Annual Report (Form 10-K), fiscal year 1993

ITEM 1. BUSINESS
INTRODUCTION
NBD Bancorp, Inc. (the Corporation) is a bank holding company incorporated under the laws of the State of Delaware on July 14, 1972. Through bank subsidiaries in Michigan, Illinois, Indiana, Ohio and Florida, the Corporation provides domestic retail banking, worldwide commercial banking, cash management, trust and investment management services. The Corporation also engages in mortgage lending and servicing, insurance, trust, leasing, discount brokerage and data processing activities through its bank-related subsidiaries to the extent permitted by the Bank Holding Company Act of 1956, as amended. The Corporation and its subsidiaries employ approximately 18,700 persons on a full-time equivalent basis. At December 31, 1993, the Corporation and its subsidiaries had total assets of $40.8 billion, total deposits of $29.8 billion and shareholders' equity of $3.2 billion. Based on rankings by total assets as of December 31, 1993, the Corporation was the 17th largest bank holding company in the United States.
Detailed financial information about the Corporation is presented under Part II later in this Form 10-K and is incorporated by reference herein.
SUBSIDIARIES
NBD BANK, N.A. (MICHIGAN)
The principal subsidiary of the Corporation is NBD Bank, N.A. (Michigan), formerly named National Bank of Detroit, which remains the largest single contributor to the Corporation's earnings. NBD Bank, N.A. accounted for approximately 62 percent of the consolidated assets and 64 percent of the consolidated net income of the Corporation in 1993.
NBD Bank, N.A. was organized under the National Bank Act in 1933. It was the largest bank in the State of Michigan and among the 20 largest commercial banks in the United States based on total deposits as of year-end 1993. At December 31, 1993, it operated 330 banking offices located throughout the lower peninsula of Michigan. The Bank maintains correspondent relationships with banks and savings associations throughout the country, including many of the largest commercial banking organizations in the United States.
International banking activities of NBD Bank, N.A. include operations in the Euro-Currency markets, the extension of lines of credit, export and import financing, making credit facilities available to foreign firms and subsidiaries of United States corporations, foreign exchange transactions and issuance of letters of credit. This international business is conducted (a) through the International Division in the main office in Detroit, (b) through full-service branch offices located in London, Frankfurt, Tokyo and Hong Kong, (c) through an off-shore banking facility in Nassau, Bahamas, (d) through a wholly-owned Edge Act subsidiary, the International Bank of Detroit (IBD), and its overseas affiliate, (e) through a wholly-owned Canadian banking subsidiary, NBD Bank, Canada, and (f) through an International Banking Facility. IBD is authorized, subject to government regulations, to make both equity investments and loans overseas and presently owns 50% of the equity, 100% of the voting rights and fully guarantees all obligations of Michell NBD Limited, a merchant banking company located in Australia. These overseas facilities are supplemented by a network of correspondent banks in more than 100 foreign countries.
NBD Bank, N.A.'s activities in foreign exchange markets are conducted primarily to service the needs of its customers. Foreign exchange risks are controlled through detailed counterparty limits for purchases, sales and one-day risk at liquidation, preapproved position limits, and closely supervised and controlled maturity gaps.
OTHER SIGNIFICANT SUBSIDIARIES
In addition to steady internal growth, the Corporation has expanded significantly in recent years through selective acquisitions, primarily in its Midwest market. In 1990, it acquired from the Resolution Trust Corporation (RTC) approximately $1.1 billion in deposits and selected assets in Michigan, Ohio and Florida. The Corporation acquired a suburban Chicago bank holding company with assets of approximately $1.5 billion in 1991. During 1992, the Corporation acquired three bank holding companies in the State of Indiana with aggregate assets of approximately $10.3 billion. The Corporation will continue to regularly explore opportunities for additional acquisitions of financial institutions and related businesses.
The foregoing acquisitions have enhanced the Corporation's geographic diversity outside of the State of Michigan, particularly in the States of Indiana and Illinois where operations are conducted through second-tier bank holding companies. At December 31, 1993, NBD Indiana, Inc. had consolidated total assets of $10.3 billion and total deposits of $8.4 billion, while NBD Illinois, Inc. had consolidated total assets of $5.0 billion and total deposits of $4.0 billion.
Additional details of the operations of the Corporation's subsidiaries are set forth under "Item 7. Management's Discussion and Analysis of Earnings and Financial Position -- Organizational Performance" later in this Form 10-K and are incorporated by reference herein.
LINES OF BUSINESS
The three primary lines of business from which the Corporation derives most of its income are corporate banking, retail banking and trust services. A commitment to the development and use of advanced technology has been a key to growth and cost control in all three of these areas.
CORPORATE BANKING
Services to industry, commerce and government include the maintenance of demand and time deposit accounts and the granting of various types of loans, including loans under lines of credit and revolving credit, term loans, real estate mortgage loans and other specialized loans. In addition, the Corporation's subsidiaries provide financial advisory services and numerous other banking services to its customers. These subsidiaries serve the requirements of large and small industrial and commercial enterprises throughout the Midwest. The Corporation and its subsidiaries also have important banking relationships with many major corporations throughout the country.
RETAIL BANKING
The retail banking business consists of traditional consumer deposit and loan services, mortgage banking, electronic banking services and safe deposit facilities. Services to individuals include demand, savings and time accounts, charge cards and other open-end credit products, and a variety of installment and mortgage loans. The Corporation has achieved significant growth in this line of business in recent years and has expanded product offerings to include auto leasing, student loans, manufactured housing loans, marine loans, home equity loans and private label credit cards. The Corporation has also begun to make a variety of non-deposit investments, including mutual funds and annuities, available in its branch offices through an unaffiliated third party marketer under the name Charterpoint Investment Centers.
TRUST SERVICES
The Corporation's subsidiaries furnish a wide range of trust services to individuals, corporations, municipalities and charitable organizations. In terms of total trust assets administered, the trust operation of NBD Bank, N.A. is one of the largest among commercial banks in the United States. NBD Bank, N.A. and the Corporation's other bank and trust company subsidiaries act as trustee of personal, corporate, pension, profit-sharing and other employee-benefit trusts, provide investment advisory and custody services, act as executor, administrator, personal representative and trustee of estates, and act as registrar, fiscal and paying agent for corporations. NBD Bank, N.A. also serves as investment advisor to The Woodward Funds, a mutual fund family of fourteen funds covering a wide variety of investment objectives. As of December 31, 1993, The Woodward Funds ranked as the seventh largest bank-managed fund family in the country, with more than $5.3 billion in assets.
TECHNOLOGY
The Corporation has made a strong commitment to the development and use of advanced technology across its various lines of business in order to produce low-cost, high-quality products and generate fees. This technological sophistication enables the Corporation and its subsidiaries to realize economies of scale, especially in its newly acquired operations, and to enhance staff productivity. Prominent technological involvements include the operation, under contract with MasterCard, of the computerized transaction routing switch for CIRRUS, a national shared network of automated teller machines (ATMs); and the operation of a similar routing switch for Magic Line, Inc., a regional shared network of ATMs in which the Corporation has an ownership interest. Magic Line, Inc. recently announced a preliminary agreement to merge with Cash Station, Inc., which operates the largest ATM network in Illinois, to form one of the largest ATM networks in the Midwest. It is expected that the Corporation will continue to serve as transaction processor for the combined network. In addition, the Corporation and its subsidiaries are actively involved in technology-based cash
management services for the wholesale and middle market, merchant and issuer credit card processing, telephone bill payment services and a telephone banking center.
COMPETITION
Active competition exists in all principal areas where the Corporation, its bank subsidiaries, and its bank-related subsidiaries are presently engaged, not only with other commercial banks, but also with savings associations, securities brokers, mutual funds, credit unions, finance companies, mortgage bankers, leasing companies, insurance companies and other domestic and foreign financial institutions and various non-financial intermediaries.
GOVERNMENT AND MONETARY POLICIES
The operations of financial institutions may be affected by legislative changes and by the policies of various regulatory authorities. In particular, bank holding companies and their subsidiaries are affected by the credit policies of the Board of Governors of the Federal Reserve System (the Federal Reserve Board) through its regulation of the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits.
REGULATION AND SUPERVISION
Bank holding companies, banks and financial institutions generally are highly regulated, with numerous federal and state laws and regulations governing their activities. As a bank holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended (the Act) and is subject to examination and supervision by the Federal Reserve Board. Under the Act the Corporation is prohibited, with certain exceptions, from acquiring or retaining direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company, and from engaging in activities other than those of banking or of managing or controlling banks, other than subsidiary companies and activities that the Federal Reserve Board determines to be so closely related to the business of banking as to be a proper incident thereto. The acquisition of direct or indirect ownership or control of a bank or bank holding company by the Corporation is also subject to certain restrictions under the Act and applicable state laws.
Various federal and state laws govern the operations of the Corporation's bank subsidiaries. National banks, including NBD Bank, N.A., are supervised and regulated by the Office of the Comptroller of the Currency under the National Bank Act. Since national banks are also members of the Federal Reserve System and their deposits are insured by the Federal Deposit Insurance Corporation (FDIC), they are also subject to the applicable provisions of the Federal Reserve Act and the Federal Deposit Insurance Act and, in certain respects, to state laws applicable to financial institutions. The state-chartered bank subsidiaries of the Corporation are, in general, subject to the same or similar restrictions and regulations, but with more extensive regulation and examination by state banking departments, the Federal Reserve Board for Federal Reserve member banks, and the FDIC. NBD Bank, Federal Savings Bank (Florida) is under the regulatory authority of the Office of Thrift Supervision, Department of Treasury.
The Corporation is a legal entity separate and distinct from its affiliate banks and its non-banking subsidiaries. Accordingly, the right of the Corporation, and thus the right of the Corporation's creditors and shareholders, to participate in any distribution of the assets or earnings of any affiliate bank or other subsidiary is necessarily subject to the prior claims of creditors of such affiliate bank or subsidiary. The principal source of the Corporation's revenues is dividends and fees from its affiliates. There are legal limitations on the extent to which the Corporation's subsidiary banks can lend or otherwise supply funds to the Corporation or certain of its affiliates. Federal law prevents the Corporation from borrowing from its subsidiary banks unless the loans are secured by specified obligations and, with respect to the Corporation or any single non-bank affiliate, such secured loans by any subsidiary bank are generally limited to 10 percent of the subsidiary bank's capital and surplus and, with respect to the Corporation and all of its non-bank affiliates, to an aggregate of 20 percent of the subsidiary bank's capital and surplus. In addition, payment of dividends to the Corporation by subsidiary banks is subject to various state and federal regulatory limitations. Net assets of the Corporation's subsidiary banks not available for dividends or loans amounted to approximately $2,567.9 million at December 31, 1993. In 1994, the Corporation's bank subsidiaries may distribute to the Corporation (in addition to their 1994 net income) approximately $503.0 million in dividends without the prior approval of bank regulatory agencies. In addition, federal bank regulatory agencies have the authority to prohibit the banking organizations they supervise from engaging in what, in the bank
regulator's opinion, constitutes an unsafe or unsound practice in conducting its business. Depending upon the financial condition of a bank, the payment of dividends could be deemed to constitute such an unsafe or unsound practice.
Recent banking legislation, including particularly the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), has broadened the regulatory powers of the federal bank regulatory agencies. Among other things, FIRREA contains a "cross-guarantee" provision which could result in insured depository institutions owned by the Corporation being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other insured depository institution owned by the Corporation. In addition, under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary bank. As a result of such policies, the Corporation could be required to commit resources to its subsidiary banks in circumstances where it might not do so absent such policies.
FDICIA revises sections of the Federal Deposit Insurance Act affecting bank regulation, deposit insurance and provisions for funding of the Bank Insurance Fund (BIF) administered by the FDIC. FDICIA also revises bank regulatory structures embodied in several other federal banking statutes, strengthens the bank regulators' authority to intervene in cases of deterioration of a bank's capital level, places limits on real estate lending and imposes detailed audit requirements. Among the significant revisions that could have an impact on each of the Corporation and its banking subsidiaries is the authority granted the FDIC to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish semiannual assessment rates on BIF-member banks so as to maintain the BIF at the designated reserve ratio defined in FDICIA. FDICIA also provides for implementation of a system of risk-based premiums for deposit insurance, which became effective beginning in 1993, pursuant to which the premiums paid by a depository institution are based on the capital strength of each institution within certain defined categories. The new premium assessment rules have not had a material effect on the Corporation's bank subsidiaries and are not expected to have such effect in the future.
Proposals to change the laws and regulations governing banks, companies that control banks, and other financial institutions are frequently raised in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood of any changes and the impact such changes might have are impossible to determine.
The bank-related subsidiaries of the Corporation are also supervised and examined by the Federal Reserve Board as well as other applicable regulatory agencies. For example, the Corporation's discount brokerage subsidiaries are subject to supervision and regulation by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. and state securities regulators. Other bank-related subsidiaries are subject to other extensive laws and regulations of both the federal government and the various states in which they are authorized to do business.
