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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 1996 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, N.Y. 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
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Common Stock 7 1/2% Subordinated Notes Due 1997
10.96% Cumulative Preferred Stock (Stated Value--$25) 7 3/4% Subordinated Notes Due 1999
8 3/8% Cumulative Preferred Stock (Stated Value--$25) 8% Subordinated Notes Due 1999
7.92% Cumulative Preferred Stock (Stated Value--$100) evidenced by 8.80% Subordinated Notes Due 2000
Depositary Shares Representing One Quarter Share of Preferred Stock 8% Subordinated Notes Due 2002
7.58% Cumulative Preferred Stock (Stated Value--$100) evidenced by 9.05% Subordinated Notes Due 2002
Depositary Shares Representing One Quarter Share of Preferred Stock 7.50% Subordinated Notes Due 2003
7 1/2% Cumulative Preferred Stock (Stated Value--$100) evidenced by Floating Rate Subordinated Notes Due 2003
Depositary Shares Representing One Quarter Share of Preferred Stock Floating Rate Subordinated Notes Due August 1, 2003
10 1/2% Cumulative Preferred Stock (Stated Value--$25) 7 7/8% Subordinated Notes Due 2004
9.76% Cumulative Preferred Stock (Stated Value--$25) 8% Subordinated Notes Due 2004
10.84% Cumulative Preferred Stock (Stated Value--$25) 6.50% Subordinated Notes Due 2005
8 1/2% Cumulative Preferred Stock (Stated Value--$25) 8% Subordinated Notes Due 2005
8.32% Cumulative Preferred Stock (Stated Value--$25) 6.25% Subordinated Notes Due 2006
8.40% Cumulative Preferred Stock (Stated Value--$25) 6 1/8% Subordinated Notes Due 2008
Adjustable Rate Cumulative Preferred Stock, Series L (Stated Value--$100) 6.75% Subordinated Notes Due 2008
Adjustable Rate Cumulative Preferred Stock, Series N (Stated Value--$25) 6.50% Subordinated Notes Due 2009
All such securities are listed on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Number of Shares of Common Stock outstanding on February 28, 1997: 431,109,758
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of The Chase Manhattan Corporation Common Stock
held by non-affiliates of The Chase Manhattan Corporation on February 28, 1997
was $42,898,000,000.
Document incorporated by reference Part of Form 10-K into
in this Form 10-K which incorporated
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Proxy statement for the annual meeting of stockholders Part III
to be held May 20, 1997
(other than information included in the proxy
statement pursuant to Rule 402 (i), (k) and (l) of
Regulation S-K)
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FORM 10-K INDEX
Part I Page
Item 1 Business........................................................... 1
Overview......................................................... 1
Lines-of-Business................................................ 1
Competition...................................................... 1
Government Monetary Policies and Economic Controls............... 1
Supervision and Regulation....................................... 2
Important Factors Relating to Forward-Looking
Statements..................................................... 5
Foreign Operations............................................... 6
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differential.......................................... 95
Securities Portfolio............................................. 102
Loan Portfolio................................... 48-52, 73, 103-105
Summary of Loan Loss Experience.................. 53-54, 74, 106-107
Deposits......................................................... 107
Return on Equity and Assets...................................... 37
Short-Term and Other Borrowed Funds.............................. 108
Item 2 Properties......................................................... 6
Item 3 Legal Proceedings.................................................. 7
Item 4 Submission of Matters to a Vote of Security Holders................ 7
Executive Officers of the Registrant............................... 8
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 9
Item 6 Selected Financial Data............................................ 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 9
Item 8 Financial Statements and Supplementary Data........................ 9
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 9
Part III
Item 10 Directors and Executive Officers of the Corporation................ 10
Item 11 Executive Compensation............................................. 10
Item 12 Security Ownership of Certain Beneficial Owners and
Management....................................................... 10
Item 13 Certain Relationships and Related Transactions..................... 10
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K......................................................... 11
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Part I
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Item 1: Business
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On March 31, 1996, The Chase Manhattan Corporation ("Chase") merged with and
into Chemical Banking Corporation ("Chemical"). Upon consummation of the merger,
Chemical Banking Corporation changed its name to "The Chase Manhattan
Corporation". (See Note One of the Notes to Consolidated Financial Statements on
page 67 for a more complete description of the merger).
The merger was accounted for as a pooling of interests and, accordingly, the
information presented in this Annual Report on Form 10-K presents the combined
results of Chase and Chemical as if the merger had been in effect for all
periods presented.
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Overview
The Chase Manhattan Corporation (the "Corporation") is a bank holding company
organized under the laws of the State of Delaware in 1968 and registered under
the Bank Holding Company Act of 1956, as amended (the "BHCA").
The Corporation conducts domestic and international financial services
businesses through various bank and non-bank subsidiaries. At December 31, 1996,
the principal bank subsidiaries of the Corporation were: The Chase Manhattan
Bank ("Chase Bank"), a New York banking corporation headquartered in New York
City, Texas Commerce Bank National Association ("Texas Commerce"), a national
bank headquartered in Texas, and Chase Manhattan Bank USA, National Association
("Chase USA"), a national bank headquartered in Delaware. The principal non-bank
subsidiary of the Corporation is Chase Securities Inc. ("CSI"), the
Corporation's "Section 20" subsidiary, which is engaged in securities
underwriting and dealing activities. At December 31, 1996, the Corporation was
the largest bank holding company in the United States in terms of total assets
and Chase Bank was the largest bank in the United States in terms of total
assets.
The bank and non-bank subsidiaries of the Corporation operate nationally as
well as through overseas branches and an international network of representative
offices, subsidiaries and affiliated banks.
The financial services provided by the Corporation's domestic subsidiaries
include personal and commercial checking accounts, savings and time deposit
accounts, personal and business loans, consumer financing, leasing, real estate
financing, investment banking, mortgage banking, money transfer, cash
management, safe deposit facilities, personal trust and estate administration,
corporate and institutional trust and securities processing services, full
investment services, discount brokerage, insurance, United States Government
and Federal agency securities dealership, corporate debt and equity securities
dealership and underwriting, and United States corporate tax depository
facilities.
Internationally, services also include correspondent banking arrangements,
merchant banking, and underwriting and trading of Eurosecurities.
The Corporation also provides products to ensure that a customer will have a
specific currency-exchange or interest rate at some future date. These products
include interest rate and currency swaps, interest rate options, forward rate
agreements, forward interest rate contracts, foreign exchange contracts and
financial futures.
The Corporation retains a 20% interest in The CIT Group Holdings, Inc.
("CIT"). CIT, directly or through its subsidiaries, engages in diversified
financial services activities, primarily in the United States.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
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Lines-of-Business
The Corporation's activities are internally organized, for management reporting
purposes, into two major business franchises (Global Wholesale Banking and
Regional and Nationwide Consumer Banking). A description of the Corporation's
business franchises are discussed in the section of Management's Discussion and
Analysis entitled "Lines of Business Results" beginning on page 43.
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Competition
The Corporation and its subsidiaries and affiliates operate in a highly
competitive environment. The Corporation's bank subsidiaries compete with other
domestic and foreign banks, thrift institutions, credit unions, and money market
and other mutual funds for deposits and other sources of funds. In addition, the
Corporation and its bank and non-bank subsidiaries face increased competition
with respect to the diverse financial services and products they offer.
Competitors include finance companies, brokerage firms, investment banking
companies, merchant banks, insurance companies, leasing companies, and a variety
of other financial services and advisory companies. Many of these competitors
are not subject to the same regulatory restrictions as are domestic bank holding
companies and banks, such as the Corporation and its bank subsidiaries.
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Government Monetary Policies and Economic Controls
The earnings and business of the Corporation are affected by general economic
conditions, both domestic and international. In addition, fiscal or other
policies that are adopted by various regulatory authorities of the United
States, by foreign governments, and by international agencies can have important
consequences on the financial performance of the Corporation. The Corporation is
particularly affected by the policies of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), which regulates the national
supply of bank credit. An important purpose of these policies is to curb
inflation and moderate recessions through the control of the supply of money and
credit. The Federal Reserve Board uses its powers to establish reserve
requirements of insured depository institutions and to conduct open market
operations in United States government securities so as to influence the supply
of money and credit. These policies have a direct effect on the amounts of bank
loans and deposits and on interest rates charged
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on loans and paid on deposits, with the result that Federal Reserve Board
policies can have a material effect on bank earnings.
The Corporation has economic, credit, legal, and other specialists who
monitor economic conditions, and domestic and foreign government policies and
actions. However, since it is difficult to predict changes in macroeconomic
conditions and in governmental policies and actions relating thereto, it is
difficult to foresee the effects of any such changes on the business and
earnings of the Corporation and its subsidiaries.
================================================================================
Supervision and Regulation
General: The Corporation is subject to regulation as a registered bank holding
company under the BHCA. As such, the Corporation is required to file with the
Federal Reserve Board an annual report and other information required quarterly
pursuant to the BHCA. The Corporation is also subject to the examination powers
of the Federal Reserve Board.
Under the BHCA, the Corporation may not engage in any business other than
managing and controlling banks or furnishing certain specified services to
subsidiaries, and may not acquire voting control of non-banking corporations,
except those corporations engaged in businesses or furnishing services which the
Federal Reserve Board deems to be so closely related to banking as "to be a
proper incident thereto". Further, the Corporation is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any corporation that is engaged in activities that
are not closely related to banking, and may not acquire direct or indirect
ownership or control of more than 5% of the voting shares of any domestic bank
without the prior approval of the Federal Reserve Board.
Dividend Restrictions: Federal law imposes limitations on the payment of
dividends by the subsidiaries of the Corporation that are state member banks of
the Federal Reserve System (a "state member bank") or national banks. Non-bank
subsidiaries of the Corporation are not subject to such limitations. The amount
of dividends that may be paid by a state member bank, such as Chase Bank, or by
a national bank, such as Chase USA or Texas Commerce, is limited to the lesser
of the amounts calculated under a "recent earnings" test and an "undivided
profits" test. Under the recent earnings test, a dividend may not be paid if the
total of all dividends declared by a bank in any calendar year is in excess of
the current-year's net income combined with the retained net income of the two
preceding years unless the bank obtains the approval of its appropriate Federal
banking regulator (which, in the case of a state member bank, is the Federal
Reserve Board and, in the case of a national bank, is the Office of the
Comptroller of the Currency (the "Comptroller of the Currency")). Under the
undivided profits test, a dividend may not be paid in excess of a bank's
"undivided profits".
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1997, without the approval of their relevant banking
regulators, pay aggregate dividends of approximately $1.5 billion to their
respective bank holding companies, plus an additional aggregate amount equal to
their net income from January 1, 1997 through the date in 1997 of any such
dividend payment.
In addition to the dividend restrictions described above, the Federal Reserve
Board, the Comptroller of the Currency and the Federal Deposit Insurance
Corporation ("FDIC") have authority under the Financial Institutions Supervisory
Act to prohibit or to limit the payment of dividends by the banking
organizations they supervise, including the Corporation and its subsidiaries
that are banks or bank holding companies, if, in the banking regulator's
opinion, payment of a dividend would constitute an unsafe or unsound practice in
light of the financial condition of the banking organization.
Capital Requirements: The Federal banking regulators have also adopted
risk-based capital and leverage guidelines, which require that the Corporation's
capital-to-assets ratios meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and specified
off-balance sheet financial instruments into four weighted categories, with
higher levels of capital being required for the categories perceived as
representing greater risk. Under the guidelines, a banking corporation's capital
is divided into two tiers. Tier 1 Capital includes common equity, qualifying
perpetual preferred stock, minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and other non-qualifying intangibles
and other assets. Tier 2 Capital includes, among other items, perpetual
preferred equity not qualifying for Tier 1, limited-life preferred stock with an
original maturity of greater than 20 years, mandatory convertible debt,
subordinated debt and intermediate-term preferred stock with an original
weighted-average maturity of at least five years, and qualifying allowance for
credit losses, less required deductions as provided by regulation. The amount of
Tier 2 Capital may not exceed the amount of Tier 1 Capital. Total Capital is the
sum of Tier 1 Capital and Tier 2 Capital.
Banking organizations are required to maintain a Total risk-based capital
ratio (Total Capital to risk-weighted assets) of 8%, of which at least 4% must
be Tier 1 Capital.
The Federal banking regulators have also established minimum leverage ratio
guidelines. The leverage ratio is defined as Tier 1 Capital divided by average
total assets (net of allowance for credit losses, goodwill and certain
intangible assets). The minimum leverage ratio is 3% for banking organizations
that have well-diversified risk (including no undue interest rate risk);
excellent asset quality; high liquidity; good earnings; and, in general, are
considered strong banking organizations. Other banking organizations are
expected to have ratios of at least 4%-5% depending upon their particular
condition and growth plans. Higher capital ratios could be required if warranted
by the particular circumstance or risk profile of a given banking organization.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required each Federal banking regulator to revise its risk-based capital
standards within 18 months of enactment of the statute to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and the risk of non-traditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family mortgages. On December 15,
1994, the Federal banking regulators adopted amendments to their respective
risk-based capital requirements that explicitly identify concentration of credit
risk and certain risks
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arising from non-traditional activities, and the management of such risks, as
important factors to consider in assessing an institution's overall capital
adequacy. The amendments do not, however, mandate any specific adjustments to
the risk-based capital calculations as a result of such factors.
In May 1996, the Federal banking agencies announced that they were going to
refrain from imposing a separate, explicit capital charge for interest rate
risk, although they might do so in the future. In August 1996, the Federal
banking agencies adopted amendments to their risk-based capital rules to
incorporate a measure for market risk in foreign exchange and commodity
activities and in the trading of debt and equity instruments. These amendments,
which become effective at year-end 1997, will require banking organizations with
relatively large trading activities, such as the Corporation, to maintain
capital for market risk in an amount that may be calculated by using the banking
organizations' own internal value-at-risk models (subject to parameters set by
the regulators). The effect of these amendments is that, in addition to existing
capital requirements for credit risk, the Corporation will be required to
maintain additional capital for market risk. This additional requirement may be
satisfied, in part, by issuing short-term subordinated debt that qualifies as
"Tier 3 Capital". The Corporation does not anticipate that these amendments to
the risk-based capital rules will have a material effect on its operations.
FDICIA: FDICIA also required the FDIC to establish a risk-based assessment
system for FDIC deposit insurance and revised certain provisions of the Federal
Deposit Insurance Act, as well as certain other Federal banking statutes. In
general, FDICIA provides for expanded regulation of depository institutions and
their affiliates, including parent holding companies, by such institutions'
Federal banking regulators, and requires the Federal banking regulator to take
"prompt corrective action" with respect to a depository institution if such
institution does not meet certain capital adequacy standards.
Prompt Corrective Action: Pursuant to FDICIA, the Federal Reserve Board, the
FDIC and the Comptroller of the Currency adopted regulations setting forth a
five-tier scheme for measuring the capital adequacy of the depository
institutions they supervise. Under the regulations (commonly referred to as the
"prompt corrective action" rules), an institution would be placed in one of the
following capital categories: (i) well capitalized (an institution that has a
Total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a Tier 1 leverage ratio of at least 5%); (ii)
adequately capitalized (an institution that has a Total risk-based capital ratio
of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1
leverage ratio of at least 4%); (iii) undercapitalized (an institution that has
a Total risk-based capital ratio of under 8% or a Tier 1 risk-based capital
ratio under 4% or a Tier 1 leverage ratio under 4%); (iv) significantly
undercapitalized (an institution that has a Total risk-based capital ratio of
under 6% or a Tier 1 risk-based capital ratio under 3% or a Tier 1 leverage
ratio under 3%), and (v) critically undercapitalized (an institution that has a
ratio of tangible equity to total assets of 2% or less).
Supervisory actions by the appropriate Federal banking regulator will depend
upon an institution's classification within the five categories. All
institutions are generally prohibited from declaring any dividends, making any
other capital distribution, or paying a management fee to any controlling
person, if such payment would cause the institution to become undercapitalized.
Additional supervisory actions are mandated for an institution falling into one
of the three "undercapitalized" categories, with the severity of supervisory
action increasing at greater levels of capital deficiency. For example,
critically undercapitalized institutions are, among other things, restricted
from making any principal or interest payments on subordinated debt without
prior approval of their Federal banking regulator. The regulations apply only to
banks and not to bank holding companies, such as the Corporation; however, the
Federal Reserve Board is authorized to take appropriate action at the holding
company level based on the undercapitalized status of such holding company's
subsidiary banking institution. In certain instances relating to an
undercapitalized banking institution, the bank holding company would be required
to guarantee the performance of the undercapitalized subsidiary and may be
liable for civil money damages for failure to fulfill its commitments on such
guarantee.
As of the date hereof, each of the Corporation's banking subsidiaries were
"well capitalized".
Brokered Deposits: The ability of depository institutions to accept brokered
deposits is regulated under FDICIA. The term "brokered deposits" is defined to
include deposits that are solicited by a bank's affiliates on its behalf. A
significant portion of Chase Bank's and Chase USA's wholesale deposits are
solicited on their behalf by broker-dealer affiliates and are considered
brokered deposits. Under the rule, (i) an "undercapitalized" institution is
prohibited from accepting, renewing or rolling over brokered deposits, (ii) an
"adequately capitalized" institution must obtain a waiver from the FDIC before
accepting, renewing or rolling over brokered deposits and is not permitted to
pay interest on brokered deposits accepted in such institution's normal market
area at rates that "significantly exceed" rates paid on deposits of similar
maturity in such area, and (iii) a "well capitalized" institution may accept,
renew or roll over brokered deposits without restriction. The definitions of
"well capitalized", "adequately capitalized", and "undercapitalized" are the
same as those utilized in the "prompt corrective action" rules described above.
FDIC Insurance Assessments: Under the FDIC's risk-based insurance premium
assessment system, each depository institution is assigned to one of nine risk
classifications based upon certain capital and supervisory measures and,
depending upon its classification, is assessed insurance premiums on its
deposits. Depository institutions insured by the Bank Insurance Fund ("BIF")
which are ranked in the top risk classification category were required to pay
only the statutory minimum of $2,000 annually for deposit insurance during 1996,
while all other banks were required to pay premiums ranging from 3 basis points
to 27 basis points of domestic deposits. Each of the Corporation's banks,
including Chase Bank, Chase USA and Texas Commerce, paid the statutory minimum
premium in 1996. As a result of the enactment on September 30, 1996 of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Deposit
Funds Act"), the statutory minimum annual assessment of $2,000 was eliminated
for top-ranked depository institutions. However, the Deposit Funds Act imposed
an annual assessment on all depository institutions in order to pay interest on
bonds issued by the Financing
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Corporation ("FICO") in connection with the resolution of savings association
insolvencies occurring prior to 1991. The FICO assessment will be 1.3 basis
points of domestic deposits in the case of BIF-insured institutions such as
Chase Bank, Chase USA and Texas Commerce. These rate schedules are subject to
future adjustments by the FDIC. In addition, the FDIC has authority to impose
special assessments from time to time, subject to certain limitations specified
in the Deposit Funds Act.
Powers of the FDIC Upon Insolvency of an Insured Depository Institution: The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA")
imposes liability on an FDIC-insured depository institution (such as the
Corporation's bank subsidiaries) for costs incurred by the FDIC in connection
with the insolvency of other FDIC-insured institutions under common control with
such institution (commonly referred to as "cross-guarantees" of insured
depository institutions). An FDIC cross-guarantee claim against a depository
institution is superior in right of payment to claims of the holding company and
its affiliates against such depository institution.
In the event an insured depository institution becomes insolvent, or upon the
occurrence of certain other events specified in the Federal Deposit Insurance
Act, whenever the FDIC is appointed the conservator or receiver of such insured
depository institution, the FDIC has the power: (i) to transfer any of such
bank's assets and liabilities to a new obligor (including, but not limited to,
another financial institution acquiring all or a portion of the bank's business,
assets or liabilities), without the approval of such bank's creditors; (ii) to
enforce the terms of such bank's contracts pursuant to their terms, or (iii) to
repudiate or disaffirm any contract or lease to which such depository
institution is a party, the performance of which is determined by the FDIC to be
burdensome and the disaffirmance or repudiation of which is determined by the
FDIC to promote the orderly administration of such depository institution. Such
provisions of the Federal Deposit Insurance Act would be applicable to
obligations and liabilities of those of the Corporation's subsidiaries that are
insured depository institutions, such as Chase Bank, Chase USA and Texas
Commerce, including without limitation, obligations under senior or subordinated
debt issued by such banks to investors (hereinafter referred to as "public
noteholders") in the public markets.
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is not permitted to take any action
that would have the effect of increasing the losses to a deposit insurance fund
by protecting depositors for more than the insured portion of their deposits or
by protecting creditors of the insured depository institution (including public
noteholders), other than depositors. In addition, the FDIC is authorized to
settle all uninsured and unsecured claims in the insolvency of an insured
institution by making a final settlement payment after the declaration of
insolvency based upon a percentage determined by the FDIC reflecting an average
of the FDIC's receivership recovery experience, regardless of the assets of the
insolvent institution actually available for distribution to creditors. Such a
payment would constitute full payment and disposition of the FDIC's obligations
to claimants.
The Omnibus Budget Reconciliation Act of 1993 included a "depositor
preference" provision, which provided that the claims of a receiver of an
insured depository institution for administrative expenses and the claims of
holders of deposit liabilities (including the FDIC, as subrogee of such holders)
have priority over the claims of other unsecured creditors of such institution,
including public noteholders, in the event of the liquidation or other
resolution of such institution.
As a result of the provisions described above, whether or not the FDIC ever
sought to repudiate any obligations held by public noteholders of any subsidiary
of the Corporation that is an insured depository institution, such as Chase
Bank, Chase USA or Texas Commerce, the public noteholders would be treated
differently from, and could receive, if anything, substantially less than,
holders of deposit obligations of such depository institution.
Other Supervision and Regulation: Under Federal Reserve Board policy, the
Corporation is expected to act as a source of financial strength to each bank
subsidiary and to commit resources to support such bank subsidiary in
circumstances where it might not do so absent such policy. Any loans by a bank
holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of the subsidiary banks.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a Federal bank regulatory agency to maintain the capital of a
subsidiary bank at a certain level will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
The bank subsidiaries of the Corporation are subject to certain restrictions
imposed by Federal law on extensions of credit to, and certain other
transactions with, the Corporation and certain other affiliates and on
investments in stock or securities thereof. Such restrictions prevent the
Corporation and other affiliates from borrowing from a bank subsidiary unless
the loans are secured in specified amounts. Without the prior approval of the
Federal Reserve Board, secured loans, other transactions and investments by any
bank subsidiary are generally limited in amount as to the Corporation and as to
each of the other affiliates to 10% of the bank's capital and surplus and as to
the Corporation and all such other affiliates to an aggregate of 20% of the
bank's capital and surplus. Federal law also requires that transactions between
a bank subsidiary and the Corporation or certain non-bank affiliates, including
extensions of credit, sales of securities or assets and the provision of
services, be conducted on terms at least as favorable to the bank subsidiary as
those that apply or that would apply to comparable transactions with
unaffiliated parties.
The Corporation's bank and non-bank subsidiaries are subject to direct
supervision and regulation by various other Federal and state authorities. Chase
Bank, as a New York State-chartered bank and member bank of the Federal Reserve
System, is subject to supervision and regulation of the New York State Banking
Department as well as by the Federal Reserve Board and the FDIC. The
Corporation's national bank subsidiaries, such as Chase USA and Texas Commerce,
are subject to substantially similar supervision and regulation by the
Comptroller of the Currency. Supervision and regulation by each of the foregoing
regulatory agencies generally include comprehensive annual reviews of all major
aspects of the relevant bank's business and condition, as well
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as the imposition of periodic reporting requirements and limitations on
investments and other powers. The operations of The Vista Funds, the
Corporation's mutual funds, including the means by which they may be distributed
in the United States, are subject to regulation by the Securities and Exchange
Commission ("SEC") and the Federal Reserve Board. The types of activities in
which the foreign branches of Chase Bank and the international subsidiaries of
the Corporation may engage are subject to various restrictions imposed by the
Federal Reserve Board. Such foreign branches and international subsidiaries are
also subject to the laws and banking authorities of the countries in which they
operate.
The Corporation also conducts securities underwriting, dealing and brokerage
activities through various broker-dealer subsidiaries, all of which are subject
to the regulations of the SEC and the National Association of Securities
Dealers, Inc. CSI, the Corporation's "Section 20" subsidiary, is also subject to
the supervision and regulation of the Federal Reserve Board. The Federal Reserve
Board has generally required Section 20 subsidiaries to operate under a large
number of conditions, commonly referred to as "firewalls", that separate Section
20 companies from affiliated banks and, to a certain degree, from other bank
holding company affiliates. In addition, the Federal Reserve Board required that
no more than 10% of a Section 20 subsidiary's gross revenues be derived from
underwriting and dealing in "ineligible" securities (i.e., securities in which a
national bank may not underwrite or deal). On December 20, 1996, the Federal
Reserve Board increased, effective March 6, 1997, the ineligible revenue limit
to 25% of total revenues. The effect of this regulatory action will be to enable
the Corporation to substantially expand CSI's underwriting and dealing
capabilities. On January 9, 1997, the Federal Reserve Board proposed eliminating
most of the firewalls and incorporating the remaining firewalls in a statement
of operating standards. The proposal, if adopted, would enable CSI to operate
somewhat more efficiently.
The activities of Chase Bank, Chase USA and Texas Commerce as consumer
lenders are also subject to regulation under various Federal laws including the
Truth-in-Lending, the Equal Credit Opportunity, the Fair Credit Reporting, the
Fair Debt Collection Practice and the Electronic Funds Transfer Acts, as well as
various state laws. These statutes impose requirements on the making,
enforcement and collection of consumer loans and on the types of disclosures
that need to be made in connection with such loans. During 1996, the United
States Supreme Court decided two cases involving the consumer lending activities
of banks. In January 1996, the Court held that Federal law pre-empted state laws
prohibiting a credit card issuing bank located in one state from assessing
various fees and charges (such as late fees, over-the-limit fees, returned check
fees and annual membership fees) on credit card holders residing in another
state. In March 1996, the Court held that the Federal statute authorizing
national banks to sell insurance in small towns pre-empts a state statute
forbidding national banks from selling insurance in that state. The effect of
these decisions should be to enhance the Corporation's ability to conduct its
consumer banking businesses.
================================================================================
Important Factors Relating to Forward-Looking Statements.
Certain statements in this report are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties and the Corporation's actual future
results may differ materially from those set forth in such forward-looking
statements. The Corporation notes that the forward-looking statements contained
in this report speak only as of the date of this report and the Corporation
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
Factors that might cause the Corporation's future financial performance to
vary include, but are not limited to, those set forth in the "Management's
Discussion and Analysis" and "Supervision and Regulation" sections of this
report, as well as the following:
The Merger: Because of the inherent uncertainties associated with merging two
large companies, there can be no assurance that the Corporation will be able
fully to realize the cost savings it currently expects to realize as a result of
the merger or that such savings will be realized at the times currently
anticipated. Currently unforeseen changes in real estate markets or personnel
requirements, if they occur, could affect the timing and magnitude of the
anticipated savings. In addition, there is no assurance that the remaining work
that needs to be accomplished in order to complete fully the technology
integration and systems conversions undertaken with the merger will be done on
the originally contemplated time schedule or at the originally estimated cost.
Currently unanticipated problems in the merger integration process could, if
they occur, delay the cost savings or increase the expenses of the merger beyond
the level originally anticipated.
Competition: As noted above in Item 1 of this report, the Corporation operates
in a highly competitive environment. The Corporation expects that competitive
conditions will continue to intensify as a result of technological advances.
Technological advances have, for example, made it possible for non-depository
institutions to offer customers automatic transfer systems and other automated
payment systems services that have been traditional banking products.
Competition is also expected to increase as a result of legislation enacted in
1994 permitting interstate banking. Legislation pending in Congress, which would
permit new types of affiliations between banks and financial service companies,
including securities firms, could, if enacted, also have increased competitive
effects (See, "Legislation and Pending Litigation" below).
Foreign Operations: The Corporation does business throughout the world,
including in developing regions of the world commonly known as emerging markets.
The Corporation also invests in the securities of corporations located in such
emerging markets. The Corporation's businesses and revenues derived from
emerging markets securities are subject to risk of loss from unfavorable
political and diplomatic developments, currency fluctuations, social
instability, changes in governmental policies, expropriation, nationaliza-
5
8
tion, confiscation of assets and changes in legislation relating to foreign
ownership. In addition, foreign trading markets, particularly in emerging market
countries, are often smaller, less liquid, and more volatile than the U.S.
trading markets.
Government Monetary Policies and Economic Controls: As noted above in Item 1 of
this report, the earnings and business of the Corporation are affected by
general economic conditions, both domestic and international, and by the fiscal
or other policies that are adopted by various regulatory authorities of the
United States, foreign governments, and international agencies. The nature and
impact of future changes in economic and market conditions and fiscal policies
are not predictable and beyond the Corporation's control. In addition, these
policies and conditions can impact the Corporation's customers and
counterparties, which may increase the risks of default on their obligations to
the Corporation.
Legislation and Pending Litigation: Federal and state legislation affecting the
banking industry has played, and will continue to play, a significant role in
shaping the nature of the financial services industry. For example, during 1994,
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle Act") was enacted. The Riegle Act permitted, commencing September 29,
1995, interstate banking under certain conditions relating to concentration of
deposits. The Riegle Act also permits, commencing June 1, 1997 (subject to
enactment by any state of "opt-out" legislation), interstate branching by
consolidation across state lines, of banks under the common control of a bank
holding company. The States of New York, New Jersey and Connecticut have
"opted-in" early to the provisions of the Riegle Act. As a result, the
Corporation was able to integrate the branches of its New Jersey and Connecticut
banks into Chase Bank, thereby increasing the operational efficiency of such
branches. However, another effect of the early "opt-in" by New York, New Jersey
and Connecticut may be to increase competition within the tri-state region,
although the Corporation cannot predict whether and to what extent such
competition will increase. The State of Texas has "opted-out" of the provisions
of the Riegle Act.
Legislation is pending in Congress that would, if enacted, substantially
reform the regulatory structure under which U.S. bank holding companies and
other financial services institutions operate and could, therefore, have
important implications for the Corporation and other financial services
companies. Given the current status of these legislative efforts, it is not
possible for the Corporation to predict the extent to which the Corporation and
its subsidiaries may be affected by any of these initiatives.
Business Conditions and General Economy: The Corporation is a leading provider
of services in the global markets, global services, investment banking, private
banking and national consumer businesses. The profitability of these businesses,
as well as the Corporation's credit quality, could be adversely affected by a
worsening of general economic conditions, particularly by a higher domestic
interest rate environment, as well as by foreign and domestic trading market
conditions. An economic downturn or significantly higher interest rates could
increase the risk that a greater number of the Corporation's customers would
become delinquent on their loans or other obligations to the Corporation, or
would refrain from securing additional debt. In addition, a higher level of
domestic interest rates could affect the amount of assets under management by
the Corporation (for example, by affecting the flows of moneys to or from the
mutual funds managed by the Corporation), impact the willingness of financial
investors to participate in loan syndications and underwritings managed by the
Corporation's corporate finance business, adversely impact the Corporation's
loan and deposit spreads and affect its domestic trading revenues. Revenues from
foreign trading markets may also be subject to negative fluctuations as a result
of the impact of unfavorable political and diplomatic developments, social
instability and changes in the policies of central banks or foreign governments,
and the impact of these fluctuations could be accentuated by the volatility and
lack of relative liquidity in some of these foreign trading markets.
================================================================================
Foreign Operations
For geographic distributions of average assets, total revenue, total expense,
income before income tax expense and net income, see Note Twenty Two of the
Notes to Consolidated Financial Statements on page 89. For a discussion of
foreign loans, see Note Four of the Notes to Consolidated Financial Statements
on page 73 and see the sections entitled "Foreign Portfolio" and "Cross-Border
Outstandings," on pages 52 and 104.
- --------------------------------------------------------------------------------
Item 2: Properties
- --------------------------------------------------------------------------------
The headquarters of the Corporation is located in New York City at 270 Park
Avenue, which is a 50-story bank and office building owned by the Corporation.
This location contains approximately 1.3 million square feet of commercial
office and retail space.
The Corporation also owns and occupies a 60-story building at One Chase
Manhattan Plaza in downtown Manhattan, New York. This location has approximately
2 million square feet of commercial office and retail space, of which
approximately 800,000 square feet is leased to outside tenants.
The Corporation also owns and occupies a 22-story bank and office building at
4 New York Plaza, New York City, with 900,000 square feet of commercial office
and retail space. In addition, the Corporation owns a 50-story building known as
One New York Plaza in downtown Manhattan which is leased to outside tenants.
The Corporation built in 1992 and fully occupies a two-building complex known
as Chase MetroTech in downtown Brooklyn, New York. This facility contains
approximately 1.75 million square feet and houses, among other things, the
Corporation's operations and product support functions.
6
9
The Corporation also occupies under leasehold agreements, office space at 55
Water Street, 95 Wall Street, 2 Chase Manhattan Plaza (20 Pine Street) and
various other locations in New York City and on Long Island, New York.
The Corporation occupies, in the aggregate, approximately one million square
feet of space in the United Kingdom. Approximately 352,000 square feet of this
total is scheduled to be exited during the second quarter of 1997. The most
significant components of the leased space in London are 218,000 square feet at
125 London Wall and 147,000 square feet at Thomas More Square. The Corporation
also owns and occupies a 300,000 square foot operations center in Bournemouth.
In addition, the Corporation and its subsidiaries own and occupy
administrative and operational facilities in Hicksville, New York; Tampa,
Florida; Tempe, Arizona; and in Houston, Austin, Arlington, and El Paso, Texas.
The Corporation and its subsidiaries occupy branch offices and other
locations throughout the United States and in foreign countries under various
types of ownership and leasehold agreements which, when considered in the
aggregate, are not material to its operations.
The Corporation is currently eliminating approximately 100 existing branches
in New York State which are located near other existing Chase and Chemical
branches. In addition, the Corporation has begun, and will continue, to combine
and consolidate redundant operations conducted by both Chase and Chemical prior
to the merger.
- --------------------------------------------------------------------------------
Item 3: Legal Proceedings
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
Item 4: Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
None.
7
10
- --------------------------------------------------------------------------------
Executive Officers of the Registrant
- --------------------------------------------------------------------------------
Positions and offices held
Name Age with the Corporation and The Chase Manhattan Bank
- --------------------------------------------------------------------------------
Walter V. Shipley 61 Chairman of the Board and Chief Executive Officer
of the Corporation and the Bank 1983-1992 and
1994 to the present. From 1992 until December 31,
1993, President of the Corporation and the Bank.
Director of the Corporation and the Bank since
1982.
Thomas G. Labrecque 58 President and Chief Operating Officer of the
Corporation and the Bank since March 31, 1996,
having served since 1990 as Chairman of the Board
and Chief Executive Officer of the corporation
formerly known as The Chase Manhattan Corporation
which merged into the Corporation on March 31,
1996, and The Chase Manhattan Bank (National
Association) which merged into Chemical Bank on
July 14, 1996. He had been a Director of the
former Chase since 1980 and became a Director of
the Corporation on March 31, 1996.
Edward D. Miller 56 Senior Vice Chairman of the Board of the
Corporation and the Bank since March 31, 1996.
Mr. Miller was President of the Corporation and
the Bank from 1994 to March 31, 1996, after
serving as Vice Chairman of the Board from 1991.
From 1988 until the merger of Manufacturers
Hanover Corporation (MHC) with the Corporation in
1991, he had served as Vice Chairman and a
Director of MHC. He became a Director of the
Corporation in 1991. Mr. Miller is scheduled to
retire on April 1, 1997.
William B. Harrison Jr. 53 Vice Chairman of the Corporation and the Bank. A
Director of the Corporation since the MHC merger
and of the Bank since 1990. Prior to the MHC
merger, Mr. Harrison had been an Executive
Officer of the Corporation since 1988.
Peter J. Tobin 53 Chief Financial Officer of the Corporation and
the Bank since 1991. Mr. Tobin had served in the
same capacity for MHC from December 1985 until
MHC's merger into the Corporation in 1991.
Unless otherwise noted, all of the Corporation's above-named executive officers
have continuously held senior-level positions with the Corporation or its
predecessor institutions, Chemical Banking Corporation and The Chase Manhattan
Corporation, during the five fiscal years ended December 31, 1996. There are no
family relationships among the foregoing executive officers.
8
11
Part II
- --------------------------------------------------------------------------------
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
The outstanding shares of the Corporation's Common Stock are listed on the New
York Stock Exchange and the London Stock Exchange Limited. For the quarterly
high and low prices of the Common Stock on the New York Stock Exchange and the
quarterly dividends declared for the Corporation's common stock for the last two
years, see the section entitled "Quarterly Financial Information" on page 92.
At February 28, 1997, there were 87,569 holders of record of the
Corporation's Common Stock.
- --------------------------------------------------------------------------------
Item 6: Selected Financial Data
- --------------------------------------------------------------------------------
For five-year selected financial data, see "Summary of Selected Financial Data"
on page 37.
- --------------------------------------------------------------------------------
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations, entitled "Management's Discussion and Analysis", appears on pages 37
through 61.
- --------------------------------------------------------------------------------
Item 8: Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
The consolidated financial statements appear, together with the Notes thereto
and the report of Price Waterhouse LLP dated January 21, 1997 thereon, on pages
62 through 91.
Supplementary financial data for each full quarter within the two years ended
December 31, 1996 is included on page 92 in the table entitled "Quarterly
Financial Information". Also included is a "Glossary of Terms" on page 93.
- --------------------------------------------------------------------------------
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
9
12
Part III
- --------------------------------------------------------------------------------
Item 10: Directors and Executive Officers of the Corporation
- --------------------------------------------------------------------------------
See Item 13 below.
- --------------------------------------------------------------------------------
Item 11: Executive Compensation
- --------------------------------------------------------------------------------
See Item 13 below.
- --------------------------------------------------------------------------------
Item 12: Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
See Item 13 below.
- --------------------------------------------------------------------------------
Item 13: Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
Pursuant to Instruction G (3) to Form 10-K, the information to be provided by
Items 10, 11, 12 and 13 of Form 10-K (other than information pursuant to Rule
402 (i), (k) and (l) of Regulation S-K) are incorporated by reference to the
Corporation's definitive proxy statement for the annual meeting of stockholders,
to be held May 20, 1997, which proxy statement will be filed with Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the close of
the Corporation's 1996 fiscal year.
10
13
Part IV
- --------------------------------------------------------------------------------
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) EXHIBITS
1. Financial Statements
The consolidated financial statements, the Notes thereto and the report
thereon listed in Item 8 are set forth commencing on page 62.
2. Financial Statement Schedules
None.
3. EXHIBITS
3.1 Restated Certificate of Incorporation of the Corporation, as
amended (incorporated by reference to Exhibit 4.1 to the
Corporation's Registration Statement on Form S-8, dated July 11,
1996, File No. 333-07941).
3.2 By-laws, as amended as of March 18, 1997.
4.1 Indenture, dated as of December 1, 1989, between Chemical Banking
Corporation and The Chase Manhattan Bank (National Association) as
succeeded to by Bankers Trust Company, as Trustee, which
Indenture includes the form of Debt Securities (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-3
(File No. 33-32409) of Chemical Banking Corporation).
4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as
of December 15, 1992, between Chemical Banking Corporation and
Morgan Guaranty Trust Company of New York, as succeeded to by
First Trust of New York, National Association, as Trustee, which
Indenture includes the form of Subordinated Debt Securities
(incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K, dated December 22, 1992, of Chemical Banking
Corporation, File No. 1-5805).
4.2(b) Second Supplemental Indenture, dated as of October 8, 1996,
between the Corporation and First Trust of New York, National
Association to the Indenture, dated as of April 1, 1987, as
amended and restated as of December 15, 1992 (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form S-3
(File No. 333-14959) of the Corporation).
4.3(a) Indenture, dated as of June 1, 1985, between Manufacturers Hanover
Corporation and IBJ Schroder Bank and Trust Company, as Trustee,
relating to 8 1/2% Subordinated Capital Notes Due February 15,
1999 (incorporated by reference to Exhibit 4(b) to the Current
Report on Form 8-K, dated February 27, 1987, of Manufacturers
Hanover Corporation, File No. 1-5923-1).
4.3(b) First Supplemental Indenture, dated as of December 31, 1991, among
Chemical Banking Corporation, Manufacturers Hanover Corporation
and IBJ Schroder Bank and Trust Company to the Indenture dated
June 1, 1985 (incorporated by reference to Exhibit 4.18(b) to
the Annual Report on Form 10-K, dated December 31, 1991, of
Chemical Banking Corporation, File No. 1-5805).
4.3(c) Second Supplemental Indenture, dated as of October 8, 1996,
between the Corporation and IBJ Schroder Bank and Trust Company to
the Indenture dated June 1, 1985 (incorporated by reference to
Exhibit 4.12 to the Registration Statement Form S-3 (File No.
333-14959) of the Corporation).
4.4(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan
Corporation and Bankers Trust Company, as Trustee, (incorporated
by reference to Exhibit (4)(a) to the Registration Statement on
Form S-3 (File No. 33-7299) of The Chase Manhattan Corporation).
4.4(b) First Supplemental Indenture, dated as of November 1, 1990,
between The Chase Manhattan Corporation and Bankers Trust Company,
as Trustee to the Indenture, dated as of July 1, 1986,
(incorporated by reference to Exhibit (4)(b) to the Registration
Statement on Form S-3 (File No. 33-40485) of The Chase Manhattan
Corporation).
4.4(c) Second Supplemental Indenture, dated as of May 1, 1991, between
The Chase Manhattan Corporation and Bankers Trust Company, as
Trustee to the Indenture dated as of July 1, 1986 (incorporated by
reference to Exhibit (4)(c) to the Registration Statement on Form
S-3 (File No. 33-42367) of The Chase Manhattan Corporation).
11
14
4.4(d) Third Supplemental Indenture, dated as of March 29, 1996, among
Chemical Banking Corporation, The Chase Manhattan Corporation and
Bankers Trust Company, as Trustee to the Indenture, dated as of
July 1, 1986, (incorporated by reference to Exhibit 4.18 to the
Registration Statement on Form S-3 (File No. 333-14959) of the
Corporation).
4.5(a) Amended and Restated Indenture, dated as of September 1, 1993,
between The Chase Manhattan Corporation and Chemical Bank, as
Trustee (incorporated by reference to Exhibit (4)(cc) to the
Current Report on Form 8-K, dated August 19, 1993, of The Chase
Manhattan Corporation, File No. 1-5945).
4.5(b) First Supplemental Indenture, dated as of March 29, 1996, among
Chemical Banking Corporation, The Chase Manhattan Corporation,
Chemical Bank, as resigning Trustee, and First Trust of New York,
National Association, as successor Trustee to the Amended and
Restated Indenture, dated as of September 1, 1993 (incorporated by
reference to Exhibit 4.22 to the Registration Statement on Form
S-3 (File No. 333-14959) of the Corporation).
4.5(c) Second Supplemental Indenture, dated as of October 8, 1996,
between the Corporation and First Trust of New York, National
Association to the Amended and Restated Indenture, dated as of
September 1, 1993 (incorporated by reference to Exhibit 4.23 to
the Registration Statement on Form S-3 (File No. 333-14959) of the
Corporation).
4.6(a) Indenture, dated as of May 15, 1993, between Margaretten Financial
Corporation and The Bank of New York, as Trustee, relating to the
6 3/4% Guaranteed Notes due June 15, 2000 (incorporated by
reference to Exhibit 4(a) to Registration Statement on Form S-3
(No. 33-60262) of Margaretten Financial Corporation).
4.6(b) Supplemental Indenture, dated as of July 22, 1994, to the
Indenture dated as of May 15, 1993 among Margaretten Financial
Corporation, Chemical Banking Corporation and The Bank of New
York, as Trustee, and Guarantee dated as of July 22, 1994 by
Chemical Banking Corporation (incorporated by reference to Exhibit
4.34 to the Current Report on Form 8-K, dated September 28, 1994,
of Chemical Banking Corporation, File No. 1-5805).
4.7 Junior Subordinated Indenture, dated as of December 1, 1996,
between the Corporation and The Bank of New York, as Debenture
Trustee (incorporated by reference to Exhibit 4.24 to the
Registration Statement on Form S-3 (File No. 333-19719) of the
Corporation).
10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase
Manhattan Corporation and The Chase Manhattan Bank, as amended and
restated effective December 1996.
10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as
amended and restated as of May 21, 1996.
10.3 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993
(incorporated by reference to Exhibit 10.5 to the Annual Report on
Form 10-K, dated December 31, 1994, of Chemical Banking
Corporation, File No. 1-5805).
10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan
(incorporated by reference to the Schedule 14A of the Corporation
filed on April 17, 1996, File No. 1-5805).
10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10O to the The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, File No. 1-5945).
10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10S to the The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as
amended and restated as of May 19, 1992 (incorporated by reference
to Exhibit 10.7 to the Annual Report on Form 10-K, dated December
31, 1992, of Chemical Banking Corporation, File No. 1-5805).
10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended
(incorporated by Reference to Exhibit 10A to the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-5945).
10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10T to The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.10 Key Executive Performance Plan of Chemical Banking Corporation
(incorporated by reference to Exhibit 10.4 to the Annual Report on
Form 10-K, dated December 31, 1994, of Chemical Banking
Corporation, File No. 1-5805).
12
15
10.11 The Chase Manhattan Annual Incentive Arrangement for Certain
Executive Officers (incorporated herein by reference to Exhibit
10W to The Chase Manhattan Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995, File No. 1-5945).
10.12 Forms of employment agreements as entered into by Chemical Banking
Corporation and certain of its executive officers (incorporated by
reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated
December 31, 1995 of Chemical Banking Corporation, File No.
1-5805).
10.13 Permanent Life Insurance Options Plan (incorporated by reference
to Exhibit 10.11 to the Annual Report on Form 10-K, dated December
31, 1992, of Chemical Banking Corporation, File No. 1-5805).
10.14 Executive Retirement Plan of Chemical Banking Corporation and
Certain Subsidiaries (incorporated by reference to Exhibit 10.8 to
the Annual Report on Form 10-K, dated December 31, 1995, of
Chemical Banking Corporation, File No. 1-5805).
10.15 Supplemental Retirement Plan of Chemical Bank and Certain
Affiliated Companies, restated effective January 1, 1993 and as
amended through January 1, 1995 (incorporated by reference to
Exhibit 10.9 to the Annual Report on Form 10-K, dated December 31,
1995, of Chemical Banking Corporation, File No. 1-5805).
10.16 Supplemental Retirement Plan of The Chase Manhattan Bank, as
amended (incorporated by reference to Exhibit 10G of the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1989, File No. 1-5945).
10.17 Further Amendment to the Supplemental Retirement Plan of The Chase
Manhattan Bank (incorporated by reference to Exhibit 10G of the
The Chase Manhattan Corporation's Annual Report on Form 10-K for
the year ended December 31, 1990, File No. 1-5945).
10.18 Amendment to Supplemental Retirement Plan of The Chase Manhattan
Bank (incorporated herein by reference to Exhibit 10Z to The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.19 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10H of the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-5945).
10.20 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10AA to The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.21 TRA 86 Supplemental Benefit Plan of the Bank, as amended
(incorporated by reference to Exhibit 10I of the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-5945).
10.22 Amendment to TRA86 Supplemental Benefit Plan of The Chase
Manhattan Bank (incorporated herein by reference to Exhibit 10BB
to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, File No. 1-5945).
11.1 Computation of Earnings per Common Share
12.0 Computation of ratio of earnings to fixed charges.
12.1 Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements.
21.1 List of Subsidiaries of the Corporation.
22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase
Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21
under the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
13
16
The Corporation hereby agrees to furnish to the Commission, upon request, copies
of instruments defining the rights of holders for the following outstanding
nonregistered long-term debt of the Corporation and its subsidiaries: Floating
Rate Subordinated Notes Due November 25, 1998 of the Corporation; Subordinated
Floating Rate Notes Due April 22, 2003 of the Corporation; Floating Rate Notes
Due September 25, 2002 of the Corporation; Zero-Coupon Notes Due September 25,
2002 of the Corporation; Serial Zero Coupon Guaranteed Notes Due 1984-2003 of
the Corporation; 8.35% Senior Notes Due January 27, 2000 of the Corporation;
Floating Rate Senior Notes Due October 17, 2001 of the Corporation; Senior
Floating Rate Notes Due April 12, 2000 of the Corporation; Senior Floating Rate
Notes Due July 6, 2000 of the Corporation; 2.835% Senior Notes Due June 4, 2001
of the Corporation; 2.82% Senior Notes Due August 8, 2001 of the Corporation; 7
1/4% Subordinated Notes Due September 15, 2002 of Chemical Bank; 7% Subordinated
Notes Due June 1, 2005 of Chemical Bank; Floating Rate Subordinated Notes Due
May 5, 2003 of Chemical Bank; Floating Rate Subordinated Notes Due June 15, 2000
of Chemical Bank; Floating Rate Subordinated Notes Due July 29, 2003 of Chemical
Bank; 6 5/8% Subordinated Notes Due 2005 of Chemical Bank; 6.70% Subordinated
Notes Due August 15, 2008 of Chemical Bank; 6.125% Subordinated Notes Due
November 1, 2008 of Chemical Bank; Floating Rate Subordinated Notes Due July 15,
1997 of Manufacturers Hanover Corporation; Floating Rate Subordinated Capital
Notes Due April 1997 of Manufacturers Hanover Trust Company; LIBOR Note, Series
C, Due March 1998 of Manufacturers Hanover Corporation; 5.30% Senior Yen Notes
Due July 29, 1998 of The Chase Manhattan Corporation; Floating Rate Subordinated
Notes Due November 26, 1997 of The Chase Manhattan Corporation; Floating Rate
Subordinated Notes Due May 31, 2000 of The Chase Manhattan Corporation; and
Floating Rate Subordinated Notes Due December 30, 2009 of The Chase Manhattan
Corporation. These instruments have not been filed as exhibits hereto by reason
that the total amount of each issue of such securities does not exceed 10% of
the total assets of the Corporation and its subsidiaries on a consolidated
basis.
(b) REPORTS ON FORM 8-K
o A Current Report on Form 8-K dated October 7, 1996 was filed resubmitting
Exhibit 27 (Financial Data Schedule) of the Corporation's 1996 second
quarter Form 10-Q.
o A Current Report on Form 8-K dated October 15, 1996 was filed setting
forth the Corporation's financial results for the 1996 third quarter.
o A Current Report on Form 8-K dated December 17, 1996 was filed announcing
a new company-wide stock option program for employees.
