ML20239A006
| ML20239A006 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley |
| Issue date: | 06/30/1987 |
| From: | Mcdonough W, Brian Sullivan, Thomas R FIRST CHICAGO CORP. |
| To: | |
| Shared Package | |
| ML20239A003 | List: |
| References | |
| NUDOCS 8709170008 | |
| Download: ML20239A006 (13) | |
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QUARTER R- E P O R T i
Report for the Period Ending June 30,1987 I
1 PER"1888R8587Elia I PDR
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7b the Stockholders ofFirst Chicago Corporation e
The U.S. banking industry experienced its worst earnings perfor-mance ever in the second quarter of 1987, with all top ten bank holding companies reporting record losses. Concerns surrounding loans to troubled foreign country debtors led banks to increase their reserves for credit losses in the quarter by unprecedented amounts.
On June 12, First Chicago announced that it was adding $800 million to its reserves for exposure to troubled country debtors. As a result of this action, the Corporation reported a loss of $698.3 million for the second quarter of 1987, The fundamental earnings for the quarter, however, did demonstrate continuing positive trends in net interest income, certain areas of noninterest income, and expenses.
First Chicago's decision to increase reserves resulted from a review of worldwide economic trends and their potential implications for its foreign debt portfolia The factors taken into account included Brazil's decision in the first quarter to suspend debt service, the pro-grams announced by other money-center banks, and the Corpora-tion's intent to reduce exposure to troubled country debtors through such portfolio management techniques as debt-fordebt and debt-for-equity swaps, as well as loan sales.
First Chicago was well positioned to take this action, given its excel-lent capital strength, and we are confident that it is in the best inter-ests of the stockholders. Our ratio of the allowance for credit losses
, to loans and the primary capital-to-assets ratio continued to be among the highest of our peer group. At June 30, after the addition to reserves, the allowance ratio was 5.28 percent and the primary capital ratio was 8.03 percent.
The strengthening of our reserves will increase our flexibility in managing our foreign loan portfolio, while we continue to work closely with other creditors and the troubled countries to seek solu-tions that will enable them to improve the capacity to service their outstanding debt.
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Although the special provision for troubled country exposure was clearly the dominant event in the quarter, the Corporation's under-lying financial performance exhibited a number of strengths. Net inteNst income was a record high, boosted by substantial loan fees.
Foreign exchange trading turned in its second consecutive record quarter in terms of profits. Cost containment was also evident in the quarter, continuing the trend initiated last year. For the first half of 1987, noninterest expense was up less than 5 percent from a year agg adjusted for a special non recurring charge last year. Bond trading activities, however, registered a substantial loss in the highly volatile market environment in April, during which interest rates moved rapidly and sharply. Although bond trading was more profitable in the remainder of the quarter, the overall loss was
$28.6 million.
The Corporation's progress in its acquisition strategy was manifested in two key event:, of the quarter. In late June, The First National Bank of Chicago announced that it had signed an agreement in prin.
ciple to purchase a 35 percent interest in The Wood Gundy Corpora-tion, an international investment banking firm headquartered in Ibronto. The Bank will invest, through its Canadian bank subsidiary, approximately $200 million (U.S.) in a combination of newly issued common equity and convertible debentures of Wood Gundy. The two firms also agreed to an operating arrangement in which they will cooperate in delivering capital markets products and services to their customers. Combined with First Chicago's expertise in banking, foreign exchangg swaps, and other products, this association with Wood Gundy will provide our customers with greater access to inter-national capital markets and a broader range of financial products than offered by many other commercial and investment banking firms. The agreement is subject to the approval of U.S. and Canadian regulatory agencies and execution of definitive agreements.
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I Secondly, the acquisition of Beneficial National Bank USA received the necessary regulatory approvals during the second quarter, and the transaction was completed effective July 1. Renamed FCC National Bank, this Delaware bank adds approximately one million credit card accounts to First Chicago's portfolio, raising total outstanding credit card balances to approximately $4.3 billion, the third highest level among bankcard issuers. Through FCC National Bank, First Card now offers more flexible pricing to cardholders by means of a variable rate finance charge option and a program that waives annual fees for certain levels of annual expenditures. Also during the quarter, First Chicago introduced the Mileage Plus Card, a bankcard offering travel benefits through United Airlines and its business partners. In addition, the acquisition of First United Finan-cial Services, Inc., the holding company for five suburban banks, is expected to be completed on or about October 1,1987.