ITEM 2.



ITEM 2. PROPERTIES
The executive offices of the Corporation are located in the main office of NBD Bank, N.A., a 14-story building in the central financial and business district of Detroit. This building, which has two additional floors below the street level, is owned by NBD Bank, N.A. and occupied exclusively by NBD Bank, N.A., the Corporation and other direct and indirect subsidiaries of the Corporation. The Corporation also owns a 14-story, 300,000 square foot office building in Troy, Michigan, and a 380,000 square foot Technology Center in Van Buren Township, Wayne County, Michigan, near Detroit Metropolitan Airport. During 1993, NBD Bank, N.A. acquired approximately 143 acres of land in Farmington Hills, Michigan for possible future facility needs.
As of December 31, 1993, the Corporation's subsidiaries operated 699 offices within the United States of which 384 are owned by such subsidiaries and 315 are leased. Foreign offices in London, Frankfurt, Tokyo, Hong Kong, Canada and Australia are located in leased premises. Historic rental expense and anticipated rental payments are set forth under "Item 8. Financial Statements and Supplementary Data -- Note 5. Premises and Equipment" and are incorporated by reference herein.
All of these properties are considered by management to be suitable and adequate for the purpose intended.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Corporation or any of its subsidiaries. On December 17, 1993, without admitting or denying the allegations, NBD Bank, N.A., agreed to the entry of a Consent Judgment in the U.S. District Court for the Southern District of New York in an SEC action brought against NBD Bank, N.A. and other institutions for alleged violations of Regulation U promulgated under Section 7(d) of the Securities Exchange Act of 1934. The SEC alleged that NBD Bank, N.A. and the other defendant banks violated the margin rules by unlawfully extending credit in custodial accounts that the bank maintained for four customers. The Consent Judgment imposed a civil money penalty on NBD Bank, N.A., required it to disgorge custody fees that it had received from the custodial accounts, enjoined NBD Bank, N.A. from future violations of Regulation U and required it to adopt revised policies and procedures with respect to these matters.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Corporation as of March 1, 1994, are as follows:
Officers of the Corporation are elected in the spring of each year at the annual organizational meeting of the Board of Directors to serve for the ensuing year and until their successors are elected and qualified.
All of the executive officers of the Corporation named above have held various positions with NBD Bank, N.A. or its affiliates or their predecessors for more than five years.
There is no family relationship between any of the executive officers, nor is there any arrangement or understanding between any such officer and any other person pursuant to which the officer was elected.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE CORPORATION'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The 160,715,173 shares of common stock of the Corporation outstanding at December 31, 1993, had a market value of $4.8 billion and were held by approximately 28,000 individuals and institutions located throughout the United States and several foreign countries.
At December 31, 1993, the Corporation had $199,985,000 of 7 1/4% Convertible Subordinated Debentures outstanding. The debentures have been called by the Corporation for redemption on March 15, 1994, at a redemption price of $1,050.75 per $1,000 of principal outstanding. Holders may elect to convert their holdings into the Corporation's common stock before the redemption date at the conversion price of $30.40 per share.
Since April 1986, NBD Bancorp, Inc. common stock has been included in the Standard & Poor's 500 index. The index is composed of 400 industrials, 40 utilities, 40 financial firms and 20 transportation companies.
The following table lists the high and low prices of the Corporation's common stock, which trades on the New York Stock Exchange (ticker symbol -- NBD), as well as the quarterly dividends declared per share, in each of the last three years.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the Corporation's consolidated financial statements and the accompanying notes presented elsewhere herein.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to cover the significant factors affecting the Corporation's consolidated balance sheet and income statement from 1991 to 1993. It provides shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. To establish a framework for this discussion, the major components of the Corporation's operating results for 1993, 1992 and 1991 are summarized in the following table and then discussed in greater detail on subsequent pages.
NET INTEREST INCOME
In the summary of operating results shown above, the excess of interest earned on assets, including loan fees and lease financing income, over the interest paid for funds is designated "Net Interest Income." An adjustment to this figure has been made that increases fully or partially tax-exempt interest income to an amount comparable to interest subject to normal income taxes. An offsetting adjustment of the same amount is made in the income tax section of the earnings summary. Therefore, the final earnings figure remains the same before and after this taxable equivalent adjustment.
Net interest income on a fully taxable equivalent (FTE) basis accounted for 73.6 percent of total income before any provision for possible credit losses in 1993, 75.0 percent in 1992 and 75.1 percent in 1991. It is influenced primarily by changes in: (1) the volume and mix of earning assets and sources of funding; (2) market rates of interest, and (3) income tax rates. The impact of some of these factors can be controlled by management policies and actions. External factors also can have a significant impact on changes in net interest income from one period to another. Some examples of such factors are: (1) the strength of credit demand by customers; (2) liquidity and maturity preferences of savings and time deposit customers; (3) Federal Reserve Board monetary policy, and (4) fiscal and debt management policies of the federal government, including changes in tax laws.
The following table presents average daily balances, interest income on an FTE basis and interest expense, as well as average rates earned and paid on the Corporation's major asset and liability items for the years 1993, 1992 and 1991.
- ------------------------- * Primarily $100,000 and over. Notes: Nonaccrual loans are included in average balances. The FTE adjustments are computed using a combined federal and state income tax rate of 36.4 percent in 1993 and 35.4 percent in 1992 and 1991.
Net interest income on an FTE basis increased by $39.6 million, or 2.5 percent, in 1993 following a gain of $160.8 million, or 11.2 percent, in 1992.
A better understanding of the factors accounting for the year-to-year increases in net interest income can be obtained by examining the changes in: (1) the volume of earning assets and (2) the net interest income produced after the related cost of funding these earning assets.
The following table allocates total interest income between the amounts earned at the "interest spread" on assets funded with: (1) interest-bearing liabilities and (2) non-interest-bearing liabilities (primarily demand deposits) and equity capital. The interest spread on earning assets funded by interest-bearing liabilities is defined as the difference between the average rate earned on total earning assets and the average rate paid on the interest-bearing liabilities. The interest spread on assets funded with non-interest-bearing sources of funds is simply the rate earned on total earning assets.
Approximately three-quarters of the $39.6 million increase in total net interest income between 1992 and 1993 can be attributed to an increased interest spread (3.85 percent in 1993 versus 3.69 percent in 1992) on earning assets funded with interest-bearing liabilities, which more than offset the lower volume of earning assets funded by the interest-bearing liabilities. The balance of the increase in net interest income can be accounted for by the significantly higher level of earning assets supported by non-interest-bearing funds during 1993, notwithstanding the lower yield on earning assets (7.41 percent in 1993 versus 8.07 percent in 1992).
The $160.8 million increase in total net interest income between 1991 and 1992 can be attributed entirely to a higher level of earning assets funded with interest-bearing liabilities at an increased interest spread (3.69 percent in 1992 versus 3.29 percent in 1991). The combination of these two factors more than offset the impact of a substantially lower interest spread (8.07 percent in 1992 versus 9.53 percent in 1991) on a higher level of earning assets funded with non-interest-bearing funds.
ANALYSIS OF NET INTEREST INCOME (FTE)
A more detailed analysis of the effect of volume and rate changes on net interest income between 1991, 1992 and 1993 is set forth in the following table.
For purposes of this table, changes in interest due to volume and rates were determined as follows: (1) volume variance -- change in volume multiplied by previous rate, (2) rate variance -- change in rate multiplied by previous volume, and (3) rate/volume variance -- change in volume multiplied by change in rate. The rate/volume variance was
allocated entirely to volume. Net interest income has been computed on a fully taxable equivalent basis and includes loan fees. Average balances for non-accrual loans have been included in this table.
- ------------------------- * Primarily over $100,000.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The Provision for Possible Credit Losses was increased from $166.2 million in 1991 to $228.5 million in 1992 and then reduced to $119.7 million in 1993. Of the $62.3 million increase between 1991 and 1992, approximately $51 million represented provisions to conform acquired banks' loan evaluation policies with those of NBD Bancorp. The reduced provision in 1993 was made in view of the decline in nonperforming loans and a significantly lower level of net loan charge-offs during the year.
Net charge-offs as a percentage of average loans and leases outstanding rose from 0.65 of 1 percent in 1991 to 0.81 of 1 percent in 1992 and then dropped to 0.46 of 1 percent in 1993. During the past five years, gross charge-offs totaled $996 million, while recoveries amounted to $295 million for a "recovery ratio" of approximately 30 percent. The net charge-off ratio during the same period averaged 0.60 of 1 percent.
In the commercial loan and lease portfolio, the largest single net charge-off in 1993 was $10.0 million on a loan to a retail chain. During 1992, the largest net charge-off was a $19.2 million balance of a loan to an air transportation company.
Real estate construction loan net charge-offs totaled $19.4 in 1993 and $22.9 million in 1992 and were spread over several credits in each year. None of the individual charge-offs exceeded $4 million in either year.
Charge-offs in the residential mortgage loan portfolio were nominal in 1993, as in prior years.
Charge-off experience in the consumer loan area during 1993 was considerably lower than in either 1992 or 1991 and was below the industry average in each year. The net charge-off ratio was 0.43 of 1 percent in 1993, 0.64 of 1 percent in 1992 and 0.86 of 1 percent in 1991.
Foreign loan net charge-offs amounted to $12.4 million in 1993, down from $14.1 million in the prior year. The 1993 charge-off figure included the write-off of the remaining $8.7 million balance of credits to individual political entities formerly known as Yugoslavia. Results for 1992 included net charge-offs of $10.5 million in Canada where the economy was experiencing a recession.
At December 31, 1993, the Allowance for Possible Credit Losses amounted to $423.0 million, or 1.66 percent of total loans and leases outstanding and approximately 157 percent of nonperforming loans, as well as 3.7 times net charge-offs during the year.
The following tables present an analysis of the Corporation's Allowance for Possible Credit Losses, together with summary loan and lease data, including charge-offs and recoveries, as well as related ratios for the five years ended December 31, 1993
RECONCILIATION OF ALLOWANCE FOR POSSIBLE CREDIT LOSSES
In order to comply with certain regulatory reporting requirements, management has prepared the following table that provides the components of the Allowance for Possible Credit Losses by loan category. This breakdown of the Allowance reflects management's best estimate of possible credit losses based on the loss potential associated with specific loans, subjective assessment of risk characteristics in the portfolio and historical loss experience. This breakdown should not be regarded as an indication of future losses or that losses will occur in these proportions.
The Corporation and its subsidiaries do not maintain specific reserves against any loan or particular group of loans as it is management's policy to charge off all losses as they become known. The Allowance should be considered in its entirety and is available for credit losses across the entire portfolio. It is management's opinion that the Allowance for Possible Credit Losses at December 31, 1993, is adequate to cover future losses.
ANALYSIS OF ALLOWANCE FOR POSSIBLE CREDIT LOSSES BY CATEGORY
AS OF DECEMBER 31, 1993:
ANALYSIS OF LOAN AND LEASE LOSSES
DAILY AVERAGE LOANS AND LEASES OUTSTANDING
ANALYSIS OF NET CHARGE-OFF RATIOS
SELECTED CREDIT RATIOS
- ------------------------- * Excludes $88.9 million of renegotiated Mexican government debt at December 31, 1992, 1991 and 1990. Concurrent with the implementation of SFAS No. 115, effective December 31, 1993, this debt was reclassified from loans to "Investment Securities Available-for-Sale."
NON-INTEREST INCOME
Non-interest income increased by $56.2 million, or 10.6 percent, in 1993 following an increase of $56.2 million, or 11.9 percent, in 1992. Approximately one-quarter of the gain between 1991 and 1992 can be attributed to the inclusion of Gainer Bank's revenues in those of the Corporation since January 23, 1992.
The two largest components of non-interest income, accounting for nearly 54 percent of the total for 1993, were deposit service charges and trust fees. Service charges on deposit account business rose $7.0 million, or 4.4 percent, in 1993 after an increase of $21.0 million, or 15.3 percent, in the prior year. The higher service charge revenues can be attributed to greater account activity, selective increases in charges for certain services and lower earnings credits for business account balances due to a general decline in market rates of interest. Service charge fees in 1992 were boosted by approximately $5 million from the inclusion of Gainer's results.
Trust fees rose $9.7 million, or 6.9 percent, in 1993 following an increase of $9.6 million, or 7.4 percent in 1992. Approximately $2.2 million of the increase in 1992 is attributable to the inclusion of Gainer's trust revenues. Increased volumes of business, selective fee increases and higher market values contributed to the growth of trust revenues in 1993 and 1992.
A particularly strong gain in non-interest income was generated from the profits on the sale of mortgages during the past two years. This was the result of the decline in interest rates, which increased the value of mortgages held for sale, as well as from an increased volume of mortgage sales. Other areas exhibiting strong growth during the past two years were data processing fees, mutual fund and annuity product fees, rental income and fees for the issuance of commercial and standby letters of credit. The growth of standby letter of credit business has been fostered by the "double A" credit ratings from Moody's and Standard & Poor's for NBD Bank, N.A. (Michigan).
