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 March 31, 1998 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 426,722,484
- --------------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
April 30, 1998.
2
- --------------------------------------------------------------------------------
FORM 10-Q INDEX
Part I Page
- ------ ----
Item 1 Financial Statements - The Chase Manhattan Corporation
and Subsidiaries:
Consolidated Balance Sheet at March 31, 1998 and
December 31, 1997. 3
Consolidated Statement of Income for the three months
ended March 31, 1998 and March 31, 1997. 4
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 1998 and March 31, 1997. 5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and March 31, 1997. 6
Notes to Financial Statements. 7-11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. 12-33
Glossary of Terms. 34
Part II
Item 1 Legal Proceedings. 35
Item 2 Sales of Unregistered Common Stock. 35
Item 6 Exhibits and Reports on Form 8-K. 35
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-2-
3
Part I
Item 1.
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions, except share data)
March 31, December 31,
1998 1997
--------- ---------
ASSETS
Cash and Due from Banks $ 14,906 $ 15,704
Deposits with Banks 3,465 2,886
Federal Funds Sold and Securities
Purchased Under Resale Agreements 23,739 30,928
Trading Assets:
Debt and Equity Instruments 36,658 34,641
Risk Management Instruments, Net of Allowance for Credit
Losses of $75 in 1998 and 1997 34,587 37,752
Securities 59,819 52,738
Loans 167,944 168,454
Allowance for Credit Losses (3,622) (3,624)
--------- ---------
Net Loans 164,322 164,830
Premises and Equipment 3,841 3,780
Due from Customers on Acceptances 1,398 1,719
Accrued Interest Receivable 2,873 3,359
Other Assets 20,107 17,184
--------- ---------
TOTAL ASSETS $ 365,715 $ 365,521
========= =========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 45,091 $ 46,603
Interest-Bearing 77,373 71,576
Foreign:
Noninterest-Bearing 3,289 3,205
Interest-Bearing 70,343 72,304
--------- ---------
Total Deposits 196,096 193,688
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 55,715 56,126
Commercial Paper 5,125 4,744
Other Borrowed Funds 6,503 6,861
Acceptances Outstanding 1,398 1,719
Trading Liabilities 48,411 52,438
Accounts Payable, Accrued Expenses and Other Liabilities, Including
the Allowance for Credit Losses of $170 in 1998 and 1997 13,581 12,526
Long-Term Debt 14,355 13,387
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 1,940 1,740
--------- ---------
TOTAL LIABILITIES 343,124 343,229
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note 6)
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,368 1,740
Common Stock (Issued 440,766,001 and 440,753,296 Shares) 441 441
Capital Surplus 10,141 10,360
Retained Earnings 11,471 11,086
Accumulated Other Comprehensive Income 134 112
Treasury Stock, at Cost (14,924,965 and 19,788,820 Shares) (1,514) (1,997)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 22,041 21,742
--------- ---------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 365,715 $ 365,521
========= =========
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 March 31,
(in millions, except per share data)
1998 1997
------ ------
INTEREST INCOME
Loans $3,405 $3,129
Securities 889 722
Trading Assets 676 626
Federal Funds Sold and Securities Purchased
Under Resale Agreements 671 559
Deposits with Banks 152 106
------ ------
Total Interest Income 5,793 5,142
------ ------
INTEREST EXPENSE
Deposits 1,815 1,515
Short-Term and Other Borrowings 1,509 1,302
Long-Term Debt 305 257
------ ------
Total Interest Expense 3,629 3,074
------ ------
NET INTEREST INCOME 2,164 2,068
Provision for Credit Losses 344 220
------ ------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 1,820 1,848
------ ------
NONINTEREST REVENUE
Investment Banking Fees 361 176
Trust, Custody and Investment Management Fees 348 310
Credit Card Revenue 300 261
Service Charges on Deposit Accounts 91 91
Fees for Other Financial Services 419 383
Trading Revenue 480 405
Securities Gains 83 101
Revenue from Equity-Related Investments 287 164
Other Revenue 96 191
------ ------
Total Noninterest Revenue 2,465 2,082
------ ------
NONINTEREST EXPENSE
Salaries 1,254 1,124
Employee Benefits 224 222
Occupancy Expense 189 187
Equipment Expense 209 190
Restructuring Costs 521 30
Other Expense 738 694
------ ------
Total Noninterest Expense 3,135 2,447
------ ------
INCOME BEFORE INCOME TAX EXPENSE 1,150 1,483
Income Tax Expense 425 556
------ ------
NET INCOME $ 725 $ 927
====== ======
NET INCOME APPLICABLE TO COMMON STOCK $ 691 $ 872
====== ======
NET INCOME PER COMMON SHARE:
Basic $ 1.64 $ 2.02
====== ======
Diluted $ 1.59 $ 1.97
====== ======
The Notes to Financial Statements are an integral part of these Statements.
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5
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Three months Ended March 31,
(in millions)
1998 1997
-------- --------
Preferred Stock:
Balance at Beginning of Year $ 1,740 $ 2,650
Redemption of Stock (372) (150)
-------- --------
Balance at End of Period $ 1,368 $ 2,500
-------- --------
Common Stock:
Balance at Beginning and End of Period $ 441 $ 441
-------- --------
Capital Surplus:
Balance at Beginning of Year $ 10,360 $ 10,459
Shares Issued and Commitments to Issue Common Stock
for Employee Stock-Based Awards and Related Tax Effects (219) (160)
-------- --------
Balance at End of Period $ 10,141 $ 10,299
-------- --------
Retained Earnings:
Balance at Beginning of Year $ 11,086 $ 8,610
Net Income 725 927
Cash Dividends Declared:
Preferred Stock (34) (55)
Common Stock (306) (265)
-------- --------
Balance at End of Period $ 11,471 $ 9,217
-------- --------
Accumulated Other Comprehensive Income:
Balance at Beginning of Year $ 112 $ (271)
Other Comprehensive Income 22 (270)
-------- --------
Balance at End of Period $ 134 $ (541)
-------- --------
Common Stock in Treasury, at Cost:
Balance at Beginning of Year $ (1,997) $ (895)
Purchase of Treasury Stock (73) (609)
Reissuance of Treasury Stock 556 330
-------- --------
Balance at End of Period $ (1,514) $ (1,174)
-------- --------
Total Stockholders' Equity $ 22,041 $ 20,742
======== ========
Comprehensive Income:
Net Income $ 725 $ 927
Other Comprehensive Income 22 (270)
-------- --------
Comprehensive Income $ 747 $ 657
======== ========
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 CASH FLOWS
Three months Ended March 31,
(in millions)
1998 1997
-------- --------
Operating Activities
Net Income $ 725 $ 927
Adjustments to Reconcile Net Income to Net Cash Provided (Used)
by Operating Activities:
Provision for Credit Losses 344 220
Restructuring Costs 521 30
Depreciation and Amortization 242 235
Net Change In:
Trading-Related Assets 1,379 (6,880)
Accrued Interest Receivable 486 (195)
Other Assets (3,301) (572)
Trading-Related Liabilities (4,300) 8,750
Accrued Interest Payable (61) 166
Other Liabilities 485 671
Other, Net (867) 95
-------- --------
Net Cash Provided (Used) by Operating Activities (4,347) 3,447
-------- --------
Investing Activities
Net Change In:
Deposits with Banks (579) 5,046
Federal Funds Sold and Securities Purchased Under Resale Agreements 5,966 (5,802)
Loans Due to Sales and Securitizations 9,320 5,948
Other Loans, Net (9,175) (6,876)
Other, Net 86 (172)
Proceeds from the Maturity of Held-to-Maturity Securities 286 229
Purchases of Held-to-Maturity Securities (20) (18)
Proceeds from the Maturity of Available-for-Sale Securities 6,396 1,820
Proceeds from the Sale of Available-for-Sale Securities 37,873 16,323
Purchases of Available-for-Sale Securities (50,301) (14,635)
-------- --------
Net Cash Provided (Used) by Investing Activities (148) 1,863
-------- --------
Financing Activities
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (1,512) (2,794)
Domestic Time and Savings Deposits 5,797 (501)
Foreign Deposits (1,877) (1,596)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 812 2,285
Other Borrowed Funds 23 (2,132)
Other, Net (326) (37)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 1,831 1,121
Repayments of Long-Term Debt (662) (625)
Proceeds from the Issuance of Stock 337 170
Redemption of Preferred Stock (372) (150)
Treasury Stock Purchased (73) (1,031)
Cash Dividends Paid (295) (296)
-------- --------
Net Cash Provided (Used) by Financing Activities 3,683 (5,586)
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks 14 20
-------- --------
Net Decrease in Cash and Due from Banks (798) (256)
Cash and Due from Banks at January 1, 15,704 14,605
-------- --------
Cash and Due from Banks at March 31, $ 14,906 $ 14,349
======== ========
Cash Interest Paid $ 3,690 $ 2,908
-------- --------
Taxes Paid $ 159 $ 160
-------- --------
The Notes to Financial Statements are an integral part of these Statements.
-6-
7
Part I
Item 1. (continued)
- --------------------------------------------------------------------------------
See Glossary of Terms on page 34 for definition of terms used throughout the
Notes to Financial Statements.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of The Chase Manhattan Corporation and
Subsidiaries ("Chase") are prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all necessary adjustments have been included for a fair presentation
of this interim financial information. In addition, certain amounts have been
reclassified to conform to the current presentation.
Effective January 1, 1998, Chase implemented SFAS 127, which had deferred the
effective date of SFAS 125 relating to the accounting for securities lending,
repurchase agreements and other secured financing transactions. Under SFAS 125,
resale agreements and repurchase agreements are accounted for as secured lending
and secured borrowing transactions, respectively, when certain criteria are met.
If the criteria are not met, Chase accounts for its resale agreements as
purchases of securities with related off-balance sheet forward commitments to
resell and accounts for its repurchase agreements as sales of securities with
related off-balance sheet forward commitments to repurchase. For resale
agreements accounted for as secured lending transactions where Chase, as the
secured party, has taken control of securities received as collateral, Chase
recognizes the securities in Trading Assets and records an obligation to return
those securities in Trading Liabilities. For repurchase agreements accounted for
as secured borrowing transactions where the secured party has taken control of
securities pledged by Chase as collateral, Chase reclassifies the securities
pledged as a receivable, if material. Chase monitors the market value of
securities and adjusts the level of collateral for resale and repurchase
agreements, as appropriate. The impact of adopting SFAS 127 on Chase's earnings,
liquidity and capital resources is not material.
In March 1998, the AICPA issued SOP 98-1, which becomes effective for financial
statements for calendar year 1999. Chase elected early adoption beginning in the
1998 first quarter. SOP 98-1 requires the capitalization of eligible costs of
specified activities related to computer software developed or obtained for
internal use. Chase capitalized $17 million of these costs in the 1998 first
quarter.
NOTE 2- EARNINGS PER SHARE
For a discussion of Chase's current earnings per share policy, see Note Ten of
the 1997 Annual Report. For the calculation of basic and diluted EPS for the
three-month periods ended March 31, 1998 and 1997, see Exhibit 11 on page 38.
NOTE 3- COMPREHENSIVE INCOME
Effective with the first quarter 1998, Chase adopted SFAS 130, which defines and
establishes the standards for reporting comprehensive income. Comprehensive
income for Chase includes net income as well as the change in unrealized gains
and losses on available-for-sale securities and foreign currency translation,
each of which includes the impact of related derivatives. Chase has presented
these items net of tax in the Statement of Changes in Stockholders' Equity.
==================================================================================================================================
Three Months Ended March 31,
(in millions)
1998 1997
----------------------------------------------------- ------------------------------------------------
Net Unrealized Accumulated Net Unrealized Accumulated
Accumulated Gain(Loss) on Other Accumulated Gain(Loss) on Other
Translation Securities Comprehensive Translation Securities Comprehensive
Adjustment Available-for-Sale Income Adjustment Available-for-Sale Income
---------- ------------------ ------------- ----------- ------------------ -------------
Beginning Balance $ 17 $ 95 $ 112 $ 17 $ (288) $ (271)
Change During Period -- 22 22 1 (271) (270)
--------- ------- -------- --------- ---------- ---------
Ending Balance $ 17 $ 117 (a) $ 134 $ 18 $ (559) (a) $ (541)
========= ======= ======== ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Represents the tax effected difference between the fair value and
amortized cost of both the Available-for-Sale securities portfolio and
securities classified as loans, which are subject to the provisions of
SFAS 115. See Note Five.
