1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 1-5805
THE CHASE MANHATTAN CORPORATION
-------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2624428
- ------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
270 PARK AVENUE, NEW YORK, NEW YORK 10017
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 270-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
COMMON STOCK, $1 PAR VALUE 423,482,309
- --------------------------------------------------------------------------------
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
STOCK ON JULY 31, 1997.
2
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FORM 10-Q INDEX
PART I PAGE
Item 1 Financial Statements - The Chase Manhattan Corporation
and Subsidiaries:
Consolidated Balance Sheet at June 30, 1997 and
December 31, 1996. 3
Consolidated Statement of Income for the three months
ended June 30, 1997 and June 30, 1996. 4
Consolidated Statement of Income for the six months
ended June 30, 1997 and June 30, 1996. 5
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1997 and June 30, 1996. 6
Consolidated Statement of Cash Flows for the six months
ended June 30, 1997 and June 30, 1996. 7
Notes to Financial Statements. 8-15
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16-47
PART II
Item 1 Legal Proceedings. 48
Item 2 Sales of Unregistered Common Stock. 48
Item 4 Submission of Matters to a Vote of Security Holders. 48
Item 6 Exhibits and Reports on Form 8-K. 49
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Part I
Item 1.
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
JUNE 30, December 31,
1997 1996
--------- ------------
ASSETS
Cash and Due from Banks $ 16,879 $ 14,605
Deposits with Banks 4,042 8,344
Federal Funds Sold and Securities
Purchased Under Resale Agreements 39,228 28,966
Trading Assets:
Debt and Equity Instruments 37,567 30,377
Risk Management Instruments 29,949 29,579
Securities:
Available-for-Sale 39,463 44,691
Held-to-Maturity (Fair Value: $3,450 and $3,849) 3,463 3,855
Loans (Net of Allowance for Loan Losses of $3,446 and $3,549) 156,511 151,543
Premises and Equipment 3,676 3,642
Due from Customers on Acceptances 2,102 2,276
Accrued Interest Receivable 3,445 3,020
Other Assets 15,708 15,201
--------- ---------
TOTAL ASSETS $ 352,033 $ 336,099
========= =========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 45,396 $ 42,726
Interest-Bearing 67,565 67,186
Foreign:
Noninterest-Bearing 3,698 4,331
Interest-Bearing 67,085 66,678
--------- ---------
Total Deposits 183,744 180,921
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 58,262 53,868
Commercial Paper 4,424 4,500
Other Borrowed Funds 7,874 9,231
Acceptances Outstanding 2,102 2,276
Trading Liabilities 46,706 38,136
Accounts Payable, Accrued Expenses and Other Liabilities 13,053 12,309
Long-Term Debt 13,135 12,714
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 1,390 600
--------- ---------
TOTAL LIABILITIES 330,690 314,555
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 6)
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,980 2,650
Common Stock (Issued 440,743,176 and 440,747,317 Shares) 441 441
Capital Surplus 10,328 10,459
Retained Earnings 9,846 8,627
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (155) (288)
Treasury Stock, at Cost (17,472,937 and 9,936,716 Shares) (1,647) (895)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 20,793 20,994
--------- ---------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 352,033 $ 336,099
========= =========
The Notes to Financial Statements are an integral part of these Statements.
-3-
4
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA)
1997 1996
------- -------
INTEREST INCOME
Loans $ 3,082 $ 3,028
Securities 735 685
Trading Assets 705 388
Federal Funds Sold and Securities Purchased Under Resale Agreements 697 514
Deposits with Banks 114 156
------- -------
Total Interest Income 5,333 4,771
------- -------
INTEREST EXPENSE
Deposits 1,568 1,458
Short-Term and Other Borrowings 1,510 1,087
Long-Term Debt 273 221
------- -------
Total Interest Expense 3,351 2,766
------- -------
NET INTEREST INCOME 1,982 2,005
Provision for Credit Losses 189 250
------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,793 1,755
------- -------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 274 258
Trust, Custody and Investment Management Fees 321 302
Credit Card Revenue 248 233
Service Charges on Deposit Accounts 95 100
Fees for Other Financial Services 392 381
Trading Revenue 491 397
Securities Gains 30 24
Revenue from Equity-Related Investments 179 219
Other Revenue 128 35
------- -------
Total Noninterest Revenue 2,158 1,949
------- -------
NONINTEREST EXPENSE
Salaries 1,110 1,046
Employee Benefits 219 225
Occupancy Expense 193 207
Equipment Expense 193 181
Foreclosed Property Expense -- (8)
Restructuring Charge and Expenses 71 22
Other Expense 685 651
------- -------
Total Noninterest Expense 2,471 2,324
------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,480 1,380
Income Tax Expense 555 524
------- -------
NET INCOME $ 925 $ 856
======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 874 $ 801
======= =======
NET INCOME PER COMMON SHARE:
Primary $ 2.00 $ 1.80
======= =======
Assuming Full Dilution $ 2.00 $ 1.79
======= =======
The Notes to Financial Statements are an integral part of these Statements.
-4-
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Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA)
1997 1996
------- -------
INTEREST INCOME
Loans $ 6,194 $ 6,269
Securities 1,457 1,405
Trading Assets 1,331 801
Federal Funds Sold and Securities Purchased Under Resale Agreements 1,256 1,015
Deposits with Banks 220 328
------- -------
Total Interest Income 10,458 9,818
------- -------
INTEREST EXPENSE
Deposits 3,083 3,102
Short-Term and Other Borrowings 2,812 2,113
Long-Term Debt 530 448
------- -------
Total Interest Expense 6,425 5,663
------- -------
NET INTEREST INCOME 4,033 4,155
Provision for Credit Losses 409 495
------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 3,624 3,660
------- -------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 442 482
Trust, Custody and Investment Management Fees 631 587
Credit Card Revenue 526 466
Service Charges on Deposit Accounts 186 199
Fees for Other Financial Services 775 759
Trading Revenue 913 752
Securities Gains 131 76
Revenue from Equity-Related Investments 343 442
Other Revenue 310 71
------- -------
Total Noninterest Revenue 4,257 3,834
------- -------
NONINTEREST EXPENSE
Salaries 2,234 2,122
Employee Benefits 441 530
Occupancy Expense 380 428
Equipment Expense 383 365
Foreclosed Property Expense 3 (17)
Restructuring Charge and Expenses 101 1,678
Other Expense 1,376 1,311
------- -------
Total Noninterest Expense 4,918 6,417
------- -------
INCOME BEFORE INCOME TAX EXPENSE 2,963 1,077
Income Tax Expense 1,111 310
------- -------
NET INCOME $ 1,852 $ 767
======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 1,746 $ 658
======= =======
NET INCOME PER COMMON SHARE:
Primary $ 3.99 $ 1.48
======= =======
Assuming Full Dilution $ 3.97 $ 1.46
======= =======
The Notes to Financial Statements are an integral part of these Statements.
-5-
6
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
1997 1996
-------- --------
PREFERRED STOCK:
Balance at Beginning of Year $ 2,650 $ 2,650
Redemption of Stock (670) --
-------- --------
Balance at End of Period $ 1,980 $ 2,650
-------- --------
COMMON STOCK:
Balance at Beginning of Year $ 441 $ 458
Retirement of Treasury Stock -- (20)
-------- --------
Balance at End of Period $ 441 $ 438
-------- --------
CAPITAL SURPLUS:
Balance at Beginning of Year $ 10,459 $ 11,075
Retirement of Treasury Stock -- (433)
Shares Issued for Employee Stock-Based Awards and
Certain Related Tax Benefits (131) (210)
-------- --------
Balance at End of Period $ 10,328 $ 10,432
-------- --------
RETAINED EARNINGS:
Balance at Beginning of Year $ 8,627 $ 7,997
Net Income 1,852 767
Retirement of Treasury Stock -- (557)
Cash Dividends Declared:
Preferred Stock (106) (109)
Common Stock (528) (572) (a)
Accumulated Translation Adjustment 1 8
-------- --------
Balance at End of Period $ 9,846 $ 7,534
-------- --------
NET UNREALIZED LOSS ON SECURITIES AVAILABLE-FOR-SALE:
Balance at Beginning of Year $ (288) $ (237)
Net Change in Fair Value of Securities Available-for-Sale,
Net of Taxes 133 (403)
-------- --------
Balance at End of Period $ (155) $ (640)
-------- --------
COMMON STOCK IN TREASURY, AT COST:
Balance at Beginning of Year $ (895) $ (1,107)
Retirement of Treasury Stock -- 1,010
Purchase of Treasury Stock (1,242) (885)
Reissuance of Treasury Stock 490 908
-------- --------
Balance at End of Period $ (1,647) $ (74)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 20,793 $ 20,340
======== ========
(a) Includes fourth quarter 1995 common stock dividends of $80 million
declared and paid by old Chase in the 1996 first quarter.
The Notes to Financial Statements are an integral part of these Statements.
-6-
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Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
1997 1996
-------- --------
OPERATING ACTIVITIES
Net Income $ 1,852 $ 767
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Credit Losses 409 495
Restructuring Charge and Expenses 101 1,678
Depreciation and Amortization 471 406
Net Change In:
Trading-Related Assets (7,702) 1,574
Accrued Interest Receivable (425) 7
Other Assets (232) (2,959)
Trading-Related Liabilities 8,711 (197)
Accrued Interest Payable 118 (152)
Other Liabilities 463 (1,527)
Other, Net (47) 216
-------- --------
Net Cash Provided by Operating Activities 3,719 308
-------- --------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 4,302 2,663
Federal Funds Sold and Securities Purchased Under Resale Agreements (12,546) (14,354)
Loans Due to Sales and Securitizations 10,525 20,976
Other Loans, Net (15,532) (22,288)
Other, Net (123) (429)
Proceeds from the Maturity of Held-to-Maturity Securities 420 613
Purchases of Held-to-Maturity Securities (69) (112)
Proceeds from the Maturity of Available-for-Sale Securities 4,130 5,826
Proceeds from the Sale of Available-for-Sale Securities 37,704 22,575
Purchases of Available-for-Sale Securities (36,782) (29,771)
-------- --------
Net Cash Used by Investing Activities (7,971) (14,301)
-------- --------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 2,670 (1,140)
Domestic Time and Savings Deposits 379 3,728
Foreign Deposits (226) (5,779)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 6,678 16,097
Other Borrowed Funds (1,433) (55)
Other, Net (174) 436
Proceeds from the Issuance of Long-Term Debt and Capital Securities 2,271 820
Repayments of Long-Term Debt (1,069) (917)
Proceeds from the Issuance of Stock 359 712
Redemption of Preferred Stock (670) --
Treasury Stock Purchased (1,660) (882)
Cash Dividends Paid (613) (532)
-------- --------
Net Cash Provided by Financing Activities 6,512 12,488
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks 14 2
-------- --------
Net Increase (Decrease) in Cash and Due from Banks 2,274 (1,503)
Cash and Due from Banks at January 1, 14,605 14,794
-------- --------
Cash and Due from Banks at June 30, $ 16,879 $ 13,291
======== ========
Cash Interest Paid $ 6,307 $ 5,815
-------- --------
Taxes Paid $ 916 $ 915
-------- --------
The Notes to Financial Statements are an integral part of these Statements.
-7-
8
Part I
Item 1. (continued)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of The Chase Manhattan Corporation and
subsidiaries (the "Corporation") are prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and the results of
operations for the interim periods presented have been included. In addition,
certain amounts have been reclassified to conform to the current presentation.
The Corporation adopted, commencing January 1, 1997, the requirements of
Statement of Financial Accounting Standards No. 125 entitled, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), for the following types of transactions: securitizations,
recognitions of servicing assets and liabilities, transfers of receivables with
recourse, loan participations, and extinguishments of liabilities. The adoption
of SFAS 125 did not have a material effect on the Corporation's earnings,
liquidity, or capital resources.
In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 127 entitled, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127"),
which deferred for one year, the effective date of SFAS 125 as applied to
securities lending, repurchase agreements and other secured financing
transactions. The Corporation believes that the adoption of SFAS 127 will not
have a material effect on the Corporation's earnings, liquidity or capital
resources.
NOTE 2- EARNINGS PER SHARE
For a discussion of the Corporation's current earnings per share policy,
reference is made to Note One of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996 ("1996 Annual Report"). For a discussion of
the FASB's Statement of Financial Accounting Standards No. 128 entitled,
"Earnings per Share", see the Accounting and Reporting Developments section on
page 43 of this Form 10-Q.
-8-
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Part I
Item 1. (continued)
NOTE 3 - TRADING ACTIVITIES
For a discussion of the Corporation's trading revenue, see Management's
Discussion and Analysis ("MD&A") on page 21 of this Form 10-Q.
TRADING ASSETS AND LIABILITIES
Trading assets and trading liabilities (which are carried at estimated fair
value, after taking into account the effects of legally enforceable master
netting agreements relating to risk management instruments) are presented in the
following table for the dates indicated.
JUNE 30, December 31,
(in millions) 1997 1996
-------- ------------
Trading Assets - Debt and Equity Instruments:
U.S. Government, Federal Agencies and Municipal Securities $ 9,958 $ 8,523
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 2,380 1,486
Debt Securities Issued by Foreign Governments 12,035 12,284
Debt Securities Issued by Foreign Financial Institutions 5,940 3,569
Corporate Securities 2,553 1,873
Loans and Other 4,701 2,642
-------- --------
Total Trading Assets - Debt and Equity Instruments (a) $ 37,567 $ 30,377
======== ========
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $ 15,173 $ 14,227
Foreign Exchange Contracts 13,619 13,760
Equity, Commodity and Other Contracts 1,232 1,667
Allowance for Credit Losses for Risk Management Instruments (75) (75)
-------- --------
Total Trading Assets - Risk Management Instruments $ 29,949 $ 29,579
======== ========
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $ 15,705 $ 14,622
Foreign Exchange Contracts 13,814 12,867
Equity, Commodity and Other Contracts 1,173 1,202
-------- --------
Trading Liabilities - Risk Management Instruments 30,692 28,691
Securities Sold, Not Yet Purchased 13,302 7,242
Structured Notes 2,712 2,203
-------- --------
Total Trading Liabilities $ 46,706 $ 38,136
======== ========
(a) Includes emerging markets instruments of $5,692 million at June 30,
1997 and $5,500 million at December 31, 1996.
NOTE 4 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note One
of the Corporation's 1996 Annual Report.
The valuation of available-for-sale securities, including securities classified
as loans which are subject to the provisions of Statement of Financial
Accounting Standards No. 115 entitled, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), resulted in a net after-tax
unfavorable impact of $155 million on the Corporation's stockholders' equity at
June 30, 1997, compared with a net after-tax unfavorable impact of $288 million
at December 31, 1996. The change from the 1996 year-end was the result of
decreases in U.S. dollar interest rates during the 1997 second quarter, thereby
causing an increase in the market value of the securities portfolio.
-9-
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Part I
Item 1. (continued)
Net gains from available-for-sale securities sold in the second quarter and
first six months of 1997 amounted to $30 million (gross gains of $79 million and
gross losses of $49 million) and $131 million (gross gains of $195 million and
gross losses of $64 million), respectively. Net gains on such sales for the same
periods in 1996 amounted to $24 million (gross gains of $77 million and gross
losses of $53 million) and $76 million (gross gains of $151 million and gross
losses of $75 million), respectively.
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale securities,
including the impact of related derivatives, were as follows for the dates
indicated:
JUNE 30, 1997 (IN MILLIONS) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- -------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $20,490 $ 17 $ 200 $20,307
Collateralized Mortgage Obligations 2,148 2 2 2,148
Other, primarily U.S. Treasuries 7,738 -- 232 7,506
Obligations of State and Political Subdivisions 230 -- -- 230
Debt Securities Issued by Foreign Governments 7,292 61 17 7,336
Corporate Debt Securities 588 24 5 607
Equity Securities 906 169 78 997
Other, primarily Asset-Backed Securities (a) 346 1 15 332
------- ------- ------- -------
Total Available-for-Sale Securities $39,738 $ 274 $ 549 $39,463
======= ======= ======= =======
December 31, 1996 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $20,961 $ 18 $ 285 $20,694
Collateralized Mortgage Obligations 2,293 1 2 2,292
Other, primarily U.S. Treasuries 12,250 3 193 12,060
Obligations of State and Political Subdivisions 325 2 -- 327
Debt Securities Issued by Foreign Governments 6,893 100 3 6,990
Corporate Debt Securities 923 43 14 952
Equity Securities 957 116 25 1,048
Other, primarily Asset-Backed Securities (a) 328 1 1 328
------- ------- ------- -------
Total Available-for-Sale Securities $44,930 $ 284 $ 523 $44,691
======= ======= ======= =======
(a) Includes collateralized mortgage obligations of private issuers which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
-10-
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Part I
Item 1. (continued)
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity securities for
the dates indicated were as follows:
JUNE 30, 1997 (IN MILLIONS) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $1,464 $ 2 $ 10 $1,456
Collateralized Mortgage Obligations 1,890 4 9 1,885
Other, primarily U.S. Treasuries 53 -- -- 53
Other, primarily Asset-Backed Securities (a) 56 -- -- 56
------ ------ ------ ------
Total Held-to-Maturity Securities $3,463 $ 6 $ 19 $3,450
====== ====== ====== ======
December 31, 1996 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $1,584 $ 4 $ 8 $1,580
Collateralized Mortgage Obligations 2,075 6 9 2,072
Other, primarily U.S. Treasuries 73 -- -- 73
Other, primarily Asset-Backed Securities (a) 123 1 -- 124
------ ------ ------ ------
Total Held-to-Maturity Securities $3,855 $ 11 $ 17 $3,849
====== ====== ====== ======
(a) Includes collateralized mortgage obligations of private issuers which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
NOTE 5 - LOANS
For a discussion of the accounting policies relating to loans, including
securities classified as loans which are subject to the provisions of SFAS 115,
as well as impaired loans pursuant to SFAS 114, reference is made to Notes One
and Four of the Corporation's 1996 Annual Report. The following table reflects
the amortized cost and estimated fair value of loans measured pursuant to SFAS
115 (which are all available-for-sale), including the impact of related
derivatives, for the dates indicated.
