining to foreign exchange contracts are adjusted by discounting those gains and losses to their present value. The resulting profits and losses are included in foreign exchange trading profits.

(1) Loan Fees Fees representing compensation for services provided are generally recognized s hen the related services are performed. Fees representing adjustments ofinterest rate yield are deferred and amortized into interest and fees on loans over the term of the loan. Fees received in connection with restructured international loans are deferred and amortized over the term of the loan.

E

- Note 3-Operating Segments The Corporation is engaged primanly in the banking business. income before income taxes, and net income for each of the three

. Significant foreign operations are conducted by the Corporation years ended December 31,1986, '1985, and 1984, and the amounts of through the head office, foreign branches, foreign and Edge Act consolidated total assets at December 31,1986,1985, and 1984, subsidiaries, and foreign representative offices. The following tables attributable to domestic operations and foreign operations by geo-show the approximate amounts of consolidated revenues, expenses, graphic area (in millions):

Income Betare income Net Tut.d .

1986 Revenues

• Expenses" Taxes Imome Assets Domestic Operations 12,952.2 $2.499.3 $452.9 $M9.4 $28.058 Foreign Operations Connnental Europe 229.8 245.4 (15.6) (8.3) 1,991 British Isles-Scandinavia 242.3 252.7 (10.4) (6.8) 2,477 Latin America 277.7 305.8 (28.1) (14.8) 2,399 North America-Caribbean 79.8 82.6 (2.8) (2.3) 1.232 Middle East-Africa 46.1 102.5 (56.4) (29.6) 417 Asia-Pacific 254.9 238.9 16.0 8.6 2,574 Total Foreign Operations 1,130.6 1,227.9 (97.3) (53.2) 11,090 Consolidated $4,082.8 $3,727.2 $355.6 $276.2 $39.148 1985 Domestic Operations $3,024.5 $2,670.5 $354.0 $254.1 $27,005 Foreign Operations Continental Europe 268.9 268.5 0.4 0.3 2,384 British Isles Scandinavia 220.8 215.1 5.7 3.6 2,231 1.atin America 378.4 484.4 (106.0) (57.8) 3,046 North America-Caribbean 108.5 95.7 12.8 6.6 1,052 Middle East Africa 90.4 142.3 ($1.9) (24.1) 710 Asia Pacific 278.8 303.7 (24.9) (13.7) 2,465 Total Foreign Operations 1,345.8 1,509.7 (163.9) (85.1) 11.888 Consolidated $4.370.3 $4,180.2 $190.1 $169.0 538.893 1%4 Domestic Operations $2,920.6 $2,803.2 $117.4 $113.2 $27,099 F6 reign Operations Continental Europe 335.1 374.0 (38.9) (20.3) 2,483 British Isles Scandinavia 230.3 226.9 3.4 2.9 1,953 Latm America 406.8 391.8 15.0 7.3 3,061 North America-Caribbean 166.8 156.5 10.3 5.4 1,289 Middle East Africa 143.0 190.3 (47.3) (21.5) 1,023 Asia Pacific 323.1 322.6 0.5 (0.6) 2,938 Total Foreign Operations 1,605.1 1,662.1 (57.0) (26.8) 12,747 Consolidated $4.525.7 $4,465.3 $ 60.4 $ 86.4 $ 39.846

' Includes mterest income and nunmterest income.

" Includes mterest expense. provision for loan losses, and nonmeerest expense i

)

44 [

l

Because many of the resources employed by the Corporanon are Net debt investment securities gains (losses) after taxes were common to both its foreign and domestic activities, it is difficult to $14.349,000, $557,000, and $(17,000), ii. the years ended December

. segregate assets, related revenues, and expenses into their foreign 31,1986,1985, and 1984, respectively. The applicable income taxes and domestic components. The amounts in the preceding tables are (benefit) wee $13,277,000, $407,000, and $(17,000) for the years estimated on the basis ofinternally developed assignment and ended December 31,1986,1985, and 1984, respectively.

allocation procedures, which to an extent are subjective. The principal internal allocations used to prepare this information are Note 5-Loans descnbed below. The following is a breakdown ofloans included in the consolidated balance sheet as of December 31,1986 and 1985 (in thousands):

The allocation of corporate overhead expense is based on internal allocations appropriate to individual acovities.

1986 1985 Total assets and revenues reDect the allocation ofloans and related gom,,,;cgo,n, interest income among geographic areas based on the domicile of commercial $ 7,4t8,699 $ 6,465,048 the customer. Deposit placements and related revenues are allocated secured by real estate among geographic areas based on the domicile of the depository construccon 1,595.960 1.490.739 institution. Mortgage 2.251.830 1.888.569 l Financulinsatunons 2,133,518 1,437.125 l

Net income reDects the allocation of contractualinterest spreads consumer 3,887.926 3,750.044 among geographic areas on r.he bases described above. Differences i. ease financ n8 480.270 427.621 between contractual spreads and actual funding results are redected other 1,868,332 2.071.339 in the earnings of the areas providing the funding. Distribution of Domesoc loans 19.636.535 17.530a85 certain fee income among geographic areas is reDected on the basis foreign loans of services rendered. Commercial 2,742,688 3.156.348 Governments and oflicial insotunons 1,157.422 l.254.513 Expenses incurred for the benefit of another geographic area, Banks and other financial insuruoans 1,537,388 1,964.989 including certain domestic administrative expenses, are allocated to other 336.384 284.033 the area benefited.

Foreven loans 5.773.882 6.659.883 See page 35 for a discussion of the Corporation's foreign 1.oans $25.4t0.4 7 $24.190.368 outstanding in excess of 1 percent of consolidated total assets to countries that have been experiencing liquidity problems.

See page 32 for tables setting forth nonaccrual and renegotiated Note 4-Investment Securities 1 ans, interest n such loans at original contract rates, interest Investment securities in the consolidated balance sheet at December amaDy recognized, and commitments to lend addmonal funds in ,

31,1986 and 1985 are summarized as follows (in thousandsk c nneca n with such loans.

In 1980, the Corporation extended a loan to Mr. Barry F. Sullivan in Book Market the amount of $1,512,500 to finance the purchase of 100,000 shares December 31.1986 value value of common stock of the Corporation. This loan is repayable on

" 8 November 19,1987, or upon his voluntary termination of employment care nhoIal$u i n j with the Corporation. Interest on the loan is payable quarterly at a Other secunces, rate of 5 percent per annum, bonds, notes and debentures 117,444 117,686 Equiry secunces 518,949 650.100 investment secunces $2 04 3.425 $ 2.179.124 December 31,1985 U 5 Government and Federal Agency $ 798,717 $ 811.675 Sures and pobocal subdivmons 538,529 481.277 Other secunnes*

Bonds, notes and debentures 168,524 168.846 Equiry secunces 505.924 591,595 investment secunnes $2.011.694 $2.053.393

• The rnarket values for certam secunces for which market quotauons are not avadable have been esumated.

45

Note 6-Allowince for Loan Losses Note 9-Long-term Debt-The changes in the allowance for loan losses for the three years Long-term debt consists of borrowings having an original maturity

.. ended December 31,1986 were as follows (in thousands); of seven years or more. Long-term debt at December 31,1986 and 1985,is as follows (in thousands):

1986 1985 1984 I ahnte, begmning of year $431.643 5291.726 $217;967 N W85 Addicons (deductions) 7W notes due 1986 $ - $124.932 Charge-offs (340.000) (308,994) (437,987) 38N noter due 1993 ' 37.771 30.993 Recovenes 52.295 17.711 23.094 Bin notes due 1998 98,932 -

Nec charge offs - (287.705) (271.283) (414.893) Subordmated Goanng rate notes due 1992 199.424 199.317 Provision for loan Iones 440.000 411.200 464.800 Other long term debt 68.877 63.106 Acquisiouns and dnposioons 1.081 - 23.852 Equity commitment notes Subordinated floaong rate due 1994 100.000 100.000 lialance end of year - $585.019 5 5431.643 $291.726 Subordmated floaong rate due 1996 124.502 124.450 Equity contract notes subordinated ong rate capital Note 7-Pledged and Restricted Assets Assets, primarily investments, carried at $2.8 bilh,on m, the con-Subordmated Goaang rate capital solidated balance sheet at December 31,1986, were pledged as notes due 1997 198.992 198 892 collateral for borrowings to secure government and trust deposits and for other purposes as required by law. hat 3953.498 sm.6%

Based on the types and amounts of deposits received, banks must 3%% Notes maintain appropriate noninterest-bearing cash balances in accordance These notes are obligations of First Chicago Overseas Finance N.V.

with Federal Reserve Bank reserve requirements. In 1986, the (FCOF), a wholly owned subsidiary of the Corporation. They are average noninterest bearing cash balance maintained to meet reserve unconditionally guaranteed by the Corporation and rank equally requirements was approximately $496 million. with other direct issues of the Corporation. These notes are .

denominated in Swiss Francs (SF), with the initial principal amount Note 8-Lease Commitments .

totaling SF 70 million. These notes may be redeemed prior to their The Corpo:ation has entered into a number of noncancellable maturity if certain changes in existing income tax laws occur.

operating lease agreements for premises and equipment. The mini- Commencing in 1984, FCOF has had the right to redeem all or mum annual rental commitments under these leases at December part of these notes. At December 31,1986 and 1985, 31,1986, are shown below (in thousands): respectively, SF 61 million and SF 64 million were outstanding.

Lease comnutment5 8b% Notes gg7 Si,83g These notes are direct, unsecured obligations of the Corporation 1988 51,740 and are not subordinated to any otherindebted". af the Corporation.

1989 47.914 These notes may not be redeemed by the Corporation prior to their 1990 43.611 sta.ed maturity. The notes are, however, subject to redemption at the 1991 34.240 option of the holders thereofonJune 1,1993. These senior notes qual-1992 and beyond 277.822 ify as secondary capital under the Federal Reserve Board guidelines.

hal $507.178 Subordinated Floating Rate Notes Due 1992 These notes are direct obligations of the Corporation, subordinated Occupancy expense has been reduced by rentalincome from to other indebtedness of the Corporation. The interest rate on the premises leased to others of $16.8 million in 1986, $15.1 million in notes changes quarterly based on the average of offered rates in the 1985, and $18.9 million in 1984. London interbank market for three-month Eurodollar deposits plus 10 basis points. The effective interest rate on these subordinated notes was 6.25 percent at December 31,1985. These notes may be redeemed by the Corporation, in whole or in part, on any interest payment date, beginning in May 1987, at their principal amounts.

Other Long-term Debt Other long-term debt includes various notes with maturities ranging from 1987 to 2026 and interest rates at December 31,1986, ranging from 4.88 percent to 13.70 percent.

46

Eqyiry Commitment Notes Note 10-Pr*rred Stock s The subordinated notes matuncon 1994 were issued by FCOF and The Coriwau n is authorized to issue 10,000,000 shares of I are guaranteed by the Corporanon, while the subordinated notes preferred coa without par value. The Board of Directors is maturing in 1996 are direct obligations of the Corporation. In both authoriz 'd to fix the particular designations, preferences, rights, instances such notes are subordinated to other indebtedness issued qualificans. and restrictions for each series of preferred stock by the Corporation. Both issues are floating rate notes, with the issued.

interest rate changing quarterly based on the average of offered rates in the London interbank market for three month Eurodollar deposits. The outstar@ing adjustable rate cumulative, Series A. Series B, and The pricing on the subordinated notes maturing in 1994 is 1/4 Series C preferred stocks were issued in October 1982, February percent above such average rate, while the subordinated notes 1983, and February 1984, respectively. The dividend rate on each matunng in 1996 are priced at 1/8 percent over such average rate. series is adjusted quarterly, based on a formula that considers the The effective interest rates on these issues as of December 31,1986, interest rates for selected short- and long-term U.S. Treasury were 6.31 percent and 6.27 percent, respectively. securities prevailing at the time the rate is set. All preferred shares rank prior to common shares, both as to dividends and liquidation, The sulmrdinated notes maturing in 1994 may be wholly or but have no general voting rights.

partially redeemed at FCOF's option on any interest payment date at their principal amounts. The subordinated notes maturing in The Series A preferred stock is subject to a minimum and maximum 1996 may be wholly or partially redeemed at the Corporation's dividend rate of 7.00 percent and 15.00 percent, respectively. The option, as ofJuly 1986, at their principal amounts plus accrued dividend rate for the quarterly dividend period ending December interest. 31,1986, was 7.00 percent. Shares of this series are redeemable on or after October 1,1987, through September 30,1992, at the option of The agreements under which these notes were issued require the the Corporation, at a redemption price equal to $51.50 per share, Corporation, prior to maturity, to issue common stock, perpetual and thereafter at its stated value per share ($50.00) plus accrued and preferred stock, or other forms of equity approved by the Federal unpaid dividends.