The large variability in securities gains over the past three years can be attributed mainly to: (1) a $7.6 million gain taken in 1993 on the sale of an equity holding in a nonbank financial services company and (2) a $5.0 million gain realized from the sale of common stock of the Student Loan Marketing Association in 1991.
The "Other" classification contains income items that are generally small in amount or infrequent in occurrence. The major factors contributing to the large increase in 1993 were: (1) a gain of $9.6 million on the sale of certain charge card receivables and (2) gains of $13.9 million from the disposal of certain real estate previously acquired in settlement of loans. Included in the "Other" category in 1992 and 1991 were gains of $1.8 million and $4.1 million, respectively, from the sale of common stock warrants.
ANALYSIS OF NON-INTEREST INCOME
COMPENSATION EXPENSE
Total compensation expense rose $27.5 million, or 4.1 percent, in 1993. This was primarily the result of a 3.7 percent increase in average compensation per employee, as average employment on a full-time equivalent basis increased by 65 people, or 0.3 percent, between 1992 and 1993.
Compensation expense increased by $53.0 million, or 8.5 percent, in 1992. Excluding the effect of the Gainer acquisition, the increase was $29.2 million, or 4.7 percent. While total employment increased by 4.4 percent in 1992, this was more than accounted for by the inclusion of approximately 885 employees from Gainer since early in the year. Excluding the Gainer acquisition, there were 100 fewer employees in 1992 compared to 1991.
The rate of increase for employee benefit costs has been reduced from 15.1 percent in 1991 to 11.9 percent in 1992 and then to 6.2 percent in 1993. A continuing emphasis on controlling health care costs was responsible for the sharp drop in the rate of increase in total benefit costs in 1993. We continue to monitor our various health care plans to achieve a better control of these costs while still providing a comprehensive plan for employees. Increased employee deductibles were instituted in 1992, and certain other cost-sharing arrangements have been implemented on an annual basis in recent years. While substantial changes in the nation's health care system have been proposed by the Clinton Administration, we cannot determine at this time what the impact might be on the Corporation.
ANALYSIS OF COMPENSATION EXPENSE
The Corporation's pension plans remain well funded. At December 31, 1993, the total projected benefit obligation was $585 million, while the market value of pension fund assets amounted to approximately $583 million. The decline in long-term interest rates and a relative stability in the inflation rate at a lower level in recent years has affected the assumptions used in determining the actuarial present value of the projected benefit obligations. For a more detailed description of the pension and other employee benefit plans, see Note 8 to the Financial Statements.
During 1992, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement requires accrual of employee postretirement benefits during the years earned while employed. The initial obligation for prior service amounted to $58.9 million ($37.9 million -- or $0.24 per share -- after tax effect). This future obligation was recognized as a one-time charge at the beginning of 1992. The adoption of SFAS No. 106 increased the annual provision for this benefit expense, which is almost entirely related to future health care costs, by approximately $3 million ($0.01 per share after tax effect).
OTHER NON-INTEREST EXPENSES
All other non-interest expenses declined by $43.8 million between 1992 and 1993. However, the 1992 figure included $76.1 million of one-time merger-related expenses in connection with the INB Financial Corporation (INB) and Summcorp acquisitions. Excluding these special charges, other non-interest expenses rose $32.3 million, or 5.5 percent in 1993, following a $47.9 million, or 8.9 percent increase in 1992. Nearly two-thirds of the increase between 1991 and 1992 can be attributed to the inclusion of Gainer's expenses in 1992 but not in 1991.
The largest factor accounting for the increase in amortization of intangibles during the past two years is the acceleration of the write-off of certain purchased mortgage servicing rights. This reflects the significant increase in mortgage principal repayments due to an increase in refinancing activities. The $6.1 million decline in purchased services expense between 1992 and 1993 is largely attributable to the corporation's assumption of certain processing activities formerly outsourced by the Indiana banks. A significant portion of the $4.2 million increase in travel and entertainment expense in 1993 can be attributed to the additional travel-related expenses resulting from the large-scale conversion of the Indiana banks' operating systems to those of NBD Bancorp. Expenses involved in other real estate owned rose by $3.1 million in 1993 following an increase of $2.8 million in the prior year. These increases resulted primarily from higher write-downs recorded on properties taken in settlement of loans. The subsequent gain or loss when the property is sold is recognized as "Other" non-interest income. (Net gains on the disposition of such properties amounted to $13.9 million in 1993 but were inconsequential in 1992 and 1991.) The increase of approximately 33 percent in the expense for public relations in 1993 is essentially due to a higher level of charitable contributions.
The increase in "Other" expense of approximately $12 million between 1991 and 1992 primarily resulted from: (1) a $2.4 million non-recurring loss on sub-leased premises; (2) a $1.5 million prepayment penalty on the retirement of high-rate, long-term debt, and (3) the inclusion of Gainer's expenses since its January 1992 acquisition.
ANALYSIS OF NON-INTEREST EXPENSES
INCOME TAXES
The Corporation's income tax expense was $220.1 million in 1993, up from $134.4 million in 1992 and $122.3 million in 1991. The increase of $85.7 million in income tax expense for 1993 can be accounted for principally by: (1) a $229.6 million rise in pre-tax income between 1992 (which was impacted by $76.1 million of merger-related expenses) and 1993; (2) an increase in the statutory tax rate, and (3) an increase in the proportion of pre-tax income that was subject to income taxes.
The statutory tax rate on NBD Bancorp taxable earnings was increased to 35 percent in 1993 from 34 percent in 1992 and 1991. The higher tax rate increased the corporation's income tax expense by $7.0 million; however, this was partially offset by a $4.8 million income tax benefit relating to a revaluation of the net deferred tax receivable to the new tax rate.
The adoption early in 1993 of SFAS No. 109, "Accounting for Income Taxes," increased reported earnings by nearly $4.0 million, or $0.03 per share. For a more detailed discussion and analysis of income taxes, including the adoption of SFAS No. 109, see Note 9 to the Financial Statements.
The tax reform act of 1986 raised from 20 percent to 100 percent the disallowance of the interest cost on funds employed to carry most tax-exempt loans and securities acquired after August 7, 1986. As a result of continued maturities in the tax-exempt portfolio, a greater proportion of pre-tax earnings has been subject to federal income taxes in each of the past three years. The effective rate increased from 25.3 percent in 1991 to 28.4 percent in 1992 and then to 31.4 percent in 1993.
The Corporation's banks are required to maintain sizeable cash reserves at the Federal Reserve Bank. These non-earning reserves are not required of nonbank companies (e.g., money market mutual funds) that offer competitive deposit-type instruments and services. When the average yield on our earning assets (7.41 percent) is applied to the average reserve maintained ($308 million) during 1993, the result is a reduction in after-tax income equal to $0.10 per share. Inasmuch as nearly all of the earnings of the Federal Reserve System (estimated to have been $22 billion in 1993) are remitted to the United States Treasury, this foregone income essentially represents an additional tax on shareholders.
When all direct taxes and regulatory assessments are added to the interest foregone on cash balances at the Federal Reserve Bank, the Corporation's total "taxes" for 1993 amounted to a very substantial $335 million.
CAPITAL ACCOUNTS
Shareholders' equity increased by $307.7 million, or 10.5 percent, in 1993, to approximately $3 1/4 billion at year-end. Shareholders' equity, as a percent of total assets, increased from 7.18 percent at the end of 1992 to 7.97 percent at December 31, 1993. This was the highest end-of-year equity capital ratio in nearly 30 years.
ANALYSIS OF SHAREHOLDERS' EQUITY
- ------------------------- (1) Based on daily average balances.
(2) Excludes impact of conversions of capital notes, purchases and issuance of common stock and other adjustments to capital accounts.
New regulatory risk-adjusted capital adequacy standards became fully effective on January 1, 1993. The principal features of the new standards are as follows: (1) required capital levels are based on the perceived risk in the various asset categories; (2) certain "off-balance sheet" items, such as standby letters of credit and interest rate swaps, require capital allocations, and (3) the definition of what constitutes capital has been refined. Equity capital, net of certain adjustments for intangible assets and investments in nonconsolidated subsidiaries, and certain classes of preferred stock are considered
Tier 1 capital. Total capital consists basically of Tier 1 capital plus subordinated debt, some types of preferred stock and a limited amount of the Allowance for Possible Credit Losses.
Regulatory authorities have also established a minimum level of Tier 1 capital to total assets, a so-called "leverage" ratio. The new standards call for minimum Tier 1, Total and Tier 1 Leverage capital ratios of 4 percent, 8 percent and 3 percent, respectively. As can be noted in the following table, the Corporation's ratios have comfortably exceeded these regulatory standards.
ANALYSIS OF REGULATORY CAPITAL
During the past three years, the Corporation has bolstered its regulatory total capital base through the issuance of subordinated debt (totaling $750 million) of the parent company (NBD Bancorp, Inc.). An additional $200 million was raised in 1993 through the issuance of 6 1/4% Subordinated Notes of NBD Bank, N.A. (Michigan).
The debt that is included in regulatory total capital at December 31, 1993, had no significant scheduled maturities until the year 2002. However, on January 27, 1994, the Corporation called for redemption the $199,985,000 outstanding 7 1/4% Convertible Subordinated Debentures Due 2006 at a price of 105.075 percent of its principal amount, plus accrued interest to the March 15, 1994, redemption date. Holders of the debentures may opt to convert their debentures into NBD Bancorp common stock at a conversion price of $30.40 per share, or 32.895 shares per $1,000 principal amount of debentures. If all debentures were redeemed for cash, the Corporation's pro forma Tier 1 and Total Capital Ratios at year-end 1993 would be 9.10 percent and 12.96 percent, respectively, and the Tier 1 Leverage Ratio would be 7.34 percent.
SOURCE OF FUNDS
While total funds to support earning assets increased only $146 million, on a daily average basis, or less than 1 percent in 1993, the mix of funds changed significantly. Demand deposits, net of items in process of collection ("float") and due from other banks, increased by $467 million, or nearly 12 percent, on a year-over-year basis. An accommodative Federal Reserve Board monetary policy fostered a strong growth of demand deposits, as did the relatively low level of market rates of interest that encouraged many customers to maintain higher balances to avoid paying certain service charges on their deposit activity. We also believe that the increased level of residential mortgage refinancing activity resulted in higher than normal customer deposits from those who increased their indebtedness as a result of such transactions. For many of these same reasons, as well as customer preference for more liquid asset holdings, total savings account balances averaged nearly $1 billion, or 15.5 percent, higher in 1993 than in the prior year.
Consumer time deposits declined by more than $1.8 billion, or approximately 20 percent, from the 1992 level, as investors searched for higher market returns when their high-rate time deposits issued in prior years matured. While the proceeds from many of these maturing time deposits were re-deposited in demand and savings accounts, considerable money flowed out of the banking system into direct market investments, including bond and stock mutual funds and
annuity products. Indeed, our Charterpoint Investment Centers attracted a substantial amount of this type of investor money, much of which was invested in our proprietary family of Woodward Funds, from which we earn investment management fees.
Reliance on large (i.e., $100,000 and over) certificates of deposit as a source of funds continued to decline in 1993, as less costly alternatives were utilized to a greater extent.
Management categorizes time deposits of $100,000 or more as either "Other Time Deposit" or "Large Certificates of Deposit" depending on whether they are considered to be "retail" (i.e., primarily from individuals) or "wholesale" (i.e., primarily from large corporations, institutions or public authorities). However, there is a regulatory requirement to disclose the total amount and maturity distribution of such large time deposits regardless of the source of such funds. At December 31, 1993, domestic time deposits of $100,000 or more in size amounted to approximately $1.5 billion and were scheduled to mature as shown below.
ANALYSIS OF MATURITY DISTRIBUTION OF DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
By closely managing the alternative sources of funds, the Corporation has been able to improve its overall net interest margin on earning assets from 4.13 percent in 1990 to 4.22 percent in 1991, and then to 4.39 percent and 4.48 percent in 1992 and 1993, respectively. Other things equal, each basis point (0.01 percent) increase in the net interest margin equates to an increase in earnings of $0.01 1/2 per share.
ANALYSIS OF SOURCES OF FUNDS FOR EARNING ASSETS
The increase in "Long-Term Debt" in recent years is related to management's desire to strengthen the Corporation's and subsidiary banks' risk-based capital ratios, as well as to serve as a funding source for long-term investments, including acquisitions.
The "All Other" category basically represents that portion of equity capital that funds earning assets.
A detailed analysis of the composition of our principal short-term borrowings over the past three years is summarized in the following table. The use of "Bank Notes" as a source of funds was initiated late in 1991 and provides an additional source of relatively low-cost funds for asset funding and liquidity purposes. Our ability to issue large amounts of these notes, which are not deposit liabilities and hence do not carry the cost of deposit insurance premiums, is enhanced by the high credit rating that NBD Bank, N.A. (Michigan) has earned in the money markets.
ANALYSIS OF PRINCIPAL SHORT-TERM BORROWINGS
- ------------------------- * With original maturity of less than one year.