================================================================================
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8
Part I
Item 1. (continued)
NOTE 4 - RESTRUCTURING COSTS
During the 1998 first quarter, Chase incurred a one-time pre-tax charge of $510
million in connection with initiatives to streamline support functions and
realign certain business activities. Annual savings from these actions are
expected to amount to approximately $460 million, which will be reinvested in
Chase's high-growth businesses. The majority of these costs relate to
anticipated staff reductions of approximately 4,500 existing positions
(approximately $338 million), costs in connection with planned dispositions of
certain premises and equipment (approximately $144 million) and other expenses
(approximately $28 million). As of March 31, 1998, an immaterial amount was
applied against the reserve.
Residual merger-related expenses of $11 million and $30 million were incurred in
the first quarters of 1998 and 1997, respectively, relating to the merger of The
Chase Manhattan Corporation and Chemical Banking Corporation. Cumulative-to-date
merger-related expenses have amounted to $367 million, in addition to the $1.65
billion restructuring charge taken at the March 31, 1996 merger date. For a
further discussion of Chase's merger-related restructuring costs, refer to Note
Twelve and page 29 of Chase's 1997 Annual Report.
NOTE 5 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note One
of Chase's 1997 Annual Report.
The amortized cost and estimated fair value of Chase's securities, including the
impact of related derivatives, are presented in the following table.
================================================================================================================================
(in millions) March 31, 1998 December 31, 1997
----------------------------- ----------------------------
Available-for-Sale Securities Amortized Fair Amortized Fair
Cost Value (a) Cost Value (a)
---------- --------- ---------- ----------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 31,711 $ 31,792 $ 27,849 $ 27,943
Collateralized Mortgage Obligations 2,284 2,287 2,013 2,018
Other, primarily U.S. Treasuries 14,391 14,296 11,492 11,461
Obligations of State and Political Subdivisions 266 266 274 276
Debt Securities Issued by Foreign Governments 6,708 6,724 6,153 6,138
Corporate Debt Securities 295 303 606 622
Equity Securities 860 1,017 876 1,015
Other, primarily Asset-Backed Securities (b) 435 423 308 282
---------- --------- ---------- ----------
Total Available-for-Sale Securities (c) $ 56,950 $ 57,108 $ 49,571 $ 49,755
========== ========= ========== ==========
Held-to-Maturity Securities
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 1,169 $ 1,182 $ 1,256 $ 1,267
Collateralized Mortgage Obligations 1,474 1,474 1,660 1,661
Other, primarily U.S. Treasuries 55 55 52 52
Other, primarily Asset-Backed Securities (b) 13 14 15 15
---------- --------- ---------- ----------
Total Held-to-Maturity Securities $ 2,711 $ 2,725 $ 2,983 $ 2,995
========== ========= ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
(a) Gross unrealized gains and losses on available-for-sale securities were
$340 million and $182 million, respectively, at March 31, 1998 and $386
million and $202 million, respectively, at December 31, 1997. Gross
unrealized gains and losses on held-to-maturity securities were $17
million and $3 million, respectively, at March 31, 1998 and $16 million
and $4 million, respectively, at December 31, 1997.
(b) Includes collateralized mortgage obligations of private issuers which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
(c) Excludes securities classified as loans, which are subject to the
provisions of SFAS 115. The amortized cost and fair value of these loans,
including the impact of related derivatives, were $771 million and $798
million, respectively, at March 31, 1998. This compares with $1,005
million and $982 million, respectively, at December 31, 1997.
================================================================================
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9
Part I
Item 1. (continued)
Net gains from available-for-sale securities sold in the first quarter of 1998
amounted to $83 million (gross gains of $134 million and gross losses of $51
million). Net gains on these sales for the same period in 1997 amounted to $101
million (gross gains of $116 million and gross losses of $15 million)
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
For a discussion of these business trusts, see page 58 of Chase's 1997 Annual
Report.
The following is a summary of Chase's outstanding capital securities, net of
discount, issued by each trust as of March 31, 1998:
==========================================================================================================================
Amount of
Capital Securities, Stated Maturity Interest Rate Interest
Name of Trust Net of Discount of Capital Securities of Capital Securities Payment Dates
(in millions)
- --------------------------------------------------------------------------------------------------------------------------
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
Chase Capital IV 350 12/6/2027 7.34% Quarterly - commencing 3/31/98
Chase Capital V 200 3/31/2028 7.03% Quarterly - commencing 3/31/98
------
Total $1,940
======
==========================================================================================================================
NOTE 8 - RISK-BASED CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note
Seventeen of Chase's 1997 Annual Report.
The following table presents the capital ratios for Chase and its significant
banking subsidiaries. Assets and capital amounts for Chase's banking
subsidiaries reflect intercompany transactions, whereas the respective amounts
for Chase reflect the elimination of intercompany transactions.
=========================================================================================
March 31, 1998 ($ in millions, The Chase Chase
except ratios) Chase Manhattan Bank Texas Chase USA
- -----------------------------------------------------------------------------------------
Tier 1 Capital Ratio (a)(c) 8.06% 7.27% 8.04% 7.95%
Total Capital Ratio (a)(c) 11.86% 10.96% 11.00% 11.68%
Tier 1 Leverage Ratio (b)(c) 6.02% 5.38% 6.83% 7.80%
Tier 1 Capital $ 22,643 $ 16,546 $ 1,498 $ 2,407
Total Qualifying Capital 33,319 24,952 2,050 3,537
Risk-Weighted Assets 280,825 227,584 18,629 30,284
Adjusted Average Assets 375,840 307,487 21,920 30,852
- -----------------------------------------------------------------------------------------
(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.
================================================================================
-9-
10
Part I
Item 1. (continued)
NOTE 9 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
Chase utilizes various derivative and foreign exchange financial instruments for
trading purposes and for purposes other than trading, such as asset/liability
management ("ALM"). For a discussion of the various financial instruments used
and the credit and market risks involved, see Note Eighteen of Chase's 1997
Annual Report.
The following table summarizes the aggregate notional amounts of derivative 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).
===============================================================================================================================
Notional Amounts Credit Exposure
March 31, December 31, March 31, December 31,
(in billions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Interest Rate Contracts
Interest Rate Swaps
Trading $ 3,486.1 $ 3,206.0 $ 11.9 $ 14.0
ALM 103.2 98.2 0.7 0.6
Futures, Forwards and Forward Rate Agreements
Trading 1,651.9 1,643.7 0.3 0.3
ALM 57.2 42.6 -- --
Purchased Options
Trading 339.1 316.1 1.7 1.7
ALM 43.2 13.1 -- --
Written Options
Trading 442.8 395.7 -- --
ALM 26.0 0.2 -- --
----------- ---------- ---------- --------
Total Interest Rate Contracts $ 6,149.5 $ 5,715.6 $ 14.6 $ 16.6
=========== ========== ========== ========
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Exchange Contracts
Spot, Forward and Futures Contracts
Trading $ 1,508.0 $ 1,521.7 $ 11.4 $ 14.4
ALM 67.4 72.6 -- --
Other Foreign Exchange Contracts (a)
Trading 411.6 358.7 6.7 5.8
ALM 7.8 5.2 -- --
----------- ---------- ---------- --------
Total Foreign Exchange Contracts $ 1,994.8 $ 1,958.2 $ 18.1 $ 20.2
=========== ========== ========== ========
- ------------------------------------------------------------------------------------------------------------------------------
Equity, Commodity and Other Contracts
Trading $ 77.4 $ 64.4 $ 2.7 $ 1.6
----------- ---------- ---------- --------
Total Equity, Commodity and Other Contracts $ 77.4 $ 64.4 $ 2.7 $ 1.6
=========== ========== ========== ========
- ------------------------------------------------------------------------------------------------------------------------------
Total Credit Exposure Recorded on the Balance Sheet $ 35.4 $ 38.4
- ------------------------------------------------------------------------------------------------------------------------------
(a) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $158.3 billion, $146.1 billion and
$115.0 billion, respectively, at March 31, 1998, compared with $123.9
billion, $126.6 billion and $113.4 billion, respectively, at December 31,
1997.
================================================================================
-10-
11
Part I
Item 1. (continued)
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of Chase's fair value methodologies, see Note Twenty-One of its
1997 Annual Report. The following table presents the financial assets and
liabilities valued under SFAS 107.
==================================================================================================================================
March 31, 1998 December 31, 1997
------------------------------------------- -----------------------------------------
Carrying Estimated Appreciation/ Carrying Estimated Appreciation/
(in millions) Value Fair Value (Depreciation) Value Fair Value (Depreciation)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 356,932 $ 359,702 $ 2,770 $ 357,077 $ 359,975 $ 2,898
========== =========== =========== ===========
Total Financial Liabilities $ 342,299 $ 341,684 615 $ 342,501 $ 341,700 801
========== =========== --------- =========== =========== ----------
Estimated Fair Value in Excess
of Carrying Value $ 3,385 $ 3,699
========= ==========
==================================================================================================================================
Derivative contracts used for ALM activities had an unrecognized net loss of
$471 million at March 31,1998 and an unrecognized net loss of $489 million at
December 31, 1997, both of which are included in the above amounts. Derivative
contracts used by Chase to reduce its exposure to prepayment risks associated
with its mortgage servicing rights that are not required to be fair valued under
SFAS 107 are excluded from the above table. At March 31, 1998 and December 31,
1997, these derivative contracts had an unrecognized net gain of $79 million and
$100 million, respectively. Also not included in the above table is an
unrecognized net gain from daily margin settlements on open future contracts of
$4 million at March 31, 1998 and an unrecognized net loss of $3 million at
December 31, 1997.
NOTE 11 - SUBSEQUENT EVENT
On March 17, 1998, Chase's Board of Directors approved a two-for-one stock
split, subject to stockholder approval at Chase's annual meeting on May 19th. If
approved by the stockholders, the stock split is intended to be effective at the
close of business on May 20, 1998. Assuming stockholder approval of the split,
Chase's basic and diluted pro-forma EPS for the 1998 first quarter would be
$0.82 and $0.80, respectively. The comparable amounts for the 1997 first quarter
would be $1.01 and $0.99 per share, respectively.
-11-
12
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 data, and ratios)
(As of or for the period ended) 1998 1997
---------- ------------------------------------------------
First Over(Under) Fourth Third Second First
Quarter 1Qtr97 Quarter Quarter Quarter Quarter
------- ------ ------- ------- ------- -------
AS REPORTED BASIS:
Total Revenues $ 4,629 12% $ 4,084 $ 4,409 $ 4,140 $ 4,150
Noninterest Expenses
(excluding Restructuring Costs) 2,614 8 2,470 2,590 2,400 2,417
Restructuring Costs 521 NM 20 71 71 30
Provision for Credit Losses 344 56 205 190 189 220
Net Income $ 725 (22) $ 874 $ 982 $ 925 $ 927
Net Income Per Common Share: (a)
Basic $ 1.64 (19) $ 1.99 $ 2.23 $ 2.06 $ 2.02
Diluted 1.59 (19) 1.94 2.16 2.00 1.97
Cash Dividends Declared 0.72 16 0.62 0.62 0.62 0.62
Book Value at Period End 48.55 14 47.51 46.19 44.44 42.59
Market Value at Period End 134.88 44 109.50 118.00 97.06 93.88
Performance Ratios: (b)
Return on Average Common Equity 13.77% 17.02% 19.63% 19.23% 19.12%
Return on Average Assets 0.78 0.92 1.08 1.06 1.11
MANAGED OPERATING BASIS: (c)
Operating Revenues $ 4,909 14 $ 4,289 $ 4,658 $ 4,407 $ 4,320
Operating Noninterest Expenses 2,610 10 2,467 2,499 2,400 2,364
Credit Costs (d) 628 44 471 445 456 437
Operating Net Income 1,053 11 850 1,081 969 949
Cash Operating Earnings 1,091 12 882 1,105 994 976
Shareholder Value Added (SVA) 404 23 205 441 352 329
Operating Net Income Per Common Share: (a)
Basic $ 2.41 16 $ 1.93 $ 2.46 $ 2.17 $ 2.08
Diluted 2.35 16 1.89 2.38 2.11 2.02
Performance Ratios: (b)
Operating Return on Average Common Equity 20.3% 16.5% 21.7% 20.2% 19.6%
Cash Return on Average Common Equity 21.1 17.2 22.2 20.8 20.2
Common Dividend Payout Ratio 30 32 25 29 30
Efficiency Ratio 53 57 53 54 55
Selected Balance Sheet Items:
Loans - Managed $186,067 9 $185,306 $178,892 $173,948 $170,060
Total Assets - Managed 383,838 8 382,373 382,379 366,024 354,516
- --------------------------------------------------------------------------------------------------------------------------------
(a) Effective December 31,1997, Chase adopted SFAS 128 relating to the
computation of earnings per share ("EPS"), which replaced primary EPS with
basic EPS and fully-diluted EPS with diluted EPS. Prior period amounts have
been restated.