(in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
JUNE 30, 1997 $1,556 $ 152 $ 213 $1,495
====== ====== ====== ======
December 31, 1996 $1,869 $ 93 $ 369 $1,593
====== ====== ====== ======
There were no net gains or losses in the second quarter or first six months of
1997 related to the disposition of available-for-sale emerging market
securities, compared with a net loss of $30 million in the 1996 second quarter
and a net loss of $65 million in the 1996 first six months.
-11-
12
Part I
Item 1. (continued)
The following table sets forth information about the Corporation's impaired
loans. The Corporation uses the discounted cash flow method as its primary
method for valuing impaired loans.
JUNE 30, December 31,
(in millions) 1997 1996
-------- ------------
Impaired Loans with an Allowance $ 482 $ 535
Impaired Loans without an Allowance (a) 140 182
------ ------
Total Impaired Loans $ 622 $ 717
====== ======
Allowance for Impaired Loans under
SFAS 114 (b) $ 169 $ 194
------ ------
Average Balance of Impaired Loans
during the year-to-date period ended: $ 671 $1,104
------ ------
Interest Income Recognized on Impaired
Loans during the year-to-date period ended: $ 5 $ 30
------ ------
(a) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the loan. Such
loans do not require an allowance under SFAS 114.
(b) The Allowance for Impaired Loans under SFAS 114 is a part of the
Corporation's overall Allowance for Loan Losses.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
In the fourth quarter of 1996 and first quarter of 1997, the Corporation
established three separate statutory business trusts, each wholly owned by the
Corporation, which issued an aggregate $1,390 million in capital securities, net
of discount. The capital securities qualify as Tier 1 Capital for the
Corporation. The proceeds from each issuance by a trust of its capital
securities were invested in a corresponding series of junior subordinated
deferrable interest debentures of the Corporation. The sole assets of each
statutory business trust are these debentures. The Corporation has fully and
unconditionally guaranteed each of the business trusts' obligations under each
trust's capital securities. Each trust's capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures at
their stated maturity or earlier redemption.
The following is a summary of the Corporation's outstanding capital securities,
net of discount, issued by each trust:
Amount of
Capital Securities,
Net of Discount Stated Maturity Interest Rate Interest
Name of Trust (in millions) of Capital Securities of Capital Securities Payment Dates
- ------------- ------------- --------------------- --------------------- -------------
Chase Capital I $ 600 12/1/2026 7.67% Semi-annual - commencing 6/1/97
Chase Capital II 494 2/1/2027 LIBOR + .50% Quarterly - commencing 5/1/97
Chase Capital III 296 3/1/2027 LIBOR + .55% Quarterly - commencing 6/1/97
------------
Total $ 1,390
============
-12-
13
Part I
Item 1. (continued)
NOTE 8 - PREFERRED STOCK OF SUBSIDIARY
Chase Preferred Capital Corporation ("CPCC"), a real estate investment trust
established for the purpose of acquiring, holding and managing real estate
mortgage assets, is a wholly-owned subsidiary of The Chase Manhattan Bank. On
September 18, 1996, CPCC issued 22 million shares of 8.10% Cumulative Preferred
Stock, Series A, with a liquidation preference of $25 per share. Dividends are
cumulative, are payable quarterly and are recorded as minority interest expense
by the Corporation. The Series A Preferred Shares are treated as Tier 1 Capital
for the Corporation.
For a further discussion of the Corporation's Series A Preferred Shares,
reference is made to Note Seven of the Corporation's 1996 Annual Report.
NOTE 9 - RISK-BASED CAPITAL
For a discussion of the calculation of the Corporation's risk-based capital
ratios, as well as the various regulatory guidelines which are applicable to the
Corporation, reference is made to Note Sixteen of the Corporation's 1996 Annual
Report.
The following table presents capital ratios for the Corporation and its
significant banking subsidiaries (reference is made to Note One of the 1996
Annual Report, for a discussion of the Corporation's significant banking
subsidiaries). Assets and capital amounts for the Corporation's banking
subsidiaries reflect intercompany transactions, whereas the respective amounts
for the Corporation reflect the elimination of intercompany transactions.
The Chase Texas
JUNE 30, 1997 ($ in millions) Corporation Manhattan Bank Commerce Chase USA
Tier 1 Capital Ratio (a)(c) 7.79% (d) 7.54% 7.72% 9.83%
Total Capital Ratio (a)(c) 11.38% (d) 11.03% 10.78% 12.56%
Tier 1 Leverage Ratio (b)(c) 6.63% (d) 6.08% 6.76% 10.49%
Tier 1 Capital $ 20,752 $ 16,517 $ 1,403 $ 2,501
Total Qualifying Capital 30,325 24,153 1,959 3,196
Risk-Weighted Assets 266,494 218,960 18,174 25,443
Adjusted Average Assets 312,858 271,491 20,748 23,837
(a) Tier 1 Capital or Total Capital, as applicable, divided by
risk-weighted assets. Risk-weighted assets include assets and
off-balance sheet positions, weighted by the type of instruments and
the risk weight of the counterparty, collateral or guarantor.
(b) Tier 1 Capital divided by adjusted average assets (net of allowance for
credit losses, goodwill and certain intangible assets).
(c) The provisions of SFAS 115 do not apply to the calculation of these
ratios.
(d) Excludes the assets and off-balance sheet financial instruments of the
Corporation's securities subsidiary, Chase Securities Inc., as well as
the Corporation's investment in such subsidiary. Including the
Corporation's securities subsidiary, the June 30, 1997 Tier 1 Capital,
Total Capital and Tier 1 Leverage ratios were 8.02%, 11.89% and 6.21%,
respectively.
NOTE 10 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
The Corporation utilizes various derivative and foreign exchange financial
instruments for trading purposes and for purposes other than trading, such as
asset/liability management ("ALM"). These financial instruments represent
contracts with counterparties where payments are made to or from the
counterparty based upon specific interest rates, currency levels, other market
rates or on terms predetermined by the contract. These derivative and foreign
exchange transactions involve, to varying degrees, credit risk and market risk.
For a discussion of these risks, see Note Seventeen of the Corporation's 1996
Annual Report.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR TRADING PURPOSES: The
financial instruments used for the Corporation's trading activities are
disclosed in Note 3 of this Form 10-Q. The credit risk relating to the
Corporation's trading activities is recorded on the balance sheet. The effects
of market risk (gains or losses) on the Corporation's trading activities have
been reflected in trading revenue, as the trading instruments are
marked-to-market on a daily basis.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR PURPOSES OTHER THAN TRADING
(SUCH AS ALM ACTIVITIES): A discussion of the Corporation's objectives and
strategies for employing derivative and foreign exchange instruments for ALM
activities is included on pages 55-58 of the Corporation's 1996 Annual Report. A
discussion of the accounting policies relating to derivatives used for ALM
activities is provided in Note One of the Corporation's 1996 Annual Report.
-13-
14
Part I
Item 1. (continued)
The following table summarizes the aggregate notional amounts of interest rate
and foreign exchange contracts as well as the credit exposure related to these
instruments (after taking into account the effects of legally enforceable master
netting agreements) for the dates indicated below. The table should be read in
conjunction with the descriptions of these products and their risks included in
Note Seventeen of the Corporation's 1996 Annual Report.
NOTIONAL AMOUNTS (a) CREDIT EXPOSURE
JUNE 30, December 31, JUNE 30, December 31,
(in billions) 1997 1996 1997 1996
--------- ------------ --------- ------------
INTEREST RATE CONTRACTS
Futures, Forwards and Forward Rate Agreements
Trading $ 1,635.4 $ 1,209.6 $ 0.3 $ 0.5
Asset and Liability Management 68.4 30.8 -- --
Interest Rate Swaps
Trading 2,815.2 2,300.3 11.5 11.4
Asset and Liability Management 99.0 96.4 0.6 0.7
Purchased Options
Trading 312.3 172.7 3.3 2.3
Asset and Liability Management 18.3 15.5 -- --
Written Options
Trading 415.5 199.4 -- --
Asset and Liability Management 1.5 1.4 -- --
--------- --------- --------- ---------
Total Interest Rate Contracts $ 5,365.6 $ 4,026.1 $ 15.7 $ 14.9
========= ========= ========= =========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,502.5 $ 1,308.6 $ 9.9 $ 10.0
Asset and Liability Management 65.7 60.1 -- --
Other Foreign Exchange Contracts (b)
Trading 320.2 267.4 3.7 3.8
Asset and Liability Management 3.6 4.2 -- --
--------- --------- --------- ---------
Total Foreign Exchange Contracts $ 1,892.0 $ 1,640.3 $ 13.6 $ 13.8
========= ========= ========= =========
EQUITY, COMMODITY AND OTHER
CONTRACTS
Trading $ 53.9 $ 45.7 $ 1.2 $ 1.7
--------- --------- --------- ---------
Total Equity, Commodity
and Other Contracts $ 53.9 $ 45.7 $ 1.2 $ 1.7
========= ========= ========= =========
Total Credit Exposure Recorded on the Balance Sheet $ 30.5 $ 30.4
(a) The notional amounts of exchange-traded interest rate contracts,
foreign exchange contracts, and equity, commodity and other contracts
were $900.9 billion, $8.2 billion and $2.9 billion, respectively, at
June 30, 1997, compared with $521.5 billion, $9.5 billion and $6.4
billion, respectively, at December 31, 1996. The credit risk amounts of
these contracts were minimal since exchange-traded contracts
principally settle daily in cash.
(b) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $102.8 billion, $104.3 billion
and $116.7 billion, respectively, at June 30, 1997, compared with $89.6
billion, $94.2 billion and $87.8 billion, respectively, at December 31,
1996.
-14-
15
Part I
Item 1. (continued)
NOTE 11 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
The following table summarizes the Corporation's credit risk that is represented
by contract amounts relating to lending-related financial instruments at June
30, 1997 and December 31, 1996. The table should be read in conjunction with the
description of these products and their risks included in Note Eighteen of the
Corporation's 1996 Annual Report.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
JUNE 30, December 31,
(in millions) 1997 1996
Credit Card Lines $ 58,305 $54,192
Other Commitments to Extend Credit 105,440 94,278
Standby Letters of Credit and Guarantees (Net of Risk
Participations of $4,678 and $5,205) 33,507 30,843
Other Letters of Credit 5,812 5,588
Customers' Securities Lent 44,091 38,715
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of the Corporation's fair value methodologies, see Note Twenty
of the Corporation's 1996 Annual Report. The following table presents the
carrying value and estimated fair value at June 30, 1997 and December 31, 1996
of the Corporation's financial assets and liabilities valued under SFAS 107.
JUNE 30, 1997 December 31, 1996
---------------------------------------------- -----------------------------------------------
CARRYING ESTIMATED APPRECIATION/ Carrying Estimated Appreciation/
(in millions) VALUE FAIR VALUE (DEPRECIATION) Value Fair Value (Depreciation)
Total Financial Assets $ 344,124 $ 347,113 $ 2,989 $ 328,504 $ 330,831 $ 2,327
========= ========= ========= =========
Total Financial Liabilities $ 329,918 $ 330,465 (547) $ 314,144 $ 314,626 (482)
========= ========= --------- ========= ========= ---------
Estimated Fair Value in Excess
of Carrying Value $ 2,442 $ 1,845
========= =========
Derivative contracts used for ALM activities are included in the above amounts
and are valued using market prices or pricing models consistent with methods
used by the Corporation in valuing similar instruments used for trading
purposes. The following table presents the carrying value and estimated fair
value of derivatives contracts used for ALM activities.
JUNE 30, 1997 December 31, 1996
-------------------------------------- --------------------------------------
CARRYING ESTIMATED NET UNRECOGNIZED Carrying Estimated Net Unrecognized
(in millions) VALUE FAIR VALUE GAINS/(LOSSES) Value Fair Value Gains/(Losses)
Total Financial Assets $ 172 $ 28 $(144)(a) $ 222 $ 135 $ (87)
Total Financial Liabilities $ 265 $ 86 $(179)(a) $ 76 $ (67) $(143)
(a) Unrecognized gains and losses related to total financial assets were
$229 million and $373 million, respectively, at June 30, 1997.
Unrecognized gains and losses related to total financial liabilities
were $251 million and $430 million, respectively, at June 30, 1997.
-15-
16
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
1997 1997 1996 SIX MONTHS ENDED
SECOND First Second JUNE 30,
QUARTER Quarter Quarter 1997 1996
--------- --------- --------- --------- ---------
EARNINGS:
Income Before Restructuring Costs $ 969 $ 946 $ 870 $ 1,915 $ 1,807 (e)
Restructuring Costs (After-Tax) (a) (44) (19) (14) (63) (1,040)
--------- --------- --------- --------- ---------
Net Income $ 925 $ 927 $ 856 $ 1,852 $ 767
========= ========= ========= ========= =========
Net Income Applicable to Common Stock $ 874 $ 872 $ 801 $ 1,746 $ 658
========= ========= ========= ========= =========
INCOME PER COMMON SHARE:
Primary:
Income Before Restructuring Costs $ 2.11 $ 2.02 $ 1.83 $ 4.13 $ 3.81 (e)
Restructuring Costs (After-Tax) (a) (0.11) (0.04) (0.03) (0.14) (2.33)
--------- --------- --------- --------- ---------
Net Income $ 2.00 $ 1.98 $ 1.80 $ 3.99 $ 1.48
========= ========= ========= ========= =========
Assuming Full Dilution:
Income Before Restructuring Costs $ 2.11 $ 2.01 $ 1.82 $ 4.11 $ 3.77 (e)
Restructuring Costs (After-Tax) (a) (0.11) (0.04) (0.03) (0.14) (2.31)
--------- --------- --------- --------- ---------
Net Income $ 2.00 $ 1.97 $ 1.79 $ 3.97 $ 1.46
========= ========= ========= ========= =========
PER COMMON SHARE:
Book Value $ 44.44 $ 42.59 $ 40.47 $ 44.44 $ 40.47
Market Value $ 97.06 $ 93.88 $ 70.63 $ 97.06 $ 70.63
Common Stock Dividends Declared (b) $ 0.62 $ 0.62 $ 0.56 $ 1.24 $ 1.12
COMMON SHARES OUTSTANDING:
Average Common and Common Equivalent Shares 434.9 441.0 444.8 438.0 445.4
Average Common Shares Assuming Full Dilution 436.0 442.6 448.4 439.7 450.2
Common Shares at Period End 423.3 428.3 437.1 423.3 437.1
PERFORMANCE RATIOS: (AVERAGE BALANCES)
Income Before Restructuring Costs: (c)
Return on Assets 1.11% 1.13% 1.10% 1.12% 1.15%
Return on Common Stockholders' Equity 20.20% 19.54% 19.00% 19.87% 19.27%(e)
Return on Total Stockholders' Equity 18.76% 18.15% 17.58% 18.45% 17.84%
Net Income: (c)
Return on Assets 1.06% 1.11% 1.08% 1.09% 0.49%
Return on Common Stockholders' Equity 19.23% 19.12% 18.67% 19.18% 7.47%
Return on Total Stockholders' Equity 17.91% 17.78% 17.30% 17.84% 7.57%
Efficiency Ratio (d) 58.0% 57.6% 58.4% 57.8% 59.0%
Efficiency Ratio - Excluding Securitizations (d) 54.4% 54.5% 56.2% 54.4% 57.1%
(a) Represents merger-related restructuring costs. See page 24 for further
discussion.
(b) The Corporation increased its quarterly common stock dividend from
$0.56 per share to $0.62 per share in the first quarter of 1997.
(c) Based on annualized income amounts.
(d) Excludes restructuring costs, foreclosed property expense, and
nonrecurring items.
(e) Includes nonrecurring items which had a $70 million net favorable
impact on net income. Excluding these items, net income was $1,737
million, primary earnings per share was $3.66, fully-diluted earnings
per share was $3.62 and return on common stockholders' equity was
18.48%.
-16-
17
Certain forward-looking statements contained herein are subject to risks and
uncertainties. The Corporation's actual results may differ materially from those
set forth in such forward-looking statements. Reference is made to the
Corporation's reports filed with the Securities and Exchange Commission, in
particular the Form 8-K dated July 15, 1997, and the Corporation's Annual Report
to Stockholders on Form 10-K for the year ended December 31, 1996 (the "1996
Annual Report") for a discussion of factors that may cause such differences to
occur.
OVERVIEW
The Chase Manhattan Corporation (the "Corporation") reported second quarter 1997
operating net income of $969 million, compared with second quarter 1996 results
of $870 million. Primary earnings per share ("primary EPS") in the second
quarter of 1997 were $2.11, compared with $1.83 in the same 1996 period. Fully
diluted earnings per share ("fully-diluted EPS") in the second quarter of 1997
were $2.11, a 16% increase from $1.82 in the comparable 1996 quarter. The return
on common stockholders' equity on an operating basis was 20.2% for the second
quarter of 1997 versus 19.0% for the comparable period of 1996. Operating net
income excludes merger-related restructuring costs in both periods. Reported net
income in the 1997 second quarter was $925 million, compared with $856 million
in the prior-year second quarter. Primary and fully-diluted EPS were both $2.00
in 1997, compared with $1.80 and $1.79, respectively, in 1996.