INVESTMENT SECURITIES
Total holdings of investment securities, on a daily average and on a year-end to year-end basis, declined by 1 percent and about 4 1/2 percent, respectively.
For a number of years, the Corporation has been increasing its holdings of U. S. Government Agency securities, primarily mortgage pass-through securities issued or guaranteed by the Government National Mortgage Association, Federal National Mortgage Association or Federal Home Loan Mortgage Corporation. These are high-quality, marketable investments that provide yields above those available on U. S. Treasury securities of comparable duration. The "Other" securities category primarily consists of collateralized mortgage obligations backed by federal agency pass-throughs. The substantial volume of refinancings and prepayments of mortgages during 1993 required a concomitant increase in purchases of mortgage-backed securities to maintain portfolio positions.
Holdings of tax-exempt securities have steadily declined in recent years. The tax reform act of 1986 increased the disallowance of the interest cost of funding all but certain small issues of tax-exempt securities from 20 percent to 100 percent.
HOLDINGS OF INVESTMENT SECURITIES
Effective December 31, 1993, the Corporation implemented SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This requires the following: (1) debt securities that the Corporation has the positive intent and ability to hold to maturity are to be classified as "Investment Securities Held-to-Maturity" and reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling in the near term are to be classified as "Trading Account Securities" and reported at fair value, with unrealized gains and losses included in earnings, and (3) debt and equity securities not classified as "Held-to-Maturity" or "Trading Account" are to be classified as "Investment Securities Available-for-Sale" and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity, net of tax.
The "Unrealized Loss on Available-for-Sale Securities" component of shareholders' equity shows a negative balance of approximately $7 million, as of December 31, 1993. This essentially represents the unrealized loss (after tax effect) on that date of $88.9 million of United Mexican States obligations that were reclassified for balance sheet purposes from loans to securities on that date. (A further discussion of this indebtedness can be found in the "International Banking" section beginning on page 30.)
At December 31, 1993, Investment Securities held by the Corporation's banks were classified as follows: (1) Held-to-Maturity -- U. S. Government Securities with remaining maturities of more than two years, essentially all tax-exempt securities and fixed-rate mortgage pass-through securities and (2) Available-for-Sale -- all other investment securities. At that date, the aggregate fair value of the Investment Securities Held-to-Maturity was $410 million, or 6.2 percent, above the carrying value shown on the Consolidated Balance Sheet.
The maturity distribution and yields, on a fully taxable equivalent basis, of the four major components of the investment securities portfolio at December 31, 1993, are shown below. Investment Securities "Available-for-Sale" and "Held-to-Maturity" are shown separately.
INVESTMENT SECURITIES -- YIELDS AND MATURITIES
AS OF DECEMBER 31, 1993:
- ------------------------- * Fully taxable equivalent yield is based on a combined federal and state tax rate of 36.4% in 1993. ** Consists primarily of mortgage-backed securities. The maturity distribution of such securities is based on average expected maturities. Note: Yields are based on amortized cost of securities.
For several years, a portion of the tax-exempt portfolio -- $371 million with an average maturity of approximately 5 years at year-end 1993 -- has had its funding spread protected by a series of interest rate "swaps" of comparable amount but shorter maturity. At December 31, 1993, the fair value of this block of tax-exempt securities was approximately $39 million above carrying cost. However, the recognition of the unrealized gains would leave the Corporation with an unfavorable interest rate swap position. The cost of eliminating the rate swap position under the market conditions that prevailed at year-end 1993 would have offset the gain that could have been realized by the sale of these securities. It should be noted that $190 million of rate swaps for these and similar transactions are scheduled to mature in 1994 and another $135 million in 1995.
Included in the $1,507 million of tax-exempt securities at December 31, 1993, were $462 million of obligations of the State of Michigan and its political subdivisions. Except for the securities issued or guaranteed by the State of Michigan and its political subdivisions, no investment in securities of a single issuer of non-U. S. Government-guaranteed securities exceeded 10 percent of shareholders' equity at December 31, 1993 or 1992.
LOANS AND LEASE FINANCING
Total loans and leases outstanding, on a daily average basis, increased by $418 million, or 1.7 percent, in 1993, following an increase of $1,405 million, or 6.0 percent, in 1992. Consumer loans and commercial loans were up approximately 6 percent and 3 percent, respectively, in 1993, while real estate construction and residential mortgage loans were about 18 percent and 4 1/2 percent lower, respectively. The significant decline in real estate construction loans in 1993, as well as in 1992, reflects the strenuous efforts made to improve the credit quality of the portfolio, as well as a reduced level of new lending activity.
The following two tables summarize year-end totals for the major sectors of the Corporation's total loan portfolio over the last five years. The principal change in the mix of the loan portfolio since 1989 is reflected in the growing importance of consumer loans and the decline in the real estate construction loan portfolio.
ANALYSIS OF LOAN AND LEASE PORTFOLIO
- ------------------------- * "Mortgages Held for Sale" are included in the "Residential Mortgage" category for 1989.
A more detailed discussion of the major elements of the loan portfolio, as well as an analysis of loans involving highly leveraged transactions (HLTs) and exposures in the commercial real estate sector, including construction loans, can be found on subsequent pages.
As can be seen in the following tables, the Corporation's domestic business loans at December 31, 1993, were well diversified geographically, as well as by type of borrower.
On June 30, 1992, the banking regulators phased out their definition of HLTs and the related reporting requirements. The following information is based on the regulatory definition in effect prior to June 30, 1992.
As of December 31, 1993, the Corporation's HLT commitments totaled $337.7 million, and the outstandings under the commitments amounted to $153.5 million. The average commitment size in the HLT portfolio was $10.9 million, and the average outstanding loan was $5.0 million. The largest single commitment was for $30.0 million, of which nothing was outstanding at December 31, 1993. At the same date, a total of $1.0 million involving one company, or 0.7 percent of HLT outstandings, was classified as nonperforming. During 1993, there were net recoveries of $1.6 million on loans previously charged off. During 1992, there were net charge-offs of HLTs amounting to $23.7 million.
The geographic distribution and industry concentration of the HLT outstandings at year-end 1993 are shown in the following tables.
In the commercial real estate sector, construction loans totaled $789 million, while investment property term loans amounted to $1,573 million at December 31, 1993. Approximately 92 percent of the construction loans were located in the Midwest, with 39 percent in the state of Michigan, 30 percent in Indiana and 13 percent in Illinois. The largest loan outstanding was $24.0 million. At year-end 1993, $45.7 million was classified as nonperforming, the largest of which was $6.4 million. One year earlier, the comparable figures were $68.4 million and $6.1 million, respectively. Net charge-offs of construction loans totaled $19.4 million in 1993, compared with $22.9 million in 1992.
Essentially all of the investment property loans were sited in the Midwest, with 38 percent in Michigan, 32 percent in Indiana and 22 percent in Illinois. The largest loan outstanding at year-end 1993 was for $20.1 million. At December 31, 1993, $49.6 million was classified as nonperforming, the largest of which amounted to $5.6 million. One year earlier, $41.4 million was classified as nonperforming. Net charge-offs of investment property loans amounted to $18.8 million in 1993 and $10.4 million in 1992.
A more detailed analysis of the outstanding construction and investment property loans at year-end 1993 is shown in the following table. The geographic distribution of commitments to lend and loans outstanding is comparable.
In addition to the construction and investment property loans, at year-end 1993, the Corporation's banks held $1,946 million of loans on owner-occupied commercial real estate, of which the largest single category (42 percent) was classified as industrial. Nearly 48 percent of the dollar total was located in Michigan and almost 24 percent and 20 percent in Indiana and Illinois, respectively.
Residential mortgage loans outstanding, on a daily average basis, declined from $2,915 million in 1992 to $2,784 million in 1993. While the volume of loan originations rose between 1992 and 1993, prepayments, refinancings and loan sales were also higher.
The consumer loan portfolio increased by $367 million, or 6.0 percent, from $6,126 million on a daily average basis in 1992 to $6,493 million in 1993. It ended the year at $6,758 million.
The 1992 acquisitions of INB, Summcorp and Gainer significantly expanded the size and changed the composition of the consumer loan portfolio. In particular, the large credit card and student loan balances of INB have noticeably increased the relative size of these types of loans within the corporation's total consumer loan portfolio.
The expansion of the consumer loan portfolio in recent years has been considerably greater than the growth in both the Corporation's total loan portfolio and total earning assets. With more than 600 banking offices in five states, the network is in place to support continued good growth in the consumer loan portfolio.
Consumer loan loss experience continues to compare favorably with industry averages. This is the result of the high underwriting standards employed in extending credit, as well as the close monitoring of delinquency trends within the loan portfolio. It also reflects the particular mix of the portfolio, which includes a relatively large proportion of home equity loans and government-guaranteed student loans. Net charge-offs, as a percentage of average outstandings, amounted to
0.86 and 0.87 of 1 percent in the recession years of 1990 and 1991, respectively. As the subsequent business recovery gathered strength, the net charge-off ratio declined to 0.64 of 1 percent in 1992 and then to 0.43 of 1 percent in 1993.
Foreign loans, on a daily average basis, declined by $46 million, or 4.1 percent, in 1993, following a decline of $60 million, or 5.1 percent, in 1992. In part, this trend reflects generally weak economic conditions in most major overseas markets where we are represented.
NONPERFORMING LOANS
Nonperforming loans are defined to include loans on which interest is not being accrued and restructured loans where interest rates have been renegotiated at below market rates. The trend of such loans over the past five year ends is shown below. Also shown are: (1) loans 90 days or more past due but still accruing interest -- largely consumer loans, which are charged off when they become 120 days to 150 days past due, and (2) Other Real Estate Owned, which primarily represents the value of collateral taken in settlement of loans.
ANALYSIS OF NONPERFORMING LOANS
- ------------------------- * Excludes $88.9 million of United Mexican States (UMS) obligations (secured by zero-coupon U.S. Treasury securities of comparable maturity) that were renegotiated early in 1990 at a then below market rate. These obligations were reclassified to "Investment Securities Available-for-Sale" at year-end 1993, concurrent with the implementation of SFAS No. 115.
Total nonperforming loans declined by $83 million, or 23.6 percent, in 1993 following a decrease of $38 million, or 9.7 percent, during 1992. Approximately 62 percent of the net reduction in nonperforming loans during 1993 can be accounted for by a combination of repayments, charge-offs and a return to performing status on three credits -- two
retailing firms and a manufacturing concern -- and an $8.7 million charge-off of the remaining balance of loans to individual political entities formerly known as Yugoslavia. The largest nonperforming loan at December 31, 1993, was the $21.6 million balance of a loan to another retail firm. No other nonperforming loan exceeded $7 million at year-end 1993.
The largest reductions within the nonperforming category between year-ends 1991 and 1992 were: (1) the $19.7 million balance of a loan to an air transportation company that was charged off during 1992 and (2) the return to performing status of a $12.4 million balance of a loan to a cable television operation. The four largest nonperforming loans at December 31, 1992, totaled $51.5 million. They were essentially eliminated during 1993 as described in the preceding paragraph.
The interest foregone for the past two years based on nonperforming loans at each year end was as follows:
In addition to the loans classified as nonperforming, there were other loans totaling $56.2 million at December 31, 1993 (and $73.1 million at December 31, 1992), where management was closely monitoring the borrowers' ability to comply with payment terms, but where existing conditions did not warrant either a partial charge-off or classification as nonaccrual. The largest of such loans was $13.2 million at year-end 1993.
MATURITY AND RATE SENSITIVITY OF LOANS
The following tables summarize the maturity distribution and interest rate sensitivity of the loan portfolio, excluding real estate mortgage and consumer loans. There was a modest increase in the proportion of these loans that were scheduled to mature within one year between year-ends 1992 and 1993. This increase was more than accounted for by changes in the scheduled maturities within the Commercial and Foreign categories, inasmuch as the reduced level of Real Estate Construction outstandings included a lesser proportion of maturities of one year or less at year-end 1993.
MATURITY DISTRIBUTION OF LOANS
The total amount of loans with maturities beyond one year declined by $246 million, or 5.1 percent, between December 31, 1992, and the end of 1993. At the same time, the proportion of these loans that carried fixed rates of interest rose from 52.7 percent at year-end 1992 to 53.6 percent at December 31, 1993. The significantly lower level of foreign loans carrying a fixed rate of interest is in large part due to the reclassification of approximately $89 million of renegotiated Mexican debt from the loan category to "Investment Securities Available-for-Sale." This indebtedness is discussed in greater detail in the following section on International Banking.
LOANS WITH MATURITIES BEYOND ONE YEAR
The following table details the residential mortgage and consumer loan portfolios, as of December 31, 1993 and 1992, according to management's estimate of their sensitivity to interest rate changes. For purposes of this analysis, Mortgages Held for Sale have been included in the Residential Mortgage totals.