14
17
Pages 15 - 35 Not Used
18
FINANCIAL TABLE OF CONTENTS
Management's Discussion and Analysis:
37 Summary of Selected Financial Data
38 Overview
39 Results of Operations
39 Net Interest Income
39 Provision for Credit Losses
40 Noninterest Revenue
41 Noninterest Expense
43 Income Taxes
43 Lines of Business Results
44 Global Wholesale Banking
46 Regional and Nationwide Consumer Banking
47 Corporate
48 Credit Risk Management
48 Loan Portfolio
49 Domestic Consumer Portfolio
51 Domestic Commercial Portfolio
52 Foreign Portfolio
52 Industry Diversification
52 Cross-Border Exposure
52 Derivative and Foreign Exchange Financial Instruments
53 Allowance for Credit Losses
54 Market Risk Management
54 Trading Activities
55 Asset/Liability Management
58 Operating Risk Management
58 Capital and Liquidity Risk Management
60 Accounting Developments
60 Comparison Between 1995 and 1994
Audited Financial Statements:
62 Management's Report on Responsibility for Financial Reporting
62 Report of Independent Accountants
63 Consolidated Financial Statements
67 Notes to Consolidated Financial Statements
Supplementary Data:
92 Quarterly Financial Information
93 Glossary of Terms
36
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
Summary of Selected Financial Data
(in millions, except per share and ratio data)
As of or for the year ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net Interest Income $ 8,340 $ 8,202 $ 8,312 $ 8,291 $ 8,117
Provision for Credit Losses 897 758 1,050 2,254 2,585
Provision for Loans Held for Accelerated Disposition -- -- -- 566 --
Noninterest Revenue 7,512 6,758 6,701 7,181 5,420
Noninterest Expense (excluding Restructuring Costs) 9,330 9,375 9,537 9,625 8,801
Income Before Restructuring Costs, Income Tax Expense
and Effects of Accounting Changes 5,625 4,827 4,426 3,027 2,151
Restructuring Costs 1,814 15 465 203 --
Income Tax Expense 1,350 1,842 1,475 798 428
Net Effect of Changes in Accounting Principles(a) -- (11) -- 368 --
Net Income $ 2,461 $ 2,959 $ 2,486 $ 2,394 $ 1,723
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Primary:
Income Before Restructuring Costs and Accounting Changes $ 7.54 $ 6.25 $ 5.66 $ 4.28 $ 3.65
Net Income 5.02 6.20 5.02 4.85 3.65
Fully-Diluted:
Income Before Restructuring Costs and Accounting Changes 7.43 6.09 5.60 4.24 3.61
Net Income 4.94 6.04 4.97 4.79 3.61
Book Value at December 31, 42.58 41.81 37.37 36.10 31.84
Market Value at December 31, 89.38 58.75 35.88 40.13 38.63
Cash Dividends Declared 2.24 1.94 1.64 1.37 1.20
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Income Before Restructuring Costs and Accounting Changes:
Return on Average Total Assets(b) 1.12% .97% .96% .87% .72%
Return on Average Common Stockholders' Equity 18.74 16.27 15.63 12.90 11.88
Return on Average Total Stockholders' Equity 17.40 15.17 14.55 12.06 11.29
Common Dividend Payout 29 29 27 30 33
Net Income:
Return on Average Total Assets(b) .77 .96 .87 .97 .72
Return on Average Common Stockholders' Equity 12.48 16.15 13.86 14.62 11.88
Return on Average Total Stockholders' Equity 11.94 15.06 13.06 13.44 11.29
Efficiency Ratio(c) 59 64 64 60 62
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL AT YEAR-END
Loans $ 155,092 $ 150,207 $ 142,231 $ 137,117 $ 144,568
Total Assets 336,099 303,989 285,383 251,948 235,502
Deposits 180,921 171,534 166,462 169,786 161,397
Long-Term Debt 12,714 12,825 13,061 13,833 13,711
Total Stockholders' Equity 20,994 20,836 18,873 19,101 16,353
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Tier 1 Risk-Based Capital Ratio 8.15% 8.22% 8.05% 8.06% 7.01%
Total Risk-Based Capital Ratio 11.78 12.27 12.23 12.35 11.22
Tier 1 Leverage 6.79 6.68 6.63 7.35 6.79
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES
Common and Common Equivalent Shares 446.4 440.8 442.2 433.1 397.5
Common Shares Assuming Full Dilution 453.4 453.5 450.9 441.7 408.2
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Reflects the adoption of SFAS 106 in 1995 for the accounting for other
postretirement benefits relating to The Chase Manhattan Corporation's (the
"Corporation") foreign plans. Also reflects the adoption in 1993 of SFAS 106 for
the Corporation's domestic plans and SFAS 109 relating to accounting for income
taxes. (b) Excluding the gross-up impact of FASI 39, which was adopted by the
Corporation in 1994, the return on average assets for 1996, 1995 and 1994 was
1.22%, 1.08% and 1.07%, respectively, before restructuring costs and accounting
changes, and 0.84%, 1.07% and 0.96%, respectively, based on net income.(c)
Excludes restructuring costs, foreclosed property expense and nonrecurring
items.
37
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain forward-looking statements contained herein are subject to risks and
uncertainties. The Corporation's actual results may differ materially from those
set forth in such forward-looking statements. Reference is made to the
Corporation's reports filed with the Securities and Exchange Commission for a
discussion of factors that may cause such differences to occur. See Glossary of
Terms on page 93 for a definition of terms used throughout the annual report.
OVERVIEW
The Corporation's net income, excluding merger restructuring costs, was $3,586
million in 1996, an increase of 20% from $2,979 million, in 1995. The
Corporation's primary earnings per share were $7.54 in 1996, compared with $6.25
in 1995. On a fully-diluted basis, earnings per share rose 22% when compared
with the prior year, to $7.43. The return on average common stockholders' equity
was 18.74% in 1996, an increase from 16.27% in 1995.
The 1996 results were characterized by strong earnings growth across the full
breadth of the Corporation's businesses, and were realized at the same time the
Corporation executed significant merger integration plans.
Including merger restructuring costs, the Corporation's net income for 1996
was $2,461 million compared with $2,959 million for 1995. Primary earnings per
share were $5.02 in 1996 and $6.20 in 1995, while fully-diluted earnings per
share were $4.94 in 1996, compared with $6.04 in 1995.
The Corporation's financial targets for 1996 through 1998 included
double-digit operating earnings per share growth in each of the three years
through 1998, and an efficiency ratio in the low 50 percent range and a return
on average common stockholders' equity of 18 percent or higher by the end of
1998. These targets are based on measuring the Corporation's results using
operating earnings (net income less restructuring costs and nonrecurring items).
Nonrecurring items had a $70 million net favorable impact on net income in 1996
compared with a $65 million net favorable impact in 1995.
[GRAPH 1 - SEE APPENDIX I]
The following table reflects the Corporation's results on an operating basis.
Year Ended December 31, (in millions, except per share) 1996 1995
- --------------------------------------------------------------------------------
Operating Revenue(a) $16,431 $15,041
Operating Noninterest Expense(b)(c) 9,249 9,450
Operating Net Income(c) 3,516 2,903
Operating Net Income Per Share-Fully Diluted(c) $ 7.27 $ 5.92
- --------------------------------------------------------------------------------
Note - See Performance Goals table for footnotes.
In connection with the merger of The Chase Manhattan Corporation ("old
Chase") into Chemical Banking Corporation ("Chemical") in March 1996, the
Corporation announced additional performance goals for 1996. In 1996, the
Corporation largely exceeded its performance goals.
PERFORMANCE GOALS 1996 Goals 1996 Results
- --------------------------------------------------------------------------------
Operating Earnings Per Share - Fully Diluted Above 15% growth 23% growth
Operating Revenue(a) 5-7% growth 9% growth
Operating Noninterest Expense(b)(c) $9.1 billion $9.2 billion
Operating Efficiency Ratio(a) High 50's 56.6%
Return on Average Common Equity(c) 17% 18.4%
Common Dividend Payout Ratio(c) 25-35% net income 29%
Tier 1 Capital 8-8.25% 8.2%
- --------------------------------------------------------------------------------
(a) Excludes the impact of credit card securitizations.
(b) Excludes foreclosed property expense, a charge to conform retirement
benefits provided to foreign employees, start-up costs incurred in connection
with the co-branded Wal-Mart credit card program ("Wal-Mart program") and the
Real Estate Investment Trust ("REIT") minority interest expense.
(c) Excluding restructuring costs.
The Corporation's total revenue in 1996 was $15.9 billion, an increase of 6%
from the prior year. On a managed basis, which excludes the impact of credit
card securitizations, total revenue for 1996 increased 9% and exceeded the
Corporation's 5%-7% performance target range. Management currently expects
annual operating revenue growth on a managed basis of approximately 6%-8% in
1997.
During 1996, the Corporation realized merger-related expense savings of $555
million, exceeding management's original target of $510 million and reflecting
the acceleration of merger savings originally expected to be realized in 1997.
Management expects cumulative merger-related annual cost savings will
approximate $1.2 billion by the end of 1997 and $1.7 billion by the end of 1998.
Although operating noninterest expense for 1996 declined 2.1% from the prior
year, total operating noninterest expense for 1996 exceeded the original target
as a result of higher than anticipated incentive costs due to the strong growth
in revenue and competitive market pressures. Management expects that the
underlying operating noninterest expense of the Corporation, before merger
savings, will be approximately 5%-6% higher in 1997 than in 1996.
During 1996, the Corporation maintained a disciplined approach to the use of
its capital. On October 15, 1996, the Corporation's Board of Directors announced
a buy-back program pursuant to which the Corporation is authorized until
December 1998 to repurchase up to $2.5 billion of its common stock, in addition
to such other common share repurchases as may be neces-
38
21
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
sary to provide for expected issuances under its dividend reinvestment plan and
its various stock-based director and employee benefits plans. By the end of
1996, the Corporation had repurchased approximately $1.0 billion of common
equity under the buy-back program. In early 1997, management announced that it
intended to purchase equity on a more accelerated time schedule than previously
expected and, therefore, management believes it is likely that the buy-back
program will be completed in late 1997 or early 1998. Additionally, in 1996, the
Corporation increased its quarterly common stock dividend by 12% to $.56 per
share, while maintaining Tier 1 risk-based capital at 8.2% at December 31, 1996.
The Corporation's nonperforming assets at December 31, 1996 were $1,151
million, a decline of 31% from the 1995 year-end. As a result of the continued
decline in nonperforming assets, the ratio of the allowance for loan losses to
nonperforming loans reached 348% at December 31, 1996. Nonperforming assets have
been reduced by over $10 billion, or 90%, from their peak level in 1991.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Reported net interest income totaled $8,340 million in 1996, an increase of $138
million from 1995. The level of reported net interest income in both 1996 and
1995 was reduced by the impact of credit card securitizations. On a managed
basis, net interest income increased by 8% in 1996 to $9,254 million, reflecting
a higher level of interest-earning assets (particularly consumer receivables and
trading-related assets), as well as the funding benefit of higher equity levels.
Also contributing to the increase was $54 million of interest related to Federal
and State tax audit settlements in 1996.
%
Year Ended December 31, 1996 1995 Change
- ---------------------------------------------------------------------------------------
Net Interest Income (in millions)
Managed Basis $ 9,254 $ 8,562 8.1%
Impact of Securitizations (914) (360) --
- ---------------------------------------------------------------------------------------
Reported $ 8,340 $ 8,202 1.7%
- ---------------------------------------------------------------------------------------
Average Interest-Earning Assets (in billions)
Managed Basis $ 271.5 $ 248.8 9.1%
Impact of Securitizations (10.6) (4.3) --
- ---------------------------------------------------------------------------------------
Reported $ 260.9 $ 244.5 6.7%
- ---------------------------------------------------------------------------------------
Net Yield on Interest-Earning Assets (a)
Managed Basis 3.40% 3.45% --
Impact of Securitizations (.19) (.08) --
- ---------------------------------------------------------------------------------------
Reported 3.21% 3.37% --
- ---------------------------------------------------------------------------------------
(a) Reflected on a taxable equivalent basis in order to permit comparisons of
yields on tax-exempt and taxable assets.
The reported net yield on interest-earning assets was 3.21% in 1996, compared
with 3.37% for the prior year. Adjusting for securitizations, the net yield on a
managed basis was 3.40%, a slight decline from 3.45% in 1995, reflecting a shift
in the composition of interest-earning assets from higher-yielding loans to
lower-yielding securities and liquid assets. The following table reflects the
composition of the Corporation's average interest-earning assets (on a balance
sheet basis) for the periods indicated.
INTEREST EARNING-ASSETS (in billions) 1996 1995
- ----------------------------------------------------------------------------------------
Loans $150.0 57% $146.5 60%
Securities 43.7 17 36.7 15
Liquid Assets 67.2 26 61.3 25
- ----------------------------------------------------------------------------------------
Total $260.9 100% $244.5 100%
- ----------------------------------------------------------------------------------------
Average interest-earning assets in 1996 were $260.9 billion, an increase of
$16.4 billion from 1995. The Corporation has continued to increase its liquid
interest-earning assets through its trading and Section 20 activities, and to
increase its securities portfolio as part of its asset/liability management
("ALM") activities. The increase in the Corporation's average total loans in
1996 reflected growth of $3.5 billion in consumer loans, despite the impact of
an increase in average credit card securitizations of approximately $6.3 billion
from 1995.
The growth in interest-earning assets was largely funded by a $10.0 billion
increase in Federal funds purchased and securities sold under repurchase
agreements, which provided short-term funding for trading-related positions and
the securities portfolio.
Management anticipates that, given its current expectations for interest rate
movements in 1997, the Corporation's managed net interest income in 1997 will be
higher than in 1996.
PROVISION FOR CREDIT LOSSES
The provision for credit losses in 1996 was $897 million, compared with $758
million in 1995. The increase resulted primarily from higher commercial net
charge-offs as a result of a lower level of recoveries. During 1996 the
Corporation recorded lower consumer net charge-offs due, in part, to a decline
in the level of credit card receivables retained on the balance sheet.
Management believes that the credit quality of the Corporation's overall
commercial and industrial portfolio will remain relatively stable in 1997.
Management expects the provision for credit losses in 1997 (which is anticipated
to equal net charge-offs) to be modestly higher than in 1996, primarily as a
result of growth in retained consumer loans, higher losses in credit card loans,
and lower recoveries in commercial loans.
[GRAPH 2 - SEE APPENDIX I]
39
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
NONINTEREST REVENUE
Total noninterest revenue was $7,512 million in 1996, an 11% increase from 1995,
reflecting strong trading results, higher credit card revenue, strong corporate
finance and syndication activities, as well as higher trust, custody, and
investment management fees. The Corporation continued to generate fee growth by
offering clients integrated financing and advisory solutions.
Year Ended December 31, (in millions) 1996 1995
- ----------------------------------------------------------------------------------
Corporate Finance and Syndication Fees $ 929 $ 796
Trust, Custody, and Investment Management Fees 1,176 1,018
Credit Card Revenue 1,063 834
Service Charges on Deposit Accounts 394 417
Fees for Other Financial Services 1,529 1,453
- ----------------------------------------------------------------------------------
Total Fees and Commissions 5,091 4,518
Trading Revenue 1,270 1,016
Securities Gains 135 132
Revenue from Equity-Related Investments 726 626
Other Revenue 290 466
- ----------------------------------------------------------------------------------
Total Noninterest Revenue $7,512 $6,758
- ----------------------------------------------------------------------------------
[GRAPH 3 - SEE APPENDIX I]
FEES AND COMMISSIONS
Corporate finance and syndication fees in 1996 increased 17% to $929 million
from the prior year, resulting from strong loan syndication, advisory and debt
securities underwriting activities. The active merger and acquisition
environment during 1996 was an underlying factor for the increases in these
activities. During 1996, the Corporation acted as agent for approximately $434
billion of syndicated credit facilities, a reflection of the Corporation's large
client base and strong distribution network.
Trust, custody, and investment management fees for 1996 were $1,176 million,
an increase of 16% from 1995, reflecting increased global services and
securities processing activities, higher fees attributable to growth in assets
under management and growth in fees from the Vista mutual funds. The acquisition
of the securities processing businesses of U.S. Trust Corporation ("US Trust")
in September 1995 also contributed to the increase in fees.
TRUST, CUSTODY, AND INVESTMENT MANAGEMENT FEES
Year Ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Product Diversification:
Trust, Custody and Investment Management Fees(a) $ 909 $ 808
Mutual Fund Fees(b) 83 70
Other Trust Fees(c) 184 140
- --------------------------------------------------------------------------------
Total Trust, Custody, and Investment Management Fees $1,176 $1,018
- --------------------------------------------------------------------------------
(a) Represents fees for trustee, agency, registrar, estate services, safekeeping
and maintenance of securities, as well as providing advisory services and
investment management for asset holdings, for domestic and global customers.
Customers include corporations, individuals, governments and nonprofit
organizations.
(b) Represents administrative, custody, trustee and other fees in connection
with the Corporation's Vista mutual funds.
(c) Includes securities lending and broker clearing.
Credit card revenue increased $229 million from the 1995 level as a result of
an increase in securitization volume as well as overall growth in managed
outstandings. The securitization of credit card receivables changes the
classification in which the revenue associated with the credit card
securitization is reported in the Consolidated Statement of Income. Amounts that
would previously have been reported as net interest income and as provision for
credit losses are instead reported as components of noninterest revenue (i.e.,
credit card revenue). During 1996, average securitized credit card receivables
were $10.6 billion compared with an average of $4.3 billion during 1995. The
higher level of securitizations accounted for $145 million of the increase in
credit card revenue with the remaining increase the result of higher interchange
income (fees from merchants for processing sales volume) and various other fees
on retained credit card receivables. Total average managed credit card
receivables grew 13% to $23.7 billion for 1996, from $21.0 billion in 1995. For
a further discussion of the credit card portfolio and related securitization
activity, see pages 50-51.
FEES FOR OTHER FINANCIAL SERVICES
Year Ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Commissions on Letters of Credit and Acceptances $ 330 $ 350
Fees in Lieu of Compensating Balances 295 281
Mortgage Servicing Fees 204 212
Loan Commitment Fees 120 123
Other Fees 580 487
- --------------------------------------------------------------------------------
Total Fees for Other Financial Services $1,529 $1,453
- --------------------------------------------------------------------------------
Fees for other financial services for 1996 increased by $76
million, or 5%, from 1995 primarily due to an increase in fees related to
automobile securitizations, and higher transaction volume and a larger customer
base at the Corporation's discount brokerage firm, Brown and Company.
40
23
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
TRADING REVENUE
Year Ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Trading Revenue $1,270 $1,016
Net Interest Income Impact(a) 703 442
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,973 $1,458
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $ 535 $ 445
Foreign Exchange Contracts(b) 444 584
Debt Instruments and Other(b) 994 429
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,973 $1,458
- --------------------------------------------------------------------------------
(a) Net interest income attributable to trading activities includes interest
recognized on interest-earning and interest-bearing trading-related positions as
well as management allocations reflecting the funding cost or benefit associated
with trading positions. This amount is included in the net interest income
caption on the Consolidated Statement of Income.
(b) For the classes of financial instruments included, see Note Two of the Notes
to Consolidated Financial Statements.
The increase in revenue from interest rate contracts during 1996 was
primarily due to the volatility experienced in certain Western European, Asian
and U.S. interest rate markets, as well as higher customer demand for
derivatives used for risk management purposes. The decline in foreign exchange
revenue in 1996 was largely caused by the decrease in the level of
cross-currency trading activity in the European markets in anticipation of the
integration of the European Monetary System. In the long-term, management
expects a further reduction in foreign exchange trading revenues in Europe,
although market volatility will still create opportunities from time to time.
The increase in debt instrument and other revenue during 1996 was primarily the
result of strong performances in emerging markets in Latin America and Eastern
Europe. In addition, the 1995 results had been adversely affected by major
declines in the prices of emerging markets debt instruments during the early
part of 1995.
Trading revenues are affected by many factors including volatility of
currencies and interest rates, the volume of transactions executed by the
Corporation on behalf of its customers, the Corporation's success in proprietary
positioning, the credit standing of the Corporation, and the steps taken by
central banks and governments that affect financial markets. The Corporation
expects its trading revenues will fluctuate as these factors will vary from
period to period.
OTHER NONINTEREST REVENUE
Year Ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Securities Gains $ 135 $ 132
- --------------------------------------------------------------------------------
Revenue from Equity-Related Investments $ 726 $ 626
- --------------------------------------------------------------------------------
Other Revenue:
Net Losses on Emerging Markets Securities Sales $ (80) $ (49)
Gain on the Sale of Investment in Far East Bank
and Trust Company -- 85
Residential Mortgage Origination/Sales Activities 63 179
Loss on Sale of a Building in Japan (60) --
All Other Revenue 367 251
- --------------------------------------------------------------------------------
Total Other Revenue $ 290 $ 466
- --------------------------------------------------------------------------------
Securities gains were $135 million in 1996, a slight increase from the 1995
amount. All securities sales were from the available-for-sale portfolio and were
made in connection with the Corporation's asset/liability management ("ALM")
activities. For further discussion of the Corporation's securities, see Note
Three of the Notes to Consolidated Financial Statements.
Revenue from equity-related investments includes income from venture capital
activities and emerging markets investments. The increase from 1995 reflects the
continuing benefits of a broad-based portfolio of investments in an active
market. At December 31, 1996, the Corporation had equity-related investments
with a carrying value of approximately $2.8 billion. The Corporation believes
that equity-related investments (which have been averaging approximately $170
million of revenue per quarter for the previous eight quarters), will continue
to make contributions to the Corporation's earnings, although the timing of the
recognition of gains from these activities is unpredictable and revenues from
such activities could vary significantly from period to period.
Other revenue in 1996 was $290 million, compared with $466 million in 1995.
Contributing to the decline were higher net losses related to the disposition of
available-for-sale emerging markets securities, lower revenue from residential
mortgage origination/sales activities, a $60 million loss on the sale of a
building in Japan in 1996 and lower income from the Corporation's investment in
CIT Group Holdings, Inc. ("CIT"). In addition, the 1995 results included an $85
million gain on the sale of the Corporation's investment in Far East Bank and
Trust Company. Partially offsetting the declines in other revenue were higher
gains during 1996 from the sales of various nonstrategic assets and from
securitizations.
Residential mortgage origination/sales activities declined $116 million for
1996, when compared with 1995, largely reflecting higher gains from the sale of
servicing rights and loans during 1995.
The Corporation's investment in CIT produced $48 million of revenue in 1996,
a decrease of $31 million from the prior year, as a result of the sale of half
of the Corporation's investment in CIT in December 1995.
NONINTEREST EXPENSE
Year Ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Salaries $ 4,232 $ 4,208
Employee Benefits 926(a) 899
Occupancy Expense 824 897
Equipment Expense 724 755
Other Expense 2,640 2,691
- --------------------------------------------------------------------------------
Subtotal 9,346 9,450
Foreclosed Property Expense (16) (75)
Restructuring Costs 1,814 15
- --------------------------------------------------------------------------------
Total Noninterest Expense $ 11,144 $ 9,390
- --------------------------------------------------------------------------------
Operating Efficiency Ratio(b) 58.7% 63.5%
Operating Efficiency Ratio-Excluding Securitizations(b) 56.6 62.8
- --------------------------------------------------------------------------------
(a) Includes a $40 million charge to conform retirement benefits for foreign
employees.
(b) Excludes restructuring costs, foreclosed property expense and charge to
conform retirement benefits for foreign employees.
41
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
[GRAPH 4 - SEE APPENDIX I]
Noninterest expenses, excluding restructuring costs and foreclosed property
expense, totaled $9,346 million in 1996, a decrease from $9,450 million in 1995.
The results for 1996 include noninterest expenses of $44 million related to the
introduction of the Corporation's co-branded Wal-Mart MasterCard and $13 million
of expenses associated with preferred stock dividends issued by a newly
organized real estate investment trust ("REIT") subsidiary of The Chase
Manhattan Bank.
One measure by which the Corporation gauges its financial performance is that
of operating noninterest expense. Operating noninterest expense for 1996, which
excluded the impact of a one-time $40 million charge for conforming foreign
employees retirement benefits and the aforementioned Wal-Mart and REIT expenses,
totaled $9,249 million compared with $9,450 million in 1995 (as there were no
nonrecurring expenses in 1995). The decline is primarily due to staff
reductions, merger integration efforts and lower FDIC expenses.
Operating noninterest expense for 1996 reflected merger-related expense
savings of $555 million, exceeding management's original target of $510 million
and reflecting the acceleration of merger savings originally expected to be
realized in 1997. Underlying operating expense growth for 1996, before merger
saves, was 3.7%, reflecting higher incentive costs due to strong revenue growth.
The Corporation's operating efficiency ratio for 1996 was 59%, compared with
64% for 1995. Adjusting for the impact of securitizations, the efficiency ratio
was 57% in 1996. Management is currently targeting the Corporation to achieve an
operating efficiency ratio in the low 50's range by 1998.
SALARIES AND EMPLOYEE BENEFITS
Salaries increased by $24 million in 1996 as a result of higher incentive costs
due to strong revenue growth for most businesses and a competitive recruiting
environment for specialized skills in selected businesses. Also contributing to
the increase in salaries was the vesting in 1996 of certain stock-based
incentive awards, as a result of the improvement in the Corporation's stock
price. Partially offsetting these increases were the impact of personnel
reductions undertaken in 1996 as a result of the merger. The total number of
full-time equivalent employees was 67,785 at December 31, 1996, a decrease of 7%
when compared with 72,696 at December 31, 1995.
The increase of $27 million in employee benefits during 1996 reflected a $40
million charge related to conforming retirement benefits provided to foreign
employees, higher social security expenses associated with the exercise of
options granted under broad-based employee plans and an increase in pension
expense due to a decline in the discount rate. Partially offsetting the increase
was the impact of merger-related staff reductions on medical and other benefit
costs.
[GRAPH 5 - SEE APPENDIX I]
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense decreased $73 million in 1996 largely as a result of the
consolidation of operations and branch facilities from merger integration
efforts as well as pre-merger expense-reduction programs.
Equipment expense in 1996 was $724 million, a decrease of $31 million from
1995 reflecting the disposition of equipment and the consolidation of
back-office and other operations in connection with merger integrations.
FORECLOSED PROPERTY EXPENSE
Foreclosed property expense was a credit of $16 million in 1996, compared with a
credit of $75 million in 1995, due to lower gains on the sale of a lower level
of foreclosed properties during 1996.
RESTRUCTURING CHARGE AND EXPENSES
In connection with the merger, $1.9 billion of one-time merger-related costs
were identified, of which $1.65 billion was taken as a restructuring charge on
March 31, 1996. An additional $164 million of merger-related expenses, from an
expected $250 million of merger-related expenses, were incurred during 1996 and
included in the restructuring charge and expenses caption of the income
statement. The remaining merger-related expenses are expected to be
substantially incurred over the next year as these costs do not
42
25
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
qualify for immediate recognition under an existing accounting pronouncement and
were not included in the $1.65 billion charge taken on March 31, 1996. These
remaining costs will also be reflected in the restructuring charge and expenses
caption when incurred. For a further discussion, see Note Eleven of the Notes to
Consolidated Financial Statements.
Because of the inherent uncertainties associated with merging two large
corporations, there can be no assurance that the $1.9 billion of merger-related
costs (or the composition between restructuring charge and merger-related
expenses) will reflect the actual costs ultimately incurred by the Corporation
in implementing the merger or that the Corporation would not deem it appropriate
to take additional charges, as the merger implementation process continues.
During 1995, the Corporation recorded a $15 million restructuring charge
related to exiting a futures brokerage business.
OTHER EXPENSE
Year Ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Other Expense:
Professional Services $ 530 $ 559
Marketing Expense 346 372
Telecommunications 326 333
Amortization of Intangibles 169 182
Minority Interest 54 27
FDIC Assessments 9 117
All Other 1,206 1,101
- --------------------------------------------------------------------------------
Total Other Expense $2,640 $2,691
- --------------------------------------------------------------------------------
Other expense decreased by $51 million, or 2%, during 1996 when compared with
1995. The improvement reflected lower FDIC assessments of $108 million (which
resulted from the elimination of FDIC assessments except for deposits associated
with former savings and loan branches). Reductions were also experienced in
various expense categories such as stationery and other supplies, postage and
shipping, reflecting the Corporation's sourcing and other expense-reduction
initiatives.
Partially offsetting the declines were the impact of consolidating a foreign
investment that had been accounted for on the equity method, and higher travel
and other incidental costs related to services provided by employees involved
with merger-integration efforts. In addition, during 1996, the Corporation
incurred $44 million of expenses related to the Wal-Mart MasterCard and $13
million of minority interest expense associated with the REIT.
Management has initiated an enterprise-wide program to prepare the
Corporation's computer systems and applications for the year 2000. The
Corporation expects to incur internal staff costs as well as consulting and
other expenses related to infrastructure and facilities enhancements necessary
to prepare the systems for the year 2000. Testing and conversion of system
applications is expected to cost approximately $200 million to $250 million over
the next three years. A significant proportion of these costs are not likely to
be incremental costs to the Corporation, but rather will represent the
redeployment of existing information technology resources.
INCOME TAXES
The Corporation recognized income tax expense of $1,350 million in 1996 compared
with $1,842 million in 1995. The 1996 amount includes tax benefits related to
restructuring costs as well as aggregate tax benefits and refunds of $132
million. The Corporation's effective tax rates for 1996 and 1995 (excluding the
aforementioned tax benefits and refunds) were 38.0% and 38.3%, respectively. For
additional information, refer to Note Twelve of the Notes to Consolidated
Financial Statements.
LINES OF BUSINESS RESULTS
The Corporation manages itself using an economic-based risk-adjusted management
information system ("MIS"). This system includes many key lines of business
which are organized into two major business franchises, Global Wholesale Banking
and Regional and Nationwide Consumer Banking ("RNCB"). Within each of these
franchises, key businesses are measured independently on a profit and loss and
rate of return basis, as well as by other key performance measures. Highlights
of key business performance measures follow, reflecting risk-adjusted MIS
line-of-business results.
Lines-of-business results are subject to restatement as appropriate whenever
there are refinements in management reporting policies or changes to the
management organization. The current presentation of the lines-of-business
results have been restated to reflect a single, uniform post-merger set of
management accounting policies.
Guidelines exist for assigning expenses that are not directly incurred by the
businesses, such as overhead and taxes, as well as for allocating stockholders'
equity and the provision for credit losses, utilizing a risk-based methodology.
Also incorporated in the guidelines is a process for matching assets and
liabilities with similar maturity, liquidity and interest characteristics within
each business. Noninterest expenses of the Corporation are fully allocated to
the business units, except for special corporate one-time charges. Management
has developed a risk-adjusted capital methodology that quantifies different
types of risk -- credit, market, and operating -- within various businesses and
assigns capital accordingly. The provision for credit losses is allocated to
business units utilizing a credit risk methodology applied consistently across
the Corporation and a risk grading system appropriate for a business unit's
portfolio. The difference between the risk-based provision for credit losses and
the Corporation's provision for credit losses is included in the Corporate
results. Long-term expected tax rates are assigned in evaluating the
Corporation's businesses and the difference between the risk-based tax rate and
the Corporation's tax rate is included in the Corporate results.
43
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
LINES OF BUSINESS RESULTS Global Wholesale Regional and Nationwide
Banking Consumer Banking Total (a)
---------------- ----------------------- ---------
Year Ended December 31, (in millions, except ratios) 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 3,487 $ 3,141 $ 5,877 $ 5,560 $ 8,286 $ 8,202
Noninterest Revenue 4,999 4,274 2,222 2,166 7,572 6,676
Noninterest Expense 4,741 4,565 4,461 4,748 9,306 9,450
- ---------------------------------------------------------------------------------------------------------------------------
Operating Margin 3,745 2,850 3,638 2,978 6,552 5,428
Credit Costs 307 221 1,434 1,048 881 683
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 3,438 2,629 2,204 1,930 5,671 4,745
Income Taxes 1,289 986 861 766 2,155 1,842
- ---------------------------------------------------------------------------------------------------------------------------
Operating Net Income 2,149 1,643 1,343 1,164 3,516 2,903
Restructuring Costs (49) (9) (42) -- (1,125) (9)
Nonrecurring Items(b) -- 51 -- 45 70 65
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,100 $ 1,685 $ 1,301 $ 1,209 $ 2,461 $ 2,959
- ---------------------------------------------------------------------------------------------------------------------------
Average Common Equity $ 9,663 $ 9,265 $ 6,415 $ 6,698 $ 17,965 $ 16,913
Average Assets $221,680 $203,696 $111,914 $106,906 $321,240 $307,385
Return on Common Equity 21.0% 16.1% 19.7% 16.1% 18.4% 15.8%
Operating Efficiency Ratio 56% 62% 55% 61% 59% 64%
- ---------------------------------------------------------------------------------------------------------------------------
- ----------
(a) Total column includes Corporate results. See description of Corporate
results on page 47.
(b) Nonrecurring items for 1996 include the loss on the sale of a building in
Japan, costs incurred in combining the Corporation's foreign retirement plans,
and aggregate tax benefits and refunds. The 1995 results include the gains on
the sales of the Corporation's investment in Far East Bank and Trust Company and
Chemical New Jersey Holdings, Inc. and the loss on the sale of half of the
Corporation's 40% interest in CIT.
GLOBAL WHOLESALE BANKING
Global Wholesale Banking provides financing, advisory, sales and trading, trade
finance, asset management, private banking and operating services to clients
worldwide, including corporations, institutions, governments and wealthy
individuals. Through these businesses, the Corporation is driving towards a new
model for the delivery of global financial services, integrating product
expertise, industry knowledge and geographic reach to effect superior customer
solutions. Global Wholesale Banking operates in more than 50 countries,
including major operations in all key international financial centers.
Global Wholesale Banking encompasses investment banking and corporate
lending, global markets activities, equity investing, private banking, asset
management and information and transaction services. Terminal Businesses,
representing discontinued portfolios (primarily the remaining refinancing
country debt and commercial real estate problem asset and nonperforming
portfolio), are also included in Global Wholesale Banking.
Global Wholesale Banking's operating net income for 1996 was $2,149 million
and operating return on common equity was 21%. These favorable results were
driven by higher trading-related revenue, reflecting strong performance in the
emerging markets, combined with higher fee revenue from loan syndication,
securities underwriting and advisory activities and higher equity-related
investment revenue.
The following table sets forth certain key financial performance measures of
the businesses within Global Wholesale Banking for the periods indicated.
1996 1995
---------------------------------- ------------------------------------
Net Efficiency Net Efficiency
Year Ended December 31, (in millions, except ratios) Revenues Income ROCE Ratio Revenues Income ROCE Ratio
- -------------------------------------------------------------------------------------------------------------------------------
Global Wholesale Banking:
Global Investment Banking and Corporate Lending $ 2,157 $ 686 19.1% 37% $2,007 $627 21.1% 36%
Global Markets 2,574 743 31.3 56 2,071 393 14.6 71
Chase Capital Partners 703 397 35.8 10 503 280 29.5 12
Global Asset Management & Private Banking 794 158 30.2 65 711 125 28.8 71
Global Services 1,930 255 22.7 79 1,735 220 19.1 80
Terminal Businesses (36) (100) NM NM 91 47 NM NM
- -------------------------------------------------------------------------------------------------------------------------------
Global Investment Banking and Corporate Lending: Global Investment Banking and
Corporate Lending finances and advises corporations, financial sponsors,
governments and projects 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, merger and acquisitions, project finance,
restructuring, private placements, lease financings and lending. The Corporation
is the global leader in syndicated finance, raising over $434 billion for
clients in 1996 as agent. Also, the Corporation is the market leader in
44
27
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
leveraged finance, raising over $55 billion in 1996 for the Corporation's
clients, including loans and high-yield securities. Net income in 1996 was $686
million, an increase of $59 million, or 9%, from 1995. These favorable results
were driven by 20% growth in corporate finance and syndication fees due to
increased market activity and broadened product offerings and client reach.
Global Markets: Global Markets' activities encompass the trading and sales of
foreign exchange, derivatives, fixed income securities and commodities,
including related origination functions. A leader in capital markets, the
Corporation operates 24 hours a day covering the major international
cross-border markets as well as many local markets in both developed and
developing countries. Global Markets is a recognized world leader in such key
activities as foreign exchange, interest rate swaps and emerging markets debt.
Also included within Global Markets are the domestic and international treasury
units which have the primary responsibility of managing the Corporation's
asset/liability and investment securities activities. The strong growth in
trading-related revenue contributed to a net income for 1996 of $743 million and
a return on common equity of 31%, a significant improvement from 1995's result
of $393 million and 15%, respectively. Trading-related revenue for 1996 was
$1,951 million, an increase of 27% from last year's results, driven by a strong
performance in emerging markets which recovered from the 1995 decline in the
prices of emerging market debt instruments. ALM activities in the treasury units
are managed on a total return basis, with one of the major objectives being the
creation of economic value over time. In 1996, the gross total return from
asset/liability management activities amounted to $475 million.
Chase Capital Partners: Chase Capital Partners ("CCP") is a global private
equity organization with approximately $4.0 billion under management, including
$2.8 billion in equity-related investments. Through professionals focused on
investing in the United States, Europe, Asia and Latin America, CCP provides
equity and mezzanine financing for a wide variety of investment opportunities.
During 1996, CCP's direct investments totaled a record $725 million in over 60
venture capital, management buyout, recapitalization, growth equity and
mezzanine transactions. CCP's net income for 1996 was $397 million, a 42%
increase from the prior year's results of $280 million. Return on common equity
rose to 36% from 30% in 1995. These improved results were attributable to higher
revenue derived from realizing gains on a broad-based portfolio of approximately
300 investments, during an active and favorable market.
Global Asset Management and Private Banking: The Global Asset Management and
Private Banking group serves a global client base of wealthy individuals,
institutional investors, mutual fund investors and self-directed investors.
Services include a full range of private banking capabilities, including trust
and estates, custody, corporate finance, capital markets, and other global
banking services; investment management for individuals and institutional
investors globally; Vista Family of Mutual Funds (at December 31, 1996, the
fourth largest bank-managed mutual fund family in the U.S.) and discount
brokerage. Total assets under management amounted to $126 billion at December
31, 1996. Net income grew 26% to $158 million in 1996, with a return on common
equity of 30%. A 12% growth in revenue was driven by higher revenues in trust
and investment management fees, Vista mutual fund fees and the discount
brokerage operations as well as by an 11% increase in loan volume.
Global Services: Global Services is a leading provider of information and
transaction services globally. As the world's largest provider of global custody
and a leader in trust and agency services, Global Services was custodian for
over $3.6 trillion in assets at year-end and serviced over $1.4 trillion in
outstanding debt. Global Services also operates the largest U.S. dollar funds
transfer business in the world and is a market leader in FedWire, ACH and CHIPS
volume. Net income in 1996 was $255 million, an increase of $35 million, or 16%,
from 1995. Return on common equity for 1996 was 23%; excluding the impact of
goodwill, the return on tangible common equity was 31%. The 1996 results were
favorably affected by an 11% revenue increase reflecting the U.S. Trust
portfolio acquisition ($79 million); mutual fund and equity markets growth; and
the impact of industry consolidation in the securities processing business. New
business development in the cash management and trust businesses and higher
deposit balances across all businesses contributed to the current-year's growth
in revenue.
[GRAPH 6 - SEE APPENDIX I]
45
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
[GRAPH 7 - SEE APPENDIX I]
REGIONAL AND NATIONWIDE CONSUMER BANKING
The Regional and Nationwide Consumer Banking franchise includes the third
largest bank credit card issuer in the U.S., the third largest originator and
servicer of residential mortgages and a leading provider of auto financing and
other consumer lending products. The Corporation maintains a leading market
share position in the New York metropolitan tri-state area in serving the
financial needs of consumers, middle market commercial enterprises and small
businesses. It offers customers convenient access to financial services by
telephone, PC, and the Internet, and has the most branches and ATMs in the New
York metropolitan tri-state area. Additionally, included in RNCB is Texas
Commerce Bank, which is the second-largest bank in Texas and a leader in
providing financial products and services to businesses and individuals
throughout Texas. RNCB also includes a small international consumer presence
which is highly profitable.
For 1996, RNCB's operating net income was $1,343 million, an increase of $179
million over 1995. Operating return on common equity for 1996 was 20%, compared
with 16% in 1995. These favorable results were driven mainly by strong growth in
loan volume related to credit card and mortgage banking products, combined with
lower FDIC costs on customer deposits and the benefit of merger-related savings.
The following table sets forth certain key financial performance measures of
the businesses within RNCB for the periods indicated.
1996 1995
------------------------------------- --------------------------------------
Net Efficiency Net Efficiency
Year Ended December 31, (in millions, except ratios) Revenues(a) Income ROCE Ratio Revenues(b) Income ROCE Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
Regional and Nationwide Consumer Banking:
Credit Cards $2,663 $311 20.7% 38% $2,351 $337 26.8% 43%
Deposits and Investments 1,915 267 25.5 75 1,888 238 25.2 78
Middle Market 910 223 20.9 50 916 228 21.4 50
Mortgage Banking 652 110 8.3(b) 66 636 56 2.7 80
National Consumer Finance 600 147 32.2 39 531 117 25.2 38
International Consumer 254 64 82.0 57 210 43 78.9 65
Texas Commerce 1,233 272 19.2 63 1,125 208 15.0 70
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------
(a) Insurance products managed within Deposits and Investments, but included for
reporting purposes in Credit Cards, Mortgage Banking, and National Consumer
Finance, generated revenues of $81 million and $70 million in 1996 and 1995,
respectively.
(b) Excluding the impact of goodwill, the return on tangible common equity was
13% for 1996.
Credit Cards: For 1996, Chase Cardmember Services ranked as the third largest
bank card issuer in the U.S., with a $25 billion managed portfolio, inclusive of
the Shell MasterCard, which now totals $4.5 billion in outstandings. During
1996, the Corporation introduced a co-branded MasterCard with Wal-Mart, a
premier retailer of consumer-based products in the U.S., and announced a
partnership with First Data Corporation to establish a joint venture in the
merchant credit card processing business. For 1996, net income (reflected on a
managed basis) was $311 million, a $26 million decrease from 1995's results of
$337 million. Earnings were driven by the revenue generated from growth in the
loan portfolio offset by the start-up costs for the Wal-Mart MasterCard ($27
million after-tax) and a higher credit provision.
Deposits and Investments: At December 31, 1996, Deposits and Investments has the
leading share of primary bank relationships among consumers and small businesses
in the New York metropolitan tri-state area. In addition to its tri-state
businesses, the Corporation makes available insurance and investment products
nationwide. Deposits and Investments allows customers to choose the way they
handle their financial relationships, offering telephone, PC and Internet
banking, in addition to branches
46
29
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
and ATMs. It is also developing a major business in electronic payments,
including its MasterDebit product and its 1997 electronic cash "Smart Card"
pilot (through its investment in Mondex U.S.). Net income in 1996 was $267
million, an increase of $29 million from $238 million in 1995. Return on common
equity for 1996 was 26%, compared with 25% in 1995. The improvement in net
income was due to an increase in deposit and managed asset volume and lower
operating and FDIC expenses.
Middle Market: At December 31, 1996, the Corporation was the number one middle
market bank in the New York tri-state area where it has relationships with 52%
of regional companies with sales ranging from $10 million to $500 million.
Credit reengineering initiatives, greater use of technology in service delivery
and focus on customer profitability and corporate finance products have resulted
in a strong efficiency ratio of 50%. Net income was $223 million for 1996
compared with 1995 results of $228 million. The results reflected lower spreads
on deposits and an increase in the credit provision resulting from lower
recoveries.
Mortgage Banking: At December 31, 1996, Mortgage Banking was the third-largest
originator and servicer of residential mortgage loans in the U.S., serving more
than 1.6 million customers nationwide. In 1996, $33 billion in loans were
originated and the Corporation's servicing portfolio totaled $141 billion at
December 31, 1996. Typically, the mortgages originated by the Corporation are
sold in the secondary market, while the Corporation retains the related
servicing rights. In addition, the Mortgage Bank also purchases and sells
mortgage servicing rights from and to other mortgage-related companies. Net
income improved in 1996 to $110 million, a $54 million increase from 1995.
Return on common equity rose to 8%; excluding the impact of goodwill, the return
on tangible common equity was 13%. The 1996 results were favorably affected by a
15% increase in average loan outstandings, improved loan spreads and lower staff
expense as the mortgage unit has begun to significantly restructure its
origination operations to lower its fixed-cost base as part of a restructuring
program to improve its overall returns.
National Consumer Finance: National Consumer Finance is a leading provider of
auto financing, home equity secured lending, student lending, unsecured consumer
lending (Chase Advantage Credit) and manufactured housing financing. At December
31, 1996, Chase Auto Finance ($11 billion in outstandings at year-end) was
ranked number one among noncaptive finance companies in new originations ($11
billion in 1996 originations). In 1996, the Corporation and the Student Loan
Marketing Association ("Sallie Mae") formed a joint venture (Educational First
Finance) creating the largest student loan origination business in the U.S. Net
income in 1996 was $147 million, an increase of $30 million from $117 million in
1995. Return on common equity for 1996 was 32%, compared with 25% in 1995. These
improved results were due to a 17% growth in loan volume and higher servicing
fees.
International Consumer: International Consumer provides deposit, investment and
insurance products for individuals in Hong Kong. Also included is The Manhattan
Card Company Limited (the Corporation's 54% owned subsidiary), which is the
third largest credit card issuer in Hong Kong. Additionally, the Corporation has
a leading full-service banking presence in Panama and the Eastern Caribbean,
providing deposit, investment and asset products for individuals, small
businesses, large corporations and government entities. Net income for 1996 was
$64 million, a $21 million increase over the prior year's results of $43
million. The increase in earnings was driven by increased loan and deposit
volumes.
Texas Commerce: Texas Commerce is the primary bank for more large corporations
and middle market companies than any other bank in Texas. Texas Commerce also
maintains a strong consumer banking presence in Texas through its 124 locations
statewide. Corporate/middle market revenues and consumer revenues contributed
48% and 36%, respectively, of Texas Commerce's 1996 revenue. Additionally, Texas
Commerce is the largest bank for personal and corporate trust services in the
Southwest. As of December 31, 1996, Texas Commerce had $23 billion in total
assets. Net income for 1996 was $272 million, a $64 million increase from the
prior year's results of $208 million. Return on common equity rose to 19%;
excluding the impact of goodwill, the return on tangible common equity was 25%.
The improved results were due to 12% growth in loan volume, higher corporate
finance fees, lower FDIC costs and the benefits of an aggressive expense
management program.
CORPORATE
Corporate includes the management results attributed to the Corporation's
investment in CIT and some effects remaining at the Corporate level after the
implementation of management accounting policies, including residual credit
provision and tax expense. The securitized portion of the credit card portfolio
is included in Corporate. Corporate also includes one-time unallocated special
items such as merger-related restructuring charge and income tax refunds. For
1996, Corporate had operating net income of $24 million, compared with $96
million in 1995. Due to the economic risk-based methodology for capital applied
on a business unit level basis for credit, market and operating risk, Corporate
housed unallocated equity of $1,887 million in 1996 and $950 million in 1995.
This reflects the significantly improved overall risk profile of the
Corporation.
47
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
CREDIT RISK MANAGEMENT
Credit risk, the risk of loss from the default by an obligor or counterparty, is
inherent in many of the Corporation's businesses. Under the direction of the
Chief Credit Officer, policies and procedures for measuring and managing such
risks are formulated, approved and communicated throughout the Corporation.
Senior credit executives representing the major lines of business are
responsible for maintaining sound credit processes, addressing transaction and
product risk issues, providing an independent review function and monitoring the
aggregate portfolio.
Credit risk management is an integrated and continuous process operating
concurrently and interactively at both the transaction and portfolio levels. At
the transaction level, credits are originated by line business units in the
context of business strategies that address potential risks and rewards of
specific market segments. Credit executives are involved early in the
origination and underwriting process to ensure adherence to risk policies and
underwriting standards. Transactions or product offerings require approval by an
officer with the requisite credit authority. Such authorities are differentiated
by dollar amount, risk rating and industry expertise. Only a limited number of
highly experienced credit executives have sufficient authority to approve major
exposures.
Portfolio diversification lowers the Corporation's risk profile. Within the
loan, derivatives and foreign exchange instruments portfolios, diversification
is achieved by minimizing excessive concentrations to any one obligor, industry,
risk grade, product or geographic location. For a further discussion of these
portfolios, see the sections which follow.
LOAN PORTFOLIO
The following table presents loan-related information for the dates indicated.
Past Due
90 Days and Over
Loans Nonperforming Assets Net Charge-offs and Accruing
--------------- -------------------- --------------- ----------------
As of or for the year ended December 31, (in millions) 1996 1995 1996 1995 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Domestic Consumer:
1-4 Family Residential Mortgages $ 36,621 $ 34,060 $ 249 $ 238 $ 30 $ 62 $ 7 $ 12
Credit Card 12,157 17,078 -- -- 618 675 267 352
Auto Financings 11,121 8,327 28 20 38 18 6 15
Other Consumer (a) 9,185 9,966 7 19 138 104 115 149
- -----------------------------------------------------------------------------------------------------------------------------------
Total Domestic Consumer 69,084 69,431 284 277 824 859 395 528
- -----------------------------------------------------------------------------------------------------------------------------------
Domestic Commercial:
Commercial and Industrial 34,742 32,276 444 496 86 (4) 19 38
Commercial Real Estate 5,934 6,660 156 375 14 31 8 54
Financial Institutions 5,540 5,714 2 2 -- (12) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Domestic Commercial 46,216 44,650 602 873 100 15 27 92
- -----------------------------------------------------------------------------------------------------------------------------------
Total Domestic 115,300 114,081 886 1,150 924 874 422 620
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign:
Consumer 3,286 3,035 17 31 9 6 6 16
Commercial 36,506 33,091 118 312 (36) (40) 6 28
- -----------------------------------------------------------------------------------------------------------------------------------
Total Foreign 39,792 36,126 135 343 (27) (34) 12 44
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans $155,092 $150,207 $1,021 $1,493 $897 $840 $434 $ 664
- -----------------------------------------------------------------------------------------------------------------------------------
Charge Related to Conforming Credit Card
Charge-off Policies -- -- 102 --
Assets Acquired as Loan Satisfactions 130 171 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets & Net Charge-offs $1,151 $1,664 $999 $840
- -----------------------------------------------------------------------------------------------------------------------------------
- ----------
(a) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured revolving lines of credit. There are
essentially no credit losses in the student loan portfolio due to the existence
of Federal and State government agency guarantees. At December 31, 1996 and
1995, student loans that were past due 90 days and over and still accruing were
approximately $54 million and $107 million, respectively.
The consumer and commercial segments of the portfolio have different risk
characteristics and different techniques are utilized to measure and manage
their respective credit risks. The consumer loan risk management process
utilizes sophisticated credit scoring and other analytical methods to
differentiate risk characteristics. Risk management procedures include
monitoring both loan origination credit standards and loan performance quality
indicators. The consumer portfolio review process also includes evaluating
product-line performance, geographic diversity and consumer economic trends.
Within the commercial sector, all credit facilities are risk-rated based on
an assessment of the business and financial risks of the borrower. Risk ratings
are periodically checked against external benchmarks, such as bond ratings, when
available.
48
31
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
[GRAPH 8 - SEE APPENDIX I]
Facilities are also subject to hold targets based on their risk rating and other
factors and are often syndicated to lower potential concentration risks.