The Corporation's operating net income for the first six months of 1997 was
$1,915 million, compared with $1,737 million for the same 1996 period. Primary
and fully-diluted EPS for the first six months of 1997 were $4.13 and $4.11,
respectively, compared with $3.66 and $3.62, respectively, for the same periods
of 1996. Operating net income excludes merger-related restructuring costs in
both periods and the net effect of favorable nonrecurring items totaling $70
million in the first quarter of 1996. Reported net income for the first six
months of 1997 was $1,852 million compared with $767 million for 1996. Primary
and fully-diluted EPS were $3.99 and $3.97, respectively, for the first six
months of 1997, compared with $1.48 and $1.46, respectively, for the same 1996
period.
The Corporation's total operating revenue (which excludes nonrecurring items)
for the 1997 second quarter was $4,140 million, an increase of 5% from the same
1996 period. For the first six months of 1997, total operating revenue increased
to $8,246 million or 3% from the comparable 1996 period. On a managed basis,
which excludes the impact of credit card securitizations, total operating
revenue for the 1997 second quarter increased 7% to $4,410 million and for the
1997 six months increased 6% to $8,748 million.
The 1997 second quarter included incremental merger savings of $185 million,
which were offset by investment spending and increased incentive costs related
to strong trading results. The quarter also included restructuring expenses of
$71 million, bringing cumulative restructuring expenses to $265 million. The
Corporation currently expects that merger-related expenses will rise $100
million to $125 million from its previous estimate of $250 million.
The Corporation's efficiency ratio improved to 58.0% for the second quarter of
1997, compared with 58.4% for the comparable 1996 period. Excluding the impact
of credit card securitizations, the efficiency ratio for the second quarters of
1997 and 1996 was 54.4% and 56.2%, respectively.
The Corporation remains on track to achieve its 1997 financial goals, including
annual earnings per share growth of 15%; return on common equity of 19%; an
efficiency ratio of between 54% to 55% and incremental merger savings of $635
million to $680 million. The Corporation continues to target annual managed
revenue growth of six to eight percent; however, due to investment spending in
targeted growth businesses, the Corporation currently expects the growth in
underlying noninterest operating expense (before merger savings) for the full
year to exceed six percent.
During the 1997 second quarter, the Corporation purchased approximately 6.7
million common shares as part of a stock repurchase plan announced in October of
1996. The Corporation also reissued approximately 1.7 million treasury shares
under the Corporation's employee benefit plans, resulting in a net repurchase of
5.0 million shares of its common stock. During the period from the inception of
the program through June 30, 1997, the Corporation has repurchased 24.3 million
common shares ($2.3 billion) and reissued approximately 6.9 million treasury
shares under the Corporation's benefit plans, resulting in a net repurchase of
17.4 million shares ($1.8 billion) of its common stock.
-17-
18
RESULTS OF OPERATIONS
NET INTEREST INCOME
Reported net interest income for the 1997 second quarter was $1,982 million,
down $23 million from the 1996 second quarter. For the first six months,
reported net interest income was $4,033 million in 1997, a decrease of $122
million from the 1996 level. The 1996 first six months included $54 million of
interest income related to Federal and State tax audit settlements. Excluding
the impact of securitizations and the 1996 tax audit settlements, net interest
income on a managed basis increased 3% in both the 1997 second quarter and first
six months reflecting a higher level of liquid interest-earning assets to
support the Corporation's trading businesses.
SECOND QUARTER SIX MONTHS
------------------------------------------ -------------------------------------------
1997 1996 % Change 1997 1996 % Change
--------- --------- --------- ---------
(in millions)
NET INTEREST INCOME
Managed Basis $ 2,278 $ 2,213 2.9% $ 4,627 $ 4,496(a) 2.9%
Impact of Securitizations (296) (208) -- (594) (395) --
--------- --------- --------- ---------
Reported $ 1,982 $ 2,005 (1.1)% $ 4,033 $ 4,101(a) (1.7)%
========= ========= ========= =========
(in billions)
AVERAGE INTEREST-EARNING ASSETS
Managed Basis $ 298.2 $ 267.0 11.7% $ 290.5 $ 265.0 9.6%
Impact of Securitizations (14.1) (9.9) -- (13.7) (9.1) --
--------- --------- --------- ---------
Reported $ 284.1 $ 257.1 10.5% $ 276.8 $ 255.9 8.2%
========= ========= ========= =========
NET YIELD ON INTEREST-EARNING ASSETS (b)
Managed Basis 3.08% 3.35% -- 3.22% 3.43% (a) --
Impact of Securitizations (.27) (.20) -- (.27) (.19) --
--------- --------- --------- ---------
Reported 2.81% 3.15% -- 2.95% 3.24% (a) --
========= ========= ========= =========
(a) Excludes $54 million of interest income related to tax audit
settlements which was considered a nonrecurring item.
(b) Reflected on a taxable equivalent basis in order to permit comparison
of yields on tax-exempt and taxable assets. For net interest income on
a taxable equivalent basis, and additional information on average
balances and rates, see the Average Balance Sheets on pages 45 and 46.
The reported and managed net yields on average interest-earning assets decreased
in the 1997 second quarter and first six months compared with the same 1996
periods. The declines in net yield are primarily due to a higher level of liquid
assets, driven by the Corporation's trading businesses, and narrower spreads on
interest-earning assets.
-18-
19
Average interest-earning assets retained on the balance sheet increased by 11%
in the second quarter of 1997 and 8% in the first six months of 1997, when
compared with the same 1996 periods, principally as a result of the increase in
liquid interest-earning assets. Liquid interest-earning assets (in particular
trading-related assets) increased in the 1997 second quarter and first six
months by 30% and 23%, respectively, versus the same 1996 periods. Both average
total loans and securities also increased slightly in both 1997 periods, but
decreased as a percentage of total interest-earning assets. The growth in
interest-earning assets in the 1997 second quarter and first six months was
largely funded by an increase in Federal funds purchased and securities sold
under repurchase agreements, which provide short-term funding for
trading-related positions.
AVERAGE INTEREST-EARNING ASSETS
SECOND QUARTER
(in billions) 1997 1996
----------------- -----------------
Loans $156.4 55% $150.6 58%
Securities 44.4 16 42.5 17
Liquid Assets 83.3 29 64.0 25
------ ------ ------ ------
Total $284.1 100% $257.1 100%
====== ====== ====== ======
SIX MONTHS
1997 1996
------------------- -------------------
Loans $154.8 56% $150.1 59%
Securities 44.0 16 42.6 17
Liquid Assets 78.0 28 63.2 24
------ ------ ------ ------
Total $276.8 100% $255.9 100%
====== ====== ====== ======
Management anticipates that, given its current expectations for interest rate
movements in 1997, the Corporation's managed net interest income in 1997 will be
approximately 3% higher than in 1996 (excluding the impact of tax audit
settlements in 1996).
PROVISION FOR CREDIT LOSSES
The Corporation's provision for credit losses, which has equaled net
charge-offs, amounted to $189 million in the 1997 second quarter and $409
million for the first six months of 1997, compared with $250 million and $495
million, respectively, for the prior year's periods. The decreases in the
provision were the result of lower commercial net charge-offs. Consumer net
charge-offs on a retained basis remained relatively constant.
Management currently expects that the provision for credit losses for full-year
1997 (which is anticipated to continue to equal net charge-offs) will be equal
to or lower than the full-year 1996 provision, primarily as a result of the
continued strong performance in the commercial and industrial loan portfolio and
the effects of expected credit card securitizations in the latter half of the
year. For a discussion of the Corporation's net charge-offs, see the Credit Risk
Management Section on pages 30-36.
NONINTEREST REVENUE
Noninterest revenue increased 11% for both the 1997 second quarter and six month
periods across a broad spectrum of fee-based and market sensitive categories,
when compared with each of the corresponding 1996 periods. The Corporation
continues to generate overall fee growth by offering clients integrated
financing and advisory solutions and new products and by generating new
business. Noninterest revenue in the first half of 1997 included a $44 million
gain on the sale of a partially-owned foreign investment and in 1996 included a
$60 million loss on the sale of a building in Japan.
-19-
20
The following table presents the components of noninterest revenue for the
periods indicated.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
------ ------ ------ ------
Corporate Finance and Syndication Fees $ 274 $ 258 $ 442 $ 482
Trust, Custody and Investment Management Fees 321 302 631 587
Credit Card Revenue 248 233 526 466
Service Charges on Deposit Accounts 95 100 186 199
Fees for Other Financial Services 392 381 775 759
------ ------ ------ ------
Total Fees and Commissions 1,330 1,274 2,560 2,493
Trading Revenue 491 397 913 752
Securities Gains 30 24 131 76
Revenue from Equity-Related Investments 179 219 343 442
Other Revenue 128 35 310 71
------ ------ ------ ------
Total $2,158 $1,949 $4,257 $3,834
====== ====== ====== ======
FEES AND COMMISSIONS
Corporate finance and syndication fees were a record $274 million in the 1997
second quarter, rebounding sharply from the first quarter 1997 level of $168
million and increasing by $16 million from the previous record level in the
prior-year's second quarter. During the 1997 second quarter, investment banking
deal flow increased across the full range of market and customer segments and
revenues from securities underwriting grew as the volume of lead mandates
increased in active high-yield and investment grade markets. While the 1997
first half reflects substantial growth in fees from securities underwriting and
other new business initiatives, first half 1997 fees were lower than the 1996
first half as less activity in the leveraged lending market in the 1997 first
quarter adversely impacted fee opportunities as well as 1996 results being
favorably impacted by several significant transactions.
Trust, custody and investment management fees rose 6% to $321 million in the
1997 second quarter and rose 7% to $631 million in the 1997 first six months
when compared with the same 1996 periods. These favorable results were largely
the result of growth in assets under custody, new business initiatives,
increased investment advisory activities, and appreciated market values
resulting in a higher level of assets under management, including in the
Corporation's proprietary Vista mutual funds.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
---- ---- ---- ----
Product Diversification:
Institutional (a) $170 $148 $330 $283
Personal (b) 102 102 203 201
Mutual Fund Fees (c) 24 23 47 42
Other Trust Fees 25 29 51 61
---- ---- ---- ----
Total Trust, Custody and Investment Management Fees $321 $302 $631 $587
==== ==== ==== ====
(a) Represents fees for trustee, agency, registrar, securities lending,
broker clearings, safekeeping and maintenance of securities.
(b) Represents fees for trustee, estate services, custody, advisory and
investment management.
(c) Represents administrative, custody, trustee and other fees in
connection with the Corporation's proprietary mutual funds.
Credit card revenue rose $15 million to $248 million in the 1997 second quarter
and increased 13% for the first six months of 1997, as a result of growth in
managed outstandings, including the new Wal-mart co-branded product. The
increase in revenue for both 1997 periods was partially offset by a rise in net
charge-offs on the securitized portfolio which reduces the excess servicing fees
the Corporation receives from the securitizations. Average managed credit card
receivables (credit card receivables on the balance sheet plus securitized
credit card receivables) grew to $25.6 billion in the second quarter of 1997,
when compared with $23.3 billion for the prior year's comparable period. For a
further discussion of the credit card portfolio and related securitization
activity, see pages 32-33 of this Form 10-Q.
-20-
21
The following table presents the components of fees for other financial services
for the periods indicated.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
---- ---- ---- ----
Fees for Other Financial Services:
Commissions on Letters of Credit and Acceptances $ 74 $ 74 $146 $155
Fees in Lieu of Compensating Balances 74 74 155 148
Mortgage Servicing Fees 62 54 118 104
Loan Commitment Fees 29 30 56 60
Other Fees 153 149 300 292
---- ---- ---- ----
Total $392 $381 $775 $759
==== ==== ==== ====
The higher levels of mortgage servicing fees for both 1997 periods reflect an
increase in mortgage servicing volume largely resulting from the acquisition of
the Source One Mortgage Services Corporation's ("Source One") portfolio in
February 1997.
TRADING REVENUE
The following table sets forth the components of trading revenue for the second
quarter and first six months of 1997 and 1996.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
---- ---- ------ ------
Trading Revenue $491 $397 $ 913 $ 752
Net Interest Income Impact (a) 164 124 337 285
---- ---- ------ ------
Total Trading-Related Revenue $655 $521 $1,250 $1,037
==== ==== ====== ======
Product Diversification:
Interest Rate Contracts (b) $217 $180 $ 400 $ 326
Foreign Exchange Contracts (c) 175 93 344 233
Debt Instruments and Other (d) 263 248 506 478
---- ---- ------ ------
Total Trading-Related Revenue $655 $521 $1,250 $1,037
==== ==== ====== ======
(a) Net interest income attributable to trading activities includes
interest recognized on interest-earning and interest-bearing
trading-related positions as well as management allocations reflecting
the funding cost or benefit associated with trading positions. This
amount is included in the net interest income caption on the
Consolidated Statement of Income.
(b) Includes interest rate swaps, cross-currency interest rate swaps,
foreign exchange forward contracts, interest rate futures, and forward
rate agreements and related hedges.
(c) Includes foreign exchange spot and option contracts.
(d) Includes U.S. and foreign government and government agency securities,
corporate debt securities, emerging markets debt instruments,
debt-related derivatives, equity securities, equity derivatives, and
commodity derivatives.
Trading-related revenues for the 1997 second quarter were at a record level, up
26% from the 1996 second quarter, as a result of a very strong performance
across the breadth of the Corporation's trading and sales platforms amid
favorable market conditions. The Corporation benefited from active market making
and client business in its traditional foreign exchange and interest rate
activities, strong growth in specialty derivative products and continued high
levels of securities trading and underwriting.
The increase in revenue from interest rate contracts was primarily due to higher
volume as a result of volatility exhibited in the overseas markets, in
particular, Europe. The rise in foreign exchange revenue represented strong
earnings across a broad spectrum of currencies, as well as an increase in
cross-currency trading activity in the European markets caused by uncertainty as
to the integration of the European Monetary System. Debt instruments and other
revenue remained at high levels, primarily as a result of strong performances in
both emerging markets in Latin America and Eastern Europe and in the U.S.
securities business.
-21-
22
Trading revenues are affected by many factors, including volatility of
currencies and interest rates, the volume of transactions executed by the
Corporation on behalf of its customers, the Corporation's success in proprietary
positioning, the credit standing of the Corporation, and the steps taken by
central banks and governments which affect financial markets. The Corporation
expects its trading revenues will fluctuate as these factors will vary from
period to period.
OTHER NONINTEREST REVENUE
The following table presents securities gains, revenue from equity-related
investments and the composition of other revenue for the periods indicated.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
----- ----- ----- -----
Securities Gains $ 30 $ 24 $ 131 $ 76
Revenue from Equity-Related Investments 179 219 343 442
Other Revenue:
Residential Mortgage Origination/Sales Activities $ 30 $ (2) $ 61 $ 26
Gain on Sale of a Partially-Owned Foreign Investment -- -- 44 --
Loss on Sale of a Building in Japan -- -- -- (60)
Net Losses on Emerging Markets Securities Sales -- (30) -- (65)
All Other Revenue 98 67 205 170
----- ----- ----- -----
Total Other Revenue $ 128 $ 35 $ 310 $ 71
===== ===== ===== =====
The securities gains resulted from sales from the available-for-sale portfolio,
made in connection with the Corporation's asset/liability management activities.
The higher gains in 1997 were primarily the result of sales of U.S. Government
and agency securities in the 1997 second quarter and of securities overseas in
the 1997 first quarter.
Revenue from equity-related investments, which includes income from venture
capital activities and emerging markets investments, was $179 million in the
1997 second quarter, higher than the recent quarterly average (approximately
$163 million per quarter for the previous eight quarters), but $40 million lower
than the strong results reported in the 1996 second quarter. For the first six
months of 1997, revenue from equity-related investments was $343 million,
compared with $442 million for the 1996 first half. These decreases were largely
the result of a number of large deals recorded in the 1996 first half. At June
30, 1997, the Corporation had equity-related investments with a carrying value
of approximately $3.0 billion. The Corporation believes that equity-related
investments will continue to make contributions to the Corporation's earnings
although the timing of the recognition of gains from these activities is
unpredictable and revenues from such activities could vary significantly from
period to period.
Other revenue increased $93 million in the 1997 second quarter and $239 million
for the first six months, when compared with the prior year's periods. The 1997
results included higher residential mortgage origination and sales revenue
resulting from favorable secondary market conditions and higher gains on
portfolio sales. In addition, the 1996 second quarter and six-month results
included net losses on the disposition of available-for-sale emerging markets
securities of $30 million and $65 million, respectively. The 1997 six-month
results also included a $44 million gain on the sale of a non-strategic,
partially-owned foreign investment, while the 1996 first half results included a
$60 million loss on the sale of a building in Japan.
All other revenue also includes the Corporation's investment in CIT Group
Holdings, Inc., which contributed revenue of $18 million in the second quarter
and $32 million for the first six months of 1997, compared with $14 million and
$25 million in the respective 1996 periods.
NONINTEREST EXPENSE
Noninterest expense, excluding restructuring costs, was $2,400 million in the
1997 second quarter, an increase of 4% from the prior year's quarter, and was
$4,817 million for the first half of 1997, an increase of 2% from the same 1996
period. The 1997 results for both periods included investment spending on new
product offerings and technology as well as higher incentive costs related to
strong trading results. Partially offsetting these expenses were incremental
merger savings of $185 million and $390 million, respectively, in the 1997
second quarter and first six months.