The proportion of the residential mortgage portfolio that was of a variable rate nature or scheduled to mature within one year declined from 61.2 percent ($1,798 million out of $2,938 million) at the end of 1992 to 46.8 percent ($1,317 million out of $2,817 million) at year-end 1993. This decrease reflects customers' actions taken to lock in relatively low rates at the time of original borrowing or when existing loans were refinanced.
At both year-ends 1992 and 1993, approximately 57 1/2 percent of total consumer loans were considered to be sensitive to interest rate changes within a one-year time horizon.
RATE SENSITIVITY OF RESIDENTIAL MORTGAGE AND CONSUMER LOANS
INTERNATIONAL BANKING
The Corporation's foreign cross-border outstandings consist primarily of loans, interest-bearing deposits, bankers' acceptances and federal funds sold. An item is classified as either foreign or domestic based on the domicile of the party ultimately responsible for payment. The balances are reported net of any legally enforceable written guarantees by domestic or other non-local partners. Assets of our foreign offices denominated in the local currency are included to the extent that they are not hedged or are not funded by local currency borrowings. At December 31, 1993 and 1992, total foreign cross-border outstandings amounted to $900 million, compared to $1.0 billion at the end of 1991.
During the first quarter of 1990, $88.9 million of Mexican debt was exchanged for new United Mexican States (UMS) 30-year bonds. The debt that was exchanged had interest rates at 13/16 of 1 percent above the London interbank rate for three-or six-month Eurodollar deposits and had maturities not extending beyond December 31, 2006. The bonds bear interest at 6.25 percent and had a market value of approximately $74 million at December 31, 1993, up from $58 million and $55 million at year-ends 1992 and 1991, respectively. These bonds are collateralized by zero-coupon U. S. Treasury bonds, which have an identical final maturity. The collateral is held at the Federal Reserve Bank of New York. Payment of semi-annual interest on the bonds is collateralized by cash or permitted short-term investments in an amount equal to but not less than 18 months' interest on a rolling basis. Interest collateral also is held at the collateral agent for the benefit of the bondholders. These bonds are fully performing in compliance with terms of the exchange agreements.
Included in foreign outstandings at year-end 1992 were $10.4 million in aggregate (all of which was nonperforming) for countries that management considered to be experiencing severe economic and liquidity problems. There were no such credits outstanding at year-end 1993.
STANDBY LETTERS OF CREDIT
At December 31, 1993, aggregate standby letters of credit (SLC) of various subsidiaries amounted to $1,720 million. The comparable amounts at year-ends 1992 and 1991 were $1,558 million and $1,203 million, respectively. While these dollar amounts represent contingent liabilities of the Corporation's issuing banks, they are not reflected on the Consolidated Balance Sheet since funds had not been advanced against the commitments.
Fees for the "standby" backing are generally recognized over the life of the commitment. Such fees recognized in 1993 and 1992 were $9.6 million and $7.9 million, respectively. At year-end 1993, total SLC fees received but not yet recognized as income amounted to $4.6 million. The comparable figure one year earlier was $4.4 million.
The following table summarizes the Corporation's SLC position as of year-ends 1993 and 1992 according to maturity and type of obligation guaranteed.
STANDBY LETTERS OF CREDIT
The credit risk associated with SLC commitments is evaluated and monitored using the same policies and practices applicable to commercial loans.
RATE SENSITIVITY ANALYSIS
The difference between the amount of earning assets and interest-bearing liabilities that would reprice, within comparable time periods, in response to changes in the level of interest rates is typically referred to as the asset or liability funding gap or the rate sensitivity position. To mitigate the potential impact on earnings of changes in interest rates, it is the Corporation's policy that the cumulative asset or liability gap out to one year may not exceed 10 percent of total earning assets, although individual bank subsidiaries, other than NBD Bank, N.A. (Michigan), may exceed this level from time to time with the approval of NBD Bancorp management. Positions are monitored daily by management and reviewed monthly by the Board of Directors for compliance with corporate policy.
Simulations of the effect on net interest income of changes in interest rate levels, of various magnitudes and over various time periods, are periodically reviewed by management to determine, given the probability of interest rate changes, whether changes in the composition of the balance sheet are prudent.
As highlighted in the accompanying table, at December 31, 1993, the Corporation's interest rate sensitivity showed a net asset sensitive position of $606 million (1.6 percent of earning assets) within a one-year maturity range, a net liability sensitivity of $1,636 million (4.4 percent of earning assets) out to six months, and a net liability sensitive position of $1,784 million (4.8 percent of earning assets) in the shorter maturity range of 1-90 days.
RATE SENSITIVITY OF EARNING ASSETS AND INTEREST-BEARING LIABILITIES
At year-end 1993, total earning assets exceeded aggregate interest-bearing liabilities by $7,113 million. These assets were funded by demand deposits and equity capital of the Corporation. These interest-free sources funded 19.2 percent of total earning assets at that date.
Beginning in the second quarter of 1984, the Corporation entered into a series of interest rate swaps. The primary purposes of these rate management swaps has been to provide a greater assurance of fixing the net interest spread on certain earning assets in the investment, loan and lease financing portfolios and, to a lesser extent, to hedge certain long-term debt costs. At the end of 1993, there were $1,381 million of interest rate swap contracts outstanding for these purposes, as shown in the following table.
ANALYSIS OF INTEREST RATE MANAGEMENT SWAP POSITION
AS OF DECEMBER 31, 1993:
By itself, the effect of carrying the interest rate management swap position was to reduce the Corporation's aggregate net interest margin by 16 basis points and 15 basis points during 1993 and 1992, respectively. However, the purpose of entering into these rate swaps is to provide greater flexibility in overall asset and liability management policies.
An additional $1.4 billion of customer accommodation contracts, unrelated to the funding of specific earning assets of the Corporation, were outstanding at December 31, 1993.
The creditworthiness of each counterparty to a rate swap is analyzed under the same procedures that would apply to a commercial loan request. The transaction is also subject to the approval of the Credit Policy Committee.
LIQUIDITY CONSIDERATIONS
The parent holding company has four primary sources to meet its liquidity requirements -- the commercial paper market, established credit facilities from unaffiliated banks, capital markets and dividends from its subsidiaries.
Funds raised in the commercial paper market are primarily employed to support the activities of the mortgage banking subsidiaries. The Corporation's ability to attract funds from this market on a regular basis and at a competitive cost is fostered by the highest credit ratings given by the major credit rating agencies for commercial paper -- P1 from Moody's and A1+ from Standard & Poor's. Commercial paper borrowings averaged $143 million in 1993, $191 million in 1992 and $128 million in 1991.
During 1990, NBD Bancorp established a $200 million revolving credit with a group of unaffiliated banks. This credit facility was renewed at $180 million in 1991 for a two-year period with the right to convert to a three-year term loan. No drawings have been made under this facility, and its conversion feature was extended to August of 1995 during the past year.
The parent company has gone to the capital markets on four occasions in the past three years to issue a total of $750 million of long-term debt and preferred purchase units, of which $150 million was raised in 1993. An additional $200 million of ten-year, 6 1/4% subordinated debt was issued by NBD Bank, N.A. (Michigan) in 1993. At December 31, 1993, a total of $846 million of parent company debt was outstanding, with the earliest scheduled maturity falling in the
year 2002. (As noted earlier, on January 27, 1994, the corporation called for redemption, on March 15, 1994, the $200 million outstanding 7 1/4% Convertible Subordinated Debentures Due 2006.) The parent company's subordinated debt ratings were reaffirmed in 1993 at A1 (Moody's) and A+ (Standard & Poor's).
The cash requirements of the parent company can also be met to a limited extent by dividends from its subsidiaries, which are the primary source of funds for dividend payments to shareholders. During the past three years, NBD Bank, N.A. (Michigan) declared dividends totaling $379.9 million, while upstream dividends from other subsidiaries amounted to $252.6 million. NBD Bancorp itself declared dividends to shareholders amounting to $479.9 million over this same three-year period, a 41.8 percent payout of Net Income.
* * *
NBD Bank, N.A. (Michigan) supports the funding requirements of its wholly-owned subsidiary bank in Canada and merchant bank in Australia by guaranteeing their deposit and other liabilities.
Management considers the liquidity of NBD Bank, N.A. (Michigan) to be excellent. In addition to a high degree of liquidity embodied in the loan and securities portfolios, the bank has demonstrated an ability to raise substantial amounts of funds on a consistent basis during all phases of the credit cycle by: (1) borrowing federal funds (i.e., the excess reserves of other financial institutions) through a long-established and extensive network of correspondent banks; (2) issuing large CDs, deposit notes and bank notes to regular customers, as well as in the national money markets; (3) entering into repurchase agreements whereby U. S. Government and U. S. Government Agency securities are pledged as collateral for short-term borrowings, and (4) pledging acceptable assets as collateral for certain tax collection monies held temporarily in the U. S. Treasury Tax and Loan accounts in the commercial banking system. Borrowings from the Federal Reserve Bank can be relied upon for short periods of time to meet unexpected liquidity needs of a temporary nature. No such borrowings occurred during the last three years at NBD Bank, N.A. (Michigan).
The ability to attract funds from the money and capital markets on a regular basis is enhanced by the strong credit ratings of NBD Bank, N.A. (Michigan). Among these ratings, as of December 31, 1993, were: (1) Aa2 and P1 from Moody's on the bank's long-and short-term deposits, respectively; (2) AA from Standard & Poor's on the bank's long-term deposits and letter of credit-backed issues, and (3) Aa3 and AA- from Moody's and Standard & Poor's, respectively, on the bank's long-term subordinated debt issues.
* * *
The Corporation's other subsidiary banks typically meet their need for funds from core deposit growth and through asset management policies designed to maintain adequate liquidity. Individual banks also raise money from time to time in the federal funds market, through repurchase agreements, Treasury Tax and Loan account borrowings and borrowings from the Federal Reserve Bank. They can also draw upon the resources of NBD Bank, N.A. (Michigan) and the parent holding company for temporary liquidity needs, as well as to meet longer term capital needs and requirements.
ORGANIZATIONAL PERFORMANCE
Net Income contributed by the major organizational units of the Corporation is presented in the table below. NBD Bank, N.A., with 330 banking offices in Michigan and 10 foreign offices, accounted for approximately 62 percent of the Corporation's assets at year-end 1993 and 64 percent of consolidated net income for the year.
The Indiana banks operated 233 offices and accounted for 25 percent of the Corporation's total assets at year-end 1993 and 23 percent of earnings. Results in Indiana for 1993 reflect an after-tax gain of $5.7 million from the sale of certain charge card receivables to an outside party early in the year, as well as a $4.9 million after-tax profit on the sale of an equity investment in a nonbank financial services firm. Their earnings for 1992 were substantially reduced by special merger-related charges and provisions amounting to $85.3 million (after tax effect).
The earnings of the Illinois banks comprised 12 percent of the Corporation's Net Income in 1993. With 39 banking offices, they also accounted for 12 percent of consolidated corporate assets at year-end 1993.
In its third full year of operation, the Ohio bank operated 24 offices and accounted for less than 2 percent of the Corporation's year-end assets and less than 1 percent of consolidated earnings.
The substantial increase in the operating earnings of the mortgage companies during the 1991-93 period can be attributed to increased gains on the sale of mortgages and wider funding spreads on the mortgages held for sale. An increased flow of mortgage servicing fees from a larger loan servicing portfolio also favorably affected earnings in 1992.
Parent company losses primarily reflect the fact that the majority of the Corporation's consolidated long-term debt is an obligation of the parent company. This includes $200 million of convertible debentures issued in 1991, $400 million of subordinated notes and debentures issued in 1992, and $150 million of debt securities issued in 1993.
ANALYSIS OF ORGANIZATIONAL PERFORMANCE
- ------------------------- * Restated for mergers.
** 1993 results are net of the cumulative effect of SFAS No. 109 -- $4.5 million for NBD Bank, N.A., $(0.2) million for the Indiana banks, $(1.8) million for the Illinois banks and $1.5 million for all other subsidiaries, the total of which is $4.0 million for consolidated NBD Bancorp.
*** 1992 results are net of the after-tax effect of merger-related charges and the cumulative effect of SFAS No. 106 -- $25.7 million for NBD Bank, N.A., $91.5 million for the Indiana banks, $4.1 million for the Illinois banks and $1.9 million for all other subsidiaries, the total of which is $123.2 million for consolidated NBD Bancorp.
CONSOLIDATED SIX-YEAR SUMMARY AVERAGE BALANCES AND AVERAGE RATES
- ------------------------- Note: Average rates are on a fully taxable equivalent basis.
CONSOLIDATED SIX-YEAR SUMMARY (CONTINUED) AVERAGE BALANCES AND AVERAGE RATES
- ------------------------- Note: Average rates are on a fully taxable equivalent basis.
CONSOLIDATED SIX-YEAR SUMMARY (CONTINUED) SUPPLEMENTARY FINANCIAL DATA
- ------------------------- Note: Rates of return and per share data are after SFAS No. 109 and No. 106 Cumulative Adjustments.