(b) Performance ratios are based on annualized amounts.
(c) Excludes the impact of credit card securitizations, restructuring costs and
special items. See Glossary of Terms on page 34.
(d) Includes provision for credit losses, foreclosed property expenses and
charge-offs related to the securitized credit card portfolio.
NM Not Meaningful
-12-
13
Certain forward-looking statements contained herein are subject to risks and
uncertainties. Chase's actual results may differ materially from those set forth
in such forward-looking statements. Reference is made to Chase's reports filed
with the Securities and Exchange Commission, in particular the 1997 Annual
Report, for a discussion of factors that may cause such differences to occur.
See Glossary of Terms on page 34 for a definition of terms used throughout the
10-Q.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
Operating net income for the 1998 first quarter increased to $1,053 million from
$949 million in the first quarter of 1997. Diluted operating earnings per share
were $2.35 in the first quarter of 1998, a 16% increase when compared with $2.02
in the 1997 first quarter. The 1998 first quarter was marked by growing trading,
investment banking, equity-related and Global Services revenues, as well as by
solid performance in National Consumer Services.
For the first quarter of 1998, reported net income was $725 million or $1.59 per
share on a diluted basis, compared with $927 million or $1.97 per share in the
1997 first quarter. The results for the 1998 first quarter reflected a
previously-announced, one time charge of $510 million ($320 million after-tax)
taken in connection with initiatives to streamline support functions and realign
certain business functions. It is anticipated that annual savings from these
actions will amount to approximately $460 million, which will be reinvested in
Chase's high-growth businesses.
First quarter 1998 financial highlights:
- Operating diluted earnings per share rose 16%.
- Total managed revenues increased 14% to $4.9 billion.
- Return on common stockholders' equity rose to 20.3% from 19.6%.
Total noninterest operating expenses were $2,610 million in the 1998 first
quarter, a 10% increase from the prior-year quarter, reflecting increased
incentives related to higher Global Banking revenues and increased investment
spending on new product offerings.
The impact of economic conditions in Asia on 1998 first quarter results included
an increase in total nonperforming assets related to Asia (including
derivatives) to $243 million at March 31, 1998 and Asian commercial net
charge-offs for the 1998 first quarter of $92 million. Total exposure to
Indonesia, Korea and Thailand was reduced by 26% to $7.5 billion at March 31,
1998 from $10.1 billion at December 31, 1997. Total nonperforming assets at
March 31, 1998 were $1,335 million compared with $1,018 million at December
31,1997.
As part of its Business Effectiveness Review Project, Chase launched Chase
Business Services on April 6th. Chase Business Services is Chase's "shared
services" entity, intended to provide support services for Chase more
efficiently and at lower cost. Additionally, business restructuring in all three
major lines of business was well underway by the end of the 1998 first quarter.
In the first quarter of 1998, Chase raised the cash dividend on its common stock
to $.72 per share, from $.62 per share.
At March 31, 1998, Chase's Tier 1 Capital and Total Capital ratios were 8.1% and
11.9%, respectively, and at March 31,1998, Chase and each of its depository
institutions were "well capitalized".
-13-
14
- --------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
- --------------------------------------------------------------------------------
As of January 1,1998, Chase adopted Shareholder Value Added (SVA) as its primary
measure of business unit performance. SVA represents operating earnings
excluding the amortization of goodwill and certain intangibles (i.e., cash
operating earnings) less an explicit charge for allocated capital. For a further
discussion of Chase's line of business franchises and its capital allocation
method under SVA, reference is made to pages 21 and 24-25 of the 1997 Annual
Report.
Lines of Business Results
Management measures Chase's financial performance and that of its business units
based on managed operating earnings, which excludes the impact of credit card
securitizations, restructuring costs and special items.
===================================================================================================================================
For Three Months Ended Global National Global Services
March 31, Banking (a) Consumer Services (a) (Within CTS) (a) Total (b)
------------------------- ---------------------- ------------------- -------------
(in millions, except ratios) 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
Net Interest Income - Managed (c) $ 734 $ 793 $ 1,383 $ 1,302 $ 291 $ 244 $ 2,279 $ 2,194
Noninterest Revenue - Managed (c) 1,730 1,336 558 484 344 316 2,630 2,126
Noninterest Expense 1,130 994 978 940 449 407 2,610 2,364
-------- ---------- ---------- --------- -------- -------- ---------- -----
Operating Margin 1,334 1,135 963 846 186 153 2,299 1,956
Credit Costs 100 98 543 426 1 1 628 437
-------- ---------- ---------- --------- -------- -------- ---------- ----------
Operating Income Before Taxes 1,234 1,037 420 420 185 152 1,671 1,519
Income Taxes 470 389 159 165 70 58 618 570
-------- ---------- ---------- --------- -------- -------- ---------- ----------
Operating Earnings (d) $ 764 $ 648 $ 261 $ 255 $ 115 $ 94 $ 1,053 $ 949
======== ========== ========== ========= ======== ======== ========== ==========
Cash Operating Earnings (e) $ 770 $ 654 $ 287 $ 270 $ 119 $ 97 $ 1,091 $ 976
======== ========== ========== ========= ======== ======== ========== ==========
Average Common Equity $ 13,486 $ 12,332 $ 6,969 $ 5,415 $ 1,369 $ 1,421 $ 20,349 $ 18,494
Average Assets - Managed $278,140 $ 249,581 $ 104,928 $ 91,009 $ 9,526 $ 9,123 $ 394,302 $352,382
Shareholder Value Added $ 317 $ 223 $ 54 $ 81 $ 73 $ 48 $ 404 $ 329
Cash Return on Common Equity 22.5% 20.4% 16.1% 19.1% 34.5% 26.6% 21.1% 20.2%
Efficiency Ratio - Managed 46% 47% 50% 53% 71% 73% 53% 55%
===================================================================================================================================
Note: Lines-of-business results are subject to restatement as appropriate
whenever there are refinements in management reporting policies or changes
to the management organization.
(a) Only the global banking portion of Chase Texas is reported in the total
Global Banking line of business results. The consumer- and global
services-related results for Chase Texas are reported as part of National
Consumer Services ("NCS") and Chase Technology Solutions ("CTS") lines of
business results, respectively.
(b) Total column includes Corporate results. See description of Corporate on
page 17.
(c) Trading-related net interest income is reflected in Noninterest Revenue -
Managed.
(d) Operating Earnings exclude restructuring costs and special items.
(e) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain intangibles.
================================================================================
Chase's financial performance goals over the next several years include an
average return on common equity of 18% or higher, growth in managed operating
revenues accelerating to 10% per year and double-digit growth in operating
earnings per share.
-14-
15
- --------------------------------------------------------------------------------
GLOBAL BANKING
- --------------------------------------------------------------------------------
Global Banking managed revenues rose 16% in the first quarter, with cash
operating earnings rising 18%. SVA increased by 42% to $317 million. These
improvements were driven by higher investment banking fees, trading-related
revenue and revenue from equity-related investments.
The following table sets forth certain key financial performance measures of the
businesses within Global Banking for the periods indicated.
==================================================================================================================================
Global Banking:
1998 1997
--------------------------------------------- ---------------------------------------------
Three Months Ended Cash Cash
March 31, Managed Operating Efficiency Managed Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
Global Markets $ 955 $ 325 46% $ 901 $ 325 43%
Corporate Finance 349 97 53 155 11 88
Corporate Lending 365 120 29 379 135 27
--------- -------- -------- -------
Total Global Investment Banking
and Corporate Lending 714 217 40 534 146 45
Chase Capital Partners 269 149 11 137 72 16
Global Asset Management
and Private Banking 191 34 69 176 33 69
Middle Market 199 46 53 209 56 45
Chase Texas (consolidated) 376 94 59 330 77 62
- ----------------------------------------------------------------------------------------------------------------------------------
Global Markets
Global Markets' activities encompass the trading and sales of foreign exchange,
derivatives, fixed income securities and commodities. As a leader in capital
markets, Chase operates 24 hours a day covering the major international
cross-border financial markets, as well as many local markets, in both developed
and emerging countries. Global Markets is a recognized world leader in such key
activities as foreign exchange, interest rate swaps and emerging markets debt.
Trading-related revenue for the first quarter of 1998 was $713 million, an
increase of 23% from 1997 first quarter's results. Improved conditions in
capital markets worldwide enabled Chase to take advantage of an attractive
foreign exchange environment as well as fixed income opportunities, particularly
within non-Asian emerging markets. The 1998 first quarter results reflected
higher incentive costs. Also included within Global Markets are Chase's domestic
and international treasury units, which have the primary responsibility for
Chase's asset/liability management activities ("ALM"). ALM activities in the
treasury units are managed on a total return basis with one of the primary
objectives being the creation of economic value over time. Total return combines
the reported revenues (net interest income and securities gains/losses) and the
change in the net unrealized appreciation/depreciation of all financial
instruments and underlying balance sheet items. In the first quarter of 1998,
the total return from ALM activities amounted to $85 million pre-tax before
expenses.
Global Investment Banking and Corporate Lending
Global Investment Banking and Corporate Lending finances and advises
corporations, financial institutions, 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, restructuring, private
placements, lease financing, trade finance and lending. Chase continues to
maintain its lead position in loan syndications and in leveraged finance. Cash
operating earnings in the first quarter of 1998 were $217 million, a $71 million
increase when compared with 1997. The 1998 first quarter results reflect
significant activity in loan syndications, as well as the growing contributions
of newer businesses, such as high-yield and investment-grade underwriting and
mergers and acquisitions.
-15-
16
Chase Capital Partners
Chase Capital Partners ("CCP") is a global private equity organization with
approximately $5.4 billion under management, including $4.0 billion in
equity-related investments. CCP provides equity and mezzanine financing for a
wide variety of investment opportunities in the United States and abroad. During
the first quarter of 1998, CCP's direct investments totaled $371 million in 34
venture capital, management buyout, recapitalization, growth equity and
mezzanine transactions, compared with $124 million in 13 direct investments
during the same period in 1997. CCP cash operating earnings rose $77 million to
$149 million for the 1998 first quarter, marking a continuation of favorable
private and public equity markets and CCP's accelerated pace of investment
activities over the last several years.
Global Asset Management and Private Banking
The Global Asset Management and Private Banking Group serves a global client
base of high net worth individuals, families, institutional and mutual fund and
self-directed investors. Services include investment management for
institutional investors globally, Chase Vista Mutual Funds (at March 31, 1998,
the third largest bank-managed mutual fund family in the U.S.) and a full range
of integrated private banking capabilities, investment management and advisory
services, trust and estate planning, global custody, global mutual funds, credit
and banking, and philanthropic advisory services. Total assets under management
amounted to $167 billion at March 31, 1998. Earnings for the first quarter of
1998 were driven by a 9% growth in revenue reflecting higher trust fees.
Middle Market
Chase is the premier provider of financial services to middle-market companies
(companies with sales ranging from $10 million to $500 million) regionally, with
a national focus in selected industries. It is also the market leader in the New
York metropolitan tri-state area where it has relationships with 53% of middle
market companies and is lead bank for 25% of these companies. Cash operating
earnings for the first quarter of 1998 were $46 million, a $10 million decrease
when compared with the 1997 results reflecting lower deposit volume and spreads
and a 12% increase in expenses.
Chase Texas
Chase Texas is the primary bank for more large corporations and middle market
companies than any other bank in Texas. Chase Texas also maintains a strong
consumer banking presence through its 125 locations. Additionally, Chase Texas
is the largest bank for personal and corporate trust services in the Southwest.
Managed revenues for the first quarter of 1998 increased 14% from the 1997 first
quarter, reflecting continuing growth in fee-based activities, higher loan and
deposit volumes, and securities gains.
- --------------------------------------------------------------------------------
NATIONAL CONSUMER SERVICES (NCS)
- --------------------------------------------------------------------------------
For the first quarter of 1998, NCS's cash operating earnings were $287 million,
a $17 million increase over the 1997 first quarter. The increase in cash
operating earnings is attributable to a 9% increase in revenue due primarily to
the acquisition of The Bank of New York's ("BONY") credit card portfolio in
November 1997. NCS's expenses increased in the 1998 first quarter, primarily as
a result of higher credit costs for credit cards and auto loans. SVA for the
1998 first quarter was $54 million, compared with $81 million in the 1997 first
quarter. The decline in SVA is due to more capital being allocated to NCS as a
result of recent acquisitions.
The following table sets forth certain key financial performance measures of the
businesses within NCS for the periods indicated.