Late in July, First Chicago announced a major step in its plan to strengthen its international presence. In response to the increasing
-importance of international cross border capital flows, and the diminishing importance of the local branch services created in the 1960s and 1970s, we will continue to consolidate our international banking network. Specifically, existing installations in France, Germany, Greece, Ireland, Italy, Panama, Singapore, Sweden, and Dubai will be restructured through sale, closure, or substantial reduc-tion in scala This initiative underscores our ongoing strategic pursuit of business opportunities in global capital markets, particularly in London, Ibkyo, Geneva, and Hong Kong, where we will provide prin-cipally corporate finance, trading, and operating services. In conjunc-tion with this restructuring, First Chicago may incur special charges in the third quarter of up to $30 million. The overall effect of this strategy will be a more focused, efficient, and profitable network to serve our customers internationally.
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We believe that the many events of recent months - the fundamental earnings strength, the special addition to reserves, the Beneficial National Bank acquisition, and the announced international restruc-turing - along with the completion later this year of the First United acquisition and the Wood Gundy affiliation, all have very positive im- .
plications for First Chicago's future and provide momentum for the achievement of our financial and strategic goals.
i ks h 0 0-S Barry E Sullivan Chairman of the Board YW7 Richard L. Thomas President
& . s b William J. McDonough
, Vice Chairman of the Board August 11,1987 4
Earnings and Balance Sheet Review The net loss in the second quarter 1987, was $698.3 million, or
$12.74 per common share, compared with net income of $63.6 million, or $1.08 per common share, in the second quarter of 1986.
Net income, excluding the impact of the special addition to reserves
, of $800 million, and related tax benefits, would have been $54.7 million, or $0.90 per common share; return on assets would have been 0.50 percent and return on common equity would have been 9.45 percent.
Net interest income on a tax-equivalent basis for the quarter was a record $309.6 million, up from $283.5 million a year aga Domestic spread income increased 17 percent from a year agg with loan fees being an especially strong contributor. Lower overseas net interest income, resulting in part from the nonaccrual status of long term and medium-term Brazilian loans, offset somewhat the increase in the domestic business. Average earning assets rose to $39] billion from
$34.4 billion in last year's second quarter. Domestic loan volume and overseas deposit placements grew significantly, while the level of foreign loans continued to decline. The drop in net interest margin to 3.18 percent from 3.31 percent a year earlier reflected the lower tax-equivalent adjustment generated by this year's lower corporate tax rate, and the impact of a lower. yielding asset mix in the portfolia Noninterest income was $120.7 million, compared with $177.0 million in the second quarter of 1986. Foreign exchange trading ~
profits were a record $27.3 million, versus $23.5 million in the year- ;
ago quarter. Bond trading activities produced a loss of $28.6 million in volatile markets, compared with $5.1 million in profits a year aga 5
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i4" Gains on the sales of equity securities were $19.6 million, down from
$43.1 million a year earlier. Fiduciary and investment management fees were $28.4 million for the second quarter, versus $25.8 million last year. Credit card fees were $32.5 million, compared with $32.3 million; and service charges and commissions grew to $56.1 million ,
from $44.0 million a year aga In addition, noninterest income was reduced by $20 million as part of the special reserves relating to
- troubled country debtors.
Noninterest expense for the quarter totaled $277.9 million, com-pared with $271.0 million a year aga Adjusted for the nonrecurring
$8.0 million expense in last year's second quarter for the disposition of Banco Denasa de Investimento S.A., the growth rate in expenses was less than 6 percent. Lower salaries and benefits were offset by net increases in other expense items.
The total provision for credit losses was $855 million in the second quarter, including the special addition of $780 million for troubled country debtors and $75 million for other credit exposure, which was unchanged from the first quarter and down from the $85 million pro-vision in the year ago quarter. The allowance for credit losses at June 30 was $1.381 billion, or 5.28 percent of total loans, compared with $595.5 million, or 2.40 percent of loans outstanding at March 31. The allowance at June 30,1986, was $478.3 million, or 1.95 percent ofloans outstanding.
Net charge-offs in the second quarter totaled $69.5 million, versus
$68.1 million in the first quarter and $66.6 million a year aga The net charge-offs on commercialloans rose to $40.0 million from $35.9 million in the first quarter and $39.0 million in the year-ago quarter.