Aggregate exposure to a single obligor and affiliated parties is monitored
against target thresholds that vary by risk rating and other factors. The risk
characteristics of industries and countries are also evaluated and incorporated
into the credit risk management process at both the transaction and portfolio
levels. Finally, the aggregate portfolio is regularly monitored to detect
changes in its overall risk profile or potential concentration risks.
The commercial loan review process includes industry specialists and country
risk managers who provide expert insight into the portfolio. Industries and
countries are also evaluated in a process which is incorporated into credit-risk
decisions through the facility-risk grading system and by direct consultation
with originating officers.
Nonperforming assets decreased $513 million from the 1995 year-end level. The
reduction in nonperforming assets reflects the improvement in the Corporation's
credit profile as a result of a lower level of loans being placed on
nonperforming status, repayments, charge-offs and the Corporation's continuing
loan workout and collection activities. Also contributing to the reduction was
the transfer of $161 million of domestic commercial real estate nonperforming
assets to the Assets Held for Accelerated Disposition portfolio.
Net charge-offs increased $57 million in 1996 when compared with 1995,
excluding a charge of $102 million recorded in the 1996 first quarter related to
conforming the credit card charge-off policies of old Chase and Chemical. Total
net charge-offs (on a managed basis) were $1,441 million in 1996, compared with
$1,014 million in 1995, primarily reflecting higher delinquencies in managed
credit card receivables as well as lower recoveries in commercial loans.
Management expects the Corporation's total net charge-offs in 1997 to be
modestly higher than in 1996, primarily as a result of growth in retained
consumer loans, higher losses in credit card loans, and lower recoveries in
commercial loans.
DOMESTIC CONSUMER PORTFOLIO
The domestic consumer loan portfolio consists of one-to-four family residential
mortgages, credit cards, auto financings and other consumer loans. The domestic
consumer loan portfolio totaled $69.1 billion at December 31, 1996, a decrease
of $347 million from the 1995 year-end, reflecting strong loan growth offset by
the impact of credit card, auto loan and residential mortgage securitizations
during 1996.
Residential Mortgage Loans: Residential mortgage loans at December 31, 1996 were
$36.6 billion, an increase of $2.6 billion from the 1995 year-end, primarily
reflecting a higher level of adjustable-rate loan outstandings. Nonperforming
loans related to residential mortgage loans were $249 million at December 31,
1996, compared with $238 million for the 1995 year-end. Net charge-offs for 1996
were $30 million, a decline from $62 million in 1995.
[GRAPH 9 - SEE APPENDIX I]
[GRAPH 10 - SEE APPENDIX I]
49
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESIDENTIAL MORTGAGE LOANS BY GEOGRAPHIC REGION
December 31, (in millions) 1996 1995
- ------------------------------------------------------------
New York City $3,722 $3,399
New York (Excluding New York City) 4,892 4,467
Remaining Northeast 6,231 6,210
- ------------------------------------------------------------
Total Northeast 14,845 14,076
Southeast 4,364 3,586
Midwest 3,222 3,154
Texas 2,320 2,179
Southwest (Excluding Texas) 926 166
California 7,997 8,030
West (Excluding California) 2,947 2,869
- ------------------------------------------------------------
Total $36,621 $34,060
- ------------------------------------------------------------
The Corporation both originates and services residential mortgage loans as
part of its mortgage banking activities. The following table presents the
residential mortgage servicing portfolio activity for 1996 and 1995.
Year Ended December 31, (in billions) 1996 1995
- --------------------------------------------------------------
Balance at Beginning of Year $ 132.1 $ 118.3
Originations 32.8 27.6
Acquisitions 1.1 11.0
Repayments and Sales (25.4) (24.8)
- --------------------------------------------------------------
Balance at End of Year $ 140.6 $ 132.1
- --------------------------------------------------------------
Mortgage servicing rights (included in other assets) amounted to $1,404
million at December 31, 1996, compared with $1,242 million at December 31, 1995.
The increase reflects the corresponding increase in the Corporation's
residential mortgage servicing portfolio. The Corporation continually evaluates
prepayment exposure of the servicing portfolio, adjusting the balance and
remaining life of the servicing rights as a result of prepayments, and utilizes
derivative contracts (interest rate swaps and purchased option contracts) to
reduce its exposure to such prepayment risks.
Credit Card Loans: The Corporation analyzes its credit card portfolio on a
"managed basis", which includes credit card receivables on the balance sheet as
well as credit card receivables which have been securitized. During 1996, the
Corporation securitized $7.5 billion of credit card receivables compared with
$4.8 billion of receivables during 1995. At December 31, 1996, the Corporation
had $25.2 billion of managed receivables ($12.2 billion of receivables on the
balance sheet), compared with $23.7 billion ($17.1 billion on the balance sheet)
at year-end 1995, reflecting the continued strong growth in credit card
outstandings due in large part to active account and balance solicitations.
DOMESTIC CREDIT CARD RECEIVABLES BY GEOGRAPHIC REGION
December 31, (in millions) 1996 1995
- ------------------------------------------------------------
New York City $ 917 $ 1,412
New York (Excluding New York City) 894 1,377
Remaining Northeast 2,280 3,448
- ------------------------------------------------------------
Total Northeast 4,091 6,237
Southeast 1,989 2,446
Midwest 2,309 3,275
Texas 816 1,196
Southwest (Excluding Texas) 518 477
California 1,746 2,383
West (Excluding California) 688 1,064
- ------------------------------------------------------------
Total $12,157 $17,078
- ------------------------------------------------------------
The following table presents the Corporation's managed credit card-related
data for the periods presented.
As of or for the year ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Average Managed Credit Card Receivables $23,709 $20,980
Past Due 90 Days and Over and Accruing 564 498
As a Percentage of Average Credit Card Receivables 2.38% 2.37%
Net Charge-offs 1,156(a) 849
As a Percentage of Average Credit Card Receivables 4.87% 4.05%
- --------------------------------------------------------------------------------
- ----------
(a) Excludes a charge related to conforming credit card charge-off policies.
The increase in net charge-offs of managed credit card receivables for 1996,
when compared with 1995, reflects growth in average managed credit card
outstandings and higher levels of personal bankruptcies. Management currently
expects the Corporation's credit card net charge-offs, as a percentage of
average managed credit card receivables, to increase modestly in 1997 when
compared with 1996, primarily as a result of higher personal bankruptcies and
delinquencies in credit card loans.
[GRAPH 11 - SEE APPENDIX I]
[GRAPH 12 - SEE APPENDIX I]
50
33
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
Credit Card Securitizations: In a credit card securitization, the Corporation
takes a portion of its credit card receivables and packages them into
securities. Securitizations change the Corporation's status from that of a
lender to that of a loan servicer. The securitization of credit card receivables
does not significantly affect the Corporation's reported net income; due to the
revolving nature of the credit card receivables sold, the recognition of
servicing fees results in a pattern of income recognition that is substantially
similar to the pattern that would be experienced if the receivables had not been
sold. The initial gain on the sale of the securitized receivables is recorded at
the time of the securitization. Thereafter, for securitized receivables, amounts
that would previously have been reported as net interest income and as provision
for credit losses are instead reported as components of noninterest revenue in
the income statement, as shown in the following table.
Favorable (Unfavorable)
Impact
-----------------------
Year Ended December 31, (in millions) 1996 1995
- ---------------------------------------------------------------
Net Interest Income $(914) $(360)
Provision for Credit Losses 570 170
Credit Card Revenue 318 173
Other Revenue 23 24
- ---------------------------------------------------------------
Pre-tax Income Impact of Securitizations $ (3) $ 7
- ---------------------------------------------------------------
Auto Financings: This portfolio consists of auto loans and leases. Auto
financings were $11.1 billion at December 31, 1996, an increase of $2.8 billion
from the prior year-end level. The increase in auto financings reflect stronger
consumer demand during the first half of 1996 due to favorable pricing programs,
partially offset by the impact of auto loan securitizations. Total originations
were $11.6 billion in 1996, compared with $7.2 billion in 1995. The Corporation
securitized approximately $4.0 billion of auto loans during 1996, compared with
approximately $3.0 billion during 1995.
Net charge-offs related to auto financings were $38 million in 1996, an
increase of $20 million from 1995, primarily reflecting growth in the portfolio
and the performance of a discontinued product line. The largest concentrations
of auto financings are in the Texas, New York and California markets,
representing 18%, 17% and 13%, respectively, of the portfolio. No other state
represents more than 10% of the auto financings portfolio.
Other Consumer Loans: These consumer loans consist of secured installment loans
(primarily loans related to recreational vehicles and manufactured housing
financing), student loans and unsecured revolving lines of credit.
Other consumer loans were $9.2 billion at December 31, 1996, a decrease of
$.8 billion from the prior year-end level. The decrease primarily reflected the
sale of approximately $1.5 billion of student loans during the fourth quarter of
1996 in conjunction with the formation of the Corporation's joint venture with
Sallie Mae (which is accounted for on the equity basis), partly offset by
increased demand for installment loans. Net charge-offs related to the other
consumer loans were $138 million in 1996, versus $104 million in 1995, primarily
relating to higher bankruptcies on unsecured revolving lines of credit.
DOMESTIC COMMERCIAL PORTFOLIO
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $34.7 billion at December 31, 1996, compared with
$32.3 billion at December 31, 1995. The portfolio consists primarily of loans
made to large corporate and middle market customers and is diversified
geographically and by industry.
Net charge-offs of domestic commercial and industrial loans were $86 million
in 1996, compared with net recoveries of $4 million in 1995, reflecting lower
recoveries during 1996. Management believes that the credit quality of the
Corporation's commercial and industrial loan portfolio will remain relatively
stable in 1997, although it expects net charge-offs in 1997 to be modestly
higher than in 1996, as a result of an anticipated reduction in recoveries from
the high levels achieved during 1996 and 1995.
Domestic Commercial Real Estate Portfolio: The domestic commercial real estate
portfolio represents loans secured primarily by real property, other than loans
secured by mortgages on one-to-four family residential properties (which are
included in the consumer loan portfolio).
Domestic commercial real estate loans were $5.9 billion at December 31, 1996,
a decrease of $.7 billion from 1995, principally as a result of securitizations,
repayments from borrowers, transfers, collections and sales primarily from the
terminal commercial real estate portfolio. The Corporation initiated the
securitization of commercial real estate loans in 1996.
Nonperforming domestic commercial real estate loans were $156 million at
December 31, 1996, a 58% decrease from the 1995 year-end level, reflecting the
transfer of $145 million of nonperforming loans to the Assets Held for
Accelerated Disposition portfolio in the fourth quarter of 1996. This transfer
had no impact on the Corporation's allowance for loan losses or its 1996
results. Net charge-offs of domestic commercial real estate loans were $14
million in 1996, compared with $31 million in 1995. As a percentage of average
domestic commercial real estate loans, net charge-offs represented .22% in 1996,
compared with .43% in 1995.
The largest concentration of domestic commercial real estate loans is in the
New York/New Jersey and Texas markets, representing 52% and 24%, respectively,
of the portfolio. No other state represents more than 6% of the domestic
commercial real estate loan portfolio.
51
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
Domestic Financial Institutions Portfolio: The domestic financial institutions
portfolio includes loans to commercial banks and companies whose businesses
primarily involve lending, financing, investing, underwriting or insurance.
Loans to domestic financial institutions were $5.5 billion at December 31, 1996,
or 3% of total loans outstanding at December 31, 1996, compared with $5.7
billion at December 31, 1995. Loans to domestic financial institutions are loans
to broker-dealers, which are predominately secured, and to domestic commercial
banks and domestic branches of foreign banks. The portfolio maintained its
strong credit quality throughout 1996, with no net charge-offs in 1996 and net
recoveries of $12 million in 1995.
FOREIGN PORTFOLIO
The foreign portfolio includes commercial and industrial loans, loans to
financial institutions, commercial real estate loans, loans to foreign
governments and official institutions, and consumer loans. Included in foreign
loans were commercial and industrial loans of $23.1 billion at year-end 1996, an
increase of $2.3 billion from the 1995 year-end. Total foreign commercial real
estate loans at December 31, 1996 were $.8 billion, unchanged from the 1995
year-end. Net recoveries of foreign loans were $27 million in 1996 and $34
million in 1995.
For year-end balances by type of loan included in the foreign portfolio, see
Note Four of the Notes to Consolidated Financial Statements.
INDUSTRY DIVERSIFICATION
As of December 31, 1996, only two industry sectors exceeded 5% of total
Commercial and Industrial loans outstanding: food, beverage and tobacco
(approximately $3.1 billion) and oil and gas exploration (approximately $3.0
billion). These sectors represented 5.4% and 5.2%, respectively, of the
Commercial and Industrial loan portfolio and 2.0% and 1.9%, respectively, of the
total loan portfolio.
CROSS-BORDER EXPOSURE
At December 31, 1996, the Corporation held cross-border outstandings exceeding
1% of its total assets, as follows: $6.0 billion to United Kingdom, $5.3 billion
to Japan, $5.2 billion to Germany and $3.6 billion to Italy. The Corporation
does not have significant local currency outstandings in these individual
countries that are not hedged or funded by local currency borrowings. The
majority of outstandings to the above countries are primarily short-term in
nature, which mitigates the credit risk as transactions settle quickly. These
outstandings generally represent interbank placements and trading assets.
The Corporation's total outstandings to countries which it considers to be
emerging markets countries were $18.6 billion at December 31, 1996, compared
with $17.2 billion at December 31, 1995. Outstandings (loans and accrued
interest, interest-bearing deposits with banks, securities, acceptances and
other monetary assets, except equity investments) represent both the public and
private sectors and are net of written guarantees and tangible liquid collateral
held outside the foreign country. Exposure to emerging markets is largely
concentrated in Latin America, principally Brazil ($3.1 billion) and Mexico
($1.8 billion). These amounts exclude bonds issued by foreign governments, known
as Brady Bonds, because the principal is collateralized by U.S. Treasury
obligations. For a further discussion of the Corporation's Brady Bonds and its
trading assets-debt and equity instruments with emerging market countries, see
Notes Four and Two, respectively, of the Notes to Consolidated Financial
Statements.
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
In the normal course of its business, the Corporation utilizes various
derivative and foreign exchange financial instruments to meet the financial
needs of its customers, to generate revenues through its trading activities, and
to manage its exposure to fluctuations in interest and currency rates.
Derivative and foreign exchange transactions involve, to varying degrees,
credit risk and market risk. The effective management of credit and market risk
is vital to the success of the Corporation's trading and ALM activities. Because
of changing market environments, the monitoring and managing of these risks is a
continual process. For a further discussion of market risk, see the Market Risk
Management section on page 54.
The Corporation seeks to control the credit risk arising from derivative and
foreign exchange transactions through its credit approval process and the use of
risk control limits and monitoring procedures. The Corporation uses the same
credit procedures when entering into derivative and foreign exchange
transactions as it does for traditional lending products. The credit approval
process involves evaluating each counterparty's creditworthiness, and then
assessing the appropriateness of derivative, foreign exchange and structured
transactions to the risks the counterparty is attempting to manage, and
determining if there are specific transaction characteristics that alter the
risk profile. Credit limits are calculated and monitored on the basis of
potential exposures which takes into consideration current market values and
estimates of potential future movements in market values. If collateral is
deemed necessary to reduce credit risk, then the amount and nature of the
collateral obtained is based on management's credit evaluation of the customer.
Collateral held varies but may include cash, investment securities, accounts
receivable, inventory, property, plant and equipment, and real estate.
The Corporation believes the true measure of credit risk exposure is the
replacement cost of the derivative or foreign exchange product. This is also
referred to as repayment risk or the mark-to-market exposure amount. While
notional principal is the most commonly used volume measure in the derivative
and foreign exchange markets, it is not a measure of credit or market risk. The
notional principal amounts of the Corporation's derivative and foreign exchange
products greatly exceed the possible credit and market loss that could arise
from such transactions.
52
35
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
Mark-to-market exposure is a measure, at a point in time, of the value of a
derivative or foreign exchange contract in the open market. When the
mark-to-market is positive, it indicates the counterparty owes the Corporation
and, therefore, creates a repayment risk for the Corporation. When the
mark-to-market is negative, the Corporation owes the counterparty.
In this situation, the Corporation does not have repayment risk.
When the Corporation has more than one transaction outstanding with a
counterparty, and there exists a legally enforceable master netting agreement
with the counterparty, the "net" mark-to-market exposure represents the netting
of the positive and negative exposures with the same counterparty. If there is a
net negative number, then the Corporation's exposure to the counterparty is
considered to be zero. Net mark-to-market is, in the Corporation's view, the
best measure of credit risk when there is a legally enforceable master netting
agreement between the Corporation and the counterparty. For the notional amounts
and related credit risk exposure amounts by product, see Note Seventeen of the
Notes to Consolidated Financial Statements.
Many of the Corporation's contracts are short-term, which also mitigates the
credit risk as transactions settle quickly. The following table provides the
remaining maturities of derivative and foreign exchange contracts outstanding at
December 31, 1996 and 1995. Percentages are based upon remaining contract life
of mark-to-market exposure amounts.
1996 1995
--------------------------- -------------------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
At December 31, Contracts Contracts Total Contracts Contracts Total
- --------------------------------------------------------------------------------
Less than 3 months 15% 59% 31% 11% 55% 29%
3 to 6 months 5 21 11 8 27 15
6 to 12 months 8 15 10 8 13 10
1 to 5 years 52 5 35 45 5 29
Over 5 years 20 -- 13 28 -- 17
- --------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------
The Corporation routinely enters into derivative and foreign exchange
transactions with regulated financial institutions, which the Corporation
believes have relatively low credit risk. At December 31, 1996, approximately
86% of the Corporation's mark-to-market exposure in derivative and foreign
exchange transactions was with commercial bank and financial institution
counterparties, most of whom are dealers in these products. Nonfinancial
institutions accounted for only approximately 14% of the Corporation's
derivative and foreign exchange mark-to-market exposure.
The Corporation does not deal, to any significant extent, in derivatives,
which dealers of derivatives (such as other banks and financial institutions)
consider to be leveraged. As a result, the mark-to-market exposure as well as
the notional amount of such derivatives were insignificant at December 31, 1996.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb potential credit losses
from the entire loan portfolio, as well as derivative and foreign exchange
contracts, letters of credit and guarantees. As of December 31, 1996, the
allowance for credit losses has been allocated into three components: a $3,549
million allowance for loan losses, which is reported net in Loans; a $75 million
allowance for credit losses on derivative and foreign exchange financial
instruments, which is reported net in Trading Assets-Risk Management
Instruments; and a $70 million allowance for credit losses on letters of credit
and guarantees, which is reported in Other Liabilities. Prior period amounts
have not been reclassified due to immateriality.
The Corporation deems its allowance for credit losses at December 31, 1996 to
be adequate (i.e., sufficient to absorb losses that may currently exist in the
portfolio, but are not yet identifiable). Estimating potential future losses is
inherently uncertain and depends on many factors, including general
macroeconomic and political conditions, rating migration, structural changes
within industries which alter competitive positions, event risk, unexpected
correlations within the portfolio, and other external factors such as legal and
regulatory requirements. The Corporation periodically reviews such factors and
reassesses the adequacy of the allowance for credit losses.
The Corporation's actual credit losses arising from derivative and foreign
exchange transactions were immaterial from 1994
[GRAPH 13 - SEE APPENDIX I]
53
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
through 1996. Additionally, for both December 31, 1996 and 1995, nonperforming
derivatives contracts were immaterial.
ALLOWANCE COVERAGE RATIOS
December 31, 1996 1995
- --------------------------------------------------------------
Allowance for Loan Losses to:
Loans at Period-End 2.29% 2.52%
Average Loans 2.37 2.58
Nonperforming Loans 347.60 253.45
- --------------------------------------------------------------
MARKET RISK MANAGEMENT
The market risk management function is responsible for the measurement,
monitoring and control of market risk, and the communication of risk limits
throughout the Corporation in connection with its trading and ALM activities.
TRADING ACTIVITIES
Trading assets and liabilities are used by the Corporation to meet the financial
needs of customers as well as to generate revenues through its trading
activities. An integral strategy of the Corporation's risk management governance
structure is to manage the market risks associated with trading activities
through geographic and product diversification. Trading activities are conducted
in more than 20 countries throughout the world, with an emphasis placed on the
major trading centers in North America, Europe and Asia. The Corporation trades
a wide range of products, including derivative and foreign exchange instruments,
corporate securities, government securities, and emerging markets instruments. A
more complete description of the classes of debt, equity and risk management
instruments used in the Corporation's trading activities, as well as the credit
risk and market risk factors involved in such activities, are disclosed in Notes
Two and Seventeen of the Notes to Consolidated Financial Statements.
The Corporation generates revenue through four fundamental trading
activities: market-making, sales, arbitrage, and positioning. The Corporation
places more emphasis on the first three trading activities since they are
considered to be more stable businesses than positioning.
Market-making: The Corporation trades with the intention of profiting from the
spread between bid and ask prices. Market-making tends to be one of the more
stable trading businesses since it is related principally to market volumes.
Sales: The Corporation provides products for its clients at competitive prices.
Sales, like market-making, is considered to be a relatively stable activity
because revenue is related principally to the volume of products sold to the
Corporation's worldwide client base.
Arbitrage: The Corporation enters into a risk position and offsets that risk in
a different, but closely related, market or instrument. The Corporation believes
this strategy can be effectively utilized to generate revenue based on its
knowledge of products and participation in markets where there are numerous
products that relate to each other.
Positioning: The Corporation takes certain positions in financial instruments in
anticipation of changes in the value of such instruments. The Corporation places
less emphasis on this trading strategy since it is considered to have the lowest
stability of the four fundamental trading activities.
Management believes a risk management process that allows risk-taking within
well defined limits can be used to create and enhance both shareholder value and
competitive advantage through effective employment of risk capital. In support
of this philosophy, the Corporation has defined several fundamental risk
management principles, including:
- Formal definition of risk management governance;
- Measurement of risk using "value-at-risk" methodologies and nonstatistical
measures; and
- Continual evaluation of risk appetite, communicated through risk limits.
The risk management governance structure at the Corporation begins with broad
oversight responsibility by the Board of Directors. The market risk management
governance structure consists of the Risk Policy Committee, Risk Management
Committee, and Market Risk Committee, all of which meet on a monthly basis. The
Risk Policy Committee, a committee of the Board of Directors overseeing both
market and credit risk, has been delegated the responsibility to review the
Corporation's risk management policies and control framework, approve aggregate
levels of market risk, and evaluate the risk/return performance of trading and
treasury businesses.
In order to move the focus from oversight responsibility to active day-to-day
management of risk, the Corporation's risk management governance structure
extends into the business areas. The Office of the Chairman's Risk Management
Committee, comprised of senior business-line, credit and finance executives,
provides direction for the market risk profile of the Corporation, as well as a
forum to discuss market risk issues that may require increased corporate
awareness. The Market Risk Committee is made up of both senior business-line
managers and managers independent of the line areas that collectively have
direct accountability for all corporate-wide market risk activities.
Responsibilities of the Market Risk Committee include, among other things,
review of market risk measurement methodologies, risk limits, and risk capital
assessments.
Market risk is measured and monitored on a daily basis through a
value-at-risk ("VAR") methodology, which captures the potential overnight dollar
loss from adverse market movements. The quantification of market risk through a
VAR methodology requires a number of key assumptions including confidence level
for losses, number of days of price history, hold-
54
37
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
ing period, measurement of inter-business correlation, and the treatment of
risks outside the VAR methodology, such as event risk and liquidity risk. The
Corporation supplements its VAR calculations by performing alternative scenario
analyses to estimate the economic impact of sudden market movements on selected
portions of the trading portfolio. The Corporation has adopted as a standard for
its VAR methodology, the guidelines set forth by the Federal Reserve, effective
January 1, 1998, in its implementation of the Basle Capital Accord amendment to
incorporate market risks.
The Corporation utilizes a comprehensive limit structure as part of the
market risk management process. In addition to establishing VAR limits on market
risk activities at the aggregate and business unit levels, the Corporation also
maintains nonstatistical risk limits to mitigate risk in those instances where
statistical assumptions break down. Nonstatistical measures include net open
positions, basis point values, position concentrations and position turnover.
Criteria for risk limits include, among other factors, relevant market analysis,
market liquidity, prior track record, business strategy, and management
experience and depth. Risk limits are reviewed regularly to ensure consistency
with trading strategies and material developments in market conditions. The
Corporation also uses stop-loss advisories to inform senior management when
losses of a certain threshold are sustained from a trading activity. The
Corporation believes the use of nonstatistical measures and stop-loss advisories
in tandem with VAR limits reduces the likelihood that potential trading losses
will reach the daily VAR limit.
The following chart contains a histogram of the Corporation's daily market
risk-related revenue for 1996 and 1995. Market risk-related revenue is defined
as the daily change in value in marked-to-market trading portfolios plus any
trading-related net interest income or other revenue. Net interest income
related to funding and investment activity is excluded.
[GRAPH 14 - SEE APPENDIX I]
For 1996, the Corporation posted positive daily market risk-related revenue
for 243 out of 260 days. For 225 of the 260 days, the Corporation's daily market
risk-related revenue or losses occurred within a range of negative $5 million to
positive $15 million which is representative of the Corporation's emphasis on
market-making, sales and arbitrage activities. For 1995, the Corporation posted
positive daily market risk-related revenue for 232 out of 260 days. For 234 of
the 260 days in 1995, the Corporation's daily market risk-related revenue or
losses occurred within the negative $5 million to positive $15 million range.
For the 1996 year, the Corporation did not have any daily losses over $15
million and only one occurrence of a trading loss in excess of $10 million. The
three losses over $30 million shown for the 1995 year were all sustained in the
first quarter of 1995, primarily due to unusual volatility experienced in
emerging markets countries at the time.
Based on actual 1996 trading results, which captures the historical
correlation among business units, 95% of the variation in the Corporation's
daily trading results fell within a $24 million band centered on the daily
average amount of $8 million for the year. This compares with a $31 million band
centered on the daily average amount of $6 million for 1995.
ASSET/LIABILITY MANAGEMENT
Key elements of the Corporation's ALM process include oversight by the Board of
Directors and senior management as to the level of balance sheet interest rate
risk assumed by the Corporation relative to its financial condition, earnings
and capital. The Board of Directors reviews and approves risk management
policies, risk limits and the control framework and delegates to the Risk Policy
Committee of the Board specific oversight functions. The Asset-Liability
Committee (the "Committee"), comprised of the Office of the Chairman and senior
business and finance executives, establishes the balance sheet interest rate
risk appetite for the Corporation. The Committee is supported by a comprehensive
risk management process that identifies, measures, manages and monitors interest
rate risk.
55
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
A key element of the Corporation's ALM process is that it allows the
assumption of risk by a limited number of authorized units with close contacts
to the markets. Interest rate risk is generally managed with consideration for
both total-return and reported earnings. The interest rate risk profile of the
Corporation's assets, liabilities and derivatives exposures is modified based on
an ongoing assessment of fundamental trends in interest rates, economic
developments and technical analysis.
Interest rate risk arises from a variety of factors, including differences in
the timing between the contractual maturity or repricing (the "repricing") of
the Corporation's assets and liabilities and derivative financial instruments.
For example, the Corporation's net interest income and financial condition are
affected by changes in the level of market interest rates as the repricing
characteristics of its loans and other assets do not necessarily match those of
its deposits, other borrowings and capital. In the case of floating-rate assets
and liabilities, the Corporation may also be exposed to basis risk, which is the
difference in repricing characteristics of two floating rate indices, such as
the Prime rate and the three-month London Interbank Offered Rate ("LIBOR"). In
addition, many of the Corporation's products have embedded options which impact
pricing and principal balance levels.
The Corporation, as part of its ALM process, employs a variety of cash
(primarily securities) and derivative instruments in managing its exposure to
fluctuations in market interest rates. The Corporation uses derivative
instruments to adjust the interest rate repricing characteristics of specific
on-balance sheet assets and liabilities, or groups of assets and liabilities
with similar repricing characteristics. See Note One of the Notes to
Consolidated Financial Statements for a discussion of the Corporation's
accounting policy relative to derivative instruments used for ALM.
Measuring Interest Rate Sensitivity: In managing exposure, the Corporation uses
quantifications of net gap exposure, measurements of earnings at risk based on
net interest income simulations, and valuation sensitivity measures. An example
of aggregate net gap analysis is presented below. Assets, liabilities and
derivative instruments are placed in gap intervals based on their repricing
dates. Assets and liabilities for which no specific contractual repricing or
maturity dates exist, or whose contractual maturities do not reflect their
expected maturities, are placed in gap intervals based on management's judgment
and statistical analysis, as applicable, concerning their most likely repricing
behaviors. Derivatives used in interest rate sensitivity management are also
included in the applicable gap intervals.
A net gap for each time period is calculated by subtracting the liabilities
repricing in that interval from the assets repricing. A negative gap - more
liabilities repricing than assets - will benefit net interest income in a
declining interest rate environment and will detract from net interest income in
a rising interest rate environment. Conversely, a positive gap - more assets
repricing than liabilities - will benefit net interest income if rates are
rising and will detract from net interest income in a falling rate environment.
INTEREST SENSITIVITY TABLE
Over
At December 31, 1996 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance Sheet $(13,951) $ (3,486) $ 3,454 $ 37,501 $(23,518) $ --
- -------------------------------------------------------------------------------------------------------------------------------
Derivative Instruments Affecting
Interest-Rate Sensitivity(a) 1,328 (2,183) 6,893 (9,157) 3,119 --
- -------------------------------------------------------------------------------------------------------------------------------
Interest-Rate-Sensitivity Gap (12,623) (5,669) 10,347 28,344 (20,399) --
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative Interest-Rate Sensitivity Gap $(12,623) $(18,292) $ (7,945) $ 20,399 $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
% of Total Assets (4)% (5)% (2)% 6% -- --
- -------------------------------------------------------------------------------------------------------------------------------
- ----------
(a) Represents net repricing effect of derivative positions, which include
interest rate swaps, futures, forward rate agreements and options, that are used
as part of the Corporation's overall ALM activities.
At December 31, 1996, the Corporation had $7,945 million more liabilities
than assets repricing within one year (including net repricing effects of
derivative positions), amounting to 2% of total assets. The consolidated gaps
include exposure to U.S. dollar interest rates as well as exposure to non-U.S.
dollar rates in currency markets in which the Corporation does business. Since
U.S. interest rates and non-U.S. interest rates may not move in tandem, the
overall cumulative gaps may tend to differ from the actual exposures of the
Corporation.
Gap analysis is the simplest representation of the Corporation's interest
rate sensitivity. However, it cannot reveal the impact of factors such as
administered rates (e.g., the prime lending rate), pricing strategies on
consumer and business deposits, changes in balance sheet mix, or the effect of
various options embedded in balance sheet instruments. Accordingly, the
Corporation conducts simulations of net interest income under a variety of
market interest rate scenarios. These simulations, which consider forecasted
balance sheet changes, such as asset sales and securitizations, and forecasted
changes in interest rate spreads, provide an estimate of earnings at risk for
given changes in interest rates.
56
39
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
At December 31, 1996, based on the Corporation's simulation models, which
provide comprehensive simulations of net interest income under a variety of
market interest rate scenarios, earnings at risk to an immediate 100 basis point
rise in market interest rates over the next twelve months was estimated to be
less than 3.5% of projected 1997 after-tax net income. During 1996, the
Corporation's earnings exposure to an immediate 100 basis point rise in interest
rates averaged less than 3% of projected after-tax net income (excluding the
merger-related restructuring charge). An immediate 100 basis point rise in
interest rates is a hypothetical rate scenario, used to calibrate risk, and does
not necessarily represent management's current view of future market
developments.
All the measurements of risk described above are made based upon the
Corporation's business mix and interest rate exposures at a particular point in
time. The exposures change continuously as a result of the Corporation's ongoing
businesses and its risk management initiatives. While management believes these
measures provide a meaningful representation of the Corporation's interest rate
sensitivity, they do not take into account all business developments that have
an effect on net income, such as changes in credit quality or the size and
composition of the balance sheet.
Interest rate swaps: Interest rate swaps are one of the various financial
instruments used in the Corporation's ALM activities.
The following table summarizes the outstanding ALM interest rate swap
notional amounts at December 31, 1996, by yearly intervals. The decrease in
notional amounts from one period to the next period represents maturities of the
underlying contracts. The weighted-average fixed interest rates to be received
or paid on such swaps are presented for each yearly interval.
Three-month LIBOR is provided for reference in the following table and
reflects the average implied forward yield curve for that index as of December
31, 1996. However, actual repricings of the Corporation's interest rate swaps
will be based on the applicable rates that are in effect at the actual repricing
date. To the extent rates change, the variable rates paid or received will
change. The Corporation expects the impact of any interest rate changes to be
largely mitigated by corresponding changes in the interest rates and values
associated with the linked assets and liabilities.
OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY
INTERVALS
For the Year Beginning January 1, (in millions) 1997 1998 1999 2000 2001 Thereafter
- -------------------------------------------------------------------------------------------------------------------------
RECEIVE FIXED SWAPS:
Notional amount $32,652 $21,021 $18,410 $15,145 $13,016 $ 9,414
Weighted-average fixed rate 6.57% 6.32% 6.68% 6.69% 6.59% 6.63%
PAY FIXED SWAPS:
Notional amount $37,741 $26,218 $17,303 $10,693 $ 8,376 $ 4,431
Weighted-average fixed rate 6.55% 6.48% 7.08% 7.47% 7.47% 7.65%
BASIS SWAPS:
Notional amount $25,981 $21,825 $16,351 $ 3,975 $ 2,182 $ 1,332
- -------------------------------------------------------------------------------------------------------------------------
Average three-month implied forward LIBOR rates 5.75% 6.20% 6.57% 6.62% 6.84% 7.11%
- -------------------------------------------------------------------------------------------------------------------------
Total Notional Amounts $96,374 $69,064 $52,064 $29,813 $23,574 $15,177
- -------------------------------------------------------------------------------------------------------------------------
The following table summarizes the Corporation's assets and liabilities at
December 31, 1996, along with the notional amounts of derivative contracts used
for ALM activities related to such assets and liabilities.
DERIVATIVE CONTRACTS AND RELATED BALANCE SHEET POSITIONS
Notional Amount(a)
---------------------------------
Balance Interest Other ALM
December 31, (in millions) Sheet Amount Rate Swaps Contracts(b)
- --------------------------------------------------------------------------------
Deposits with Banks $ 8,344 $ 1,899 $ 3,321
Securities - Available-for-Sale 44,691 4,728 5,967
Loans 151,543 47,405 25,766
Other Assets 15,201 3,100 4,464
Deposits 180,921 25,100 5,691
Other Borrowed Funds 9,231 646 --
Long-Term Debt 12,714 5,376 1,742
- --------------------------------------------------------------------------------
- ----------
(a) At December 31, 1996, notional amounts of approximately $8 billion of
interest rate swaps and $1 billion of other ALM contracts, both of which are
used in place of cash instruments (See Note One of the Notes to Consolidated
Financial Statements), have been excluded from the above table.
(b) Includes futures, forwards and options.
Included in the preceding table are notional amounts of approximately $7.6
billion of derivatives related to mortgage servicing assets and approximately
$7.6 billion of derivatives related to mortgage and consumer loans held for sale
which were outstanding at December 31, 1996. The weighted-average maturity of
contracts linked to mortgage servicing assets is approximately four years.
Contracts related to loans held for sale generally mature within one year.
The unfavorable impact on net interest income from the Corporation's ALM
derivative activities was $103 million for 1996, compared with a favorable
impact of $153 million for 1995. The Corporation also has derivatives that
affect noninterest revenue (such as derivatives linked to mortgage servicing
rights).
57
40
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table reflects the deferred gains and losses on closed
derivative contracts and unrecognized gains and losses on open derivative
contracts utilized in the Corporation's ALM activities.
December 31, (in millions) 1996 1995 Change
- ------------------------------------------------------------
ALM Derivative Contracts:
Net Deferred Gains (Losses) $ (42) $ (98) $ 56
Net Unrecognized Gains (Losses) (243) 184 (427)
- ------------------------------------------------------------
Net ALM Derivative Gains (Losses) $(285) $ 86 $(371)
- ------------------------------------------------------------
Net deferred gains and losses on closed contracts relate to futures, forwards
and swaps used in connection with available-for-sale securities, loans, deposits
and debt. The net unrecognized gains and losses relating to ALM activities are
largely the result of interest rate swaps, options, forward and futures
contracts primarily used in connection with loans, deposits and debt. These net
unrecognized losses do not include the net favorable impact from the
assets/liabilities being hedged by these derivative contracts. For a further
discussion of unrecognized gains/losses on open derivative contracts, see Note
Twenty of the Notes to Consolidated Financial Statements.
The net deferred losses at December 31, 1996 are expected to be amortized as
yield adjustments in interest income, interest expense or noninterest revenue
over the periods reflected in the following table. The Consolidated Balance
Sheet includes unamortized premiums on open ALM option contracts that will be
amortized as a reduction to net interest income or noninterest revenue over the
following periods.
AMORTIZATION OF NET DEFERRED GAINS (LOSSES) ON CLOSED ALM CONTRACTS AND OF
PREMIUMS ON OPEN ALM OPTIONS CONTRACTS
Deferred
Year Ended December 31, (in millions) Gains/(Losses) Premiums
- ---------------------------------------------------------------
1997 $ 29 $ 16
1998 (14) 15
1999 (30) 33
2000 (12) 26
2001 and After (15) 37
- ---------------------------------------------------------------
Total $(42) $127
- ---------------------------------------------------------------
Foreign currency exposures (arising from activities conducted in the
Corporation's overseas units) and net investments in overseas entities, are
managed through the use of foreign exchange forward contracts. Entities having
exposures in other than their functional currency match outstanding foreign
currency positions on a currency-by-currency basis to hedge the impact of
foreign exchange rate changes on their operating performance. The notional
amount of these foreign exchange forward contracts, which are not included in
the previous tables, amounted to $51.6 billion at December 31, 1996.
OPERATING RISK MANAGEMENT
The Corporation, like all large financial institutions, is exposed to many types
of operating risk, including the risk of fraud by employees or outsiders,
unauthorized transactions by employees, and errors relating to computer and
telecommunications systems. The Corporation maintains a system of controls that
is designed to keep operating risk at appropriate levels in view of the
financial strength of the Corporation, the characteristics of the businesses and
markets in which the Corporation operates, competitive circumstances and
regulatory considerations. However, from time to time in the past, the
Corporation has suffered losses from operating risk and there can be no
assurance that the Corporation will not suffer such losses in the future.
CAPITAL AND LIQUIDITY RISK MANAGEMENT
CAPITAL
The Corporation's level of capital at December 31, 1996 remained strong, with
capital ratios well in excess of regulatory guidelines. The Corporation's Tier 1
and Total Capital ratios were 8.15% and 11.78%, respectively, at December 31,
1996. As part of the Corporation's commitment to a disciplined capital policy,
management has continued to target a Tier 1 Capital ratio for the Corporation of
8% to 8.25%. The Corporation manages its capital to execute its strategic
business plans and support its growth and investments, including its acquisition
strategies in its core businesses.
Total capitalization, which is the sum of Tier 1 Capital and Tier 2 Capital,
increased by $1.1 billion during 1996, to $29.4 billion at December 31, 1996.
Total capital includes the recently issued $550 million of preferred stock of
Chase Preferred Capital Corporation and $600 million of 7.67% Capital
Securities, Series A, of Chase Capital I, both of which are included in the
Corporation's Tier 1 Capital. See Notes Six and Seven of the Notes to
Consolidated Financial Statements.
During 1996, the Corporation repurchased approximately 26.7 million shares of
its outstanding common stock. Of this amount, 15.2 million shares were
repurchased primarily to meet the anticipated needs of the Corporation's
employee stock option and incentive plans and were part of a buy-back program
that terminated at September 30, 1996. The remaining 11.5 million shares were
repurchased in the 1996 fourth quarter as part of a new stock repurchase program
announced in October 1996.
58
41
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
[GRAPH 15 - SEE APPENDIX I]
The October 1996 common stock repurchase program enables the Corporation to
purchase up to $2.5 billion of its common stock until December 31, 1998, in
addition to such other number of common shares as may be necessary to provide
for expected issuances under its dividend reinvestment plan and its various
stock-based director and employee benefits plans. The Corporation repurchased $1
billion of its common equity during the fourth quarter of 1996. In early 1997,
management announced that it intended to purchase equity on a more accelerated
time schedule than previously expected and, therefore, management believes it is
likely that the buy-back program will be completed in late 1997 or early 1998.
The Corporation raised the cash dividend on its common stock by 12%, to $.56
per share, in the first quarter of 1996. Management currently expects the
Corporation to pay a common stock dividend equal to approximately 25%-35% of the
Corporation's net income (excluding restructuring costs) less preferred stock
dividends. Future dividend policies will be determined by the Board of Directors
in light of the earnings and financial condition of the Corporation and its
subsidiaries and other factors, including applicable governmental regulations
and policies.
Total stockholders' equity at December 31, 1996 was $21.0 billion, compared
with $20.8 billion at December 31, 1995. The slight increase from 1995 reflects
net income of $2,461 million generated during 1996 partially offset by common
and preferred stock dividends totaling $1,280 million, and the impact of the
Corporation's common stock buy-back programs, net of reissuances, in the amount
of $798 million.
LIQUIDITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Corporation's financial commitments and
to capitalize on opportunities for the Corporation's business expansion.
Liquidity management addresses the Corporation's ability to meet deposit
withdrawals either on demand or at contractual maturity, to repay borrowings as
they mature, and to make new loans and investments as opportunities arise.
Liquidity is managed on a daily basis at both the parent company and the
subsidiary levels, enabling senior management to monitor effectively changes in
liquidity and to react accordingly to fluctuations in market conditions.
Contingency plans exist and could be implemented on a timely basis to minimize
the risk associated with dramatic changes in market conditions.
In managing liquidity, the Corporation takes into account the various legal
limitations on the extent to which banks may pay dividends to their parent
companies or finance or otherwise supply funds to certain of their affiliates.
The primary source of liquidity for the bank subsidiaries of the Corporation
derives from their ability to generate core deposits. The Corporation considers
funds from such sources to comprise its subsidiary banks' "core" deposit base
because of the historical stability of such sources of funds. These deposits
fund a portion of the Corporation's asset base, thereby reducing the
Corporation's reliance on other, more volatile, sources of funds. The
Corporation's average core deposits for 1996 were $78 billion, or 52% of average
loans.
The Corporation holds marketable securities and other short-term investments
that can be readily converted to cash. As part of the Corporation's ongoing
capital management process, loan syndication networks and retail securitization
programs are maintained in order to facilitate the timely disposition of assets,
if and when deemed desirable.
The Corporation is an active participant in the capital markets and issues
commercial paper, medium-term notes, long-term debt, common stock and preferred
stock.
The slight decrease in long-term debt during 1996 resulted primarily from
maturities of $1,433 million of the Corporation's long-term debt (including $997
million of senior medium-term notes, $365 million of other senior notes and $71
million of subordinated notes) and the redemption of $20 million of senior
medium-term notes. These decreases were partially offset by additions to the
Corporation's long-term debt of $1,291 million (including $650 million of senior
medium-term notes, $75 million of subordinated medium-term notes, $366 million
of other senior notes and $200 million of other subordinated notes). The
Corporation will continue to evaluate the opportunity for future redemptions of
its outstanding debt and preferred stock in light of current market conditions.
The Corporation has approximately $1.1 billion of fixed-rate preferred stock
which becomes callable in 1997.
[GRAPH 16 - SEE APPENDIX I]
59
42
MANAGEMENT'S DISCUSSION AND ANALYSIS
ACCOUNTING DEVELOPMENTS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the FASB issued SFAS 125 which provides standards
for distinguishing between transfers of financial assets that are sales from
transfers that are secured borrowings.
As issued, SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
However, in December 1996, the FASB issued SFAS 127 which deferred for one year
the effective date of SFAS 125 as applied to securities lending, repurchase
agreements and other secured financing transactions. The Corporation adopted the
requirements of SFAS 125 commencing January 1, 1997 for the following types of
transactions: securitizations, recognitions of servicing assets and liabilities,
transfers of receivables with recourse, loan participations, and extinguishments
of liabilities. The Corporation believes that the adoption of SFAS 125 will not
significantly affect the Corporation's earnings, liquidity, or capital
resources.
DERIVATIVE AND MARKET RISK DISCLOSURES
In January 1997, the Securities and Exchange Commission ("SEC") issued Release
Nos. 33-7386 and 34-38223 which requires (i) quantitative and qualitative
disclosures outside the financial statements about the market risk inherent in
derivatives and other financial instruments and (ii) enhanced descriptions of
accounting policies for derivatives in the footnotes to the financial
statements.
The market risk disclosure requirements of this release will be applicable
commencing with the Corporation's 1997 annual report. The Corporation is
currently evaluating this release and expects to comply with the requirements of
the release in its 1997 annual report.
COMPARISON BETWEEN 1995 AND 1994
OPERATING HIGHLIGHTS
The Corporation reported net income of $2,959 million in 1995, compared with
$2,486 million in 1994. Primary earnings per share were $6.20 in 1995, an
increase from $5.02 in 1994. On a fully-diluted basis, earnings per share were
$6.04 in 1995, compared with $4.97 for the prior year.
Net income on an operating basis was $2,903 million in 1995, an increase of
12% from comparable earnings of $2,589 million in 1994. Primary earnings per
share on a operating basis were $6.07 in 1995, an increase of 15% from $5.26 in
1994, while fully-diluted earnings per share were $5.92 in 1995, compared with
$5.20 for the prior year.
NET INTEREST INCOME
The Corporation's net interest income was $8,202 million in 1995, compared with
$8,312 million in 1994. Excluding, in 1995, the impact of securitizations ($94
million) and the sale of Chemical New Jersey Holdings, Inc. ($33 million), the
improvement was primarily due to an increase in interest-earning assets and
higher trading-related net interest income, partially offset by narrower
spreads. Average interest-earning assets were $244.5 billion in 1995, compared
with $227.3 billion in 1994, reflecting an increase led by growth in consumer
loans and commercial lending.
PROVISION FOR CREDIT LOSSES AND NET CHARGE-OFFS
The provision for credit losses in 1995 was $758 million, compared with $1,050
million in 1994, a decline of 28%. Net charge-offs were $840 million compared
with $1,612 million in 1994, a decline of 48%, reflecting a significant
improvement in the Corporation's credit quality and an increase in commercial
loan recoveries. The 1994 net charge-off amount of $1,612 million included a
$148 million charge related to the decision to designate certain assets as held
for accelerated disposition as well as a $291 million charge incurred in
connection with management's final valuation of its emerging markets portfolio.
NONINTEREST REVENUE
Noninterest revenue totaled $6,758 million in 1995, a $57 million increase
compared with 1994, reflecting higher fees and commissions, principally from
corporate finance and syndication activities and credit card revenue, partially
offset by lower other revenue.
Corporate finance and syndication fees in 1995 were $796 million, a 34%
increase from the prior year, principally reflecting increases in global
investment banking activities, especially loan syndications and new issues of
high-yield securities.
Trust, custody and investment management fees in 1995 declined 4% from the
1994 level, largely due to the absence of $46 million in fees related to the
joint venture with Mellon Bank Corporation, which was recorded on an equity
basis within other revenue in 1995.
Credit card revenue increased $80 million from 1994 due to a growing
cardholder base and increased fees related to securitizations.
60
43
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
Fees for other financial services for 1995 were $1,453 million, an increase
of $40 million from 1994, primarily due to increased mortgage servicing fees
reflecting higher volume from the acquisitions of Margaretten Financial
Corporation ("Margaretten") in July 1994, and American Residential Holding
Corporation ("AmRes") in September 1994, as well as additions to the portfolio
from mortgage originations.
Trading-related revenue (which includes net interest income attributable to
trading activities) in 1995 increased 9% from the prior year, benefitting from
anticipated volatility in the currency markets and from the Corporation's
market-making activities. The 1994 results included a $70 million loss from
unauthorized foreign exchange transactions involving the Mexican peso.
Securities gains were $132 million in 1995, an increase of $67 million from
1994, resulting from the Corporation's ALM activities.
Revenue from Equity-Related Investments in 1995 increased by $49 million from
the 1994 level reflecting the continuing benefits of a broad-based portfolio of
investments in an active market.
The Corporation's other noninterest revenue for 1995 was $466 million,
compared with $662 million in 1994. Other revenue declined in 1995 primarily due
to the absence of gains related to the disposition of emerging markets
securities that were included in the 1994 results.
NONINTEREST EXPENSE
Noninterest expense in 1995 was $9,390 million, compared with $10,002 million in
1994. Included in the results for 1994 was a $260 million restructuring charge,
taken in connection with a program to improve earnings per share, a $48 million
restructuring charge related to the closing of 50 New York branches, and a
charge of $157 million related to productivity initiatives. For a further
discussion regarding the restructuring charges taken by the Corporation during
1995 and 1994, see Note Eleven of the Notes to Consolidated Financial
Statements.
Excluding restructuring charges and foreclosed property expense in both
years, noninterest expense for 1995 decreased by $37 million, when compared with
the prior year. The improvement in 1995 reflects the benefits of pre-merger
expense-reduction initiatives, a reduction in the FDIC assessment rate, the sale
of certain New Jersey banking operations, and the shareholder services joint
venture with Mellon Bank Corporation. These declines were partially offset by a
full year of noninterest expense relating to the acquisitions of Margaretten and
AmRes, and the 1995 acquisition of the U.S. Trust processing business.
Salaries and employee benefits expenses in 1995 were $5,107 million, compared
with $4,861 million in 1994. The increase in 1995 was primarily due to higher
incentives related to improved earnings in most businesses, additional staff
costs resulting from business acquisitions, the vesting of certain stock-based
incentive awards due to improved stock prices, and the continued growth in the
Corporation's securities underwriting business. Partially offsetting these
increases were the impact of personnel reductions undertaken in 1995.
Occupancy expense declined $71 million from 1994 largely resulting from the
consolidation of operational and branch facilities and other expense-reduction
initiatives.
Equipment expense in 1995 was $755 million, an increase of $31 million,
principally due to continued technology enhancements to support the
Corporation's investments in certain key businesses.
Foreclosed property expense was a credit of $75 million in 1995, compared
with an expense of $50 million in 1994, reflecting the significant progress made
in reducing the Corporation's real estate portfolio. The 1995 amount included
gains recorded on the sale of certain foreclosed properties.
For 1995, other expense was $2,691 million, a decrease of $243 million from
the 1994 level. The decrease reflected a reduction in the FDIC assessment rate
during 1995 and an 11% decrease in all other expense due to expense reduction
initiatives, partially offset by higher telecommunications expense.
INCOME TAXES
The Corporation recorded income tax expense of $1,842 million in 1995 compared
with $1,475 million in 1994. The effective tax rate was 38.3% in 1995 compared
with 39.0% in 1994, after excluding $70 million of tax benefits recognized in
1994.