Reserve Board in an amount equal to the original aggregate principal amount of the notes. These equiry commitment notes qualify as The Series B preferred stock is subject to a minimum and maximum pnmary capital under the Federal Reserve Board guidelines. As of dividend rate of 6.00 percent and 12.00 percent, respectively. The December 31,1986, the Corporation had set aside proceeds of $170 dividend rate for the quarterly period ending Fe' oruary 28,1987, is million from the issuance of common stock under its Dividend 6.00 percent. Shares of this series are redeemable on or after March Reinvestment and Stock Purchase Plan and Employee Stock Purchase 1,1988, chrough February 28,1993, at the option of the Corporation, and Savings Plan to partially satisfy the agreements under which at a redemption price equal to $103.00 per share, and thereafter at these notes were issued. its stated value per share ($100.00) plus accrued and unpaid dividends.

Fquity Contract Notes The subordinated floating rate capital notes maturing in 1996 and The Series C preferred stock is subject to a minimum and maximum 1997 are direct obligations of the Corporation, and are subordinated dividend rate of 6.50 percent and 12.50 percent, respectively. The to other indebtedness of the Corporation. The interest rates on dividend rate for the quartedy period ending February 28,1987, is these notes are reset quarterly at 3/16 percent over the average offered 6.50 percent. Shares of this series are redeemable on or after March rates in the London interbank market for three-month Eurodollar 1,1989, through February 28,1994, at the option of the Corporation, deposits. The effective interest rates on these issues as of December at a redemption price equal to $103.00 per share, and thereafter at 31,1986, were 6.59 percent and 6.34 percent, respectively. its stated value per share ($100.00) plus accrued and unpaid dividends.

The agreement under which these notes were issued requires the Corporation to redeem these notes at maturity with proceeds from the issuance of common stock, perperual preferred stock, or other forms ofits equity approved by the Federal Reserve Board in an amount equal to the onginal aggregate principal amount of the notes.

These equity contract notes qualify as primary capital under the Federal Reserve Board guidelines.

Earnings per common and common equivalent share would have been $4.17 for 1986, $2.58 for 1985, and unchanged for 1984, had common stock been issued at the year end market value to satisfy the requirements of the agreements under which the equity commit-ment and equity contract notes were issued.

Original issue discount and deferred issuance costs are amortized over the terms of the related notes.

47

Note 11-Translation Adjustments Defern d tax expense results from certain income and expense items

'Fhe following table shows an analysis of the changes in translacon being accounted for in different ome penods for financial reporting adjustments for the years ended December 31,1986 and 1985 (in purpoies than for income tax purposes. The tax effects of these thousands): differences were as follows (in thousands):

1986 1985 1986 1985 1984 Balance, begmnmg of year $(15.328) $ (7.076) Deferred mcome on lease Translarmn/ hedge for the year (8.777) (12.943) financmg 8 22.200 $ 41.000 $ 20.300 Apphcable mcome taxes (bene 6t) (l.282) (4/M6) Pmmion for loan losses (105.200) (14.100) (??.400)

Investment tu credits deferred.

Net translanon/ hedge for the year (7.495) (tl.257) less amoruzanon 1,100 500 8.300 Transferred to income on disposmons 1.130 $

Investment en credit carryover 33.500 (5.200) (8.600)

I Dalance. end of year $(21.693) $(15328) Deferred fee income -

(4.100) (5.500)

Accrenon on mvestment Translation / hedge gains included in other noninterest income were wcunun a 1m 2m j $69,000 in 1986, $1,635,000 in 1985, and $1,046,000 in 1984. [,

b ", [ **I "'f"','

""'",, 33,

"[*

l Pension accrual 45.000 5.000 -

Note 12-income Taxes other (34.800) 12.500 (9.300)

Total applicable income taxes (benefit) reported in the consolidated income statement for the years ended December 31,1986,1985, Toul $ n.8% lo2.im) $66.w) and 1984, included the following components (in thousands):

The accumulated deferred income taxes and investment tax credits 1986 1985 1984 included in od er liabilities in the consolidated balance sheet were Current ux expense (benen.t) approximately $109 million and $22 million, respectively, at December 7

31,1986, and f 97 million and $21 million, respectively, at

)

c efgn 3- $ jg $j December 31,1985. For tax return purposes, the consolidated sute 10.200 7.200 3.800 investment tax credit carryover totaled approximately $21 million at December 31,1986.

Taral 63.600 $3.200 30.400 Deterred tu expense (bene 6t)

The reasons for the differences between applicable income taxes Iederal 13.600 (30hx)) (53.700) (benefit) and the amount computed at the applicable statutory Fonagn (5.500) 1.000 1.300 7,700 Federal tax rate of 46 percent were as follows (in thousands):

_ _ State (2,500) (4,000)

Total 15.800 (32.100) (56.400) 1986 1985 1984 Apphcable mcome taxes (bene 6t) $79.400 $ 21.100 $(26.000) Tues at statutory Federal mcome tax rare $163.600 $ 87.400 $ 27.800 Not included in the above table but charged directly to translation lac'ed$e fdecrea'c) * *c5 adjustments in stockholders' equity were taxes related to translation / '""I'*8 f**

hedging acuvities. These taxes were as follows for the years ended Ta txempt income (41,300) (61.000) (47300)

December 31,1986,1985 and 1984 (in thousands): ,["['"";"'[6t 9,'00 1500 0 00)

Investment tax credit (6.600) (9.600) (6.700)

Capit.d rams (27,000) - -

1986 1985 1984 Equ tv earnmgs of foreign Current tu expense (bene 6t) $ 2,800 arnhares (3.700) (2,300) (3.600)

$ (200) $4.100 threrred ta expense (bene 6t) Leveraged lease ad;ustment for rate (4.100) (4.500) 2.500 change and lost mvestment tax Total tax expense (bene 6t) $(1.500) $(4.700) $6.600 credit -

(20.400) -

Other 5.100 4,100 3.900 Appbcable mcome taxes (benent) $ 79.400 $ 21.100 $(26.000) 48 i

Nute 13-Emplo>ee Benefit and Incentive Plans The following table sets forth the plans' funded status at December 31,1986, after the parnal settlement, and at December 31,1985 (a) Pension plans Essentially all eligible, salan. e d, domestic employees of the Corpora- (in thousands):

tion are covered by noncontributory, defined benefit pension plans.

Employees m foreign offices participate to varying degrees in local 1986 m5 pension plans, which in the aggregate are not significant. Proiccred benefa obhganon.

Vested benehts $(103,726) $(168,581)

Under the plans, retirement benefits are primanly a function of Nonvested bene 6ts (33.830) (27.764) both the years of service and the level of compensatic;n dunag AccumuLted benent obhgacon (137.556) ( l *.3.i 5 )

cither the last five years of employment or the highest five Eff of eminted future consecutive salary years occurring during the last ten years before mmremo" !"els (112.958) (91.721) retirement. Projected benefa obhganon (250.514) (288.066)

Plans

• assets at fair value 504.522 537.951 It is the Corporation's policy to fund the plans on a current basis to pun, ,,,et3,n excess of protected the extent deducoble under existing tax regulations. Such contri- benent obhgauan 254.008 2w.n5 butions are intended to provide not only for benefits attributed to Unresognned net gam due to past expenence nervice to date, but also for those expected to be earned in the ditTerent from assumpoons made (39.7'0) (54.029) future. Unrecognized oct transman asset bemg recognized over 17 years (121.106) (196.637) l In 1986, the Corporation recognized an $81.7 million gain from the Prep.ud (accrued) pension cost s 93.132 s (781) l settlement of a portion ($112.6 million) ofits pension plan j obligation. This gain results from the purchase of an insurance The plans' assets consist primanly oflisted common stocks and

! contract providing for the payment of benefits to current pensioners, units of certain trust funds administered by a subsidiary of the and resulong m the accounung recognmon of a poroon of the over-Corporation. At December 31,1986, the plans' assets included funded position of the pension plan. The transaction will have no shares of the Corporation's common stock with a market value of

' \

effect on the level of benefits paid to current or future pensioners. $24.6 million.

Net periodic pension credit was $12.2 million in 1986 and $10.9 Net periodic pension cost for 1986 included the following mdlion in 1985, when Statement of Financial Accounting Standards (in thousands):

No. 87, Employers' Accounting for pensions, was prospectively adopted. In accordance with the provisions of Statement No. 87, 19"6 pension expense has not been restated for years prior to adoption. Semce costs-bene 6ts camed pension expense for 1984 was $1.3 million. dunng penod $ 16.202 Interest cost on protected benefit obhganon 21.4'2 Return on plan assets (86.620)

Net amorazanon and deferral M?!?

Net penodic pension cost (credit) $(12.244)

In determining the projected benefit obligation, the assumed weighted average discount rate used was 7.6 percent in 1986 and 8.1 percent in 1985, while the rate ofincrease in future salary levels ranged from 6.5 to 7.5 percent foi both years. The expected long-term rate of return on assets, used in determining net periodic pension cost, was 8 percent.

49

(b) Profit-sharing plan Cash incentive plans, including certain specialized business unit -

As of December 31,1986, there were approximately 6,200 participants incentives, are based on attainment of certain financial goals and a

• ' in The First National Bank of Chicago's profit-shzring plan. Profit- combination of business unit and Corporate objectives.

sharing expense included in employee benefits expense in the

. consolidated income statement was $31.2 million in 1986, $20.8 The 1983 stock option plan currently reserves 1,000,000 shares million in 1985, and $2.8 million in 1984. of common stock of the Corporation for issuance to senior officers, and also provides for granting of stock appreciation rights under ,

(c) Employee stock purchase and savings plan the plan.

l- Employees enrolled in this plan authorize payroll deductions for deposit in savings accounts during a two-year savings period. At the Stock options may be granted under the plan until Apnl 8,1993.

end of the savings period, employees may receive savings balances Options may be granted at a price not less than the market value on in cash or use them to purchase shares of the Corporation's common the date of grant and are exercisable beginning at least one year stock at a price fixed by the plan, following the date of grant and no later than 10 years from the date ofgrant.

During 1986,495,503 shares of common stock were purchased by employees under the plan at a price of $20.092 per share. The Under the plan, stock options may be granted with or without a current savings period began August 29,1986, with a stock purchase related stock appreciation right.

price of $31.552 per share. As of December 31,1986, approximately 3,300 employees were participating in the plan, and the level of A stock appreciation right entitles the optionee,in lieu of exercising savings deposits and payroll deductions for the current savings an option, to receive an amount equal to the excess of the market l

period, including projected interest thereon, represented potential value of the shares for which the right is exercised, on the exercise purchases of approximately $41,000 shares of common stock. The date, over the option price of the shares. The stock appreciation maximum number of shares issuable under the plan is currently right can be exercised subject to the same conditions as the related limited to 2.25 million. The Corporation makes no charge to expense stock option. Upon exercise of a stock appreciation right, the in connection with this plan, other than interest on savings accounts. related stock option is canceled. The estimated cost of the stock appreciation rights is charged to expense during the period between (d) Other incentive plans the grant and exercise dates.

The Corporation's other incentive plans include stock incentives, cash incentives and stock options. The following table summarizes activity under the 1983 stock option plan for 1986 and its status as of December 31,1986.

Stock incentives include grants to key officers of shares of the outstandmg Opoons Exerosable opoons Corporation's common stock, restricted as to sale based upon

. continued employment for three or four years, under the terms of opoon opoon Shares Pnce Shares Pnce plans in effect during 1986, depending upon the individual grant.

The rnarket value of restricted shares as of the date ofgrant is amortized to expense over the restriction period. As of D rember 31,1986,  %,Enber Dec 31,1985 642.393 s24% s2h ist.n4 s26 725,785 restricted shares were outstandmg. Stock incentives also Granted 211.160 $284-s30% - -

include performance share grants made to senior officers that will be Became exercisable - -

214.798 s26-s26%

37.858 s26.s264 37,858 sz6-s26%

seeded in stock and cash upon attainment of specified financial Exerased Expired or canceled 52.688 s24% s28% 43.608 $26 s26%

goals during a three year period. The estimated cost of performance share grants is charged to expense over the performance period. 3,i,nc,,

December 31.1986 763.007 s24%.s305 315.076 $26 $264 i

l Stock appreciation rights are attached to 219,267 of exercisable stock options and 262,000 of the outstanding stock options.