CONSOLIDATED SIX-YEAR SUMMARY (CONTINUED) SUPPLEMENTARY FINANCIAL DATA
- ------------------------- Note: Rates of return and per share data are after SFAS No. 109 and No. 106 Cumulative Adjustments.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and independent auditors' report are set forth in this Form 10-K on the following pages:
(b) The following additional data is set forth in this Form 10-K on the following pages:
MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY
TO THE SHAREHOLDERS:
Management of NBD Bancorp, Inc. has prepared and is responsible for the financial statements and for the integrity and consistency of other related information contained in the Annual Report and Form 10-K. In the opinion of management, the financial statements, which necessarily include amounts based on management estimates and judgments, have been prepared in conformity with generally accepted accounting principles appropriate to the circumstances.
The Corporation maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with the Corporation's authorizations and policies, and that transactions are properly recorded so as to permit preparation of financial statements that fairly present financial position and results of operations in conformity with generally accepted accounting principles. Internal accounting controls are augmented by written policies covering standards of personal and business conduct and an organizational structure providing for division of responsibility and authority.
The effectiveness of and compliance with established control systems is monitored through a continuous program of internal audit and credit examinations. In recognition of cost-benefit relationships and inherent control limitations, some features of the control systems are designed to detect rather than prevent errors, irregularities and departures from approved policies and practices. Management believes the system of controls has prevented or detected on a timely basis any occurrences that could be material to the financial statements and that timely corrective actions have been initiated when appropriate.
With the ratification of the shareholders, the Corporation engaged the firm of Deloitte & Touche, independent auditors, to render an opinion on the financial statements. The independent auditors have advised management that they were provided with access to all information and records necessary to render their opinion.
The Board of Directors exercises its responsibility for the financial statements and related information through the Audit Committee, which is composed entirely of outside directors. The Audit Committee meets regularly with management, the General Auditor of the Corporation and the independent auditors to assess the scope of the annual audit plan, to review status and results of audits, to review the Annual Report and Form 10-K including major changes in accounting policies and reporting practices and to approve non-audit services rendered by the independent auditors.
The independent auditors also meet with the Audit Committee, without management being present, to afford them the opportunity to express their opinion on the adequacy of compliance with established corporate policies and procedures and the quality of financial reporting.
January 19, 1994
NBD BANCORP, INC.
CONSOLIDATED BALANCE SHEET (in thousands except share data)
ASSETS
The accompanying notes are an integral part of the financial statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
NBD BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME (in thousands except share data)
The accompanying notes are an integral part of the financial statements.
NBD BANCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands except share data)
The accompanying notes are an integral part of the financial statements.
NBD BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
The accompanying notes are an integral part of the financial statements.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of NBD Bancorp, Inc. and its subsidiaries (the Corporation) conform to generally accepted accounting principles.
(A) CONSOLIDATION:
The consolidated financial statements of the Corporation include the accounts of NBD Bancorp, Inc. (the Parent) and its majority-owned subsidiary companies. All material inter-company accounts and transactions have been eliminated.
(B) STATEMENT OF CASH FLOWS:
Cash and Due From Banks is considered Cash and Cash Equivalents in the Consolidated Statement of Cash Flows.
(C) SECURITIES:
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective December 31, 1993.
SFAS No. 115 requires the following: (a) Debt securities that the Corporation has the positive intent and ability to hold to maturity are to be classified as Held-to-Maturity and reported at amortized cost; (b) Debt and equity securities that are bought and held principally for the purpose of selling in the near term are to be classified as Trading and reported at fair value, with unrealized gains and losses included in earnings; and (c) Debt and equity securities not classified as Held-to-Maturity or Trading are to be classified as Available-for-Sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity, net of tax.
Prior to December 31, 1993, the Corporation classified securities purchased with the intent and the ability to hold to maturity as Investment Securities and reported them at amortized cost. If it was subsequently determined that certain investment securities were to be sold, their reported value was adjusted as necessary to the lower of cost or fair value with the adjustments included in Securities Gains(Losses). Securities purchased that the Corporation intended to sell prior to maturity were classified as Other Money Market Investments and recorded at the lower of amortized cost or fair value. Fair value adjustments were included in Securities Gains(Losses). The Corporation's accounting for Trading Account Securities was not changed by the adoption of SFAS No. 115; these securities are carried at fair value with unrealized gains and losses included in Other Non-Interest Income.
Gains and losses realized on the sale of Investment Securities are determined by the specific identification method and included in Securities Gains(Losses).
(D) LOANS:
Loans are generally reported at the principal amount outstanding, net of unearned income. Non-refundable loan origination and commitment fees and certain costs of origination are deferred and either included in interest income over the term of the related loan or commitment or, if the loan is held for sale, included in Other Non-Interest Income when the loan is sold.
Mortgages Held For Sale are valued at the lower of aggregate cost or fair value. Unrealized losses, as well as realized gains or losses, are included in Other Non-Interest Income.
Interest income on loans is accrued as earned. Except for consumer loans, loans are placed on non-accrual status and previously accrued but unpaid interest is reversed against current period interest income when collectibility of principal or interest is considered doubtful, payment of principal or interest is 90 days or more past due, or the loan is completely or partially charged off. Interest income on loans considered doubtful or 90 days or more past due is recorded as collected. Collections of principal and interest on charged-off loans are applied in the following sequence: (1) as a reduction of remaining principal balance; (2) as recovery of principal charged off; and (3) as interest income.
Consumer loans are not placed on a non-accrual status because they are charged off when 120 days to 150 days past due. Accrued but unpaid interest is generally reversed against current period interest income when the loan is charged off.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(E) ALLOWANCE FOR POSSIBLE CREDIT LOSSES:
The Allowance is maintained at a level considered by management to be adequate to provide for probable loan and lease losses inherent in the portfolio. Management's evaluation is based on a continuing review of the loan and lease portfolio and includes consideration of the actual loan and lease loss experience, the present and prospective financial condition of borrowers, balance of the loan and lease portfolio, industry and country concentrations within the portfolio and general economic conditions.
(F) BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to operations over the estimated useful lives of the assets and is computed on either the straight-line or accelerated depreciation method. The estimated useful lives are generally 10 to 35 years for buildings and building improvements, and three to 10 years for furniture and equipment.
Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.
Maintenance, repairs and minor alterations are expensed as incurred.
(G) INTANGIBLE ASSETS:
The unamortized amount of intangible assets is included in Other Assets. Goodwill, representing the excess of the cost of investments in consolidated subsidiaries over the fair value of net assets acquired, is amortized on a straight-line basis over periods ranging from 15 to 25 years.
Other intangible assets such as purchased mortgage servicing rights, core deposits, and credit card relationships are amortized using various methods over the periods benefited.
(H) INCOME TAXES:
The Corporation adopted SFAS No. 109, "Accounting For Income Taxes," effective January 1, 1993. SFAS No. 109 requires an asset and liability approach to accounting and reporting for income taxes. Under this approach, current and deferred income taxes payable and refundable are remeasured annually using provisions of then enacted tax laws and rates. SFAS No. 109 also changed the criteria for recognition and measurement of deferred income tax benefits.
Prior to January 1, 1993, the Corporation accounted and reported for income taxes in accordance with Accounting Principles Board Opinion (APB) No. 11, "Accounting For Income Taxes." Under APB No. 11, income tax expense was based on income as reported in the financial statements. Deferred income tax liabilities and benefits were measured using tax rates in effect when the deferred item was first created, and were not adjusted for subsequent changes in the statutory tax rate.
(I) INTEREST RATE CONTRACTS:
The Corporation enters into interest rate contracts to manage the market risk of its assets and liabilities (hedge contracts), as a source of fee income (customer contracts), and to generate profits (trading contracts).
Hedge contracts reduce the Corporation's exposure to interest rate changes that cause financial instruments to decrease in value or to be more costly to settle. Income or loss on a hedge contract is accrued over its life and is included in Net Interest Income. Any gain or loss from early termination of a hedge contract is deferred and amortized to the earlier of the maturity date of the hedged asset or liability, or the original expiration date of the contract. If the hedged asset or liability is disposed of, any unrealized or deferred gain or loss on the related hedge contract is included in determining the gain or loss on the disposition.
Any fee, including the initial bid/offer spread, on a customer contract is recognized as Other Non-Interest Income over the life of the contract.
Customer contracts and trading contracts are recorded at fair value, with changes in their value recorded as Other Non-Interest Income.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(J) FOREIGN CURRENCY EXCHANGE AND TRANSLATION:
The Corporation distinguishes between (1) adjustments arising principally from translation of foreign entity financial statements into U.S. dollar equivalents, which are recorded in a separate component of shareholders' equity, and (2) translation gains or losses arising from transactions conducted in foreign currencies, which are recorded in Other Non-Interest Income.
Foreign exchange positions on forward contracts are valued monthly at market rates and the unrealized gain or loss is included in Other Non-Interest Income.
(K) LETTERS OF CREDIT AND GUARANTEES:
In the normal course of business, the Corporation issues and participates in letters of credit and financial guarantees. Fees are accrued over the life of the agreements and included in Other Non-Interest Income.
(L) POSTRETIREMENT BENEFITS OTHER THAN PENSION:
The Corporation adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1992. This Statement requires that the expected cost of providing postretirement benefits be recognized in the financial statements during an employee's active service period. Prior to 1992, the Corporation's practice was to expense these benefits when paid.
(M) INCOME PER SHARE:
Primary per share amounts are based on the weighted average number of shares outstanding throughout the year and the assumed exercise of stock options. Fully diluted per share amounts assume conversion of all outstanding convertible debt of the Corporation and the elimination of related after-tax interest expense.
(N) RECLASSIFICATION:
Prior years' financial statements have been reclassified to conform with the current financial statement presentations.
2. CASH AND DUE FROM BANKS
The subsidiary banks of the Corporation are required to maintain non-interest-bearing reserve balances with the Federal Reserve Bank based on a percentage of the subsidiary banks' deposits. During 1993 and 1992, the average reserve balances were approximately $308,100,000 and $297,900,000, respectively.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES
The Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective December 31, 1993. Following are the carrying value (i.e., fair value) and amortized cost of Investment Securities Available-for-Sale, and the carrying value (i.e., amortized cost) and fair value of Investment Securities Held-to-Maturity at DECEMBER 31, 1993:
Following are the carrying value (i.e., amortized cost) and fair value of Investment Securities at DECEMBER 31, 1992:
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The maturity distribution of investment securities at December 31, 1993, is shown below. The distribution of mortgage-backed securities is based on average expected maturities. Actual maturities may differ because issuers may have the right to call or prepay obligations.
Proceeds from the sale of Investment Securities during 1993 were $66,037,000 resulting in gross realized gains of $9,047,000 and gross realized losses of $129,000. Securities Gains in 1993 also included $410,000 of gains realized on the sale of Other Money Market Investments. Proceeds from the sale of Investment Securities during 1992 were $703,193,000 resulting in gross realized gains of $9,516,000 and gross realized losses of $7,902,000. Proceeds from the sale of Investment Securities during 1991 were $1,102,863,000 resulting in gross realized gains of $12,827,000 and gross realized losses of $4,082,000.
Assets, principally Investment Securities, carried at approximately $5,868,081,000 were pledged at December 31, 1993, to secure public deposits (including deposits of $27,870,000 of the Treasurer, State of Michigan), repurchase agreements and for other purposes required by law.
Excluded from the Consolidated Statement of Cash Flows is the reclassification to Investment Securities Available-for-Sale of $88.9 million of United Mexican States obligations previously classified as Loans, and $30.9 million of obligations previously classified as Other Money Market Investments. These reclassifications were made concurrent with the implementation of SFAS No. 115 as of December 31, 1993.
4. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The changes in the Allowance for Possible Credit Losses for 1993, 1992 and 1991 are summarized below:
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This statement requires that an impaired loan be measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate. The statement is effective for fiscal years beginning after December 15, 1994. The Corporation has not determined the impact that adoption of the standard will have on the financial statements.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
Depreciation and amortization expense was $65,914,000 in 1993, $59,976,000 in 1992 and $54,409,000 in 1991.
Rental expense for leased properties and equipment totaled $42,453,000 in 1993, $41,814,000 in 1992 and $40,679,000 in 1991. Aggregate future minimum rental payments on operating leases having non-cancelable lease terms in excess of one year amounted to $211,515,000 as of December 31, 1993; minimum annual rental payments for such leases are $25,443,000 in 1994 and do not exceed $21,909,000 for any year thereafter.
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
At December 31, 1993, the Parent had an unused revolving credit of $180 million, convertible to a term loan at the option of the Corporation, to support general corporate financing needs. An annual commitment fee of 17 1/2 basis points is paid on the credit facility.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
The following is a summary of long-term debt:
The 7 1/4% Convertible Subordinated Debentures Due 2006 are convertible, in whole or in part, into shares of common stock of the Parent at any time prior to maturity at a conversion price of $30.40 per share, subject to adjustment in certain events. Interest on the notes is payable semiannually on March 15 and September 15. During 1993, $15,000 of the Debentures were converted. Subsequent to December 31, 1993, the debentures were called by the Parent for redemption on March 15, 1994, at a redemption price of $1,050.75 per $1,000 of the principal amount. Holders who elect to convert between the March 1, 1994, interest payment record date and the March 15, 1994, redemption date will be entitled to accrued interest to the date of conversion. Holders may not convert after March 15, 1994, and interest will cease to accrue after redemption.
