Described by the two companies as a "merger of equals", the deal would create the 7th- largest bank in the US. First Chicago, with $72.4bn in assets, is number 10, and NBD, with $47.8bn in assets, is number 18.
Analysts estimated the deal is worth $5.3bn, making it the second-largest bank merger in US history. The name of the new combined operation will be First Chicago NBD Corp, with headquarters in Chicago.
Its principal subsidiary banks will be First National Bank of Chicago, NBD Bank (Michigan), based in Detroit, NBD Bank (Indiana), in Indianapolis, American National Bank and Trust Company of Chicago and FCC National Bank.
"The combination of these two fine banking organisations is part of the continuing consolidation of the financial services industry," Verne Istock, chairman of NBD, said when he announced the merger.
"Our new company will have the scale and capabilities to compete head- to-head with banks and non-banking financial companies across the Midwest, the United States and around the world."
The biggest bank merger in the US, a $5.4bn deal between First Union Corp and First Fidelity Bancorp, was announced last month.
First Chicago's stock lost $1.625 to trade at $59 on the New York Stock Exchange at mid-morning, while NBD gained $1.375 to $33.875, also on the NYSE.
The combined banking company said it expected to make annualised cost savings of $200m, which will be fully realised in 1997. Most of this will come from elimination of the overlap in Chicago-area retail branch expenses. The merged bank will also slash approximately $25bn of low-margin assets from the combined balance sheet over time. The two banks anticipate an estimated restructuring charge of $225 million for merger-related costs.
Prior to the close of the merger, which is anticipated by early next year, the combined operation will buy back about $300mworth of First Chicago and NBD common stock.
Richard Thomas, chairman of First Chicago, will be chairman of the new company until his retirement on 20 May next year. Mr Istock, currently chairman and chief executive officer of NBD, will then take over.
The board of directors of First Chicago also plans to increase the annual dividend rate on its common stock by 20 cents to $2.40 a share.
Common stockholders of First Chicago will get 1.81 shares of common stock of the new First Chicago NBD Corp in exchange for each share of First Chicago common stock. Each share of common stock of NBD will remain outstanding and represent one share of the new company.