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23
For the 1997 second quarter and first six months, growth in underlying operating
noninterest expense (which excludes restructuring costs, foreclosed property
expense, nonrecurring items and expenses associated with preferred stock
dividends issued by a real estate investment trust ("REIT") subsidiary of the
Corporation, before giving effect to the merger-related cost savings) was 11%
and 9%, respectively. Management of the Corporation believes that underlying
noninterest expense growth for the full year of 1997 will exceed 6% due to
investment spending in targeted growth businesses.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
------- ------- ------- -------
Salaries $ 1,110 $ 1,046 $ 2,234 $ 2,122
Employee Benefits 219 225 441 530
Occupancy Expense 193 207 380 428
Equipment Expense 193 181 383 365
Foreclosed Property Expense -- (8) 3 (17)
Other Expense 685 651 1,376 1,311
------- ------- ------- -------
Total Before Restructuring Charge 2,400 2,302 4,817 4,739
Restructuring Charge and Expenses 71 22 101 1,678
------- ------- ------- -------
Total $ 2,471 $ 2,324 $ 4,918 $ 6,417
======= ======= ======= =======
Efficiency Ratio (a) 58.0% 58.4% 57.8% 59.0%
Efficiency Ratio Excluding Securitizations (a) 54.4% 56.2% 54.4% 57.1%
(a) The computation of the efficiency ratio (noninterest expense as a
percentage of the total of net interest income and noninterest revenue)
excludes restructuring costs, foreclosed property expense, and
nonrecurring items. Nonrecurring items in the first half of 1997
included the gain on a sale of a non-strategic, partially-owned foreign
investment and costs due to the accelerated vesting of stock-based
incentive awards. Nonrecurring items in the first six months of 1996
included aggregate tax benefits and refunds, loss on a sale of a
building in Japan and costs incurred in combining the Corporation's
foreign retirement plans.
SALARIES AND EMPLOYEE BENEFITS
The increase in salaries for the 1997 second quarter and first six months was
primarily due to higher incentive costs as a result of strong trading results.
Also contributing to the increase in salaries for the 1997 six month period was
$50 million of costs incurred in the first quarter of 1997 for the accelerated
vesting of stock-based incentive awards as a result of the improvement in the
Corporation's stock price.
The following table presents the Corporation's full-time equivalent employees at
the dates indicated.
JUNE 30, December 31, June 30,
1997 1996 1996
-------- ------------ --------
Domestic Offices 57,984 57,592 58,136
Foreign Offices 10,148 10,193 10,692
------ ------ ------
Total Full-Time Equivalent Employees 68,132 67,785 68,828
====== ====== ======
The slight increase in full-time equivalent employees since December 31, 1996
reflects planned growth in selected businesses.
Employee benefits in the 1997 second quarter and first six months decreased by
$6 million and $89 million, respectively, from the comparable periods in 1996.
Included in the results for the first six months of 1996 was a $40 million
charge related to conforming retirement benefits provided to foreign employees.
Contributing to the decline in employee benefits during 1997 were lower social
security expenses associated with a lower volume of employee stock options being
exercised during 1997, and to a lesser extent, a slight decline in staff levels
from the prior year period, which reduced medical costs and other staff
benefits.
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense in the 1997 second quarter and first six months decreased by
$14 million and $48 million, respectively, largely as a result of the
consolidation of operations and branch facilities from merger integration
efforts. The higher level of equipment expense was primarily the result of
increased software expenses to enhance processing systems throughout the
Corporation, and technology expenditures necessary to support targeted growth
businesses.
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RESTRUCTURING CHARGE AND EXPENSES
In connection with the merger of The Chase Manhattan Corporation ("Chase") and
Chemical Banking Corporation ("Chemical"), $1.9 billion of one-time
merger-related costs were identified, of which $1.65 billion was taken as a
restructuring charge on March 31, 1996. The remaining merger-related expenses
originally estimated at $250 million, did not qualify for immediate recognition
under an existing accounting pronouncement and were not included in the $1.65
billion charge. Merger-related expenses of $71 million were incurred in the
second quarter 1997, resulting in cumulative to date merger-related expenses of
$265 million.
The Corporation currently expects that merger-related expenses will rise by $100
million to $125 million from its previous estimate of $250 million. These
additional costs primarily relate to technology and systems integration costs,
most of which are expected to be incurred by year-end 1997.
At June 30, 1997, the reserve balance associated with the merger-related $1.65
billion restructuring charge was approximately $675 million, of which $187
million related to severance and other termination-related costs, $442 million
related to the disposition of certain facilities, premises and equipment, and
$46 million related to other merger costs, including costs to eliminate
redundant back office and other operations.
OTHER EXPENSE
The following table presents the components of other expense for the periods
indicated.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
------ ------ ------ ------
OTHER EXPENSE:
Professional Services $ 136 $ 141 $ 269 $ 270
Marketing Expense 107 73 210 163
Telecommunications 73 82 148 167
Amortization of Intangibles 41 42 82 85
Minority Interest 20 11 39 20
All Other 308 302 628 606
------ ------ ------ ------
Total $ 685 $ 651 $1,376 $1,311
====== ====== ====== ======
Other expense for the 1997 second quarter and first six months increased by $34
million and $65 million, respectively, when compared with the second quarter and
first six months of 1996. The increase reflected expenses of $25 million and $48
million, for the respective periods, related to marketing and other costs for
the co-branded Wal-Mart MasterCard and approximately $11 million per quarter of
minority interest expense associated with the REIT, both of which commenced in
the 1996 fourth quarter. Partially offsetting these increases were lower
telecommunications expenses of $9 million and $19 million in the 1997 second
quarter and first six months, respectively, due to the Corporation's sourcing
and other expense-reduction initiatives.
INCOME TAXES
The Corporation recognized income tax expense of $555 million in the second
quarter of 1997, compared with $524 million in the second quarter of 1996. For
the first six months, the Corporation recorded income tax expense of $1,111
million in 1997, compared with $310 million in 1996. The 1996 amount includes
tax benefits related to the restructuring charge as well as aggregate tax
benefits and refunds of $132 million. The Corporation's effective tax rate was
37.5% for both the second quarter and first six months of 1997 and 38.0%
(excluding the aforementioned tax benefits and refunds) for both comparable 1996
periods.
-24-
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LINES OF BUSINESS RESULTS
The Corporation is managed utilizing an economic-based risk-adjusted management
information system ("MIS"). The Corporation's businesses are organized into two
major business franchises, Global Wholesale Banking and Regional and Nationwide
Consumer Banking ("RNCB"). Within each of these franchises, key businesses are
measured independently on a profit and loss and rate of return basis, as well as
by other key performance measures. Highlights of key business performance
measures follow, reflecting MIS results.
LINES OF BUSINESS RESULTS
Global Wholesale Regional and Nationwide
For Three Months Ended June 30, Banking Consumer Banking Total (a)
--------------------------- --------------------------- ---------------------------
(in millions, except ratios) 1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- ---------
Net Interest Income $ 853 $ 809 $ 1,544 $ 1,474 $ 1,982 $ 2,005
Noninterest Revenue 1,478 1,340 638 543 2,158 1,949
Noninterest Expense 1,192 1,178 1,161 1,107 2,400 2,310
--------- --------- --------- --------- --------- ---------
Operating Margin 1,139 971 1,021 910 1,740 1,644
Credit Costs 76 79 476 342 189 242
--------- --------- --------- --------- --------- ---------
Income Before Taxes 1,063 892 545 568 1,551 1,402
Income Taxes 378 340 215 222 582 532
--------- --------- --------- --------- --------- ---------
Operating Net Income 685 552 330 346 969 870
Restructuring Costs (22) (7) (15) (5) (44) (14)
--------- --------- --------- --------- --------- ---------
Net Income $ 663 $ 545 $ 315 $ 341 $ 925 $ 856
========= ========= ========= ========= ========= =========
Average Common Equity $ 9,465 $ 9,619 $ 6,570 $ 6,455 $ 18,227 $ 17,252
Average Assets $ 240,563 $ 219,432 $ 119,494 $ 112,141 $ 348,895 $ 317,579
Return on Common Equity 27.9% 21.8% 19.0% 20.3% 20.2% 19.0%
Efficiency Ratio 51% 55% 53% 55% 58% 58%
Global Wholesale Regional and Nationwide
For Six Months Ended June 30, Banking Consumer Banking Total (a)
--------------------------- --------------------------- ---------------------------
(in millions, except ratios) 1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- ---------
Net Interest Income $ 1,755 $ 1,721 $ 3,085 $ 2,922 $ 4,033 $ 4,101
Noninterest Revenue 2,887 2,632 1,251 1,121 4,257 3,894
Noninterest Expense 2,380 2,332 2,310 2,256 4,814 4,716
--------- --------- --------- --------- --------- ---------
Operating Margin 2,262 2,021 2,026 1,787 3,476 3,279
Credit Costs 151 152 924 687 412 478
--------- --------- --------- --------- --------- ---------
Income Before Taxes 2,111 1,869 1,102 1,100 3,064 2,801
Income Taxes 772 703 434 430 1,149 1,064
--------- --------- --------- --------- --------- ---------
Operating Net Income 1,339 1,166 668 670 1,915 1,737
Restructuring Costs (33) (7) (19) (5) (63) (1,040)
Nonrecurring Items (b) -- -- -- -- -- 70
--------- --------- --------- --------- --------- ---------
Net Income $ 1,306 $ 1,159 $ 649 $ 665 $ 1,852 $ 767
========= ========= ========= ========= ========= =========
Average Common Equity $ 9,454 $ 9,683 $ 6,575 $ 6,415 $ 18,359 $ 17,720
Average Assets $ 236,658 $ 214,926 $ 118,791 $ 111,179 $ 344,108 $ 315,252
Return on Common Equity 27.4% 23.0% 19.3% 19.8% 19.9% 18.5%
Efficiency Ratio 51% 54% 53% 56% 58% 59%
(a) Total column includes Corporate results. See description of Corporate
on page 30.
(b) Nonrecurring items for 1996 include the loss on the sale of a building
in Japan, costs incurred in combining the Corporation's foreign
retirement plans and aggregate tax benefits and refunds.
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GLOBAL WHOLESALE BANKING
Global Wholesale Banking provides financing, advisory, sales and trading, trade
finance, asset management, private banking and operating services to clients
worldwide, including corporations, institutions, governments and wealthy
individuals. Through these businesses, the Corporation is driving towards a new
model for the delivery of global financial services, integrating product
expertise, industry knowledge and geographic reach to effect superior customer
solutions. Global Wholesale Banking operates in more than 50 countries,
including major operations in all key international financial centers. Terminal
Businesses, representing discontinued portfolios (primarily the remaining
refinancing country debt and commercial real estate problem asset and
nonperforming portfolios), are also included in Global Wholesale Banking.
Global Wholesale Banking's operating net income for the second quarter of 1997
was $685 million, an increase of $133 million over the 1996 second quarter.
Operating return on equity in the second quarter of 1997 was 27.9%, compared
with 21.8% in 1996. Global Wholesale Banking's operating net income of $1,339
million and operating return on equity of 27.4% for the first six months of 1997
increased from last year's results of $1,166 million and 23.0%, respectively.
These favorable results were due primarily to significant revenue growth
throughout the Corporation's global markets businesses reflecting higher
trading-related revenue due to increases in foreign exchange and interest rate
activities, strong growth in specialty derivative products and continued high
levels of securities trading and underwriting.
The following table sets forth certain key financial performance measures of the
businesses within Global Wholesale Banking for the periods indicated.
1997 1996
------------------------------------------------ ---------------------------------------------
Three Months Ended June 30, NET EFFICIENCY Net Efficiency
(in millions, except ratios) REVENUES INCOME ROCE RATIO Revenues Income ROCE Ratio
Global Wholesale Banking:
Global Investment Banking
and Corporate Lending $ 560 $ 180 20.2% 36% $ 556 $ 172 19.1% 38%
Global Markets 840 296 55.0 47 683 204 35.1 54
Chase Capital Partners 178 99 34.4 12 212 122 44.8 8
Global Asset Management
and Private Banking 178 33 26.9 69 169 32 25.7 66
Global Services 522 80 28.7 75 483 62 22.3 79
Terminal Businesses 24 (2) NM NM 18 (12) NM NM
1997 1996
--------------------------------------------- ---------------------------------------------
Six Months Ended June 30, NET EFFICIENCY Net Efficiency
(in millions, except ratios) REVENUES INCOME ROCE RATIO Revenues Income ROCE Ratio
Global Wholesale Banking:
Global Investment Banking
and Corporate Lending $1,040 $ 315 17.6% 39% $1,099 $ 352 19.6% 36%
Global Markets 1,721 610 56.5 45 1,307 380 31.8 56
Chase Capital Partners 314 170 29.8 14 460 268 50.7 7
Global Asset Management
and Private Banking 355 66 26.7 69 336 60 24.1 67
Global Services 1,035 156 28.3 76 963 125 22.5 79
Terminal Businesses 25 (20) NM NM 29 (21) NM NM
NM - Not meaningful.
-26-
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GLOBAL INVESTMENT BANKING AND CORPORATE LENDING
Global Investment Banking and Corporate Lending finances and advises
corporations, financial sponsors and governments by providing integrated
one-stop financial solutions and industry expertise to clients globally. Client
industries include broker/dealers, chemicals, healthcare, insurance, media and
telecommunications, multinationals, natural resources, oil and gas, power and
environmental, real estate, retail and transportation. The product offerings
encompass syndicated finance, high-yield securities, mergers and acquisitions,
project finance, restructurings, private placements, lease financing, and
lending. The Corporation continued to maintain its lead position in loan
syndication and in leveraged finance. Net income for the second quarter of 1997
was $180 million, an increase of $8 million from the second quarter of 1996. The
increase reflected higher corporate finance and loan syndication fees, as
investment banking deal flow increased across the full range of market and
customer segments. Contributing to fee growth was a substantial increase in
revenue from securities underwriting as the volume of lead mandates and market
share increased in an active high yield market. For the first six months of
1997, net income of $315 million decreased $37 million compared with the same
period in 1996 due to a decline in net interest income and from less activity in
the leveraged loan market in the first quarter of 1997 adversely impacting fee
opportunities. In addition, while the 1997 first half reflects substantial
growth in fees from new business initiatives, the 1996 results were favorably
impacted by several significant transactions.
GLOBAL MARKETS
Global Markets' activities encompass the trading and sales of foreign exchange,
derivatives, fixed income securities and commodities, including related
origination functions. A leader in capital markets, the Corporation operates 24
hours a day covering the major international cross-border financial markets, as
well as many local markets, in both developed and developing countries. Global
Markets is a recognized world leader in such key activities as foreign exchange,
interest rate swaps and emerging markets debt. The strong growth in
trading-related revenue contributed to the favorable 1997 results. For the
second quarter of 1997, net income was $296 million with a return on common
equity of 55%, compared with the 1996 second quarter results of $204 million and
35%, respectively. For the first six months of 1997, net income was $610 million
with a return on common equity of 57%, representing a substantial increase from
the 1996 first six months results of $380 million and 32%, respectively.
Trading-related revenue of $655 million for the 1997 second quarter reflected
record trading results and an increase of 27% from last year's second quarter
results. These results were driven by a very strong performance across the
breadth of the Corporation's trading and sales platforms amid favorable market
conditions. For the first six months of 1997, trading-related revenue was $1,235
million, an increase of 24% from last year's results, reflecting higher foreign
exchange, derivatives, and securities results worldwide. Also included within
Global Markets are the domestic and international treasury units which have the
primary responsibility of managing the Corporation's asset/liability and
investment securities activities. ALM activities in the treasury units are
managed on a total return basis with one of the major objectives being the
creation of economic value over time. The gross total return from ALM activities
for the second quarter of 1997 is $222 million and for the first six months of
1997 is $423 million.
CHASE CAPITAL PARTNERS
Chase Capital Partners ("CCP") is a global private equity organization with
approximately $4.3 billion under management, including $3.0 billion in
equity-related investments. Through professionals focused on investing in the
United States, Europe, Asia and Latin America, CCP provides equity and mezzanine
financing for a wide variety of investment opportunities. During the first six
months of 1997, CCP's direct investments totaled $270 million in 34 venture
capital, management buyout, recapitalization, growth equity and mezzanine
transactions. Net income for the second quarter of 1997 was $99 million, a 19%
decrease from the 1996 second quarter. For the first six months of 1997, net
income was $170 million, a $98 million decrease from last year's six month
results. These results were primarily due to a decline in equity investment
gains, reflecting a lower number of large transactions in 1997 when compared
with the same periods in 1996.
GLOBAL ASSET MANAGEMENT AND PRIVATE BANKING
The Global Asset Management and Private Banking group serves a global client
base of wealthy individuals and institutional, mutual fund and self-directed
investors. Services include a full range of private banking capabilities,
including trust and estates, custody, investment management for individuals and
institutional investors globally and Vista Mutual Funds (at June 30, 1997, the
fourth largest bank-managed mutual fund family in the U.S.). The Corporation's
total assets under management amounted to $138 billion at June 30, 1997. Net
income of $33 million in the 1997 second quarter was flat compared with the same
1996 period. For the first six months of 1997, net income grew 10% to $66
million, with a return on common equity of 27%, as a result of higher assets
under management and increased investment advisory activities. The second
quarter and first six months of 1996 included a $23 million pre-tax gain on the
sale of deposits.
GLOBAL SERVICES
Global Services is a leading provider of information and transaction services
globally. As the world's largest provider of global custody and a leader in
trust and agency services, Global Services was custodian for over $4.0 trillion
in assets at June 30, 1997 and serviced over $1.5 trillion in outstanding debt.