The 7 1/4% Fixed Rate Subordinated Debentures Due 2004 will mature on August 15, 2004. The Debentures are unsecured, subordinated to all present and future Senior Indebtedness of the Parent, and are not redeemable prior to maturity. Interest is payable semiannually on February 15 and August 15.
The 8.10% Subordinated Notes Due 2002 will mature on March 1, 2002. The Notes are unsecured, subordinated to all present and future Senior Indebtedness of the Parent, and are not redeemable prior to maturity. Interest is payable semiannually on March 1 and September 1. In connection with these Notes, the Corporation has entered into interest rate swap contracts to exchange the fixed rate on $120,000,000 of the Notes for a floating rate. The contracts mature on the same date as the Notes. The Notes, coupled with the interest rate swap contracts, provide the Corporation with $120,000,000 of funding at an approximate effective interest rate of the six-month LIBOR plus 0.25 percent.
Each 7 1/2% Preferred Purchase Unit consists of a 7.40% subordinated debenture due May 10, 2023, in a principal amount of $25 and a related purchase contract paying fees of 0.10% per year. The contract requires the purchase on May 10, 2023, of one depositary share representing a one-fourth interest in a share of 7 1/2% cumulative preferred stock of NBD Bancorp at a purchase price of $25 per depositary share.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Floating Rate Subordinated Notes Due 2005 will mature on the interest payment date in December 2005 at par. Interest on the Notes is payable quarterly in arrears at a rate of 1/4 of 1 percent per annum above the LIBOR for three- month Eurodollar deposits. In no event will the rate be less than 5.25 percent per annum.
The 6 1/4% Fixed Rate Subordinated Notes Due 2003 will mature on August 15, 2003. The Notes are unsecured, subordinated to the claims of depositors and other creditors of NBD Bank, N.A. (Michigan), and are not redeemable prior to maturity. Interest is payable semiannually on February 15 and August 15.
The Bank Notes are unsecured and unsubordinated debt obligations of NBD Bank, N.A. (Michigan). The Bank Notes are offered with maturities from twelve months to ten years and are issued in denominations of $250,000 or any amount in excess thereof that is a multiple of $1,000. Each Note bears interest at a fixed rate that is established by the bank at the time of issuance. The interest payment dates on the Bank Notes are January 15 and July 15 of each year.
The Senior Notes are 8.75% fixed rate notes originally issued by NBD Indiana, Inc. on May 1, 1987. The debt provisions call for no principal payments during the first ten years, then equal principal payments at the end of the 10th, 11th and 12th years. In addition, NBD Indiana, Inc. prepaid $1,000,000 of 11.00% Senior Notes during 1993.
Aggregate long-term debt of $154,784,000, $68,921,000, $53,379,000, $91,447,000 and $6,710,000 will mature in 1994, 1995, 1996, 1997 and 1998, respectively.
8. PENSION AND OTHER EMPLOYEE BENEFITS
The Corporation maintains pension plans (the Pension Plans) covering substantially all full-time salaried employees. The Pension Plans are non-contributory, defined benefit plans which provide benefits based on years of service and compensation level. The Corporation's policy is to fund the Pension Plans according to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Plan assets are stated at market value and are composed primarily of equity securities and debt securities issued by the U.S. Government and its agencies and corporations.
In addition, the Corporation maintains separate unfunded nonqualified pension restoration plans (the Restoration Plans) for certain officers when the defined benefits provided under the terms of the Pension Plans exceed limits imposed by federal tax law on benefits payable from qualified plans.
The pension expense is comprised of:
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the Plans' funded status and amounts recognized in the consolidated balance sheet at December 31:
The funded status of the Pension Plans as of December 31, 1993, includes plan assets of $75,880,000, accumulated benefit obligation of $85,607,000, and projected benefit obligation of $112,809,000 relating to a pension plan maintained by NBD Indiana, Inc. (formerly INB Financial Corporation, or INB), a wholly-owned subsidiary of NBD Bancorp, Inc. The INB plan will be merged with the NBD Bancorp, Inc. plan on January 1, 1994.
The assumptions used in determining the actuarial present value of the projected benefit obligations are set forth below:
Service cost in 1992 includes $4,014,000 and $245,000 for the Pension Plans and the Restoration Plans, respectively, of additional expense for individuals who elected to accept an early retirement option offered to employees of INB.
Postretirement Benefits Other Than Pensions
The Corporation adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1992. The Statement requires that the expected cost of providing postretirement benefits be recognized in the financial statements during employees' active service periods. The Corporation's previous practice was to expense these benefits when paid.
The Corporation provides medical and life insurance for employees who retire after age 55 with a minimum of 15 years of service. The postretirement health care benefit, which can also cover eligible dependents, is contributory with retiree contributions adjusted annually to reflect increases in the Corporation's health care costs. The postretirement life insurance benefit is noncontributory.
The Corporation elected to immediately recognize the January 1, 1992, accumulated benefit obligation which resulted in a charge of $58,924,000 ($37,885,000 after tax) to 1992 earnings. In addition, such postretirement benefit
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
expense for 1992 was $2,981,000 higher ($1,897,000 after tax) than what would have been recorded on the previous accounting basis.
Net periodic postretirement benefit cost included the following components for the years ended December 31:
The Corporation funds postretirement benefit cost as claims are incurred. The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheet at December 31:
For measurement purposes, an 11 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to trend downward to 5.5 percent by the year 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would have increased the accumulated postretirement benefit obligation as of December 31, 1993, by $8,560,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1993 by approximately $1,000,000.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0 percent at December 31, 1993, and 8.0 percent at year-end 1992.
In November 1992, the Financial Accounting Standards Board issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Postemployment benefits are benefits provided to former or inactive employees after employment, but before retirement. This statement, which becomes effective for fiscal years beginning after December 15, 1993, requires accrual of the obligation to provide postemployment benefits. The Corporation does not expect adoption of the statement to have a material impact on the financial statements.
Employee Savings Plans
The Corporation contributes to various 401(k) savings plans and profit sharing plans for the benefit of employees meeting certain eligibility requirements. The Corporation's participation in the 401(k) savings plans is in the form of "matching funds" wherein it contributes an amount equal to the participant's contributions up to 2 percent of the participant's compensation, plus an amount equal to one-half of the participant's contribution between 2 percent and 6 percent of the participant's compensation subject to certain limitations imposed by the IRS.
In addition, INB sponsored a leveraged Employee Stock Ownership Plan (ESOP), wherein the ESOP used the proceeds of a $33.0 million loan from INB to acquire 1,236,500 shares of its common stock. Subsequently, shares of
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
common stock held by the ESOP were allocated to participating employees. The ESOP was terminated in the fourth quarter of 1992.
Total expense for all plans was $15,467,000 in 1993, $12,659,000 in 1992, and $13,958,000 in 1991.
Stock Award and Stock Option Plans
The executive officers of the Corporation and certain other employees are eligible for awards pursuant to the Performance Incentive Plan (the PIP Plan) administered by the Compensation Committee of the Board of Directors. The Committee is empowered to make two types of awards and to establish two groups of awardees.
The first group is selected from among the more senior officers. The Committee is authorized to award to this group Performance Shares. A Performance Share is one share of the Corporation's common stock. Distribution of the awards is tied to the achievement of certain financial performance goals for the Corporation as set by the Committee, over performance periods of at least one year and up to five years in duration. The second group of employees (which excludes the more senior officers) may be awarded shares of the Corporation's common stock, the ultimate distribution of which is not tied to corporate performance goals. The award periods for this group have ranged from one to five years in duration.
The cost of stock awards to the more senior officers is the market value of the stock on the date the award is finally distributed. For the second group of employees, the cost of stock awards is the market value of the stock on the date of grant. The cost, either estimated or actual, of stock awards for both groups is amortized on a straight-line basis over the award duration periods. The unamortized cost of these awards is included in Shareholders' Equity.
The PIP Plan also permits the granting of stock options. The term of each option is determined by the Committee, except that the term of an incentive option may not exceed ten years from the date of grant. No option can be exercised prior to the expiration of the first year of its term. The option price may not be less than the fair market value of the common stock on the date the option is granted.
The Committee may grant stock options that include the right to receive "restoration options." A restoration option allows a participant who exercises the original option prior to retirement, and who pays all or part of the purchase price of the option with shares of the Corporation's common stock, the right to receive an option to purchase the number of shares of the common stock of the Corporation equal to the number of shares used by the participant in payment of the original option price. The exercise price of the restoration option is equal to the fair market value of the common stock on the date the restoration option is granted.
The following table summarizes activity under the option and award plans for 1992 and 1993:
As of December 31, 1993, 966,000 options were exercisable.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The Corporation adopted SFAS No. 109, "Accounting For Income Taxes," effective January 1, 1993. In prior years, the Corporation accounted and reported for income taxes in accordance with APB No. 11, "Accounting for Income Taxes." The cumulative effect of adopting SFAS No. 109 increased 1993 Net Income by $3,950,000. Under the new standard, the change in the statutory tax rate during 1993 from 34% to 35% required a revaluation of deferred tax assets and liabilities, which reduced tax expense in 1993 by $4,805,000 as compared to what tax expense would have been under APB No. 11.
The consolidated income tax expense (benefit) is comprised of the following elements:
The tax effects of certain valuation adjustments to securities, foreign currency translation adjustments, and certain tax benefits related to stock options are recorded directly in Shareholders' Equity. Net tax credits recorded directly in Shareholders' Equity amounted to $9,450,000, $5,330,000 and $1,428,000 for 1993, 1992 and 1991, respectively. In addition, a deferred tax benefit of $21,039,000 was recorded in 1992 as part of the cumulative effect of adopting SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions."
The Corporation has substantial investments in tax-exempt debt securities and loans on which borrowers pay a lower rate of interest than would be required if the income were subject to federal income taxes. Because of these and other differences, Income Tax Expense is less than that computed by applying the federal statutory income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991. A summary reconciliation of reported income tax expense to income tax based on the statutory rate is as follows:
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The significant components of the Corporation's deferred tax assets and liabilities as of December 31, 1993, are as follows:
During 1992 and 1991, in accordance with APB No. 11, deferred income tax provisions were recorded resulting from the differences in the timing of recognizing certain revenues and expenses for financial statement and income tax purposes. The sources of the differences and their income tax effect are as follows:
The cumulative deferred tax benefit amounted to $188,534,000 (which included $21,039,000 attributable to the cumulative effect of adopting SFAS No. 106) and $124,959,000 at December 31, 1992 and 1991, respectively.
10. INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
The Corporation, in the normal course of business, utilizes various types of off-balance sheet financial instruments to accommodate customer needs, to manage the Corporation's exposure to market risk in both on and off-balance sheet instruments and, on a limited scale, to generate trading profits.
Financial instruments may contain elements of both market risk and credit risk. Market risk is the possibility of changes in interest or currency rates that would cause a financial instrument to decrease in value or to be more costly to settle. Credit risk is the possibility of loss arising from failure by a party to the transaction to perform according to terms of the contract. Credit risk is controlled through credit policies, approval processes, collateral requirements, limits, and monitoring procedures similar to the Corporation's practices employed to monitor and control the credit risk of loans and loan commitments.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The contract or notional amount of interest rate and foreign exchange contracts at December 31 are shown below.
The credit risk inherent in interest rate and foreign exchange contracts is measured as the cost of replacing, in the current market, contracts having a positive value with contracts having identical terms. This amount for contracts used to manage market risk is not recorded on the balance sheet and totaled $16,121,000 at December 31, 1993, and $7,232,000 at December 31, 1992. This amount for customer and trading contracts is recorded on the balance sheet.
Interest rate swaps are contracts where the parties agree to exchange fixed rate for floating rate interest payments for a specified time period on a specified (notional) amount.
Options are contracts that allow the holder to purchase or sell a financial instrument, at a specified price, prior to the expiration date of the contract. Caps and floors are contracts under which the holder will receive the interest rate differential when a specified benchmark rate exceeds the cap rate, or falls below the floor rate. The writer of these contracts charges a fee at the outset in exchange for assuming the risk of an unfavorable change in the price of the financial instrument or interest rate underlying the contract.
Futures contracts require the seller of a contract to deliver a specified instrument to the purchaser at a specified price or yield, on a specified future date.
Commitments to purchase securities are made for the future delivery of investment securities at a specified price or yield. The commitments to sell loans are made to protect against a decline in the value of mortgage loans held for sale and of commitments to make mortgage loans at specified rates.