The expense for the above stock and cash incentive plans was $59.0 l

million in 1986, $38.8 million in 1985, and $12.2 million in 1984.

In connection with the above incentive plans, the 1974 stock option plan was curtailed as ofJanuary 1,1980. All options under this plan were granted to salaried key employees of the Corporation and its subsidiaries to purchase shares ofits common stock at prices not i

less than market value at the date granted. The Corporation makes l

no charge against income with respect to the granting or exercise of these options. Options outstanding under the 1974 plan are nonqualified options. None were exercisable within one year of the date of grant and none expire later than 10 years after the date of grant.

1 so I

L--_______________- _. _

n <

LThe following table sumraarizes the activity under the '1974 stock '

i option plan for 1986, and the plarn status as of December 31,1986..

' Opcon

' Oustar. ding and Exercisable Opuona shares Pnce c Balance.-

December 31, l985 384 A00 $18 $21% ~

Becarac enerosable . .

_ Exercised ' 102.**5 $184 821%

. Expired or canceled 2.800 $184 lialance.

December 31,1986 . 278.829 $18 $214

!(e) Postretirement benefits

- (Jpon reaching normal retirement age and meeting certain vesting -

requirements, essentially all domesac employees currendy qualify for postretirement health care and life insurance benefits. Life in-surence benefits are provided at no cost to the employee / retiree, while health care benefits are partially contnbutory and are coordinated with Medicare benefits.-

The cost of the retiree life insurance benefits is based on an estimate c, of.each year's expected claims plus administrative costs, and is

> accrued on a level basis each year. Accrued life insurance costs are -

" = funded annually, and amounted to approximately $0.5 million in 1986, $0.4 million in 1985, and $0.1 million in 1984. A trust has been established to provide retiree health care benefits. The trust is funded based on an actuarial projection of each year's incurred -

claims plus administrative costs less trust income. The health care costs are accrued on a level basis each year and funded annually.

' The retiree health care costs amounted to approximately $1.6

~million in 1986, $1.6 million in 1985, and $1.3 million in 1984, 1

l 51

r-More 14-First Chicago. Corporation (Parent Company Only)-

Condensed Financial Statements -

C - Condensed Balance Sheet Demnber 11 (In thouun6) 1986 IWS Assets ...

' Cash and due from banks Bank subsidiaries-noninterest bearin $ 18,681 -$ 17,687 Bank subsidiaries-interest bearing g 1,294,800 - 340,900 Other interest bearing' 379,695 102,995 Loans:

Bank subsidiaries 442,000 442,000 Other subsidiaries 480,991 561,081 Other - 1,513 1,906 Investment in wholly-owned subsidiaries

- Bank subsidiaries 1,959,635 1,844,361 Other subsidiaries 341,713 254,920 Other assets 59,348 57,964 '

Total assets $4,978,376 $3.623,814 Liabilities Funds borrowed .

Other subsidiaries $ 84,236 $ 117.589 Other 1,711,275 683,532 Long term debt 798,181 694,046 Other liabilities 37,307 38,603 Total liabilities 2,630,999 1,533,770 Stockholders' Equity 2,347,377 2,090,044 Totalliabilities and stockholders' equity $4.978.376 $3,623,814 Condensed income Statement For the We (in thouunds) 1986 1985 IW4 Operating income -

Dividends from subsidiaries Bank subsidiaries 's 58,000 $ 30,051 $ 64,031 Other subsidiaries 56,521 63,500 63,000 Interest income Bank and other subsidiaries 112,924 110,006 82,415 Othe- 27.278 17,717 39,913 Other mwme (4,337) 1,326 920 Total 250,386 222,600 250,279 Operating Expense Interest expense Other subsidiaries 9,432 11,250 13,269 Other 130,703 129,515 99,713 Other expense 4.591 7,045 4,123 Total - 144,726 147,810 117,105 income Before Income Taxes and Equiry in Undistributed Net income of Subsidiaries 105,660 74,790 133,174 Applicable income taxes (benefit) 1,185 (7,506) 3,588 income Before Equiry in Undistributed Net income of Subsidiaries 104,475 82,296 129,586 Equity in undistributed net income (loss) of subsidiaries Bank subsidiaries 102,948 33,147 (28,978)

Other subsidiaries 68,779 53,556 (14.239)

Net income $276,202 $ 168,999 $ 86.369 l The Parent Company Only Statement of Changes in Stockholders' Equity is the same as the Consolidated Statement of Changes in  !

Stockholders' Equity. (See page 40.)

l l

52 1

~ Ce,ndensed St:tement of Changes in Financial Position i

+ for the Year On thousands) 1986 1985 - 1984 l Sources of Financial Resources .

i j provided from operations Net income $ 276,202 $166.999 $ 86,369 (Excess) deficit of equity in earnings of subsidiaries over chvidends received (171,717) (86,703)- 43,217 Other (2,899) 86 l (771) l Financial resources provided by operations ' 101,576 81,525 129,672-l Cash dividends declared (93,841) (94,530) (93.112)

Net financial resources provided by (applied to) operations 7,735 (13,005) 36,560

. Financing activities -

l- Funds borrowed 994,390 (135,672) 67,651 Long-term debt 104,135 404,303 137,757 Stock issued 82.999 100,718 '190,661 Total financial resources provided by -

financing activities 1,181,524 369,349 396.069 Nonearning assets and liabilities Cash and due from banks (3,419)

Other, net (994) 573 (7,808) (23,213) (22,161)

Total financial resources applied to nonearning assets (22,640)

(8.802) (25,580)

Increase in financial resources $1,180,457 $333.704 $407,049 increase in earning assets and investment in subsidiaries:

Due from banks-interest bearing $1,250,600 $ 28,888 $(61,992)

Investment in wholly owned subsidiaries 30,340 125,502 329,424 Loans, net (80,483) 179,314 139,617 increase in caming assets and investment in subsidiaries $1,180,457 $333,704 $407.049 Dividends that may be paid by bank subsidiaries are subject to a legal In connection with issuances of commercial paper, the Corporation limitacon. This limitation is equal to net profits, as defined for has agreements providing future credit availability (back-up lines of the current year, combined with retained net profits for the preceding credit) with various banks. The agreements with nonaffiliated banks two years. At December 31,1986, the bank subsidiaries could have aggregated $250 million at December 31,1986, and at December declared additional dividends of up to approximately $304 million 31,1985. The Corporation also had agreements for back up lines of without the approval of the Comptroller of the Currency As a prac- credit with The First National Bank of Chicago aggregating $150 tical matter, dividend payments are restricted to lesser amounts million at December 31,1986, and December 31,1985. In 1986, the because of the desire to maintain strong capital positions in the bank - Corporation had agreements to pay a 0.25 percent per annum subsidiaries. commitment fee on any unused lines. The back up lines of credit, together with overnight money market loans, short term investments, Federal banking law also restricts the bank subsidiaries from extending and other sources ofliquid assets, exceeded the amount of com-credit to the parent company in excess of 10 percent of their capital mercial paper issued at December 31,1986.

stock and surplus, as defined. Any such extensions of credit are subject to strict collateral requirements, l

t .

4 p

53

. Note 15-Commitraents Long term Foreign Exchange Contracts s .

In the normal course of business, there are various commitments In addition to establishing customer limits for short term foreign

. and contingent liabilities outstanding, such as standby letters of credit exchange activity, the Corporation monitors the credit risk associ-l and other letters ofguarantee, commitments to extend credt long- sted with its participation in long-term foreign exchange contracts j term foreign exchange contracts, and interest-rate swap aereements, (over 1 year). The Corporation's risk in these long-term forelyn which are not reflected in the accompanying ficancial statements. exchange contracts can be calculated by valuing such foreign The credit risk associated with these instruments is reviewed on an exchenge contracts at the prevailing rates of exSange and itermin- l individual customer basis and considered in assedng the adequacy ing all positions which result in net exposure on an individual of the Corporation's allowance for loan losses. Tin following is a customer basis. The amount of such risk, calcukted in this manner, brief descnption of some of these activities as ofDecember 31,1986. approximated $92 million at December 31,1986. This amount fluctuates as a function of forward foreign exchange rates.

Standby Letters of Credit and Other Guarutte Instruments  ;

Standby letters of credit and other guarantee in truments are issued Acquisitions by the Corporation to ensure its customers' periermance in dealings In December 1986, First Chicago Corporation signed a definitive with others. As of December 31,1986, the Corporation had issued agreement to purchase Beneficial National Bank USA of Wilmington, standby letters of credit and other guarantee instruments, net of Delaware, from Beneficial Corporation. Under the terms ofits agree-cash collateral deposits, for the following purposes (in millions): ment with Beneficial Corporation, the Corporation will pay $247 million in cash for the stock of Beneficial National Bank USA. The primary business of Beneficial National Bank USA is the issuance of !

Purpose Amount Typical Maturity Ranges Visa and MasterCard credit cards, and its assets are approximately Commercial paper $ 920 2 to 3 years $1.1 billion. Completion of this transaction, subject to necessary Tax exempt securities 1,434 5 to 20 years regulatory and legal approvals, is expcted m mid 1987.

Bid or performance guarantees 334 1 to 2 years inJanuary 1987, First Chicago Corporation announced an agree-Other 2,437 1 to 8 years ment in principk tucquire First United Financial Services. Inc. for Total 5,125 $175.6 milliott Grst United is a Chicago-area bank holdmg com-Less: Risk participation 404 Pany comprised af five suburban ba3ks, a trust company, and a finance company, with consolidated assets of $ 1.1 billion. The com- )

Net $4,721 pletion of the acquisition is subject to execution of a definitive acquisition agreement, First United stockholders' approval, legal Net outstanding standby letters of credit and other guarantee approvals, and the approval of various regulatory agencies. First United instruments as of December 31,1985, aggregated approximately stockholders will have an option to receive either a new issue of

$4,7 billion. First Chicago Corporation convertible preferred stock, or cash, pro- _j vided that no more than 70 percent, but at least 50 percent, of income is generally rscognized on a straight line basis over the term First United's shares will be exchanged for preferred stock. The of the standby letter of credit or other guarantee instruments in acquisition is expected to be completed during the second half of 1987.

noninterest income. The amount of uneamed income related to these activities was approximately $1.9 million at December 31, Note 16-Contingenchs i 1986, and approximately $2,7.nillion at December 31,1985. The Corporation and certain ofits subsidiaries are defendants in various lawsuits uising out of normal banking activities, including  ;

Interest Rate Swap Agreements certain class actions, and the Corporation has received certain tax The Corporation enters into interest rate swap agreements both as a deficiency assessments. In the opinion of management and the  ;

, financial intermediary to produce fee revenue and as a principal to Corporation's general counsel, the ultimate resolution of these manage its own interest rate exposure. Certain agreements are mattus will not have a material effect on the Corporat.on's financial i (ombined interest rate and foreign currency swap transactions. As a statements.

financial intermediary, it is the Corporation's policy to limit risk by matching offsetting swap agreements. In November 1984, the United Sutes 5ccurities and Exchange Commission issued a formal order ofinvestigation of the Cc,rpora-The Corporation's risk in these transactions is the cost of replacing tion to deer.rmine whether there were certain violations of United at current market rates all those outstanding contracts where there is Sutes hurities laws for periods since December 31,1981.The such a cost. At December 31,1986, this approximated $790 million, investigation is directed to periods during 1982,1983, and 1984 and-and includes related interest receivables. This amount fluctuates relates to the adequacy of the Corporation's allowance for loan as a function of maturity, market interest rates, and market foreign losses, tne timing of the provisions for loan losse, and the proce-exchange rates. dures employed by the Corporation to determine such amounts.

Discussions between the Corporation and the Commission staff are presendy being held, but the outcome of such discussions and their impact on the financial statements for periods during 1982, 1983, and 1984 cannot be determined at this time. In the opinion of management and the Corporation's legal counsel, the ulumate resolution of the SEC investigation will not have a material adverse effect on the Corporation's financial position.