Global Services also operates the largest U.S. dollar funds transfer business in
the world and is a market leader in FedWire, ACH and CHIPS volume. Net income in
the second quarter of 1997 was $80 million, an increase of $18 million or 29%
from the 1996 second quarter. For the first six months of 1997, net income
increased 25% from last year's results to $156 million. Return on common equity
for the 1997 second quarter was 29% and for the first six months of 1997, it was
28%; excluding the impact of goodwill, the return on tangible common equity was
39% and 38%, respectively. These favorable results are due to strong revenue
growth reflecting an increase in assets under custody and new business
initiatives, as well as continued productivity gains.
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REGIONAL AND NATIONWIDE CONSUMER BANKING (RNCB)
The Regional and Nationwide Consumer Banking franchise, as of June 30, 1997,
included the fourth-largest bank credit card issuer in the U.S., the
third-largest originator and second-largest servicer of residential mortgages,
and a leading provider of auto financing and other consumer lending products.
The Corporation maintains a leading market share position in the New York
metropolitan tri-state area in serving the financial needs of consumers, middle
market commercial enterprises and small businesses. It offers customers
convenient access to financial services by telephone, PC, and the Internet, and
has the most branches and ATMs in the New York metropolitan tri-state area.
Additionally, included in RNCB is Texas Commerce Bank, which is the
second-largest bank in Texas and a leader in providing financial products and
services to businesses and individuals throughout Texas. RNCB also includes a
small international consumer presence which is highly profitable.
RNCB's operating net income for the second quarter of 1997 was $330 million, a
$16 million decrease from the 1996 second quarter. For the first six months of
1997, RNCB's operating net income of $668 million was essentially flat when
compared with last year's results. Higher revenues resulting from increased loan
volume in credit cards and mortgage banking, and the benefit of merger-related
savings, were offset by higher credit provisions for credit cards and auto
loans, and expenses related to marketing initiatives and the development of
new product offerings.
The following table sets forth certain key financial performance measures of the
businesses within RNCB for the periods indicated.
1997 1996
--------------------------------------------- --------------------------------------------
Three Months Ended June 30, NET EFFICIENCY Net Efficiency
(in millions, except ratios) REVENUES (a) INCOME ROCE RATIO Revenues Income ROCE Ratio
Regional and Nationwide
Consumer Banking:
Credit Cards $720 $ 39 9.9% 38% $640 $ 81 21.8% 37%
Retail Payments and
Investments 526 80 29.7 73 508 81 30.3 72
Middle Market 214 56 21.0 47 199 44 16.0 54
Mortgage Banking 186 47 15.1 (b) 54 159 27 8.2 67
National Consumer Finance 162 29 25.3 39 153 37 32.1 43
International Consumer 64 14 72.5 62 63 15 76.2 59
Texas Commerce 325 72 19.2 61 302 65 18.2 64
1997 1996
------------------------------------------------- -----------------------------------------------
Six Months Ended June 30, NET EFFICIENCY Net Efficiency
(in millions, except ratios) REVENUES (a) INCOME ROCE RATIO Revenues Income ROCE Ratio
Regional and Nationwide
Consumer Banking:
Credit Cards $1,450 $ 94 12.3% 39% $1,275 $ 153 20.6% 38%
Retail Payments and
Investments 1,028 157 28.9 73 1,005 142 26.8 75
Middle Market 423 111 21.1 47 416 97 18.0 52
Mortgage Banking 373 93 14.9 (b) 55 324 49 7.4 70
National Consumer Finance 317 56 24.1 41 303 70 31.2 42
International Consumer 129 29 76.6 60 124 29 76.5 59
Texas Commerce 645 138 18.5 62 611 133 18.8 63
(a) Insurance products are managed within Retail Payments and Investments
but are included for reporting purposes in Credit Cards, Mortgage
Banking, and National Consumer Finance, and generated revenues for the
second quarter of $25 million and $16 million in 1997 and 1996,
respectively, and for the first six months of $49 million and $35
million in 1997 and 1996, respectively.
(b) Excluding the impact of goodwill, the return on tangible common equity
was 22% for both the second quarter and the first six months of 1997.
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29
CREDIT CARDS
Chase Cardmember Services ranks as the fourth-largest bank-card issuer in the
United States as of June 30, 1997, with a $26 billion managed portfolio,
inclusive of the co-branded Shell MasterCard (which now totals $4.7 billion in
outstandings). For the second quarter of 1997, net income (reflected on a
managed basis) was $39 million, a $42 million decrease from the 1996 second
quarter. For the first six months of 1997, net income on a managed basis was $94
million, a $59 million decrease from the same period in 1996. Earnings for the
first six months of 1997 were driven by a 14% revenue increase generated from
growth in average managed receivables and the effects of higher fees and
risk-based pricing initiatives. These revenues were more than offset by higher
credit card charge-offs and expenses related to the launch of the Wal-Mart
co-branded credit card.
RETAIL PAYMENTS & INVESTMENTS
At June 30, 1997, Retail Payments and Investments has the leading share of
primary bank relationships among consumers and small businesses in the New York
metropolitan tri-state area. In addition to its tri-state businesses, Retail
Payments and Investments includes discount brokerage services and insurance and
investment products nationwide. Retail Payments and Investments allows customers
to choose the way they handle their financial relationships, offering telephone,
PC and Internet banking in addition to branches and ATMs. Net income in the
second quarter of 1997 of $80 million was flat, compared with the 1996 second
quarter. For the first six months of 1997, net income was $157 million, an
increase of $15 million from the first six months of 1996. The improvement in
net income is due primarily to lower noninterest expense, reflecting staff
reductions and branch consolidations, coupled with the impact of higher deposit
volumes.
MIDDLE MARKET
The Corporation is the premier provider of financial services to middle-market
companies regionally, with a national focus in selected industries (companies
with sales ranging from $10 to $500 million). Also, it is the market leader in
the New York metropolitan tri-state area where it has relationships with 53% of
middle-market companies and is the lead bank for 25% of such companies. Net
income for the 1997 second quarter was $56 million, a $12 million increase when
compared with the 1996 second quarter. For the first six months of 1997, net
income was $111 million, a 14% increase from last year's six month results.
These favorable results are due to higher deposit volume and staff reductions.
MORTGAGE BANKING
At June 30, 1997, Mortgage Banking is the third-largest originator and
second-largest servicer of residential mortgage loans in the U.S., serving more
than 1.8 million customers nationwide. In 1997, the Corporation completed the
acquisition of Source One's $17 billion portfolio of mortgage servicing rights.
In the first six months of 1997, the Corporation originated $15 billion in loans
and at June 30, 1997, the Corporation's servicing portfolio totaled $163
billion. Net income in the second quarter of 1997 was $47 million, a $20 million
increase from the 1996 second quarter. For the first six months of 1997, net
income was $93 million, a $44 million increase from last year's six month
results. For both the 1997 second quarter and the first six months, return on
common equity was 15%; however, excluding the impact of goodwill, the return on
tangible common equity was 22% for both periods. The 1997 six month results were
favorably affected by a 15% increase in revenue reflecting a higher level of
servicing assets, an increase in net interest income due to loan volume growth,
and a 9% decrease in expenses due to merger saves and productivity gains
resulting from the reengineering of the mortgage origination business.
NATIONAL CONSUMER FINANCE
National Consumer Finance is a leading provider of auto financing, home
equity-secured lending, student lending, unsecured consumer lending (Chase
Advantage Credit) and manufactured housing financing. At June 30, 1997, Chase
Auto Finance had approximately $11 billion in outstandings with $4.5 billion in
new originations for the first six months of 1997. Net income in the second
quarter of 1997 was $29 million, an $8 million decrease from the 1996 second
quarter. For the first six months of 1997, net income was $56 million, a $14
million decrease from last year's six month results. The results for both
periods in 1997 include revenue growth due to an increase in loan volume, which
was offset by a higher credit provision. The growth in revenue for the first six
months of 1997, when compared to the same 1996 period, was partially offset by
the impact of a joint venture formed with Sallie Mae in the 1996 fourth
quarter, which is accounted for on the equity basis. Excluding the effects
of this joint venture, revenue grew by 14%.
INTERNATIONAL CONSUMER
International Consumer provides loan, deposit, investment and insurance products
for individuals in Hong Kong. Also included is The Manhattan Card Company
Limited (the Corporation's 54% owned subsidiary) which is the third-largest
credit card issuer in Hong Kong. Additionally, the Corporation has a leading
full-service banking presence in Panama and the Eastern Caribbean, providing
deposit, investment and asset products for individuals, small businesses, large
corporations and government entities. Net income for the second quarter of 1997
was $14 million and, for the first six months of 1997, was $29 million, which
was essentially unchanged when compared with the same 1996 periods. The 1997 six
month results were driven by a 4% growth in revenue reflecting higher loan
volumes, which were offset by higher expenses, primarily due to investment
spending, and higher credit costs.
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TEXAS COMMERCE
Texas Commerce is the primary bank for more large corporations and middle market
companies than any other bank in Texas. Texas Commerce also maintains a strong
consumer banking presence through its 123 locations. Additionally, Texas
Commerce is the largest bank for personal and corporate trust services in the
Southwest. As of June 30, 1997, Texas Commerce had $23 billion in total assets.
Net income for the second quarter of 1997 was $72 million, a $7 million increase
when compared with the 1996 second quarter. For the first six months of 1997,
net income was $138 million, a $5 million increase from last year's six month
results. Return on common equity for both the 1997 second quarter and the first
six months of 1997 was 19%; excluding the impact of goodwill, the return on
tangible common equity was 25% and 24%, respectively. Texas Commerce continues
to contribute solid revenue growth reflecting an increase in corporate finance
fees and higher loan and deposit volumes, partially offset by higher expenses.
CORPORATE
Corporate includes the management results attributed to the Corporation's
investment in CIT and some effects remaining at the Corporate level after the
implementation of management accounting policies, including residual credit
provision and tax expense. The securitized portion of the credit card portfolio
is included in Corporate. Corporate also includes one-time unallocated special
items such as merger-related restructuring charges and expenses as well as tax
refunds. For the second quarter of 1997, Corporate had an operating net loss of
$46 million, compared with a $28 million operating net loss in the 1996 second
quarter. For the first six months, Corporate had an operating net loss of $92
million in 1997, compared with a $99 million operating net loss in 1996. The
economic risk-based methodology for capital is allocated on a business unit
level basis for credit, market and operating risk, with the unallocated portion
included in Corporate. In 1997, Corporate had unallocated equity of $2,192
million in the second quarter and $2,330 million in the first six months,
compared with $1,178 million in the 1996 second quarter and $1,622 million in
the first six months of 1996, reflecting the continued improvement of the
overall risk profile of the Corporation and the generation of retained earnings.
Lines-of-business results are subject to restatement as appropriate whenever
there are refinements in management reporting policies or changes to the
management organization. The current presentation of the lines-of-business
results have been restated to reflect a single, uniform post-merger set of
management accounting policies.
Guidelines exist for assigning expenses that are not directly incurred by the
businesses, such as overhead and taxes, as well as for allocating shareholders'
equity and the provision for credit losses, utilizing a risk-based methodology.
Also, incorporated in the guidelines is a process for matching assets and
liabilities with similar maturity, liquidity and interest characteristics within
each business. Noninterest expenses of the Corporation are fully allocated to
the business units except for special corporate one-time charges. The provision
for credit losses is allocated to the wholesale bank and commercial businesses
based on a consistently applied credit risk methodology and a risk-grading
system appropriate for a business unit's portfolio. For the retail consumer
businesses, provision for credit losses are assigned utilizing a net charge-off
methodology. Long-term expected tax rates are assigned in evaluating the
Corporation's businesses.
CREDIT RISK MANAGEMENT
The following discussion of the Corporation's credit risk management focuses
primarily on developments since December 31, 1996 and should be read in
conjunction with pages 48-54 of the Corporation's 1996 Annual Report. A
description of the Corporation's accounting policies for its nonperforming loans
and assets acquired as loan satisfactions is provided in Note One of the
Corporation's 1996 Annual Report.
LOAN PORTFOLIO
The Corporation's loans outstanding totaled $160.0 billion at June 30, 1997,
compared with $155.1 billion at the 1996 year-end. The increase reflects
increased demand for consumer and commercial loans and was partially offset by
the impact of credit card, auto loan and residential and commercial mortgage
securitizations.
The Corporation's nonperforming assets at June 30, 1997 were $1,106 million, a
decrease of $45 million from the 1996 year-end level. The reduction in
nonperforming assets reflects the ongoing improvement in the Corporation's
credit profile as a result of a lower level of loans being placed on
nonperforming status, repayments, charge-offs, and continuing loan workout and
collection activities.
Total net charge-offs were $189 million in the second quarter of 1997, compared
with $250 million for the comparable period in 1996. For the first six months,
net charge-offs were $409 million, compared with $495 million in 1996. The 1996
first six month's amount excludes a charge of $102 million related to conforming
the credit card charge-off policies of Chase and Chemical. Total net charge-offs
(on a managed basis, which excludes the impact of credit card securitizations)
were $451 million in the 1997 second quarter, compared with $384 million in the
second quarter of 1996. For the first six months, total net charge-offs (on a
managed basis) were $879 million in 1997, compared with $735 million in 1996
(excluding the aforementioned charge of $102 million).
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The following table presents the Corporation's loan-related information for the
dates indicated.
PAST DUE 90 DAYS AND OVER
LOANS NONPERFORMING ASSETS & STILL ACCRUING
---------------------- ---------------------- ----------------------
JUNE 30, Dec 31, JUNE 30, Dec 31, JUNE 30, Dec 31,
(in millions) 1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- --------
DOMESTIC CONSUMER:
Residential Mortgage(a) $ 37,425 $ 36,621 $ 292 $ 249 $ 2 $ 7
Credit Card 12,597 12,157 -- -- 209 267
Auto Financings 11,618 11,121 27 28 12 6
Other Consumer(b) 9,268 9,185 5 7 117 115
-------- -------- -------- -------- -------- --------
Total Domestic Consumer 70,908 69,084 324 284 340 395
-------- -------- -------- -------- -------- --------
DOMESTIC COMMERCIAL:
Commercial and Industrial 36,578 34,742 344 444 29 19
Commercial Real Estate(c) 5,679 5,934 176 156 2 8
Financial Institutions 5,555 5,540 1 2 -- --
-------- -------- -------- -------- -------- --------
Total Domestic Commercial 47,812 46,216 521 602 31 27
-------- -------- -------- -------- -------- --------
Total Domestic 118,720 115,300 845 886 371 422
-------- -------- -------- -------- -------- --------
FOREIGN:
Commercial and Industrial 26,318 23,109 75 79 -- 6
Commercial Real Estate 363 800 -- 1 -- --
Financial Institutions & Foreign Gov't 11,074 12,597 30 38 -- --
Consumer 3,482 3,286 19 17 13 6
-------- -------- -------- -------- -------- --------
Total Foreign 41,237 39,792 124 135 13 12
-------- -------- -------- -------- -------- --------
TOTAL LOANS $159,957 $155,092 969 1,021 $ 384 $ 434
======== ======== -------- -------- ======== ========
Assets Acquired as Loan Satisfactions 137 130
-------- --------
TOTAL NONPERFORMING ASSETS $ 1,106 $ 1,151
======== ========
NET CHARGE-OFFS
-----------------------------------------
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
(in millions) 1997 1996 1997 1996
----- ----- ----- -----
DOMESTIC CONSUMER:
Residential Mortgage(a) $ 6 $ 7 $ 13 $ 15
Credit Card 121 145 271 310
Auto Financings 15 7 27 15
Other Consumer(b) 48 33 88 62
----- ----- ----- -----
Total Domestic Consumer 190 192 399 402
----- ----- ----- -----
DOMESTIC COMMERCIAL:
Commercial and Industrial 4 46 18 94
Commercial Real Estate(c) (6) 30 (10) 26
Financial Institutions -- -- -- --
----- ----- ----- -----
Total Domestic Commercial (2) 76 8 120
----- ----- ----- -----
Total Domestic 188 268 407 522
----- ----- ----- -----
FOREIGN:
Commercial and Industrial (1) (11) (3) (20)
Commercial Real Estate -- (2) -- (2)
Financial Institutions & Foreign Gov't (1) (6) (1) (8)
Consumer 3 1 6 3
----- ----- ----- -----
Total Foreign 1 (18) 2 (27)
----- ----- ----- -----
TOTAL LOANS 189 250 409 495
----- ----- ----- -----
Charge Related to Conforming
Credit Card Charge-off Policies -- -- -- 102
----- ----- ----- -----
TOTAL $ 189 $ 250 $ 409 $ 597
===== ===== ===== =====
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured revolving lines of credit. There
are essentially no credit losses in the student loan portfolio due to
the existence of Federal and State government agency guarantees.
Student loans which were past due 90 days and over and still accruing
were approximately $43 million and $54 million at June 30, 1997 and
December 31, 1996, respectively.
(c) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
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DOMESTIC CONSUMER PORTFOLIO
Residential Mortgage Loans: Residential mortgage loans were $37.4 billion at
June 30, 1997, compared with $36.6 billion at December 31, 1996, primarily
reflecting a higher level of adjustable-rate loan outstandings.
At June 30, 1997, nonperforming domestic residential mortgage loans as a
percentage of the portfolio was 0.78%, compared with 0.68% at the 1996 year-end.
The $43 million increase from December 31, 1996 reflects a higher level of
delinquencies and foreclosure activity. For the first six months of 1997, the
percentage of domestic residential mortgage net charge-offs to average loan
outstandings was 0.07%, down from 0.09% for the same 1996 period.