Foreign exchange contracts are agreements to exchange different currencies at specified future dates and rates. Foreign exchange options allow the holder to purchase or sell foreign currency at a specified date and price. The Corporation manages its exposure to changes in exchange rates by establishing limits for individual currencies. Income from revaluing forward and spot foreign exchange positions to market amounted to $12,567,000 in 1993, $11,619,000 in 1992 and $9,885,000 in 1991.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
A commitment to extend credit obligates the Corporation to advance funds to a customer providing there is compliance with terms of the commitment. Commitments generally have fixed expiration dates or other termination clauses, permit the customer to borrow at a market rate of interest and require payment of a fee. Unused commitments totaled $14,917,545,000 and $13,712,602,000 at December 31, 1993 and 1992, respectively. Since many commitments typically expire without being utilized, the total does not necessarily represent future cash requirements.
A standby letter of credit is a conditional commitment issued to guarantee contractual performance by a customer to a third party. Typical uses are to back commercial paper, bond financing and similar transactions of public and private borrowers. Total standby letters of credit outstanding at December 31, 1993 and 1992, were $1,720,489,000 and $1,558,240,000, respectively. The Corporation does not expect, in the normal course of business, to be required to fund these commitments.
A commercial letter of credit is a commitment issued to facilitate the shipment of goods from seller to buyer by guaranteeing payment to the seller. Absent inability of the buyer to perform, fund disbursement to the seller occurs simultaneously with receipt of funds from the buyer. Commercial letters of credit outstanding were $196,654,000 and $225,835,000 at December 31, 1993 and 1992, respectively.
Collateral requirements for the above commitments are based on credit evaluation of the customer.
The Corporation is a defendant in various legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Corporation's financial statements.
12. CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Corporation enters into transactions exposing it to credit risk. At December 31, 1993, the maximum credit exposure for funded transactions of $39.5 billion and unfunded commitments of $17.5 billion was well diversified geographically and by industry, as shown in the following tables.
- ------------------------- *Includes 18 percent of U.S. Government and Agencies
Over 90 percent of the Corporation's assets, revenue and net income are in the banking industry; no individual customer provides 10 percent or more of the Corporation's revenue, and total foreign assets, revenue, income before income taxes and net income comprise less than 10 percent of the Corporation's consolidated amounts.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of this disclosure, the estimated fair value of financial instruments with immediate and shorter-term maturities (generally 90 days or less) is assumed to be the same as the recorded book value. These instruments include the balance sheet lines captioned Cash and Due From Banks, Interest-Bearing Deposits, Federal Funds Sold and Resale Agreements, Other Money Market Investments, Customers' Liability on Acceptances, Short-Term Borrowings, and Liability on Acceptances.
Trading Account Securities are recorded on the balance sheet at fair value, which is based on quoted market prices.
The recorded book and estimated fair values of other financial instruments were as follows:
Based on the valuation techniques discussed below, the excess of estimated fair values over recorded book values was $541 million at December 31, 1993. These values do not recognize the potential earning power of the corporate franchise, including customer relationships, which are inseparable from related financial instruments. In Management's opinion, the fair value of the Corporation is more accurately reflected in the market value of its common stock, which at December 31, 1993, was $4.8 billion, or $1.5 billion in excess of book value.
Estimated fair values were determined as follows:
Investment Securities
Fair values are based on quoted market prices or dealer quotes.
Loans and Leases
The estimated fair value is determined by discounting contractual cash flows from the loans and leases using current lending rates for new loans with similar remaining maturities. The resulting value is reduced by an estimate of losses inherent in the portfolio.
Interest Rate and Foreign Exchange Contracts
Contracts used to hedge assets and liabilities are not recorded on the balance sheet. All other contracts are recorded on the balance sheet at their fair value. Estimated fair values are based on quoted market prices and rates, when available, or the amount the Corporation would receive or pay at current rates to terminate the contracts.
Deposit Liabilities
The fair value of Demand, Savings, and Money Market Deposits with no defined maturity is, by definition, the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the future cash flows to be paid, using the current rates at which similar deposits with similar remaining maturities would be issued.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Long-Term Debt
The fair value of the Corporation's long-term debt is based on quoted market prices, where available. The fair values of other issues are estimated by discounting the future cash flows using the current rates at which similar debt could be issued.
Commitments
Commitments to make or sell loans, standby letters of credit and financial guarantees are not recorded on the balance sheet. Their fair values are estimated as the fees that would be charged customers to enter into a similar agreement with comparable pricing and maturity. For fixed rate commitments, the estimated fair value also considers the difference between current levels of interest rates and the committed rates.
14. RESTRICTIONS ON CASH FLOWS TO THE PARENT COMPANY
National and state banking laws and regulations place certain restrictions on loans or advances made by the banking subsidiaries to members of the affiliated group, including the Parent, and also place restrictions on dividends paid by the subsidiary banks. In addition, the subsidiary banks are subject to the risk-based capital standards of the banking regulatory agencies. At December 31, 1993, net assets of the subsidiary banks not available for dividends or loans amounted to approximately $2,567,886,000.
In 1994, bank subsidiaries may distribute to the Parent (in addition to their 1994 net income) approximately $503,004,000 in dividends without prior approval from bank regulatory agencies.
15. RELATED PARTY TRANSACTIONS
Certain directors and officers of the Parent, their families and certain entities in which they have an ownership interest were customers of the Corporation in 1993 and 1992. Management believes all transactions with such parties, including loans and commitments, were in the ordinary course of business and at normal terms prevailing at the time, including interest rates and collateralization and did not represent more than normal risks. The amount of such loans attributable to persons who were related parties at December 31, 1993, was $71,446,000 at the beginning and $41,942,000 at the end of 1993. During 1993, new loans to related parties totaled $1,180,219,000 and repayments aggregated $1,209,723,000.
16. ACQUISITIONS
On October 1, 1991, the Corporation issued approximately 7,942,000 shares of its common stock in exchange for all of the common stock of FNW Bancorp, Inc., a bank holding company located in Mt. Prospect, Illinois. This combination was accounted for as a pooling of interests.
On January 23, 1992, the Corporation acquired all of the common stock of Gainer Corporation, a bank holding company located in Merrillville, Indiana. The acquisition was accounted for as a purchase and, accordingly, operations of Gainer Corporation are included in the consolidated financial statements since the date of acquisition. Essentially all of the purchase price of $168,379,000 was provided by issuing 5,729,000 shares of the Corporation's stock. The transaction generated $41,260,000 of goodwill, which is being amortized over 15 years using the straight-line method.
On July 1, 1992, the Corporation issued approximately 11,911,000 shares of its common stock in exchange for all the common stock of Summcorp, a bank holding company located in Fort Wayne, Indiana. The combination was accounted for as a pooling of interests.
In June 1992, Summcorp recorded $6.0 million ($4.4 million after tax) of merger-related expenses. These expenses were composed of charges taken to eliminate duplicate facilities and equipment, and intangibles revaluation. Summcorp also recorded a $9.8 million ($5.9 million after tax) provision for possible credit losses, to conform its credit evaluation policies to those of the Corporation, and other merger-related charges totaling $2.9 million ($1.9 million after tax).
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On October 15, 1992, the Corporation issued approximately 29,892,000 shares of its common stock for all of the common stock of INB Financial Corporation, Inc. (INB), of Indianapolis, Indiana. This merger was also accounted for as a pooling of interests.
In the third quarter of 1992, the Corporation recorded $70.1 million ($48.0 million after tax) of merger-related expenses for severance and early retirement, facilities, and equipment and intangibles revaluation. In addition, INB recorded a $41.6 million ($25.1 million after tax) provision for credit losses to conform their credit evaluation policies to those of the Corporation.
17. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information, in the opinion of management, fairly presents the results of operations for such periods.
- ------------------------- * Net income per share before the cumulative effect of the change in accounting principle was $.71 per share (primary) and $.70 per share (fully diluted) in the first quarter 1993, and $.62 per share (primary) and $.60 per share (fully diluted) in the first quarter 1992.
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
A Condensed Balance Sheet as of December 31, 1993 and 1992, and Condensed Statement of Income and Condensed Statement of Cash Flows for each of the three years ended December 31, 1993, for NBD Bancorp, Inc. (Parent Only) are as follows:
NBD BANCORP, INC. (PARENT ONLY)
CONDENSED BALANCE SHEET
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NBD BANCORP, INC. (PARENT ONLY)
CONDENSED STATEMENT OF INCOME
NBD BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NBD BANCORP, INC. (PARENT ONLY)
CONDENSED STATEMENT OF CASH FLOWS
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors NBD Bancorp, Inc. Detroit, Michigan
We have audited the accompanying consolidated balance sheet of NBD Bancorp, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the mergers of NBD Bancorp, Inc. and Summcorp, and of NBD Bancorp, Inc. and INB Financial Corporation ("INB"), each of which has been accounted for as a pooling of interests as described in Note 16 to the consolidated financial statements. We did not audit the statements of income, stockholders' equity, and cash flows of Summcorp and INB for the year ended December 31, 1991, whose combined statements reflect total revenues of $888,101,000 for the year ended December 31, 1991. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Summcorp and INB for 1991, is based solely on the reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NBD Bancorp, Inc. and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation changed its method of accounting for investment securities and income taxes in 1993, and its method of accounting for postretirement benefits other than pensions in 1992, to conform to pronouncements of the Financial Accounting Standards Board.
/s/ Deloitte & Touche DELOITTE & TOUCHE
January 18, 1994 Detroit, Michigan
NBD BANCORP, INC.
SUPPLEMENTARY DATA EARNINGS PER SHARE COMPUTATION
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" and "Security Ownership Reporting" in the definitive Proxy Statement of the Corporation dated April 8, 1994, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated by reference herein.
Reference is made to PART I of this Form 10-K for information as to the executive officers of the Corporation.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Director Compensation" and "Executive Officer Compensation" in the definitive Proxy Statement of the Corporation dated April 8, 1994, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated by reference herein.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the definitive Proxy Statement of the Corporation dated April 8, 1994, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated by reference herein.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the definitive Proxy Statement of the Corporation dated April 8, 1994, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated by reference herein.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS:
- ------------------------- * Refers to page number of this Form 10-K. ** Refers to number of Exhibit to this Form 10-K.
2. SCHEDULES:
All schedules are omitted because they are inapplicable, not required, or the information is included in the financial statements or notes thereto.
3. EXHIBITS:
The Exhibits marked with one asterisk below were filed as Exhibits to the Corporation's Form 10-K for the fiscal year ended December 31, 1989 [file number 1-7127]; the Exhibit marked with two asterisks below was filed as an Exhibit to the Corporation's Form 10-K for the fiscal year ended December 31, 1990; the Exhibit marked with three asterisks below was filed as an Exhibit to the Corporation's Form S-3 Registration Statement filed on February 14, 1992; the Exhibit marked with four asterisks below was filed as an Exhibit to the Corporation's Form S-3 Registration Statement filed on July 15, 1992; the Exhibit marked with five asterisks was filed as Exhibits to the Corporation's Form 8-K Report filed on May 11, 1993; the Exhibit marked with six asterisks below was filed as an Exhibit to the Corporation's Form 10-K for the fiscal year ended December 31, 1991; the Exhibits marked with seven asterisks below were filed as Exhibits to the Corporation's Form 10-K for the fiscal year ended December 31, 1992; the Exhibit marked with eight asterisks below was filed as an Exhibit to the Corporation's Form S-3 Registration Statement filed on April 9, 1993; and all such Exhibits are incorporated herein by reference, the Exhibit numbers in brackets being those in such Forms S-3, 10-K and 8-K.
- ------------------------- Exhibits 10(a) through 10(k) constitute the management contracts and executive compensatory plans or arrangements of the Corporation and its subsidiaries.
(b) Reports on Form 8-K
The Corporation has not filed any reports on Form 8-K during the last quarter of the year covered by this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Detroit, State of Michigan on March 1, 1994.
NBD BANCORP, INC.
/S/ VERNE G. ISTOCK -------------------------- Verne G. Istock, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 1, 1994.
[NBD LOGO]
EXHIBIT INDEX
The Exhibits marked with one asterisk below were filed as Exhibits to the Corporation's Form 10-K for the fiscal year ended December 31, 1989 [file number 1-7127]; the Exhibit marked with two asterisks below was filed as an Exhibit to the Corporation's Form 10-K for the fiscal year ended December 31, 1990; the Exhibit marked with three asterisks below was filed as an Exhibit to the Corporation's Form S-3 Registration Statement filed on February 14, 1992; the Exhibit marked with four asterisks below was filed as an Exhibit to the Corporation's Form S-3 Registration Statement filed on July 15, 1992; the Exhibit marked with five asterisks was filed as Exhibits to the Corporation's Form 8-K filed on May 11, 1993; the Exhibit marked with six asterisks below was filed as an Exhibit to the Corporation's Form 10-K for the fiscal year ended December 31, 1991; the Exhibits marked with seven asterisks below were filed as Exhibits to the Corporation's Form 10-K for the fiscal year ended December 31, 1992; the Exhibit marked with eight asterisks below was filed as an Exhibit to the Corporation's Form S-3 Registration Statement filed on April 9, 1993; and all such Exhibits are incorporated herein by reference, the Exhibit numbers in brackets being those in such Forms S-3, 10-K and 8-K.