I

$4

m .,

, s.; . -

3

? Auditors

• Report

• ' i

. To the Stockholders and the Board of Directors of First Chicago y Corporation:

-( a' i

K Te have examined the consolidated balance sheet of First 6t ,

Chicago Corporation (a Delaware corporation) and subsidiaries as of Dece6ber 31,1986 and 1985 and the related consolidated

" 1 tW statements ofincome, changes in stockholders

• equity and '

f l.9

g. .

changes in financial position for each of the three years in the i

t-period ended December 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, l ',

t accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

l 4 g% ^f 'In our opinior; the financial statements referred to above present

[b a

fairly the financial position of First Chicago Corporation and subsidiaries as of December 31,1986 and 1985 and the results of their opentions and the changes in their financial position for j

l each of the three yet.rs in the period ended December 31,1986, l

in conformity with generally accepted accounting principles - .j applied on a3 ensistent basis. '  !

ui; W ,

i Chicago, Illinois,

' January 14, 1987.  !

// ,

1 .

s" Consent ofIndependent l Public Accountants  !

l  :

To First Chicago Corporation:

l r As independent public accountants, we hereby consent to the

, , incorporation of our report datedJanuary 14,1987, incorporated

', dc s' by reference in the Form 10 K, into the Corporation's previously  ;

i I

9, filed Form S-8 Registration Statement No. 2 83105, Form S 8 Registration Statement No. 2-68153, Form S-8 Registration State- 3 ment No. 2-50411, Form S-3 Registration Statement No. 2 76715,  !

Form S-3 Registration Statement No. 2 77079, Form S 3 Registration  !

Statement No. 2 92143, and Form S 3 Registration Statement No. (

33-4041.

i a 0Aa, d.

g '

Chicago, Illinois, Ma:th 10,1987.

.(

s t-1 l

I y'

ll s t - _- _ _ - - - _ _ ._____-_-____-__-___ _ - -

~

i First Chicago Cor>oction and Subsidiaries Selected $ttistican'nformition Investment Securities I

As of December 31,1986, investment securities had the following maturity and yield characteristics:

)

I Book Market .

(in millions) Value Value  % eld U.S. Government and i'ederal Agency Maturing in one year $ 78 $ 80 8.57W Maturing after one but within five years 766 769 6.32 Maturing after five but within ten years 1 1 6.32 Maturing after ten years 16 17 9.35 l

$861 $867 6.58 States and Political Subdivisions

• Maturing in one year 5 19 $ 19 9.814

- Maturing after one but within five years 172 175 10.65 Maturing after five but within t:n years 145 152 12.58 Maturing afeer ten years 210 199 12.22

$546 $545 11.73 Other Bonds, Notes and Debentures l Maturing in one year $ 29 $ 30 9.74 %

Maturing after one but within five years 68 67 8.71 Maturing after five but within ten years 16 16 7.63 Maturing after ten years 4 5 9.62

$117 $118 8.85

• % elds for obl 9tanons of states and polincal subdmsions are calculated on a taxquivalent basis using a Federal tax rate of 46 percent.

l l

- 56 (

,3a t: i , y

^

First Chicago Cor>aration and Subsidiaries $

Selected Statistica Information

,g' y Loans-composition e

. December 31 (In mdhons) 1986 1985 1984 ~7) . 1982

s. Domestic : 4 V. 7 Commercial . $ 7,419 #$r6,465 $ 7,207 M 548 $ 6,423 :

j Secured by real estate * ,

e f 3 848 , 3,379 ' 3,470 IJ70 2,732

, f , '/

' t 9i Financial institutions 2,133 1,437 1,334 1,338 1,638 Consumer 3,888 3,750 1,333 2,336 1,875 1, case financing 480 428 386 340 345 Other 1,868 2,071 1,067 1,513

,) 1.884 Domestic 19,636 - 17.530 17.614 14.N 14,526-a

>4 \

~ ~

Foreign Loans

)' Commercial J 2,743 3,156 3,642 , 3,741 2 3,782 Governments and official institutions 1,157 . 1,255 1,353 '

1,643 1,724 4

Banks and other ficacialinstitutions .

", Other 1,537 - 1,965 2,552 2,209 1,852.

M ( 337 284 415 258 308

, Foreign loans t 5,774 6,660 . 7,962 7,851 7,666 Total Loans $25.410 $24.190 $25,576 $22.b0 '

f22.19.5 l Analysis of Net Charge-offs '

f

\ <

i December 31 (in mdlions) 1986 1985 1984 1983 ' ~ led 2 Charge offs '

Domestic < '

' ', j Commercial , $ 71.7 $102.4 $249.1 $ 65.6 $ 52.7 Secured by real estate'  ; 12.6 3.9 3.5 19.1 25.3 Consumer 133.9 104.3 50.9 32.8 30.7 Other" 15.4 24.7-

(

t

• 5.4 16.2 8.2 Foreign 106.4 93.0 109.8 26.3 9.3 Total charge-offs v ,

. 340.0 . 309.0 438.0 160.0 126.2 s

I -_

1 l Recoveries <a l Domestic

. Commercial - 19.2 y; 13.5 ,

5.8 8.7 4 4.5 Secured by real estate * " '

2.0 ' 1.8 O7 0.5 0.9 Consumer '

16.9 12.9 10.8 12.2 ' 11.3 0cher" 1.1 0.7 0.6 'l /p 1 3.7 Foreign 1.1.1 8.8 5.2 3 *// 2.1 Total recoveries 52.3 37.7 23.1 , i, 24.7 22.5 Net charge-offs $287.7 $271.3 $414.9 i $h355 $103.7

• lndudes residentui and urber mortgages. '

p ** Indudes financial insnrunons, lease 6nancing, and other.

l l., i 59 j v -

i e ,

d

'l f

1.

y $7

J'

• First Chicago Cor3 oration and Subsidiaries Interest Sensitivity of Loans Selected Statistica;Information For those loans due after one year (excluding domesuc consumer loans, residential mortgage loans, and domestic lease financing Allowance For Loan Losses (Foreign Loans) receivables), the following table shows a breakdown between those i loans that have floating interest rates and those that have predeter-(in thousands) 1986 1985 1984 mined interest' rates.

lialance, beginning of .

year : $153,075 $101,143 $ 57,594 Total Addioons (deduccom) one to over Five After one Charge offs (106.399) (92,997) (109,839) (In mdhons) Five brs Ers Er Recovenes 13,118 8.760 5.203 Loans with predetermined Net charge offs (93,281) (84,237) (104,636) interest rates $ 598 $ 496 $1,094 Provoion for loan 1.oans with floanng interest

>} i loues 1211.619 136.169 147,718- rates 5,554 3,213 8,767 Acquisioons and disposmons $6.152 $ 3.709 $9.861 (51) - 467 l 1 -- llalance, end of year $188.362 $155.075 $101.143 Deposits Maturity Distribution of Loans The following tables show a maturity distnbution of domestic time The following table shows a distribution of the maturity ofloans, cernficates of deposit of $100,000 and oser, other domestic nme excluding domestic consumer loans, residential mortgage loans, and deposits of $100,000 and over, and deposits in foreign offices,

' domestic lease financing receivables, at December 31,1986: predominandy in amounts in excess of $100,000, at December 31,1986:

/s .I One Year one to over (In millions) or I.ess Five Years Five Years Total Domesoc Ceraficates of Deposit b (In milhons) Amount Percent Domesoc Commercial $ 3,054 $2,811 Si,554 $ 7,419 Three months or less S 2,031 Svi secured by real estate 1,145 1,305 542 2,992 over three months but I~ Financial insatunons 1,691 313 129 2,133 less than six months 355 to other 1,180 402 286 1,868 over six months but less than twelve months 264 8 Total domesne 7.070 4.831 2,511 14.412 over twelve months 784 23 Foreign 3.255 1,321 1,198 5.774 Total $ 3.444 1004 Total $10.325 $6.152 $ 3.709 $20.186 ===

Percentage of total g4 gW g4 ,i_004 Domesoc other Time Deposits

_ (In mdhons) Amount Percent Three months or less $ 138 517 over three months but less than six months 17 6 over six months but less than twelve months 109 40 over twelve months 9 3 Total $ 273 1004

=

Foreign offices (In nullions) Amount Percent Three months c less $ 10,642 881 l over three rr schs but less than six mnths 820 7 over six months but less than twelve months $98 5 over twelve months 46 -

l Total $12.106 1004 I ===

58

I be following table shows the breakdown of deposits on an average Other funds borrowed as of year end 1986 totaled $1.486 billion,

( basis for the past three years. ompared with 51 A67 billion at year-end 1985. The maturities of l

J

.s other borrowings as of Decemb:r 31,1986 were (in millions):

} ..

t peposits-Averge Balances '

0:her Funds llorrowed t in milhone) 1986 1985 1984 1987

$1.033 Domesuc ]

1988 386 Demand deposits $ 4.409 3 4.162 $ 3.337 )

ruving and ume 1989 W 1990 8 deposits 5.205 4.907 3.685 1991 and beyond 9 Time terufnates of ]

deposit over $100.000 3.488 4.227 6.178 Total $ 1.486 Total domesoc 13.102 13.296 13.200 Foreign offices 13.443 14.408 13.758 Total deposits $26.545 $27.704 $26.958 Funds Borrowed Federal funds purchased, securities under repurchase agreements and commercial paper are major nonretail sources of funds. Details on the outstanding and rates of these instruments during the year follow:

(In mdhons) 1986 1985 1984 Federal funds purchased and secunces under repurchase agreements Outstandmg at year end $4,539 $5,168 $4,797 Highest outstanding at any month-end 6.312 5.929 5.607 Average interest rate at year end 15.69% 9 70% 9.07 7 Commercial paper Outstand ng at yeavend $1,174 $ 362 $ 369 Hghest outstandmg at any month-end 1,174 588 570 i Average interest rate at l

year end 11.607 8 12 % 9 67W Other funds borrowed Outstanding at year end $1.486 $1.467 81,714 Highest itstanding at aay month end 1,772 1.846 1,714 Average mterest rate at year end 9.25W 10.014 10.01%

Total funds borrowed Dady average oursundmg dunng the year $7,400 $7,069 $7,051 Approximate dady average mterest rate dunng the year 6.91W 8 47W 10 60%

$9

F.irst Chicago Cor> oration and Subsidiaries Selected Statistica Information 1986 [985 1984 1983 1982 ,

! Financial Ratios  !

Net income as a percentage of: .

Average stockholders' equity 12.38% 8.44% ' 4.51% 11.07% 10.19%

Average common stockholder:' equity 13.32 8.33 3.38 11.37 10.18 Average total assets 0.71 0.43 0.22 0.53 0.39 Average earning assets 0.80 0.48 0.25 0.60 0.45 Stockholders

• equity at year end

- as a percentage of:

Total assets at year-end 6.0 5.4 4.8 4.8 4.2 Totalloans at year end 9.2 8.6 7.5 7.8 6.7 Total deposits at year end 8.7 7.7 6.7 6.3 5A Average stockholders' equity as a percentage of:

' Average assets 5.7 5.1 5.0 4.8 3.9 Average loans 9.3 8.0 8.0 7.7 6.5 Av ruge deposits 8.4 7.2 7.1 7.1 5A Income to fixed charges: .

Excluding interest on deposits 1.5 x 1.2x 1.1x 1.4x 1.2x Including interest on deposits 1.2x 1.1x 1.0x 1.1x 1.1x Common Stock and Stockholder Data Market price High for the year $34% $30% $27 $28 $2318 1.ow for the year 26h 204 18% 174 1312

- At year-end - 28% 29b 21% 25% 18ts Dividend payout ratio 28.09 %' 46.48% 110.92 % 32.14 % 36.04 %

Price camings ratio (year end market) 6.1 10.4 18.0 6.5 5.4 Common stockholders' equity per share (at year-end) $36.91 $34.10 $34.12 $35.80 $33.55 Number of stockholders 12,415 14,458 14.529 14,462 14,003 60

Eirst Chicago Corporation and Subsidiaries

. Quarterly Data .

4 Quarterly Earnings and Market Price Summary Stock Market Pnce/ Earnings Net income Pnce Range" Range"*

Amount Per (in mdhons) Share Low Hyth Low High 1936 First Quaner $ 63.0 $1.06 $264 $32's 8.3 10.2 Second Quarter 63.6 1.08 29 4 34's 7.0 8.3 Third Quaner 72.3 1.24 26% 32% 6.0 '7.4 Founh Quarter 77.2 1.32 26b 34 4 5.6 7.3 Year 276.2 4.70 265s 34 % 5.6 7.4 1985 First Quarter $ 39.9 $0.68 $20% $264 22.4 29.2 Second Quarter 11.7 0.08 21 26%

Third Quarter 58.0 1.04 21% 25% 7.5 9.1 Fourth Quarter 59.4 1.04 204 30% 7.1 10.6 Year 169.0 2.84 20ts 30ts 7.1 10.6

• Not mea >ungful.