==================================================================================================================================
National Consumer Services:
1998 1997
--------------------------------------------- ---------------------------------------------
Three Months Ended Cash Cash
March 31, Managed Operating Efficiency Managed Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
Cardmember Services $ 931 $ 111 35% $ 796 $ 80 41%
Regional Consumer Banking 567 84 72 558 92 71
Chase Home Finance 246 66 52 250 62 52
Diversified Consumer Services (a) 183 25 57 165 27 55
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Insurance products, which are managed within Diversified Consumer Services,
but included for reporting purposes in Cardmember Services, Regional
Consumer Banking, and Chase Home Finance, generated revenues of $29 million
and $24 million in 1998 and 1997, respectively.
================================================================================
-16-
17
Cardmember Services
Chase Cardmember Services ("CCS") ranks as the fourth largest bank card issuer
in the United States with a $31 billion managed portfolio at March 31, 1998. CCS
also reflects the results of Chase's international consumer business, which
includes The Manhattan Card Company Limited, the third-largest credit card
issuer in Hong Kong (which became wholly owned in 1998), and includes consumer
banking activities in Hong Kong, Panama and the Eastern Caribbean. CCS's cash
operating earnings for the first quarter of 1998 were $111 million, a $31
million or 39% increase, over 1997. The increase was driven by a 20% revenue
growth in the domestic portfolio, which benefited from the aforementioned BONY
acquisition and increased co-branded activities. These positive results were
partially offset by increased charge-offs and the effect of the economic
environment in Asia on Chase's international consumer businesses.
Regional Consumer Banking
At March 31, 1998, Regional Consumer Banking has a leading share of primary bank
relationships among consumers and small businesses in the New York metropolitan
tri-state area. It is also a leading retail institution in key Texas markets.
Regional Consumer Banking offers customers convenient access to financial
services through the largest branch and proprietary ATM networks in the NY
metropolitan region plus state-of-the-art telephone, PC and Internet services.
Cash operating earnings for the first quarter of 1998 were $84 million, a 9%
decrease from first quarter 1997, reflecting higher expenses related to systems
integration and enhancements, particularly within Chase Texas' retail
businesses.
Chase Home Finance
At March 31, 1998, Chase Home Finance is the third-largest originator and
servicer of residential mortgage loans in the U.S., serving more than 1.9
million customers nationwide. It is also a leading provider of home-equity
secured lending and manufactured housing financing. At March 31, 1998, Chase's
residential mortgage servicing portfolio totaled $171 billion. During the first
quarter of 1998, $16 billion in residential mortgage loans were originated. Cash
operating earnings improved to $66 million in the 1998 first quarter, a $4
million increase from the comparable 1997 quarter, reflecting the continued
growth in mortgage originations partially offset by higher prepayments resulting
from greater refinancing activity. Excluding the impact of two discontinued
product lines, cash operating earnings would have risen 14%.
Diversified Consumer Services
Diversified Consumer Services ("DCS") is a leading provider of automobile
financing, student lending, and unsecured consumer lending. At March 31, 1998,
Chase Auto Finance had $14 billion in retained outstandings with $3 billion in
new originations for the first quarter of 1998. In addition to its financing
activities, DCS offers brokerage services, insurance and investment products
nationwide. DCS's revenues for the first quarter of 1998 increased 11% as a
result of loan growth. However, cash operating earnings of $25 million for the
first quarter of 1998 declined 7%, when compared with the 1997 first quarter, as
a result of higher expenses and an increase in the credit provision associated
with the business volume growth.
- --------------------------------------------------------------------------------
CHASE TECHNOLOGY SOLUTIONS
- --------------------------------------------------------------------------------
Chase Technology Solutions ("CTS") combines Chase's global services businesses,
information technology and operations, and electronic commerce initiatives into
a single group. Global Services is a leading provider of information and
transaction services globally and includes custody, cash management, trust and
other fiduciary services. As the world's largest provider of global custody and
a leader in trust and agency services, Global Services was custodian for over
$4.7 trillion in assets and serviced over $3.0 trillion in outstanding debt at
March 31, 1998. 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. Cash operating earnings for Global Services in the first quarter of 1998
was $119 million, an increase of $22 million or 23% from first quarter 1997. SVA
for Global Services in the 1998 first quarter was $73 million, a 52% increase
when compared with first quarter 1997. These improvements resulted from revenue
growth across all three businesses within Global Services (Chase Treasury
Solutions, global investor services and global trust) reflecting increased
assets under trust and custody, higher deposit levels and the benefit of ongoing
productivity initiatives.
- --------------------------------------------------------------------------------
CORPORATE
- --------------------------------------------------------------------------------
Corporate includes the effects remaining at the Corporate level after the
implementation of management accounting policies, including residual credit
provision and tax expense. Corporate also includes unallocated special items.
For the first quarter of 1998, Corporate had a cash operating loss of $85
million compared to a cash operating loss of $45 million in 1997.
-17-
18
Reconciliation of Reported Results to Managed Operating Results
The following supplemental information provides a reconciliation between Chase's
reported results and Chase's results on a managed operating basis.
==================================================================================================================================
First Quarter 1998 First Quarter 1997
------------------------------------------------ -------------------------------------------------
Managed Managed
Reported Credit Card Special Operating Reported Credit Card Special Operating
(in millions, except Results Securitizations Items Basis Results Securitizations Items Basis
per share data) (a) (b) (c) (a) (b) (d)
------- --------------- ----- ----- ------- --------------- ----- -----
EARNINGS
Total Revenue $ 4,629 $ 280 $ -- $ 4,909 $ 4,150 $ 214 $ (44) $ 4,320
Noninterest Expense 2,610 -- -- 2,610 2,414 -- (50) 2,364
-------- -------- ------ -------- ------- ------- ------- --------
Operating Margin 2,019 280 -- 2,299 1,736 214 6 1,956
Credit Costs 348 280 -- 628 223 214 -- 437
-------- -------- ------ -------- ------- ------- ------- --------
Income Before
Restructuring Costs 1,671 -- -- 1,671 1,513 -- 6 1,519
Restructuring Costs 521 -- (521) -- 30 -- (30) --
-------- -------- ------ -------- ------- ------- ------- --------
Income Before Taxes 1,150 -- 521 1,671 1,483 -- 36 1,519
Tax Expense 425 -- 193 618 556 -- 14 570
-------- -------- ------ -------- ------- ------- ------- --------
Net Income $ 725 $ -- $ 328 $ 1,053 $ 927 $ -- $ 22 $ 949
======== ======== ====== ======== ======= ======= ======= ========
NET INCOME PER COMMON SHARE
Basic $ 1.64 $ 2.41 $ 2.02 $ 2.08
Diluted $ 1.59 $ 2.35 $ 1.97 $ 2.02
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Represents results reported in Chase's financial statements, except
restructuring costs have been separately displayed and foreclosed property
expense is included in credit costs.
(b) Represents the impact of credit card securitizations. The line items on the
income statement impacted are net interest income ($348 million in 1998 and
$298 million in 1997), provision for credit losses ($280 million in 1998
and $214 million in 1997), credit card revenue ($66 million in 1998 and $68
million in 1997) and other revenue ($2 million in 1998 and $16 million in
1997).
(c) Includes restructuring costs and special items. Restructuring costs reflect
the $510 million pre-tax charge ($320 million after-tax) taken in
connection with initiatives to streamline support functions, and residual
costs of $11 million pre-tax ($8 million after-tax) related to the merger
restructuring charge.
(d) Includes restructuring costs and special items. Special items reflect a
$44 million pre-tax gain from the sale of a partially-owned foreign
investment and a $50 million pre-tax charge for the accelerated vesting of
stock-based incentive awards.
================================================================================
-18-
19
- --------------------------------------------------------------------------------
REPORTED RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The section below primarily discusses Chase's reported results of operations.
Reported results include the impact of credit card securitizations,
restructuring costs and special items.
Net Interest Income
================================================================================================================================
First Quarter
--------------------------------------
1998 1997 Change
----------- ----------- ------
Net Interest Income (in millions)
Managed Basis $ 2,512 $ 2,366 6%
Impact of Securitizations (348) (298)
--------- ---------
Reported $ 2,164 $ 2,068 5%
========= =========
Average Interest-Earning Assets (in billions)
Managed Basis $ 318.8 $ 282.8 13%
Impact of Securitizations (17.3) (13.4)
---------- ---------
Reported $ 301.5 $ 269.4 12%
========== =========
Net Yield on Interest-Earning Assets on a Taxable Equivalent Basis
Managed Basis 3.20% 3.40% (20) bp
Impact of Securitizations (.28) (.28) --
---- ----
Reported 2.92% 3.12% (20) bp
==== ====
- --------------------------------------------------------------------------------------------------------------------------------
bp - Denotes basis points
================================================================================
Reported net interest income for the 1998 first quarter was $2,164 million, an
increase of $96 million from the 1997 first quarter reflecting a higher level of
interest-earning assets, primarily loans (both consumer and commercial) and
securities. The 20 basis point decline in net yield is primarily due to
generally narrower spreads on commercial and consumer loans and a higher level
of lower-yielding available-for-sale securities.
=================================================================================================================
Average Interest-Earning Assets
First Quarter
-------------
(in billions) 1998 1997
--------------------------- -----------------------
Loans $ 170.5 57% $ 153.0 57%
Securities 55.6 18 43.5 16
Liquid Assets 75.4 25 72.9 27
---------- ------ -------- -----
Reported Average Interest-Earning Assets $ 301.5 100% $ 269.4 100%
========== ====== ======== =====
=================================================================================================================
Average interest-earning assets retained on the balance sheet increased by 12%
in the first quarter of 1998 principally as a result of the increase in loan
volume and securities. The $17.5 billion increase in average loans retained was
equally divided between the consumer and commercial portfolios, while the
increase in securities was principally from the domestic available-for-sale
portfolio. The growth in interest-earning assets was funded by higher deposit
levels coupled with an increase in Federal funds purchased and securities sold
under repurchase agreements, which provided short-term funding for
trading-related positions.
Provision for Credit Losses
Chase's provision for credit losses, which equaled net charge-offs, amounted to
$344 million in the 1998 first quarter and $220 million in the 1997 first
quarter. For a discussion of Chase's net charge-offs, see the Credit Risk
Management Section on pages 24-27.
Management expects that the provision for credit losses for full-year 1998 will
be higher than the full-year 1997 provision as a result of a higher volume of
credit card outstandings as well as increased charge-offs from the Asian
commercial portfolio.
-19-
20
Noninterest Revenue
The 1998 first quarter was particularly strong (18% increase) with record or
near-record results in several key areas (notably trading, investment banking
and equity-related revenues as well as trust fees and credit card revenue).
=======================================================================================
Noninterest Revenue First Quarter
----------------------------
(in millions) 1998 1997
----------- --------
Investment Banking Fees $ 361 $ 176
Trust, Custody and Investment Management Fees 348 310
Credit Card Revenue 300 261
Service Charges on Deposit Accounts 91 91
Fees for Other Financial Services 419 383
--------- --------
Total Fees and Commissions 1,519 1,221
Trading Revenue 480 405
Securities Gains 83 101
Revenue from Equity-Related Investments 287 164
Other Revenue 96 191
--------- --------
Total $ 2,465 $ 2,082
========= ========
- ---------------------------------------------------------------------------------------
Investment banking fees of $361 million in the 1998 first quarter were more than
double the $176 million of fees earned in the 1997 first quarter. These results
reflect significant activity in loan syndications, as well as the growing
contribution of newer businesses such as high-yield and investment-grade
underwriting and mergers and acquisitions. During the first quarter of 1998,
Chase moved into the top ten in worldwide mergers and acquisitions advisory
business.
================================================================================================
Trust, Custody and Investment Management Fees First Quarter
--------------------------
(in millions) 1998 1997
---------- -------
Institutional (a) $ 182 $ 160
Personal (a) 114 101
Mutual Fund Fees (a) 31 23
Other Trust Fees 21 26
-------- -------
Total Trust, Custody and Investment Management Fees $ 348 $ 310
======== =======
- ------------------------------------------------------------------------------------------------
(a) For the definitions of the above captions, see page 26 of Chase's 1997
Annual Report.
================================================================================
Trust, custody and investment management fees rose 12% to a record $348 million
in the 1998 first quarter. These favorable results were largely attributable to
growth in assets under custody, expanded securities lending activity, and a
higher level of assets under management (including at Chase Vista mutual
funds).
Credit card revenue rose $39 million, or 15%, in the 1998 first quarter as a
result of continued growth in managed outstandings, including the acquisition of
BONY's credit card portfolio in late 1997 and increased co-branded activities
(notably Wal-Mart). The increase in revenue was partially offset by a rise in
net charge-offs on the securitized portfolio, which reduced the excess servicing
fees Chase received from the securitizations. Average managed credit card
receivables grew to $31.8 billion in the first quarter of 1998, compared with
$25.3 billion for the prior year's first quarter. For a further discussion of
the credit card portfolio see page 25 of this Form 10-Q.