The following table presents the residential mortgage servicing portfolio
activity for the periods indicated. A discussion of the Corporation's mortgage
servicing and loan origination activities is included on pages 49-50 of the
Corporation's 1996 Annual Report.
SECOND QUARTER SIX MONTHS
------------------- -------------------
(in millions) 1997 1996 1997 1996
------ ------ ------ ------
Balance at Beginning of Period $160.3 $133.1 $140.7 $132.1
Originations 8.1 8.1 15.2 15.6
Acquisitions -- -- 16.8 (a) 1.1
Repayments and Sales (5.5) (7.9) (9.8) (15.5)
------ ------ ------ ------
Balance at June 30, $162.9 $133.3 $162.9 $133.3
====== ====== ====== ======
(a) Represents acquisition of Source One servicing portfolio in February
1997.
Mortgage servicing rights (included in other assets) amounted to $1,767 million
at June 30, 1997, compared with $1,404 million at December 31, 1996, reflecting
the corresponding increase in the Corporation's residential mortgage servicing
portfolio due to the acquisition of Source One servicing portfolio in February
1997. The Corporation continually evaluates prepayment exposure of the servicing
portfolio, adjusting the balance and remaining life of the servicing rights as a
result of prepayments, and utilizes derivative contracts (interest rate swaps
and purchased option contracts) to reduce its exposure to such prepayment risks.
At June 30, 1997, the carrying value of these derivative contracts was $125
million, and gross unrecognized gains and losses were $40 million and $78
million, respectively, resulting in an estimated positive fair value of $87
million. The net unrecognized losses do not include the favorable impact from
the mortgage servicing rights being hedged by these derivative contracts.
Credit Card Loans: The Corporation analyzes its credit card portfolio on a
"managed basis", which includes credit card receivables on the balance sheet as
well as credit card receivables which have been securitized. During the 1997
second quarter, the Corporation did not securitize any credit card receivables,
compared with the securitization of $2.9 billion in the 1996 second quarter.
During the first six months of 1997, the Corporation securitized $1.4 billion of
credit card receivables, compared with $5.8 billion in the same 1996 period. For
the second quarter of 1997, average managed receivables were $25.6 billion,
compared with $23.3 billion in the 1996 second quarter, reflecting the continued
growth in credit card outstandings.
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The following table presents credit-related information for the Corporation's
managed credit card receivables.
AS OF OR FOR THE AS OF OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in millions) 1997 1996 1997 1996
------- ------- ------- -------
Average Managed Credit Card Receivables $25,567 $23,348 $25,443 $23,296
Past Due 90 Days & Over and Accruing $ 520 $ 461 $ 520 $ 461
As a Percentage of Average Credit Card Receivables 2.03% 1.97% 2.04% 1.98%
Net Charge-offs (a) $ 383 $ 279 $ 741 $ 549
As a Percentage of Average Credit Card Receivables 5.99% 4.78% 5.83% 4.71%
(a) Excludes charge related to conforming the credit card charge-off
policies of Chase and Chemical.
The increase in net charge-offs on managed credit card receivables for both the
three month and six month periods ending June 30, 1997, when compared with the
same 1996 periods, reflects growth in average managed credit card outstandings
and higher levels of personal bankruptcies and delinquencies. Management
currently expects that credit card net charge-offs have peaked in the second
quarter of 1997 and will decline in the third and fourth quarters. Additionally,
management expects that the Corporation's credit card net charge-offs, as a
percentage of average managed credit card receivables, will be approximately
5.6% to 5.7% for the full year 1997.
Credit Card Securitizations: For a discussion of the Corporation's credit card
securitizations, see page 51 of the Corporation's 1996 Annual Report.
The following table outlines the impact of the securitizations of credit card
receivables by showing the favorable (unfavorable) change in the reported
Consolidated Statement of Income line items for the periods indicated.
Favorable (Unfavorable) Impact SECOND QUARTER SIX MONTHS
----------------- -----------------
(in millions) 1997 1996 1997 1996
----- ----- ----- -----
Net Interest Income $(296) $(208) $(594) $(395)
Provision for Credit Losses 267 156 481 261
Credit Card Revenue 26 47 94 122
Other Revenue -- 8 (2) 11
----- ----- ----- -----
Pre-tax Income (Loss) Impact of Securitizations $ (3) $ 3 $ (21) $ (1)
===== ===== ===== =====
Auto Financings: The auto financings portfolio, which consists of auto loans and
leases, was $11.6 billion at June 30, 1997 and $11.1 billion at December 31,
1996. The increase reflected continued strong consumer demand due to favorable
pricing programs, partially offset by the impact of auto loan securitizations.
Total originations were $5.0 billion in the first half of 1997, compared with
$6.4 billion in the same 1996 period. The Corporation securitized approximately
$2.1 billion of auto loans during the first six months of 1997, compared with
$1.5 billion during the first six months of 1996. Net charge-offs related to
auto financings were $15 million in the 1997 second quarter, compared with $7
million in the same period in 1996. For the first six months, net charge-offs of
auto financings were $27 million in 1997, compared with $15 million in 1996. The
increased level of net charge-offs related to auto financings in both 1997
periods primarily reflects growth in the portfolio and unfavorable performance
in a discontinued product line.
Other Consumer Loans: Other consumer loans, which includes secured installment
loans (primarily loans related to recreational vehicles and manufactured housing
financing), student loans and unsecured revolving lines of credit, were $9.3
billion at June 30, 1997, compared with $9.2 billion at December 31, 1996. The
increase in net charge-offs for the 1997 second quarter and first six months
reflects higher personal bankruptcies related to unsecured revolving lines of
credit when compared with the same periods in 1996.
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DOMESTIC COMMERCIAL PORTFOLIO
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $36.6 billion at June 30, 1997, an increase from
$34.7 billion at December 31, 1996. The portfolio consists primarily of loans
made to large corporate and middle market customers and is diversified
geographically and by industry.
Nonperforming domestic commercial and industrial loans were $344 million at June
30, 1997, compared with $444 million at December 31, 1996. In the second quarter
and first six months of 1997, the Corporation had net charge-offs of $4 million
and $18 million, respectively, compared with $46 million and $94 million in the
same 1996 periods.
Management expects commercial and industrial loan net charge-offs for full-year
1997 to be equal to or lower than the 1996 full-year level, primarily as a
result of the continued strong performance in the commercial and industrial loan
portfolio.
Domestic Commercial Real Estate Portfolio: The domestic commercial real estate
portfolio represents loans secured primarily by real property, other than loans
secured by one-to-four family residential properties (which are included in the
consumer loan portfolio). The domestic commercial real estate loan portfolio
totaled $5.7 billion at June 30, 1997, slightly lower when compared with $5.9
billion at December 31, 1996. The decrease reflects sales primarily in the
terminal commercial real estate portfolio during the second quarter of 1997.
The table below sets forth the major components of the domestic commercial real
estate loan portfolio at the dates indicated.
JUNE 30, December 31,
(in millions) 1997 1996
-------- ------------
Commercial Mortgages $4,746 $5,040
Construction 933 894
------ ------
Total Domestic Commercial Real Estate Loans $5,679 $5,934
====== ======
Nonperforming domestic commercial real estate loans were $176 million at June
30, 1997, a $20 million increase from the December 31, 1996 level.
Domestic Financial Institutions Portfolio: The domestic financial institutions
portfolio includes loans to commercial banks and companies whose businesses
primarily involve lending, financing, investing, underwriting, or insurance.
Loans to domestic financial institutions were $5.6 billion, or 3% of total loans
outstanding, at June 30, 1997, essentially consistent with $5.5 billion at
December 31, 1996. The portfolio continued to maintain its strong credit quality
during the first half of 1997, with no net charge-offs.
FOREIGN PORTFOLIO
Foreign portfolio includes commercial and industrial loans, loans to financial
institutions, commercial real estate, loans to foreign governments and official
institutions, and consumer loans. At June 30, 1997, the Corporation's total
foreign loans were $41.2 billion, compared with $39.8 billion at December 31,
1996. The portfolio included foreign commercial and industrial loans of $26.3
billion at June 30, 1997, an increase of $3.2 billion from the 1996 year-end.
Foreign nonperforming loans at June 30, 1997 were $124 million, a decrease of
$11 million from December 31, 1996. Net charge-offs of foreign loans were $1
million in the 1997 second quarter, compared with net recoveries of $18 million
in the 1996 second quarter. For the first six months, net charge-offs were $2
million in 1997, compared with net recoveries of $27 million in 1996.
INDUSTRY DIVERSIFICATION
Based upon the industry classifications utilized by the Corporation at June 30,
1997, there were no industry segments which exceeded 5% of total Commercial and
Industrial loans outstanding.
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
In the normal course of its business, the Corporation utilizes various
derivative and foreign exchange financial instruments to meet the financial
needs of its customers, to generate revenues through its trading activities, and
to manage its exposure to fluctuations in interest and currency rates. For a
discussion of the derivative and foreign exchange financial instruments utilized
in connection with the Corporation's trading activities and asset/liability
management activities, including the notional amounts and credit exposure
outstandings as well as the credit and market risks involved, see Notes 3 and 10
of this Form 10-Q and pages 52-58 and Notes One and Seventeen of the
Corporation's 1996 Annual Report.
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Many of the Corporation's derivative and foreign exchange contracts are
short-term, which mitigates credit risk as transactions settle quickly. The
following table provides the remaining maturities of derivative and foreign
exchange contracts outstanding at June 30, 1997 and December 31, 1996.
Percentages are based upon remaining contract life of mark-to-market exposure
amounts.
AT JUNE 30, 1997 At December 31, 1996
----------------------------------------------------- -----------------------------------------------------
INTEREST FOREIGN EQUITY, Interest Foreign Equity,
RATE EXCHANGE COMMODITY AND Rate Exchange Commodity and
CONTRACTS CONTRACTS OTHER CONTRACTS TOTAL Contracts Contracts Other Contracts Total
------------- ------------ ----------------- ----- ----------- ----------- ------------------ -------
Less than 3 months 14% 52% 12% 30% 15% 59% 26% 31%
3 to 6 months 6 25 12 14 5 21 5 11
6 to 12 months 6 18 27 11 8 15 28 10
1 to 5 years 52 5 48 32 52 5 40 35
Over 5 years 22 -- 1 13 20 -- 1 13
--- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
The Corporation routinely enters into derivative and foreign exchange
transactions with regulated financial institutions, which the Corporation
believes have relatively low credit risk. At June 30, 1997, approximately 86% of
the mark-to-market exposure of such transactions was with commercial bank and
financial institution counterparties, most of which are dealers in these
products. Nonfinancial institutions accounted for approximately 14% of the
Corporation's derivative and foreign exchange mark-to-market exposure.
Additionally, at June 30, 1997 and 1996, nonperforming derivatives contracts
were immaterial.
The Corporation does not deal, to any significant extent, in derivatives, which
dealers of derivatives (such as other banks and financial institutions) consider
to be "leveraged". As a result, the mark-to-market exposure as well as the
notional amount of such derivatives were insignificant at June 30, 1997.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb potential credit losses
from the entire loan portfolio, as well as derivative and foreign exchange
contracts, letters of credit, guarantees and undrawn legal commitments. As of
June 30, 1997, the allowance for credit losses has been allocated into three
components: a $3,446 million allowance for loan losses, which is reported net in
Loans; a $75 million allowance for credit losses on derivative and foreign
exchange financial instruments, which is reported net in Trading Assets-Risk
Management Instruments; and a $170 million allowance for credit losses on
letters of credit, guarantees and undrawn legal commitments, which is reported
in Other Liabilities. During the 1997 first six months, there were no provisions
or charge-offs made to either the allowance for credit losses on derivatives and
foreign exchange financial instruments or the allowance for credit losses on
letters of credit, guarantees and undrawn legal commitments. However, there was
a transfer of $100 million from the allowance for loan losses to the allowance
for credit losses on letters of credit, guarantees and undrawn legal commitments
during the 1997 second quarter as a result of the inclusion of undrawn legal
commitments in the evaluation of the allowance. The 1996 amounts have not been
reclassified due to immateriality.
The Corporation deems its allowance for credit losses at June 30, 1997 to be
adequate (i.e., sufficient to absorb losses that may currently exist in the
portfolio, but are not yet identifiable). Estimating potential future losses is
inherently uncertain and depends on many factors, including general
macroeconomic and political conditions, rating migration, structural changes
within industries which alter competitive positions, event risk, unexpected
correlations within the portfolio, and other external factors such as legal and
regulatory requirements. The Corporation periodically reviews such factors and
reassesses the adequacy of the allowance for credit losses.
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The accompanying table reflects the activity in the Corporation's allowance for
loan losses for the periods indicated.
SECOND QUARTER SIX MONTHS
(in millions) 1997 1996 1997 1996
------- ------- ------- -------
Total Allowance at Beginning of Period $ 3,550 $ 3,683 $ 3,549 $ 3,784
Provision for Credit Losses 189 250 409 495
Charge-Offs (258) (318) (531) (630)
Recoveries 69 68 122 135
------- ------- ------- -------
Subtotal Net Charge-Offs (189) (250) (409) (495)
Charge Related to Conforming Credit
Card Charge-off Policies -- -- -- (102)
------- ------- ------- -------
Total Net Charge-offs (189) (250) (409) (597)
Transfer to Allowance for Credit Losses on
Letters of Credit, Guarantees and
Undrawn Legal Commitments (100) -- (100) --
Other (4) 9 (3) 10
------- ------- ------- -------
Total Allowance at End of Period $ 3,446 $ 3,692 $ 3,446 $ 3,692
======= ======= ======= =======
The following table presents the Corporation's allowance for loan losses
coverage ratios.
JUNE 30, December 31, June 30,
For the Period Ended: 1997 1996 1996
-------- ------------ --------
Allowance for Loan Losses to:
Loans at Period-End 2.15% 2.29% 2.44%
Average Loans 2.23 2.37 2.46
Nonperforming Loans 355.62 347.60 246.46
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MARKET RISK MANAGEMENT
The following discussion of the Corporation's market risk management focuses
primarily on developments since December 31,1996 and should be read in
conjunction with pages 54-58 and Notes One and Seventeen of the Corporation's
1996 Annual Report.
TRADING ACTIVITIES
Measuring Market Risk: Market risk is measured and monitored on a daily basis
through a value-at-risk ("VAR") methodology, which captures the potential
overnight dollar loss from adverse market movements. The quantification of
market risk through a VAR methodology requires a number of key assumptions
including confidence level for losses, number of days of price history, holding
period, measurement of inter-business correlation, and the treatment of risks
outside the VAR methodology, such as event risk and liquidity risk.
[SEE GRAPH NUMBER 1 AT APPENDIX 1]
The preceding chart contains a histogram of the Corporation's daily market
risk-related revenue. Market risk-related revenue is defined as the daily change
in value in marked-to-market trading portfolios plus any trading-related net
interest income or other revenue. Net interest income related to funding and
investment activity is excluded. Based on actual trading results for the twelve
months ended June 30, 1997, which captures the historical correlation among
business units, 95% of the variation in the Corporation's daily trading results
fell within a $28 million band centered on the daily average amount of $9
million. For the twelve months ended June 30, 1997, the Corporation posted
positive daily market risk-related revenue for 245 out of 259 business trading
days for international and domestic units. For 204 of the 259 days, the
Corporation's daily market risk-related revenue or losses occurred within the
negative $5 million through positive $15 million range, which is representative
of the Corporation's emphasis on market-making, sales and arbitrage activities.
ASSET/LIABILITY MANAGEMENT ACTIVITIES
The Corporation's interest rate risk profile is generally managed with
consideration for both total return and reported earnings. Interest rate risk
arises from a variety of factors, including differences in the timing between
the contractual maturity or repricing (the "repricing") of the Corporation's
assets and liabilities and derivative financial instruments as the repricing
characteristics of its loans and other assets do not necessarily match those of
its deposits, other borrowings and capital. The Corporation, as part of its ALM
process, employs a variety of cash (primarily securities) and derivative
instruments in managing its exposure to fluctuations in market interest rates.
Measuring Interest Rate Sensitivity:
In managing exposure, the Corporation uses quantifications of net gap exposure,
measurements of earnings at risk based on net interest income simulations, and
valuation sensitivity measures. An example of aggregate net gap analysis is
presented below. Assets, liabilities and derivative instruments are placed in
gap intervals based on their repricing dates. Assets and liabilities for which
no specific contractual repricing or maturity dates exist or whose contractual
maturities do not reflect their expected maturities are placed in gap intervals
based on management's judgment and statistical analysis concerning their most
likely repricing behaviors. Derivatives used in interest rate sensitivity
management are also included in the applicable gap intervals.
A net gap for each time period is calculated by subtracting the liabilities
repricing in that interval from the assets repricing. A negative gap - more
liabilities repricing than assets - will benefit net interest income in a
declining interest rate environment and will detract from net interest income in
a rising interest rate environment. Conversely, a positive gap - more assets
repricing than liabilities - will benefit net interest income if rates are
rising and will detract from net interest income in a falling rate environment.
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CONDENSED INTEREST-RATE SENSITIVITY TABLE
(IN MILLIONS) 1-3 4-6 7-12 1-5 OVER
AT JUNE 30, 1997 MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
-------- -------- -------- -------- -------- --------
Balance Sheet $ (7,556) $ (1,009) $ 3,309 $ 27,814 $(22,558) $ --
Derivative Instruments Affecting
Interest-Rate Sensitivity 11,972 3,332 (8,436) (11,280) 4,412 --
Interest-Rate Sensitivity Gap 4,416 2,323 (5,127) 16,534 (18,146) --
Cumulative Interest-Rate
Sensitivity Gap 4,416 6,739 1,612 18,146 -- --
% of Total Assets 1% 2% -- 5% -- --
At June 30, 1997, the Corporation had $1,612 million more assets than
liabilities repricing within one year (including net repricing effect of
derivative positions). This compares with $7,945 million more liabilities than
assets repricing within one year, or 2% of total assets, at December 31, 1996.