Consumer net charge-offs, primarily credit card loans, were $29.5 million, versus $32.2 million in the first quarter and $27.6 million a year aga I
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Nonperforming assets declined $45 million from March 31 to $1.296 billion at June 30, and represented 4.9 percent of loans and other real estate owned. This total included $634 million of loans to troubled country debtors. Nonperforming assets were $1.341 billion
. at March 31,1987, or 5.4 percent ofloans and other real estate 1 owned, and $926 million, or 3.8 percent, at June 30,1986. 4 l
The Corporation's primary capital at the end of the quarter was
$3.454 billion, or 8.03 percent of adjusted total assets, compared with 8.28 percent at Mr.xh 31,1987, and 7.60 percent at June 30,1986.
The ratio of stockholders' equity to total assets was e i percent at f
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June 30, reflecting the impact of the special reserves, compared with ';
6.0 percent at the end of the first quarter and 5.7 percent at June 30, !
1986.
Average total assets were $43.3 billion and average total deposits were $30.3 billion for the quarter, both up from the year-ago levels of
$38.3 billion and $26.3, respectively.
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a First Chicago Corporation and Subsidiaries s
Comparative Summary in thousands, except for per share data , t 1987 1986 Change
.i hrte Months Ended June 30 I0f interest income - tax equivalent basis 8 309,628 $ 283.512 + 9%
Provnion for creditlosses
- 855.000 85.000 Norduterest income 120,696 177.041 - 32 %
Nodnterest expense 277.927 ?.70,9% + 3%
Net incorae(Loss) (698,287) 63.616 Per commaa share *
(12.74) 1.08 Six Months Ended June 30 Net interest income - tax-equivalent basis 8 587,537 8 566.989 + 4%
Provision for credit losses 930,00J
- 185.000 Noninterest income 293,7 0 36dFS - 19 %
Noninterest expense 's 543.371 52D35 + 3%
Net income (Loss) (633,321) 126,659 Per common share *
(11.66) 2.14 At June 30 '
Total assets $41.664.759 $39.369.666 + 6%
Total deposits 30,534,858 27,315,90? + 12 %
Loans 26,167,573 24,510.234 + 7%
Stockholders' equity 1,692,316 2.226.282 - 21%
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First Chicago Corporation and Subsidiaries F C:ns:lidat:d B:lznce Sheet June 30(In thousands) 1987 1986 Assets Cash and due from banks - noninterest bearing $ 2,415,669 8 2,349,567 q
Due from banks -interest bearing 6,606,622 5,199.460 i
2,248,820 Federal funds sold and securities under resale agreements 1.378,110 Trading account assets 830,069 2,604,499 Investment secunties (market values - $2.229,417 in 1987 and $2,096,143 in 1986) 2,104,614 1,967,379 Loans 26,167,573- 24,510.234 Less Allowance for creditlosses 1,380,981 478.310 loans, net 24,786,592 24,031,924
, Premises and equipment 479,218 462,159 Accrued income receivable 479,323 395,691 Customers' acceptance liability 099,018 - 414.341 Other assets 904.814 566336 Total asssts 8 41,664J59 8 39.369.866 '
Liabilities Deposits Demand 8 4,825.378 8 5,169.849 Savings 3,190,240 2,724.244 Time 6,705.679 6,024,122 Foreign offices 15,813.561 13.397.688 Total deposits 30,534,858 27,315,903 Federal funds purchased and securities under repurchase agreements 3,352,624 5,368,912 Commercial paper 1,395,485 517.636 Other funds borrowed 1,666,311 1,537,126 Long-term debt 967,009 947,048 Acceptances outstanding 809,018 414.341 Otherliabilities 1,247,138 1,042.618 Totalliabilities 39,972,443 37,143.584 Stockholders' Equity Preferred stock - without par velue, authorized 10,000,000 shares
!ssued and Outstanding:
Series A ($ 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 - $5 par value 280,968 270,288 1987 1986
. Number of shares authonzed 80,000,000 80,000,000 Number of sharesissued 56,193.598 54,057,553 Nuraber of shares outstanding 55,867,351- 53,822,625
, Surplus 974.352 930,200 hetained earnings 139,760 722.203 Translation adjustments (21,061) (17.017)
Total 1,699,019 2,230,674 Less Treasury stock at cost, 326,247 shares in 1987 and 234.928 shares in 1986 6,703 4.392 Stockholders' equity 1,692,316 2.226,282 Total liabilities and stockholders' equity : 41,664,759 8 39,369.866 l