61
44
Management's Report on Responsibility for Financial Reporting
TO OUR STOCKHOLDERS
The management of The Chase Manhattan Corporation and its subsidiaries has the
responsibility for preparing the accompanying consolidated financial statements
and for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles. The consolidated
financial statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
Management maintains a comprehensive system of internal control to assure the
proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. The Corporation maintains a
strong internal auditing program that independently assesses the effectiveness
of the system of internal control and recommends possible improvements thereto.
Management believes that as of December 31, 1996, the Corporation maintains an
effective system of internal control.
The Audit Committee of the Board of Directors reviews the systems of internal
control and financial reporting. The Committee meets and consults regularly with
management, the internal auditors and the independent accountants to review the
scope and results of their work.
The accounting firm of Price Waterhouse LLP has performed an independent audit
of the Corporation's financial statements. Management has made available to
Price Waterhouse LLP all of the Corporation's financial records and related
data, as well as the minutes of stockholders' and directors' meetings.
Furthermore, management believes that all representations made to Price
Waterhouse LLP during its audit were valid and appropriate. The firm's report
appears below.
/s/ Walter V. Shipley
Walter V. Shipley
Chairman of the Board and Chief Executive Officer
/s/ Thomas G. Labrecque
Thomas G. Labrecque
President and Chief Operating Officer
/s/ Peter J. Tobin
Peter J. Tobin
Chief Financial Officer
/s/ Joseph L. Sclafani
Joseph L. Sclafani
Executive Vice President and Controller
January 21, 1997
Report of Independent Accountants
[GRAPHIC] PRICE WATERHOUSE LLP 1177 AVENUE OF THE AMERICAS, NEW YORK, NY 10036
To the Board of Directors and Stockholders of The Chase Manhattan Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Chase Manhattan Corporation and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
January 21, 1997
62
45
CONSOLIDATED BALANCE SHEET THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
December 31, (in millions, except share data) 1996 1995
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 14,605 $ 14,794
Deposits with Banks 8,344 8,468
Federal Funds Sold and Securities Purchased Under Resale Agreements 28,966 17,461
Trading Assets:
Debt and Equity Instruments 30,377 26,212
Risk Management Instruments 29,579 25,825
Securities:
Available-for-Sale 44,691 37,141
Held-to-Maturity (Market Value: $3,849 in 1996 and $4,659 in 1995) 3,855 4,628
Loans (Net of Allowance for Loan Losses of $3,549 in 1996 and $3,784 in 1995) 151,543 146,423
Premises and Equipment 3,642 3,757
Due from Customers on Acceptances 2,276 1,896
Accrued Interest Receivable 3,020 2,541
Other Assets 15,201 14,843
- -----------------------------------------------------------------------------------------------------------
Total Assets $ 336,099 $ 303,989
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 42,726 $ 36,983
Interest-Bearing 67,186 63,071
Foreign:
Noninterest-Bearing 4,331 3,849
Interest-Bearing 66,678 67,631
- -----------------------------------------------------------------------------------------------------------
Total Deposits 180,921 171,534
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 53,868 37,263
Commercial Paper 4,500 6,275
Other Borrowed Funds 9,231 7,661
Acceptances Outstanding 2,276 1,915
Trading Liabilities 38,136 34,341
Accounts Payable, Accrued Expenses and Other Liabilities 12,309 11,339
Long-Term Debt 12,714 12,825
Guaranteed Preferred Beneficial Interests in Corporation's Junior
Subordinated Deferrable Interest Debentures 600 --
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 314,555 283,153
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (See Note Twenty One)
PREFERRED STOCK OF SUBSIDIARY 550 --
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,650
Common Stock (Authorized 750,000,000 Shares,
Issued 440,747,317 Shares in 1996 and 457,587,675 Shares in 1995) 441 458
Capital Surplus 10,459 11,075
Retained Earnings 8,627 7,997
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (288) (237)
Treasury Stock, at Cost (9,936,716 Shares in 1996 and 22,583,225 Shares in 1995) (895) (1,107)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 20,994 20,836
- -----------------------------------------------------------------------------------------------------------
Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 336,099 $ 303,989
- -----------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
63
46
CONSOLIDATED STATEMENT OF INCOME THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
Year ended December 31, (in millions, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 12,359 $ 12,842 $11,004
Securities 2,862 2,591 2,329
Trading Assets 2,016 1,464 1,282
Federal Funds Sold and Securities Purchased Under Resale Agreements 2,135 1,889 1,827
Deposits with Banks 537 824 869
- --------------------------------------------------------------------------------------------------------
Total Interest Income 19,909 19,610 17,311
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 6,038 6,291 4,704
Short-Term and Other Borrowings 4,630 4,175 3,447
Long-Term Debt 901 942 848
- --------------------------------------------------------------------------------------------------------
Total Interest Expense 11,569 11,408 8,999
- --------------------------------------------------------------------------------------------------------
Net Interest Income 8,340 8,202 8,312
Provision for Credit Losses 897 758 1,050
- --------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses 7,443 7,444 7,262
- --------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 929 796 593
Trust, Custody, and Investment Management Fees 1,176 1,018 1,056
Credit Card Revenue 1,063 834 754
Service Charges on Deposit Accounts 394 417 408
Fees for Other Financial Services 1,529 1,453 1,413
Trading Revenue 1,270 1,016 1,173
Securities Gains 135 132 65
Revenue from Equity-Related Investments 726 626 577
Other Revenue 290 466 662
- --------------------------------------------------------------------------------------------------------
Total Noninterest Revenue 7,512 6,758 6,701
- --------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 4,232 4,208 3,978
Employee Benefits 926 899 883
Occupancy Expense 824 897 968
Equipment Expense 724 755 724
Foreclosed Property Expense (16) (75) 50
Restructuring Charge and Expenses 1,814 15 465
Other Expense 2,640 2,691 2,934
- --------------------------------------------------------------------------------------------------------
Total Noninterest Expense 11,144 9,390 10,002
- --------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Effect of Accounting Change 3,811 4,812 3,961
Income Tax Expense 1,350 1,842 1,475
- --------------------------------------------------------------------------------------------------------
Income Before Effect of Accounting Change 2,461 2,970 2,486
Net Effect of Change in Accounting Principle -- (11) --
- --------------------------------------------------------------------------------------------------------
Net Income $ 2,461 $ 2,959 $ 2,486
- --------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 2,242 $ 2,732 $ 2,221
- --------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Primary:
Income Before Effect of Accounting Change $ 5.02 $ 6.23 $ 5.02
Net Effect of Change in Accounting Principle -- (0.03) --
- --------------------------------------------------------------------------------------------------------
Net Income $ 5.02 $ 6.20 $ 5.02
- --------------------------------------------------------------------------------------------------------
Assuming Full Dilution:
Income Before Effect of Accounting Change $ 4.94 $ 6.07 $ 4.97
Net Effect of Change in Accounting Principle -- (0.03) --
- --------------------------------------------------------------------------------------------------------
Net Income $ 4.94 $ 6.04 $ 4.97
- --------------------------------------------------------------------------------------------------------
Average Common and Common Equivalent Shares 446.4 440.8 442.2
- --------------------------------------------------------------------------------------------------------
Average Common Shares Assuming Full Dilution 453.4 453.5 450.9
- --------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
64
47
CONSOLIDATED STATEMENT OF CHANGES THE CHASE MANHATTAN CORPORATION
IN STOCKHOLDERS' EQUITY AND SUBSIDIARIES
Year ended December 31, (in millions) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at Beginning of Year $ 2,650 $ 2,850 $ 3,053
Issuance of Stock -- -- 428
Redemption of Stock -- (200) (631)
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Year 2,650 2,650 2,850
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at Beginning of Year 458 447 445
Retirement of Treasury Stock (20) -- --
Issuance of Stock 3 11 2
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Year 441 458 447
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at Beginning of Year 11,075 10,671 10,652
Retirement of Treasury Stock (433) -- --
New Issuances of Stock 42 307 40
Premium on Redemption of Preferred Stock -- -- (12)
Shares Issued for Employee Stock-Based Awards
and Certain Related Tax Benefits (225) 97 (9)
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Year 10,459 11,075 10,671
- ------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 7,997 6,045 4,484
Net Income 2,461 2,959 2,486
Retirement of Treasury Stock (557) -- --
Cash Dividends Declared:
Preferred Stock (219) (227) (253)
Common Stock (1,061)(a) (789) (672)
Accumulated Translation Adjustment(b) 6 9 --
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Year 8,627 7,997 6,045
- ------------------------------------------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES
Balance at Beginning of Year (237) (473) 479
Net Change in Fair Value of Securities Available-for-Sale, Net of Taxes (51) 236 (952)
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Year (288) (237) (473)
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY, AT COST
Balance at Beginning of Year (1,107) (667) (12)
Retirement of Treasury Stock 1,010 -- --
Purchase of Treasury Stock (2,037) (1,389) (693)
Reissuance of Treasury Stock 1,239 949 38
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Year (895) (1,107) (667)
- ------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 20,994 $ 20,836 $ 18,873
- ------------------------------------------------------------------------------------------------------------------
(a) Includes fourth quarter 1995 common stock dividends of $80 million declared
and paid by old Chase in the 1996 first quarter.
(b) Balance was $17 million, $11 million and $2 million at December 31, 1996,
1995 and 1994, respectively.
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
65
48
CONSOLIDATED STATEMENT OF CASH FLOWS THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
Year ended December 31, (in millions) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 2,461 $ 2,959 $ 2,486
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Effect of Change in Accounting Principle -- 11 --
Provision for Credit Losses 897 758 1,050
Restructuring Charge and Expenses 1,814 15 465
Depreciation and Amortization 869 866 765
Net Change In:
Trading-Related Assets (9,245) (6,466) (1,523)
Accrued Interest Receivable (479) (86) (460)
Other Assets 1,167 328 331
Trading-Related Liabilities 3,826 3,423 3,026
Accrued Interest Payable 395 12 331
Other Liabilities (1,743) (1,430) 1,373
Other, Net (945) (746) (2,740)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities (983) (356) 5,104
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 124 4,054 (840)
Federal Funds Sold and Securities Purchased Under Resale Agreements (12,929) 2,094 (2,936)
Loans Due to Sales and Securitizations 37,428 32,987 22,872
Other Loans, Net (42,935) (44,455) (29,138)
Other, Net (905) (1,281) (250)
Proceeds from the Maturity of Held-to-Maturity Securities 1,057 2,395 3,554
Purchases of Held-to-Maturity Securities (277) (1,052) (2,614)
Proceeds from the Maturity of Available-for-Sale Securities 8,513 7,427 5,357
Proceeds from the Sale of Available-for-Sale Securities 44,194 54,290 23,086
Purchases of Available-for-Sale Securities (60,380) (69,311) (30,497)
Cash Used in Acquisitions -- (10) (721)
Proceeds from Divestitures of Nonstrategic Businesses -- 1,050 --
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (26,110) (11,812) (12,127)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 5,743 2,588 (4,268)
Domestic Time and Savings Deposits 4,160 (1,279) (10,107)
Foreign Deposits (471) 6,153 11,134
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 18,029 5,287 11,677
Other Borrowed Funds (199) 2,199 1,125
Other, Net 361 378 782
Proceeds from the Issuance of Long-Term Debt and Series A Capital Securities 1,891 1,876 2,413
Repayments of Long-Term Debt (1,453) (2,076) (3,369)
Proceeds from the Issuance of Stock 1,082 665 511
Proceeds from the Issuance of Preferred Stock of Subsidiary 550 -- --
Redemption of Preferred Stock -- -- (643)
Treasury Stock Purchased (1,611) (1,389) (693)
Cash Dividends Paid (1,188) (978) (914)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 26,894 13,424 7,648
- -----------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks 10 (7) --
Net Increase (Decrease) in Cash and Due from Banks (189) 1,249 625
Cash and Due from Banks at the Beginning of the Year 14,794 13,545 12,920
- -----------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at the End of the Year $ 14,605 $ 14,794 $ 13,545
- -----------------------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 11,174 $ 11,248 $ 8,533
- -----------------------------------------------------------------------------------------------------------------------
Taxes Paid $ 1,650 $ 1,309 $ 1,139
- -----------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
66
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On March 31, 1996, The Chase Manhattan Corporation ("Chase") merged (the
"Merger") with and into Chemical Banking Corporation ("Chemical"). Upon
consummation of the Merger, Chemical changed its name to "The Chase Manhattan
Corporation" (the "Corporation"). Under the terms of the merger agreement, 183
million shares of the Corporation's common stock were issued in exchange for all
of the outstanding shares of Chase's common stock (based on an exchange ratio of
1.04 shares of the Corporation's common stock for each share of Chase's common
stock). All of Chase's series of preferred stock were exchanged on a one-for-one
basis for a corresponding series of the Corporation's preferred stock having
substantially the same terms as the Chase preferred stock so converted. The
Merger was accounted for as a pooling of interests and, accordingly, the
information included in the financial statements presents the combined results
of Chase and Chemical as if the Merger had been in effect for all periods
presented. In addition, on July 14, 1996, The Chase Manhattan Bank, N.A., a
national bank, merged with and into Chemical Bank, a New York State bank, and
Chemical Bank changed its name to "The Chase Manhattan Bank." Certain amounts
have been reclassified to conform to the current presentation.
The Corporation provides diversified financial services principally through
its two major franchises, Global Wholesale Banking and Regional and Nationwide
Consumer Banking. Global Wholesale Banking provides investment banking,
financial advisory, trading, investment services and information and transaction
services to corporations and public-sector clients worldwide. Regional and
Nationwide Consumer Banking serves the financial needs of consumers, middle
market, commercial enterprises and small businesses.
The Corporation conducts its domestic and international financial services
businesses through various bank and nonbank subsidiaries. The principal bank
subsidiaries of the Corporation are The Chase Manhattan Bank, a New York State
bank headquartered in New York City, Texas Commerce Bank National Association
("Texas Commerce"), a national bank headquartered in Texas and Chase Manhattan
Bank USA National Association ("Chase USA"), a national bank headquartered in
Delaware. The principal nonbank subsidiary of the Corporation is Chase
Securities Inc.
The accounting and financial reporting policies of the Corporation and its
subsidiaries conform to generally accepted accounting principles and prevailing
industry practices and, where applicable, the accounting and reporting
guidelines prescribed by bank regulatory authorities. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The following is a
description of significant accounting policies.
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after eliminating intercompany balances and
transactions. Equity investments in less than majority-owned companies (20%-50%
ownership interest) are generally accounted for in accordance with the equity
method of accounting and are reported in Other Assets. The Corporation's
pro-rata share of earnings (losses) of these companies is included in Other
Revenue.
Assets held in an agency or fiduciary capacity by commercial banking
subsidiaries and by trust and investment advisory subsidiaries are not assets of
the Corporation and, accordingly, are not included in the Consolidated Balance
Sheet.
- --------------------------------------------------------------------------------
TRADING ACTIVITIES
The Corporation trades debt and equity instruments and risk management
instruments, as discussed below. These instruments are carried at their
estimated fair value. Quoted market prices, when available, are used as the
basis to determine the fair value of trading instruments. If quoted market
prices are not available, then fair values are estimated on the basis of pricing
models, quoted prices of instruments with similar characteristics, or discounted
cash flows.
Realized and unrealized gains (losses) on these instruments are recognized in
Trading Revenue. The portion of the market valuation of risk management
instruments attributable to credit considerations as well as ongoing direct
servicing costs is deferred and accreted to income over the life of the
instruments, as appropriate. Interest earned on debt and dividends earned on
equity instruments and interest payable on securities sold but not yet purchased
are reported as interest income and interest expense, respectively.
Debt and Equity Instruments; Securities Sold, Not Yet Purchased; and Structured
Notes: Debt and equity instruments which includes securities, loans, and other
credit instruments held for trading purposes are reported as Trading Assets.
Obligations to deliver securities sold but not yet purchased and structured
notes issued by the Corporation are reported as Trading Liabilities.
Risk Management Instruments: The Corporation primarily deals in interest rate,
foreign exchange, precious metals and commodity contracts to generate trading
revenues. Such contracts include futures, forwards, forward rate agreements,
swaps, and options (including interest rate caps and floors). The estimated fair
values of such contracts are reported on a gross basis as Trading Assets-Risk
Management Instruments (positive fair values) and Trading Liabilities (negative
fair values), except for contracts executed with the same counterparty under
legally enforceable master netting agreements, which are presented on a net
basis.
67
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DERIVATIVES USED IN ASSET/LIABILITY MANAGEMENT ACTIVITIES
As part of its asset/liability management ("ALM") activities, the Corporation
predominantly uses interest rate swaps and futures and, to a lesser degree,
forward rate agreements and option contracts (including interest rate caps and
floors) to hedge exposures or to modify the interest rate characteristics of
related balance sheet instruments. Derivative contracts used for ALM activities
have high correlation between the derivatives contract and the item being
hedged, both at inception and throughout the hedge period; and are linked to
specific assets or groups of similar assets or specific liabilities or groups of
similar liabilities. For futures contracts only, a risk reduction criteria is
also required.
The instruments that meet the above criteria are accounted for under the
accrual method or available-for-sale fair value method, as discussed below.
Accrual Method: Under the accrual method, interest income or expense on
derivative contracts is accrued and there is no recognition of unrealized gains
and losses on the derivatives in the balance sheet. Premiums on option contracts
are amortized to interest income, interest expense or noninterest revenue over
the life of such contracts.
Available-for-Sale Fair Value Method: Derivatives linked to available-for-sale
securities are carried at fair value. The accrual of interest receivable or
interest payable on these derivatives is reported in Interest Income on
Securities. Changes in the market values of these derivatives, exclusive of net
interest accruals, are reported, net of applicable taxes, in Stockholders'
Equity consistent with the reporting of unrealized gains and losses on the
related securities.
For both the accrual and available-for-sale fair value method, realized gains
and losses from the settlement or termination of derivative contracts are
deferred on the balance sheet and are amortized to interest income, interest
expense and noninterest revenue over the appropriate risk management periods.
Amortization commences when the contract is settled or terminated. If the
related assets or liabilities are sold or otherwise disposed, then the deferred
gains or losses on the derivative contract is recognized as an adjustment to the
gain or loss on disposition of the related assets or liabilities.
Prior to January 1, 1995, the Corporation used interest rate swaps in place
of cash market instruments. Effective January 1, 1995, this practice was
discontinued. Accordingly, interest rate contracts entered into subsequent to
January 1, 1995 that do not meet the criteria described above are designated as
trading activities and are accounted for at estimated fair value.
- --------------------------------------------------------------------------------
RESALE AND REPURCHASE AGREEMENTS
The Corporation enters into short-term purchases of securities under agreements
to resell (resale agreements) and sales of securities under agreements to
repurchase (repurchase agreements) of substantially identical securities. The
amounts advanced under resale agreements and the amounts borrowed under
repurchase agreements are carried on the balance sheet at the amount advanced or
borrowed plus accrued interest. Interest earned on resale agreements and
interest incurred on repurchase agreements are reported as interest income and
interest expense, respectively. The Corporation offsets resale and repurchase
agreements executed with the same counterparty under legally enforceable netting
agreements that meet the applicable netting criteria. During 1996, the maximum
month-end balances of outstanding resale and repurchase agreements,
respectively, were $35,244 million and $53,961 million. The average amounts of
outstanding resale and repurchase agreements were $34,963 million and $53,072
million, respectively. Averages were calculated on daily outstandings.
It is the Corporation's policy to take possession of securities purchased
under resale agreements. The Corporation monitors the market value of securities
and adjusts the level of collateral for resale and repurchase agreements, as
appropriate.
- --------------------------------------------------------------------------------
SECURITIES
Securities that may be sold in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or other factors, are classified
as Available-for-Sale and are carried at fair value. Unrealized gains and losses
on these securities, along with any unrealized gains and losses on related
derivatives, are reported, net of applicable taxes, in Stockholders' Equity.
Securities that the Corporation has the positive intent and ability to hold to
maturity are classified as Held-to-Maturity and are carried at amortized cost.
Interest and dividend income on securities, including amortization of
premiums and accretion of discounts, are reported in Interest Income on
Securities. Interest income is recognized using the interest method. The
specific identification method is used to determine realized gains and losses on
sales of securities, which are reported in Securities Gains. The carrying value
of individual securities is reduced through writedowns against Securities Gains
to reflect other-than-temporary impairments in value.
The Corporation anticipates prepayments of principal in the calculation of
the effective yield for collateralized mortgage obligations ("CMOs") and
mortgage-backed securities ("MBSs"). The prepayment of CMOs and MBSs is actively
monitored through the Corporation's portfolio management function. The
Corporation typically invests in CMOs and MBSs with stable cash flows, thereby
limiting the impact of interest rate fluctuations on the portfolio. Management
regularly does simulation testing regarding the impact that interest and market
rate changes would have on its CMO and MBS portfolios. CMOs and MBSs that
management believes have high prepayment risk are included in the
available-for-sale portfolio.
68
51
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
LOANS
Loans are generally reported at the principal amount outstanding, net of the
allowance for loan losses, unearned income and net deferred loan fees
(nonrefundable yield-related loan fees, net of related direct origination
costs), if any. Loans held for sale are carried at the lower of aggregate cost
or fair value. Certain loans meeting the accounting definition of a security are
classified as loans but are measured pursuant to SFAS 115. Interest income is
recognized using the interest method or on a basis approximating a level rate of
return over the term of the loan.
The Corporation sells or securitizes certain commercial and consumer loans.
Such sales are generally without recourse to the Corporation. A limited number
of assets are sold with recourse for which appropriate reserves are provided.
Gains and losses are reported in Other Revenue.
Nonaccrual loans are those loans on which the accrual of interest has ceased.
Loans, other than certain consumer loans discussed below, are placed on
nonaccrual status immediately if, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan
agreement, or when principal or interest is past due 90 days or more and
collateral, if any, is insufficient to cover principal and interest. Interest
accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Interest
income on nonaccrual loans is recognized only to the extent received in cash.
However, where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Consumer loans (exclusive of residential mortgage products which are
accounted for in accordance with the nonaccrual loan policy discussed above) are
generally charged to the allowance for loan losses upon reaching specified
stages of delinquency. Credit card loans, for example, are charged-off at the
earlier of 180 days past due or 75 days after notification of the filing of
bankruptcy. Other consumer products are generally charged-off at 120 days past
due. Accrued interest is reversed against interest income when such consumer
loans are charged-off.
Loans are considered impaired loans when, based on current information, it is
probable that the borrower will be unable to pay contractual interest or
principal payments as scheduled in the loan agreement. The Corporation accounts
for and discloses nonaccrual commercial loans as impaired but excludes
small-balance homogeneous consumer loans, loans carried at fair value or the
lower of cost or fair value, debt securities, and leases. Impaired loans are
carried at the present value of the future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral, if the loan is collateral
dependent. The Corporation recognizes interest income on impaired loans pursuant
to the discussion above for nonaccrual loans.
A collateralized loan is considered an in-substance foreclosure and is
reclassified to Assets Acquired as Loan Satisfactions only when the Corporation
has taken physical possession of the collateral regardless of whether formal
foreclosure proceedings have taken place.
- --------------------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses provides for risks of losses inherent in the
credit extension process. The allowance is a general allowance and is based on
periodic reviews and analyses of the portfolio, which comprises primarily loans,
derivatives and foreign exchange contracts, and letters of credit and
guarantees. The periodic analyses include consideration of such factors as the
risk rating of individual credits, the size and diversity of the portfolio,
economic and political conditions, prior loss experience and results of periodic
credit reviews of the portfolio. The allowance for credit losses is increased by
provisions for credit losses charged against income and is reduced by
charge-offs, net of recoveries. Charge-offs are recorded when, in the judgment
of management, an extension of credit is deemed uncollectible, in whole or in
part.
As of December 31, 1996, in accordance with the AICPA's Audit and Accounting
Guide for Banks and Savings Institutions, the allowance for credit losses has
been allocated into three components: an allowance for loan losses, which is
reported net in Loans; an allowance for credit losses on derivative and foreign
exchange financial instruments, which is reported net in Trading Assets - Risk
Management Instruments; and an allowance for credit losses on letters of credit
and guarantees, which is reported in Other Liabilities. Prior period amounts
have not been reclassified due to immateriality. The Corporation still views the
aggregate allowance for credit losses to be available for all credit activities.
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Capital leases are included in
premises and equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization of premises are included in Occupancy Expense,
while depreciation of equipment is included in Equipment Expense. Depreciation
and amortization are computed using the straight-line method over the estimated
useful life of the owned asset and, for leasehold improvements, over the
estimated useful life of the related asset or the lease term, whichever is
shorter. Maintenance and repairs are charged to expense as incurred, while major
improvements are capitalized.
- --------------------------------------------------------------------------------
OTHER ASSETS
Assets Acquired as Loan Satisfactions: Assets acquired in full or partial
satisfaction of loans are reported at the lower of cost or estimated fair value
less costs to sell. These assets are primarily real estate. Writedowns at the
date of transfer from Loans to Assets
69
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired as Loan Satisfactions and within six months after the date of transfer
are charged to the Allowance for Credit Losses. Writedowns of such assets
subsequent to six months from the date of transfer are included in Foreclosed
Property Expense. Operating expenses, net of related revenue, and gains and
losses on sales of such assets are reported net in Foreclosed Property Expense.
Assets Held for Accelerated Disposition: These assets consist primarily of real
estate loans and real estate assets acquired as loan satisfactions. At the date
of transfer to the accelerated disposition portfolio, these assets are recorded
at their initial estimated disposition value less costs to sell. Subsequently,
assets held for accelerated disposition are carried at the lower of cost or
current estimated disposition value. Cash interest income received from these
assets is recognized either in income or applied to reduce the carrying value of
loans depending on management's judgment of collectibility. Any adjustments to
the carrying value of these assets or realized gains and losses as assets are
sold are reported in Other Revenue.
Equity and Equity-Related Investments: Equity and equity-related investments
include venture capital activities and emerging markets investments.
Nonmarketable holdings are carried at cost, net of other-than-temporary
impairment losses. Marketable holdings are marked-to-market at a discount to the
public value. Income from these investments is reported in Revenue from
Equity-Related Investments.
Intangibles: Goodwill and other acquired intangibles, such as core deposits and
credit card relationships, are amortized over the estimated periods to be
benefited generally ranging from 10 to 25 years. An impairment review is
performed periodically on these assets.
Mortgage Servicing Rights: Capitalized mortgage servicing assets consist of both
purchased and originated servicing rights. These rights are amortized into Fees
for Other Financial Services in proportion to, and over the period of, the
estimated future net servicing income stream of the underlying mortgage loans.
The Corporation's policy for assessing impairment of these rights is based on
their fair values and is evaluated by stratifying the mortgage servicing rights
by interest rate bands. Fair value is determined considering market prices for
similar assets or based on discounted cash flows using market-based prepayment
estimates for similar coupons and incremental direct and indirect costs.
- --------------------------------------------------------------------------------
FEE-BASED REVENUE
Corporate finance and syndication fees primarily include fees received for
managing and syndicating loan arrangements; providing financial advisory
services in connection with leveraged buyouts, recapitalizations, and mergers
and acquisitions; arranging private placements; and underwriting debt and equity
securities. Corporate finance and syndication fees are recognized when the
services to which they relate have been provided. In addition, recognition of
syndication fees is subject to certain tests being satisfied.
Trust, custody and investment management fees primarily include fees received
in connection with personal, corporate, and employee benefit trust and
investment management activities. Fees for other financial services primarily
include fees received in connection with mortgage servicing, loan commitments,
standby letters of credit, compensating balances and brokerage and other fees.
Trust, custody and investment management fees and fees for other financial
services are generally recognized over the period the related service is
provided.
Credit card revenues primarily include fees received in connection with
credit card activities such as annual, late payment, cash advance and
interchange fees, as well as servicing fees earned in connection with
securitization activities. Credit card revenues are generally recognized as
billed, except for annual fees, which are recognized over a twelve-month period.
- --------------------------------------------------------------------------------
INCOME TAXES
The Corporation recognizes both the current and deferred tax consequences of all
transactions that have been recognized in the financial statements. Calculations
are based on the provisions of enacted tax laws and the tax rates in effect for
current and future years. The deferred tax liability (asset) is determined based
on enacted tax rates which will be in effect when the underlying items of income
and expense are expected to be reported to the taxing authorities. Net deferred
tax assets, whose realization is dependent on taxable earnings of future years,
are recognized when a more-likely-than-not criterion is met. Annual deferred tax
expense (benefit) is equal to the change in the deferred tax liability (asset)
account from the beginning to the end of the year. A current tax liability
(asset) is recognized for the estimated taxes payable or refundable for the
current year.
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income after deducting
preferred stock dividends by average common and common equivalent shares
outstanding, which reflect the dilutive effect of stock options and warrants
during the period. The dilutive effect of stock options and warrants is computed
under the treasury stock method using the average market price of the
Corporation's common stock for the period.
Earnings per common share, assuming full dilution, is computed based on the
average number of common shares outstanding during the period, plus the dilutive
effect of stock options, warrants, and any convertible preferred stock
outstanding during the period. The dilutive effect of outstanding stock options
and warrants is computed using the greater of the closing market price or the
average market price of the Corporation's common stock for the period. Any stock
options or warrants exercised or any preferred stock converted are assumed to
have occurred at the beginning of the period. Net income applicable to common
stock is adjusted for dividends on the convertible preferred stock for the
period.
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53
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars using prevailing rates of exchange. Gains and losses on foreign currency
translation from operations for which the functional currency is other than the
U.S. dollar, together with related hedges and tax effects, are reported in
Stockholders' Equity. For foreign operations for which the U.S. dollar is the
functional currency, gains and losses resulting from converting foreign currency
assets and liabilities to the U.S. dollar, including the related hedges, are
reported in the Income Statement.
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For purposes of preparing the Consolidated Statement of Cash Flows, the
Corporation defines cash and cash equivalents as those amounts included in the
balance sheet caption Cash and Due from Banks. Cash flows from loans and
deposits are reported on a net basis.
2 - TRADING ACTIVITIES
The Corporation uses its trading assets and liabilities to meet the financial
needs of its customers and to generate revenue through its trading activities.
The Corporation generates trading revenue through market-making, sales,
arbitrage and, to a lesser degree, positioning. A description of the various
classes of derivative and foreign exchange instruments used in the Corporation's
trading activities as well as the credit and market risk factors involved in its
trading activities are disclosed in Note Seventeen.
- --------------------------------------------------------------------------------
TRADING REVENUE
The following table sets forth the components of total trading-related revenue.
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Trading Revenue $1,270 $1,016 $1,173
Net Interest Income Impact(a) 703 442 166
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,973 $1,458 $1,339
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $ 535 $ 445 $ 492
Foreign Exchange Contracts(c) 444 584 431(e)
Debt Instruments and Other(d) 994 429 416
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,973 $1,458 $1,339
- --------------------------------------------------------------------------------
(a) Net interest income attributable to trading activities includes interest
recognized on interest-earning and interest-bearing trading-related positions as
well as management allocations reflecting the funding cost or benefit associated
with trading positions. This amount is included in the net interest income
caption on the Consolidated Statement of Income.
(b) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures, and forward rate agreements
and related hedges.
(c) Includes foreign exchange spot and option contracts.
(d) Includes U.S. and foreign government and government agency securities,
corporate debt securities, emerging markets debt instruments, debt-related
derivatives, equity securities, equity derivatives, and commodity derivatives.
(e) Reflects $70 million reduction as a result of losses sustained from
unauthorized foreign exchange transactions involving the Mexican peso.
TRADING ASSETS AND LIABILITIES
The following table presents trading assets and trading liabilities for the
dates indicated.
December 31, (in millions) 1996 1995
- ----------------------------------------------------------------------------------
Trading Assets - Debt and Equity Instruments:
U.S. Government, Federal Agencies and
Municipal Securities $ 8,523 $ 9,601
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,486 2,560
Debt Securities Issued by Foreign Governments 12,284 6,318
Debt Securities Issued by Foreign Financial Institutions 3,569 3,467
Loans 876 666
Corporate Securities 1,873 2,224
Other 1,766 1,376
- ----------------------------------------------------------------------------------
Total Trading Assets-Debt and Equity Instruments(a) $ 30,377 $26,212
- ----------------------------------------------------------------------------------
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $ 14,227 $12,408
Foreign Exchange Contracts 13,760 12,384
Stock Index Options and Commodity Contracts 1,667 1,033
Allowance for Credit Losses for
Risk Management Instruments (75) --
- ----------------------------------------------------------------------------------
Total Trading Assets-Risk Management Instruments $ 29,579 $25,825
- ----------------------------------------------------------------------------------
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $ 14,622 $13,975
Foreign Exchange Contracts 12,867 13,295
Stock Index Options and Commodity Contracts 1,202 831
- ----------------------------------------------------------------------------------
Trading Liabilities-Risk Management Instruments $ 28,691 $28,101
- ----------------------------------------------------------------------------------
Securities Sold, Not Yet Purchased $ 7,242 $ 6,240
- ----------------------------------------------------------------------------------
Structured Notes $ 2,203 $ --
- ----------------------------------------------------------------------------------
Total Trading Liabilities $ 38,136 $34,341
- ----------------------------------------------------------------------------------
(a) Includes emerging markets instruments of $5,500 million in 1996 and $3,654
million in 1995.
Average trading assets and average trading liabilities were as follows for
the periods indicated.
Year Ended December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Trading Assets-Debt and Equity Instruments $29,595 $20,935
- --------------------------------------------------------------------------------
Trading Assets-Risk Management Instruments $26,684 $30,397
- --------------------------------------------------------------------------------
Trading Liabilities-Risk Management Instruments $27,421 $31,665
Securities Sold, Not Yet Purchased 8,160 7,077
Structured Notes 126 --
- --------------------------------------------------------------------------------
Total Trading Liabilities $35,707 $38,742
- --------------------------------------------------------------------------------
3 - SECURITIES
See Note One for a discussion of the accounting policies relating to securities.
Cash proceeds from the sale of available-for-sale securities during 1996, 1995
and 1994 were $44,194 million, $54,290 million and $23,086 million,
respectively. Net gains from available-for-sale securities sold in 1996, 1995
and 1994 amounted to $135 million (gross gains of $281 million and gross losses
of $146 million), $130 million (gross gains of $570 million and gross losses of
$440 million) and $65 million (gross gains of $157 million and gross losses of
$92 million), respectively. There
71
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were no sales of held-to-maturity securities during the three years ended
December 31, 1996. During 1995, early redemption of certain held-to-maturity
securities by their issuers resulted in a $2 million gain.
In accordance with the adoption of a SFAS 115 Implementation Guide, the
Corporation reassessed the classification of all securities held during 1995.
The result of the one-time reassessment was the reclassification of $4.7 billion
of held-to-maturity securities to available-for-sale securities and $11 million
of held-to-maturity securities to trading assets. Unrealized net gains related
to the transfer of held-to-maturity securities to available-for-sale securities
were $21 million after-tax. The amortized cost of held-to-maturity securities
transferred to trading assets approximated the fair value.
The amortized cost and estimated fair value of available-for-sale securities
and held-to-maturity securities, including the impact of related derivatives,
were as follows for the dates indicated:
1996 1995
--------------------------------------- --------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
December 31, (in millions) Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $20,961 $ 18 $285 $20,694 $19,029 $205 $ 2 $19,232
Collateralized Mortgage Obligations 2,293 1 2 2,292 1,132 -- 8 1,124
Other, primarily U.S. Treasuries 12,250 3 193 12,060 5,020 4 53 4,971
Obligations of State and Political Subdivisions 325 2 -- 327 633 6 -- 639
Debt Securities Issued by Foreign Governments 6,893 100 3 6,990 8,084 234 146 8,172
Corporate Debt Securities 923 43 14 952 716 31 10 737
Equity Securities 957 116 25 1,048 999 169 4 1,164
Other, primarily Asset-Backed Securities(a) 328 1 1 328 1,099 9 6 1,102
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities $44,930 $284 $523 $44,691 $36,712 $658 $229 $37,141
- ------------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $ 1,584 $ 4 $ 8 $ 1,580 $ 1,782 $ 24 $ 1 $ 1,805
Collateralized Mortgage Obligations 2,075 6 9 2,072 2,624 11 6 2,629
Other, primarily U.S. Treasuries 73 -- -- 73 82 -- -- 82
Other, primarily Asset-Backed Securities(a) 123 1 -- 124 140 3 -- 143
- ------------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities $ 3,855 $ 11 $ 17 $ 3,849 $ 4,628 $ 38 $ 7 $ 4,659
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes collateralized mortgage obligations of private issuers which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations. See Note One for further
discussion.
The amortized cost, estimated fair value, and average yield at December 31,
1996 of the Corporation's available-for-sale and held-to-maturity securities by
contractual maturity range are presented in the following table.
Available-for-Sale Securities Held-to-Maturity Securities
---------------------------------- ----------------------------------
Maturity Schedule of Securities Amortized Fair Average Amortized Fair Average
December 31, 1996 (in millions) Cost Value Yield(a) Cost Value Yield(a)
- -----------------------------------------------------------------------------------------------------------------
Due in One Year or Less $ 2,571 $ 2,571 6.47% $ 158 $ 158 5.64%
Due After One Year Through Five Years 15,282 15,293 5.96 546 546 6.40
Due After Five Years Through Ten Years 5,275 5,189 5.90 696 700 7.19
Due After Ten Years(b) 21,802 21,638 7.06 2,455 2,445 6.78
- -----------------------------------------------------------------------------------------------------------------
Total Securities $44,930 $44,691 6.52% $3,855 $3,849 6.75%
- -----------------------------------------------------------------------------------------------------------------
(a) The average yield is based on amortized cost balances at the end of the
year. Yields are derived by dividing interest income, adjusted for the effect of
related derivatives on available-for-sale securities and the amortization of
premiums and accretion of discounts, by total amortized cost. Taxable-equivalent
yields are used where applicable.
(b) Securities with no stated maturity are included with securities with a
remaining maturity of ten years or more. Substantially all of the Corporation's
MBSs and CMOs are due in ten years or more based on contractual maturity. The
estimated duration, which reflects anticipated future prepayments based on a
consensus of dealers in the market, is approximately 5 years for MBSs, and less
than 1 year for CMOs.
72
55
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
4 - LOANS
The composition of the loan portfolio at each of the dates indicated was as
follows:
1996 1995
-------------------------------------- ---------------------------------------
December 31, (in millions) Domestic Foreign Total Domestic Foreign Total
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER:
1-4 Family Residential Mortgages $ 36,665 $ 1,276 $ 37,941 $ 34,118 $ 1,102 $ 35,220
Credit Card 12,157 537 12,694 17,078 493 17,571
Auto Financings 11,815 -- 11,815 8,397 -- 8,397
Other Consumer 9,386 1,479 10,865 10,003 1,445 11,448
- ------------------------------------------------------------------------------------------------------------------------------------
Total Consumer 70,023 3,292 73,315 69,596 3,040 72,636
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial and Industrial 34,996 23,199 58,195 32,972 20,936 53,908
Commercial Real Estate:
Commercial Mortgage 5,040 755 5,795 5,514 714 6,228
Construction 894 45 939 1,148 96 1,244
Financial Institutions 5,570 6,480 12,050 5,766 5,422 11,188
Foreign Governments and Official Institutions -- 6,171 6,171 -- 6,076 6,076
- ------------------------------------------------------------------------------------------------------------------------------------
Total Commercial 46,500 36,650 83,150 45,400 33,244 78,644
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans 116,523 39,942 156,465 114,996 36,284 151,280
Unearned Income (1,223) (150) (1,373) (915) (158) (1,073)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $ 115,300 $ 39,792 $ 155,092 $ 114,081 $ 36,126 $ 150,207
- ------------------------------------------------------------------------------------------------------------------------------------
Bonds that have been issued by foreign governments (such as Mexico, Venezuela
and Brazil) to financial institutions, including the Corporation, as part of a
debt renegotiation (i.e., "Brady Bonds") are classified as loans but are subject
to the provisions of SFAS 115.
As a result of the reassessment of the portfolio in connection with the
adoption of the SFAS 115 Implementation Guide, the entire held-to-maturity
portfolio of Brady Bonds, other loans, and related derivatives (measured
pursuant to SFAS 115) were reclassified to the available-for-sale category in
1995. The amount of the reclassification was $1,972 million at amortized cost.
Unrealized net losses related to the transfer were $454 million, after-tax.
A significant portion of the Brady Bonds are collateralized by zero-coupon
U.S. Treasury obligations. Up to two-years' interest on Brady Bonds is also
collateralized by U.S. Treasury obligations. Management continually evaluates
and monitors the ability of the foreign governments to meet their obligations
under the Brady Bonds that they have issued and that are included in the
portfolio, and believes that any unrealized losses on these securities are
temporary in nature.
The amortized cost and estimated fair value of loans measured pursuant to
SFAS 115 (which are all available-for-sale), including the impact of related
derivatives, for the dates indicated were as follows:
December 31, (in millions) 1996 1995
- -------------------------------------------------
Amortized Cost $ 1,869 $ 2,849
Gross Unrealized Gains 93 47
Gross Unrealized Losses (369) (917)
- -------------------------------------------------
Fair Value $ 1,593 $ 1,979
- -------------------------------------------------
The 1996 results included a net loss of $80 million (gross gains of $155
million and gross losses of $235 million) related to the disposition of emerging
market securities. The 1995 results included a net loss of $49 million (gross
gains of $204 million and gross losses of $253 million) on the disposition of
emerging market securities. A net gain of $233 million (gross gains of $348
million and gross losses of $115 million) was recorded on the disposition of
emerging market securities in 1994. Cash proceeds from the sales of these
available-for-sale loans during 1996, 1995 and 1994 were $952 million, $1,193
million and $1,079 million, respectively.
IMPAIRED LOANS
The following table sets forth information about the Corporation's impaired
loans. The Corporation uses the discounted cash flow method as its primary
method for valuing its impaired loans.
December 31, (in millions) 1996 1995
- -----------------------------------------------------------------------
Impaired Loans with an Allowance $ 535 $ 481
Impaired Loans without an Allowance(a) 182 740
- -----------------------------------------------------------------------
Total Impaired Loans $ 717 $1,221
- -----------------------------------------------------------------------
Allowance for Impaired Loans under SFAS 114(b) $ 194 $ 152
Average Balance of Impaired Loans During the Year $1,104 $1,534
Interest Income Recognized on Impaired Loans
During the Year $ 30 $ 26
- -----------------------------------------------------------------------
(a) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the loan. Such loans do not
require an allowance under SFAS 114.
(b) The allowance for impaired loans under SFAS 114 is a part of the
Corporation's overall Allowance for Loan Losses.
73
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 - ALLOWANCE FOR LOAN LOSSES
The table below summarizes the changes in the allowance for loan losses.
Year Ended December 31, (in millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Total Allowance at January 1 $ 3,784 $ 3,894 $ 4,445
Provision for Credit Losses 897 758 1,050
Charge-Offs (1,187) (1,278) (1,970)
Recoveries 290 438 506
- ----------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (897) (840) (1,464)
Charge Related to Conforming Credit Card Charge-Off Policies (102)(a) -- --
Charge for Assets Transferred to Held for Accelerated Disposition -- -- (148)
Transfer to Trading Assets - Risk Management Instruments (See Note One) (75) -- --
Transfer to Other Liabilities (See Note One) (70) -- --
Allowance Related to Purchased (Disposed) Subsidiaries 13 (31)(b) 4
Foreign Exchange Translation Adjustment and Other (1) 3 7
- ----------------------------------------------------------------------------------------------------------------------
Total Allowance at December 31 $ 3,549 $ 3,784 $ 3,894
- ----------------------------------------------------------------------------------------------------------------------
(a) During the 1996 first quarter, the Corporation incurred a charge of $102
million as a result of conforming its credit card charge-off policies.
(b) Includes $28 million related to the sale of banking operations in southern
and central New Jersey.
6 - LONG-TERM DEBT
The following table is a summary of long-term debt (net of unamortized original
issue debt discount, where applicable) displayed by remaining maturity at
December 31, 1996.
By remaining maturity at December 31,(a) Under After 1996 1995
(in millions) 1 year 1-5 years 5 years Total Total
- ------------------------------------------------------------------------------------------------------------------------------
Parent Company:
Senior Debt:
Fixed Rate $ 617 $ 958 $ 88 $ 1,663 $ 1,503
Variable Rate 186 1,397 211 1,794 2,319
Modified Interest Rates(b) 5.06 - 8.31% 2.82 - 6.63% 5.40 - 10.17% 2.82 - 10.17% 5.30 - 10.21%
Subordinated Debt:
Fixed Rate 200 2,056 3,414 5,670 5,437
Variable Rate 267 300 715 1,282 1,275
Modified Interest Rates(b) 5.69 - 7.50% 5.56 - 10.38% 5.45 - 9.05% 5.45 - 10.38% 5.71 - 10.38%
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal $1,270 $4,711 $4,428 $10,409 $10,534
- ------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Senior Debt:
Fixed Rate $ 22 $ 270 $ 188 $ 480 716
Variable Rate 1 225 -- 226 10
Modified Interest Rates(b) 5.38 - 10.25% 5.86 - 10.26% 4.00 - 10.60% 4.00 - 10.60% 2.67 - 14.50%
Subordinated Debt:
Fixed Rate 29 -- 974 1,003 969
Variable Rate 196 150 250 596 596
Modified Interest Rates(b) 5.63 - 10.00% 5.94 - 5.94% 3.23 - 7.25% 3.23 - 10.00% 5.75 - 7.25%
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal $ 248 $ 645 $1,412 $ 2,305 $ 2,291
- ------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $1,518 $5,356 $5,840 $12,714(c) $12,825
- ------------------------------------------------------------------------------------------------------------------------------
(a) Remaining maturity is based on contractual maturity of the debt.
(b) The interest rates shown have been adjusted to reflect the effect of ALM
derivative contracts, primarily interest rate swaps, used to convert the
Corporation's fixed-rate debt to variable rates. The interest rates shown for
variable-rate issues, including those fixed-rate issues converted to
variable-rate, are those in effect at December 31, 1996.
(c) At December 31, 1996, long-term debt aggregating $2.2 billion was redeemable
at the option of the Corporation, in whole or in part, prior to maturity, based
on the terms specified in their respective notes. The aggregate principal amount
of debt that matures in each of the five years subsequent to December 31, 1996
are $1,518 million in 1997, $1,131 million in 1998, $1,596 million in 1999,
$1,644 million in 2000, and $985 million in 2001.
74
57
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
The Corporation issues long-term debt denominated in various currencies,
although predominately in U.S. dollars, with both fixed and variable interest
rates.
Fixed-rate debt outstanding at December 31, 1996 mature at various dates
through 2013 and carry contractual interest rates ranging from 4.00% to 11.83%.
The consolidated weighted-average interest rates on fixed-rate debt at December
31, 1996 and 1995 were 7.78% and 7.81%, respectively. A majority of the
Corporation's fixed-rate debt has been converted to variable rates through the
use of swap derivative contracts. Variable-rate debt outstanding, with
contractually-determined interest rates ranging from 4.38% to 6.54% at December
31, 1996, mature at various dates through 2009. The consolidated
weighted-average interest rates on variable-rate debt at December 31, 1996 and
1995 were 5.69% and 5.99%, respectively.
Included in long-term debt are equity commitment notes and equity contract
notes totaling $968 million at both December 31, 1996 and 1995.
Equity commitment notes require, by their terms, the Corporation to issue,
prior to their maturity, shares of common stock or perpetual preferred stock or
other securities of the Corporation (collectively, "Capital Securities")
approved by the Federal Reserve Board equal to 100% of the original aggregate
principal amount of the notes.
Equity contract notes require, by their terms, the Corporation to exchange
the notes at maturity for Capital Securities with a market value equal to the
principal amount of the notes or, at the Corporation's option, to pay the
principal of the notes from amounts representing designated proceeds from the
sale of Capital Securities.
At December 31, 1996, the Corporation had designated proceeds from the sale
of Capital Securities in an amount sufficient to satisfy fully the dedication
requirements of its equity commitment and equity contract notes.
The Corporation has guaranteed several long-term debt issues of its
subsidiaries. Guaranteed debt totaled $405 million and $420 million at December
31, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES
In December 1996, Chase Capital I, a Delaware statutory business trust owned by
the Corporation, issued $600 million of 7.67% Capital Securities, Series A
("Series A Capital Securities"). In connection with this issuance, Chase Capital
I purchased from the Corporation $600 million of 7.67% Junior Subordinated
Deferrable Interest Debentures, Series A ("Series A Subordinated Debentures").
The Series A Subordinated Debentures are the sole assets of the trust, bear
interest at the rate of 7.67% per annum and mature on December 1, 2026. The
Corporation has, by the terms of the indenture under which the Series A
Subordinated Debentures were issued and the related trust agreement and
guarantee, fully and unconditionally guaranteed all of Chase Capital I's
obligations under the Series A Capital Securities. The Series A Capital
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Series A Subordinated Debentures at their stated maturity or
earlier redemption.
Distributions on the Series A Capital Securities are payable semi-annually
in arrears on June 1 and December 1 of each year, commencing June 1, 1997 and
are recorded as interest expense by the Corporation. The Series A Capital
Securities are treated as Tier I Capital for the Corporation.
7 - PREFERRED STOCK OF SUBSIDIARY
In September 1996, Chase Preferred Capital Corporation ("Chase Preferred
Capital"), a wholly owned subsidiary of The Chase Manhattan Bank, issued 22
million shares of 8.10% Cumulative Preferred Stock, Series A ("Series A
Preferred Shares"), with a liquidation preference of $25 per share. Chase
Preferred Capital is a real estate investment trust established for the purpose
of acquiring, holding and managing real estate mortgage assets. Dividends on
Series A Preferred Shares are cumulative and are payable quarterly in arrears
commencing December 31, 1996 and are recorded as minority interest expense by
the Corporation.
The Series A Preferred Shares are generally not redeemable prior to September
18, 2001. On or after such date, the Series A Preferred Shares will be redeemed
for cash at the option of Chase Preferred Capital, in whole or in part, at a
redemption price of $25 per share, plus accrued and unpaid dividends, if any,
thereon. The Series A Preferred Shares are treated as Tier 1 Capital for the
Corporation. The Series A Preferred Shares are not subject to any sinking fund
or mandatory redemption and are not convertible into any other securities of
Chase Preferred Capital or the Corporation or any of its subsidiaries.
8 - PREFERRED STOCK
The Corporation is authorized to issue 200 million shares of preferred stock, in
one or more series, with a par value of $1 per share. At both December 31, 1996
and 1995, 82.0 million shares of preferred stock were outstanding.
Dividends on shares of each series of preferred stock are payable quarterly
and are cumulative. All the preferred stocks outstanding have preference over
the Corporation's common stock with respect to the payment of dividends and the
distribution of assets in the event of a liquidation or dissolution of the
Corporation.