"The pnncipal market for First Chicago Corporanon common stock is the New York Stock Exchange.

• "Computanon made by dividmg market pnces by the per share earmngs of the latest twelve month penod ending with the current quarter.

Consolidated Summary of Quanerly Financial Information 1986 (In mi!Gons. except per rb data): December 31 September 30 June 30 March 31 Interest Income $753.9 $ 788.2 $820.5 $856.9 Net Interest income 250.0 266.8 261.1 259.7 Provision for Loan Losses 100.0 155.0 85.0 100.0 Noninterest income 219.6 279.6 177.0 187.1 Noninterest Expense 299.7 278.7 271.0 255.9 Net Income 77.2 72.3 63.6 63.0 Earnings Per Common and Common Equivalent Share $1.32 $1.24 $1.08 $1.06 1985 December 31 September 30 June 30 March 31 Interest income $879.5 $878.2 $981.5 $973.1 Net Interest income 258.6 259.2 270.1 265.1 Provision for Loan Losses 90.0 150.4 90.8 80.0 Noninterest income 178.3 193.6 163.3 122.8 Noninterest Expense 267.2 244.9 351.3 246.3 Net income 59.4 58.0 11.7 39.9 Earnings Per Common and C . mon Equivalent Shue $1.04 $1.04 $0.08 $0.68 Record Cents Common Dividends Declared Date Payable Per Share 1/11/85 3/1/85 4/1/85 33 4/12/85 6/7/85 7/1/85 33 7/12/85 9/6/85 10/1/85 33 l 11/8/85 12/6/85 1/1/86 33 l

1/10/86 3/7/86 4/1/86 33 4/11/86 6/6/86 7/1/86 33 7/11/86 9/5/86 10/1/86 33

/' 11/14/86 12/5/86 1/1/87 33 1/9/87 3/6/87 4/1/87 37%

61

Fisst Chicago Corporation and Subsidiaries Average Balances / Interest Differential / Rates

.a.

Wr Ended December 31 1986 1985 (Income and rates on tax equivalent basis) Averge Average Average Average ,

. (Dollars in trullions) Balance Interest Rate Balance Interest Rare i Assets Due from banks-interest bearing (A) $ 5,271 $ 383.5 7.28 % $ 4,968 $ 444.6 8.95%

Federal funds sold and securities under resale agreements 1,382 92.5 6.69 2,067 173.3 8.38 Trading account assets

• 2,292 - 188.1 8.21 1,232 113.3 9.20 Investment securities United States Government and Federal Agency 619 49.6 8.01 581 56.5 9.72 States and political subdivisions * $21 61.2 11.75 536 61.5 11.47 Other* 739 43.5 5.89 619 55.9 9.03 Loans (B)(,C)(D)

Domesoc* 17,655 1.893.7 10.32 17,597 2,089.4 11.55 Foreign 6.250 582.4 9.25 7,379 810.0 10.94 Loans. 23,905 24.976 Total earning assets 34,729 - 34,979 Cash and due from banks-noninterest bearing 2,249 1,920 Allowance for loan losses (487) (346)

Other assets 2,362 3,019 Total assets /

Totalinterest income (E) $38.853 $3.294.5 $39.572 $3.804.5 Liabilities and Stockholders' Equity nd $ 4,409 $ 4,162 Savings 2,735 $ 154.2 5.64 2,440 $ 158.6 6.50 Time 5,958 488.3 8.20 6,694 613.6 9.17 Foreign offices (F) 13,443 959.4 7.14 14,408 1.223.4 ~ 8.49 Total deposits 26,545 27,704 Federal funds purchased and securities under repurchase agreements 5,178 352.1 6.80 5,095 421.1 8.26 Commercial paper $87 39.6 6.75 378 33.8 8.94 Other funds borrowed 1,635 119.4 7.30 1,56 143.8 9.01 Long-term debt 898 68.9 7.67 743 65.0 8.75

- Other liabilities 1,779 2,054 Preferred stock 325 325 Common stockholders' equity 1,906 1,677 Totalliabilities and stockholders' equity /

Total interest expense $38.853 $2,181.9 $39.572 $2.659.3 Interest income / Earning Assets (D) $3,294.5 9.48 $3,804.5 10.87 Interest Expense / Earning Assets 2,181.9 6.28 2,659.3 7.60 Interest Differential (D) $1,112.6 3.20 % $1,145.2 3_27%

• Includes tax equivalent adjustment based on 46 percent Federalincome tax rate.

(A) Pnncipally balances in overseas odices.

(B) includes fees on kanns of $101,492,000 for 1986; $84.667.000 for 1985; $73,664.000 for 1984; $$9,887,000 for 1983; and $50,$33.000 for 1982. Rates are calculated exclusive of fee income.

(C) includes amorozacon ofinvestment tax credits on a tas equivalent basu of $9.298 (r)0 for 1986; $11.033.000 for 1985; $8.102.000 for 1984; $6,079.000 for 1983, and

$3.876.000 for 1982. Rates are calculated on balances reduced by deferred hability for taxes and deferred investment tax credits.

62

4-1984 1983 1982

i. Average Average Average Average Average Average Balance interest Rate Balance Interest Rate Balance . Interest Rate

$ 5,611 $ 609.0 10.85 % $ 5,954 $ 585.5 $ 7,297 9.83%. $ 978.4 13.41 %

1,596 171.7 10.76 962 89.4 9.29 844 97.7 11.58 748 78.1 10.44- 528 49.2 9.32 371 50.3 13.56 1,130 116.9 10.35 497 47.5 9.56 {

553 52.1 9.42 653 76.0 11.64 557 62.3 11.18 514 55.0 10.70 l

.567 55.2 9.74 505 46.5 9.21 381 34.5 9.06 l 15,973 2,072.7 12.69 13,856 1,641.1 11.61 13,551 1,867.8 7,928 13.44 968.8 12.16 7,643 846.4 11.00 7,037 1,020.3 14.44 23,901 21,499 20,588 34,206 30,502 30,548 1,647 1,564 1,890 (258) (221) (202) 2,956 2,698 2,497

$38,551 $4,148.4 $34.543 $3,367.9 $34,733 $4,156.1

$ 3,337 $ 2,833 $ 3,030 1,900 $ 146.2 7.69 1,600 $ 118.1 7,963 7.38 720 $ 38.1 5.29 842.8 10.58 7,579 738.1 9.74 7,971 1,019.0 12.78 13,758 1,387.4 10.08 11,383 1,053.2 9.25 12,941 1,639.6 12.67 26,958 23,395 24,662 5,187 542.2 10.45 5,064 459.3 9.07 4,451 543.7 12.22 431 44.5 10.32 469 42.1 8.98 635 74.1 11.67 1,433 161.0 11.24 1,385 144.9 10.46 1,129 141.0 12.49 353 34.3 9.72 308 27.1 8.80 230 19.5 8.48 2,272 2,2 64 2,284 313 230 23 1,604 1,428 1,319

$38,551 $3.158.4 $34,543 $2,582.8 $34,733 $3,475.0

$4,148.4 12.13 $3,367.9 11.04 $4,156.1 13.61 3,158.4 9.24 2,582.8 8.47 3,475.0 11.38

$ 990.0 2g9% $ 785.1 gW $ 681.1 g%

2 (D) includes an ad;ustment for the revaluanon of the leveraged lease portfolio on a tax eqwvalent basis of $29,540.000 for 1986 and none for 1985,1984,1983 and 1982. Rates for domesoc loans. interest mcome as a percentage o(eamiryt assets, and intest ddferennat for 1986 excludmg the lease revaluanon would be 10 49%,9.57W, and 3.29%, respecovely.

(E) Indudes tas equivalent adjustments based on 46 percent Federal income tax rate of $74,927,000 for 1986; $92.214.000 for 1985; $95,062,000 for 1984, $76.022,000 for 1983, and $65.315,000 for 1982.

(F) Indudes Intemanonal Banking Facilines deposir balances m domesoc offices and balances of Edge Act and overseas oEces.

63

)

First Chicago Corporation and Subsidiaries Analysis of Cianges in Interest Differential 4

i The followiag table shows the approximate effect on the interest differential of volume and rate changes for the years 1986 and 1985. For i

I purpose

• of this table, changes that are not solely due to volume or rate changes are allocated to volume.

car Eaded December 31 198(> over 1985 1985 over 1984 tln Ellions) Volume Rae Toul Volume Rare Tuul Increase (decrease)in interest income Due from banks-interest bearing ' $ (83.1) $ 22.0 $ (61.1) $ (57.5) $(106.9) $(164.4)

Federal funds sold and securities under resale agreements (35.0) (45.8) (80.8) 39.3 '(37.9) 1.6 Trading account assets (12.2) 87.0 74.8 44.5 (9.3) 35.2 Investment securities United States Government and Federal Agency (9.9) 3.0 (6.9) (53.4) (7.0) (60.4)

States and political subdivisions 1.5 (1.8) (0.3) (13.4) (1.1) (14.5)

Other (19.5) 7.1 (12.4) 4.7 (4.0) 0.7 Loans Domestic (201,9) 6.2 (195.7) 192.8 (176.1) 16.7 Foreign (122.4) (105.2) (227.6) (60.3) (98.5) (158.8)

Total (482.5) (27.5) (510.0) 96.9 (440.8) (343.9)

Interest expense Deposits Savings 16.6 (21.0) (4.4) 35.1 (22.7) 12.4 Time (65.0) (60.3) (125.3) (116.3) (112.9) (229.2)

Foreign offices (195.1) (68.9) (264.0) 55.2 (219.2) (164.0)

Federal funds purchased and securities under repurchase agreements 5.6 (74.6) (69.0) (7.6) (113.5) (121.1)

Commercial paper (8.3) 14.1 5.8 Other funds borrowed (4.7) (6.0) (10.7)

(27.2) 2.8 (24.4) 14.7 (31.9)

Long-term debt (17.2)

(8.0) 11.9 3.9 34.1 (3.4) 30.7 Total (399.2) (78.2) (477.4) 10.5 (509.6) (499.1) increase (decrease)in interest dderential $ (83.3) $ 50.7 $J32.6) $ 86.4 5 68.8 $ 155.2 Note: Interest differential in 1986 includes an adjustment for the revaluation of the Corporation's leveraged lease portfolio resu the new tax laws and the accounting rules governing leveraged leases. This adjustment reduced 1986 over 1985 interest differential change due to rate changes by $29.5 million.

64

. Form 10-K Securities and Exchange Commission A Washington, D.C. 20549 Form 10 K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 For the fiscal year ended December 31,1986 Commission Gle number 16052 First Chicago Corporation One First National Plaza Chicago, Illinois 60670 312 732-4000 Incorporated in the State of Delaware 1.R.S. Employer identification No. 36-2669970 Securities registered pursuant to Section 12(b) of the Act-Name of each exchange Title of each class on which registered Common Stock, New Wrk Stock Exchange

$5.00 par value Midwest Stock Exchange Pacific Stock Exchange Preferred Stock with New %rk Stock Exchange Cumulative and Adjustable Dividends ($50 stated value),

no par value Preferred Stock with New %rk Stock Exchange Cumulativeand Adjustable Dividends, Series B ($100 stated value), no par value Preferred Stock with New Wrk Stock Exchange Cumulativeand Adjustable Dividends, Series C ($100 stated value), no par value Floating Rate New Wrk Stock Exchange Subordinated Notes due 1996, Series A 8%% Notes dueJune 1,1998 New York Stock Exchange No securities are registered pursuant to Section 12(g) of the Act.

The Corporation has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during l the preceding 12 months, and has been subject to such fding  !

requirements for the past 90 days.  !

I The aggregate market value of voting stock held by nonaffiliated of

)

the Corporation as of February 13,1987, was approximately  ;

$ 1,700,000.00.

l At February 13,1987, the Corporation had 55,044,354 shares ofits Common Stock, $5.00 par value, outstanding.

Portions of the Corporation's 1986 Annual Report to Stockholders are incorporated by reference into Parts I, II, and IV hereof, and l portions of the Corporation's definitive proxy statement dated March 10,1987, are incorporated by reference into Part til hereof.