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y E First Chicago Corporation and Subsidiaries
' C:ns: lid:ted inc:me St:tement ,
11 5 Three Month ded Six Months Ended June:< June 30 (In thousands) 1087 1986 1987 1986
, Interest laceme loterest and fees onloans 5 637,446 $ 62f C3 $ 1,227.068 $ 1,279.602 Interest an bank balances 129,324 d,401 230,431 196.007 Imrres', on Federaf fut'ds sold and securities under resale agreements 37,172 25,811 60,140 51.205 f.ntys', on trading ier.ount assets 27,819 47,0t5 68,024 91,427 ,
Interest oninvestment secunties l 1.'nited States Government and Federal Agency 13.317 13.094 23.301 25,075 States and political subdivisions 9,352 8.658 18,020 17.384 Other(including dividends) 7,589 7.882 14.580 16,711 Total 862,019 920 304 1,641,565 1,677.411 Interest Expense I~
Interest on deposits 428,796 ,.t 4,060 804,411 858,142 i Interest on Federal funds purchased and securities under reparchase agreements 75,939 87,936 155,057 184.315 Interest on commercial paper 20f;13 8,633 36,194 16,777 Interest onodier funds borrmd 25,308 31,092 53,643 62,159 Interest on long term debt / i 18.119 17.663 34,799 35,217 Total 568,175 559,434 1,084,104 1,156.610 Net InterEt income ,, 293,844 261,070 557,461 520,801 Provision for creditlosses I BE000 85.000 930,000 185.000 J
Net laterest Incue After Provision ?se Credit IIEes (561.15 0 176,070 (372.5 3 ) 335.801 Noninterest lacome Trading necount profits (28,635) 5,084 (23.904? 17,132 Foreign exchange trading prefits 27.307 23,45) 53,583 47,696 Fiduciary and investment management fees 28,370 25,760 60,M0 ' 52,047 Credit card fees 32,501 32,281 63,233 61,760 Service charges and commissions 56,051 44,080 102,568 87,821 Equity secunties gains 19,579 43,148 47,231 63.007 Investment secunties gains 1/43 690 2,152 10,103 i
l Other income (15,%0) 2.539 (7,004) _ 14 527 Total 120,696 177,041 293,789 364,093 l
Noninterest Expense Salaries 115,690 117,035 234,711 229.389 Employee benefits 17,935 19,289 40,732 43,683 Occapancy expense of premises, net 27 A01 28,757 55,486 55,489 Equipment rentals, depreciation and maintenance 16 S17 18.442 37,377 36,418 Other expense 97.858 87,472 175,D65 161,956 4 Total 277.927 . 2M,995 543,371 526.935 l Income (Loss) Before incer. Eues (718,387) 82,116 (622,121) 172,959 Applicableincome taxeJ(benefit) (20,100) 18,500 46,300 l
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Net income (Imas) $ (698,287) $ 63.616 $ (633,321) $ 126.659 Net income (Loss) Attributable to Comunon Stockholders' Equity $ (703.569) $ $ (643.915) $ 114.863 58.l } l Earnings per Common end Common Eqaivalent Share $(12,74) 81.08 $(13 $2.14 Average Nemher of Common and Commer Equivalent Shares Outstanding 55,201,672 53,595.472 l
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l Board ofDirectors H
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. John H. Bryen. Jr. Richard M. Morrow
. Chairman of the Board and . Chairman and Chief Executive Officer Chief Executive Officer .- Amoco Corporation Sara Lee Corporation Jerry K. Peartmar*
. Frank W. Considine Chairman. President and
- Chairman of the Board. - Chief Executive Officer President and Chief Executive Officer - Zenith Electronics Corporation American National Can Co.
Ernestine M. Raelin' James J. Ilartigan* Chairman of the Board Chairman 1st Source Corporation United Airlines. Inc. "
Patrick G. Ryan Donald P. Jacobs President and Chief Executive Officer Dean of the- Aon Corporation J. L. Kellogg Graduate School George A. Schaefer*
. Chairman and Chief Executive Officer .
Northwestern Um.versity Caterpillar Inc.
Charles S. Locke Chairman of the Board and "' ' "'
Chief Executive Officer Morton Thiokol, Inc. .
Stone Container Corporation Walter E. Massey Vice President for Research and for Argonne Nawonal Laboratory C a f BM
. The University of Chicago Richard L. Thomas William J. McDonough Vice Chairman of the Board Fred L. Turner Michael A. Miles President and Chief Operating Officer g d' C n
- Member of the Audit Committee 11 w~ _ _ _ _ _ . _ - . - - _ _
_ q BULK RATE ORRSTCHICAGO Tm C ICAGO L 6 6 PERMIT NO. 9407 One First National Plaza Chicago, Illinois 60670 I
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