75
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the Corporation's preferred stocks outstanding:
Stated Value and Shares Outstanding at December 31, Earliest Rate in Effect at
Redemption Price Per Share(a) (in millions) 1996 (in millions) 1995 Redemption Date December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
10.50% Cumulative $25.00 5.6 $ 140 $ 140 9/30/1998 10.500%
9.76% Cumulative 25.00 4.0 100 100 9/30/1999 9.760
10.96% Cumulative 25.00 4.0 100 100 6/30/2000 10.960
10.84% Cumulative 25.00 8.0 200 200 6/30/2001 10.840
9.08% Cumulative 25.00 6.0 150 150 3/31/1997 9.080
8.375% Cumulative 25.00 14.0 350 350 6/1/1997 8.375
8.50% Cumulative 25.00 6.8 170 170 6/30/1997 8.500
8.32% Cumulative 25.00 9.6 240 240 9/30/1997 8.320
7.92% Cumulative 100.00 2.0(b) 200 200 10/1/1997 7.920
8.40% Cumulative 25.00 6.9 172 172 3/31/1998 8.400
7.58% Cumulative 100.00 2.0(b) 200 200 4/1/1998 7.580
7.50% Cumulative 100.00 2.0(b) 200 200 6/1/1998 7.500
Adjustable Rate, Series L 100.00 2.0 200 200 6/30/1999 5.964(c)
Adjustable Rate, Series N 25.00 9.1 228 228 6/30/1999 6.035(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock 82.0 $2,650 $2,650
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Redemption price includes accrued but unpaid dividends, if any.
(b) Shares of such series are represented by 8.0 million depositary shares, each
representing .25 of a share.
(c) Floating rates are based on certain money market rates. The minimum and
maximum rates are 4.50% and 10.50%, respectively, for each of Series L and
Series N Preferred.
9 - COMMON STOCK
The Corporation is authorized to issue 750 million shares of common stock, with
a par value $1 per share. The number of shares of common stock issued and
outstanding was as follows:
December 31, 1996 1995 1994
- -------------------------------------------------------------------
Issued 440,747,317 (a) 457,587,675 447,110,332
Held in Treasury (9,936,716)(a) (22,583,225) (18,337,533)
- -------------------------------------------------------------------
Outstanding 430,810,601 435,004,450 428,772,799
- -------------------------------------------------------------------
(a) Under the terms of the merger agreement on March 31, 1996, all 18.6 million
treasury shares of Chase were cancelled and retired.
During 1996, the Corporation repurchased approximately 26.7 million shares of
its outstanding common stock. Of this amount, 15.2 million shares were
repurchased primarily to meet the anticipated needs of the Corporation's
employee stock option and incentive plans and were part of a buy-back program
that terminated at September 30, 1996. The remaining 11.5 million shares were
repurchased in the fourth quarter of 1996 as part of a stock repurchase plan
announced in October 1996.
During 1996, approximately 19.4 million shares were issued (of which 16.9
million were from treasury) under various employee stock option and incentive
plans, and 3.2 million shares were issued (of which all were from treasury) upon
the exercise of warrants which had originally been issued during 1993 by Chase
in settlement of a legal action. The warrants expired June 30, 1996.
During 1995, 7.6 million shares were issued from treasury in connection with
the conversion of the Corporation's 10% convertible preferred stock and 6.9
million shares were issued in connection with the acquisition of the U.S. Trust
securities processing businesses.
As of December 31, 1996, approximately 76 million shares of common stock were
reserved for issuance under various employee incentive, option and stock
purchase plans and under the Corporation's Dividend Reinvestment Plan.
Under the Corporation's Dividend Reinvestment Plan, stockholders may reinvest
all or part of their quarterly dividends in shares of common stock.
Common stock newly issued, or distributed from treasury, during 1996, 1995
and 1994 was as follows:
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------
Employee Benefit and
Compensation Plans(a) 19,357,254 17,649,425 2,104,924
Stock Warrants 3,169,695 53,362 2,222
Conversion of 10% Convertible
Preferred Stock -- 7,639,424 --
Acquisition of U.S. Trust -- 6,883,685 --
Dividend Reinvestment and
Stock Purchase Plans 118,080 385,513 998,665
- -------------------------------------------------------------------
Total Shares Newly Issued or
Distributed from Treasury(b) 22,645,029 32,611,409 3,105,811
- -------------------------------------------------------------------
(a) Amount includes 11,184,277 and 11,385,569 shares of common stock issued in
1996 and 1995, respectively, under broad-based employee stock option plans. See
Note Fourteen for a discussion of the Corporation's employee stock option plans.
(b) During 1996, 1995 and 1994, shares distributed from treasury were
20,056,837, 22,132,496 and 1,055,455, respectively.
10 - FEES FOR OTHER FINANCIAL SERVICES
Details of fees for other financial services were as follows:
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Commissions on Letters of Credit and Acceptances $ 330 $ 350 $ 334
Fees in Lieu of Compensating Balances 295 281 314
Mortgage Servicing Fees 204 212 180
Loan Commitment Fees 120 123 116
Other Fees 580 487 469
- --------------------------------------------------------------------------------
Total Fees for Other Financial Services $ 1,529 $ 1,453 $1,413
- --------------------------------------------------------------------------------
76
59
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
11 - RESTRUCTURING CHARGES AND OTHER EXPENSE
Restructuring Charges: In connection with the Merger, $1.9 billion of one-time
merger-related costs have been identified, of which $1.65 billion was taken as a
restructuring charge on March 31, 1996. An additional $164 million of
merger-related expenses, out of an expected $250 million of merger-related
expenses, were incurred during 1996 and included in the Restructuring Charge and
Expenses caption of the income statement. The remaining merger-related expenses
are expected to be substantially incurred over the next year as these costs do
not qualify for immediate recognition under an existing accounting pronouncement
and were not included in the $1.65 billion charge taken on March 31, 1996. These
costs will also be reflected in the Restructuring Charge and Expenses caption
when incurred. The $1.9 billion of merger-related costs reflects severance and
other termination-related costs to be incurred in connection with anticipated
staff reductions (approximately $600 million), costs in connection with planned
dispositions of certain facilities, premises and equipment (approximately $700
million), and other merger-related expenses, including costs to eliminate
redundant back office and other operations of Chemical and Chase and other
expenses related directly to the Merger (approximately $600 million).
At December 31, 1996, the reserve balance associated with the above charge
was approximately $917 million, of which $280 million related to severance and
other termination-related costs, $540 million related to the disposition of
certain facilities and premises and equipment, and $97 million related to other
merger costs, including costs to eliminate redundant back office and other
operations.
The 1995 results included a $15 million restructuring charge relating to
exiting from a futures brokerage business.
In 1994, the Corporation incurred the following restructuring charges: $260
million taken in connection with a program to improve earnings per share, $105
million relating to a voluntary retirement program offered to eligible
employees, $52 million for other productivity initiatives, and $48 million
related to the closing of 50 New York branches and a staff reduction of 650.
Other Expense: Details of other expense were as follows:
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Other Expense:
Professional Services $ 530 $ 559 $ 564
Marketing Expense 346 372 371
Telecommunications 326 333 294
Amortization of Intangibles 169 182 192
Minority Interest 54 27 21
FDIC Assessments 9(a) 117(a) 250
All Other 1,206 1,101 1,242
- --------------------------------------------------------------------------------
Total Other Expense $2,640 $2,691 $2,934
- --------------------------------------------------------------------------------
(a) Reflects the impact of the reduction in the FDIC assessment rate.
12 - INCOME TAXES
Deferred income tax expense (benefit) results from differences between amounts
of assets and liabilities as measured for income tax return and financial
reporting purposes. The significant components of Federal deferred tax assets
and liabilities are reflected in the following table.
December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Federal Deferred Tax Assets:
Reserves for Credit Losses $ 911 $ 933
Reserves Other Than Credit Losses 1,004 716
Fair Value Adjustments-Available-for-Sale-Securities 148 137
Interest and Fee Accrual Differences 91 101
Foreign Operations 401 285
Postretirement Benefits 279 270
Other 187 215
- --------------------------------------------------------------------------------
Gross Federal Deferred Tax Assets $3,021 $2,657
- --------------------------------------------------------------------------------
Federal Deferred Tax Liabilities:
Leasing Transactions $1,290 $1,120
Pension Benefits 81 129
Depreciation and Amortization 156 83
Other 163 113
- --------------------------------------------------------------------------------
Gross Federal Deferred Tax Liabilities $1,690 $1,445
- --------------------------------------------------------------------------------
Deferred Federal Tax Asset Valuation Reserve $ 98 $ 115
- --------------------------------------------------------------------------------
Net Federal Deferred Tax Asset After Valuation Reserve $1,233 $1,097
- --------------------------------------------------------------------------------
The Corporation's valuation reserve for Federal income taxes of $98 million
at December 31, 1996 related primarily to tax benefits associated with foreign
operations which are subject to tax law limitations on realization. This
valuation reserve was established in accordance with the requirements of SFAS
109 for tax benefits available to the Corporation but for which realization was
in doubt. A Federal deferred tax asset has been recorded in accordance with SFAS
109 related to foreign deferred taxes. Foreign deferred tax liabilities were
$220 million as of December 31, 1996. The Corporation expects that when paid,
these foreign taxes will be creditable against its Federal income tax liability.
Deferred New York State and City tax assets approximated $68 million as of
December 31, 1996. The New York State and City valuation reserve of $148 million
was released to income during the first quarter of 1996. Under the principles of
SFAS 109, the valuation reserve is no longer required since realization of all
New York State and City tax benefits is not in doubt.
The components of income tax expense included in the Consolidated Statement
of Income were as follows:
77
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Current Income Tax Expense:
Federal $ 1,022 $ 1,232 $ 605
Foreign 541 381 258
State and Local 169 264 239
- --------------------------------------------------------------------------------
Total Current Expense (Benefit) 1,732 1,877 1,102
- --------------------------------------------------------------------------------
Deferred Income Tax Expense (Benefit):
Federal (99) (164) 266
Foreign (101) 111 42
State and Local (182) 18 65
- --------------------------------------------------------------------------------
Total Deferred Expense (Benefit) (382) (35) 373
- --------------------------------------------------------------------------------
Total Income Tax Expense $ 1,350 $ 1,842 $1,475
- --------------------------------------------------------------------------------
The preceding table does not reflect the tax effects of unrealized gains and
losses with respect to available-for-sale securities that are recorded directly
in stockholders' equity, pursuant to SFAS 115, and certain tax benefits
associated with the Corporation's employee stock plans. Stockholders' equity
increased by $254 million and $676 million, respectively, in 1996 and 1994 and
decreased by $38 million in 1995 as a result of the tax effects.
The tax expense applicable to securities gains and losses for the years 1996,
1995 and 1994 was $51 million, $68 million, and $73 million, respectively.
A reconciliation of the income tax expense computed at the applicable
statutory U.S. income tax rate to the actual income tax expense for the past
three years is shown in the following table.
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Statutory U.S. Federal Tax Expense $ 1,334 $ 1,684 $ 1,386
Increase (Decrease) in Tax Expense
Resulting From:
(Recognized) Unrecognized Tax Benefits -- -- (70)
Tax-Exempt Income (27) (50) (48)
State and Local Income Taxes, Net of
Federal Income Tax Benefit (8) 183 197
Nondeductible Expense 25 81 41
Other -- Net 26 (56) (31)
- --------------------------------------------------------------------------------
Total Income Tax Expense $ 1,350 $ 1,842 $ 1,475
- --------------------------------------------------------------------------------
The following table presents the domestic and foreign components of income
before income taxes for the past three years.
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Domestic $2,458 $3,710 $2,369
Foreign(a) 1,353 1,102 1,592
- --------------------------------------------------------------------------------
Income Before Income Taxes $3,811 $4,812 $3,961
- --------------------------------------------------------------------------------
(a) For purposes of this disclosure, foreign income is defined as income
generated from operations located outside the United States.
13 - POSTRETIREMENT EMPLOYEE BENEFITS PLANS
New domestic postretirement plans for the Corporation were approved in 1996, and
the prior plans of Chase and Chemical were merged as of December 31, 1996.
- --------------------------------------------------------------------------------
PENSION PLANS
As of December 31, 1996, the Corporation had one noncontributory pension plan
that provided defined benefits to substantially all domestic employees (the
"domestic pension plan"). Commencing in 1997, the domestic pension plan employs
a cash balance form of defined benefit formula that provides for benefits based
on salary and service. The prior domestic pension plans of both Chase and
Chemical also provided defined benefits to substantially all domestic employees.
Chase's domestic plan employed a cash balance formula that provided for benefits
based on salary and service, subject to a minimum benefit level, while
Chemical's domestic plan included both a cash balance feature and a
final-average-pay feature. Contributions to the Corporation's domestic pension
plan are made within a range permitted under applicable law, consistent with the
prior plans of Chase and Chemical.
The accompanying tables present the funding status and the components of the
net pension expense for the Corporation's domestic pension plan.
FUNDED STATUS OF DOMESTIC PENSION PLAN
December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Actuarial Present Value of Benefit Obligation:
Accumulated Benefit Obligation - Vested Benefits $(1,746) $(1,724)
Accumulated Benefit Obligation - Nonvested Benefits (54) (71)
Additional Benefits Based on Future Salary Levels (228) (226)
- --------------------------------------------------------------------------------
Projected Benefit Obligation (2,028) (2,021)
Plan Assets at Fair Value(a) 2,349 2,419
Plan Assets in Excess of Projected Benefit Obligation 321 398
Unrecognized Net (Gain) Loss (64) 83
Unrecognized Net (Asset) (33) (49)
Unrecognized Prior Service Cost (Benefit) 66 (16)
- --------------------------------------------------------------------------------
Prepaid Pension Cost Reported in Other Assets $ 290 $ 416
- --------------------------------------------------------------------------------
Weighted-Average Annualized Actuarial Assumptions:
Discount Rate 7.50% 7.25%
Rate of Increase in Future Compensation 5.00 5.00
- --------------------------------------------------------------------------------
(a) Consists primarily of listed stocks, fixed-income securities and
participation rights.
78
61
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
COMPONENTS OF DOMESTIC NET PENSION EXPENSE
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Cost of Benefits Earned $ 170 $ 146 $ 171
Interest Cost on Projected Benefit Obligation 123 126 104
Actual (Gain) Loss on Plan Assets (294) (430) 16
Net Amortization and Deferral 99 246 (196)
- --------------------------------------------------------------------------------
Net Periodic Pension Expense Reported in
Employee Benefits Expense $ 98 $ 88 $ 95
- --------------------------------------------------------------------------------
Weighted-Average Annualized
Actuarial Assumptions:
Discount Rate 7.25% 8.65% 7.39%
Assumed Rate of Long-Term Return
on Plan Assets 8.50 9.32 8.50
Rate of Increase in Future Compensation 5.00 5.41 5.42
- --------------------------------------------------------------------------------
During 1994, Chase offered and completed a voluntary retirement program in
which eligible participants in the postretirement plans received accelerated and
enhanced benefits if they elected to retire under the program. As a result of
this voluntary retirement program, a restructuring charge of $105 million was
taken, primarily relating to pension benefits.
The Corporation also has a number of other defined benefit pension plans,
domestic plans not subject to Title IV of the Employee Retirement Income
Security Act and several foreign pension plans. The Corporation's funding
strategy for these plans is based on plan and legal requirements. Employee
Benefits expense related to these plans totaled $47 million in 1996, $45 million
in 1995, and $30 million in 1994. At December 31, 1996 and 1995, the
Corporation's liability included in Accrued Expenses related to those plans it
has elected not to prefund fully totaled $177 million and $170 million,
respectively.
The Corporation has several defined contribution plans. The most significant
is The 401(k) Savings Plan, which replaced similar plans of both Chase and
Chemical. The plan, subject to certain limits, allows domestic employees to make
tax-deferred investments and earn matching contributions from the Corporation.
In addition, several foreign locations provide defined contribution plans.
Employee Benefits expense related to all defined contribution plans totaled $95
million in 1996, $94 million in 1995 and $86 million in 1994.
During 1996, the Corporation also recognized a one-time pre-tax $40 million
charge as a result of conforming retirement benefits provided to foreign
employees.
- --------------------------------------------------------------------------------
POSTRETIREMENT MEDICAL AND LIFE INSURANCE
The Corporation provides postretirement medical and life insurance benefits to
substantially all domestic employees who meet certain age and length-of-service
requirements at retirement ("current benefits"). Consistent with the benefits
previously provided by Chase and Chemical, the benefits provided by the
Corporation commencing in 1997 vary with length of service and date of hire, and
provide for limits on the Corporation's share of covered medical benefits. As
with the prior benefits, the current medical benefits are contributory and the
current life insurance benefits are noncontributory. The Corporation has not
prefunded these benefits.
Effective January 1, 1995, the Corporation adopted SFAS 106 for
postretirement medical benefits for certain foreign employees. Consistent with
the January 1, 1993 adoption of SFAS 106 for domestic employees, the Corporation
elected to expense the entire unrecognized accumulated obligation as of the date
of adoption of SFAS 106 related to its foreign employees via a one-time pre-tax
charge of $17 million ($11 million after-tax).
The accompanying tables present the components of the liability and periodic
expense related to providing postretirement medical and life insurance benefits.
The discount rates and rates of increase in future compensation used to
determine the actuarial values for these benefits are generally consistent with
those used for the domestic pension plan. During 1996, the assumed
weighted-average medical benefits cost trend rate used to measure the expected
cost of benefits covered was 10.4%, declining gradually to a floor of 5.7%. The
effect of a 1% increase in the assumed medical benefits cost trend rate would be
to increase the 1996 periodic expense by approximately 5%. As of December 31,
1996, the cost trend rate used was 10% for 1997, declining gradually over seven
years to a floor of 5.25%. The effect of a 1% increase in the assumed medical
cost trend rate would be to increase the December 31, 1996 accumulated
obligation by approximately 5%.
COMPONENTS OF POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Accumulated Benefit Obligation:
Retirees $(617) $(651)
Active Employees (162) (167)
- --------------------------------------------------------------------------------
Accumulated Benefit Obligation (779) (818)
Unrecognized Net (Gain) Loss (28) 40
Unrecognized Prior Service Cost 2 --
- --------------------------------------------------------------------------------
Accrued Postretirement Medical and Life Insurance
Benefits Reported in Accrued Expenses $(805) $(778)
- --------------------------------------------------------------------------------
COMPONENTS OF NET POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Cost of Benefits Earned $11 $ 9 $ 10
Interest Cost on Accumulated Benefit Obligation 56 59 52
Amortization of Net Gain -- (3) (1)
- --------------------------------------------------------------------------------
Net Postretirement Medical and Life Insurance
Expense Reported in Employee Benefits Expense $67 $ 65 $ 61
- --------------------------------------------------------------------------------
The decrease in the accumulated benefit obligation as of December 31, 1996,
resulted primarily from the changes in assumptions.
14 - EMPLOYEE STOCK-BASED INCENTIVES
Following is a description of the terms of stock-based awards granted during the
past three years and a discussion of the pro forma impact that the
fair-value-based method, if adopted for income statement recognition purposes,
would have on the Corporation's earnings. As a result of the Merger, the
Corporation assumed all outstandings awards of prior Chase plans at a conversion
rate of 1.04 for each outstanding award.
79
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
KEY EMPLOYEE STOCK-BASED AWARDS
The Corporation has a long-term stock-based incentive plan (the "LTIP") that
provides for grants of common stock-based awards, including stock options,
restricted stock and restricted stock units ("RSUs"), to certain key employees.
Awards were also granted under the prior Chase and Chemical plans. In addition,
during 1995, a plan was initiated under which, effective January 1, 1996, a
portion of incentive compensation exceeding specified levels is paid in
restricted stock or RSUs.
Under the LTIP and prior plans, stock options have been granted with exercise
prices equal to the Corporation's common stock price on the grant date.
Generally, options cannot be exercised until one year after the grant date, and
become exercisable over various periods as determined at the time of the grant.
Options generally expire ten years after the grant date. The accompanying table
presents a summary of key employee option activity during the last three years.
KEY EMPLOYEE STOCK OPTIONS
1996 1995 1994
-------------------------- -------------------------- ---------------------------
(Amounts in thousands, except per share amounts) Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Year Ended December 31, Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, January 1 21,836 $ 35.83 21,924 $ 33.27 18,003 $ 31.37
Granted 5,327 58.32 4,937 42.09 6,033 36.34
Exercised (5,132) 34.23 (4,389) 30.04 (1,405) 21.18
Cancelled (430) 48.69 (636) 36.11 (707) 35.14
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 21,601(a) $ 41.49 21,836 $ 35.83 21,924 $ 33.27
- ------------------------------------------------------------------------------------------------------------------------------------
Options Exercisable, December 31 12,995 $ 34.91 12,748 $ 32.45 12,793 $ 30.34
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Of the total options outstanding at December 31, 1996, 1,186,000 options
(all exercisable) had exercise prices ranging from $10.22 to $25, or $14.17 on
average, and a remaining life of 4.0 years; 15,448,000 options (11,803,000 were
exercisable) had exercise prices ranging from $25 to $50, or $38.19 on average,
and a weighted-average remaining contractual life of 6.5 years; 4,967,000
options (6,000 exercisable) had exercise prices ranging from $50 to $70.06, or
$58.27 on average, and a remaining life of 9.0 years.
Restricted stock and RSUs are granted at no cost to the recipient. Restricted
stock and RSUs are subject to forfeiture until certain restrictions have lapsed,
including continued employment for a specified period. The recipient of a share
of restricted common stock is entitled to voting rights and dividends. An RSU
entitles the recipient to receive a share of common stock (or cash, in some
cases) after a specified period of continued employment; the recipient is
entitled to receive cash payments equivalent to dividends on the underlying
common stock.
Under the LTIP, vesting for most restricted shares and RSUs accelerates if
the stock price reaches and sustains target prices for a minimum period (the
"targets"). For half of the award, vesting is conditioned solely on continued
employment; for the other half, the award is forfeited in its entirety if the
targets are not achieved ("forfeitable restricted stock and RSUs"). During 1996,
2,400,000 of such awards (all payable solely in stock) were granted. During 1995
and 1994, 859,000 (67,000 payable in cash) and 901,000 (68,000 payable in cash),
respectively, of such awards were granted; all awards granted in 1995 and 1994
vested as a result of the targets having been achieved in 1996 and 1995.
Additional restricted stock and RSUs are outstanding for which vesting is
conditioned solely on continued employment. During 1996, 1995 and 1994,
respectively, 207,000, 489,000 and 156,000 of such awards were granted. In 1996,
these awards were primarily issued under the aforementioned plan, under which a
portion of incentive compensation exceeding specified levels is paid in common
stock. Awards in 1995 and 1994 were granted primarily under the previous Chase
plan.
- --------------------------------------------------------------------------------
BROAD-BASED EMPLOYEE STOCK OPTIONS
In December 1996, the Corporation adopted its Value Sharing Plan, under which
9.7 million options to purchase common stock were granted to substantially all
full-time (150 options each) and part-time (75 options each) employees. The
exercise price was equal to the stock price on the grant date. The options
become exercisable after six years, or earlier if the stock price reaches and
sustains target prices for a minimum period. The 1996 award is the first of what
is intended to be three equal annual grants. The additional grants are expected
to be issued in December 1997 and 1998 to eligible active employees on those
dates. The exercise and target prices for these awards will be determined at the
time of the grant; other terms will be similar to the 1996 awards. Both of the
Corporation's predecessor institutions made similar awards in 1994. All
outstanding options expire ten years after the grant date.
Under the prior Chemical plan, 20 million options were granted in June 1994
to substantially all full-time (500 options each) and certain part-time (250
options each) employees. The options became exercisable during 1995 when the
stock price targets were reached.
Under the prior Chase plan, 16 million stock options were granted in January
1994 to substantially all full-time (400 options each) and certain part-time
(200 options each) employees. Employees hired between January 1994 and June 1995
were awarded a proportionately reduced number of options with an exercise price
equal to the then-current stock price. The options became exercisable in
December 1995 as a result of Chase shareholder approval of the Merger.
The following table presents the activity in the broad-based employee stock
option plans during the past three years.
80
63
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
BROAD-BASED EMPLOYEE STOCK OPTIONS
1996 1995 1994
-------------------------- -------------------------- ---------------------------
(Amounts in thousands, except per share amounts) Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
Year Ended December 31, Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, January 1 18,536 $35.40 32,498 $36.39 -- $ --
Granted 9,676 86.38 450 39.76 36,203 36.15
Exercised (11,184) 34.59 (11,386) 38.36 -- --
Cancelled (150) 45.94 (3,026) 35.56 (3,705) 34.03
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 16,878(a) $65.07 18,536 $35.40 32,498 $36.39
- ------------------------------------------------------------------------------------------------------------------------------------
Options Exercisable, December 31 7,237 $36.69 18,536 $35.40 -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
(a) For options outstanding as of December 31, 1996, the exercise prices ranged
from $30.77 to $86.38, and the average remaining contractual life was 8.8 years.
- --------------------------------------------------------------------------------
COMPARISON OF THE FAIR- AND INTRINSIC-VALUE-BASED MEASUREMENT METHODS
SFAS No. 123 is effective for awards granted in 1995 and subsequent years. It
establishes accounting and reporting standards for stock-based incentive plans,
and allows two alternative methods for accounting for employee incentives: (a)
the fair-value-based method, or (b) the intrinsic-value-based method, on which
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" was based.
The Corporation elected to continue accounting for its employee stock-based
compensation plans under the intrinsic-value-based method. No expense is
recognized for stock options as they have no intrinsic value. Forfeitable
restricted stock and RSUs are valued at the vesting date stock price. The
expense for restricted stock and RSUs, other than forfeitable awards, is
measured by the grant-date stock price. If the recipient may elect to receive
cash payment in lieu of stock, expense is measured by the amount of cash paid.
Stock compensation expense recognized in reported 1996 earnings totaled $65
million, before taxes.
If the Corporation had adopted the fair-value-based method, options would be
valued using a Black-Scholes model. Forfeitable restricted stock and RSUs would
be valued at the grant-date stock price, after deducting the value assigned to
the probability that the award would not reach the target price. Consistent with
the intrinsic-value-based method, the expense for restricted stock and RSUs,
other than forfeitable awards, is measured by the grant-date stock price; if the
recipient may elect to receive cash payment in lieu of stock, expense is
measured by the amount of cash paid. The pro forma net income and primary and
fully diluted earnings per share impact, if the fair-value-based method was
adopted, would have been as much as 1.5% lower than reported 1996 amounts, and
as much as .5% lower than reported 1995 amounts. The impact of stock
compensation on pro forma expense is expected to increase in 1997, as compared
to 1996, primarily due to the impact of a full-year's pro forma expense
associated with the Value Sharing Plan, under which options were granted in
December 1996. Under both the intrinsic- and fair-value-based methods, the net
impact on Stockholders' Equity is the same.
The following table presents the assumptions (weighted, based on aggregate
grant-date award values) used to derive the dividend-adjusted
Black-Scholes-derived grant-date fair value of options granted during the past
year.
Year Ended December 31, 1996
- --------------------------------------------------------------
Weighted-Average Annualized Assumptions:
Risk-Free Interest Rate 5.99%
Expected Dividend Yield (a) 3.50
Expected Common Stock Price Volatility 22
Weighted-Average Expected Life in Years:
Key Employee Stock Options 7.2
Broad-Based Employee Stock Options 5.1
- --------------------------------------------------------------
(a) Expected dividend yield is based primarily on historical data at the grant
dates.
Under the fair-value-based method, the grant-date fair value for an option
equals the sum of the annual probability of exercise or vested termination,
multiplied by the dividend-adjusted Black-Scholes-derived value of an option
terminating in that year. The weighted-average grant-date fair value per option
for grants awarded during 1996 was $13.91 for options granted to key employees
and $16.66 for options granted under the broad-based Value Sharing Plan. The
weighted-average grant-date fair value for all restricted stock and for RSUs
payable in stock granted to key employees during 1996 was $46.15 per share.
15 - RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS
The Board of Governors of the Federal Reserve System ("Federal Reserve Board")
require depository institutions to maintain cash reserves with a Federal Reserve
Bank. The average amount of reserve balances deposited by the Corporation's bank
subsidiaries with various Federal Reserve Banks was approximately $1.2 billion
during both 1996 and 1995.
Restrictions imposed by Federal law prohibit the Corporation and certain
other affiliates from borrowing from banking subsidiaries unless the loans are
secured in specified amounts. Such secured loans to the Corporation or to each
of certain other affiliates generally are limited to 10% of the banking
subsidiary's capital and surplus; the aggregate amount of all such loans is
limited to 20% of the banking subsidiary's capital and surplus. The Corporation
was well within these limits throughout the year.
81
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal sources of the Corporation's income (on a parent company-only
basis) are dividends and interest from The Chase Manhattan Bank and the other
banking and nonbanking subsidiaries of the Corporation. Federal law imposes
limitations on the payment of dividends by the subsidiaries of the Corporation
that are state member banks of the Federal Reserve System (a "state member
bank") or are national banks. Under such limitations, dividend payments by such
banks are limited to the lesser of (i) the amount of "undivided profits" (as
defined) and (ii) absent regulatory approval, an amount not in excess of "net
income" (as defined) for the current year plus "retained net income" (as
defined) for the preceding two years. Nonbank subsidiaries of the Corporation
are not subject to such limitations.
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1997, without the approval of their relevant banking
regulators, pay dividends in the aggregate of approximately $1.5 billion to
their respective bank holding companies, plus an additional amount equal to
their net income from January 1, 1997 through the date in 1997 of any such
dividend payment.
16 - CAPITAL
Under the risk-based capital guidelines of the Federal Reserve Board applicable
to the Corporation in 1996, banking organizations are required to maintain
certain ratios of "Qualifying Capital" to "risk-weighted assets." "Qualifying
Capital" is classified into two tiers referred to as Tier 1 Capital and Tier 2
Capital. In addition, the Federal Reserve Board has another capital measure, the
Tier 1 Leverage ratio. Banking organizations are required to maintain a minimum
Total Risk-Based Capital ratio (Total Capital to risk-weighted assets) of 8%, of
which at least 4% must be Tier 1 Capital. The minimum Tier 1 Leverage ratio is
3% for banking organizations that are generally considered strong, have
well-diversified risk (including no undue interest rate risk), excellent asset
quality, high liquidity and good earnings. Higher capital ratios could be
required if warranted by the particular circumstances or risk profile of a given
banking organization. Failure to meet regulatory minimum requirements could
result in actions taken by regulators. Management believes that as of December
31, 1996 the Corporation has met all capital adequacy requirements to which it
is subject.
Pursuant to FDICIA, the Federal Reserve Board, the FDIC and the Comptroller
of the Currency adopted regulations setting forth a five-tier scheme for
measuring the capital adequacy of the depository institutions and bank holding
companies they supervise. Under the regulations (commonly referred to as the
"prompt corrective action" rules) to be "well-capitalized," a banking
organization must have a Tier 1 Capital ratio of at least 6%, a Total Capital
ratio of at least 10%, and a Tier 1 Leverage ratio of at least 5% for banks and
4% for bank holding companies. The ratios for the Corporation and each of the
Corporation's banking subsidiaries, including The Chase Manhattan Bank, Texas
Commerce and Chase USA, exceeded the ratios required to be well capitalized at
December 31, 1996. Management is not aware of any subsequent events that would
alter this classification.
The following tables present capital ratios and the components of capital for
the Corporation and its significant banking subsidiaries. Assets and capital
amounts for the Corporation's banking subsidiaries reflect intercompany
transactions, whereas the respective amounts for the Corporation reflect the
elimination of intercompany transactions.
The Chase Texas
December 31, 1996 Corporation Manhattan Bank Commerce Chase USA
- ----------------------------------------------------------------------------------------------------
Tier 1 Capital Ratio(a)(c) 8.15%(d) 7.59% 7.65% 10.19%
Total Capital Ratio(a)(c) 11.78%(d) 11.36% 10.86% 13.14%
Tier 1 Leverage Ratio(b)(c) 6.79%(d) 5.98% 6.39% 9.46%
- ----------------------------------------------------------------------------------------------------
(a) Tier 1 Capital or Total Capital, as applicable, divided by risk-weighted
assets. Risk-weighted assets include assets and off-balance sheet positions,
weighted by the type of instruments and the risk weight of the counterparty,
collateral or guarantor.
(b) Tier 1 Capital divided by adjusted average assets (net of allowance for
credit losses, goodwill and certain intangible assets).
(c) The provisions of SFAS 115 do not apply to the calculation of these ratios.
(d) Excludes the assets and off-balance sheet financial instruments of the
Corporation's securities subsidiary, Chase Securities Inc., as well as the
Corporation's investment in such subsidiary. Including the Corporation's
securities subsidiary, Chase Securities Inc., the December 31, 1996 Tier 1
Capital, Total Capital and Tier 1 Leverage ratios were 8.37%, 12.29% and 6.39%,
respectively.
82
65
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
The Chase Texas
December 31, 1996 (in millions) Corporation Manhattan Bank Commerce Chase USA
- ----------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL:
Common Stockholders' Equity $ 18,632 $ 16,036 $ 1,769 $ 2,588
Nonredeemable Preferred Stock 2,650 -- -- --
Minority Interest 1,294(a) 126 -- --
Less: Goodwill 1,353 368 326 334
Non-Qualifying Intangible Assets 128 37 96 --
50% Investment in Securities Subsidiary 780 -- -- 1
- ----------------------------------------------------------------------------------------------------------------------
Tier 1 Capital 20,315 15,757 1,347 2,253
- ----------------------------------------------------------------------------------------------------------------------
TIER 2 CAPITAL:
Long-Term Debt and Other Instruments Qualifying as Tier 2 6,709 5,229 345 375
Qualifying Allowance for Credit Losses 3,121 2,598 220 278
Less: 50% Investment in Securities Subsidiary 780 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Tier 2 Capital 9,050 7,827 565 653
- ----------------------------------------------------------------------------------------------------------------------
Total Qualifying Capital $ 29,365 $ 23,584 $ 1,912 $ 2,906
- ----------------------------------------------------------------------------------------------------------------------
Risk-Weighted Assets(b) $249,215 $207,655 $17,604 $22,113
- ----------------------------------------------------------------------------------------------------------------------
Adjusted Average Assets $299,047 $263,707 $21,071 $23,819
- ----------------------------------------------------------------------------------------------------------------------
(a) In accordance with Federal Reserve Board risk-based capital guidelines,
minority interest for the Corporation includes $550 million and $600 million in
preferred stock instruments issued in 1996 by subsidiaries of the Corporation.
For a further discussion see Notes Six and Seven.
(b) Includes off-balance sheet risk-weighted assets in the amounts of $79,099
million, $74,373 million, $3,824 million and $103 million, respectively, at
December 31, 1996.
17 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
The Corporation utilizes various derivative and foreign exchange financial
instruments for trading purposes and for purposes other than trading, such as
ALM. Such derivative and foreign exchange transactions involve, to varying
degrees, credit risk and market risk. A discussion of the credit and market
risks involved with these financial instruments is included the first six
paragraphs of the Derivative and Foreign Exchange Financial Instruments section
of the MD&A on pages 52-53, paragraphs one through three and five through seven
of the Credit Risk Management section of the MD&A on pages 48-49, and paragraphs
one, two and eight through ten of the Market Risk Management section of the MD&A
on page 54.
Derivative and Foreign Exchange Instruments Used for Trading Purposes: The
credit risk associated with the Corporation's trading activities is recorded on
the balance sheet. The effects of any market risk (gains or losses) on the
Corporation's trading activities have been reflected in trading revenue, as the
trading instruments are marked-to-market on a daily basis.
Derivative and Foreign Exchange Instruments Used for Purposes Other Than
Trading: A discussion of the Corporation's objectives and strategies for
employing derivative and foreign exchange instruments for ALM activities is
included in the first four paragraphs of the Asset/Liability Management
discussion of the MD&A on pages 55-56, paragraph seven on page 57 and paragraph
four on page 58.
At December 31, 1996, gross deferred gains and gross deferred losses relating
to closed derivative contracts used in ALM activities were $584 million and $626
million, respectively. The Corporation also uses selected derivative financial
instruments to manage its sensitivity to changes in market interest rates on
anticipated transactions; however, such transactions are not significant. At
December 31, 1996, deferred gains and losses associated with anticipatory ALM
transactions were insignificant.
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) for the dates indicated below.
83
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notional Amounts(a) Credit Exposure
-------------------------- -------------------
December 31, (in billions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
INTEREST RATE CONTRACTS
Futures, Forwards and Forward Rate Agreements
Trading $ 1,209.6 $ 1,047.5 $ 0.5 $ 1.3
Asset and Liability Management 30.8 40.0 -- 0.1
Interest Rate Swaps
Trading 2,300.3 1,692.6 11.4 10.4
Asset and Liability Management 96.4 69.7 0.7 0.3
Purchased Options
Trading 172.7 147.2 2.3 0.7
Asset and Liability Management 15.5 26.0 -- --
Written Options
Trading 199.4 161.0 -- --
Asset and Liability Management 1.4 6.4 -- --
- -----------------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $ 4,026.1 $ 3,190.4 $ 14.9 $ 12.8
- -----------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,308.6 $ 1,352.1 $ 10.0 $ 8.8
Asset and Liability Management 60.1 10.9 -- --
Other Foreign Exchange Contracts(b)
Trading 267.4 241.6 3.8 3.6
Asset and Liability Management 4.2 1.6 -- --
- -----------------------------------------------------------------------------------------------------------
Total Foreign Exchange Contracts $ 1,640.3 $ 1,606.2 $ 13.8 $ 12.4
- -----------------------------------------------------------------------------------------------------------
STOCK INDEX OPTIONS AND COMMODITY CONTRACTS
Trading $ 45.7 $ 37.7 $ 1.7 $ 1.0
- -----------------------------------------------------------------------------------------------------------
Total Stock Index Options and Commodity Contracts $ 45.7 $ 37.7 $ 1.7 $ 1.0
- -----------------------------------------------------------------------------------------------------------
Total Credit Exposure Recorded on the Balance Sheet $ 30.4 $ 26.2
- -----------------------------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and stock index options and commodity contracts were $521.5
billion, $9.5 billion and $6.4 billion, respectively, at December 31, 1996,
compared with $417.7 billion, $10.6 billion and $5.1 billion, respectively, at
December 31, 1995. The credit risk amounts of these contracts were minimal since
exchange-traded contracts principally settle daily in cash.
(b) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $89.6 billion, $94.2 billion and $87.8
billion, respectively, at December 31, 1996, compared with $92.2 billion, $92.4
billion and $58.6 billion, respectively, at December 31, 1995.
Classes of Derivative and Foreign Exchange Instruments: The following classes of
derivative and foreign exchange instruments refer to instruments that are used
by the Corporation for purposes of both trading and ALM.
Interest rate futures and forwards are contracts for the delayed delivery of
securities or money market instruments in which the seller agrees to deliver on
a specified future date, a specified instrument, at a specified price or yield.
The credit risk inherent in futures and forwards is the risk that the exchange
party may default. Futures contracts settle in cash daily and, therefore, there
is minimal credit risk to the Corporation. The credit risk inherent in forwards
arises from the potential inability of counterparties to meet the terms of their
contracts. Both futures and forwards are also subject to the risk of movements
in interest rates or the value of the underlying securities or instruments.
Forward rate agreements are contracts to exchange payments on a certain
future date, based on a market change in interest rates from trade date to
contract settlement date. The notional amount on which the interest payments are
based is not exchanged. The maturity of these agreements is typically less than
two years.
Interest rate swaps are contracts in which a series of interest rate flows in
a single currency are exchanged over a prescribed period. The notional amount on
which the interest payments are based is not exchanged. Most interest rate swaps
involve the exchange of fixed and floating interest payments. Cross-currency
interest rate swaps are contracts that involve the exchange of both interest and
principal amounts in two different currencies. The risks inherent in interest
rate and cross-currency swap contracts are the potential inability of a
counterparty to meet the terms of its contract and the risk associated with
changes in the market values of the contracts due to movements in the underlying
interest rates.
Interest rate options, which include caps and floors, are contracts which
transfer, modify, or reduce interest rate risk in exchange for the payment of a
premium when the contract is initiated. As a writer of interest rate caps,
floors and other options, the Corporation receives a premium in exchange for
bearing the risk of unfavorable changes in interest rates. Conversely, as a
purchaser of an option, the Corporation pays a premium for the right, but not
the obligation, to buy or sell a financial instrument or currency at
predetermined terms in the future. Foreign currency options are similar to
interest rate option contracts, except that they are based on currencies instead
of interest rates.
The Corporation's use of written options as part of its ALM is permitted only
in those circumstances where they are specifically linked to purchased options.
All unmatched written options are included in the trading portfolio at their
estimated fair value.
84
67
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
Foreign exchange contracts are contracts for the future receipt or delivery
of foreign currency at previously agreed-upon terms. The risks inherent in these
contracts are the potential inability of a counterparty to meet the terms of its
contract and the risk associated with changes in the market values of the
underlying currencies.
Stock index option contracts are contracts to pay or receive cash flows from
counterparties based upon the increase or decrease in the underlying index.
Commodity contracts include swaps, caps and floors and are similar to interest
rate contracts, except that they are based on commodity indices instead of
interest rates.
To reduce its exposure to market risk related to the above-mentioned classes
of derivative and foreign exchange instruments, the Corporation may enter into
offsetting positions.
To reduce credit risk, management may deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on management's credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment, and
real estate.
Derivatives and foreign exchange instruments are generally either negotiated
over-the-counter ("OTC") contracts or standardized contracts executed on a
recognized exchange. Standardized exchange-traded derivatives primarily include
futures and options. Negotiated OTC derivatives are generally entered into
between two counterparties that negotiate specific agreement terms, including
the underlying instrument, amount, exercise price and maturity.
Included as part of the financial instruments presented in the preceding
notional table are transactions involving "when-issued securities" which the
Corporation enters into primarily as part of its trading activities. When-issued
securities are commitments to purchase or sell securities authorized for
issuance, but not yet actually issued, and are not recorded on the balance sheet
until issued. However, these commitments are marked-to-market with the resulting
gains or losses reflected in trading revenue.
18 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
In addition to using derivative and foreign exchange financial instruments, the
Corporation also utilizes lending-related financial instruments in order to meet
the financing needs of its customers. The Corporation issues commitments to
extend credit, standby and other letters of credit and guarantees, and also
provides securities-lending services. For lending-related financial instruments,
the contractual amount of the financial instrument represents the maximum
potential credit risk if the counterparty does not perform according to the
terms of the contract. A large majority of these commitments expire without
being drawn upon. As a result, total contractual amounts are not representative
of the Corporation's actual future credit exposure or liquidity requirements for
such commitments.
At December 31, 1996, in accordance with the AICPA's Audit and Accounting
Guide for Banks and Savings Institutions, the Corporation allocated $70 million
of its allowance for credit losses to letters of credit and guarantees, which is
reported in Other Liabilities. For a further discussion, see Note One on page
69. The following table summarizes the contract amounts relating to the
Corporation's lending-related financial instruments at December 31, 1996 and
1995.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Commitments to Extend Credit $94,278(a) $95,555
Standby Letters of Credit and Guarantees (Net of
Risk Participations of $5,205 and $6,241) 30,843 24,745
Other Letters of Credit 5,588 5,907
Customers' Securities Lent 38,715 27,169
- --------------------------------------------------------------------------------
(a) Excludes credit card commitments of $54.2 billion and $47.6 billion at
December 31, 1996 and 1995, respectively.
Unfunded commitments to extend credit are agreements to lend to a customer
who has complied with predetermined contractual conditions. Commitments
generally have fixed expiration dates.
Standby letters of credit and guarantees are conditional commitments issued
by the Corporation generally to guarantee the performance of a customer to a
third party in borrowing arrangements, such as commercial paper, bond financing,
construction and similar transactions. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan facilities to customers and may be reduced by participations to third
parties. The Corporation holds collateral to support those standby letters of
credit and guarantees written for which collateral is deemed necessary.
Customers' securities lent are customers' securities held by the Corporation,
as custodian, which are lent to third parties. The Corporation obtains
collateral, with a market value exceeding 100% of the contract amount, for
customers' securities lent, which is used to indemnify customers against
possible losses resulting from third-party defaults.
19 - CREDIT RISK CONCENTRATIONS
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
The Corporation regularly monitors various segments of its credit risk
portfolio to assess potential concentration risks and to obtain collateral when
deemed necessary. The initial segmentation of the portfolio for this purpose is
by product within the consumer portfolio and by industry within the commercial
portfolio. The table below indicates major product and industry segments
including both on-balance sheet (principally loans) and off-balance sheet
(principally commitments to extend credit) exposures.
85
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's exposures within these major segments can be diversified by
risk rating, maturity, geography and segmented within industry classifications.
These diversification factors reduce concentration risk. For the geographic
concentration of residential mortgages and credit card outstandings, reference
is made to the tables entitled Residential Mortgage Loans by Geographic Region
and Domestic Credit Card Receivables by Geographic Region within the Domestic
Consumer Portfolio section of the MD&A on page 50. For a discussion of the
Corporation's credit exposure to financial institutions, reference is made to
the Derivative and Foreign Exchange Financial Instruments discussion included on
pages 52-53 of the MD&A. Also, see pages 51 and 52 of the MD&A for a discussion
of the domestic commercial real estate portfolio (which discloses its
concentration, primarily in the New York/New Jersey and Texas markets) and for a
discussion of cross-border exposure within the foreign portfolio (which
discloses its concentration in Latin America, principally Brazil and Mexico).
Management believes the current credit risk portfolio is well diversified and
does not contain unusual concentration risks.
1996 Distributions 1995 Distributions
-------------------------------------- --------------------------------------
Credit On-Balance Off-Balance Credit On-Balance Off-Balance
December 31, (in billions) Exposure Sheet Sheet Exposure Sheet Sheet
- ---------------------------------------------------------------------------------------------------------------
Credit Cards $ 66.9 $ 12.7 $ 54.2 $ 65.2 $ 17.6 $ 47.6
Residential Mortgages 39.4 37.9 1.5 37.4 35.2 2.2
Depository Institutions 25.1 13.0 12.1 24.7 12.8 11.9
Auto Financings 11.8 11.8 -- 8.4 8.4 --
Commercial Real Estate 8.4 6.7 1.7 8.4 7.5 0.9
- ---------------------------------------------------------------------------------------------------------------
Total $ 151.6 $ 82.1 $ 69.5 $ 144.1 $ 81.5 $ 62.6
- ---------------------------------------------------------------------------------------------------------------
20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced sale or
liquidation, and is best evidenced by a quoted market price, if one exists.
Quoted market prices are not available for a significant portion of the
Corporation's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may not
be indicative of the net realizable value. In addition, the calculation of
estimated fair value is based on market conditions at a specific point in time
and may not be reflective of future fair values.
Certain financial instruments and all nonfinancial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 provide only a partial estimate of the fair value of the Corporation;
for example, the values associated with the various ongoing businesses which the
Corporation operates are excluded. The Corporation has developed long-term
relationships with its customers through its deposit base and its credit card
accounts, commonly referred to as core deposit intangibles and credit card
relationships. In the opinion of management, these items in the aggregate add
significant value to the Corporation, but their fair value is not disclosed in
this Note.
Fair values among financial institutions are not comparable due to the wide
range of permitted valuation techniques and numerous estimates that must be
made. This lack of objective valuation standard introduces a great degree of
subjectivity to these derived or estimated fair values. Therefore, readers are
cautioned in using this information for purposes of evaluating the financial
condition of the Corporation compared with other financial institutions.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Corporation's financial instruments, required to
be valued pursuant to SFAS 107.
- --------------------------------------------------------------------------------
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value: The fair values of
certain financial assets carried at cost, including cash and due from banks,
deposits with banks, federal funds sold and securities purchased under resale
agreements, due from customers on acceptances, short-term receivables and
accrued interest receivable, are considered to approximate their respective
carrying values due to their short-term nature and negligible credit losses. The
fair value of loans held for accelerated disposition is also considered to
approximate carrying value. As discussed in Note One, such loans are carried at
the lower of cost or current estimated disposition value.
86
69
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
Trading Assets: The Corporation carries trading assets, which includes debt and
equity instruments as well as the positive fair value on derivative and foreign
exchange instruments, at estimated fair value.
Securities: Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities and related derivative contracts are carried at
fair value. The fair value of actively-traded securities is determined by the
secondary market, while the fair value for nonactively-traded securities is
based on independent broker quotations.
Loans: Loans are valued using methodologies suitable for each loan type as
discussed below.
The fair value of the Corporation's commercial loan portfolio is estimated by
assessing the two main risk components of the portfolio: credit and interest.
The estimated cash flows are adjusted to reflect the inherent credit risk and
then discounted, using rates appropriate for each maturity that incorporate the
effects of interest rate changes. Generally, emerging market loans are valued
based on secondary market prices.
For consumer installment loans and residential mortgages for which market
rates for comparable loans are readily available, the fair values are estimated
by discounting cash flows, adjusted for prepayments. The discount rates used for
consumer installment loans are current rates offered by commercial banks and
thrifts; for residential mortgages, secondary market yields for comparable MBSs,
adjusted for risk, are used. The fair value of credit card receivables is
estimated by discounting expected cash flows. The discount rates used
incorporate the effects of interest rate changes only, since the estimated cash
flows are adjusted for credit risk.
Other Assets: This caption consists primarily of equity investments, including
venture capital investments. The fair value of these investments is determined
on an individual basis. The valuation methodologies include market values of
publicly-traded securities, independent appraisals, and cash flow analyses.
- --------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value: SFAS 107 requires
that the fair value disclosed for deposit liabilities with no stated maturity
(i.e., demand, savings and certain money market deposits) be equal to the
carrying value. SFAS 107 does not allow for the recognition of the inherent
funding value of these instruments.
The fair value of foreign deposits, federal funds purchased and securities
sold under repurchase agreements, other borrowed funds, acceptances outstanding,
short-term payables and accounts payable and accrued liabilities are considered
to approximate their respective carrying values due to their short-term nature.
Domestic Time Deposits: The fair value of time deposits is estimated by
discounting cash flows based on contractual maturities at the interest rates for
raising funds of similar maturity.
Trading Liabilities: The Corporation carries trading liabilities, which include
securities sold, not yet purchased, structured notes as well as derivatives and
foreign exchange instruments, at estimated fair value. These instruments are
valued using either quoted market prices, pricing models, quoted market prices
of financial instruments with similar characteristics or discounted cash flows.
For the estimated fair value of trading liabilities, see Note Two.
Long-Term Debt: The valuation of long-term debt, including the Series A Capital
Securities, takes into account several factors, including current market
interest rates and the Corporation's credit rating. Quotes are gathered from
various investment banking firms for indicative yields for the Corporation's
securities over a range of maturities.
- --------------------------------------------------------------------------------
UNUSED COMMITMENTS AND LETTERS OF CREDIT
The Corporation has reviewed the unfunded portion of commitments to extend
credit as well as standby and other letters of credit, and has determined that
the fair value of such financial instruments is not material.
The following table presents the carrying value and estimated fair value at
December 31, 1996 and 1995 of financial assets and liabilities valued under SFAS
107 and certain derivative contracts used for ALM activities related to such
financial assets and liabilities. The table excludes those derivative contracts
used by the Corporation to manage the risks associated with its mortgage
servicing rights that are not required to be fair valued under SFAS 107. At
December 31, 1996, the carrying value of the derivative contracts was $62.1
million, and gross unrecognized gains and losses were $41.6 million and $57.7
million, respectively, resulting in an estimated fair value of $46.0 million.