65

,- ~ Form 10 K Cross Reference Index

.g. ,

Part I ' Page' Part IV (continue #

I'** b U"*'"'"

10(C).1983 Sto k Opoon Plan (Exhibit 10(D) to the Financial Review . 23,25-36 Corporanoni 1982 Annual Report on Form 10 K Selected Stanstical Informanon 25 and 56 64 (File No.16052) incorporated herein by referenceJ.

Descnpoon of Busmess . 44 45, 67 71 10( D). 1974 Stock Option Plan, as amended [" Text,of the Plan" and 74 n pages 2 through 10 of the Corporanon s Post-Effecove Amendment No. 7 to Form S-8 Registracon item 2. Properoes 71 Scarement (File No. 2-50411)incorporned herein

. Item 3. Legal Pruceedmgs 54 by reference).

Item 4. Subnussion of Matters to a Vote of 10(E). First Chicago Corporadon Compensacon Agreemenc Secunty Holders ' . . . [ Exhibit 9 to the Corporanon's 1980 Annual Report on Form 10-K (File No.14052) incorporated herem -

Execuove Officers of the Registrant 72 by reference l.

Part 11 10(F). FNBC Compensanon Agreement [ Exhibit 10 to the Corporacon's 1980 Annual Report on Form 10-K ltem 5. Wrket for Registrant) Common Equiry - (Fue No.1-6052) incorporated herem by reference).

and Related Stockholder Wrten . 25,60 61,71' 10(G). Agreement dated November 19,1980, among Barry F.

and 74 Sullivan First Chicago Corporanon, and The First Irem 6. Selected Financial Data . 25 and 60 Nanonal Bank of Chicago [ Exhibit 11 to the Corpora-

. Item 7.

non's D80 Armual Report on form 10-K (File No.

Management: Discussion and Analysis of 14052) incorporated herem by reference l. i Fmancial Condicon and Results of  ;

Operanon - 23,25 36 10(H). Performance Share Plan of ANC [ Exhibit 10(H) to ltem 8.- the Corporation's 1984 Arnual Report on Form 10-K Financial Statements and Supplementary Data - (Fue No.16052) mcorporated herem by reference l.

37 10(1). Performance incenove and Recognicon Plan of ANB First Chicago Corporanon and lExhibir 10(1) to the Corporanon) 1984 Annual Subsidianes-Coosohdated Statements Report on Form 10-K (File No.16052) incorporated 38 41 herein by referencel.

Notes to Conschdated Financial Statements 10()). Management Award Program for Employees of ANC 42 54 and Subsidianes. [Exhibir 10(J) to the Corporacon s Auditors' Report . 55 1984 Annual Report on Form 10-K (Fue No.14052)

Selected StaosocalInformanon . 25 and 56 64

' * ' ' ' ' ' ' ' " ' '"b

12. Scarements te computanon of ranos.

. . S. Disagreements on Accounting and Fm.ancial Dislosure. ** 13. The Corporanon's 1986 Annual Report to Stockholder.

Part 111 22. Subsidianes of the Corporation.

24. Consents of experts and counsel [ Consent of Item 10. Directors and Execuove Officers of the independent Pubhc Accountants' on page 55 of Registrant . 26* the Corporanon's 1986 Annual Re i Item 11. Execuove Compensacon 8-19

• inc rp rated herein by reference). port to Stoc Item 12 Secunty ownenhip of Certam Bene 6cial (b) No Reports on Form 8-K were filed by the Corporanon for Ownen and Management. 7 -8 **. the quarter endarig December 31,1986.

l l - Item 13. Certam Relationships and Related Transaccons 20***

.Unless otherwise stated, the indicated pages refer to pages in the Corporanon's Pan IV 1986 AnnualRe the Form 10-K. port to Stockholders that are incorporated by reference mto Item 14 Exhibits, Fmancial Statement Schedules, and

..This item is orrutted because it is either inapplicable or the answer thereto is in Reports on Form 8 K.

the negaove.

l (a) (I) Financial Scarements (See trem 8 for a lisung of all Gnancial '

... Incorporated by reference from the indicated pages of the Corporation's defmiove statements). proxy statement dated March 10, 1987.

(2) Financial Scarement Schedules.

Allxhedules nurmally reguired by Form 10-K are omuted smce they are either not applicable or the required mformanon This report on Form 10-K has not been approved or disapproved by the Secunces is shown in the financial statements or the notes thereto, and Exchange Commission, nor has the Commission passed upon the accuracy or adequacy of this report. Poroons of the Corporanon's 1986 Annual Report (3) Exhibits. to Stockholders are not required by the Form 10-K and are not fded as part hereof.

3(A). Restated Ceroficate ofincorporanon of the Corporation, Only those sections of the 1986 Annual Report to Stockholders referenc ed in as amended. [ Exhibit 3(A) to the Corporacon) 1985 the foregomg index are incorporated in the Form 10 K, r Annual Report on Form 10-K (Fde No.14052) -

mcorporated herein by reference). j i 3(B). By Laws of the Corporsoon, as amended [ Exhibit 2 to l l the Corporanon's 1980 Annual Report on Form 10 K j l (Fue No.14052) incorporated herem by reference).

l' 10( A) Strategic Stock Incenove Plan, as amended and restated .

[ Exhibit 10( A) to the Corporanoni 1982 Annual Report on Form 10-K (File Nc 14052) incorporated herem by reference).

10(B). Execuove frKenove Plan [ Exhibit 10(B) to the Corpora-tion's 1982 Annual Report on Form 10-K (Fue No.

16052) mcorporated herem by referena) 66 h

Description of Business The GCB is composed of eight Groups:

The Mrth Ayurican Bauliug Group includes geographically organized t Ch cago Corporation (the Corporation) is a bank holding units that serve the marketplace within the Lmted States and Canada.

company incorporated in Delaware in 1969, the principal asser of The Group also includes a unit that concentrates on middle-market i which is the capital stock of ne First National Bank of Chicago

' acovity within the hiidwest.

(FNBC). In addition, the Corporation owns all the outstanding capital stock of American National Corporation (ANC), the holding The Spaialiud Banling Group serves selected industries nationall -b

!. company for American Nanonal Bank and Trust Company of . . . .

Chicago ( ANB) and four suburban Chicago banks-American National including the real estate, communicanons, unh. .oes, petroleum, reta Bank of Arlington Heights, American National Bank of Bensenville, pg, c mm dices, finance, insurance, transportation, and securities American National Bank of Libertyville, and the Bank of Lansing. - ndustries, as well as g vernment, health, and service organizations.

ANC has dso entered into an agreement to purchase four additional suburban Chicago banks-the haconal Bank of North Evanston, the The InternationalBanking Gro*e is responsible for conductin8FNBC's Elgin National Bank, the First National Bank of Schiller Park, and bankm.g activities outside the United States and Canada, and operates the hierchants and hianufacturers State Bank. ANC anticipates that it thmugh 27 mstalianons and 9 affih, ares m 26 countnes. For informa-a n c ncernmg the location of the Corporation's international will consummate these acquisitions in the first quarter cf 1987.

m5taBat! n5, Pl ease refer m page 74; for mformation with respect The Corporation also owns the stock of various other subsidiaries , .

engard in businesses related to banking and finance. m the Corporanons foreign operanons, please refer to pages 44 and

45. First Chicago Internanonal Fmance Corporacon, a wholly-wned subsidiary of FNBC, oversees investments in and extensions In December 1986, the Corporation signed a definitive agreement to f credit to FNBC s mternaconal affiliates.

purchase Beneficial National Bank USA (BNB USA), a Delaware bank primarily engaged in the issuance of VISA and blasterCard .

credit cards. In addition, inJanuary 1987, the Corporation reached The Cudit Products Group provides specialized credit products to an agreement in principle to acquire first United Financial Services, aismmas, pnmanly m the fonn of asset based fmancing and Inc. (First United), a Chicago-area bank holding company that owns specialized corporate restructure and acquisition financing. The GmuP also provides credit support to other units of the GCB.

five suburban Chicago banks. la cach case, these acquisitions are subject to required legal and regulatory approvals and,in the case c f First United, approval of First United's stockholders. The Corpo- The Financia/ Products Group has responsibility for the GCB's financial pmducts that are outside tradiu.onal commercial banking activities.

ration expects to consummate these acquisitions during the second The Group s products mclude leasmg, trade fm, ance, mternanonal half of 1987.

private banking, and global investment banking activities such as Private Pl acements, merger and acquisition advisory services, interest-in addition to its equity investment in subsidiaries, the Corporation, rate swaps, leveraged buyout unancmg advisory semces, asset sales directly or indirectly, raises funds principally to finance the opera-and distribucons, syndicanons, and perMle securities acovities.

tions ofits nonbank subsidiaries. A substantial portion of the Corporation's annual income is typically derived from dividends The pmducts are provided through FB

.a ugh nonbank subsid-direcdy from FNBC and indirectly from ANB (collectively, the sanes f the Corporacon, including Firsty capr leasing Corporation Banks) and interest on loans to its subsidiaries, and First Chicago Investment Corporance ese acuvines are described on pages 12 through 13, and througn intemational merchant banking subsidiaries of FNBC.

The Corporation's business strategy focuses on three major lines of business: global financial business, consumer financial business, and The Smia Producri Group develops, markets, and delivers cash middle-rnarket financial business. These thee lines of business are . .

supported through the organizational st) scos of FNPr ANB, management, operaong, clean.ng, and other noncredit products to ,

< and the Corporation's nonbank subsidiam, as describee, below. ( IPorate and msutuconal customers, both domestic and foreign.

These services include money transfer, collection, disbursement, a cumentary, remittance, international securities clearing, freight The First National Bank ofChicago payment, cash management consulting, corporate trust, and share-FNBC provides a broad range of banking, fiduciary, financial, and other services on a worldwide basis to individuals, businesses, holder semces.

and govemmental units. The following describes the organizational The Group is responsible for the operations of three subsidianes of structure of FNBC, FNBC: Comtrac Information Systems, Inc., which provides trans-portation management services, including shipment planning, freight The Global Corporate Bank bill audit, and payment and distribution cost analysis; First Chicago The Global Corporate Bank (GCB) has corporate responsibility National Processing Corporation, which provides noncredit clearing for delivery of FNBC's wholesale banking products and services. The services, including lockbox processing, on a nationwide basis; and principal focus of the GCB is the extension of credit and the delivery First Chicago Intemational, which provides cleanng and documen-of corporate financial services and noncredit services to commercial, tary services. In addition, the Service Products Group is responsible financial, governmental, and real estate customers. for one of the Corporanon's nonbank subsidiaries, First Chicago Trust Company of New York, a New York state-chartered trust company, which provides corporate trust, special agency, stock transfer, and securities clearance services.

67

The Tr.2 ding Produai Grcup has global responsibility for the Asset & Liability Management Committee Corporation's money market funding and secondary trading oper. The Asset & Liability Management Committee (ALCO)is respon-6 ations, short term investment management, and the coordination sible for establishing financial policies that maximize net interest j of asser and liability management, to ensure the maximization income and ensure the maintenance of FNBC's and the Corpora- '

of ner interest income, tion's liquidity. ALCO is chaired by the Corporation's chief financial f

The Group is responsible for FNBC's activities in United States fficer, who also has responsibility for the Corporate Treasury

)

Govemment, municipal, and Federal agency securities, including Department and acts as Chairman of the Corporation's Economic trading and sales to customers. As one of 40 primary government Council, among other functions.

bond dealers, the U.S. Government Bond Department of the Group The Corporate Treasury Department handles a diverse array of reports its position daily to the Federal Reserve Open Market corporate finance functions, including public financing, capital Committee Trading Desk. The Trading Products Group also is planning, and investor relations for the Corporation.

responsible for FNBC's activities in securities of states, municipali-The Economic Council studies major economic trends, as well as t es, and other governmental entities, including trading, sales, shorter term economic developments, and provides basic guidance  ;

underwn.ang, research, and maintenance of an aHve secondary market with national sales distribution. to the Corporation for strategic and operating decisions.

in c njuncti n with ALCO's financial policies, the financial market In addition, the. Group has worldwide responsibility for FNBC's activities in foreign exchange and futures markets, including tradm.g, activities of the Corporation and FNBC are conducted by certain hedging overseas investments, and providing foreign exchange departments of the Trading Products Group of the Global Corporate Bank, as described above.

products and services to customers.