-20-
21
=======================================================================================
Fees for Other Financial Services First Quarter
--------------------------
(in millions) 1998 1997
-------- -------
Fees in Lieu of Compensating Balances $ 80 $ 81
Commissions on Letters of Credit and Acceptances 74 72
Mortgage Servicing Fees 57 56
Loan Commitment Fees 38 27
Other Fees 170 147
-------- -------
Total $ 419 $ 383
======== =======
=======================================================================================
The higher level of loan commitment fees for the 1998 first quarter was largely
a reflection of increased activity in Chase's acquisition financing business.
Higher fees related to insurance products, investment services and from loans
securitized during the latter half of 1997 contributed to the increase in other
fees.
===================================================================================
Trading Revenue First Quarter
---------------------------
(in millions) 1998 1997
---------- --------
Trading Revenue $ 480 $ 405
Net Interest Income Impact (a) 233 173
-------- --------
Total Trading-Related Revenue $ 713 $ 578
======== ========
Product Diversification:
Interest Rate Contracts (b) $ 146 $ 183
Foreign Exchange Contracts (b) 288 169
Debt Instruments and Other (b) 279 226
-------- --------
Total Trading-Related Revenue $ 713 $ 578
======== ========
- -----------------------------------------------------------------------------------
(a) Trading-related net interest income 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 net interest income on
the Consolidated Statement of Income.
(b) For the classes of financial instruments included, see Note Two of Chase's
1997 Annual Report.
================================================================================
Trading-related revenues of $713 million for the 1998 first quarter represents
another record quarter, rebounding sharply from the fourth quarter 1997 level
and 23% above last year's first quarter results. Improved conditions in capital
markets worldwide enabled Chase to take advantage of a favorable foreign
exchange environment, as well as fixed income opportunities, particularly within
non-Asian emerging markets.
Interest rate contract revenues declined modestly, mainly due to weaker results
in the U.S., especially in several structured products. The rise in foreign
exchange revenue reflected strong earnings across a broad spectrum of
currencies, with particular emphasis on Asian markets where volatility continued
to remain high. The improvement in debt instruments and other revenue was
attributable to strong performances from various non-interest rate derivative
product lines, as well as strong markets in Eastern European and Latin American
debt instruments.
Trading revenues are affected by many factors, including volatility of
currencies and interest rates, the volume of transactions executed by Chase on
behalf of its customers, volatility associated with the introduction of the
euro, Chase's success in proprietary positioning, the credit standing of Chase,
and the steps taken by central banks and governments which affect financial
markets. Chase expects its trading revenues will fluctuate as these factors vary
from period to period.
Securities gains of $83 million were realized in connection with Chase's
asset/liability management activities. There were lower gains on sales of
securities overseas during the 1998 first quarter when compared with the prior
year's first quarter, which were partially offset by higher gains in the current
quarter from sales of U.S. Government and agency securities.
-21-
22
Revenue from equity-related investments includes income from a wide variety of
investments both in the United States and abroad. The 1998 first quarter results
of $287 million were a record for Chase and were significantly higher than the
prior year's quarter and the quarterly average of approximately $192 million for
the previous eight quarters. The higher revenue reflects continued favorable
conditions in the private and public equity markets and Chase's accelerated pace
of investment activities over the last several years. At March 31, 1998, the
carrying value of Chase's equity-related investments approximated $4.0 billion.
Chase believes that equity-related investments will continue to make
contributions to its earnings, although the timing of the recognition of gains
is unpredictable and revenues could vary significantly from period to period.
===================================================================================================
Other Noninterest Revenue First Quarter
--------------------------
(in millions) 1998 1997
-------- -------
Residential Mortgage Origination/Sales Activities $ 52 $ 31
Gain on Sale of a Partially-Owned Foreign Investment -- 44
All Other Revenue 44 116
-------- -------
Total Other Noninterest Revenue $ 96 $ 191
======== =======
===================================================================================================
Other revenue, which includes gains and losses from the sale of nonstrategic
assets and from securitizations, amounted to $96 million, a decline of $95
million from the prior year's first quarter. The 1998 first quarter results
included higher revenue from residential mortgage origination and sales
activities, a result of a favorable interest rate environment. The 1997 first
quarter results included a $44 million gain on the sale of a partially-owned
foreign investment, as well as gains on sales of other nonstrategic assets and
on asset securitizations. The 1997 first quarter also include $14 million of
equity income from Chase's investment in CIT Group Holdings, Inc. (Chase's
remaining 20% interest in CIT was sold in the fourth quarter of 1997).
Noninterest Expense
Noninterest expense, excluding restructuring costs, was $2,614 million in the
1998 first quarter, an increase of 8% from the first quarter of 1997. Increased
revenues across a spectrum of Global Banking businesses contributed to an
increase in incentive costs. The balance of the increase reflects operating
costs related to portfolio acquisitions, investment spending on new product
offerings and Year 2000, Economic and Monetary Union ("EMU") integration and
other technology spending. Noninterest expense including restructuring costs was
$3,135 million in the 1998 first quarter, a 28% increase from the 1997 first
quarter.
================================================================================
Noninterest Expense First Quarter
--------------------------
(in millions, except ratios) 1998 1997
---- ----
Salaries $ 1,254 $ 1,124
Employee Benefits 224 222
Occupancy Expense 189 187
Equipment Expense 209 190
Other Expense 738 694
---------- ---------
Total Before Restructuring Costs 2,614 2,417
Restructuring Costs 521 30
---------- ---------
Total $ 3,135 $ 2,447
========== =========
Efficiency Ratio 56% 57%
Managed Efficiency Ratio (a) 53% 55%
- --------------------------------------------------------------------------------
(a) Excludes the impact of credit card securitizations.
================================================================================
The increase in salaries for the 1998 first quarter was primarily due to higher
incentive costs as a result of higher earnings across a number of businesses,
investments in selected growth businesses, and competitive market pressures
across many segments of Global Banking. Included in the 1997 first quarter
results was a charge of $50 million reflecting the accelerated vesting of
stock-based incentive awards.
-22-
23
================================================================================
Full-Time Equivalent Employees March 31, March 31,
1998 1997
-------- -------
Domestic Offices 59,738 57,953
Foreign Offices 10,521 9,924
-------- -------
Total Full-Time Equivalent Employees 70,259 67,877
======== =======
================================================================================
The increased staff levels during the 1998 first quarter were primarily in NCS,
reflecting increased activities, primarily due to portfolio acquisitions and
volume growth.
The higher level of equipment expense was primarily the result of increased
software expense to integrate and enhance processing systems throughout Chase,
and technology expenditures necessary to support targeted growth businesses.
================================================================================
Other Expense First Quarter
--------------------------
(in millions) 1998 1997
---- ----
Professional Services $ 142 $ 133
Marketing Expense 90 103
Telecommunications 77 75
Travel and Entertainment 52 51
Amortization of Intangibles 61 41
Minority Interest 12 19
Foreclosed Property Expense 4 3
All Other 300 269
--------- ---------
Total $ 738 $ 694
========= =========
================================================================================
Other expense for the 1998 first quarter increased by $44 million due to
increases in the amortization of intangibles and all other expenses. The
purchase of the BONY credit card portfolio in late 1997 contributed to the
increase in amortization expense. In addition, increased servicing costs for the
portfolio contributed to an increase in all other expense. Professional services
costs reflected higher levels of contract computer professionals associated with
planned Year 2000 and the EMU efforts. Lower credit card marketing costs, and a
decline in minority interest expense due to the consolidation of a foreign
investment in the 1998 first quarter, partially offset these increases.
For a further discussion of Chase's Year 2000 and the EMU efforts, see
pages 28-29 of Chase's 1997 Annual Report.
For a discussion of Chase's restructuring costs, see Note Four on page 8.
Income Taxes
Chase recognized income tax expense of $425 million (at a 37% effective tax
rate) in the first quarter of 1998, compared with $556 million (at a 37.5%
effective tax rate) in the first quarter of 1997.
-23-
24
- --------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following discussion of Chase's credit risk management focuses primarily on
developments since December 31, 1997 and should be read in conjunction with
pages 29-37 and 52 of Chase's 1997 Annual Report.
The following table presents Chase's credit-related information for the dates
indicated.
================================================================================================================================
Past Due 90 Days or More
Credit-Related Assets Nonperforming Assets & Still Accruing
-------------------------- ------------------------- ----------------------
March 31, Dec 31, March 31, Dec 31, March 31, Dec 31,
(in millions) 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Consumer:
Domestic Consumer:
1-4 Family Residential Mortgages $ 42,629 $ 38,680 $ 376 $ 340 $ 2 $ 2
Credit Card 13,268 15,631 -- -- 263 256
Auto Financings 13,816 13,243 25 31 13 20
Other Consumer 8,408 8,543 4 7 104 142
----------- --------- --------- -------- -------- --------
Total Domestic Consumer 78,121 76,097 405 378 382 420
Foreign Consumer 4,017 3,976 22 21 25 7
----------- --------- --------- -------- -------- --------
Total Consumer 82,138 80,073 427 399 407 427
----------- --------- --------- -------- -------- --------
Commercial:
Domestic Commercial:
Commercial and Industrial 36,523 37,931 367 258 19 18
Commercial Real Estate(a) 4,948 5,030 66 75 6 14
Financial Institutions 7,077 6,652 1 1 -- --
----------- --------- --------- -------- -------- --------
Total Domestic Commercial 48,548 49,613 434 334 25 32
Total Foreign Commercial 37,258 38,768 304 175 55 --
----------- --------- --------- -------- -------- --------
Total Commercial 85,806 88,381 738 509 80 32
----------- --------- --------- -------- -------- --------
Total Loans (b) $ 167,944 $ 168,454 1,165 908 $ 487 $ 459
=========== ========= --------- -------- ======== ========
Derivative and FX Contracts $ 35,362 $ 38,476 40 -- $ -- $ 1
=========== ========= ======== ========
Assets Acquired as Loan Satisfactions 130 110
--------- --------
Total Nonperforming Assets $ 1,335 $ 1,018
========= ========
================================================================================================================================
Net Charge-offs
------------------------------
First Quarter
(in millions) 1998 1997
---- ----
Consumer:
Domestic Consumer:
1-4 Family Residential Mortgages $ 10 $ 7
Credit Card 179 150
Auto Financings 23 12
Other Consumer 41 40
------- -------
Total Domestic Consumer 253 209
Foreign Consumer 3 3
------- -------
Total Consumer 256 212
------- -------
Commercial:
Domestic Commercial:
Commercial and Industrial 9 14
Commercial Real Estate(a) (3) (4)
------- -------
Total Domestic Commercial 6 10
Total Foreign Commercial 70 (2)
------- -------
Total Commercial 76 8
Derivative and FX Contracts 12 --
------- -------
Total Net Charge-offs $ 344 $ 220
======= =======
- --------------------------------------------------------------------------------------------------------------------------------
(a) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
(b) Total loans on a managed basis at March 31, 1998 and December 31, 1997 were
$186,067 million and $185,306 million, respectively.
- --------------------------------------------------------------------------------
-24-
25
Loan Summary
The slight decrease in loans outstanding is a result of a reduction in
commercial loans. Based upon industry classifications utilized by Chase, there
were no commercial and industrial industry segments which exceeded 5% of total
commercial and industrial loans outstanding.
Chase's nonperforming assets at March 31, 1998 increased $317 million from the
1997 year-end level primarily due to an increase in nonperforming Asian assets
and in nonperforming domestic commercial loans. Management expects that during
the remainder of 1998, there will be an increase in nonperforming assets from
the March 31, 1998 level, primarily as a result of continuing uncertainty in the
financial conditions of certain Asian countries.
Total net charge-offs on a retained basis increased $124 million during the 1998
first quarter. Total net charge-offs on a managed basis (which excludes the
impact of credit card securitizations) were $624 million in the 1998 first
quarter, compared with $434 million in the first quarter of 1997. The increase
in net charge-offs on both a managed and retained basis is due to the generally
lower credit quality of a recently acquired credit card portfolio, a factor
which was anticipated at the time of its acquisition, and increased foreign
commercial charge-offs primarily as a result of conditions in Asia.
Consumer Portfolio
Domestic Consumer
Residential Mortgage Loans: Residential mortgage loans were $42.6 billion at
March 31, 1998, a $3.9 billion increase during 1998, reflecting a lower interest
rate environment which has increased consumer demand. At March 31, 1998,
nonperforming domestic residential mortgage loans, as a percentage of the
portfolio, was 0.88%, unchanged from the 1997 year-end level.