87
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Assets/Financial Liabilities
------------------------------------------
Estimated
Carrying Fair
December 31, 1996 (in millions) Value(a)(b) Value(a)(b)
- ----------------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates Carrying Value $ 65,517 $ 65,517
Trading Assets - Debt and Equity Instruments 30,377 30,377
Trading Assets - Risk Management Instruments 29,579 29,579
Securities Available-for-Sale 44,691 44,691
Securities Held-to-Maturity 3,855 3,849
Loans, Net of Allowance for Loan Losses 151,543 153,541
Derivatives in Lieu of Cash Market Instruments(d) 118 149
Other Assets 2,824 3,128
- ----------------------------------------------------------------------------------------------------
Total Financial Assets $328,504 $330,831
- ----------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $225,647 $225,647
Domestic Time Deposits 37,047 37,482
Trading Liabilities 38,136 38,136
Long-Term Debt 12,714 12,782
Series A Capital Securities 600 579
- ----------------------------------------------------------------------------------------------------
Total Financial Liabilities $314,144 $314,626
- ----------------------------------------------------------------------------------------------------
December 31, 1995 (in millions)
- ----------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates Carrying Value $ 52,235 $ 52,235
Trading Assets - Debt and Equity Instruments 26,212 26,212
Trading Assets - Risk Management Instruments 25,825 25,825
Securities Available-for-Sale 37,141 37,141
Securities Held-to-Maturity 4,628 4,659
Loans, Net of Allowance for Loan Losses 146,423 151,078
Derivatives in Lieu of Cash Market Instruments(d) 68 117
Other Assets 2,095 2,612
- ----------------------------------------------------------------------------------------------------
Total Financial Assets $294,627 $299,879
- ----------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $208,786 $208,790
Domestic Time Deposits 27,113 27,368
Trading Liabilities 34,341 34,341
Long-Term Debt 12,825 13,199
- ----------------------------------------------------------------------------------------------------
Total Financial Liabilities $283,065 $283,698
- ----------------------------------------------------------------------------------------------------
Derivative Contracts Used for ALM Activities
--------------------------------------------------------
Gross Gross Estimated
Carrying Unrecognized Unrecognized Fair
December 31, 1996 (in millions) Value(c) Gains Losses Value(e)
- ---------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates Carrying Value $ 24 $ 21 $ (10) $ 35
Trading Assets - Debt and Equity Instruments -- -- -- --
Trading Assets - Risk Management Instruments -- -- -- --
Securities Available-for-Sale (53) -- -- (53)
Securities Held-to-Maturity -- -- -- --
Loans, Net of Allowance for Loan Losses 133 311 (440) 4
Derivatives in Lieu of Cash Market Instruments(d) 118 180 (149) 149
Other Assets -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 222 $512 $(599) $ 135
- ------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $ 8 $ 73 $(124) $ (43)
Domestic Time Deposits 158 76 (173) 61
Trading Liabilities -- -- -- --
Long-Term Debt (90) 116 (111) (85)
Series A Capital Securities -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 76 $265 $(408) $ (67)
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1995 (in millions)
- ------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates Carrying Value $ (1) $ 4 $ (1) $ 2
Trading Assets - Debt and Equity Instruments -- -- -- --
Trading Assets - Risk Management Instruments -- -- -- --
Securities Available-for-Sale (78) -- -- (78)
Securities Held-to-Maturity -- -- -- --
Loans, Net of Allowance for Loan Losses 103 159 (370) (108)
Derivatives in Lieu of Cash Market Instruments(d) 68 276 (227) 117
Other Assets -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 92 $439 $(598) $ (67)
- ------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $ 6 $ 93 $ (50) $ 49
Domestic Time Deposits 235 462 (254) 443
Trading Liabilities -- -- -- --
Long-Term Debt 29 163 (41) 151
- ------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 270 $718 $(345) $ 643
- ------------------------------------------------------------------------------------------------------------------------
(a) The carrying value and estimated fair value include the carrying value and
estimated fair value of derivative contracts used for ALM activities.
(b) The carrying value and estimated fair value of daily margin settlements on
open futures contracts are primarily included in Other Assets on the balance
sheet, except when used in connection with available-for-sale securities, which
are carried at fair value and are included in Securities: Available-for-Sale on
the balance sheet. The Corporation uses these contracts in its ALM activities to
modify the interest rate characteristics of balance sheet instruments such as
securities available-for-sale, loans and deposits. Gross unrecognized gains and
losses from daily margin settlements on open futures contracts were $4 million
and $1 million, respectively, at December 31, 1996.
(c) The carrying value of derivatives used for ALM activities is recorded as
receivables and payables and is primarily included in Other Assets on the
balance sheet, except derivatives used in connection with available-for-sale
securities which are carried at fair value and are included in Securities:
Available-for-Sale on the balance sheet.
(d) Represents derivative contracts that, as part of the Corporation's ALM
activities, are used in place of cash market instruments. See Note One for a
further discussion.
(e) Derivative contracts used for ALM activities were valued using market prices
or pricing models consistent with methods used by the Corporation in valuing
similar instruments used for trading purposes.
88
71
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
21 - COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Corporation and its subsidiaries were obligated under
a number of noncancelable operating leases for premises and equipment used
primarily for banking purposes. Certain leases contain rent escalation clauses
for real estate taxes and other operating expenses and renewal option clauses
calling for increased rents. No lease agreement imposes any restrictions on the
Corporation affecting its ability to pay dividends, engage in debt or equity
financing transactions, or enter into further lease agreements. Future minimum
rental payments required under operating leases with initial and remaining
noncancelable lease terms in excess of one year as of December 31, 1996 were as
follows:
YEAR ENDED DECEMBER 31, (in millions)
- -------------------------------------------------------------------------------
1997 $ 337
1998 292
1999 255
2000 233
2001 206
After 841
- -------------------------------------------------------------------------------
Total Minimum Payments Required $ 2,164
- -------------------------------------------------------------------------------
Less: Sublease Rentals Under Noncancelable Subleases $ (176)
- -------------------------------------------------------------------------------
Net Minimum Payment Required $ 1,988
- -------------------------------------------------------------------------------
Total rental expense was as follows:
YEAR ENDED DECEMBER 31, (in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Gross Rentals $ 526 $ 558 $ 579
Sublease Rentals (177) (173) (153)
- -------------------------------------------------------------------------------
Total Rent Expense $ 349 $ 385 $ 426
- -------------------------------------------------------------------------------
At December 31, 1996 and 1995, assets amounting to $58 billion and $57
billion, respectively, were pledged to secure public deposits and for other
purposes. The significant components of the $58 billion of assets pledged at
December 31, 1996 were as follows: $21 billion were loans, $13 billion were
securities, and the remaining $24 billion were primarily trading assets. These
amounts compare with $21 billion of loans, $16 billion of securities, and $20
billion of trading assets pledged at December 31, 1995.
The Corporation and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all such actions and proceedings
pending against or involving the Corporation and its subsidiaries, management
does not expect the aggregate liability or loss, if any, resulting therefrom to
have a material adverse effect on the consolidated financial condition of the
Corporation.
The Corporation may guarantee the obligations of its subsidiaries. These
guarantees rank on a parity with all other unsecured and unsubordinated
indebtedness of the Corporation. See Note Six for a discussion of the
Corporation's guarantees of long-term debt issues for its subsidiaries.
22 - INTERNATIONAL OPERATIONS
The following table presents average assets and income statement information
relating to international and domestic operations of the Corporation by major
geographic areas, based on the domicile of the customer. The Corporation defines
international activities as business transactions that involve customers
residing outside of the United States. However, a definitive separation of the
Corporation's domestic and foreign businesses cannot be performed because many
of the Corporation's domestic operations service international business.
As these operations are highly integrated, estimates and subjective
assumptions have been made to apportion revenue and expenses between domestic
and international operations. Estimates of the following are allocated on a
management accounting basis: stockholders' equity, interest costs charged to
users of funds, and overhead, administrative and other expenses incurred by one
area on behalf of another. The provision for credit losses is allocated based on
charge-off experience and risk characteristics of the portfolio.
The Corporation considers the balance in the allowance for credit losses to
be available for both domestic and foreign exposures; however, a portion of the
allowance is allocated to international operations based on a methodology
consistent with the allocation of the provision for credit losses, as discussed
above.
89
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average Income Before Net
For the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income
- -------------------------------------------------------------------------------------------------------------------
1996
Europe $ 56,718 $ 2,057 $ 1,210 $ 847 $ 525
Asia and Pacific 29,920 1,005 741 264 164
Latin America and the Caribbean 17,794 530 343 187 126
Middle East and Africa 1,386 68 26 42 26
Other(c) 2,252 23 13 10 6
- -------------------------------------------------------------------------------------------------------------------
Total International 108,070 3,683 2,333 1,350 847
Total Domestic 213,170 12,169 9,708 2,461 1,614
- -------------------------------------------------------------------------------------------------------------------
Total Corporation $321,240 $15,852 $12,041 $3,811 $2,461
- -------------------------------------------------------------------------------------------------------------------
1995
Europe $ 45,376 $ 1,471 $ 928 $ 543 $ 342
Asia and Pacific 30,348 1,124 730 394 251
Latin America and the Caribbean 19,833 800 433 367 232
Middle East and Africa 1,635 67 34 33 21
Other(c) 1,731 20 12 8 5
- -------------------------------------------------------------------------------------------------------------------
Total International 98,923 3,482 2,137 1,345 851
Total Domestic 208,462 11,478 8,011 3,467 2,108
- -------------------------------------------------------------------------------------------------------------------
Total Corporation $307,385 $14,960 $10,148 $4,812 $2,959
- -------------------------------------------------------------------------------------------------------------------
1994
Europe $ 44,969 $ 1,385 $ 922 $ 463 $ 293
Asia and Pacific 22,717 872 689 183 125
Latin America and the Caribbean 19,549 1,469 628 841 553
Middle East and Africa 1,509 63 27 36 26
Other(c) 1,141 37 20 17 8
- -------------------------------------------------------------------------------------------------------------------
Total International 89,885 3,826 2,286 1,540 1,005
Total Domestic 197,188 11,187 8,766 2,421 1,481
- -------------------------------------------------------------------------------------------------------------------
Total Corporation $287,073 $15,013 $11,052 $3,961 $2,486
- -------------------------------------------------------------------------------------------------------------------
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue.
(b) Expense is comprised of Noninterest Expense and Provision for Credit Losses.
(c) No geographic region included in Other International amounts to more than
10% of the total for the Corporation.
23 - PARENT COMPANY
Condensed financial information of The Chase Manhattan Corporation, the Parent
Company, is presented on the following page.
For purposes of preparing the Statement of Cash Flows, cash and cash
equivalents are those amounts included in the balance sheet caption Cash with
Banks.
90
73
THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
PARENT COMPANY - BALANCE SHEET
December 31, (in millions) 1996 1995
- --------------------------------------------------------------------------------
Assets
Cash with Banks $ 12 $ 336
Deposits with Banking Subsidiaries 4,136 6,220
Securities Purchased Under Resale Agreements 1,478 515
Available-for-Sale Securities 38 188
Short-Term Advances to Banking Subsidiaries 100 3
Short-Term Advances to Nonbanking Subsidiaries 1,895 2,085
Long-Term Advances to Banking Subsidiaries 4,602 4,467
Long-Term Advances to Nonbanking Subsidiaries 570 580
Investment (at Equity) in Banking Subsidiaries 22,206 20,976
Investment (at Equity) in Nonbanking Subsidiaries 2,387 2,325
Other Assets 530 652
- --------------------------------------------------------------------------------
Total Assets $37,954 $38,347
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other Borrowed Funds, primarily Commercial Paper $ 4,775 $ 6,329
Other Liabilities 1,024 508
Long-Term Debt(a) 11,161 10,674
- --------------------------------------------------------------------------------
Total Liabilities 16,960 17,511
Stockholders' Equity 20,994 20,836
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $37,954 $38,347
- --------------------------------------------------------------------------------
(a) At December 31, 1996, aggregate annual maturities for all issues for the
years 1997 through 2001 were $1,270 million, $1,084 million, $1,531 million,
$1,134 million and $962 million, respectively.
PARENT COMPANY - STATEMENT OF INCOME
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Income
Dividends from Banking Subsidiaries $1,993(a) $1,601 $1,606
Dividends from Nonbanking Subsidiaries 7 15 102
Interest from Banking Subsidiaries 610 530 497
Interest from Nonbanking Subsidiaries 205 232 142
Interest on Available-for-Sale Securities 8 16 11
All Other Income 5 162 89
- --------------------------------------------------------------------------------
Total Income 2,828 2,556 2,447
- --------------------------------------------------------------------------------
Expense
Interest on:
Other Borrowed Funds, primarily
Commercial Paper 293 328 175
Long-Term Debt 742 744 618
All Other Expense 97 61 83
- --------------------------------------------------------------------------------
Total Expense 1,132 1,133 876
- --------------------------------------------------------------------------------
Income Before Income Tax Benefit
and Equity in Undistributed Net Income
of Subsidiaries 1,696 1,423 1,571
Income Tax Benefit 117 73 46
Equity in Undistributed Net Income
of Subsidiaries 648 1,463 869
- --------------------------------------------------------------------------------
Net Income $2,461 $2,959 $2,486
- --------------------------------------------------------------------------------
(a) Includes a noncash dividend of $657 million.
PARENT COMPANY - STATEMENT OF CASH FLOWS
Year Ended December 31, (in millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 2,461 $ 2,959 $ 2,486
Less -- Net Income of Subsidiaries 2,648 3,079 2,577
- -------------------------------------------------------------------------------------------------------
Parent Company Net Loss (187) (120) (91)
Add -- Dividends from Subsidiaries 1,343 1,616 1,708
Other -- Net 140 (60) 221
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,296 1,436 1,838
- -------------------------------------------------------------------------------------------------------
Investing Activities
Net Change in Deposits with Banking Subsidiaries 2,084 (1,424) (2,628)
Net Change in Short-Term Advances to Subsidiaries 94 (168) 1,045
Net Change in Long-Term Advances to Subsidiaries (125) 100 (245)
Net Change in Investment (at Equity) in Subsidiaries 8 (218) (189)
Net Change in Securities Purchased Under Resale Agreements (963) 410 111
Proceeds from the Maturity of Available-for-Sale Securities 150 105 425
Proceeds from the Sale of Available-for-Sale Securities -- 13 13
Purchase of Available-for-Sale Securities -- (40) (323)
Proceeds from Divestitures of Nonstrategic Businesses -- 490 --
Other -- Net (34) (12) (101)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 1,214 (744) (1,892)
- -------------------------------------------------------------------------------------------------------
Financing Activities
Net Change in Other Borrowed Funds (1,630) 581 2,186
Proceeds from the Issuance of Long-Term Debt 1,880 1,804 1,679
Repayments of Long-Term Debt (1,367) (1,201) (2,062)
Proceeds from the Issuance of Stock 1,082 740 511
Purchase of Treasury Stock (1,611) (1,389) (693)
Redemption of Preferred Stock -- -- (643)
Cash Dividends Paid (1,188) (978) (914)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (2,834) (443) 64
- -------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (324) 249 10
Cash with Banks at the Beginning of the Year 336 87 77
- -------------------------------------------------------------------------------------------------------
Cash with Banks at the End of the Year $ 12 $ 336 $ 87
- -------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 1,041 $ 1,060 $ 784
Taxes Paid (Refunded) $ 1,297 $ 957 $ (178)
- -------------------------------------------------------------------------------------------------------
91
74
SUPPLEMENTARY DATA THE CHASE MANHATTAN CORPORATION
QUARTERLY FINANCIAL INFORMATION AND SUBSIDIARIES
(in millions, except per share and stock price data) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 2,082 $ 2,069 $ 2,023 $ 2,166 $ 2,078 $ 2,069 $ 2,028 $ 2,027
Provision for Credit Losses 182 220 250 245 186 192 195 185
Noninterest Revenue 1,856 1,856 1,931 1,869 1,765 1,710 1,726 1,557
Noninterest Expense (excluding
Restructuring Costs) 2,303 2,288 2,302 2,437 2,364 2,332 2,344 2,335
- --------------------------------------------------------------------------------------------------------------------------------
Income Before Restructuring Costs,
Income Tax Expense (Benefit) and
Effect of Accounting Change 1,453 1,417 1,402 1,353 1,293 1,255 1,215 1,064
Restructuring Costs(a) 104 32 22 1,656 -- -- 15 --
Income Tax Expense (Benefit) 513 527 524 (214) 466 491 471 414
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Effect of Accounting Change 836 858 856 (89) 827 764 729 650
Effect of Change in Accounting Principle -- -- -- -- -- -- -- (11)(b)
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 836 $ 858 $ 856 $ (89) $ 827 $ 764 $ 729 $ 639
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Stock $ 781 $ 803 $ 801 $ (143) $ 773 $ 708 $ 673 $ 578
- --------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Primary:
Income Before Restructuring Costs and
Accounting Change $ 1.89 $ 1.85 $ 1.83 $ 1.98 $ 1.73 $ 1.58 $ 1.56 $ 1.37
Income (Loss) After Restructuring Costs
and Before Effect of Accounting Change $ 1.74 $ 1.80 $ 1.80 $ (.32) $ 1.73 $ 1.58 $ 1.54 $ 1.37
Net Income (Loss) Per Share $ 1.74 $ 1.80 $ 1.80 $ (.32) $ 1.73 $ 1.58 $ 1.54 $ 1.34(b)
Assuming Full Dilution:
Income Before Restructuring Costs and
Accounting Change $ 1.88 $ 1.83 $ 1.82 $ 1.97 $ 1.73 $ 1.55 $ 1.54 $ 1.36
Income (Loss) After Restructuring Costs
and Before Effect of Accounting Change $ 1.74 $ 1.78 $ 1.79 $ (.32) $ 1.73 $ 1.55 $ 1.52 $ 1.36
Net Income (Loss) Per Share $ 1.74 $ 1.78 $ 1.79 $ (.32) $ 1.73 $ 1.55 $ 1.52 $ 1.33(b)
- --------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Share $ .56 $ .56 $ .56 $ .56 $ .50 $ .50 $ .50 $ .44
Average Common and Common
Equivalent Shares 447.7 447.2 444.8 446.1 446.0 448.4 436.2 430.5
Average Common Shares Assuming
Full Dilution 448.8 450.5 448.4 449.1 447.7 456.4 444.4 439.5
- --------------------------------------------------------------------------------------------------------------------------------
Stock Price Per Common Share:(c)
High $ 95.88 $ 81.25 $ 74.38 $ 73.50 $ 64.75 $ 61.63 $ 48.75 $ 40.88
Low 79.88 64.25 64.25 52.13 53.88 46.25 37.50 35.75
Close 89.38 80.13 70.63 70.50 58.75 60.88 47.25 37.75
- --------------------------------------------------------------------------------------------------------------------------------
(a) For a discussion of restructuring costs, see Note Eleven on page 77.
(b) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for
other postretirement benefits relating to the Corporation's foreign plans.
Primary and fully-diluted net income per share were each reduced by $.03 per
share as a result of the adoption of SFAS 106.
(c) The Corporation's common stock is listed and traded on the New York Stock
Exchange and the London Stock Exchange Limited. The high, low and closing prices
of the Corporation's common stock are from the New York Stock Exchange Composite
Transaction Tape.
92
75
GLOSSARY OF TERMS THE CHASE MANHATTAN CORPORATION
AND SUBSIDIARIES
The page numbers included after each definition below represents the pages in
the MD&A and Notes to Consolidated Financial Statements where the term is
primarily used.
Asset/Liability Management ("ALM"): The management and control of the
sensitivity of the Corporation's income to changes in market interest rates.
(Page 55)
Core Deposits: Includes all deposits except noninterest-bearing time deposits,
foreign deposits and certificates of deposit of $100,000 or more. (Page 59)
Credit Risk: The possibility that a loss may occur, due to replacement cost,
should a borrower or counterparty fail to honor fully the terms of a contract.
(Pages 48 and 52)
Derivatives and Foreign Exchange Instruments: Interest rate swaps, forward rate
agreements, futures, forwards, option 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. These instruments provide the Corporation with a
cost-effective alternative to assuming and mitigating risks associated with
traditional on-balance sheet instruments. (Pages 52 and 83)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding merger-related costs,
foreclosed property expense and nonrecurring items). (Pages 37, 41 and 42)
FASB: Financial Accounting Standards Board. (Page 60)
FASI 39: Financial Accounting Standards Interpretation No. 39, entitled,
"Offsetting of Amounts Related to Certain Contracts." (Page 37)
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991
pursuant to which each Federal banking regulator was required to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the risk of
nontraditional activities. (Page 82)
Market Risk: The risk of loss resulting from changes in the prices of financial
instruments in the markets in which the Corporation participates, such as
changes in the value of foreign exchange or fixed income securities. (Pages 52
and 54)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Page 39)
Nonrecurring Items: 1996 included aggregate tax benefits and refunds, the loss
on the sale of a building in Japan and costs incurred in combining the
Corporation's foreign retirement plans. In 1995, nonrecurring items were the
gains on the sales of the Corporation's investment in Far East Bank and Trust
Company, Chemical New Jersey Holding, Inc. and the loss on the sale of half of
the Corporations 40% interest in CIT. Nonrecurring items in 1994 and 1993
included charges related to assets held for accelerated disposition and gains on
the sales of such assets, as well as gains on emerging markets past-due interest
bond sales. There were no nonrecurring items in 1992. (Page 38)
Notional Principal of Derivative and Foreign Exchange Instruments: The amount on
which interest and other payments in a derivative or foreign exchange
transaction are based. For derivative transactions, the notional principal
typically does not change hands, but is simply a quantity upon which payments
are calculated. (Page 52)
Operating Net Income: Earnings on a fully taxable basis, excluding the impact of
changes in accounting principles, restructuring charges and nonrecurring items.
(Page 38)
Operating Noninterest Expense: Noninterest expense excluding merger-related
costs, foreclosed property expense and nonrecurring items. (Pages 38 and 42)
Replacement Cost of Derivative or Foreign Exchange Product: The cost to replace
the derivative or foreign exchange contract at current market rates should the
counterparty default prior to the settlement date. (Page 52)
Restructuring Costs: For 1996, represents one-time merger-related restructuring
charge and also merger-related expenses taken in connection with the merger of
Chemical and Chase. The merger-related expenses have been accounted for in
accordance with an existing accounting pronouncement. The restructuring costs
are included in the restructuring charge and expenses caption in the income
statement. (Pages 37, and 42)
SFAS 106: Statement of Financial Accounting Standards No. 106, entitled,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." (Pages
37 and 79)
SFAS 107: Statement of Financial Accounting Standards No. 107, entitled,
"Disclosures About Fair Value of Financial Instruments." (Page 86)
SFAS 109: Statement of Financial Accounting Standards No. 109, entitled,
"Accounting for Income Taxes." (Pages 37 and 77)
SFAS 114: Statement of Financial Accounting Standards No. 114, entitled,
"Accounting by Creditors for Impairment of a Loan." (Page 73)
SFAS 115: Statement of Financial Accounting Standards No. 115, entitled,
"Accounting for Certain Investments in Debt and Equity Securities." (Pages 69,
72 and 73)
SFAS 123: Statement of Financial Accounting Standards No. 123, entitled,
"Accounting for Stock Based Compensation." (Page 81)
SFAS 125: Statement of Financial Accounting Standards No. 125, entitled,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." (Page 60)
SFAS 127: Statement of Financial Accounting Standards No. 127, entitled,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." (Page 60)
Underlying Operating Noninterest Expense: Operating noninterest expense as
defined above before the effects of any merger-related cost savings. (Pages 38
and 42)
93
76
This Page Left Intentionally Blank
94
77
The Chase Manhattan Corporation
and Subsidiaries
================================================================================
Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differentials
A three-year summary of the Corporation's consolidated average balances,
interest rates and interest differentials on a taxable-equivalent basis for the
years 1994 through 1996, is provided on pages 96 and 97. Income computed on a
taxable-equivalent basis is the income reported in the Consolidated Statement of
Income adjusted to make income and earning yields on assets exempt from income
taxes (primarily Federal taxes) comparable to other taxable income. The
incremental tax rate used for calculating the taxable equivalent adjustment was
approximately 43% in each of the years 1994 through 1996. A substantial portion
of the Corporation's securities are taxable.
Within the Consolidated Average Balance Sheet, Interest and Rates summary,
the principal amounts of nonaccrual and renegotiated loans have been included in
the average loan balances used to determine the average interest rate earned on
loans. Interest accrued but not collected at the date a loan is placed on
nonaccrual status is reversed against interest income. Interest income on
nonaccrual loans is recognized only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought
current and future payments are reasonably assured.
A summary of interest rates and interest differentials segregated between
domestic and foreign operations for the years 1994 through 1996 is presented on
pages 98 and 99. Regarding the basis of segregation between the domestic and
foreign components, see Note Twenty Two of the Notes to Consolidated Financial
Statements at page 89. A portion of the Corporation's international operations
are funded by domestic sources (intra-company funding). Generally, the source of
such domestic funds is the Parent Company which, in order to optimize the
Corporation's overall liquidity, deposits its excess short-term funds with The
Chase Manhattan Bank's Nassau Branch to hold until such funds are needed.
Intra-company funding is very short-term in nature and the Corporation believes
such funds are not subject to cross-border risk.
Domestic net interest income was $6,721 million in 1996, an increase of $272
million from the prior year. The increase in 1996 was attributable to a higher
level of interest-earning assets (for further discussion, see the section
entitled "Net Interest Income" in Management's Discussion and Analysis at page
39).
Net interest income from foreign operations was $1,653 million for 1996,
compared with $1,798 million in 1995. The decline primarily reflected a shift
to lower yielding interest-earning assets.
The table on pages 100 and 101 presents an analysis of the effect on net
interest income of volume and rate changes for the periods 1996 over 1995 and
1995 over 1994. In this analysis, the change due to the volume/rate variance has
been allocated to volume.
95
78
- --------------------------------------------------------------------------------
Average Consolidated Balance Sheet, Interest and Rates
- --------------------------------------------------------------------------------
Year Ended December 31, 1996
(Taxable-Equivalent Interest -------------------------------
and Rates; in millions, except rates) Balance Interest Rate
- --------------------------------------------------------------------------------
Assets
Deposits With Banks $ 6,479 $ 537 8.29%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 31,165 2,135 6.85
Trading Assets - Debt and Equity Instruments 29,595 2,016 6.81
Securities:
Available-for-Sale 39,538 2,580 6.53(a)
Held-to-Maturity 4,174 302 7.24
- --------------------------------------------------------------------------------
Total Securities 43,712 2,882 6.59
- --------------------------------------------------------------------------------
Domestic Loans 113,554 9,584 8.44
Foreign Loans 36,442 2,789 7.65
- --------------------------------------------------------------------------------
Total Loans 149,996 12,373(b) 8.25
- --------------------------------------------------------------------------------
Total Interest-Earning Assets 260,947 19,943 7.64%
- --------------------------------------------------------------------------------
Allowance for Credit Losses (3,684)
Cash and Due from Banks 12,070
Trading Assets-Risk Management Instruments 26,684
All Other Assets 25,223
- --------------------------------------------------------------------------------
Total Assets $ 321,240
- --------------------------------------------------------------------------------
Liabilities
Domestic Retail Deposits $ 56,144 1,969 3.51%
Domestic Negotiable Certificates of Deposit
and Other Deposits 8,009 517 6.46
Deposits in Foreign Offices 65,869 3,552 5.39
- --------------------------------------------------------------------------------
Total Interest-Bearing Deposits 130,022 6,038 4.64
- --------------------------------------------------------------------------------
Short-Term and Other Borrowings:
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 54,655 2,883 5.28
Commercial Paper 5,199 274 5.27
Other Borrowings(c) 16,695 1,473 8.82
- --------------------------------------------------------------------------------
Total Short-Term and Other Borrowings 76,549 4,630 6.05
Long-Term Debt 12,811 901 7.03
- --------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 219,382 11,569 5.27
- --------------------------------------------------------------------------------
Noninterest Bearing Deposits 39,562
Trading Liabilities-Risk
Management Instruments 27,421
All Other Liabilities 14,102
- --------------------------------------------------------------------------------
Total Liabilities 300,467
- --------------------------------------------------------------------------------
Preferred Stock of Subsidiary 158
Stockholders' Equity
Preferred Stock 2,650
Common Stockholders' Equity 17,965
- --------------------------------------------------------------------------------
Total Stockholders' Equity 20,615(d)
- --------------------------------------------------------------------------------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 321,240
- --------------------------------------------------------------------------------
Interest Rate Spread 2.37%
- --------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 8,374 3.21%
- --------------------------------------------------------------------------------
(a) For the years ended December 31, 1996, 1995 and 1994, the annualized rate
for securities available-for-sale based on amortized cost was 6.48%, 7.26% and
7.04%, respectively. (b) Fees and commissions on loans included in loan interest
amounted to $177 million in 1996, $167 million in 1995 and $194 million in 1994.
(c) Includes securities sold but not yet purchased and structured notes. (d)The
ratio of average stockholders' equity to average assets was 6.4% for each of
1996 and 1995 and 6.6% for 1994.
96
79
The Chase Manhattan Corporation
and Subsidiaries
Year Ended December 31, 1995 1994
(Taxable-Equivalent Interest ----------------------------------- -------------------------------
and Rates; in millions, except rates) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------
Assets
Deposits With Banks $ 10,877 $ 824 7.58% $ 12,478 $ 869 6.96%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 29,465 1,889 6.41 25,333 1,827 7.21
Trading Assets Debt and Equity Instruments 20,935 1,464 6.99 19,436 1,282 6.60
Securities:
Available-for-Sale 26,946 1,948 7.23(a) 22,399 1,575 7.03(a)
Held-to-Maturity 9,756 667 6.84 10,911 779 7.14
- ----------------------------------------------------------------------------------------------------------------------
Total Securities 36,702 2,615 7.12 33,310 2,354 7.07
- ----------------------------------------------------------------------------------------------------------------------
Domestic Loans 110,752 9,725 8.78 101,440 8,258 8.14
Foreign Loans 35,776 3,138 8.77 35,273 2,770 7.85
- ----------------------------------------------------------------------------------------------------------------------
Total Loans 146,528 12,863(b) 8.78 136,713 11,028(b) 8.07
- ----------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 244,507 19,655 8.04% 227,270 17,360 7.64%
- ----------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses (3,840) (4,302)
Cash and Due from Banks 13,874 14,541
Trading Assets-Risk Management Instruments 30,397 27,956
All Other Assets 22,447 21,608
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 307,385 $ 287,073
- ----------------------------------------------------------------------------------------------------------------------
Liabilities
Domestic Retail Deposits $ 55,389 1,962 3.54% $ 60,043 1,486 2.47%
Domestic Negotiable Certificates of Deposit
and Other Deposits 9,948 624 6.27 10,612 578 5.45
Deposits in Foreign Offices 65,276 3,705 5.68 56,106 2,640 4.71
- ----------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 130,613 6,291 4.82 126,761 4,704 3.71
- ----------------------------------------------------------------------------------------------------------------------
Short-Term and Other Borrowings:
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 44,720 2,686 6.01 34,419 1,603 4.66
Commercial Paper 5,672 327 5.77 4,403 187 4.25
Other Borrowings(c) 13,033 1,162 8.92 13,029 1,657 12.72
- ----------------------------------------------------------------------------------------------------------------------
Total Short-Term and Other Borrowings 63,425 4,175 6.58 51,851 3,447 6.65
Long-Term Debt 13,080 942 7.20 13,628 848 6.22
- ----------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 207,118 11,408 5.51 192,240 8,999 4.68
- ----------------------------------------------------------------------------------------------------------------------
Noninterest Bearing Deposits 37,698 39,941
Trading Liabilities-Risk
Management Instruments 31,665 25,918
All Other Liabilities 11,261 9,932
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 287,742 268,031
- ----------------------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiary
Stockholders' Equity
Preferred Stock 2,730 3,020
Common Stockholders' Equity 16,913 16,022
- ----------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 19,643(d) 19,042(d)
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 307,385 $ 287,073
- ----------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 2.53% 2.96%
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 8,247 3.37% $ 8,361 3.68%
- ----------------------------------------------------------------------------------------------------------------------
97
80
- --------------------------------------------------------------------------------
Interest Rates and Interest Differential Analysis of
Net Interest Income - Domestic and Foreign
- --------------------------------------------------------------------------------
1996
Year Ended December 31, --------------------------------
(Taxable-Equivalent Interest Average Average
and Rates; in millions, except rates) Balance Interest Rate
- --------------------------------------------------------------------------------
DOMESTIC
Interest-Earning Assets:
Deposits With Banks $ 156 $ 5 3.21%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 21,526 1,137 5.28
Securities and Trading Assets 51,896 3,315 6.39
Loans 113,554 9,584 8.44
- --------------------------------------------------------------------------------
Total Interest-Earning Assets $ 187,132 14,041 7.50
- --------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Domestic Retail Time Deposits $ 56,144 1,969 3.51
Domestic Negotiable Certificates of
Deposit and Other Deposits 8,009 517 6.46
- --------------------------------------------------------------------------------
Total Deposits 64,153 2,486 3.88
- --------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 45,607 2,209 4.84
Other Borrowed Funds 15,209 1,118 7.35
- --------------------------------------------------------------------------------
Total Short-Term Borrowings 60,816 3,327 5.47
- --------------------------------------------------------------------------------
Long-Term Debt 12,293 853 6.94
Intra-Company Funding-Net 13,003 654 5.03
- --------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 150,265 7,320 4.87
Noninterest-Bearing Liabilities 36,867
- --------------------------------------------------------------------------------
Total Investable Funds $ 187,132 7,320 3.91
- --------------------------------------------------------------------------------
Domestic Net Interest Income and Net Yield $ 6,721 3.59%
- --------------------------------------------------------------------------------
FOREIGN
Interest-Earning Assets:
Deposits With Banks $ 6,323 $ 532 8.41%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 9,639 998 10.35
Securities and Trading Assets 21,411 1,583 7.39
Loans 36,442 2,789 7.65
- --------------------------------------------------------------------------------
Total Interest-Earning Assets $ 73,815 5,902 8.00
- --------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits $ 65,869 3,552 5.39
- --------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 9,048 674 7.45
Other Borrowed Funds 6,685 629 9.41
- --------------------------------------------------------------------------------
Total Short-Term Borrowings 15,733 1,303 8.28
- --------------------------------------------------------------------------------
Long-Term Debt 518 48 9.27
Intra-Company Funding-Net (13,003) (654) --
- --------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 69,117 4,249 6.15
Noninterest-Bearing Liabilities 4,698
- --------------------------------------------------------------------------------
Total Investable Funds $ 73,815 4,249 5.76
- --------------------------------------------------------------------------------
Foreign Net Interest Income and Net Yield $ 1,653 2.24%
- --------------------------------------------------------------------------------
Percentage of Total Assets and Liabilities
Attributable to Foreign Operations:
Assets 38.8%
Liabilities 38.9%
- --------------------------------------------------------------------------------
98
81
The Chase Manhattan Corporation
and Subsidiaries
1995 1994
Year Ended December 31, -------------------------------- --------------------------------
(Taxable-Equivalent Interest Average Average Average Average
and Rates; in millions, except rates) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------
DOMESTIC
Interest-Earning Assets:
Deposits With Banks $ 162 $ 11 6.79% $ 124 $ -- --%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 24,815 1,517 6.11 23,715 1,070 4.51
Securities and Trading Assets 40,252 2,753 6.84 35,928 2,363 6.58
Loans 110,752 9,725 8.78 101,440 8,258 8.14
- -----------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 175,981 14,006 7.96 161,207 11,691 7.25
- -----------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Domestic Retail Time Deposits $ 55,389 1,962 3.54 60,043 1,486 2.47
Domestic Negotiable Certificates of
Deposit and Other Deposits 9,948 624 6.27 10,612 578 5.45
- -----------------------------------------------------------------------------------------------------------------
Total Deposits 65,337 2,586 3.96 70,655 2,064 2.92
- -----------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 38,581 2,257 5.85 32,786 1,391 4.24
Other Borrowed Funds 15,652 1,234 7.88 14,774 907 6.14
- -----------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 54,233 3,491 6.44 47,560 2,298 4.83
- -----------------------------------------------------------------------------------------------------------------
Long-Term Debt 12,545 896 7.14 13,229 772 5.84
Intra-Company Funding-Net 10,331 584 5.65 1,057 80 7.57
- -----------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 142,446 7,557 5.31 132,501 5,214 3.94
Noninterest-Bearing Liabilities 33,535 28,706
- -----------------------------------------------------------------------------------------------------------------
Total Investable Funds $ 175,981 7,557 4.29 $ 161,207 5,214 3.23
- -----------------------------------------------------------------------------------------------------------------
Domestic Net Interest Income and Net Yield $ 6,449 3.67% $ 6,477 4.02%
- -----------------------------------------------------------------------------------------------------------------
FOREIGN
Interest-Earning Assets:
Deposits With Banks $ 10,715 $ 813 7.59% $ 12,354 $ 869 7.03%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 4,650 372 8.00 1,618 757 46.79
Securities and Trading Assets 17,385 1,326 7.63 16,818 1,273 7.57
Loans 35,776 3,138 8.77 35,273 2,770 7.85
- -----------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 68,526 5,649 8.24 66,063 5,669 8.58
- -----------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits $ 65,276 3,705 5.68 56,106 2,640 4.71
- -----------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 6,139 429 6.99 1,633 212 12.98
Other Borrowed Funds 3,053 255 8.35 2,658 937 35.25
- -----------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 9,192 684 7.44 4,291 1,149 26.78
- -----------------------------------------------------------------------------------------------------------------
Long-Term Debt 535 46 8.60 399 76 19.05
Intra-Company Funding-Net (10,331) (584) -- (1,057) (80) --
- -----------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 64,672 3,851 5.95 59,739 3,785 6.34
Noninterest-Bearing Liabilities 3,854 6,324
- -----------------------------------------------------------------------------------------------------------------
Total Investable Funds $ 68,526 3,851 5.62 $ 66,063 3,785 5.73
- -----------------------------------------------------------------------------------------------------------------
Foreign Net Interest Income and Net Yield $ 1,798 2.62% $ 1,884 2.85%
- -----------------------------------------------------------------------------------------------------------------
Percentage of Total Assets and Liabilities
Attributable to Foreign Operations:
Assets 36.3% 33.9%
Liabilities 37.0% 34.7%
- -----------------------------------------------------------------------------------------------------------------
99
82
- --------------------------------------------------------------------------------
Change in Net Interest Income, Volume and Rate Analysis
- --------------------------------------------------------------------------------
Consolidated
-------------------------------
Increase (decrease)
due to change in:
1996 over 1995 ------------------- Net
(On a Taxable-Equivalent Basis; in millions) Volume Rate Change
- --------------------------------------------------------------------------------
Interest-Earning Assets
Deposits With Banks $ (370) $ 83 $ (287)
Federal Funds Sold and Securities
Purchased Under Resale Agreements 343 (97) 246
Securities and Trading Assets 1,042 (223) 819
Loans 287 (777) (490)
- --------------------------------------------------------------------------------
Change in Interest Income 1,302 (1,014) 288
- --------------------------------------------------------------------------------
Interest-Bearing Liabilities
Deposits:
Domestic Retail Time Deposits 26 (19) 7
Domestic Negotiable Certificates of
Deposit and Other Deposits (126) 19 (107)
Deposits in Foreign Offices 32 (185) (153)
- --------------------------------------------------------------------------------
Total Deposits (68) (185) (253)
- --------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 557 (360) 197
Other Borrowed Funds 309 (51) 258
- --------------------------------------------------------------------------------
Total Short-Term Borrowings 866 (411) 455
- --------------------------------------------------------------------------------
Long-Term Debt (19) (22) (41)
Intra-Company Funding -- -- --
- --------------------------------------------------------------------------------
Change in Interest Expense 779 (618) 161
- --------------------------------------------------------------------------------
Change in Net Interest Income $ 523 $ (396) $ 127
- --------------------------------------------------------------------------------
1995 over 1994
Interest-Earning Assets
Deposits With Banks $ (121) $ 76 $ (45)
Federal Funds Sold and Securities
Purchased Under Resale Agreements 310 (248) 62
Securities and Trading Assets 339 104 443
Loans 862 973 1,835
- --------------------------------------------------------------------------------
Change in Interest Income 1,390 905 2,295
- --------------------------------------------------------------------------------
Interest-Bearing Liabilities
Deposits:
Domestic Retail Time Deposits (165) 641 476
Domestic Negotiable Certificates of
Deposit and Other Deposits (41) 87 46
Deposits in Foreign Offices 520 545 1,065
- --------------------------------------------------------------------------------
Total Deposits 314 1,273 1,587
- --------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 654 429 1,083
Other Borrowed Funds 102 (457) (355)
- --------------------------------------------------------------------------------
Total Short-Term Borrowings 756 (28) 728
- --------------------------------------------------------------------------------
Long-Term Debt (37) 131 94
Intra-Company Funding -- -- --
- --------------------------------------------------------------------------------
Change in Interest Expense 1,033 1,376 2,409
- --------------------------------------------------------------------------------
Change in Net Interest Income $ 357 $ (471) $ (114)
- --------------------------------------------------------------------------------
100
83
The Chase Manhattan Corporation
and Subsidiaries
Domestic Foreign
------------------------------- -------------------------------
Increase (decrease) Increase (decrease)
1996 over 1995 due to change in: due to change in:
(On a Taxable-Equivalent Basis; ------------------- Net ------------------- Net
in millions) Volume Rate Change Volume Rate Change
- --------------------------------------------------------------------------------------------------------------
Interest-Earning Assets
Deposits With Banks $ -- $ (6) $ (6) $ (370) $ 89 $ (281)
Federal Funds Sold and Securities
Purchased Under Resale Agreements (174) (206) (380) 517 109 626
Securities and Trading Assets 744 (182) 562 298 (41) 257
Loans 236 (377) (141) 51 (400) (349)
- --------------------------------------------------------------------------------------------------------------
Change in Interest Income 806 (771) 35 496 (243) 253
- --------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Deposits:
Domestic Retail Time Deposits 26 (19) 7
Domestic Negotiable Certificates of
Deposit and Other Deposits (126) 19 (107)
Deposits in Foreign Offices 32 (185) (153)
- --------------------------------------------------------------------------------------------------------------
Total Deposits (100) -- (100) 32 (185) (153)
- --------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 340 (388) (48) 217 28 245
Other Borrowed Funds (33) (83) (116) 342 32 374
- --------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 307 (471) (164) 559 60 619
- --------------------------------------------------------------------------------------------------------------
Long-Term Debt (17) (26) (43) (2) 4 2
Intra-Company Funding 134 (64) 70 (134) 64 (70)
- --------------------------------------------------------------------------------------------------------------
Change in Interest Expense 324 (561) (237) 455 (57) 398
- --------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 482 $ (210) $ 272 $ 41 $ (186) $ (145)
- --------------------------------------------------------------------------------------------------------------
1995 over 1994
Interest-Earning Assets
Deposits With Banks $ 3 $ 8 $ 11 $ (124) $ 68 $ (56)
Federal Funds Sold and Securities
Purchased Under Resale Agreements 67 380 447 243 (628) (385)
Securities and Trading Assets 296 94 390 43 10 53
Loans 818 649 1,467 44 324 368
- --------------------------------------------------------------------------------------------------------------
Change in Interest Income 1,184 1,131 2,315 206 (226) (20)
- --------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Deposits:
Domestic Retail Time Deposits (165) 641 476
Domestic Negotiable Certificates of
Deposit and Other Deposits (41) 87 46
Deposits in Foreign Offices 520 545 1,065
- --------------------------------------------------------------------------------------------------------------
Total Deposits (206) 728 522 520 545 1,065
- --------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 339 527 866 315 (98) 217
Other Borrowed Funds 69 258 327 33 (715) (682)
- --------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 408 785 1,193 348 (813) (465)
- --------------------------------------------------------------------------------------------------------------
Long-Term Debt (49) 173 124 12 (42) (30)
Intra-Company Funding 524 (20) 504 (524) 20 (504)
- --------------------------------------------------------------------------------------------------------------
Change in Interest Expense 677 1,666 2,343 356 (290) 66
- --------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 507 $ (535) $ (28) $ (150) $ 64 $ (86)
- --------------------------------------------------------------------------------------------------------------
101
84
================================================================================
Securities Portfolio
The amortized cost, estimated fair value and average yield, including the impact
of related derivatives, at December 31, 1996 of the Corporation's
available-for-sale and held-to-maturity securities by contractual maturity range
and type of security are presented in the table which follows:
Maturity Schedule of
Available-for-Sale Securities
December 31, 1996 (in millions, Due in 1 Due After 1 Due After 5 Due After
rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years 10 Years(a) Total
- --------------------------------------------------------------------------------------------------------------------
U.S. Government and Federal
Agency/Corporation Obligations:
Amortized Cost $ 1,381 $ 9,022 $ 4,422 $20,679 $35,504
Fair Value 1,376 8,932 4,316 20,422 35,046
Average Yield(b) 5.18% 5.70% 5.76% 7.26% 6.59%
- --------------------------------------------------------------------------------------------------------------------
Obligations of State and
Political Subdivisions:
Amortized Cost $ 252 $ 34 $ 10 $ 29 $ 325
Fair Value 252 34 10 31 327
Average Yield(b) 7.48% 5.85% 6.28% 6.64% 7.20%
- --------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $ 938 $ 6,226 $ 843 $ 1,094 $ 9,101
Fair Value 943 6,327 863 1,185 9,318
Average Yield(b) 8.11% 6.35% 6.65% 3.22% 6.18%
- --------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities:
Amortized Cost $ 2,571 15,282 $ 5,275 $21,802 $44,930
Fair Value 2,571 15,293 5,189 21,638 44,691
Average Yield(b) 6.47% 5.96% 5.90% 7.06% 6.52%
- --------------------------------------------------------------------------------------------------------------------
Maturity Schedule of
Held-to-Maturity Securities
December 31, 1996 (in millions, Due in 1 Due After 1 Due After 5 Due After
rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years 10 Years(a) Total
- --------------------------------------------------------------------------------------------------------------------
U.S. Government and Federal
Agency/Corporation Obligations:
Amortized Cost $ 158 $ 492 $ 679 $ 2,403 $ 3,732
Fair Value 158 492 683 2,392 3,725
Average Yield(b) 5.64% 6.44% 7.15% 6.72% 6.72%
- --------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $ -- $ 54 $ 17 $ 52 $ 123
Fair Value -- 54 17 53 124
Average Yield(b) --% 6.10% 8.95% 9.31% 7.84%
- --------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities:
Amortized Cost $ 158 $ 546 $ 696 $ 2,455 $ 3,855
Fair Value 158 546 700 2,445 3,849
Average Yield(b) 5.64% 6.40% 7.19% 6.78% 6.75%
- --------------------------------------------------------------------------------------------------------------------
(a) Securities with no stated maturity are included with securities with a
remaining maturity of ten years or more. Substantially all of the Corporation's
MBSs and CMOs are due in ten years or more based on contractual maturity. The
estimated duration, which reflects anticipated future prepayments based on a
consensus of dealers in the market, is approximately 5 years for MBSs, and less
than 1 year for CMOs.
(b) The average yield is based on amortized cost balances at the end of the
year. Yields are derived by dividing interest income, adjusted for the effect of
related derivatives on available-for-sale securities and the amortization of
premiums and accretion of discounts, by total amortized cost. Taxable-equivalent
yields are used, where applicable.
(c) Includes investments in debt securities issued by foreign governments,
corporate debt securities, collateralized mortgage obligations of private
issuers, other debt and equity securities.
Of the securities held in Corporation's securities portfolios, securities
issued by the Federal Republic of Germany exceeded 10% of the Corporation's
total stockholders' equity at December 31, 1996, with a fair value of $3,208
million and an amortized cost of $3,148 million. U.S. Government and Federal
Agencies were the only other issuers whose securities exceeded 10% of the
Corporation's total stockholders' equity at December 31, 1996.
For further discussion of the Corporation's securities portfolios, see Note
Three of the Notes to Consolidated Financial Statements on pages 71 and 72.
102
85
The Chase Manhattan Corporation
and Subsidiaries
================================================================================
Loan Portfolio
The table below sets forth the amount of loans outstanding by type for the dates
indicated:
December 31, (in millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
Domestic Loans:
Commercial and Industrial $ 34,996 $ 32,972 $ 30,990 $ 30,109 $ 35,656
Financial Institutions 5,570 5,766 5,277 6,239 7,772
Commercial Real Estate - Commercial Mortgage 5,040 5,514 6,125 7,892 9,870
Commercial Real Estate - Construction 894 1,148 1,580 2,545 4,977
Consumer 70,023 69,596 63,758 54,359 47,929
- ----------------------------------------------------------------------------------------------------------
Total Domestic Loans 116,523 114,996 107,730 101,144 106,204
- ----------------------------------------------------------------------------------------------------------
Foreign Loans:
Commercial, Industrial and Consumer 27,291 24,786 21,946 22,673 20,621
Foreign Governments and Official Institutions 6,171 6,076 7,859 8,530 11,744
Financial Institutions 6,480 5,422 5,591 5,476 6,876
- ----------------------------------------------------------------------------------------------------------
Total Foreign Loans 39,942 36,284 35,396 36,679 39,241
- ----------------------------------------------------------------------------------------------------------
Total Loans 156,465 151,280 143,126 137,823 145,445
- ----------------------------------------------------------------------------------------------------------
Unearned Income (1,373) (1,073) (895) (706) (877)
- ----------------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $ 155,092 $ 150,207 $ 142,231 $ 137,117 $ 144,568
- ----------------------------------------------------------------------------------------------------------
The foreign loan portfolio includes Brady Bonds which are subject to the
provisions of SFAS 115. A significant portion of the Brady Bonds are
collateralized by zero-coupon U.S. Treasury obligations. Up to two-years'
interest on Brady Bonds is also collateralized by U.S. Treasury obligations.
Management continually evaluates and monitors the ability of the foreign
governments to meet their obligations under the Brady Bonds that they have
issued and that are included in the portfolio, and believes that any unrealized
losses on these securities are temporary in nature.
Commercial mortgages provide financing for the acquisition or refinancing of
commercial properties. Construction loans are generally originated to finance
the construction of real estate projects. When the real estate project has cash
flows sufficient to support a commercial mortgage, the loan is transferred from
construction status to commercial mortgage status.
For a discussion of the Corporation's loan outstandings, see "Loan
Portfolio" on page 48.