I The Trading Products Group also is responsible for the operation of Credit Strategy Committee first Chicago Futures, Inc., a subsidiary of FNBC, whose activities The Credit Strategy Committee (CRESCO) has ultimate respon-are described on page 71. sibility for providing strategic direction and senior management oversight for the credit risk management process at FNBC. The The Cufroer Smia %up provides centralized data processing credit risk management process involves loans, leases, letters of services, systems development, loan operations services, operating credit, and other forms of credit exposure. This process includes risk oversight mpport, and other sqport services and operations, identifying and managing potential credit risk inherent in other both domce dy and internationals for the GCB and other areas product offerings such as service products, placement products, of FNBC and the Corporation, as well as providing service support and trading products.

tc other GCB groups and customers.

CRESCO develops portfolio diversification and quality strategies, The Consumer Bank and delegates commitment approval authority commensurate with these diversification and quality c5jectives. CRESCO also establishes The Consumer Bank has primary responsibility for the develop-ment and marketing of FNBC's services to individuals. These and maintains corporate policies and procedures related to credit initiation, performance monitoring, and performance measurement, services include tradmonal deposit and lending activities, personal trust management, discount brokerage services, and card issuance and directs the review of policy and procedure compliance relesant to the execution of the credit process.

and merchant services for both VISA and MasterCard. The Con-sumer Bank also operates and participates in a local shared automatic Operating through a subcommittee, the Credit Review Committee, teller machine ( ATM) network called " Cash Station," which is CRESCO reviews target market definitions, risk acceptance criter.a.

a member of CIRRUS, a nationwide ATM system. credit process audits, and the tactical implementation of credit risk assumption standards.

The Consumer Bank operates several banking centers in FNBC's main office building, and in the Two and Three First National Plaza Through a supportive body, the Country Risk Manageinent Council, buildings. FNBC also has two otT premise banking centers, which CRESCO initiates and maintains country limits designed to manage are located at Monroe and Wabash Streets in downtown Chicago and the diversification of the foreign awet portfolio. In addition, com-at Michigan and Chicago Avenues on Chicago's Near North Side, mencing in 1987, the Country Risk Management Department will and currently plans to open a third banking center in Chicago's directly manage restructured sovereign risk credits.

Dearborn Park complex by mid 1987. In addition,

the Consumer Intemational Asset Swaps, a newly formed division, is responsible Bank operates credit card centers m Elgin, Illinois, and Long Island, New York. for enhancing the collection or disposition of higher risk foreign assets through asset sales, debt-to-equity conversions, and other At described above, the Corporation recently has signed a definitive means. Similarly, in concert with the Industry Risk Management agreement to purchase BNB-USA and an agreement in principle to Council, CRESCO develops and maintains diversification practices, acquire First United. Upon receipt of necessary approvals, the credit marketing planning, and industry concentration analysis to activities of BNB USA and First United will be coordinated with manage the domestic asset portfolio.

those of the Consumer Bank.

Additional credit activities reporting to the Chairman of CRESCO During 1986, the Consumer Bank sold its interest in the CIRRUS include the Credit Policy Division, the Asset Management Depart-trademark to Newcorp, a newly formed organization of CIRRUS ment, and the Credit Process Review Department. The Credit Policy operators, and agreed to sellits Cash Station ATM switching business Division provides ongoing portfolio surveillance and evaluation, to Midwest Payment Systems (MPS) Division of the Fifth Third which it develops into management information. It also directs the Co. of Ohio. Beginning in late 1087, MPS will begin to operate the testmg of the adequacy of the allowance for loan losses. Further, Credit merged systems of" Cash Station" and " Money Network"(another Policy develops the principles of portfolio diversification and idena-Chicago-area shared ATM network) under the name " Money Station." fies broad elements of risk. The Asset Management Department in 1986, the Consumer Bank also closed its trust office in Boca Raton, Flonda, and sold its interest in Video Financial Services (a joint venture among subsidiaries of certain major banks that was developing methods of providing home banking senices) to AMR l

Information Senices, Inc., a subsidiary of American Airlines, Inc.

68

. m nages seleceed corporate and real estate loans, as'well as certain ' Nonbank Subsidiaries re estate owned by FNBC and the Corporation. The Credit Process The Corporation's 'nonbank subsidiaries are engaged in businesses 4 : Review Department audits and evaluates the activities ofindividual related to banking and finance, including leasing personal property business units to examine their credit processes, adherence to and providing specialized financing that supplements FNBC's

' established policies and procedures, achievement of portfolio objec- commerciallending activities.

tives, identification and management of deteriorating assets, and

, credit nsk ratings ofloans and leases. First Chicago Financial Corporation rtises funds to finance the I operations ofits subsidiaries: First Cwcago Leasing Corporation Staff Departments and First Chicago Investment Corporation. First Chicago Leasing Staff support for FNBC, the Corporatiori, and certain of their Corporation is engaged in leasing real and personal property on subsidianes is supplied by the Human Resources, Administration, a full payout basis, whereby the cost of the property will be retumed Audit, Systems and MIS, Law, Planmng, F nancial Administration, over the life of the lease. Property leased by this company includes Control, and Corporate Affairs Departments, and by the Govern- manufacturing and transportation equipment, industrial production mental and Community Affairs Dm,sion. and electrical power generation facilities, and various other items of commercial and industrial real estate and equipment. First Chicago As of December 31,1986, the Corporation and its subsidiaries Investment Corporation provides various forms of specialized

- had approximately 13,884 employees. financing to business ventures, including subordinated debentures, convertible preferred stock, and other types of debt and American National Bank and equity arrangements.

Trust Company ofChicago First Capital Corporation of Chicago, a small business investment -

ANB offers a wide range of banking and financial products and company licensed under the Small Business Investment Act of 1958, services, with primary emphasis on the middle-market corporate offers equity financing for small business ventures.

= customer in the Chicago metropolitan area. In addition to its main

- office, ANB has four other facilities in Chicago, one in Des Plaines, First Chicago Investment Advisors, N.A., is an institutional invest-Illinois, and an office in Grand Cayman. ment advisor that manages in excess of $9 billion in sssets of ANB is organized into three major lines of business: Banking, Trust, corporate, union, and public retirement funds. -

and Investment Management. There are also four support divisions First Chicago Trust Company of New York, located in New York within ANB; Financial Services, Auditing, Marketing, and Personnel. City, provides trust and fiduciary services.

Banking Department Competition The Banking Department comprises Commercial Banking, Corre- All hases P of the Corporation's revities, including banking, are spondent and Institutional Banking, Treasury Division, Intemational highly competitive. The Banks compete actively with money market Banking, Personal Banking, and Banking Operations. The Banking mutual funds, national and state banks, mutual savings banks, savings Department provides services for commercial and correspondent and loan associations, finance companies, credit unions, and other bank customers, including commercial loans, demand deposit and financialinstitutions located throughout the United States. For time deposit accounts, commercial finance and real estate mortgage international business, the Banks compete with other United States loans, cash management services, and investment services. The financialinstitutions that have foreign installations, and with other Department also provides personal banking services, including major banks and financial institutions throughout the world. In personal consumer loans, deposit services, discount brokerage, addition, the Corporation's subsidiaries are subject to competition and safe deposit facilities. from a variety of financial and other institutions that provide a wide array of products and services.

Trust Department The Trust Department provides complete agency, trust, and invest. Monetary Poh.ey and Econonu. c Controls ment services to individuals, partnerships, corporations, institutions, The camings of the Banks, and, therefore, the earnings of the municipalities, and governments. The Department is functionally Corporation are affected by the policies of regulatory authorities, divided into service groups as follows: Corporate Trust Services, including the Board of Govemors of the Federal Reserve System (the Individual Services, investor Services, Business Development, and Board). An important function of the Board is to promote orderly an operations group to support the service groups. economic growth by influencing interest rates and the supply of money and credit. Among the methods that have been used to The Corporate Trust Services Group acts as trustee and performs achieve this objective are open market operations in United States other services related to various financings such as bond transfer. The government securities, changes in the discount rate on member bank Individual Services Group provides personal trust and estate adminis-tration services for vanous types of trusts. The Business Development borrowings, changes in reserve requirements agai and limitations on interest rates that member banks may pay on ome

. Group is the marketing arm of the Department.

and savings deposits. These methods are used in varying combina-tions to influence overall growth and distribution of bank loans, Investment Management investment and deposits, interest rates on loans and securities,

. The Imestment Management Group provides active and passive and rates paid for deposits.

management of bond and equiry securities for individuals, corpora-tions, and employee benefit plans. The Group provides management l' services to the national institutional market, the local institutional l i market, and to individuals as clients of the Trust Department.

In addition, in early 1987, the Group assumed responsibility for the administration of pension, profit-sharing, and employee benefit plans.

I 1

I~ )

69

The monetary policies of the Board strongly influence the behavior obligations; providing foreign exchange advisory and transactional  !

ofinterest rates and can, therefore, have a significant effect on the services; acnng as a futures commission merchant; providing invest-6 operating results of commercial banks. At the beginning of 1986, ment advice with respect to certain commodities transactions to participants in the financial markets generally focused on slow financial institutions and other financially sophisticated customers; industrial growth and the beneficial effect on it flation from the drop providing consumer financial counseling; providing individuals, in oil prices. Both circumstances were widely b,lieved to be condu- businesses, and nonprofit organizations with tax planning and tax cive to an easier credit policy by the Board, and bond yields fell preparation services; providing check guaranty services to subscribing sharply. Fearing a possible recession, the Board cut its discount rate merchants; operating a couection agency; and operating a credit from 71/2 percent in mid March to 51/2 percent in late August, bureau. The Board, from time to time, may revise this list of and short term interest rates fell proportionately. Market participants permitted activities.

were generally convinced more credit easing was to come. After August, however, m, dustrial production and employment began t The Act also prohibits bank holding companies from acquiring more rebound, and the broad based money supply was growing rapidly- than 5 percent of the voting shares of any bank that is not already The econonuc environment was further compbcated by a chronic majority-owned without the prior approval of the Board. No federal deficit and a volatile, though generally weakenmg, dollar on application to acquire shares of a bank (as defined in the Act) located foreign exchange markets. The Board responded to the cross- outside the state in which the operations of the applicant's banking subsidiaries are principally conducted may be approved by the Board currents m the economy by holdm, g its discount rate steady, and market rates fluctuated in a narrow range until year-end. In December, unless such acquisition is specifically authorized by a statute of the temporary problems m the distnbution of reserves m the banking state in which the bank whose shares are to be acquired is located. At system helped push some short term mterest rates up significantly, present,in excess of 35 states have adopted legislation permitting the squeezmg the net mterest margm of banks. In early 1987, these rates acquisition by an out-of-state bank holding company of the shares of settled back into their narrow range. an in state bank. In some of these states only banks with limited powers may be established and in other stares the laws permit only The effect of the various Board measures on the future business and speci6c out of-state bank holding companies to acquire in-state earnings of the Banks and the Corporation cannot be predicted. banks. Some states permit emergency bank acquisitions by out-of-Other economic controls also have affected operations of the state bank holding companies. In addition, the laws of some other Corporation in the past. The Corporation cannot predict the nature states Permit an out of-state bank holding company to own a bank or extent of any effects that possible future govemmental controls wa n their stage only if a bank holding company withm such state or legislation may have on its business and earnings. w uld be permitted to own a bank m the state of the out-of-state bank holding company. Certain reciprocal statutes are limited to Supervision and Regulation speci6aegim of se comry and, in a 1985 decision, the United Bank Holding Company Regulation Stapes Supreme Court sustained the constitutionality of two of these The Corporation is a bank holding company within the meaning of regt nal interstate bankmg statutes in New England. Addmonal the Bank Holding Company Act of 1956, as amended (the Act), developments by state and federal authonties, with respect to and is registered as such with the Board. Under the Act, bank interstate banking, may occur m, the future. The impact of any such holding companies are prohibited, with certain exceptions, from developments on the Corporation and the Banks cannot be predicted engaging in or from acquiring more than 5 percent of the voting ***""**'

stock of any company engaging in activities other than banking, The Illinois Bank Holding Company Act provides for reciprocal or managing or controlling banks, or furnishing services to, or interstate banking in a region consisting of seven Midwestern states:

performing services for, their subsidiaries. Illinois, Indiana, Iowa, Kentucky, Michigan, Missouri, and Wiscon-The Act authorizes the Board to permit bank holding companies to sin. This stature, which became effectivejuly 1,1 engage in, and to acquire or retain shares of companies that engage holding company whose principal ess place of ofbusm, is m one the 986 in, activities which the Board has determined to be so closely related six Midwestern states other than Illinois to acqutre control of to banking or mv. aging or controlling banks as to be a proper an Illin is bank or bank holdmg company, provided that the laws incident thereto. Acuvities which the Board has determined meet f the other state permit an Illinois bank holding company to acquire this standard include, with certain limitations: making and servicing cmm f a bank or bank holdmg company m that state. The loans; performing certain fiduciary functions; providing investment approval of the Illinois Commusioner of Banks and Trust Companies and financial advice; leasing real and personal property; investing in a mquired m complete such an interstate ac uisition in Illinois.