Credit Card Loans: Chase analyzes its credit card portfolio on a "managed
basis", which includes credit card receivables on the balance sheet as well as
credit card receivables that have been securitized.
The following table presents credit-related information for Chase's managed
domestic credit card receivables.
========================================================================================
As of or for the
Three Months Ended
March 31,
----------------------------
(in millions, except ratios) 1998 1997
------------ ----------
Average Managed Credit Card Receivables $ 31,835 $ 25,318
Past Due 90 Days or more and Accruing $ 649 $ 622
As a Percentage of Average Credit Card Receivables 2.04% 2.46%
Net Charge-offs $ 459 $ 358
As a Percentage of Average Credit Card Receivables 5.77% 5.66%
- ----------------------------------------------------------------------------------------
The $6.5 billion increase in average managed credit card receivables is largely
the result of the purchase of a credit card portfolio in late 1997, totaling
approximately $4.0 billion in outstandings. The increase in net charge-off
percentage is due to the generally lower credit quality of that portfolio.
Management expects that domestic credit card net charge-offs, as a percentage of
average managed credit card receivables, will increase modestly in 1998 when
compared with 1997.
Auto Financings: The increase in retained auto financings outstanding reflected
continued strong consumer demand due to favorable pricing programs, partially
offset by the impact of auto loan securitizations. Total originations were $3.0
billion in the first three months of 1998, compared with $2.8 billion in 1997.
Net charge-offs related to auto financings were $23 million in the 1998 first
quarter, compared with $12 million in 1997. The increased level of net
charge-offs related to auto financings in 1998 primarily reflects growth in the
portfolio and the unfavorable performance in a discontinued product line.
-25-
26
Commercial Portfolio
Domestic Commercial
The solid performance in the domestic commercial portfolio continued during the
1998 first quarter as net charge-off levels remained low and the portfolio
continued to maintain its strong credit quality.
Foreign Commercial
The foreign commercial portfolio totaled $37.3 billion at March 31, 1998, a
decrease of $1.5 billion from the 1997 year-end. Nonperforming loan levels at
March 31, 1998, as well as net charge-off levels for the 1998 first quarter,
increased in comparison with the respective prior year periods, due to financial
conditions in Asia.
Total nonperforming assets in Asia, including derivatives, increased by $161
million from year-end levels to $243 million at March 31, 1998. Asian commercial
net charge-offs, including derivatives, for the 1998 first quarter were $92
million compared with a net recovery of $1 million in the 1997 first quarter.
Derivative and Foreign Exchange Financial Instruments
For a discussion of the derivative and foreign exchange financial instruments
utilized in connection with Chase's trading and ALM activities, see pages 35-36
and Notes One and Eighteen of Chase's 1997 Annual Report. At March 31, 1998, the
majority of these transactions were with commercial bank and financial
institution counterparties, most of which are dealers in these products. The
following table provides the remaining maturities of derivative and foreign
exchange contracts outstanding at March 31, 1998 and December 31, 1997.
=================================================================================================================================
At March 31, 1998 At December 31, 1997
--------------------------------------------------- --------------------------------------------------
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 1 year 20% 95% 49% 49% 27% 95% 51% 54%
1 to 5 years 49 5 50 33 47 5 48 32
Over 5 years 31 -- 1 18 26 -- 1 14
--- --- --- ----- --- --- --- ----
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === ===== === === === ====
=================================================================================================================================
Chase's net charge-offs arising from derivative and foreign exchange
transactions were $12 million in the 1998 first quarter compared with none in
1997. At March 31,1998, nonperforming derivative contracts were $40 million
compared with none in 1997. The increases in both net charge-offs and
nonperforming derivative contracts were due to the financial conditions in Asia.
Cross-Border Exposure
Credits denominated in a currency other than that of the country in which a
borrower is located, such as dollar-denominated loans made overseas, are called
"cross-border" credits. The Asian financial turmoil, which started in July 1997,
affected many countries where Chase has had long-standing banking relationships.
The following table presents Chase's cross-border exposure to selected Asian
countries. For a further discussion of Chase's cross-border exposure to Asian
countries, see pages 34-35 of Chase's 1997 Annual Report.
==================================================================================================================================
March 31, 1998 December 31, 1997
---------------------------------------------- ----------------------------------------------
Lending- Foreign Total Lending- Foreign Total
Selected Asian Countries Related Exchange & Cross-Border Related Exchange & Cross-Border
(in billions) and Other (a) Derivatives (b) Exposure and Other (a) Derivatives (b) Exposure
Korea $ 2.9 $ 0.9 $ 3.8 $ 3.4 $ 2.0 $ 5.4
Hong Kong 2.5 0.4 2.9 3.1 0.5 3.6
Indonesia 1.5 0.5 2.0 1.8 0.8 2.6
Thailand 1.3 0.4 1.7 1.5 0.6 2.1
Singapore 1.2 0.4 1.6 1.2 0.6 1.8
Philippines 0.9 -- 0.9 1.1 -- 1.1
Malaysia 0.8 0.1 0.9 0.9 0.2 1.1
China 0.7 0.1 0.8 0.7 0.1 0.8
Taiwan 0.8 -- 0.8 0.8 -- 0.8
India 0.1 -- 0.1 0.2 -- 0.2
------- -------- ------- --------- ------- ---------
Total Selected Countries $ 12.7 $ 2.8 $ 15.5 $ 14.7 $ 4.8 $ 19.5
======= ======== ======= ========= ======= =========
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes loans and accrued interest, interest-bearing deposits with banks,
trading debt and equity instruments, acceptances, other monetary assets,
issued letters of credit, undrawn commitments to extend credit and local
currency assets, net of local currency liabilities.
(b) Foreign exchange largely represents the mark-to-market exposure of spot and
forward contracts. Derivatives largely represent the mark-to-market
exposure of risk management instruments. Mark-to-market exposure is a
measure, at a point in time, of the value of a foreign exchange or
derivative contract in the open market. The impact of legally enforceable
master netting agreements on these foreign exchange and derivative
contracts reduced exposure by $0.9 billion at March 31,1998 and $0.7
billion at December 31, 1997.
================================================================================
-26-
27
Allowance for Credit Losses
The following discussion of Chase's allowance for credit losses focuses
primarily on developments since December 31, 1997 and should be read in
conjunction with pages 36-37 and Note Five of Chase's 1997 Annual Report.
The accompanying tables reflect the activity in and composition of Chase's
allowance for credit losses and certain coverage ratios related to the allowance
for credit losses on loans for the periods indicated.
========================================================================================================
First Quarter
--------------------------------
(in millions, except ratios) 1998 1997
------------ ---------
Aggregate Allowance at Beginning of Period $ 3,869 $ 3,694
Provision for Credit Losses 344 220
Charge-Offs (419) (273)
Recoveries 75 53
---------- ---------
Net Charge-Offs (344) (220)
Other (2) 1
----------- ---------
Aggregate Allowance at End of Period $ 3,867 $ 3,695
========== =========
- --------------------------------------------------------------------------------------------------------
March 31, March 31,
1998 1997
----------- ---------
Composition of Allowance for Credit Losses:
Loans $ 3,622 $ 3,550
Derivative and Foreign Exchange Contracts 75 75
Lending-Related Commitments 170 70
---------- ---------
Aggregate Allowance $ 3,867 $ 3,695
========== =========
- --------------------------------------------------------------------------------------------------------
Allowance for Credit Losses on Loans to:
Nonperforming Loans 311% 356%
Loans at Period-End 2.16 2.28
Average Loans 2.12 2.32
========================================================================================================
Chase deems its allowance for credit losses at March 31, 1998 to be adequate
(i.e., sufficient to absorb losses that may currently exist in the portfolio,
but are not yet identifiable). The allowance is a general allowance available
for all credit activities. 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. Chase periodically reviews such factors and reassesses the
adequacy of the allowance for credit losses.
-27-
28
- --------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following discussion of Chase's market risk management focuses primarily on
developments since December 31, 1997 and should be read in conjunction with
pages 37-41 and Notes One and Eighteen of Chase's 1997 Annual Report.
Chase uses both historic simulation and Monte Carlo statistical techniques to
estimate a daily value-at-risk ("VAR"). The VAR calculation is performed for all
material trading portfolios and market risk-related ALM portfolios, with results
reported by business unit and in the aggregate. The total VAR for Chase's
trading portfolio and market risk-related ALM portfolio as of or for the twelve
month period ended March 31, 1998 was as follows:
==================================================================================================================================
Marked-to-Market Trading Portfolio Market Risk-Related ALM Activities
----------------------------------------------- ----------------------------------------------
March 31, March 31,
Average Minimum Maximum 1998 Average Minimum Maximum 1998
(in millions) VAR VAR VAR VAR VAR VAR VAR VAR
--- --- --- --- --- --- --- ---
Interest Rate VAR $ 21.6 $ 15.1 $ 51.4 $ 19.1 $ 50.6 $ 36.4 $ 67.3 $ 46.2
Foreign Exchange VAR 5.9 2.5 17.7 9.3 -- -- -- --
Commodities VAR 2.7 1.1 5.0 4.0 -- -- -- --
Equities VAR 4.7 2.1 9.4 2.6 -- -- -- --
Less:
Portfolio Diversification (11.9) NM NM (14.5) -- -- -- --
-------- --------- -------- ------- --------- -------- -------- --------
Total VAR $ 23.0 $ 15.6 $ 51.5 $ 20.5 $ 50.6 $ 36.4 $ 67.3 $ 46.2
======== ========== ======== ======= ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
NM: Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect.
================================================================================
Chase's average aggregate VAR (VAR for both trading and ALM activities), for the
twelve month period ended March 31, 1998, was $56.3 million. Chase's aggregate
VAR at March 31, 1998 was $48.6 million. Chase's aggregate average and period
end VAR are less than the sum of the respective trading and ALM VARs shown in
the above table due to risk-offsets resulting from portfolio diversification
which occur across the trading and ALM portfolios.
Chase was among the earliest adopters of the Basle market risk capital rules.
Both for regulatory compliance with the Basle rules and for internal evaluation
of VAR, Chase conducts daily backtesting of its VAR against trading revenues.
For aggregate mark-to-market activities, there were no days in the first quarter
of 1998 in which VAR was exceeded by a daily trading loss.
Management believes stress tests are an essential complement to VAR. At Chase,
stress tests are an integral part of an effective risk management process, and
have assumed an equal standing to VAR as a risk measurement and control
technique for market risk. As of March 31, 1998, Chase conducted monthly stress
tests, consisting of five historical and three hypothetical scenarios, for all
material trading portfolios and market risk-related ALM portfolios. Since
December 31, 1997, stress test results have been incorporated into Chase's
internal capital allocation methodology, which provides a significant incentive
for active management of aggregate exposures to difficult market environments.
-28-
29
Trading Activities
The following chart contains a histogram of Chase's daily market risk-related
revenue, which is defined as the daily change in value of marked-to-market
trading portfolios plus any trading-related net interest income.
[GRAPHIC OF DAILY CHANGES IN MARKET RISK-RELATED TRADING REVENUE -
SEE APPENDIX I]
Based on actual trading results for the twelve months ended March 31, 1998,
Chase posted positive daily market risk-related revenue for 229 out of 259
business trading days with 85 days exceeding positive $15 million over the past
twelve months. This compares with 42 days exceeding positive $15 million for the
twelve months ended March 31, 1997. The large increase in days exceeding
positive $15 million reflected continued efforts to build key trading
activities. Chase incurred five daily trading losses in excess of negative $15
million over the past twelve months. Four of these five losses resulted from
sharp price declines and a loss of liquidity for certain securities,
particularly emerging market debt instruments, during the difficult and
unusually volatile trading markets in late October 1997.
Asset/Liability Management
Measuring Interest Rate Sensitivity: Chase, as part of its ALM process, employs
a variety of cash (primarily securities) and derivatives instruments in managing
its exposure to fluctuations in market interest rates. In managing exposure,
Chase uses quantifications of net gap exposure and measurements of earnings at
risk (the risk to earnings from adverse movements in interest rates) based on
earnings simulations. An example of aggregate net gap analysis is presented
below.