Maturities and Sensitivity to Changes in Interest Rates
The following table shows loan maturity distribution based upon the stated terms
of the loan agreements, and sensitivity to changes in interest rates of the loan
portfolio, excluding consumer loans, at December 31, 1996:
Within 1-5 After 5
December 31, 1996 (in millions) 1 Year(a) Years Years Total
- --------------------------------------------------------------------------------
Domestic:
Commercial and Industrial $14,434 $14,854 $ 5,708 $34,996
Financial Institutions 5,436 134 -- 5,570
Commercial Real Estate 1,628 3,306 1,000 5,934
Foreign(b) 22,882 8,166 5,602 36,650
- --------------------------------------------------------------------------------
Total $44,380 $26,460 $12,310 $83,150
- --------------------------------------------------------------------------------
Loans at Fixed Interest Rates $ 3,850 $ 1,851
Loans at Variable Interest Rates 22,610 10,459
- --------------------------------------------------------------------------------
Total $26,460 $12,310
- --------------------------------------------------------------------------------
(a) Includes demand loans, overdrafts and loans having no stated schedule of
repayments and no stated maturity.
(b) Substantially all foreign loans that meet the accounting definition of a
security pursuant to SFAS 115 mature in over 10 years.
103
86
Cross-Border Outstandings
The extension of 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. In addition to the credit risk
associated with any borrower, these particular credits are also subject to
"country risk" - economic and political risk factors specific to the country of
the borrower which may make the borrower unable or unwilling to pay principal
and interest according to contractual terms. Other risks associated with these
credits include the possibility of insufficient foreign exchange and
restrictions on its availability. To minimize country risk, the Corporation
monitors its foreign credits in each country with specific consideration given
to maturity, currency, industry and geographic concentration of the credits.
The following table lists all countries in which the Corporation's
cross-border outstandings exceeded 1% of consolidated assets as of any of the
dates specified. For further discussion of the Corporation's Cross-Border
exposure see page 52.
Cross-Border Outstandings Exceeding One Percent of Total Assets(a)
Cross-Border
Total Outstandings
Cross-Border as a Percentage
(in millions) At December 31 Public Banks Other Outstandings(b) of Total Assets
- -----------------------------------------------------------------------------------------
Japan 1996 $1,312 $3,111 $ 863 $5,286 1.57%
1995 905 2,708 1,724 5,337 1.76
1994 248 5,280 1,538 7,066 2.48
- -----------------------------------------------------------------------------------------
Germany 1996 3,757 1,120 366 5,243 1.56
1995 4,315 339 413 5,067 1.67
1994 1,490 496 883 2,869 1.01
- -----------------------------------------------------------------------------------------
United Kingdom 1996 975 932 4,076 5,983 1.78
1995 192 915 3,314 4,421 1.45
1994 165 1,215 3,024 4,404 1.54
- -----------------------------------------------------------------------------------------
Italy 1996 3,074 329 215 3,618 1.08
1995 1,055 304 216 1,575 .52
1994 1,013 264 423 1,700 .60
- -----------------------------------------------------------------------------------------
Brazil 1996 1,295 297 1,468 3,060 .91
1995 1,029 424 1,856 3,309 1.09
1994 1,088 262 1,877 3,227 1.13
- -----------------------------------------------------------------------------------------
(a) Outstandings (including loans and accrued interest, interest-bearing
deposits with banks, securities, acceptances and other monetary assets, except
equity investments) represent those of both the public and private sectors and
are presented on a risk basis, i.e., net of written guarantees and tangible
liquid collateral when held outside the foreign country. At December 31, 1996,
outstandings to Canada were $2,776 million, which were in excess of .75% of
total assets. At December 31, 1996, 1995 and 1994, outstandings to Korea were
$2,691 million, $2,809 million and $2,164 million, respectively, which were in
excess of .75% of total assets. At December 31, 1994, outstandings to Hong Kong
and Mexico were $2,603 million and $2,259 million, respectively, which were in
excess of .75% of total assets.
(b) Outstandings exclude equity received in debt-for-equity conversions, which
is recorded initially at fair market value and generally accounted for under the
cost method. Commitments (outstanding letters of credit, standby letters of
credit, guarantees and unused legal commitments) are excluded. At December 31,
1996, off-balance sheet commitments, after adjusting for transfers of risk,
amounted to $2,502 million for Japan, $2,040 million for Germany, $2,767 million
for the United Kingdom, $963 million for Italy, and $195 million for Brazil.
The majority of outstandings to the above countries are short-term in nature,
which mitigates the credit risk as transactions settle quickly. These
outstandings generally represent interbank placements and trading assets. Due to
the short-term nature of interbank placements and trading assets, the
Corporation's balances tend to fluctuate greatly and the amount of outstandings
at year-end tends to be a function of timing, rather than representing a
consistent trend.
104
87
The Chase Manhattan Corporation
and Subsidiaries
Risk Elements
The following table sets forth the nonperforming assets and contractually
past-due loans at the dates indicated:
December 31, (in millions) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
Domestic Nonperforming Loans:
Nonaccruing Loans $ 848 $ 1,115 $ 1,091 $ 2,543 $ 5,763
Renegotiated Loans 38 35 37 37 --
- ------------------------------------------------------------------------------------------
Total Domestic Nonperforming Loans 886 1,150 1,128 2,580 5,763
- ------------------------------------------------------------------------------------------
Foreign Nonperforming Loans:
Nonaccruing Loans 132 339 457 1,061 2,990
Renegotiated Loans 3 4 4 4 5
- ------------------------------------------------------------------------------------------
Total Foreign Nonperforming Loans 135 343 461 1,065 2,995
- ------------------------------------------------------------------------------------------
Total Nonperforming Loans 1,021 1,493 1,589 3,645 8,758
- ------------------------------------------------------------------------------------------
Assets Acquired as Loan
Satisfactions (primarily Real Estate) 130 171 537 1,985 2,509
- ------------------------------------------------------------------------------------------
Total Nonperforming Assets $ 1,151 $ 1,664 $ 2,126 $ 5,630 $11,267
- ------------------------------------------------------------------------------------------
Contractually Past-Due Loans(a)
Domestic:
Consumer $ 395 $ 528 $ 485 $ 485 $ 514
Commercial 27 92 64 87 292
- ------------------------------------------------------------------------------------------
Total Domestic 422 620 549 572 806
- ------------------------------------------------------------------------------------------
Foreign 12 44 181 12 45
- ------------------------------------------------------------------------------------------
Total $ 434 $ 664 $ 730 $ 584 $ 851
- ------------------------------------------------------------------------------------------
(a) Accruing loans past-due 90 days or more as to principal and interest, which
are not characterized as nonperforming loans.
Renegotiated loans are those for which concessions, such as the reduction of
interest rates or deferral of interest or principal payments, have been granted
due to a deterioration in the borrowers' financial condition. Interest on
renegotiated loans is accrued at the renegotiated rates. Certain renegotiated
loan agreements call for additional interest to be paid on a deferred or
contingent basis. Such interest is recognized in income only as collected.
Impact of Nonperforming Loans on Interest Income
The following table presents the amount of interest income recorded by the
Corporation on its nonaccrual and renegotiated loans, excluding loans held for
accelerated disposition, and the amount of interest income on the carrying value
of such loans that would have been recorded if these loans had been current in
accordance with their original terms (i.e., interest at original rates). The
decrease in the total negative impact on interest income reflects the continued
reduction in the level of the Corporation's nonperforming loans.
Year Ended December 31, (in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Domestic:
Gross Amount of Interest That Would
Have Been Recorded at the Original Rate $ 81 $ 94 $ 116
Interest That Was Recognized in Income (25) (23) (32)
- --------------------------------------------------------------------------------
Negative Impact-Domestic 56 71 84
- --------------------------------------------------------------------------------
Foreign:
Gross Amount of Interest That Would
Have Been Recorded at the Original Rate 11 34 34
Interest That Was Recognized in Income (7) (11) (12)
- --------------------------------------------------------------------------------
Negative Impact-Foreign 4 23 22
- --------------------------------------------------------------------------------
Total Negative Impact on Interest Income $ 60 $ 94 $ 106
- --------------------------------------------------------------------------------
105
88
================================================================================
Summary of Loan Loss Experience
Allowance for Loan Losses
The table below summarizes the changes in the allowance for loan losses during
the periods indicated.
Year Ended December 31, (in millions) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 3,784 $ 3,894 $ 4,445 $ 4,938 $ 5,235
Provision for Credit Losses 897 758 1,050 2,254(g) 2,585
Provision for Loans Held for
Accelerated Disposition -- -- -- 566 --
Charge-Offs
Domestic:
Commercial and Industrial (181) (169) (252) (658) (700)
Financial Institutions -- -- (19) (57) (41)
Consumer (921) (967) (871) (908)(g) (965)
Commercial Real Estate (47) (84) (386) (564) (758)
Foreign(a) (38) (58) (442)(f) (948) (662)
- ----------------------------------------------------------------------------------------------------
Total Charge-Offs (1,187) (1,278) (1,970) (3,135) (3,126)
- ----------------------------------------------------------------------------------------------------
Recoveries
Domestic:
Commercial and Industrial 95 173 165 125 73
Financial Institutions -- 12 7 2 3
Consumer 97 108 106 95 101
Commercial Real Estate 33 53 96 43 15
Foreign 65 92 132 252(h) 59
- ----------------------------------------------------------------------------------------------------
Total Recoveries 290 438 506 517 251
- ----------------------------------------------------------------------------------------------------
Net Charge-Offs (897) (840) (1,464) (2,618) (2,875)
Charge Related to Conforming Credit
Card Charge-off Policies (102) -- -- -- --
Charge for Assets Transferred to
Held-for-Accelerated Disposition -- -- (148) (701) --
Transfer to Trading Assets-Risk
Management Instruments (75)(b) -- -- -- --
Transfer to Other Liabilities (70)(c) -- -- -- --
Other 12(d) (28)(e) 11 6 (7)
- ----------------------------------------------------------------------------------------------------
Balance at End of Year $ 3,549 $ 3,784 $ 3,894 $ 4,445 $ 4,938
- ----------------------------------------------------------------------------------------------------
(a) Includes losses on sales and swaps of loans previously classified as
emerging markets.
(b) Transfer relates to the allowance for credit losses on derivative and
foreign exchange financial instruments.
(c) Transfer relates to the allowance for credit losses on letters of credit and
guarantees.
(d) Relates primarily to the consolidation of a foreign subsidiary.
(e) Relates primarily to the sale of banking operations in southern and central
New Jersey.
(f) Includes $291 million related to management's final evaluation of the
emerging markets portfolio.
(g) Includes $55 million related to the decision to accelerate the disposition
of certain nonperforming residential mortgage loans.
(h) Includes $175 million of recoveries on the disposition of emerging markets
debt.
As of December 31, 1996, in accordance with the AICPA's Audit and Accounting
Guide for Banks and Savings Institutions, the allowance for credit losses has
been allocated into three components: an allowance for loan losses, which is
reported net in Loans; an allowance for credit losses on derivative and foreign
exchange financial instruments, which is reported net in Trading Assets - Risk
Management Instruments; and an allowance for credit losses on letters of credit
and guarantees, which is reported in Other Liabilities. Prior period amounts
have not been reclassified due to immateriality. The Corporation views the
aggregate allowance for credit losses to be available for all credit
activities.
Loan Loss Analysis
Year Ended December 31,
(in millions, except ratios) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
Balances
Loans-Average $149,996 $146,528 $136,713 $140,245 $146,771
Loans-Year End 155,092 150,207 142,231 137,117 144,568
Net Charge-Offs 999(a) 840 1,612(b) 3,319(b) 2,875
Allowance for Loan Losses 3,549 3,784 3,894 4,445 4,938
Nonperforming Loans 1,021 1,493 1,589 3,645 8,758
Ratios
Net Charge-Offs to:
Loans-Average .67% .57% 1.18% 2.37% 1.96%
Allowance for Loan Losses 28.15 22.20 41.40 74.67 58.22
Allowance for Loan Losses to:
Loans-Year End 2.29 2.52 2.74 3.24 3.42
Nonperforming Loans 347.60 253.45 245.06 121.95 56.38
- ---------------------------------------------------------------------------------------------------
(a) Includes a charge of $102 million related to conforming credit card
charge-off policies. See page 49.
(b) Includes charges for assets transferred to held for accelerated disposition
of $148 million and $701 million in 1994 and 1993, respectively.
106
89
The Chase Manhattan Corporation
and Subsidiaries
Allowance for Loan Losses-Foreign
The following table shows the changes in the portion of the allowance for loan
losses allocated to loans related to foreign operations:
Year Ended December 31, (in millions) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 431 $ 428 $ 721 $ 1,452 $ 1,972
Provision for Credit Losses (24) (32) 12 171 292
Charge-offs (38) (58) (442) (948) (662)
Recoveries 65 92 132 252 59
- ------------------------------------------------------------------------------------------
Net (Charge-Offs) Recoveries 27 34 (310) (696) (603)
Transfer to Domestic Allowance -- -- -- (200) (200)
Other 12 1 5 (6) (9)
- ------------------------------------------------------------------------------------------
Balance at End of Year $ 446 $ 431 $ 428 $ 721 $ 1,452
- ------------------------------------------------------------------------------------------
================================================================================
Deposits
The following data provides a summary of the Corporation's average deposits and
average interest rates for the years indicated:
Average Balances Average Interest Rates
(in millions, except interest rates) 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Domestic:
Noninterest-Bearing Demand $ 27,284 $ 30,647 $ 32,675 -- % -- % -- %
Interest-Bearing Demand 3,375 8,358 9,098 2.05 1.52 1.40
Savings 43,986 36,074 39,698 2.89 3.56 2.31
Time 25,349 25,165 26,634 4.52 4.68 3.83
- ----------------------------------------------------------------------------------------------
Total Domestic Deposits 99,994 100,244 108,105 2.49 2.58 1.91
- ----------------------------------------------------------------------------------------------
Foreign:
Noninterest-Bearing Demand 2,918 2,684 2,611 -- -- --
Interest-Bearing Demand 19,551 17,561 14,831 4.50 5.00 3.88
Savings 862 755 825 3.39 3.95 2.82
Time 46,259 47,067 40,330 5.72 5.94 5.06
- ----------------------------------------------------------------------------------------------
Total Foreign Deposits 69,590 68,067 58,597 5.10 5.44 4.51
- ----------------------------------------------------------------------------------------------
Total Deposits $169,584 $168,311 $166,702 3.56% 3.74% 2.82%
- ----------------------------------------------------------------------------------------------
The following table presents deposits by maturity range and type at December
31, 1996:
Domestic Time Other Domestic Deposits in
By remaining maturity at Certificates of Deposit Time Deposits Foreign Offices
December 31, 1996 (in millions) ($100,000 or More) ($100,000 or More) ($100,000 or More)
- --------------------------------------------------------------------------------------------------------
Three Months or Less $ 5,729 $ 5,393 $45,916
Over Three Months but within Six Months 2,089 1,283 1,826
Over Six Months but within Twelve Months 656 728 3,184
Over Twelve Months 563 801 1,516
- --------------------------------------------------------------------------------------------------------
Total $ 9,037 $ 8,205 $52,442
- --------------------------------------------------------------------------------------------------------
At December 31, 1996, total interest bearing deposits in domestic offices
were $67,186 million, of which $9,037 million were time certificates of deposit
in denominations of $100,000 or more, $8,205 million were other time deposits in
denominations of $100,000 or more, and $49,453 million were money market deposit
accounts and other savings accounts. Deposits of $100,000 or more in foreign
offices totaled $52,442 million, substantially all of which were
interest-bearing.
107
90
================================================================================
Short-Term and Other Borrowed Funds
The following data provides a summary of the Corporation's short-term and
other borrowed funds and weighted-average rates for the years indicated:
(in millions, except rates) 1996 1995 1994
- --------------------------------------------------------------------------------
Federal funds purchased and securities
sold under repurchase agreements:
Balance at year-end $53,868 $37,263 $32,410
Average daily balance during the year 54,655 44,720 34,419
Maximum month-end balance 67,750 52,655 42,828
Weighted-average rate at December 31 5.45% 5.82% 5.47%
Weighted-average rate during the year 5.28% 6.01% 4.66%
- --------------------------------------------------------------------------------
Other Borrowed Funds-Commercial paper:
Balance at year-end $ 4,500 $ 6,275 $ 5,841
Average daily balance during the year 5,199 5,672 4,403
Maximum month-end balance 5,991 6,275 5,841
Weighted-average rate at December 31 5.07% 5.52% 5.31%
Weighted-average rate during the year 5.26% 5.77% 4.25%
- --------------------------------------------------------------------------------
Other Borrowed Funds-Other borrowings:(a)
Balance at year-end $ 9,231 $ 7,661 $ 5,939
Average daily balance during the year 8,535 5,956 5,565
Maximum month-end balance 12,509 9,117 8,936
Weighted-average rate at December 31(b) 9.97% 6.96% 6.29%
Weighted-average rate during the year(b) 8.82% 11.08% 20.86%
- --------------------------------------------------------------------------------
(a) Excludes securities sold but not yet purchased.
(b) The weighted-average interest rates reflect the impact of local
interest rates prevailing in certain Latin American countries with highly
inflationary economies. The 1996 and 1995 rates reflect lower interest rates due
to the significant decrease in Brazilian inflation beginning in the third
quarter of 1994.
Federal funds purchased represents overnight funds. Securities sold under
repurchase agreements generally mature between one day and three months.
Commercial paper is generally issued in amounts not less than $100,000 and with
maturities of 270 days or less. Other borrowings consist of demand notes, term
federal funds purchased, and various other borrowings in domestic and foreign
offices that generally have maturities of one year or less.
At December 31, 1996, the Corporation had unused lines of credit available
for general corporate purposes, including the payment of commercial paper
borrowings, amounting to $1.0 billion.
108
91
The Chase Manhattan Corporation
and Subsidiaries
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized, on the 18th day of
February, 1997.
THE CHASE MANHATTAN CORPORATION
(Registrant)
By WALTER V. SHIPLEY
------------------------
(Walter V. Shipley,
Chairman of the Board and
Chief Executive Officer)
This report has been reviewed by each member of the Board of Directors and
pursuant to the requirements of the Securities Exchange Act of 1934, signed on
behalf of the registrant by members present at the meeting of the Board of
Directors on the date indicated. The Corporation does not exercise the power of
attorney to sign on behalf of any Director.
Capacity Date
-------- ----
WALTER V. SHIPLEY Director and Chairman of the
- ---------------------------- Board (Principal Executive
(Walter V. Shipley) Officer)
THOMAS G. LABRECQUE Director, President and
- ---------------------------- Chief Operating Officer
(Thomas G. Labrecque)
EDWARD D. MILLER Director and Senior Vice
- ---------------------------- Chairman of the Board
(Edward D. Miller)
WILLIAM B. HARRISON JR. Director and Vice Chairman
- ---------------------------- of the Board
(William B. Harrison Jr.)
FRANK A. BENNACK JR. Director February 18, 1997
- ----------------------------
(Frank A. Bennack Jr.)
SUSAN V. BERRESFORD Director
- ----------------------------
(Susan V. Berresford)
M. ANTHONY BURNS Director
- ----------------------------
(M. Anthony Burns)
H. LAURANCE FULLER Director
- ----------------------------
(H. Laurance Fuller)
MELVIN R. GOODES Director
- ----------------------------
(Melvin R. Goodes)
92
Capacity Date
-------- ----
WILLIAM H. GRAY, III Director
- ----------------------------
(William H. Gray, III)
GEORGE V. GRUNE Director
- ----------------------------
(George V. Grune)
HAROLD S. HOOK Director
- ----------------------------
(Harold S. Hook)
HELENE L. KAPLAN Director
- ----------------------------
(Helene L. Kaplan)
J. BRUCE LLEWELLYN Director
- ----------------------------
(J. Bruce Llewellyn)
EDMUND T. PRATT JR. Director February 18, 1997
- ----------------------------
(Edmund T. Pratt Jr.)
HENRY B. SCHACHT Director
- ----------------------------
(Henry B. Schacht)
ANDREW C. SIGLER Director
- ----------------------------
(Andrew C. Sigler)
JOHN R. STAFFORD Director
- ----------------------------
(John R. Stafford)
MARINA v.N. WHITMAN Director
- ----------------------------
(Marina v.N. Whitman)
PETER J. TOBIN Chief Financial Officer
- ---------------------------- (Principal Financial
(Peter J. Tobin) Officer)
JOSEPH L. SCLAFANI Executive Vice President
- ---------------------------- and Controller (Principal
(Joseph L. Sclafani) Accounting Officer)
93
APPENDIX I
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.
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------- ---- -----------
1 38 Bar graph entitled "Operating Net Income and Return on Common
Equity in millions, except ratios" presenting the following
information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Net Income $1,564 $2,266 $2,589 $2,903 $3,516
Return on Common
Equity 10.58% 13.73% 14.51% 15.82% 18.35%
2 39 Bar graph entitled "Provision for Credit Losses in millions"
presenting the following information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Provision for
Credit Losses $2,585 $2,254 $1,050 $ 758 $ 897
3 40 Bar graph entitled "Noninterest Revenue in millions"
presenting the following information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Total Noninterest
Revenue $5,420 $7,181 $6,701 $6,758 $7,512
====== ====== ====== ====== ======
Percentage increase of fees and
commissions from the
prior year 7% 9% 7% 13%
4 42 Bar graph entitled "Operating Noninterest Expense in millions"
presenting the following information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Operating
Noninterest
Expense-excludes
foreclosed
property expense,
restructuring
costs, a charge to
conform retirement
benefits provided
to foreign
employees, and
costs associated
with Wal-Mart
program and
the REIT $8,388 $8,798 $9,487 $9,450 $9,249
94
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------- ---- -----------
5 42 Bar graph entitled "Total Full-Time Equivalent Employees in
thousands" presenting the following information:
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- --------
74.2 76.0 77.9 72.7 67.8
6 45 Two pie charts entitled "Global Wholesale Banking Total
Revenue by Business" presenting the following information:
1996 1995
---- ----
Global Markets 32% 29%
Global Investment Banking and Corporate Lending 26% 29%
Global Services 23% 25%
Global Asset Management and Private Banking 10% 10%
Chase Capital Partners 9% 7%
7 46 Two pie charts entitled "Regional and Nationwide Consumer
Banking Total Revenue by Business" presenting the following
information:
1996 1995
---- ----
Credits Cards 33% 31%
Middle Market 11% 12%
International Consumer 3% 3%
National Consumer Finance 7% 7%
Mortgage Banking 8% 8%
Texas Commerce 15% 15%
Deposits and Investments 23% 24%
8 49 Pie chart entitled "Diversification of Loan Portfolio at
December 31, 1996" presenting the following information:
Domestic Residential Mortgage 24%
Domestic Credit Cards 8%
Domestic Auto Financings 7%
Domestic Other Consumer 6%
Domestic Financial Institutions 3%
Domestic Commercial Real Estate 4%
Domestic Commercial and Industrial 22%
Foreign Commercial 24%
Foreign Consumer 2%
95
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------- ---- -----------
9 49 Bar graph entitled "Nonperforming Assets in millions at
December 31" presenting the following information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Nonperforming Assets $11,181 $5,630 $2,126 $1,664 $1,151
====== ====== ====== ====== ======
10 49 Bar graph entitled "Net Charge-offs in millions" presenting
the following information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Total Net Charge-offs $2,875 $3,319 $1,612 $ 840 $ 999
====== ====== ====== ====== ======
11 50 Bar graph entitled "Managed Credit Card Receivables in
billions" presenting the following information:
12/19/92 12/19/93 12/19/94 12/19/95 12/19/96
-------- -------- -------- -------- --------
Owned $ 12.5 $ 13.6 $ 17.0 $ 17.1 $ 12.2
======== ======== ======== ======== ========
Managed $ 16.3 $ 17.4 $ 19.7 $ 23.7 $ 25.2
======== ======== ======== ======== ========
12 50 Bar graph entitled "Credit Card Net Charge-offs as a
Percentage of Average Managed Receivables in millions, except
ratios" presenting the following information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Net Charge-offs of Managed
Credit Card Receivables $ 877 $ 779 $ 745 $ 849 $1,156
Net Charge-offs of Managed
Credit Card Receivables as
a percentage of Average
Managed Credit Card
Receivables 5.59% 4.91% 4.30% 4.05% 4.87%
13 53 Bar graph entitled "Total Allowance for Loan Losses and
Allowance Coverage Ratio in millions, except ratios"
presenting the following information:
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- --------
Total Allowance for
Loan Losses $4,938 $4,445 $3,894 $3,784 $3,549
Total Allowance as a
Percentage of Total
Nonperforming Loans 56% 122% 245% 253% 348%
96
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------- ---- -----------
14 55 Bar graph entitled "Histogram of Daily Market Risk-Related
Revenue for 1996 and 1995" presenting the following
information:
Millions of dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30
----- ------ ------- ------- ------- -------
1996
Number of trading days ----
market risk-related 65 86 60 24 6 2
revenue was within the 1995
above prescribed positive ----
dollar range 58 99 60 12 2 1
Millions of dollars 0 - (5) (5) - (10) (10) - (15) (15) - (30) (30) and over
------- ---------- ----------- ----------- -------------
1996
Number of trading days ----
market risk-related 14 2 1 0 0
revenue was within the 1995
above prescribed negative ----
dollar range 17 6 2 0 3
15 59 Bar graph entitled "Risk-Based Capital Ratios" presenting the
following information:
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- --------
Total Risk-Based
Capital Ratio 11.22% 12.35% 12.23% 12.27% 11.78%
Tier 1 Risk-Based
Capital Ratio 7.01% 8.06% 8.05% 8.22% 8.15%
Tier 1 Leverage Ratio 6.79% 7.35% 6.63% 6.68% 6.79%
The minimum regulatory requirements for the above ratios are
as follows:
Minimum Total Risk-Based Capital Ratio 8%
Minimum Tier 1 Risk-Based Capital Ratio 4%
Minimum Tier 1 Leverage Ratio 3%
97
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------- ---- -----------
16 59 Bar graph entitled "Market Capitalization in billions"
presenting the following information:
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- --------
Market Capitalization $15.8 $17.8 $15.4 $25.6 $38.5
98
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of the Corporation, as
amended (incorporated by reference to Exhibit 4.1 to the
Corporation's Registration Statement on Form S-8, dated July 11,
1996, File No. 333-07941).
3.2 By-laws, as amended as of March 18, 1997.
4.1 Indenture, dated as of December 1, 1989, between Chemical Banking
Corporation and The Chase Manhattan Bank (National Association) as
succeeded to by Bankers Trust Company, as Trustee, which
Indenture includes the form of Debt Securities (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-3
(File No. 33-32409) of Chemical Banking Corporation).
4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as
of December 15, 1992, between Chemical Banking Corporation and
Morgan Guaranty Trust Company of New York, as succeeded to by
First Trust of New York, National Association, as Trustee, which
Indenture includes the form of Subordinated Debt Securities
(incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K, dated December 22, 1992, of Chemical Banking
Corporation, File No. 1-5805).
4.2(b) Second Supplemental Indenture, dated as of October 8, 1996,
between the Corporation and First Trust of New York, National
Association to the Indenture, dated as of April 1, 1987, as
amended and restated as of December 15, 1992 (incorporated by
reference to Exhibit 4.5 to the Registration Statement on Form S-3
(File No. 333-14959) of the Corporation).
4.3(a) Indenture, dated as of June 1, 1985, between Manufacturers Hanover
Corporation and IBJ Schroder Bank and Trust Company, as Trustee,
relating to 8 1/2% Subordinated Capital Notes Due February 15,
1999 (incorporated by reference to Exhibit 4(b) to the Current
Report on Form 8-K, dated February 27, 1987, of Manufacturers
Hanover Corporation, File No. 1-5923-1).
4.3(b) First Supplemental Indenture, dated as of December 31, 1991, among
Chemical Banking Corporation, Manufacturers Hanover Corporation
and IBJ Schroder Bank and Trust Company to the Indenture dated
June 1, 1985 (incorporated by reference to Exhibit 4.18(b) to
the Annual Report on Form 10-K, dated December 31, 1991, of
Chemical Banking Corporation, File No. 1-5805).
4.3(c) Second Supplemental Indenture, dated as of October 8, 1996,
between the Corporation and IBJ Schroder Bank and Trust Company to
the Indenture dated June 1, 1985 (incorporated by reference to
Exhibit 4.12 to the Registration Statement Form S-3 (File No.
333-14959) of the Corporation).
4.4(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan
Corporation and Bankers Trust Company, as Trustee, (incorporated
by reference to Exhibit (4)(a) to the Registration Statement on
Form S-3 (File No. 33-7299) of The Chase Manhattan Corporation).
4.4(b) First Supplemental Indenture, dated as of November 1, 1990,
between The Chase Manhattan Corporation and Bankers Trust Company,
as Trustee to the Indenture, dated as of July 1, 1986,
(incorporated by reference to Exhibit (4)(b) to the Registration
Statement on Form S-3 (File No. 33-40485) of The Chase Manhattan
Corporation).
4.4(c) Second Supplemental Indenture, dated as of May 1, 1991, between
The Chase Manhattan Corporation and Bankers Trust Company, as
Trustee to the Indenture dated as of July 1, 1986 (incorporated by
reference to Exhibit (4)(c) to the Registration Statement on Form
S-3 (File No. 33-42367) of The Chase Manhattan Corporation).
99
4.4(d) Third Supplemental Indenture, dated as of March 29, 1996, among
Chemical Banking Corporation, The Chase Manhattan Corporation and
Bankers Trust Company, as Trustee to the Indenture, dated as of
July 1, 1986, (incorporated by reference to Exhibit 4.18 to the
Registration Statement on Form S-3 (File No. 333-14959) of the
Corporation).
4.5(a) Amended and Restated Indenture, dated as of September 1, 1993,
between The Chase Manhattan Corporation and Chemical Bank, as
Trustee (incorporated by reference to Exhibit (4)(cc) to the
Current Report on Form 8-K, dated August 19, 1993, of The Chase
Manhattan Corporation, File No. 1-5945).
4.5(b) First Supplemental Indenture, dated as of March 29, 1996, among
Chemical Banking Corporation, The Chase Manhattan Corporation,
Chemical Bank, as resigning Trustee, and First Trust of New York,
National Association, as successor Trustee to the Amended and
Restated Indenture, dated as of September 1, 1993 (incorporated by
reference to Exhibit 4.22 to the Registration Statement on Form
S-3 (File No. 333-14959) of the Corporation).
4.5(c) Second Supplemental Indenture, dated as of October 8, 1996,
between the Corporation and First Trust of New York, National
Association to the Amended and Restated Indenture, dated as of
September 1, 1993 (incorporated by reference to Exhibit 4.23 to
the Registration Statement on Form S-3 (File No. 333-14959) of the
Corporation).
4.6(a) Indenture, dated as of May 15, 1993, between Margaretten Financial
Corporation and The Bank of New York, as Trustee, relating to the
6 3/4% Guaranteed Notes due June 15, 2000 (incorporated by
reference to Exhibit 4(a) to Registration Statement on Form S-3
(No. 33-60262) of Margaretten Financial Corporation).
4.6(b) Supplemental Indenture, dated as of July 22, 1994, to the
Indenture dated as of May 15, 1993 among Margaretten Financial
Corporation, Chemical Banking Corporation and The Bank of New
York, as Trustee, and Guarantee dated as of July 22, 1994 by
Chemical Banking Corporation (incorporated by reference to Exhibit
4.34 to the Current Report on Form 8-K, dated September 28, 1994,
of Chemical Banking Corporation, File No. 1-5805).
4.7 Junior Subordinated Indenture, dated as of December 1, 1996,
between the Corporation and The Bank of New York, as Debenture
Trustee (incorporated by reference to Exhibit 4.24 to the
Registration Statement on Form S-3 (File No. 333-19719) of the
Corporation).
10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase
Manhattan Corporation and The Chase Manhattan Bank, as amended and
restated effective December 1996.
10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as
amended and restated as of May 21, 1996.
10.3 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993
(incorporated by reference to Exhibit 10.5 to the Annual Report on
Form 10-K, dated December 31, 1994, of Chemical Banking
Corporation, File No. 1-5805).
10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan
(incorporated by reference to the Schedule 14A of the Corporation
filed on April 17, 1996, File No. 1-5805).
10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10O to the The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, File No. 1-5945).
10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10S to the The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as
amended and restated as of May 19, 1992 (incorporated by reference
to Exhibit 10.7 to the Annual Report on Form 10-K, dated December
31, 1992, of Chemical Banking Corporation, File No. 1-5805).
10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended
(incorporated by Reference to Exhibit 10A to the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-5945).
10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10T to The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.10 Key Executive Performance Plan of Chemical Banking Corporation
(incorporated by reference to Exhibit 10.4 to the Annual Report on
Form 10-K, dated December 31, 1994, of Chemical Banking
Corporation, File No. 1-5805).
100
10.11 The Chase Manhattan Annual Incentive Arrangement for Certain
Executive Officers (incorporated herein by reference to Exhibit
10W to The Chase Manhattan Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995, File No. 1-5945).
10.12 Forms of employment agreements as entered into by Chemical Banking
Corporation and certain of its executive officers (incorporated by
reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated
December 31, 1995 of Chemical Banking Corporation, File No.
1-5805).
10.13 Permanent Life Insurance Options Plan (incorporated by reference
to Exhibit 10.11 to the Annual Report on Form 10-K, dated December
31, 1992, of Chemical Banking Corporation, File No. 1-5805).
10.14 Executive Retirement Plan of Chemical Banking Corporation and
Certain Subsidiaries (incorporated by reference to Exhibit 10.8 to
the Annual Report on Form 10-K, dated December 31, 1995, of
Chemical Banking Corporation, File No. 1-5805).
10.15 Supplemental Retirement Plan of Chemical Bank and Certain
Affiliated Companies, restated effective January 1, 1993 and as
amended through January 1, 1995 (incorporated by reference to
Exhibit 10.9 to the Annual Report on Form 10-K, dated December 31,
1995, of Chemical Banking Corporation, File No. 1-5805).
10.16 Supplemental Retirement Plan of The Chase Manhattan Bank, as
amended (incorporated by reference to Exhibit 10G of the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1989, File No. 1-5945).
10.17 Further Amendment to the Supplemental Retirement Plan of The Chase
Manhattan Bank (incorporated by reference to Exhibit 10G of the
The Chase Manhattan Corporation's Annual Report on Form 10-K for
the year ended December 31, 1990, File No. 1-5945).
10.18 Amendment to Supplemental Retirement Plan of The Chase Manhattan
Bank (incorporated herein by reference to Exhibit 10Z to The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.19 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10H of the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-5945).
10.20 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10AA to The Chase
Manhattan Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, File No. 1-5945).
10.21 TRA 86 Supplemental Benefit Plan of the Bank, as amended
(incorporated by reference to Exhibit 10I of the The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-5945).
10.22 Amendment to TRA86 Supplemental Benefit Plan of The Chase
Manhattan Bank (incorporated herein by reference to Exhibit 10BB
to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, File No. 1-5945).
11.1 Computation of Earnings per Common Share
12.0 Computation of ratio of earnings to fixed charges.
12.1 Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements.
21.1 List of Subsidiaries of the Corporation.
22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase
Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21
under the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
1
BY-LAWS
THE CHASE MANHATTAN CORPORATION
(name changed from Chemical Banking Corporation on
March 31, 1996)
AS AMENDED THROUGH
March 18, 1997
Office of the Secretary
270 Park Avenue, 35th floor
New York, New York 10017
2
CONTENTS
SUBJECT
Article
- -------
I Meetings of Stockholders
Section 1.01 Annual Meeting
Section 1.02 Special Meetings
Section 1.03 Notice of Meetings
Section 1.04 Quorum
Section 1.05 Organization
Section 1.06 Voting
Section 1.07 List of Stockholders
Section 1.08 Inspectors of Election
Section 1.09 Notice of Stockholder Business and Director
Nominations.
II Board of Directors
Section 2.01 Number
Section 2.02 Vacancies
Section 2.03 Annual Meeting
Section 2.04 Regular Meetings
Section 2.05 Special Meetings
Section 2.06 Quorum
Section 2.07 Rules and Regulations
Section 2.08 Compensation
III Committees
Section 3.01 Executive Committee
Section 3.02 Audit Committee
Section 3.03 Other Committees
IV Officers and Agents
Section 4.01 Officers
Section 4.02 Clerks and Agents
Section 4.03 Term of Office
Section 4.04 Chairman of the Board
Section 4.05 President
Section 4.06 Vice Chairman of the Board
Section 4.07 Chief Financial Officer
Section 4.08 Controller
Section 4.09 Secretary
Section 4.10 Assistant Corporate Secretary
Section 4.11 General Auditor
Section 4.12 Powers and Duties of Other Officers
V Proxies re Stock or Other Securities of Other Corporations
3
VI Shares and Their Transfer
Section 6.01 Certificates for Stock
Section 6.02 Transfers of Stock
Section 6.03 Regulations
Section 6.04 Lost, Stolen, Destroyed and Mutilated
Certificates
Section 6.05 Fixing Date for Determination of
Stockholders of Record
VII Corporate Seal
VIII Fiscal Year
IX Indemnification
Section 9.01 Right to Indemnification
Section 9.02 Contracts and Funding
Section 9.03 Employee Benefit Plans
Section 9.04 Indemnification Not Exclusive Right
Section 9.05 Advancement of Expenses; Procedures
X By-laws
Section 10.01 Inspection
Section 10.02 Amendments
Section 10.03 Construction
4
BY-LAWS
OF
THE CHASE MANHATTAN CORPORATION
ARTICLE I
Meetings of Stockholders
Section 1.01. Annual Meeting. The annual meeting of the stockholders
of The Chase Manhattan Corporation (the "Corporation") shall be held on the
third Tuesday in May in each year (or, if that day shall be a legal holiday then
on the next preceding business day) at such time and place within or without the
State of Delaware, as may be specified in the notice thereof, as shall be fixed
by the Board of Directors (the "Board"), for the purpose of electing directors
and for the transaction of such other business as may properly be brought before
such meeting. If any annual meeting shall not be held on the day designated or
the directors shall not have been elected thereat or at any adjournment thereof,
thereafter the Board shall cause a special meeting of the stockholders to be
held as soon as practicable for the election of directors. At such special
meeting the stockholders may elect directors and transact other business with
the same force and effect as at an annual meeting of the stockholders duly
called and held.
Section 1.02. Special Meetings. A special meeting of the
stockholders may be called at any time by the Board, the Chairman of the Board
(herein called the Chairman), the President or a Vice Chairman of the Board or
otherwise as provided by the General Corporation Law of the State of Delaware
(herein called Delaware General Corporation Law). Such meetings shall be held at
such places, within or without the State of Delaware, as may from time to time
be designated by the Board or in the respective notices or waivers of notice
thereof.
Section 1.03. Notice of Meetings. Except as may otherwise expressly
be required by law, notice of the place, date and hour of holding each annual
and special meeting of the stockholders and the purpose or purposes thereof
shall be delivered personally or mailed in a postage prepaid envelope, not less
than ten (10) nor more than sixty (60) days before the date of such meeting, to
each person who appears on the stock books and records of the Corporation as a
stockholder entitled to vote at such meeting, and, if mailed, it shall be
directed to such stockholder at his address as it appears on such records unless
he shall have filed with the Secretary of the Corporation a written request that
notice intended for him be mailed to some other address, in which case it shall
be mailed to the address designated in such request. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who shall
attend such meeting in person or by proxy and shall not, at the beginning of
such meeting, object to the transaction of any business because the meeting has
not been lawfully called or convened, or who shall, either before or after the
meeting, submit a signed waiver of notice, in person or by proxy. Unless the
Board shall fix a new record date for an adjourned meeting, notice of such
adjourned meeting need not be given if the time and place to which the meeting
shall be adjourned were announced at the meeting at which the adjournment was
taken, provided that the adjournment is not for more than thirty (30) days.
Section 1.04. Quorum. At each meeting of the stockholders,
stockholders holding of record shares of common stock constituting a majority of
the voting power of stock of the Corporation having general voting power (shares
having such general voting power being hereinafter sometimes referred to as a
"voting interest of the stockholders") shall be present in person or by proxy to
constitute a quorum for the transaction of business. In the absence of a quorum
at any such meeting or any adjournment or adjournments thereof, a majority in
voting interest of the stockholders present in
- 1 -
5
person or by proxy and entitled to vote thereat, or in the absence therefrom of
all the stockholders, any officer entitled to preside at, or to act as secretary
of, such meeting may adjourn such meeting from time to time. At any such
adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally called.
The absence from any meeting of stockholders holding the number of shares of
stock of the Corporation required by the laws of the State of Delaware or by the
Certificate of Incorporation of the Corporation or by these By-laws for action
upon any given matter shall not prevent action at such meeting upon any other
matter or matters which may properly come before the meeting, if there shall be
present thereat in person or by proxy stockholders holding the number of shares
of stock of the Corporation required in respect of such other matter or matters.
Section 1.05. Organization. At each meeting of the stockholders, the
Chairman, or, if he shall be absent therefrom, the President, or a Vice Chairman
of the Board, or, if they also shall be absent therefrom, another officer of the
Corporation chosen as chairman of such meeting by a majority in voting interest
of the stockholders present in person or by proxy and entitled to vote thereat,
or, if all the officers of the Corporation shall be absent therefrom, a
stockholder holding of record shares of stock of the Corporation so chosen,
shall act as chairman of the meeting and preside thereat; and the Secretary, or,
if he shall be absent from such meeting or shall be required pursuant to the
provisions of this Section to act as chairman of such meeting, the person (who
shall be an Assistant Corporate Secretary, if an Assistant Corporate Secretary
shall be present thereat) whom the chairman of such meeting shall appoint shall
act as secretary of such meeting and keep the minutes thereof.
Section 1.06. Voting. Except as otherwise provided in the
Certificate of Incorporation, each stockholder shall, at each meeting of the
stockholders, be entitled to one vote in person or by proxy for each share of
stock of the Corporation held by him and registered in his name on the stock
books and records of the Corporation:
(a) on the date fixed pursuant to the provisions of Article VI of these
By-laws as the record date for the determination of stockholders who
shall be entitled to notice of and to vote at such meeting, or
(b) if no such record date shall have been so fixed, then at the close
of business on the day next preceding the day on which notice of the
meeting shall be given.
Persons holding in a fiduciary capacity stock of the Corporation shall be
entitled to vote such stock so held, and persons whose stock is pledged shall be
entitled to vote such stock, unless in the transfer by the pledgor on the books
of the Corporation he shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or his proxy, may represent such stock
and vote thereon. If shares of stock of the Corporation shall stand of record in
the names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons shall have the same fiduciary relationship respecting the
same shares of stock of the Corporation, unless the Secretary shall have been
given written notice to the contrary and have been furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(a) if only one shall vote, his act shall bind all;
(b) if more than one shall vote, the act of the majority so voting shall
bind all; and
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(c) if more than one shall vote, but the vote shall be evenly split on
any particular matter, then, except as otherwise required by the
Delaware General Corporation Law, each faction may vote the shares
in question proportionally.
If the instrument so filed shall show that any such tenancy is held in unequal
interests, the majority or even-split for the purpose of the next foregoing
sentence shall be a majority or even-split in interest. Any vote on stock of the
Corporation may be given at any meeting of the stockholders by the stockholder
entitled thereto in person or by his proxy appointed by an instrument in writing
subscribed by such stockholder or by his attorney thereunto authorized and
delivered to the Secretary of the Corporation or to the secretary of the
meeting; or by the transmitting or authorizing the transmission of a telegram,
cablegram, or other means of electronic transmission to the person who will be
the holder of the proxy to receive such transmission, provided that any such
telegram, cablegram, or other means of electronic transmission must either set
forth or be submitted with information from which it can be determined that the
telegram, cablegram or other electronic transmission was authorized by the
stockholder. Any copy, facsimile telecommunication or other reliable
reproduction of such writing or transmission may be substituted or used in lieu
of the original writing or transmission for any and all purposes for which the
original writing or transmission could be used, provided that any such
reproduction is a complete reproduction of the entire original writing or
transmission. No proxy shall be voted or acted upon after three (3) years from
its date, unless said proxy shall provide for a longer period. At all meetings
of the stockholders all matters, except those otherwise specified in these
By-laws, and except also those the manner of deciding upon which is otherwise
expressly regulated by law or by the Certificate of Incorporation of the
Corporation, shall be decided by the vote of a majority in voting interest of
the stockholders present in person or by proxy and entitled to vote thereat, a
quorum being present. Except in the case of votes for the election of directors,
unless demanded by a stockholder of the Corporation present in person or by
proxy at any meeting of the stockholders and entitled to vote thereat or so
directed by the chairman of the meeting, the vote thereat need not be by ballot.
Upon a demand of any such stockholder for a vote by ballot on any question or at
the direction of such chairman that a vote by ballot be taken on any question,
such vote shall be taken. On a vote by ballot each ballot shall be signed by the
stockholder voting, or by his proxy, if there be such proxy, and shall state the
number of shares voted.
Section 1.07. List of Stockholders. It shall be the duty of the
Secretary or other officer of the Corporation who shall have charge of its stock
books and records, either directly or through another officer of the Corporation
designated by him or through a transfer agent appointed by the Board, to prepare
and make, at least ten (10) days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
said meeting, either at a place within the city where said meeting is to be
held, which place shall be specified in the notice of said meeting, or, if not
so specified, at the place where said meeting is to be held. The list shall also
be produced and kept at the time and place of said meeting during the whole time
thereof, and may be inspected by any stockholder who shall be present thereat.
Upon the willful neglect or refusal of the directors to produce such list at any
meeting for the election of directors, they shall be ineligible for election to
any office at such meeting. The stock books and records shall be the only
evidence as to who are the stockholders entitled to examine the stock books and
records of the Corporation, or such list, or to vote in person or by proxy at
any meeting of stockholders.
Section 1.08. Inspectors of Election. At each meeting of the
stockholders, the chairman of such meeting may appoint two or more Inspectors of
Election to act thereat. Each Inspector of Election so appointed shall first
subscribe an oath or affirmation faithfully to execute the duties of an
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Inspector of Election at such meeting with strict impartiality and according to
the best of his ability. Such Inspectors of Election, if any, shall take charge
of the ballots at such meeting and after the balloting thereat on any question
shall count the ballots cast thereon and shall make a report in writing to the
secretary of such meeting of the results thereof. An Inspector of Election need
not be a stockholder of the Corporation, and any officer of the Corporation may
be an Inspector of Election on any question other than a vote for or against his
election to any position with the Corporation or on any other question in which
he may be directly interested.
Section 1.09. Notice of Stockholder Business and Director
Nominations.
(a) Business and Director Nominations to be Considered at Annual Meeting of
Stockholders.
(1) Nominations of persons for election to the Board and the proposal of
business to be considered by the stockholders may be made at an
annual meeting of stockholders (i) pursuant to the Corporation's
notice of meeting, (ii) by or at the direction of the Board, or
(iii) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this By-law
who is entitled to vote at the meeting and complies with the notice
procedures set forth in this By-law.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of
paragraph (a)(1) of this By-law Section 1.09, (i) the stockholder
must have given timely notice thereof in writing to the Secretary of
the Corporation and (ii) such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal offices
of the Corporation not later than the close of business on the 90th
day nor earlier than the 120th day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the
event that the date of the annual meeting is more than thirty (30)
days before or more than sixty (60) days after such anniversary
date, notice by the stockholder to be timely must be so delivered
not earlier than the 120th day prior to such annual meeting and not
later than the close of business on the later of the 90th day prior
to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the
giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or re-election as a
director all information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors
in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected);
(ii) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to
be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business
of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving
the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (A) the name and address of such
stockholder, as they appear on the Corporation's books, and of such
beneficial owner, (B) the class and number of shares of the
Corporation which are owned beneficially
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and of record by such stockholder and any such beneficial owner, and
(C) whether the proponent intends or is part of a group which
intends to solicit proxies from other stockholders in support of
such proposal or nomination.
(3) Notwithstanding anything in the second sentence of paragraph (a)(2)
of this By-law to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation
is increased and there is no public announcement by the Corporation
naming all of the nominees for director or specifying the size of
the increased Board of Directors at least ninety (90) days prior to
the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this By-law shall also be
considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the
Secretary at the principal offices of the Corporation not later than
the close of business on the 10th day following the day on which
such public announcement is first made by the Corporation.
(b) Business and Director Nominations to be Considered at Special Meetings of
Stockholders.
(1) Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant
to the Corporation's notice of meeting.
(2) Nominations of persons for election to the Board may be made at a
special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (i) by or at the
direction of the Board; or (ii) provided that the Board has
determined that directors shall be elected at such meeting, by any
stockholder of the Corporation who (A) is a stockholder of record at
the time of giving of notice provided for in this By-law, (B) shall
be entitled to vote at the meeting, and (C) complies with the notice
procedures set forth in this By-law. In the event the Corporation
calls a special meeting of stockholders for the purpose of electing
one or more persons to the Board, any such stockholder may nominate
a person or persons (as the case may be) for election to such
position(s) as specified in the Corporation's notice of meeting, if
the stockholder's notice required by paragraph (a)(2) of this By-law
shall be delivered to the Secretary at the principal offices of the
Corporation not earlier than the 90th day prior to such special
meeting, and not later than the close of business on the later of
the 60th day and prior to such special meeting or the 10th day
following the day on which public announcement is first made of the
date of the special meeting and the nominees proposed by the Board
for election at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new
time period for the giving of a stockholder's notice as described
above.
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(c) General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this By-law (or who are elected or appointed
to the Board pursuant to Article II, Section 2.02 of these By-laws)
shall be eligible to serve as directors of the Corporation and only
such business shall be conducted at a meeting of stockholders as
shall have been brought before the meeting in accordance with the
procedures set forth in this By-law.
(2) Except as otherwise provided by law, the Restated Certificate of
Incorporation or these By-laws, the chairman of the meeting shall
have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set
forth in this By-law and if any nomination or business is not in
compliance with this By-law to declare that such defective proposal
or nomination shall be disregarded.
(3) For purposes of this By-law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in
a document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act.
(4) Notwithstanding the foregoing provisions of this By-law, a
stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this By-law. Nothing in this
By-law shall be deemed to affect any rights (i) of stockholders to
request inclusion of proposals in the Corporation's proxy statement
pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of preferred stock to elect directors under specified
circumstances.
ARTICLE II
Board of Directors
Section 2.01. Number. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors, of such
number as may be fixed from time to time by resolution adopted by the Board or
by the stockholders, selected, organized and continued in accordance with the
provisions of the laws of the State of Delaware. Each director hereafter elected
shall hold office until the annual meeting of stockholders and until his
successor is elected and has qualified, or until his death or until he shall
resign or shall have been removed.
Section 2.02. Vacancies. In case of any increase in the number of
directors, the additional director or directors, and in case of any vacancy in
the Board due to death, resignation, removal, disqualification or any other
cause, the successors to fill the vacancies shall be elected by a majority of
the directors then in office, for a term expiring at the next annual meeting of
stockholders.
Section 2.03. Annual Meeting. An annual meeting of the directors
shall be held each year, without notice, immediately following the annual
meeting of stockholders. The time and place of such meeting shall be designated
by the Board. At such meeting, the directors shall, after qualifying, elect from
their own number a Chairman of the Board, a President and one or more Vice
Chairmen of the Board, and shall elect or appoint such other officers authorized
by these By-laws as they may deem desirable, and appoint the Committees
specified in Article III hereof. The directors may also elect to serve at the
pleasure of the Board, one or more Honorary Directors, not members of the Board.