During the first quarter of 1997, management took actions to reduce the
Corporation's interest rate sensitivity, and as of June 30, 1997, the
Corporation's earnings at risk to an immediate 100 basis point rise in interest
rates is estimated to be approximately 1% of the Corporation's projected
after-tax net income for the next twelve months. An immediate 100 basis point
rise in interest rates is an hypothetical rate scenario, used to measure risk,
and does not necessarily represent management's current view of future market
developments. At December 31, 1996, the Corporation's earnings at risk to a
similar increase in market rates was estimated to be approximately 3.5% of
projected 1997 after-tax net income.
Interest Rate Swaps: Interest rate swaps are one of the various financial
instruments used in the Corporation's ALM activities. The following table
summarizes the outstanding ALM interest rate swap notional amounts at June 30,
1997, by twelve-month intervals (i.e., July 1, 1997 through June 30, 1998). The
decrease in notional amounts from one period to the next period represents
maturities of the underlying contracts. The weighted-average fixed interest
rates to be received and paid on such swaps are presented for each twelve-month
interval. The three-month London Interbank Offered Rate (LIBOR), provided for
reference in the following table, reflects the average implied forward yield
curve for that index as of June 30, 1997. However, actual repricings will be
based on the applicable rates in effect at the actual repricing date. To the
extent rates change, the variable rates paid or received will change. The
Corporation expects the impact of any interest rate changes on these swaps to be
largely mitigated by corresponding changes in the interest rates and values
associated with the linked assets and liabilities.
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OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY
INTERVALS
For the twelve-month period beginning July 1,
(in millions) 1997 1998 1999 2000 2001 Thereafter
------- ------- ------- ------- ------- ----------
Receive fixed swaps
Notional amount $33,339 $22,369 $18,685 $15,279 $12,043 $ 9,386
Weighted-average fixed rate 6.36% 6.28% 6.24% 6.55% 6.67% 6.65%
Pay fixed swaps
Notional amount $41,017 $27,539 $14,683 $10,234 $ 8,111 $ 2,881
Weighted-average fixed rate 6.43% 6.55% 6.92% 7.14% 7.22% 7.27%
Basis Swaps
Notional amount $24,633 $16,689 $ 4,931 $ 2,246 $ 2,048 $ 1,202
Average Three-Month Implied
Forward LIBOR Rates 5.89% 6.33% 6.36% 6.50% 6.56% 6.65%
Total Notional Amount $98,989 $66,597 $38,299 $27,759 $22,202 $13,469
The following table summarizes the Corporation's assets and liabilities at June
30, 1997, with the notional amount of related derivatives used for ALM purposes.
DERIVATIVE CONTRACTS AND RELATED BALANCE SHEET POSITIONS Notional Amount (a)
---------------------------
Balance Interest Other ALM
(in millions) Sheet Amount Rate Swaps Contracts(b)
Deposits with Banks $ 4,042 $ 2,140 $ 2,531
Securities - Available-for-Sale 39,463 2,832 7,107
Loans 156,511 49,935 29,813
Other Assets 15,708 3,900 9,429
Deposits 183,744 27,880 42,258
Other Borrowed Funds 7,874 1,013 --
Long-Term Debt 13,135 5,677 1,138
(a) At June 30, 1997, notional amounts of approximately $6 billion for
interest rate swaps, which are used in place of cash market
instruments, have been excluded from the above table. See Note One of
the 1996 Annual Report for a discussion of the Corporation's accounting
policy relative to derivatives used in place of cash market
instruments.
(b) Includes futures, forwards, forward rate agreements and options.
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40
The unfavorable impact on net interest income from the Corporation's ALM
derivative activities was $25 million in the second quarter and $49 million for
the first six months of 1997, compared with an unfavorable impact of $46 million
for the second quarter of 1996 and $35 million for the first six months of 1996.
The Corporation also has derivatives that affect noninterest revenue (such as
derivatives linked to mortgage servicing rights).
The following table reflects the deferred gains/losses on closed derivative
contracts and unrecognized gains/losses on open derivative contracts utilized in
the Corporation's ALM activities at June 30, 1997 and December 31, 1996.
JUNE 30, December 31,
(in millions) 1997 1996 Change
-------- ------------ ------
ALM Derivative Contracts:
Net Deferred Gains (Losses) $ (32) $ (42) $ 10
Net Unrecognized Gains (Losses) (371) (243) (128)
----- ----- -----
Net ALM Derivative Gains (Losses) $(403) $(285) $(118)
===== ===== =====
The net deferred losses at June 30, 1997 are expected to be amortized as yield
adjustments in net interest income or noninterest revenue, as applicable, over
the periods reflected in the following table. The Corporation also uses selected
derivative financial instruments to manage the sensitivity to changes in market
interest rates on anticipated transactions; however, such transactions are not
significant. Accordingly, at June 30, 1997, deferred gains and losses associated
with such transactions were not material.
Included in the table above are gross unrecognized gains and losses from
daily margin settlements on open futures contracts which were $3 million
and $13 million, respectively, at June 30, 1997. The net unrecognized losses
shown above do not include the net favorable impact from the assets/liabilities
being hedged by these derivative contracts. For a further discussion, see
Note 12 on page 15.
The Consolidated Balance Sheet includes unamortized premiums on open ALM
option contracts which will be amortized as a reduction to net interest
income or noninterest revenue over the periods indicated in the following table.
AMORTIZATION OF NET DEFERRED GAINS (LOSSES) ON CLOSED ALM CONTRACTS AND OF
PREMIUMS ON OPEN ALM OPTION CONTRACTS
Deferred
(in millions) Gains/(Losses) Premiums
------- ------
1997 $ 21 $ 13
1998 2 31
1999 (20) 40
2000 (15) 40
2001 and After (20) 68
------- ------
Total $ (32) $ 192
======= ======
OPERATING RISK MANAGEMENT
The Corporation, like all large financial institutions, is exposed to many types
of operating risk, including the risk of fraud by employees or outsiders,
unauthorized transactions by employees, and errors relating to computer and
telecommunications systems. The Corporation maintains a system of controls that
is designed to keep operating risk at appropriate levels in view of the
financial strength of the Corporation, the characteristics of the businesses and
markets in which the Corporation operates, competitive circumstances and
regulatory considerations. However, from time to time in the past, the
Corporation has suffered losses from operating risk and there can be no
assurance that the Corporation will not suffer such losses in the future.
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41
CAPITAL AND LIQUIDITY RISK MANAGEMENT
The following capital and liquidity discussion should be read in conjunction
with the Capital and Liquidity Risk Management section on pages 58-59 and Note
Sixteen of the Corporation's 1996 Annual Report.
CAPITAL
The Corporation's level of capital at June 30, 1997 remained strong, with
capital ratios well in excess of regulatory guidelines. At June 30, 1997, the
Corporation's Tier 1 and Total Capital ratios were 7.79% and 11.38%,
respectively. These ratios, as well as the leverage ratio, exclude the assets
and off-balance sheet financial instruments of the Corporation's securities
subsidiary, Chase Securities Inc., as well as the Corporation's investment in
such subsidiary. In addition, the provisions of SFAS 115 do not apply to the
calculation of these ratios. The Corporation manages its capital to execute its
strategic business plans and support its growth and investments, including
acquisition strategies in its core businesses. As part of the Corporation's
commitment to a disciplined capital policy, management has targeted a Tier 1
capital ratio for the Corporation of 8 to 8.25%.
Total capitalization (the sum of Tier 1 Capital and Tier 2 Capital) increased by
$960 million during the first half of 1997 to $30.3 billion reflecting, in
part, $790 million of capital securities, net of discount, issued by subsidiary
trusts of the Corporation (see Note 7 of this Form 10-Q), partially offset by
the redemption of $670 million of preferred stock.
In October 1996, the Corporation announced a common stock purchase program in
which the Corporation is authorized until December 31, 1998 to purchase up to
$2.5 billion of its common stock, in addition to such amount of common
stock as may be necessary to provide for expected issuances under its dividend
reinvestment plan and its various stock-based director and employee benefit
plans. During the period from the inception of the program through June 30,
1997, the Corporation has repurchased 24.3 million common shares ($2.3 billion)
and reissued approximately 6.9 million treasury shares ($0.5 billion) under the
Corporation's benefit plans, resulting in a net repurchase of 17.4 million
shares ($1.8 billion) of its common stock. Management intends to purchase equity
on a more accelerated time schedule than originally announced and believes it is
likely that the buy-back program will be completed in late 1997 or early 1998.
The Corporation raised the cash dividend on its common stock to $.62 per share,
an increase from $.56 per share, in the first quarter of 1997. Management's
current expectation is that the dividend policy of the Corporation will
generally be to pay a common stock dividend equal to approximately 25-35% of the
Corporation's net income (excluding restructuring charges) less preferred stock
dividends. Future dividend policies will be determined by the Board of Directors
in light of the earnings and financial condition of the Corporation and its
subsidiaries and other factors, including applicable governmental regulations
and policies.
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42
The following table sets forth the components of capital for the Corporation.
COMPONENTS OF CAPITAL
JUNE 30, December 31,
(in millions) 1997 1996
--------- ------------
TIER 1 CAPITAL
Common Stockholders' Equity $ 18,968 $ 18,632
Nonredeemable Preferred Stock 1,980 2,650
Minority Interest (a) 2,130 1,294
Less: Goodwill 1,321 1,353
Non-Qualifying Intangible Assets 177 128
50% Investment in Securities Subsidiary 828 780
--------- ---------
Tier 1 Capital $ 20,752 $ 20,315
--------- ---------
TIER 2 CAPITAL
Long-Term Debt Qualifying as Tier 2 $ 7,066 $ 6,709
Qualifying Allowance for Credit Losses 3,335 3,121
Less: 50% Investment in Securities Subsidiary 828 780
--------- ---------
Tier 2 Capital $ 9,573 $ 9,050
--------- ---------
TOTAL QUALIFYING CAPITAL $ 30,325 $ 29,365
========= =========
RISK-WEIGHTED ASSETS (b) $266,494 $ 249,215
========= =========
(a) Minority interest includes Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable Interest Debentures and in
the Preferred Stock of Subsidiary. For a further discussion, see Notes
7 and 8 of this Form 10-Q.
(b) Includes off-balance sheet risk-weighted assets in the amount of
$88,490 million and $79,099 million, respectively, at June 30, 1997 and
December 31, 1996.
LIQUIDITY
The primary source of liquidity for the bank subsidiaries of the Corporation
derives from their ability to generate core deposits (which includes all
deposits except noninterest-bearing time deposits, foreign deposits and
certificates of deposit of $100,000 or more). The Corporation considers funds
from such sources to comprise its subsidiary banks' "core" deposit base because
of the historical stability of such sources of funds. These deposits fund a
portion of the Corporation's asset base, thereby reducing the Corporation's
reliance on other, more volatile, sources of funds. The Corporation's average
core deposits for the first six months of 1997 were $80 billion and represented
52% of average loans for the period.
The Corporation is an active participant in the capital markets. In addition to
issuing commercial paper and medium-term notes, the Corporation raises funds
through the issuance of long-term debt, common stock and preferred stock. The
Corporation's long-term debt at June 30, 1997 was $13,135 million, an increase
of $421 million from the 1996 year-end. The increase resulted largely from
issuances of the Corporation's long-term debt of $1,481 million, partially
offset by maturities of $1,069 million of long-term debt. The Corporation will
continue to evaluate the opportunity for future redemptions of its outstanding
debt and preferred stock in light of current market conditions.
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43
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 2-5 of the Corporation's 1996 Annual Report.
DIVIDENDS
At June 30, 1997, in accordance with the dividend restrictions applicable to
them, the Corporation's bank subsidiaries could, during 1997, without the
approval of their relevant banking regulators, pay dividends in an aggregate
amount of approximately $2.1 billion to their respective bank holding companies,
plus an additional amount equal to their net income from July 1, 1997 through
the date in 1997 of any such dividend payment.
In addition to the dividend restrictions set forth in statutes and regulations,
the Federal Reserve Board, the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation ("FDIC") have authority under the
Financial Institutions Supervisory Act to prohibit or to limit the payment of
dividends by the banking organizations they supervise, including the Corporation
and its subsidiaries that are banks or bank holding companies, if, in the
banking regulator's opinion, payment of a dividend would constitute an unsafe or
unsound practice in light of the financial condition of the banking
organization.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the FDIC to establish a risk-based assessment system for FDIC deposit
insurance. FDICIA also contained provisions limiting certain activities and
business methods of depository institutions. Finally, FDICIA provided for
expanded regulation of depository institutions and their affiliates, including
parent holding companies, by such institutions' appropriate Federal banking
regulator. Each of the Corporation's banking institutions were "well
capitalized" as that term is defined under the various regulations promulgated
under FDICIA and, therefore, the Corporation does not expect such regulations to
have a material adverse impact on its business operations.
ACCOUNTING AND REPORTING DEVELOPMENTS
DERIVATIVE AND MARKET RISK DISCLOSURES
In January 1997, the Securities and Exchange Commission ("SEC") issued a Release
(Nos. 33-7386 and 34-38223) which requires (i) quantitative and qualitative
disclosures outside the financial statements about the market risk inherent in
derivatives and other financial instruments and (ii) enhanced descriptions of
accounting policies for derivatives in the footnotes to the financial
statements.
The market risk disclosure requirements of this release will be applicable
commencing with the Corporation's 1997 Annual Report. The Corporation is
currently evaluating this release and expects to comply with the requirements of
the release in its 1997 Annual Report.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 entitled, "Earnings
per Share" ("SFAS 128"). This statement establishes standards for computing and
presenting earnings per share (EPS) and simplifies the previously issued
accounting standards for computing earnings per share. It replaces the
computation and presentation of "primary EPS" with a computation and
presentation of "basic EPS". It revises the computation and presentation of
"fully-diluted EPS" with a computation and presentation of "diluted EPS". It
also requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997.
While SFAS 128 is not yet effective, the Corporation believes that with the
adoption of SFAS 128, basic EPS would have been approximately $0.05 higher than
primary EPS for the 1997 second quarter and approximately $0.09 higher for the
1997 first six months. The impact of converting from fully-diluted EPS to
diluted EPS for the same periods would have been negligible.
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44
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS 130 entitled, "Reporting Comprehensive
Income" ("SFAS 130"). This statement establishes standards for the reporting and
display of comprehensive income which includes, in addition to net income as
reported, such items as unrealized holding gains and losses on
available-for-sale securities, foreign currency translation adjustments and
certain other items that are not included in the income statement as presently
configured. SFAS 130 requires that an enterprise classify items of comprehensive
income in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 permits the display of comprehensive income
within the statement of changes in stockholders' equity. In addition, SFAS 130
requires that an enterprise display the accumulated balance of comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the consolidated balance sheet.
This statement is effective for fiscal years beginning after December 15, 1997.
The Corporation is currently assessing the manner in which it will disclose the
required information. The adoption of SFAS 130 will not affect the Corporation's
earnings, liquidity, or capital resources.
SEGMENTS
In June 1997, the FASB issued SFAS 131 entitled, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"). This statement establishes
quantitative and qualitative criteria that an enterprise must use to determine
the number and nature of its operating segments. SFAS 131 requires the reporting
of selected information about these operating segments in annual financial
statements and interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
This statement is effective for fiscal years beginning after December 15, 1997.
The Corporation is currently assessing the manner in which it will disclose the
required information. The adoption of SFAS 131 will not affect the Corporation's
earnings, liquidity, or capital resources.
MARKET RISK
On August 29, 1996, the Banking Regulatory Authorities issued an amendment to
the risk-based capital standards to incorporate a measure for market risk
consistent with the principles adopted by the Basle Committee on Banking
Supervision under the Basle Capital Accord. The amendment, which is effective
January 1, 1998 and permits adoption during 1997 with prior regulatory approval,
requires banks and bank holding companies that have significant market risk
exposure, to measure that risk utilizing a value-at-risk model, based on the
parameters contained in the amendment, and to maintain a commensurate amount of
capital.
The Corporation currently expects to adopt the amendment during 1997. Management
anticipates that the adoption will have a modestly favorable impact on the
Corporation's reported Tier 1 and Total Capital ratios largely as a result of
the inclusion of the assets and off-balance sheet financial instruments, and
related capital, of the Corporation's securities subsidiary, Chase Securities
Inc., in these ratios.