Condensed Interest-Rate Sensitivity Table
==============================================================================================================================
(in millions) 1-3 4-6 7-12 1-5 Over
At March 31, 1998 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
Balance Sheet $(28,140) $ 1,393 $ 8,290 $38,192 $(19,735) $ ---
Derivative Instruments Affecting
Interest-Rate Sensitivity 5,868 (4,014) (7,408) 1,438 4,116 ---
Interest-Rate Sensitivity Gap (22,272) (2,621) 882 39,630 (15,619) ---
Cumulative Interest-Rate
Sensitivity Gap (22,272) (24,893) (24,011) 15,619 --- ---
% of Total Assets (6%) (7%) (7%) 4% --- ---
==============================================================================================================================
-29-
30
At March 31, 1998, Chase had $24.0 billion more liabilities than assets
repricing within one year (including the net repricing effects of derivative
positions), or 7% of total assets. This compares with $17.8 billion more
liabilities than assets repricing within one year, or 5% of total assets, at
December 31, 1997.
At March 31, 1998, based on Chase's simulation model and applying immediate
increases in various market interest rates (100 bp increase for US
dollar-denominated positions and 100 bp to 1500 bp increases for non-US
dollar-denominated positions), earnings at risk over the next twelve months are
estimated to be approximately 5.5% of projected 1998 after-tax income (before
restructuring costs). At December 31, 1997, Chase's earnings at risk to an
immediate rise in interest rates was estimated to be approximately 3.5% of
after-tax income. The increase in earnings at risk from year-end reflects a
higher level of fixed-rate investment securities funded by floating-rate
liabilities. The hypothetical rate shocks are used to calibrate risk that Chase
believes to be reasonably possible of occurring in the near-term, but these
scenarios do not necessarily represent management's current view of future
market developments.
Impact of ALM Derivative Activity:
The following table reflects the deferred gains/losses on closed derivative
contracts and unrecognized gains/losses on open derivative contracts utilized in
Chase's ALM activities at March 31, 1998 and December 31, 1997.
======================================================================================================
March 31, December 31,
(in millions) 1998 1997 Change
------------ --------------- --------
ALM Derivative Contracts:
Net Deferred Gains (Losses) $ 22 $ - $ 22
Net Unrecognized Gains (Losses) (a) (388) (392) 4
--------- ------- -------
Net ALM Derivative Gains (Losses) $ (366) $ (392) $ 26
========= ======= =======
- ------------------------------------------------------------------------------------------------------
(a) These net unrecognized losses do not include the net favorable impact from
the assets/liabilities being hedged by these derivative contracts.
================================================================================
- --------------------------------------------------------------------------------
OPERATING RISK MANAGEMENT
- --------------------------------------------------------------------------------
Chase, 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. Chase maintains a system of controls that is
designed to keep operating risk at appropriate levels in view of the financial
strength of Chase, the characteristics of the businesses and markets in which
Chase operates, competitive circumstances and regulatory considerations.
However, from time to time in the past, Chase has suffered losses from operating
risk and there can be no assurance that Chase will not suffer such losses in the
future.
- --------------------------------------------------------------------------------
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 41-43 and Note
Seventeen of Chase's 1997 Annual Report.
Capital
Chase's capital levels at March 31, 1998 remained well in excess of regulatory
guidelines. At March 31, 1998, Tier 1 and Total Capital ratios were 8.1% and
11.9%, respectively, and the Tier 1 leverage ratio was 6.0%. At March 31, 1998,
the total capitalization of Chase (the sum of Tier 1 and Tier 2 Capital) was
$33.3 billion, the same level as at December 31, 1997. The amount of retained
earnings (net income less common and preferred dividends) generated during the
first quarter of 1998 and the issuance of $200 million (net of discount) of
capital securities issued during the quarter by certain Chase subsidiaries (see
Note 7 of this Form 10-Q), was offset by the redemption of preferred stock.
-30-
31
In the first quarter of 1998, Chase raised the cash dividend on its Common Stock
to $.72 per share from $.62 per share. Management currently expects that Chase's
dividend policy will generally be to pay a Common Stock dividend equal to
approximately 25% to 35% of Chase's operating net income, less the amount of
preferred stock dividends. Chase's future dividend policies will be determined
by its Board of Directors, taking into consideration Chase's earnings and
financial condition and applicable governmental regulations and policies.
From inception of a stock buy-back program authorized by Chase's Board of
Directors in October 1996 through March 31, 1998, Chase repurchased 33.2 million
shares of its Common Stock ($3.3 billion) and reissued from treasury
approximately 18.4 million shares of its Common Stock ($1.5 billion) under its
benefit plans, resulting in a net repurchase of 14.8 million shares.
Management is committed to maintaining a disciplined capital policy for Chase.
That policy is intended to increase SVA, to employ capital to support growth,
including through acquisitions or other investment opportunities, and to return
excess capital to stockholders. In light of management's current target ratio
for Tier 1 Capital of 8% to 8.25%, and Chase's pending acquisition of a global
custody business (see "Other Events" below), management currently believes Chase
may not repurchase the full amount of shares permitted to be purchased under the
stock buy-back program, which expires at year-end. The extent to which Common
Stock is purchased by Chase during the remainder of the year will depend on
Chase's future earnings, internal asset growth and future investment
opportunities.
On March 17, 1998, Chase's Board of Directors approved a two-for-one stock
split, subject to stockholder approval at Chase's annual meeting on May 19th. If
approved by the stockholders, the stock split is intended to be effective at the
close of business on May 20, 1998.
Liquidity
Chase manages its liquidity in order to ensure the availability of sufficient
cash flows to meet all of Chase's financial commitments and to capitalize on
opportunities for Chase's business expansion. Chase is an active participant in
the capital markets and issues commercial paper, medium-term notes, long-term
debt, and common and preferred stock. At March 31, 1998, Chase's long-term debt
was $14,355 million. Chase issued $1,631 million of long-term debt during the
first three months of 1998; during the same period, $534 million of long-term
debt matured and $128 million was redeemed. During the first quarter of 1998,
Chase redeemed $200 million of its 7.92% cumulative preferred stock and $172
million of its 8.40% cumulative preferred stock and called for redemption $200
million of its 7.58% cumulative preferred stock (which was redeemed April 1,
1998). An additional $340 million of Chase's fixed-rate preferred stock becomes
callable in 1998. Chase constantly evaluates the opportunities to redeem its
outstanding debt and preferred stock in light of current market conditions.
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 1-5 of Chase's 1997 Annual Report.
Dividends
Chase's bank subsidiaries could, without the approval of their relevant banking
regulators, pay dividends to their respective bank holding companies in amounts
up to the limitations imposed upon such banks by regulatory restrictions. These
dividend limitations, in the aggregate, totaled approximately $1.7 billion at
March 31, 1998.
- --------------------------------------------------------------------------------
OTHER EVENTS
- --------------------------------------------------------------------------------
On May 7, 1998, Chase and Morgan Stanley Dean Witter & Co. ("Morgan Stanley")
reached a definitive agreement under which Chase will acquire the global custody
business of Morgan Stanley, which has more than $400 billion of assets under
custody. The acquisition is expected to be completed during the latter part of
1998. The clients and staff joining Chase will be integrated into Chase Global
Investor Services, which is part of Chase's Global Services Business included in
CTS.
-31-
32
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
March 31, 1998 March 31, 1997
----------------------------------------- ------------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
Deposits with Banks $ 4,180 $ 152 14.78% $ 5,491 $ 106 7.86%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 37,882 671 7.19% 36,102 559 6.28%
Trading Assets-Debt and Equity
Instruments 33,310 676 8.24% 31,185 626 8.14%
Securities:
Available-for-Sale 52,750 848 6.52% (b) 39,818 664 6.76% (b)
Held-to-Maturity 2,837 46 6.63% 3,729 62 6.76%
Loans 170,491 3,405 8.10% 153,030 3,131 8.30%
---------- ------- ---------- --------
Total Interest-Earning Assets 301,450 5,798 7.80% 269,355 5,148 7.75%
Allowance for Credit Losses on Loans (3,558) (3,452)
Cash and Due from Banks 14,173 12,065
Risk Management Instruments 39,369 36,669
Other Assets 26,158 24,632
---------- ----------
Total Assets $ 377,592 $ 339,269
========== ==========
LIABILITIES
Domestic Retail Deposits $ 58,934 572 3.95% $ 57,654 529 3.72%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 15,441 187 4.89% 9,236 150 6.59%
Deposits in Foreign Offices 76,935 1,056 5.56% 65,231 836 5.20%
---------- ------- ---------- --------
Total Time and Savings
Deposits 151,310 1,815 4.86% 132,121 1,515 4.65%
---------- ------- ---------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 68,259 947 5.63% 59,470 785 5.35%
Commercial Paper 4,134 54 5.30% 4,293 55 5.21%
Other Borrowings (c) 17,482 508 11.79% 17,372 462 10.79%
---------- ------- ---------- --------
Total Short-Term and
Other Borrowings 89,875 1,509 6.81% 81,135 1,302 6.51%
Long-Term Debt 15,707 305 7.88% 13,523 257 7.70%
---------- ------- ---------- --------
Total Interest-Bearing Liabilities 256,892 3,629 5.73% 226,779 3,074 5.50%
---------- ------- ---------- --------
Noninterest-Bearing Deposits 44,566 40,897
Risk Management Instruments 39,077 36,357
Other Liabilities 14,478 13,544
---------- ----------
Total Liabilities 355,013 317,577
---------- ----------
PREFERRED STOCK OF SUBSIDIARY 550 550
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,680 2,648
Common Stockholders' Equity 20,349 18,494
---------- ----------
Total Stockholders' Equity 22,029 21,142
---------- ----------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 377,592 $ 339,269
========== ==========
INTEREST RATE SPREAD 2.07% 2.25%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $2,169 (a) 2.92% $ 2,074 (a) 3.12%
====== ==== ======== ====
- ------------------------------------------------------------------------------------------------------------------------------------
(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 March 31, 1998 and March 31, 1997, the
annualized rate for available-for-sale securities based on historical cost
was 6.55% and 6.69%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-32-
33
THE CHASE MANHATTAN CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1998 1997
---------- ------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Interest Income
Loans $ 3,405 $ 3,392 $ 3,294 $ 3,106 $ 3,129
Securities 889 851 720 735 722
Trading Assets 676 707 732 705 626
Federal Funds Sold and Securities
Purchased Under Resale Agreements 671 728 623 697 559
Deposits with Banks 152 156 149 114 106
--------- ---------- --------- -------- ----------
Total Interest Income 5,793 5,834 5,518 5,357 5,142
--------- ---------- --------- -------- ----------
Interest Expense
Deposits 1,815 1,764 1,714 1,568 1,515
Short-Term and Other Borrowings 1,509 1,640 1,451 1,510 1,302
Long-Term Debt 305 320 284 273 257
--------- ---------- --------- -------- ----------
Total Interest Expense 3,629 3,724 3,449 3,351 3,074
--------- ---------- --------- -------- ----------
Net Interest Income 2,164 2,110 2,069 2,006 2,068
Provision for Credit Losses 344 205 190 189 220
--------- ---------- --------- -------- ----------
Net Interest Income After
Provision For Credit Losses 1,820 1,905 1,879 1,817 1,848
--------- ---------- --------- -------- ----------
Noninterest Revenue
Investment Banking Fees 361 369 308 283 176
Trust, Custody and Investment
Management Fees 348 338 338 321 310
Credit Card Revenue 300 322 281 224 261
Service Charges on Deposit Accounts 91 96 94 95 91
Fees for Other Financial Services 419 421 411 392 383
Trading Revenue 480 (78) 505 491 405
Securities Gains 83 123 58 30 101
Revenue from Equity-Related Investments 287 220 243 179 164
Other Revenue 96 163 102 119 191
--------- ---------- --------- -------- ----------
Total Noninterest Revenue 2,465 1,974 2,340 2,134 2,082
--------- ---------- --------- -------- ----------
Noninterest Expense
Salaries 1,254 1,072 1,292 1,110 1,124
Employee Benefits 224 192 206 219 222
Occupancy Expense 189 193 194 193 187
Equipment Expense 209 217 192 193 190
Restructuring Costs 521 20 71 71 30
Other Expense 738 796 706 685 694
--------- ---------- --------- -------- ----------
Total Noninterest Expense 3,135 2,490 2,661 2,471 2,447
--------- ---------- --------- -------- ----------
Income Before Income Tax Expense 1,150 1,389 1,558 1,480 1,483
Income Tax Expense 425 515 576 555 556
--------- ---------- --------- -------- ----------
Net Income $ 725 $ 874 $ 982 $ 925 $ 927
========= ========== ========= ======== ==========
Net Income Applicable To
Common Stock $ 691 $ 839 $ 941 $ 874 $ 872
========= ========== ========= ======== ==========
Net Income Per Common Share:
Basic $ 1.64 $ 1.99 $ 2.23 $ 2.06 $ 2.02
========= ========== ========= ======== ==========
Diluted $ 1.59 $ 1.94 $ 2.16 $ 2.00 $ 1.97
========= ========== ========= ======== ==========
-33-
34
- --------------------------------------------------------------------------------
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
The page numbers included after each definition represents the pages in the 10-Q
where the term is primarily used.