community welfare corporations or projects; providing data process- Indiana, Kentucky, Michigan, Wisconsin, an Missouri have exiseng ing and data transmission services and facilities; acting as insurance rec 1Procal interstate statutes that include Illinois. Also effective agent for, or underwriter of, certain kinds of credit-related insurance; Ju y 1, q86, Enois penmts intrastam acquisitions throughout Illinois providing courier services; providing management consulting advice by 111inon bank holdmg companies. All mterstate and intrastate to banks not affiliated with the holding company and to nonbank bank acquisitions by the Corporacon are subject to the approval of depository institucons; the issuance and sale at retail of money se Board. The ulumate impact of these Illinois statutory changes orders, the issuance and sale of travelers checks, and the sale of U.S. n se Corporation and the Banks, while clearly significant, cannot savings bonds; performing appraisals of real estate and personal be pre &cted at su ume.

properry; arranging commercial real estate equity financing; provid- The Corporation is required to Gle with the Board annual reports ing secunties brokerage services solely as agent for customers; and such add;tionalinformation as the Board may require pursuant underwnting and deahng in government and certain money market to the Act. The Board penodically examines the Corporation and its nonbank subsidiaries, and is authorized to impose reserve require-ments and interest rate limitations on certain debt obligations issued by bank la Iding companies.

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in L989, First Chicago Intemational Finance Corporation (FCIFC), Certam organizaconal units within each of the Banks are registered a wholly owned subsid;ary of FNBC, entered into an agreement with with the Securities and Exchange Commission (the Commission) 6 the Federal Resern Dank of Chicago. Under this agreement, FCIFC as municipal securities dealers. As such, they are subject to the i

agreed to maintain a management structure, policies, and procedures applicable rules and regulations of the Commission and the Munici- l l

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conceming the acquisition and management of overseas investments pal Securities Rulemaking Board with respect to transactions in l that will ensure appropriate controls, informed decision making, municipal securities performed in a municipal secunties dealer j and adherence to the Board's regulations. FCIFC is in full compli- capacity. j ance with the agreernent and intends to continue to carry out its responsibihees under the agreement. FCIFC anticipates that The Banks are registered with the Comptroller as transfer agents and, its continued comphance wdl not have an adverse effect on its as such, are subject to the rules and regulations of the Commission ,

operacons or financial results. and the Comptroller with respect to their activities as transfer agents. i As a bank holding company, the Corporation and its subsidiaries During 1986, FNBC formed a discount securities brokerage subsidiary, are prohibited from engaging m certam ae-in arrangements in First Chicago Investment Services, Inc. (FCIS), which is registered connect kn with extensions of credit or the provision of property as a broker-dealer with the Commission and is a member of the or services. National Association of Securities Dealers (the NASD). As such, the brokerage activities of FCIS are subject to the applicable rules Bank Regulation and regulations of the Commission and the NASD.

The Corporation and its nonbank subsidiaries are affiliates of the inJanuary 1987, First Chicago Futures, Inc. (FCFI), a subsidiary of Banks within the meaning of the Federal Reserve Act. As such, they FNBC which conducts a commodities brokerage and dealer business, are subject to certain restnctions on loans made by the Banks to the began operating as a market maker in foreign currency options and, Corporation or such other subsidiaries, on inve-sents made by the as a result, also was required to register with the Commission as a Banks in their stock or securities, and on the Banks taking such stock broker-dealer. In addition, FCFI is registered with the Commodity  !

and securities as collateral for loans. The Corporation and its Futures Trading Commission (the CFTC) as a futures commission subsidiaries, including the Banks, are also subject to certain restric-merchant and is a member of National Futures Association (the tions with respect to engaging in the issuance, flotation, underwnting, NFA). As such, FCFI is subject to the applicable rules and public sale, or distribution of securities, regulations of the Commission, the CFTC, the NFA, and certain ,

There are various additional requirements and restrictions in the laws c mm dicies and securities exchanges of which FCFIis a member of the United States and the State ofIllinois affecting the Banks and with respect to its activities as a foreign currency market maker their operations, including the requirement to maintain reserves and a futures commission merchant.

against deposits, restrictions on the nature and amount ofloans that pro rties raay be made by the Banks, restrictions relating to investments and The rporation and FNBC occupy a 60-story combined bank and other activities of the Banks, and restrictions against branch bankmg.

The Banks, as national banks, are subject to regulacon by the Office office building at One First National Plaza, Chicago, Illinois, which of the Comptroller of the Currency (the Comptroller), the Board, is owned by FNBC's wholly-owned subsidiary, First Chicago Building end the Federal Deposit Insurance Corporation. The Banks are Corporation. It has 1,850,000 rentable square feet of space, of which exarnmed by the Comptroller, and m their operacons m other the Corporation occupies approximately 59 percent, and the balance is leased to others. The building is located on the north half countries the Banks are subject to various restrictions imposed by the laws of such countnes. of a block in the heart of the Chicago "1.oop," the entire block being owned by FNBC. The south half of the block includes a plaza, In March 1986, FNBC's agreement with the Comptroller, primarily the First Investment Center (a facility of FCIS), parking and restaurant i relating to FNBC's capital, funding, and asset quality, was terminated facilitie.r, and a general purpose auditorium. j by mutual consent as a result of FNBC's improvements in these areas.

The Corporation rents additional office space as necessary under The approval of the Comptroller is required if the total of all various terms from various lessors.

dividends declared by the board of directors of a nationti bank in any calendar year will exceed the total of such bank's net profits (as defined) for that year, combined with its retained net profits for the preceding two years. As of December 31,1986, the Corpora- i tion's bank subsidiaries could have declared additional dividends of approximately $304 million without such approval. The Comptroller also has authority under the Financial Institutions Supervisory Act to prohibit a nationrl bank from paying dividends if, in the Comptroller's opinion, the payment of dividends would, in light of the financial condition of such bank, constitute an unsafe or unsound practice.

In recent years a number oflegislative developments affecting national banks have occurred. Among these developments have been ones that repealed statutory limitations on the power of national banks to borrow, simplified limitations and restrictions on transac-l tions of national banks with affiliates, removed interest-rate limitations

! on deposits and authorized money market deposit accounts, increased 3

the limit on the aggregate amount of outstanding loans and exten. 1 sions of credit by a naconal bank to any person, and increased the permissible amount of bankers' acceptances a national bank may issue.

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Eyecutive Officers of the Registrant

• Present Position Held with the Corporation and Effective Date First Elected Other Positions Held Name and Age to Office Indicated During Past Fise Years Barry F. Sullivan (56) Director and Chairman of the Board (7-28 80)

• Rnhard L Thomas (56) Director and President (5 0174)

Wilham). McDonough (52) Director and Vice Chairman

• of the Board (1114 86)

Kenneth G. Arnesen (58) Execuuve Vice President (711-86), General

• Counsel (912 80), and Secretary (910-82)

William E. Bennett (40) Executive Vice President (411-86)

Stephen C. Diamond (52) Executive Vice President (41186) Executive Vice President of FNBC:

Senior Vice President of FNBC: Senior Vice PresiJent.

Chase Manhattan Bank, N.A. (banking)

A D. Franer (42) Executive Vice President (110 86) Execuove Vice President of FNBC: Senior Vice President of the Corporanon and FNBC: Execuove Vice President.

Citizens and Southern National Bank of Georgia (bankmg)

Donald R. Hollis (51) Executive Vice President (4 0181)

William E. Moeller (44) Execuove Vice President (41186)

Charles H. Montgomery (56) Executive Vite President (12 31-75) +

and Comptroller (1012 73)

Leo F. Mulhn (45) Executive Vice President (1214-84)

Lawrence C. Russell (48) Execuove Vice President (1214 84)

D John Stavropoulos (54) Executive Vice President (112 79)

• E. Neal Trogdon (41)

• Executive Vice President (41186)

David). Vitale (40) Executive Vice President (41186)

Michael E. Tobin (61) Chairman of the Board of ANC (10 8-82) Chairman of the Board of ANB

'Has sened as an officer of the Corporacon or a subsidary for at least the past five years.

Offners of the Corporacon serve unul the annual mecong of the Board of Directors ( Apnl 10, 1987).

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I I Signatures . .

Pursuant to the requ'irements of Section 13 or 15(d) of the Securities

' ' i a j Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly--

L authorized,' this 13th day of Febru'ary,1987. .

. . First Chicago Corporation p (Registrant)-

L By Barry F. Suuivan, Chairman of the Board

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Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf -

of the Corporation and in the capacities indicated, this 13th day -

' of February,1987.

g John H. Bryan,Jr. Director Frank W, Considine ' Director William B. Graham . Director

JamesJ. Hartigan Director Donald RJacobs Director

!- Charles S. Locke Director -

Walter E. Massey .

Director c WilliamJ. McDonough . Director and Principal Financial OfTicer Richard M. Me row . Director JohnJ. Nevin Director -

Jerry K. Pearlman Director William Wood Prince Director Ernestine M. Ractin Director

, Patrick G. Ryan . Director George A. Schaefer Director

m Roger W. Stone Director

. Barry F. Sullivan Director and Principal Executive Officer Richard L Thomas Director Fred L Turner Director Charles H. Montgomery Principal Accounting Officer 4

1 i

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i cf '

Worldwide Facilities and United States Offices American National Corporation Bankcard Services international Private Banking and Chicago Community Banks Elgin Uniondale Personal Trust Installations Des Plaines in Illinois: Chicago Hong Kong Grand Cayman Arlington Heights Corporate Trust Offices Geneva London Bensenville Chicago London Guernsey New %rk Elgin Guernsey New Wrk Evanston Leasing Office Lansing Edge Act Offices Chicago Libertyville Boston New %rk Melrose Park Houston San Francisco Merchant Banking Offices Schiller Park Los Angeles Geneva Singapore Hong Kong Sydney Energy Offices London Tokyo Chicago Los Angeles Mexico City Toronto Houston New Wrk Panama City Information Processing Services National Processing Centers Chicago Columbus Charlotte Pasadena Chicago Secaucus Institutionalinvestment Dallas Management Adanta London Real Estate Offices Chicago Phoenix Atlanta Miami Dallas Chicago New Wrk Dallas San Francisco International Banking Locations Los Angeles Washington, D.C.

Athens London Barcelona Madrid Regional Offices Beijing Manila Atlanta Los Angeles Buenos Aires Mexico City Boston New Wrk Cairo Milan Cleveland San Francisco Caracas Panama City Dallas Washington, D.C.

Cayman Islands Paris Chicago Rome Venture Capital Offices Dubai Sao Paulo Boston Chicago Dublin Seoul Frankfurt Singapore Geneva Stockholm Guemsey Sydney Hong Kong Tokyo Jakarta Toronto Lagos Zurich Corporate Reports Annual Meeting independent Accountants This Annual Report and the SEC Report on The Annual Meeting of Stockholders of Arthur Andersen & Co.

l Form 10 K (other than the exhibits), and First Chicaga Corporation will be held at quartedy interim reports are available upon 9:30 a.m. (CST) Friday, April 10,1987, Stock Listings request without charge. For copies, please in the First Chicago Center located in Midwest Stock Exchange *

, call (312) 732-6204 or write Public Relations One First National Plaza. New Wrk Stock Exchange, Inc?

at the address shown on the back cover. Pacific Stock Exchange Incorporated' An enlarged version will be available for the Stock Transfer Agent The Stock Exchange (London) visually impaired. Also, a list of organizations and Registrar Tokyo Stock Exchange receiving substantial charitable, educational, The First National Bank of Chicago ' Stock Symbol-FNB cultural, or other grants by the Corporation One First National Plaza l or subsidiaries is available to any stockholder Chicago, Illinois 60670 l on request. Wur comments, questions, or suggestions on any aspect of our business I are welcome.

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