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THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
----------------------------------------- ------------------------------------
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (ANNUALIZED) BALANCE INTEREST (ANNUALIZED)
--------- --------- ----- --------- --------- ---------
ASSETS
Deposits with Banks $ 4,185 $ 114 10.91% $ 7,307 $ 156 8.58%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 42,715 697 6.54% 29,354 514 7.05%
Trading Assets-Debt and Equity
Instruments 36,358 705 7.78% 27,293 388 5.72%
Securities:
Available-for-Sale 40,850 679 6.67%(b) 38,295 610 6.41% (b)
Held-to-Maturity 3,535 60 6.78% 4,245 81 7.61%
Loans 156,459 3,084 (c) 7.91% 150,612 3,034 (c) 8.09%
--------- --------- --------- ---------
Total Interest-Earning Assets 284,102 5,339 7.54% 257,106 4,783 7.48%
Allowance for Credit Losses (3,437) (3,681)
Cash and Due from Banks 13,334 11,849
Risk Management Instruments 31,991 26,280
Other Assets 22,905 26,025
--------- ---------
Total Assets $ 348,895 $ 317,579
========= =========
LIABILITIES
Domestic Retail Deposits $ 57,369 529 3.70% $ 55,451 490 3.56%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 8,750 153 7.01% 7,808 131 6.76%
Deposits in Foreign Offices 68,588 886 5.18% 64,858 837 5.19%
--------- --------- --------- ---------
Total Time and Savings
Deposits 134,707 1,568 4.67% 128,117 1,458 4.58%
--------- --------- --------- ---------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 66,149 924 5.60% 52,222 665 5.13%
Commercial Paper 4,035 55 5.42% 4,714 59 5.09%
Other Borrowings (d) 21,993 531 9.69% 16,437 363 8.85%
--------- --------- --------- ---------
Total Short-Term and
Other Borrowings 92,177 1,510 6.57% 73,373 1,087 5.96%
Long-Term Debt 14,035 273 7.81% 12,916 221 6.86%
--------- --------- --------- ---------
Total Interest-Bearing Liabilities 240,919 3,351 5.58% 214,406 2,766 5.19%
--------- --------- --------- ---------
Noninterest-Bearing Deposits 41,064 39,658
Risk Management Instruments 32,189 28,518
Other Liabilities 13,452 15,095
--------- ---------
Total Liabilities 327,624 297,677
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 --
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 2,494 2,650
Common Stockholders' Equity 18,227 17,252
--------- ---------
Total Stockholders' Equity 20,721 19,902
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 348,895 $ 317,579
========= =========
INTEREST RATE SPREAD 1.96% 2.29%
========= =======
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 1,988(a) 2.81% $ 2,017(a) 3.15%
========= ========= ========= =======
(a) Reflects a pro forma adjustment to the net interest income amount
included in the Statement of Income to permit comparisons of yields on
tax-exempt and taxable assets.
(b) For the three months ended June 30, 1997 and June 30, 1996, the
annualized rate for available-for-sale securities based on historical
cost was 6.58% and 6.32%, respectively.
(c) For the three months ended June 30, 1997 and June 30, 1996, the
negative impact from nonperforming loans on net interest income was $18
million and $20 million, respectively.
(d) Includes securities sold but not yet purchased and structured notes.
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THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
----------------------------------------- ------------------------------------
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (ANNUALIZED) BALANCE INTEREST (ANNUALIZED)
--------- --------- --------- --------- --------- ---------
ASSETS
Deposits with Banks $ 4,834 $ 220 9.19% $ 7,772 $ 328 8.48%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 39,427 1,256 6.42% 28,075 1,015 7.27%
Trading Assets-Debt and Equity
Instruments 33,786 1,331 7.95% 27,291 801 5.90%
Securities:
Available-for-Sale 40,337 1,343 6.72%(b) 38,242 1,255 6.60% (b)
Held-to-Maturity 3,631 122 6.77% 4,381 161 7.38%
Loans 154,754 6,198 (c) 8.08% 150,123 6,275 (c) 8.41%
--------- --------- --------- ---------
Total Interest-Earning Assets 276,769 10,470 7.63% 255,884 9,835 7.73%
Allowance for Credit Losses (3,444) (3,729)
Cash and Due from Banks 12,703 12,450
Risk Management Instruments 34,317 25,925
Other Assets 23,763 24,722
--------- ---------
Total Assets $ 344,108 $ 315,252
========= =========
LIABILITIES
Domestic Retail Deposits $ 57,511 1,058 3.71% $ 55,766 976 3.52%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 8,991 303 6.79% 7,838 207 5.30%
Deposits in Foreign Offices 66,919 1,722 5.19% 67,344 1,919 5.73%
--------- --------- --------- ---------
Total Time and Savings
Deposits 133,421 3,083 4.66% 130,948 3,102 4.76%
--------- --------- --------- ---------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 62,828 1,709 5.48% 48,588 1,286 5.32%
Commercial Paper 4,164 110 5.31% 5,146 134 5.26%
Other Borrowings (d) 19,695 993 10.17% 16,323 693 8.53%
--------- --------- --------- ---------
Total Short-Term and
Other Borrowings 86,687 2,812 6.54% 70,057 2,113 6.07%
Long-Term Debt 13,780 530 7.75% 12,946 448 6.95%
--------- --------- --------- ---------
Total Interest-Bearing Liabilities 233,888 6,425 5.54% 213,951 5,663 5.32%
--------- --------- --------- ---------
Noninterest-Bearing Deposits 40,981 39,203
Risk Management Instruments 34,262 28,036
Other Liabilities 13,497 13,692
--------- ---------
Total Liabilities 322,628 294,882
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 --
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 2,571 2,650
Common Stockholders' Equity 18,359 17,720
--------- ---------
Total Stockholders' Equity 20,930 20,370
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 344,108 $ 315,252
========= =========
INTEREST RATE SPREAD 2.09% 2.41%
========= =======
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 4,045(a) 2.95% $ 4,172(a) 3.28%
========= ========= ========= =======
(a) Reflects a pro forma adjustment to the net interest income amount
included in the Statement of Income to permit comparisons of yields on
tax-exempt and taxable assets.
(b) For the six months ended June 30, 1997 and June 30, 1996, the
annualized rate for available-for-sale securities based on historical
cost was 6.63% and 6.53%, respectively.
(c) For the six months ended June 30, 1997 and June 30, 1996, the negative
impact from nonperforming loans on net interest income was $35 million
and $49 million, respectively.
(d) Includes securities sold but not yet purchased and structured notes.
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THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
1997 1996
------------------ ------------------------------------------
SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- -------
INTEREST INCOME
Loans $ 3,082 $ 3,112 $ 3,048 $ 3,042 $ 3,028 $ 3,241
Securities 735 722 767 690 685 720
Trading Assets 705 626 615 482 388 413
Federal Funds Sold and Securities
Purchased Under Resale Agreements 697 559 571 549 514 501
Deposits with Banks 114 106 97 112 156 172
------- ------- ------- ------- ------- -------
Total Interest Income 5,333 5,125 5,098 4,875 4,771 5,047
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits 1,568 1,515 1,520 1,416 1,458 1,644
Short-Term and Other Borrowings 1,510 1,302 1,304 1,213 1,087 1,026
Long-Term Debt 273 257 233 220 221 227
------- ------- ------- ------- ------- -------
Total Interest Expense 3,351 3,074 3,057 2,849 2,766 2,897
------- ------- ------- ------- ------- -------
NET INTEREST INCOME 1,982 2,051 2,041 2,026 2,005 2,150
Provision for Credit Losses 189 220 182 220 250 245
------- ------- ------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 1,793 1,831 1,859 1,806 1,755 1,905
------- ------- ------- ------- ------- -------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 274 168 213 234 258 224
Trust, Custody and Investment Management Fees 321 310 294 295 302 285
Credit Card Revenue 248 278 320 277 233 233
Service Charges on Deposit Accounts 95 91 98 97 100 99
Fees for Other Financial Services 392 383 377 393 381 378
Trading Revenue 491 422 289 347 397 355
Securities Gains 30 101 25 34 24 52
Revenue From Equity-Related Investments 179 164 172 112 219 223
Other Revenue 128 182 109 110 35 36
------- ------- ------- ------- ------- -------
Total Noninterest Revenue 2,158 2,099 1,897 1,899 1,949 1,885
------- ------- ------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 1,110 1,124 1,070 1,040 1,046 1,076
Employee Benefits 219 222 185 211 225 305
Occupancy Expense 193 187 192 204 207 221
Equipment Expense 193 190 180 179 181 184
Foreclosed Property Expense -- 3 (1) 2 (8) (9)
Restructuring Charge and Expenses 71 30 104 32 22 1,656
Other Expense 685 691 677 652 651 660
------- ------- ------- ------- ------- -------
Total Noninterest Expense 2,471 2,447 2,407 2,320 2,324 4,093
------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 1,480 1,483 1,349 1,385 1,380 (303)
Income Tax Expense (Benefit) 555 556 513 527 524 (214)
------- ------- ------- ------- ------- -------
NET INCOME (LOSS) $ 925 $ 927 $ 836 $ 858 $ 856 $ (89)
======= ======= ======= ======= ======= =======
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 874 $ 872 $ 781 $ 803 $ 801 $ (143)
======= ======= ======= ======= ======= =======
NET INCOME (LOSS) PER COMMON SHARE:
Primary $ 2.00 $ 1.98 $ 1.74 $ 1.80 $ 1.80 $ (0.32)
======= ======= ======= ======= ======= =======
Assuming Full Dilution $ 2.00 $ 1.97 $ 1.74 $ 1.78 $ 1.79 $ (0.32)
======= ======= ======= ======= ======= =======
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48
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and its subsidiaries are defendants in a number of
legal proceedings. After reviewing with counsel all actions and
proceedings pending against or involving the Corporation and its
subsidiaries, management does not expect the aggregate liability or
loss, if any, resulting therefrom to have a material adverse effect on
the consolidated financial condition of the Corporation.
Item 2. Sales of Unregistered Common Stock
During the second quarter of 1997, shares of common stock of the
Corporation were issued in transactions exempt from registration under
the Securities Act of 1933 pursuant to Section 4(2) thereof. On April
1, 1997, 278 shares of common stock were issued to retired executive
officers who had deferred receipt of such common stock pursuant to the
Corporate Performance Incentive Plan.
Item 4. Submission of Matters to a Vote of Security Holders
The following is a summary of matters submitted to vote at the Annual
Meeting of Stockholders of the Corporation. The Annual Meeting of
Stockholders was held on May 20, 1997. A total of 365,840,089 shares,
or 85.1%, of the 429,687,495 shares entitled to vote at the Annual
Meeting, were represented at the meeting.
(A) Election of Directors
The following sixteen (16) directors were elected to hold
office until the 1998 Annual Meeting or until their successors
are elected and have qualified.
Votes Received Votes Withheld
-------------- --------------
Frank A. Bennack, Jr. 364,219,004 1,621,085
Susan V. Berresford 364,131,098 1,708,991
M. Anthony Burns 364,164,590 1,675,499
H. Laurance Fuller 364,180,329 1,659,760
Melvin R. Goodes 364,196,071 1,644,018
William H. Gray III 363,907,511 1,932,578
George V. Grune 364,102,917 1,737,172
William B. Harrison, Jr. 364,163,479 1,676,610
Harold S. Hook 364,178,045 1,662,044
Helene L. Kaplan 361,231,130 4,608,959
Thomas G. Labrecque 364,024,573 1,815,516
Henry B. Schacht 364,184,640 1,655,449
Walter V. Shipley 364,106,325 1,733,764
Andrew C. Sigler 364,130,338 1,709,751
John R. Stafford 364,182,173 1,657,916
Marina v.N. Whitman 364,134,943 1,705,146
(B) (1) Ratifying Independent Accountants
A proposal to ratify Price Waterhouse LLP as independent
accountants was approved by 99.81% of the votes cast. The
proposal received a "for" vote of 364,243,182 and an "against"
vote of 676,523. The number of votes abstaining was 920,384.
There were no broker non-votes.
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49
Item 4 continued
(2) Stockholder Proposal Re: Term Limits for Directors
A proposal by Evelyn Y. Davis that the Board of Directors take
the necessary steps so that future outside directors shall not
serve for more than six years was rejected by 96.45% of the
votes cast. The vote "for" was 11,059,836 and the vote
"against" was 300,584,539. The number of votes abstaining was
9,683,282 and there were 44,512,432 broker non-votes.
(3) Stockholder Proposal Re: Cumulative Voting
A proposal by John J. Gilbert that the Board of Directors take
the steps necessary to provide for cumulative voting in the
election of directors was rejected by 67.27% of the votes
cast. The vote "for" was 104,190,738 and the vote "against"
was 214,139,891. The number of votes abstaining was 2,997,029
and there were 44,512,431 broker non-votes.
(4) Stockholder Proposal Re: Independent Director as Chairman of
the Board
A proposal by the Teamsters Affiliates Pension Plan that the
Board of Directors amend the By-laws to require that an
independent director who is not currently the chief executive
of the Corporation serve as chair of the board was rejected by
94.35% of the votes cast. The vote "for" was 17,545,540 and
the vote "against" was 292,835,747. The number of votes
abstaining was 10,946,369 and there were 44,512,433 broker
non-votes.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
11 - Computation of net income per share.
12(a) - Computation of ratio of earnings to fixed charges.
12(b) - Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements.
27 - Financial Data Schedule.
(B) Reports on Form 8-K:
The Corporation filed one report on Form 8-K during the
quarter ended June 30, 1997, as follows:
Form 8-K dated April 18, 1997: The Corporation announced the
results of operations for the first quarter of 1997.
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50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
-------------------------------
(Registrant)
Date August 14, 1997 By /s/ Joseph L. Sclafani
---------------- -----------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
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51
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
11 Computation of net income 52
per share
12 (a) Computation of ratio of 53
earnings to fixed charges
12 (b) Computation of ratio of 54
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 56
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1
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
Net income for primary and fully-diluted EPS are computed by subtracting from
the applicable earnings the dividend requirements on preferred stock to arrive
at earnings applicable to common stock and dividing this amount by the
weighted-average number of common and common equivalent shares outstanding
during the period. For a further discussion of the Corporation's earnings per
share computation, see Note One of the Corporation's 1996 Annual Report.
(in millions, except per share amounts) Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
EARNINGS PER SHARE 1997 1996 1997 1996
--------- --------- --------- ---------
PRIMARY
Earnings:
Net Income $ 925 $ 856 $ 1,852 $ 767
Less: Preferred Stock Dividend Requirements 51 55 106 109
--------- --------- --------- ---------
Net Income Applicable to Common Stock $ 874 $ 801 $ 1,746 $ 658
========= ========= ========= =========
Shares:
Average Common and Common Equivalent Shares Outstanding 434.9 444.8 438.0 445.4
Primary Earnings Per Share:
Net Income $ 2.00 $ 1.80 $ 3.99 $ 1.48
========= ========= ========= =========
ASSUMING FULL DILUTION
Earnings:
Net Income Applicable to Common Stock $ 874 $ 801 $ 1,746 $ 658
Shares:
Average Common and Common Equivalent Shares Outstanding 434.9 444.8 438.0 445.4
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect 1.1 3.6 1.7 4.8
--------- --------- --------- ---------
Adjusted Shares of Common and Equivalent Shares Outstanding 436.0 448.4 439.7 450.2
Earnings Per Share Assuming Full Dilution:
Net Income $ 2.00 $ 1.79 $ 3.97 $ 1.46
========= ========= ========= =========
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1
EXHIBIT 12(a)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIOS)
Six Months Ended
June 30, 1997
----------------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 2,963
-------
Fixed charges:
Interest expense 3,342
One third of rents, net of income from subleases (a) 57
-------
Total fixed charges 3,399
-------
Less: Equity in undistributed income of affiliates (38)
-------
Earnings before taxes and fixed charges, excluding capitalized interest $ 6,324
=======
Fixed charges, as above $ 3,399
=======
Ratio of earnings to fixed charges 1.86
=======
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 3,399
Add: Interest on deposits 3,083
-------
Total fixed charges and interest on deposits $ 6,482
=======
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 6,324
Add: Interest on deposits 3,083
-------
Total earnings before taxes, fixed charges, and interest on deposits $ 9,407
=======
Ratio of earnings to fixed charges 1.45
=======
(a) The proportion deemed representative of the interest factor.
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1
EXHIBIT 12(b)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(IN MILLIONS, EXCEPT RATIOS)
Six Months Ended
June 30, 1997
----------------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 2,963
-------
Fixed charges:
Interest expense 3,342
One third of rents, net of income from subleases (a) 57
-------
Total fixed charges 3,399
-------
Less: Equity in undistributed income of affiliates (38)
-------
Earnings before taxes and fixed charges, excluding capitalized interest $ 6,324
=======
Fixed charges, as above $ 3,399
Preferred stock dividends 106
-------
Fixed charges including preferred stock dividends $ 3,505
=======
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.80
=======
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends, as above $ 3,505
Add: Interest on deposits 3,083
-------
Total fixed charges including preferred stock
dividends and interest on deposits $ 6,588
=======
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 6,324
Add: Interest on deposits 3,083
-------
Total earnings before taxes, fixed charges, and interest on deposits $ 9,407
=======
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.43
=======
(a) The proportion deemed representative of the interest factor.
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2
APPENDIX 1
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------ ---- -----------
1 37 Bar Graph entitled "Histogram of Daily Market Risk-Related Revenue for the twelve months ended
June 30, 1997" presenting the following information:
Millions of Dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30
------------------- ----- ------ ------- ------- ------- -------
Number of trading
days revenue was
within the above
prescribed positive
range 58 67 67 36 11 6
Millions of Dollars 0 - (5) (5) - (10) (10) - (15)
------------------- ------- --------- ----------
Number of trading
days revenue was
within the above
prescribed negative
range 12 1 1
9
0000019617
THE CHASE MANHATTAN CORPORATION
1,000,000
U.S. DOLLARS
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
1
16,879
4,042
39,228
67,516
39,463
3,463
3,450
159,957
3,446
352,033
183,744
70,560
59,759
13,135
0
1,980
441
18,372
352,033
6,194
1,457
1,476
10,458
3,083
6,425
4,033
409
131
4,918
2,963
1,852
0
0
1,852
3.99
3.97
2.95
969
384
0
0
3,549
531
122
3,446
0
0
0