1997 Annual Report: Annual Report on Form 10-K for the year ended December 31,
1997. (Pages 7-11, 13-14, 20-21, 23-24, 26-28, 30-31)
ACH: "Automated Clearing House", a firm set up and used by member financial
institutions to combine, sort and distribute payment orders. (Page 17)
AICPA: "American Institute of Certified Public Accountants". (Page 7)
Asset/Liability Management ("ALM"): The management and control of the
sensitivity of Chase's income to changes in market interest rates and other
market risks. (Page 29)
CHIPS: "Clearing House Interbank Payments System", a money transfer system that
enables banks to make transfers through a central clearinghouse mechanism. (Page
17)
Derivative and Foreign Exchange ("FX") Instruments: Interest rate swaps, forward
rate agreements, futures, forwards, options, equity, commodity and other
contracts used for asset and liability management or trading purposes. The
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. (Page 10)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding restructuring costs,
foreclosed property expense, special items and costs associated with a real
estate investment trust subsidiary of Chase ("REIT"). (Pages 12, 22)
FedWire: A computerized money transfer system linking the U.S. Federal Reserve
System banks, branches and member banks. (Page 17)
Managed Credit Card receivables: Credit card receivables on the balance sheet
plus securitized credit card receivables. (Page 25)
Managed Operating Results: Reported results excluding the impact of credit card
securitizations, restructuring costs and special items. (Pages 12, 18)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Page 19)
Operating Net Income: Reported net income excluding restructuring costs and
special items. (Pages 12-13)
SFAS: Statement of Financial Accounting Standards.
SFAS 107: Statement of Financial Accounting Standards No. 107, entitled,
"Disclosures About Fair Value of Financial Instruments." (Page 11)
SFAS 115: Statement of Financial Accounting Standards No. 115, entitled,
"Accounting for Certain Investments in Debt and Equity Securities." (Pages 7-9)
SFAS 125: Statement of Financial Accounting Standards No. 125, entitled,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." (Page 7)
SFAS 127: Statement of Financial Accounting Standards No. 127, entitled,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." (Page 7)
SFAS 130: Statement of Financial Accounting Standards No. 130, entitled,
"Reporting Comprehensive Income." (Page 7)
Special Items: There were no special items in the 1998 first quarter. Special
items in the 1997 first quarter included a gain on the sale of a partially owned
foreign investment and costs incurred for accelerated vesting of stock-based
incentive awards. (Page 12)
Statement of Position ("SOP") 98-1: "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". (Page 7)
Value-at-Risk ("VAR"): The potential overnight loss from adverse market
movements. (Page 28)
-34-
35
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 29 Bar Graph entitled "Histogram of Daily Changes in Market Risk-Related Trading Revenue for the twelve months
ended March 31, 1998" presenting the following information:
Millions of Dollars 0-5 5-10 10-15 15-20 20-25 25-30 Over 30
Number of trading
days revenue was
within the above
prescribed positive
range 32 57 55 38 25 13 9
Millions of Dollars 0-(5) (5)-(10) (10)-(15) (15)-(20) (20)-(25) (25)-(30) Over (30)
Number of trading
days revenue was
within the above
prescribed negative
range 13 8 4 1 0 2 2
36
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of Legal Proceedings, see 1997 Annual Report on
page 6.
Item 2. Sales of Unregistered Common Stock
During the first quarter of 1998, shares of common stock of Chase
were issued in transactions exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof. 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 as follows: January 5, 1998 - 1,590
shares; and January 6, 1998 - 3,693 shares. Shares of common stock
were issued to retired directors who had deferred receipt of such
common stock pursuant to the Deferred Compensation Plan for
Non-Employee Directors as follows: January 2, 1998 - 527 shares.
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.
27.1-.9 - Restated Financial Data Schedules.
(B) Reports on Form 8-K:
Chase filed three reports on Form 8-K during the quarter ended
March 31, 1998, as follows:
Form 8-K dated January 21, 1998: Chase announced the results
of operations for the fourth quarter of 1997; disclosed
estimates of Chase's cross-border exposures to certain Asian
countries at December 31, 1997; and announced new performance
goals for Chase over the next several years.
Form 8-K dated January 28, 1998: Chase filed certain legal
opinions in connection with the issuance of the 7.03% Capital
Securities, Series E, of Chase Capital V.
Form 8-K dated March 17, 1998: Chase announced actions to
streamline support functions and realign certain business
functions; an increase in the quarterly dividend on its common
stock; and a two-for-one common stock split, subject to
stockholders' approval.
-35-
37
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 May 15, 1998 By /s/ Joseph L. Sclafani
------------ ---------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-36-
38
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
- ----------- -------- ---------------------
11 Computation of net income 38
per share
12(a) Computation of ratio of 39
earnings to fixed charges
12(b) Computation of ratio of 40
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 41
27.1-27.9 Restated Financial Data Schedules 42-50
-37-
1
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION and Subsidiaries
Computation of net income per share
Net income for basic and diluted EPS is computed by subtracting from the
applicable earnings the dividend requirements on preferred stock to arrive at
earnings applicable to common stock. Basic EPS is computed by dividing net
income available to common shares outstanding by the weighted-average number of
common shares outstanding for the period. Diluted EPS is computed using the same
method as basic EPS, but reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For a further discussion of Chase's earnings per share
computation, see Note Ten of Chase's 1997 Annual Report.
(in millions, except per share amounts) Three Months Ended
March 31,
--------------------------------
EARNINGS PER SHARE 1998 1997
- ------------------------------------------------------------------------------------------------
Basic
Earnings:
Net Income $ 725 $ 927
Less: Preferred Stock Dividend Requirements 34 55
---------- --------
Net Income Applicable to Common Stock $ 691 $ 872
========== ========
Shares:
Weighted- Average Basic Shares Outstanding 422.4 430.4
Basic Earnings Per Share:
Net Income $ 1.64 $ 2.02
========== ========
Diluted
Earnings:
Net Income Applicable to Common Stock $ 691 $ 872
Shares:
Weighted-Average Basic Shares Outstanding 422.4 430.4
Additional Shares Issuable Upon Exercise of Stock Options
for Dilutive Effect 11.3 11.6
---------- --------
Weighted-Average Diluted Shares Outstanding 433.7 442.0
Diluted Earnings Per Share:
Net Income $ 1.59 $ 1.97
========== ========
================================================================================================
-38-
1
EXHIBIT 12(a)
THE CHASE MANHATTAN CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
(in millions, except ratios)
Three Months Ended
March 31, 1998
--------------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 1,150
--------
Fixed charges:
Interest expense 1,814
One third of rents, net of income from subleases (a) 26
--------
Total fixed charges 1,840
--------
Less: Equity in undistributed income of affiliates (5)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 2,985
========
Fixed charges, as above $ 1,840
========
Ratio of earnings to fixed charges 1.62
========
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 1,840
Add: Interest on deposits 1,815
--------
Total fixed charges and interest on deposits $ 3,655
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 2,985
Add: Interest on deposits 1,815
--------
Total earnings before taxes, fixed charges, and interest on deposits $ 4,800
========
Ratio of earnings to fixed charges 1.31
========
(a) The proportion deemed representative of the interest factor.
-39-
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)
Three Months Ended
March 31, 1998
--------------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 1,150
--------
Fixed charges:
Interest expense 1,814
One third of rents, net of income from subleases (a) 26
--------
Total fixed charges 1,840
--------
Less: Equity in undistributed income of affiliates (5)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 2,985
========
Fixed charges, as above $ 1,840
Preferred stock dividends 34
--------
Fixed charges including preferred stock dividends $ 1,874
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.59
========
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends, as above $ 1,874
Add: Interest on deposits 1,815
--------
Total fixed charges including preferred stock
dividends and interest on deposits $ 3,689
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 2,985
Add: Interest on deposits 1,815
--------
Total earnings before taxes, fixed charges, and interest on deposits $ 4,800
========
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.30
========
(a) The proportion deemed representative of the interest factor.
-40-
9
1,000,000
U.S. DOLLARS
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
1
14,906
3,465
23,739
71,245
57,108
2,711
2,725
167,944
3,622
365,715
196,096
67,343
61,992
14,355
0
1,368
441
20,232
365,715
3,405
889
823
5,793
1,815
3,629
2,164
344
83
3,135
1,150
725
0
0
725
1.64
1.59
2.92
1,165
487
0
0
3,624
419
75
3,622
0
0
0
9
1,000,000
U.S.DOLLARS
12-MOS
DEC-31-1995
JAN-01-1995
DEC-31-1995
1
14,794
8,468
17,461
52,037
37,141
4,628
4,659
150,207
3,784
303,989
171,534
51,199
45,680
12,825
0
2,650
458
17,728
303,989
12,903
2,591
2,713
19,592
6,291
11,408
8,184
758
132
9,390
4,812
2,970
(11)
0
2,959
6.33
6.04
3.37
1,454
664
39
0
3,894
1,278
438
3,784
3,353
431
0
9
1,000,000
U.S.DOLLARS
3-MOS
DEC-31-1996
JAN-01-1996
MAR-31-1996
1
10,846
6,257
19,292
48,445
38,646
4,398
4,382
149,331
3,683
301,984
168,934
50,115
48,131
12,977
0
2,650
438
16,679
301,984
3,259
720
673
5,065
1,644
2,897
2,168
245
52
4,093
(303)
(89)
0
0
(89)
(0.32)
(0.32)
3.43
1,537
518
0
0
3,784
414
67
3,683
0
0
0
9
1,000,000
U.S.DOLLARS
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
1
13,291
5,805
33,039
51,711
37,855
4,125
4,080
151,274
3,692
321,761
168,343
68,465
49,398
12,770
0
2,650
438
17,252
321,761
6,325
1,405
1,343
9,874
3,102
5,663
4,211
495
76
6,417
1,077
767
0
0
767
1.52
1.46
3.32
1,498
486
0
0
3,784
732
135
3,692
0
0
0
9
1,000,000
U.S.DOLLARS
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
1
13,729
4,433
26,586
59,835
42,477
3,956
3,925
150,333
3,697
322,604
165,042
75,157
45,560
12,379
0
2,650
440
18,050
322,604
9,392
2,095
2,004
14,774
4,518
8,512
6,262
715
110
8,737
2,462
1,625
0
0
1,625
3.35
3.23
3.25
1,370
532
0
0
3,784
1,027
210
3,697
0
0
0
9
1,000,000
U.S.DOLLARS
12-MOS
DEC-31-1996
JAN-01-1996
DEC-31-1996
1
14,605
8,344
28,966
59,956
44,691
3,855
3,849
155,092
3,549
336,099
180,921
67,599
50,445
12,714
0
2,650
441
17,903
336,099
12,468
2,862
2,672
19,900
6,038
11,569
8,331
897
135
11,144
3,811
2,461
0
0
2,461
5.13
4.94
3.21
980
434
41
0
3,784
1,289
290
3,549
3,103
446
0
9
1,000,000
U.S.DOLLARS
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
1
14,349
3,298
34,554
67,478
40,372
3,603
3,561
155,882
3,550
340,338
176,030
67,538
59,389
12,419
0
2,500
441
17,801
340,338
3,129
722
665
5,142
1,515
3,074
2,068
220
101
2,447
1,483
927
0
0
927
2.02
1.97
3.12
998
441
0
0
3,549
273
53
3,550
0
0
0
9
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
6,235
1,457
1,476
10,499
3,083
6,425
4,074
409
131
4,918
2,963
1,852
0
0
1,852
4.08
3.97
2.98
969
384
0
0
3,549
531
122
3,446
0
0
0
9
1,000,000
U.S.DOLLARS
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
1
14,367
4,152
38,958
75,752
43,987
3,254
3,260
163,087
3,462
366,574
181,788
77,122
68,433
13,899
0
1,740
441
18,985
366,574
9,529
2,177
2,248
16,017
4,797
9,874
6,143
599
189
7,579
4,521
2,834
0
0
2,834
6.31
6.08
2.93
931
349
0
0
3,549
808
209
3,462
0
0
0
9
1,000,000
U.S.DOLLARS
12-MOS
DEC-31-1997
JAN-01-1997
DEC-31-1997
1
15,704
2,886
30,928
72,393
49,755
2,983
2,995
168,454
3,624
365,521
193,688
67,731
64,964
13,387
0
1,740
441
19,561
365,521
12,921
3,028
3,132
21,851
6,561
13,598
8,253
804
312
10,069
5,910
3,708
0
0
3,708
8.30
8.03
2.89
907
459
1
0
3,549
1,096
292
3,624
3,180
444
0