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Honorary Directors of the Board shall be paid such compensation or such fees for
attendance at meetings of the Board, and meetings of other committees of the
Board, as the Board shall determine from time to time.
Section 2.04. Regular Meetings. The Board shall hold a regular
meeting without notice at the principal office of the Corporation on the third
Tuesday in each month, with such exceptions as shall be determined by the Board,
at such time as shall be determined by the Board, unless another time or place,
within or without the State of Delaware, shall be fixed by resolution of the
Board. Should the day appointed for a regular meeting fall on a legal holiday,
the meeting shall be held at the same time on the preceding day or on such other
day as the Board may order.
Section 2.05. Special Meetings. Special meetings of the Board shall
be held whenever called by the Chairman, the President, a Vice Chairman of the
Board, the Secretary or a majority of the directors at the time in office. A
notice shall be given as hereinafter in this Section provided of each such
special meeting, in which shall be stated the time and place of such meeting,
but, except as otherwise expressly provided by law or by these By-laws, the
purposes thereof need not be stated in such notice. Except as otherwise provided
by law, notice of each such meeting shall be mailed to each director, addressed
to him at his residence or usual place of business, at least two (2) days before
the day on which such meeting is to be held, or shall be sent addressed to him
at such place by telegraph, cable, wireless or other form of recorded
communication or be delivered personally or by telephone not later than noon of
the calendar day before the day on which such meeting is to be held. At any
regular or special meeting of the Board, or any committee thereof, one or more
Board or committee members may participate in such meeting by means of a
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. This type of
participation shall constitute presence in person at the meeting. Notice of any
meeting of the Board shall not, however, be required to be given to any director
who submits a signed waiver of notice whether before or after the meeting, or if
he shall be present at such meeting; and any meeting of the Board shall be a
legal meeting without any notice thereof having been given if all the directors
of the Corporation then in office shall be present thereat.
Section 2.06. Quorum. One-third of the members of the entire Board,
or the next highest integer in the event of a fraction, shall constitute a
quorum, but if less than a quorum be present, a majority of those present may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice.
Section 2.07. Rules and Regulations. The Board may adopt such rules
and regulations for the conduct of its meetings and the management of the
affairs of the Corporation as it may deem proper, not inconsistent with the laws
of the State of Delaware or these By-laws.
Section 2.08. Compensation. Directors shall be entitled to receive
from the Corporation such amount per annum and in addition, or in lieu thereof,
such fees for attendance at meetings of the Board or of any committee, or both,
as the Board from time to time shall determine. The Board may also likewise
provide that the Corporation shall reimburse each such director or member of
such committee for any expenses paid by him on account of his attendance at any
such meeting. Nothing in this Section contained shall be construed to preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor.
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ARTICLE III
Committees
Section 3.01. Executive Committee. The Board, by resolution adopted
by a majority of the entire Board, shall appoint an Executive Committee which,
when the Board is not in session, shall have and may exercise all the powers of
the Board that lawfully may be delegated, including without limitation the power
and authority to declare dividends. The Executive Committee shall consist of
such number of directors as the Board shall from time to time determine, but not
less than five and one of whom shall be designated by the Board as Chairman
thereof, as follows: (a) the Chairman of the Board, the President, the Vice
Chairmen of the Board; and (b) such other directors, none of whom shall be an
officer of the Corporation, as shall be appointed to serve at the pleasure of
the Board. The Board, by resolution adopted by a majority of the entire Board,
may (a) designate one or more directors as alternate members of the Executive
Committee or (b) specify that the member or members of the Executive Committee
present and not disqualified from voting at a meeting of the Executive
Committee, whether or not he or they constitute a quorum, may unanimously
appoint another member of the Board to act at such meeting in place of any
absent or disqualified member. The attendance of one-third of the members of the
Committee or their substitutes, or the next highest integer in the event of a
fraction, at any meeting shall constitute a quorum, and the act of a majority of
those present at a meeting thereof at which a quorum is present shall be the act
of the Committee. All acts done and powers conferred by the Committee from time
to time shall be deemed to be, and may be certified as being done or conferred
under authority of the Board. The Committee shall fix its own rules and
procedures, and the minutes of the meetings of the Committee shall be submitted
at the next regular meeting of the Board at which a quorum is present, or if
impracticable, at the next such subsequent meeting. The Committee shall hold
meetings "On Call" and such meetings may be called by the Chairman of the
Executive Committee, the Chairman of the Board, the President, a Vice Chairman
of the Board, or the Secretary. Notice of each such meeting of the Committee
shall be given by mail, telegraph, cable, wireless or other form of recorded
communication or be delivered personally or by telephone to each member of the
Committee not later than the day before the day on which such meeting is to be
held. Notice of any such meeting need not be given to any member of the
Committee who submits a signed waiver of notice whether before or after the
meeting, or if he shall be present at such meeting; and any meeting of the
Committee shall be a legal meeting without any notice thereof having been given,
if all the members of the Committee shall be present thereat. In the case of any
meeting, in the absence of the Chairman of the Executive Committee, such member
as shall be designated by the Chairman of the Executive Committee or the
Executive Committee shall act as Chairman of the meeting.
Section 3.02. Audit Committee. The Board, by resolution adopted by a
majority of the entire Board, shall appoint an Audit Committee composed of not
less than three of its members, none of whom shall be an officer of the
Corporation, to hold office at its pleasure and one of whom shall be designated
by the Board as Chairman thereof. The Committee shall make such examination into
the affairs of the Corporation and make such reports in writing thereof as may
be directed by the Board. The attendance of one-third of the members of the
Committee, or the next highest integer in the event of a fraction, at any
meeting shall constitute a quorum, and the act of a majority of those present at
a meeting thereof at which a quorum is present shall be the act of the
Committee.
Section 3.03. Other Committees. The Board, by resolution adopted by
a majority of the entire Board, may appoint, from time to time, such other
committees composed of not less than two of its members for such purposes and
with such duties and powers as the Board may determine. The attendance of
one-third of the members of such other committees, or the next highest integer
in the event of a fraction, at any meeting shall constitute a quorum, and the
act of a majority of those present at a meeting thereof at which a quorum is
present shall be the act of such other committees.
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ARTICLE IV
Officers and Agents
Section 4.01. Officers. The officers of the Corporation shall be (a)
a Chairman of the Board, a President and one or more Vice Chairmen of the Board,
each of whom must be a director and shall be elected by the Board; (b) a Chief
Financial Officer, a Controller, a Secretary, and a General Auditor, each of
whom shall be elected by the Board; and (c) such other officers as may from time
to time be elected by the Board or under its authority, or appointed by the
Chairman or the President or a Vice Chairman of the Board.
Section 4.02. Clerks and Agents. The Board may elect and dismiss, or
the Chairman or the President or a Vice Chairman of the Board may appoint and
dismiss, or delegate to any other officers authority to appoint and dismiss,
such clerks, agents and employees as may be deemed advisable for the prompt and
orderly transaction of the Corporation's business, and may prescribe, or
authorize the appointing officers to prescribe, their respective duties, subject
to the provisions of these By-laws.
Section 4.03. Term of Office. The officers designated in Section
4.01(a) shall be elected by the Board at its annual meeting. The officers
designated in Section 4.01(b) may be elected at the annual or any other meeting
of the Board. The officers designated in Section 4.01(c) may be elected at the
annual or any other meeting of the Board or appointed at any time by the
designated proper officers. Any vacancy occurring in any office designated in
Section 4.01(a) may be filled at any regular or special meeting of the Board.
The officers elected pursuant to Section 4.01(a) shall each hold office for the
term of one year and until their successors are elected, unless sooner
disqualified or removed by a vote of two-thirds of the whole Board. All other
officers, clerks, agents and employees elected by the Board, or appointed by the
Chairman, the President, or a Vice Chairman of the Board, or under their
authority, shall hold their respective offices at the pleasure of the Board or
officers elected pursuant to Sections 4.01(a).
Section 4.04. Chairman of the Board. The Chairman shall be the chief
executive officer of the Corporation and shall have, subject to the control of
the Board, general supervision and direction of the business and affairs of the
Corporation and of its several officers. He shall preside at all meetings of the
stockholders and at all meetings of the Board. He shall have the right to
execute any document or perform any act which could be or is required to be
executed or performed by the President of the Corporation. He shall have the
power to sign checks, orders, contracts, leases, notes, drafts and other
documents and instruments in connection with the business of the Corporation,
and together with the Secretary or an Assistant Corporate Secretary execute
conveyances of real estate and other documents and instruments to which the seal
of the Corporation is affixed. He shall perform such other duties as from time
to time may be prescribed by the Board.
Section 4.05. President. The President shall, subject to the
direction and control of the Board and the Chairman, participate in the
supervision of the business and affairs of the Corporation. In general, the
President shall perform all duties incident to the office of President, and such
other duties as from time to time may be prescribed by the Board or the
Chairman. In the absence of the Chairman, the President, shall preside at
meetings of stockholders and of the Board. The President shall have the same
power to sign for the Corporation as is prescribed in these By-laws for the
Chairman.
Section 4.06. Vice Chairman of the Board. The Vice Chairman of the
Board, or if there be more than one, then each of them, shall, subject to the
direction and control of the Board and the
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Chairman, participate in the supervision of the business and affairs of the
Corporation, and shall have such other duties as may be prescribed from time to
time by the Board or the Chairman. In the absence of the Chairman and the
President, a Vice Chairman, as designated by the Chairman or the Board, shall
preside at meetings of the stockholders and of the Board. Each Vice Chairman
shall have the same power to sign for the Corporation as is prescribed in these
By-laws for the Chairman.
Section 4.07. Chief Financial Officer. The Chief Financial Officer
shall have such powers and perform such duties as the Board, the Chairman, the
President or a Vice Chairman of the Board may from time to time prescribe which
may include, without limitation, responsibility for strategic planning,
corporate finance, control, tax and auditing and shall perform such other duties
as may be prescribed by these By-laws.
Section 4.08. Controller. The Controller shall exercise general
supervision of the accounting departments of the Corporation. He shall be
responsible to the Chief Financial Officer and shall render reports from time to
time relating to the general financial condition of the Corporation. He shall
render such other reports and perform such other duties as from time to time may
be prescribed by the Chief Financial Officer, a Vice Chairman of the Board, the
President or the Chairman.
Section 4.09. Secretary. The Secretary shall:
(a) record all the proceedings of the meetings of the
stockholders, the Board and the Executive Committee in one or
more books kept for that purpose;
(b) see that all notices are duly given in accordance with the
provisions of these By-laws or as required by law;
(c) be custodian of the seal of the Corporation; and he may see
that such seal or a facsimile thereof is affixed to any
documents the execution of which on behalf of the Corporation
is duly authorized and may attest such seal when so affixed;
and
(d) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be
prescribed by the Board and the Chairman.
Section 4.10. Assistant Corporate Secretary. At the request of the
Secretary, or in case of his absence or inability to act, the Assistant
Corporate Secretary, or if there be more than one, any of the Assistant
Corporate Secretaries, shall perform the duties of the Secretary and, when so
acting, shall have all the powers of, and be subject to all the restrictions
upon, the Secretary. Each Assistant Corporate Secretary shall perform such other
duties as from time to time may be prescribed by the Secretary, a Vice Chairman
of the Board, the President or the Chairman.
Section 4.11. General Auditor. The General Auditor shall
continuously examine the affairs of the Corporation. He shall have and may
exercise such powers and duties as from time to time may be prescribed by the
Board, the Chairman, a Vice Chairman of the Board, the President or the Chief
Financial Officer.
Section 4.12. Powers and Duties of Other Officers. The powers and
duties of all other officers of the Corporation shall be those usually
pertaining to their respective offices, subject to the direction and control of
the Board and as otherwise provided in these By-laws.
ARTICLE V
Proxies re Stock or Other Securities of
Other Corporations
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Unless otherwise provided by the Board, the Chairman, the President,
a Vice Chairman of the Board, the Chief Financial Officer or the Secretary may
from time to time (a) appoint an attorney or attorneys or an agent or agents of
the Corporation to exercise in the name and on behalf of the Corporation the
powers and rights which the Corporation may have as the holder of stock or other
securities in any other corporation to vote or consent in respect of such stock
or other securities; (b) instruct the person or persons so appointed as to the
manner of exercising such powers and rights; and (c) execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal, or otherwise, all such written proxies or other instruments as he may deem
necessary or proper in order that the Corporation may exercise its said powers
and rights.
ARTICLE VI
Shares and Their Transfer
Section 6.01. Certificates for Stock. Every owner of stock of the
Corporation of any class (or, if stock of any class shall be issuable in series,
any series of such class) shall be entitled to have a certificate, in such form
as the Board shall prescribe, certifying the number of shares of stock of the
Corporation of such class, or such class and series, owned by him. The
certificates representing shares of stock of each class (or, if there shall be
more than one series of any class, each series of such class) shall be numbered
in the order in which they shall be issued and shall be signed in the name of
the Corporation by the Chairman, the President, or a Vice Chairman of the Board,
and by the Secretary or an Assistant Corporate Secretary; provided, however,
that if any such certificate is countersigned by a registrar and the Board shall
by resolution so authorize, the signatures of such Chairman, President, Vice
Chairman of the Board, Secretary or Assistant Corporate Secretary or any
transfer agent may be facsimiles. In case any officer or officers or transfer
agent of the Corporation who shall have signed, or whose facsimile signature or
signatures shall have been placed upon any such certificate shall cease to be
such officer or officers or transfer agent before such certificate shall have
been issued, such certificate may be issued by the Corporation with the same
effect as though the person or persons who signed such certificate, or whose
facsimile signature or signatures shall have been placed thereupon were such
officer and officers or transfer agent at the date of issue. A stock ledger
shall be kept of the respective names of the persons, firms or corporations
owning stock represented by certificates for stock of the Corporation, the
number, class and series of shares represented by such certificates,
respectively, and the respective dates thereof, and in case of cancellation, the
respective dates of cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be cancelled and a new certificate or
certificates shall not be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled, except in cases provided
for in Section 6.04 or otherwise required by law.
Section 6.02. Transfers of Stock. Transfers of shares of the stock
of the Corporation shall be made on the stock books and records of the
Corporation only by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary, or
with a transfer agent duly appointed, and upon surrender of the certificate or
certificates for such shares properly endorsed and payment of all taxes thereon.
The person in whose name shares of stock stand on the stock books and records of
the Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation.
Section 6.03. Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates for stock of the
Corporation. The Board may appoint, or authorize any officer or officers to
appoint, one or more transfer agents and one or more registrars, and may require
all certificates for stock to bear the signature or signatures of any of them.
- 11 -
15
Section 6.04. Lost, Stolen, Destroyed and Mutilated Certificates.
The owner of any stock of the Corporation shall immediately notify the
Corporation of any loss, theft, destruction or mutilation of the certificate
therefor, and the Corporation may issue a new certificate for stock in the place
of any certificate theretofore issued by it and alleged to have been lost,
stolen or destroyed, and the Board may, in its discretion, require the owner of
the lost, stolen or destroyed certificate or his legal representatives to give
the Corporation a bond in such sum, limited or unlimited, and in such form and
with such surety or sureties, as the Board shall in its uncontrolled discretion
determine, to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate, or the issuance of such new certificate. The Board may, however, in
its discretion refuse to issue any such new certificate except pursuant to legal
proceedings under the laws of the State of Delaware in such case made and
provided.
Section 6.05. Fixing Date for Determination of Stockholders of
Record.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board may fix a record date, which
record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board, and which record
date shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting. If no record is fixed by the Board,
the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting
of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the
adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a
meeting, the Board may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record
date is adopted by the Board, and which date shall not be more than
ten (10) days after the date upon which the resolution fixing the
record date is adopted by the Board. If no record date has been
fixed by the Board, the record date for determining stockholders
entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is required by Delaware
General Corporation Law, shall be the first date on which signed
written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation by delivery to its registered
office in the State of Delaware, its principal place of business, or
an officer or agent of the Corporation having custody of the book in
which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record
date has been fixed by the Board and prior action by the Board is
required by Delaware General Corporation Law, the record date for
determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the
day on which the Board adopts the resolution taking such prior
action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or
allotment of any rights or the stockholders entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or
for the purpose of any other lawful action, the Board may fix a
record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record
date shall be not more than sixty (60) days prior to such action. If
no record date is
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fixed, the record date for determining stockholders for any such
purpose shall be the close of business on the day on which the Board
adopts the resolution relating thereto.
ARTICLE VII
Corporate Seal
The corporate seal of the Corporation shall be in the form of a
circle and shall bear the full name of the Corporation and the words and figures
"Corporate Seal 1968 Delaware".
ARTICLE VIII
Fiscal Year
The fiscal year of the Corporation shall be the calendar year.
ARTICLE IX
Indemnification
Section 9.01. Right to Indemnification. The Corporation shall to the
fullest extent permitted by applicable law as then in effect indemnify any
person (the "Indemnitee") who was or is involved in any manner (including,
without limitation, as a party or a witness), or is threatened to be made so
involved, in any threatened, pending or completed investigation, claim, action,
suit or proceeding, whether civil, administrative or investigative (including
without limitation, any action, suit or proceeding by or in the right of the
Corporation to procure a judgment in its favor) (a "Proceeding") by reason of
the fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer or employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such Proceeding. Such
indemnification shall be a contract right and shall include the right to receive
payment in advance of any expenses incurred by the Indemnitee in connection with
such Proceeding, consistent with the provisions of applicable law as then in
effect.
Section 9.02. Contracts and Funding. The Corporation may enter into
contracts with any director, officer, employee or agent of the Corporation in
furtherance of the provisions of this Article IX and may create a trust fund,
grant a security interest or use other means (including, without limitation, a
letter of credit) to ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Article IX.
Section 9.03. Employee Benefit Plans. For purposes of this Article
IX, references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee,
or agent of the Corporation which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner not opposed to the best interest of a corporation.
Section 9.04. Indemnification Not Exclusive Right. The right of
indemnification and advancement of expenses provided in this Article IX shall
not be exclusive of any other rights to which
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a person seeking indemnification may otherwise be entitled, under any statute,
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office. The provisions of this Article IX shall inure to the
benefit of the heirs and legal representatives of any person entitled to
indemnity under this Article IX and shall be applicable to Proceedings commenced
or continuing after the adoption of this Article IX, whether arising from acts
or omissions occurring before or after such adoption.
Section 9.05. Advancement of Expenses; Procedures. In furtherance,
but not in limitation, of the foregoing provisions, the following procedures and
remedies shall apply with respect to advancement of expenses and the right to
indemnification under this Article IX:
(a) Advancement of Expenses. All reasonable expenses incurred by or
on behalf of the Indemnitee in connection with any Proceeding shall be advanced
to the Indemnitee by the Corporation within twenty (20) days after the receipt
by the Corporation of a statement or statements from the indemnitee requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the expenses incurred by the Indemnitee and, if required by law at the
time of such advance, shall include or be accompanied by an undertaking by or on
behalf of the Indemnitee to repay the amounts advanced if it should ultimately
be determined that the Indemnitee is not entitled to be indemnified against such
expenses.
(b) Written Request for Indemnification. To obtain indemnification
under this Article IX, an Indemnitee shall submit to the Secretary of the
Corporation a written request, including such documentation and information as
is reasonably available to the Indemnitee and reasonably necessary to determine
whether and to what extent the Indemnitee is entitled to indemnification (the
"Supporting Documentation"). The determination of the Indemnitee's entitlement
to indemnification shall be made within a reasonable time after receipt by the
Corporation of the written request for indemnification together with the
Supporting Documentation. The Secretary of the Corporation shall, promptly upon
receipt of such a request for indemnification, advise the Board in writing that
the Indemnitee has requested indemnification.
(c) Procedure for Determination. The Indemnitee's entitlement to
indemnification under this Article IX shall be determined (i) by the Board by a
majority vote of a quorum (as defined in Article II of these By-laws) consisting
of directors who were not parties to such action, suit or proceeding, or (ii) if
such quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(iii) by the stockholders, but only if a majority of the disinterested
directors, if they constitute a quorum of the board, presents the issue of
entitlement to indemnification to the stockholders for their determination.
ARTICLE X
By-laws
Section 10.01. Inspection. A copy of the By-laws shall at all times
be kept in a convenient place at the principal office of the Corporation, and
shall be open for inspection by stockholders during business hours.
Section 10.02. Amendments. Except as otherwise specifically provided
by statute, these By-laws may be added to, amended, altered or repealed at any
meeting of the Board by vote of a majority of the entire Board, provided that
written notice of any such proposed action shall be given to each director prior
to such meeting, or that notice of such addition, amendment, alteration or
repeal shall have been given at the preceding meeting of the Board.
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Section 10.03. Construction. The masculine gender, where appearing
in these By-laws, shall be deemed to include the feminine gender.
- 15 -
1
THE CHASE MANHATTAN CORPORATION
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
(As amended and restated December 1996)
1. Definitions - The following are defined terms wherever they appear in the
Plan.
1.1 "Administrator" shall mean the Secretary, or such other person or
committee appointed by the Chief Executive Officer of the
Corporation, responsible for those functions assigned to the
Administrator under the Plan.
1.2 "Bank" shall mean The Chase Manhattan Bank.
1.3 "Board of Directors" shall mean the Board of Directors of the
Corporation or the Bank.
1.4 "Corporation" shall mean The Chase Manhattan Corporation.
1.5 "Deferred Compensation Account" or "Account" shall mean the separate
account established under the Plan for each Participant as described
in Section 3.1.
1.6 "Director" shall mean a member of the Board of Directors of the
Corporation or the Board of Directors of the Bank who is not also an
employee (or former employee) of the Corporation or the Bank.
1.7 "Participant" shall mean each Director who participates in the Plan
in accordance with the terms and conditions of the Plan.
1.8 "Plan" shall mean the Deferred Compensation Plan for Non-Employee
Directors of The Chase Manhattan Corporation and The Chase Manhattan
Bank, as amended from time to time.
1.9 "Stock" shall mean the Common Stock of the Corporation, $1.00 par
value per share.
1.10 "Valuation Date" shall mean the close of business on the last
business day of each calendar quarter.
1.11 "Subsidiary" shall mean any corporation which at the time qualifies
as a subsidiary of the Corporation under the definition of
"subsidiary corporation" in Section 425(f) of the Internal Revenue
Code, as amended from time to time.
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2. Participation.
2.1 Eligibility. Each Director is eligible to participate in the Plan.
2.2 Participation in the Plan; Termination of Participation.
(a) An individual may elect to participate by delivering a
properly executed election form to the Administrator. The
election form shall specify: (1) the amount, by percentage or
by dollar amount, of cash compensation and/or the amount (but
not less than all) of Stock compensation to be deferred; (2)
the allocation of deferred cash compensation among the forms
of hypothetical investment of such deferred compensation; (3)
the manner in which deferred compensation is to be paid; (4)
the date or dates for payment of deferred compensation; and
(5) the manner of payment of deferred compensation to a
Participant's estate in the event of death before complete
distribution of deferred compensation.
(b) The effective date for participation in the Plan by an
individual who is a Director shall be the first day of the
calendar year next beginning after the date that the
Administrator receives the individual's election to
participate in the Plan. The effective date of participation
in the Plan for an individual who is not a Director shall be
the date that he becomes a Director if the Administrator has
received an election to participate in the Plan prior to that
date.
(c) A Participant may elect to terminate participation in the Plan
by delivering written notice to the Administrator. The
effective date for termination shall be the date specified by
the Participant in the notice of termination (but not earlier
than the date of such notice).
(d) The deferral of a Participant's compensation shall begin or
end, as appropriate, as of the effective date of the
Participant's election to participate or of the Participant's
notice to terminate participation, as appropriate, described
in paragraphs (b) and (c) above.
2.3 Term of Election of Deferral; Modification or Termination of
Election of Deferral.
(a) An election to defer compensation, or to modify a prior
election to defer compensation, must be made by the
Participant prior to the commencement of the period during
which the compensation is earned or to which the compensation
relates and shall continue in effect until modified or
terminated by the Participant or until the Participant ceases
to be eligible to participate in the Plan. A Participant may
at any time modify
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or terminate an election to defer compensation, but in each
case only once in any 12-month period.
(b) A termination of an election to defer compensation shall apply
prospectively only and shall not affect previously deferred
compensation. A Participant who terminates an election to
defer compensation is not eligible to participate in the Plan
again until 12 months after the date that the Participant's
election to terminate becomes effective under Section 2.2.
3. Compensation Deferred.
3.1 Deferred Compensation Account.
(a) A Deferred Compensation Account shall be established for each
Participant. The Account shall consist of two parts: (1) cash
compensation deferred by a Participant under the Plan, along
with hypothetical income (or losses) on this compensation (the
"Cash Account") and (2) compensation in the form of Stock
plus Stock credited to Participant as a result of the
hypothetical reinvestment of hypothetical dividends on such
Stock compensation (the "Stock Account"). The amount of cash
deferred (plus income or less losses) shall be credited to the
Participant's Cash Account. The number of shares of Stock
deferred, plus Stock resulting from the hypothetical
reinvestment of hypothetical dividends on deferred Stock
compensation, shall be credited to the Participant's Stock
Account.
(b) Deferred cash compensation shall be credited to the
Participant's Cash Account as of the last day of the month
during which such cash compensation was otherwise payable to
the Participant. For purposes of hypothetical investment of
cash compensation under Section 3.3, however, deferred cash
compensation shall not be considered to be hypothetically
invested until the first day of the calendar quarter next
following the date that such compensation is credited to the
Participant's Cash Account and shall not begin to earn income
until the first day of such quarter.
(c) Deferred Stock compensation shall be credited annually to the
Participant's Stock Account as of December 1 or such other
date as may be specified by the Board of Directors for the
payment of Stock compensation.
3.2 Amount of Deferral. A Participant may elect to defer receipt of all
or a specified portion, by percentage or by dollar amount, of
compensation otherwise payable in cash and/or all (but not a portion
of) compensation payable in Stock to the Participant for services as
a Director or as a member of a committee of the Board of Directors
of the Corporation or the Bank or as a member of any advisory
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4
board of the Corporation, the Bank or any subsidiary of the
Corporation or the Bank. For these purposes, compensation shall
include, but shall not be limited to, Directors' fees (whether in
cash or Stock), retainers, meeting fees, fees for committees or
other similar forms of remuneration, but shall not include direct
reimbursement of expenses.
3.3 Hypothetical Investment of Cash. Deferred cash compensation is
assumed to be invested, without charge, in one or more of the
investment equivalents made available from time to time hereunder.
Descriptions of investment equivalents available under the Plan
shall be provided to each Participant on or prior to the Participant
making an allocation or reallocation of investment equivalents into
which any deferred cash payments are to be allocated or reallocated.
3.4 Time of Hypothetical Investment of Cash. The amount of cash in the
Participant's Cash Account on each Valuation Date which has not been
previously invested shall be deemed invested in a hypothetical
investment on that Valuation Date based on the value of the
hypothetical investment on that date.
3.5 Allocation of Hypothetical Investments of Cash; Reallocation of
Hypothetical Investments of Cash.
(a) A Participant may allocate the balance of the Participant's
Cash Account to one or more hypothetical investments. The
allocation shall be selected by the Participant.
(b) A Participant may at any time prospectively change the
allocation of the hypothetical investment of future deferred
cash compensation. The reallocation of such future deferred
compensation may be made only once in a 12-month period and
shall be effective as of, and shall be based upon values in
effect on, the Valuation Date which is coincident with or next
following the date that the Administrator receives the
Participant's written notification of the reallocation.
(c) A Participant may at any time also reallocate among the
hypothetical investments any cash compensation previously
deferred by the Participant and then credited to the
Participant's Cash Account. This reallocation is in addition
to the reallocation described in paragraph (b) above and may
be made only once in a 12-month period. The reallocation shall
be effective as of, and based upon values in effect on, the
Valuation Date which is coincident with or next following the
date that the Administrator receives the Participant's written
notification of the reallocation.
4
5
3.6 Hypothetical Dividends on Deferred Stock. Dividends shall be deemed
to have been paid on Stock allocated to a Participant's Stock
Account as if such allocated Stock were actual shares of Stock
issued and outstanding on the record date for dividends on Stock.
Such hypothetical dividends shall be converted into deferred shares
of Stock and shall be credited to a Participant's Stock Account
quarterly on each payment date in the amount of such hypothetical
dividends divided by the average of the high and low selling price
of one share of Stock as reported in the New York Stock Exchange
Composite Transactions on such payment date. Fractional shares shall
be credited to a Participant's Stock Account cumulatively, but the
balance of shares of Stock in a Participant's Stock Account shall be
rounded to the next highest whole share in the event of any issuance
and distribution of Stock to such Participant pursuant to Section
4.1. The number of shares of Stock in a Participant's Stock Account
shall be adjusted to reflect stock dividends, splits and
reclassifications.
3.7 Balance of Deferred Compensation Account. The balance of each
Participant's Deferred Compensation Account shall include: (1) cash
compensation deferred by the Participant and income (or losses) from
the hypothetical investment of this compensation credited to the
Participant's Cash Account and (2) Stock compensation deferred by
the Participant and credited to the Participant's Stock Account and
any additional Stock credited to the Participant's Stock Account
from the investment of dividends deemed paid on such Stock
compensation. The balance of each Participant's Deferred
Compensation Account, and the income or losses attributable to the
Account since the last Valuation Date, shall be determined as of
each Valuation Date.
3.8 Statement of Account. A statement shall be sent to each Participant
as to the balance of the Participant's Deferred Compensation Account
at least once a calendar year.
4. Payment of Deferred Compensation.
4.1 Payment of Deferred Compensation. Upon termination of services as a
Director, the balance of the Participant's Deferred Compensation
Account shall (subject to Section 4.2) be paid to the Participant in
the manner and at the time selected by the Participant prior to the
date of such termination. For purposes of payment, the balance of
the Participant's Account shall be valued as of the Valuation Date
coincident with or immediately preceding the date that the balance,
or the particular installment thereof, is to be paid, but the
balance of the Participant's Account shall include all compensation
deferred by the Participant since the last Valuation Date.
5
6
4.2 Elections Pertaining to Payments. The Participant may elect the
manner of payment of the balance of the Participant's Deferred
Compensation Account, whether in the Cash or Stock Account,
including the dates of periodic payments over a specified period of
years or the date of a lump sum distribution, provided that:
(a) If the payment provides for installments, the payments shall
be made at least annually and not more frequently than
quarterly and shall be payable for a period not to exceed 15
years;
(b) Except as provided in paragraph (d) below, no payments may be
made prior to the first day of the calendar year following the
calendar year during which the Participant terminates services
as a Director unless the payment is made pursuant to Section
4.4 or Section 4.5;
(c) No payments from any Participant's Stock Account shall be
payable otherwise than in shares of Stock; and
(d) No payments from any Participant's Cash Account shall be
payable otherwise than in cash.
4.3 Modifications of Elections Pertaining to Payments. A Participant may
at any time prior to the date that the Participant's service as a
Director is terminated modify previous elections pertaining to: (1)
the date or dates and the manner in which the balance of the
Participant's Deferred Compensation Account is to be paid and (2)
the manner of payment of the balance of the Participant's Deferred
Compensation Account in the event of the Participant's death.
4.4 Payments to a Deceased Participant's Estate or Beneficiaries.
(a) A Participant may elect by notice to the Administrator that in
the event of the Participant's death, any balance in the
Participant's Deferred Compensation Account shall be paid (i)
to beneficiaries, named by the Participant, provided that if
no such election is made, payment shall be to the
Participant's estate; and (ii) in the same manner as provided
with respect to the Participant, provided that if no such
election is made the balance of the Participant's Deferred
Compensation Account shall be determined as of the Valuation
Date coincident with or immediately following the
Participant's death and this amount shall be paid in a single
payment to the Participant's estate as soon as reasonably
practicable thereafter.
(b) In the event of a Participant's election to have Deferred
Compensation payments made in installments following the death
of such Participant, the
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7
Administrator may, upon consideration of the application of
the duly appointed administrator or executor of the
Participant's estate, or such beneficiaries as have been named
by the Participant, direct that the balance of the
Participant's Deferred Compensation Account be paid in a
single payment. The payment shall be made at the time
specified by the Administrator.
4.5 Unforeseeable Emergency. A Participant may request the Administrator
to make payment in the care of an unforeseeable emergency. For
purposes of this Plan, an unforeseeable emergency is severe
financial hardship to the Participant resulting from a sudden and
unexpected illness or accident of the Participant or of a dependent
(as defined by relevant provisions of law) of the Participant, loss
of the Participant's property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant. The circumstances that
will constitute an unforeseeable emergency will depend upon the
facts of each case, but, in any case, payment may not be made to the
extent that such hardship is or may be relieved (i) through
reimbursement or compensation by insurance or otherwise, (ii) by
liquidation of the Participant's assets, to the extent the
liquidation of such assets would not itself cause severe financial
hardship, or (iii) by cessation of deferrals under the Plan.
Examples of what are not considered to be unforeseeable emergencies
include the need to send a Participant's child to college or the
desire to purchase a home. Withdrawals of amounts because of an
unforeseeable emergency must only be permitted to the extent
reasonably needed to satisfy the emergency need.
5. General Provisions.
5.1 Participant's Rights Unsecured. The right of any Participant to
receive future payments of cash or Stock under the provisions of the
Plan shall be an unsecured claim against the general assets of the
Corporation or the Bank, as appropriate.
5.2 Assignability. No right to receive payments or distributions under
the Plan shall be transferable or assignable by a Participant,
except by will, by the laws of descent and distribution or by a
court of competent jurisdiction. Any other attempted assignment or
alienation of payments under the Plan shall be void and of no force
or effect.
5.3 Administration. Except as otherwise provided herein, the Plan shall
be administered by the Administrator, who shall have the authority
to adopt rules and regulations for carrying out the Plan and who
shall interpret, construe and implement the provisions of the Plan.
5.4 Amendment. The Plan may at any time or from time to time be amended,
modified or terminated by the Corporation and/or the Bank, provided
that no
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8
amendment, modification or termination (a) shall, without the
consent of the Participant and the approval of the Board of
Directors, adversely affect the balance of a Participant's Deferred
Compensation Account at that time or (b) permit payment of the
balance of a Participant's Deferred Compensation Account prior to
the date of payment specified in Section 4.2 (except for payments
provided in Section 4.4 or Section 4.5).
5.5 Legal Opinions. The Administrator may consult with legal counsel,
who may be counsel for the Corporation or other counsel, with
respect to the Administrator's obligations or duties hereunder, or
with respect to any action, proceeding or any question of law, and
shall not be liable with respect to any action taken or omitted to
be taken, by the Administrator in good faith pursuant to the advice
of such counsel.
5.6 Liability. Any decision made or action taken by the Board of
Directors, the Administrator, or any employee of the Corporation or
any of its subsidiaries arising out of or in connection with the
construction, administration, interpretation or effect of the Plan
shall be within their or its absolute discretion and shall be
conclusive and binding on all parties. Neither the Administrator nor
any member of the Board of Directors, and no employee of the
Corporation or of any of its subsidiaries, shall be liable for any
act or action hereunder, whether of omission or commission, except
in circumstances involving bad faith, or for any act of any other
member or employee or of any agent to whom duties in connection with
the administration of the Plan have been delegated.
5.7 Construction. The singular shall include the plural, where
appropriate.
8
1
THE CHASE MANHATTAN CORPORATION
Post-Retirement Compensation Plan for Non-Employee Directors
(As amended and restated effective May 21, 1996.)
SECTION 1. Plan. This plan is the Chase Manhattan Corporation
Post-Retirement Compensation Plan for Non-Employee Directors.
SECTION 2. Definitions. For purposes of the Plan, the following terms
shall have the meanings specified below:
"Administrator" shall mean the person appointed by the Chief Executive
Officer of the Corporation to administer the Plan.
"Board" shall mean the Board of Directors of the Corporation.
"Common Stock" shall mean the shares of common stock, par value $1 per
share, of the Corporation.
"Corporation" shall mean The Chase Manhattan Corporation, a Delaware
corporation.
"Director" shall mean a person serving as a director of the
Corporation.
"Fair Market Value" shall mean the mean between the high and low
selling prices of Common Stock on the date as of which such value is being
determined.
"Outside Director" shall mean any Director of the Corporation who has
never been an employee or officer of the Corporation or a Subsidiary.
"Participant" shall have the meaning assigned to such term in Section
3.
"Subsidiary" shall mean any corporation which at the time qualifies as
a subsidiary of the Corporation under the definition of "subsidiary corporation"
in Section 425(f) of the Internal Revenue Code of 1986, as the same may be
amended from time to time.
"Unit" shall mean a unit which is equal in value to the Fair Market
Value of a share of Common Stock.
SECTION 3. Participants. Effective as of May 21, 1996, the term
"Participant" shall be limited to those Outside Directors who were participating
in the Plan and on such date, the Plan shall be frozen, and no further amounts
shall accrue in respect of any Participant, except as set forth in Section 4(b).
1
2
SECTION 4. Compensation. (a) Commencing upon a Participant's
retirement, resignation or removal from service as a Director on the Board, or
any failure of a Participant to be reelected as a Director after accepting a
nomination for election, in each case (i) after attaining the age of 70 (or such
other age as may be established from time to time by the Board as the retirement
age), (ii) with the consent of the Board or (iii) because of disability or
health reasons, the Corporation shall pay on May 1 of each year (or on such
other date or dates as the Administrator shall so designate in his sole
discretion) during the Participant's lifetime to each Participant an amount
equal to the dollar value of the annual retainer fee (such dollar value to be
determined by the Administrator from time to time) payable to Directors of the
Corporation at the date the Participant retires, resigns, or is removed from
service as a Director or is not reelected as a Director after accepting a
nomination for election, which amount shall be not less than $25,000 for
Participants ceasing to serve the Corporation in the capacity of Director on or
after January 1, 1990; provided, however, such amount shall be reduced for each
Participant with fewer than ten years of service to the Board as an Outside
Director by ten percent for each year, or part thereof, less than ten years of
service. In calculating the number of years a Participant has served on the
Board, all years served prior to the effectiveness of this Plan and for
Participants who were Directors of Manufacturers Hanover Corporation or who were
Directors of The Chase Manhattan Corporation at the time of its merger with
Chemical Banking Corporation, all years such Participants had served as
directors of such corporation prior to becoming Directors of the Corporation.
shall be included in the calculation.
(b) For purposes of determining the amount payable hereunder to any
Participant retiring, resigning or being removed on or after May 20, 1996, the
following rules shall apply:
(i) any Participant retiring, resigning or being removed on
May 20, 1996, shall be permitted to elect to (A) receive the compensation set
forth in Section 4(a), except that the age specified in Section 4(a) (i) shall
be 65 and such Participant shall be deemed to have performed ten years of
service to the Board as an Outside Director (regardless of his or her actual
years of service); or (B) be treated in the manner set forth in Section 4(b)
(ii) below;
(ii) any Participant retiring, resigning, being removed or
otherwise terminating service as an Outside Director after May 20, 1996 shall,
in lieu of the compensation payable under this Section 4(a), receive an amount
determined pursuant to Section 5; provided that in determining the amount to be
initially credited to the Participant's account under Section 5, each
Participant shall be considered to have performed ten years of service to the
Board as an Outside Director (regardless of his or her actual years of service).
SECTION 5. Deferred Account. (a) The compensation otherwise payable
under Section 4(a) to Participants described in Section 4(b) (ii) or electing to
be so treated under the provisions of Section 4(b) (i) shall be converted to a
present value dollar amount, based on actuarial assumptions satisfactory to the
Administrator, and such dollar amount converted into a number of Units by
dividing such dollar amount by
2
3
the average of the Fair Market Value of the Common Stock during the period
commencing July 18, 1996 and ending August 5, 1996, inclusive.
(b) The amount so determined pursuant to Section 5(a) shall be treated as
deferred in accordance with Appendix A hereto.
SECTION 6. Nontransferability. No amount due to any Participant shall
be assignable or transferable by a Participant, except by will or the laws of
descent and distribution, and no right or interest of any Participant shall be
subject to any lien, obligation or liability. Any attempted assignment or
alienation of payments hereunder shall be void and of no force or effect.
SECTION 7. Amendment. The Board may amend, suspend or terminate the
Plan or any portion hereof at any time; provided, however, no right under the
Plan of any Participant (including the right to receive future compensation in
specified amounts) immediately prior to any amendment of the Plan shall in any
way be amended, modified, suspended or terminated without such Participant's
prior written consent.
SECTION 8. Withholding. The Corporation shall have the right to deduct
from any and all amounts paid to any Participant under this Plan any taxes
required by law to be withheld therefrom.
SECTION 9. Administration. The Plan shall be administered by the
Administrator who shall have the authority to adopt rules and regulations for
carrying out the Plan, and who shall interpret, construe and implement the
provisions of the Plan.
SECTION 10. Participant's Rights Unsecured. The right of any
Participant to receive future payments under the provisions of the Plan shall be
an unsecured claim against the general assets of the Corporation.
SECTION 11. Effective Date. This Plan became effective on May 13, 1988.
3
4
Appendix A
SECTION A1. Participants' Account Balances. The Corporation shall maintain an
individual book account under the Plan for each Participant having a deferred
account. Each Participant shall initially have credited to his or her account
the number of Units calculated in respect of such Participant pursuant to
Section 5 hereof. Such account shall continue to be expressed in Units until an
Outside Director has ceased to render services to the Corporation as an Outside
Director. Any dividends paid on Common Stock shall be credited to a
Participant's account in respect of each Unit and deemed to be reinvested in
additional Units based on the Fair Market Value of Common Stock on the dividend
payment date. In addition, the number of Units allocated to a Participant's
account shall be adjusted to reflect stock dividends, splits and
reclassifications, and similar transactions affecting the value of Common Stock.
At the time that the Participant's services as an Outside Director cease,
subject to Section 5 hereof, the account balance will, until such time as it is
paid to the Participant in accordance with the Participant's payment elections,
be allocated among the hypothetical investments permitted under the Plan for
Participants who have ceased to render service as an Outside Director, as such
allocation may be elected by the Participant.
SECTION A2. Payment Elections. (a) General Provisions. In connection with the
commencement of participation in this Plan, each Participant shall make an
election (the "Payment Election") concerning the timing and form of distribution
of the amounts credited to his or her Plan account. Any payment from the Plan
shall commence following termination of the Participant's services to the
Corporation as an Outside Director, but in no event prior to one year after
receipt by the Corporation of the Outside Director's initial Payment Election.
The forms of benefit available under the Plan shall be a lump sum payment or
quarterly, semi-annual or annual installments over a period not to exceed 15
years from the earliest date the director may commence receiving payments
hereunder.
(b) Special Rules. (i) Subsequent Payment Elections may be made by a
Participant, which shall supersede the initial Payment Election, but any such
subsequent Payment Election shall not be valid unless it is made prior to May of
the calendar year preceding the calendar year in which payments to the Director
hereunder are otherwise due to commence.
(ii) If a Participant has elected to receive installment payments of the
amount in his or her account, the Participant may, at the Participant's option,
elect to allocate the account, on or after the date on which he or she ceases to
perform services as an Outside Director, among such forms of hypothetical
investment as may be made available hereunder by the Administrator with
reference to the hypothetical investments made available under the Deferred
Compensation Plan for Non-Employee Directors of The Chase Manhattan Corporation
(the "Deferred Compensation Plan"). Reallocations may be made among hypothetical
investments on the same basis as is permitted under the Deferred Compensation
Plan.
4
5
SECTION A3. Payments to a Deceased Participant's Estate. (a) In the event of a
Participant's death before the balance of his or her account is fully paid,
payment of the balance of the Participant's account shall then be made to his or
her estate in accordance with the manner selected by the Participant prior to
death, which manner shall provide that: (i) payment shall be made to the
Participant's estate in the same manner as provided with respect to the payments
to the Participant or (ii) the balance of the Participant's account shall be
determined as soon as practicable following his or her death and this amount
shall be paid in a single payment to the Participant's estate as soon as
reasonably practicable thereafter. In the event no election has been made,
payment shall be made in accordance with clause (ii) of the preceding sentence.
(b) In the event of a Participant's death before the balance of his or
her account is fully paid to the estate in installments, the Administrator may,
upon consideration of the application of the duly appointed administrator or
executor of the Participant's estate, direct that the balance of the
Participant's account be paid to the estate in a single payment. The payment
shall be made at the time specified by the Administrator.
5
1
EXHIBIT 11.1
The Chase Manhattan Corporation
and Subsidiaries
Computation of Earnings Per Common Share
For a discussion of the computation of primary and fully-diluted earnings per
common share, see Note One of the Notes to Consolidated Financial Statements on
page 70.
Year Ended December 31, (in millions, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Earnings Per Share
Primary
Earnings:
Income Before Effect of Accounting Change $ 2,461 $ 2,970 $ 2,486
Net Effect of Change in Accounting Principle -- (11)(a) --
- ------------------------------------------------------------------------------------------------------------
Net Income $ 2,461 $ 2,959 $ 2,486
Less: Preferred Stock Dividends 219 227 265
- ------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 2,242 $ 2,732 $ 2,221
- ------------------------------------------------------------------------------------------------------------
Shares:
Average Common and Common Equivalent Shares Outstanding 446.4 440.8 442.2
- ------------------------------------------------------------------------------------------------------------
Primary Earnings Per Share:
Income Before Effect of Accounting Change $ 5.02 $ 6.23 $ 5.02
Net Effect of Change in Accounting Principle -- (0.03)(a) --
- ------------------------------------------------------------------------------------------------------------
Net Income $ 5.02 $ 6.20 $ 5.02
- ------------------------------------------------------------------------------------------------------------
Assuming Full Dilution
Earnings:
Net Income Applicable to Common Stock $ 2,242 $ 2,732 $ 2,221
Add: Applicable Dividend on Convertible Preferred Stock -- 7 20
- ------------------------------------------------------------------------------------------------------------
Adjusted Net Income $ 2,242 $ 2,739 $ 2,241
- ------------------------------------------------------------------------------------------------------------
Shares:
Average Common and Common Equivalent Shares Outstanding 446.4 440.8 442.2
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect and Conversion of Preferred Stock(b) 7.0 12.7 8.7
- ------------------------------------------------------------------------------------------------------------
Adjusted Shares of Common and Common Equivalent Shares Outstanding 453.4 453.5 450.9
- ------------------------------------------------------------------------------------------------------------
Earnings Per Share Assuming Full Dilution:
Income Before Effect of Accounting Change $ 4.94 $ 6.07 $ 4.97
Net Effect of Change in Accounting Principle -- (0.03)(a) --
- ------------------------------------------------------------------------------------------------------------
Net Income $ 4.94 $ 6.04 $ 4.97
- ------------------------------------------------------------------------------------------------------------
(a) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for
other postretirement benefits relating to its foreign plans.
(b) During the second quarter of 1995, the Corporation called all of the
outstanding shares of its 10% convertible preferred stock for redemption.
Substantially all of the 10% convertible preferred stock was converted, at the
option of the holders thereof, to common stock. The common stock was issued from
treasury.
1
Exhibit 12.0
The Chase Manhattan Corporation
and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31, (in millions, except ratios) 1996
- --------------------------------------------------------------------------------
Excluding Interest on Deposits
Income before income taxes $ 3,811
- --------------------------------------------------------------------------------
Fixed charges:
Interest expense 5,531
One third of rents, net of income from subleases(a) 116
- --------------------------------------------------------------------------------
Total fixed charges 5,647
- --------------------------------------------------------------------------------
Less: Equity in undistributed income of affiliates (64)
- --------------------------------------------------------------------------------
Earnings before taxes and fixed charges,
excluding capitalized interest $ 9,394
- --------------------------------------------------------------------------------
Fixed charges, as above $ 5,647
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.66
- --------------------------------------------------------------------------------
Including Interest on Deposits
Fixed charges, as above $ 5,647
Add: Interest on deposits 6,038
- --------------------------------------------------------------------------------
Total fixed charges and interest on deposits $ 11,685
- --------------------------------------------------------------------------------
Earnings before taxes and fixed charges,
excluding capitalized interest, as above $ 9,394
Add: Interest on deposits 6,038
- --------------------------------------------------------------------------------
Total earnings before taxes, fixed charges
and interest on deposits $ 15,432
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.32
- --------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor.
1
EXHIBIT 12.1
The Chase Manhattan Corporation
and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements
Year Ended December 31, (in millions, except ratios) 1996
- --------------------------------------------------------------------------------
Excluding Interest on Deposits
Income before income taxes $ 3,811
- --------------------------------------------------------------------------------
Fixed charges:
Interest expense 5,531
One third of rents, net of income from subleases(a) 116
- --------------------------------------------------------------------------------
Total fixed charges 5,647
- --------------------------------------------------------------------------------
Less: Equity in undistributed income of affiliates (64)
- --------------------------------------------------------------------------------
Earnings before taxes and fixed charges,
excluding capitalized interest $ 9,394
- --------------------------------------------------------------------------------
Fixed charges, as above $ 5,647
- --------------------------------------------------------------------------------
Preferred stock dividends 219
- --------------------------------------------------------------------------------
Fixed charges including preferred stock dividends $ 5,866
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.60
- --------------------------------------------------------------------------------
Including Interest on Deposits
Fixed charges including preferred stock dividends, as above $ 5,866
Add: Interest on deposits 6,038
- --------------------------------------------------------------------------------
Total fixed charges including preferred
stock dividends and interest on deposits $ 11,904
- --------------------------------------------------------------------------------
Earnings before taxes and fixed charges,
excluding capitalized interest, as above $ 9,394
Add: Interest on deposits 6,038
- --------------------------------------------------------------------------------
Total earnings before taxes, fixed charges
and interest on deposits $15,432
- --------------------------------------------------------------------------------
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.30
- --------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor.
1
EXHIBIT 21.1
The Chase Manhattan Corporation
List of Subsidiaries
The Corporation has the following subsidiaries, all of which are included in the
Corporation's Consolidated Financial Statements:
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ---------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank New York 100%
CB Capital Investors, Inc. Delaware 100
Chase 254 Realty Corp. Puerto Rico 100
Chase Access Services Corporation Delaware 100
Chase Asset Management, Inc. Delaware 100
Chase Bank International United States 100
Chase Commercial Mortgage Securities Corp. New York 100
Chase Community Development, Inc. Delaware 100
Chase Equipment Leasing Inc. New York 100
Chase Investment Services Corp. Delaware 100
Chase Manhattan Automotive Finance Corporation Delaware 100
Chase Manhattan Capital Corporation New York 100
Chase Manhattan International Inc. United States 100
Chase Manhattan International Finance Ltd. United States 100
Banco Chase Manhattan, S.A. Brazil 100
Banco Norchem, S.A. Brazil 49
Bancroft Holdings B.V. The Netherlands 100
Chase Investment Bank (Panama), S.A. Panama 100
Chase Manhattan Asia Limited Hong Kong 100
Chase Manhattan Bank (Ireland) plc Ireland 100
Chase Manhattan Bank (M) Berhad Malaysia 100
Chase Manhattan Bank, A.G. Germany 100
Chase Manhattan Bank CMB., S.A. Spain 100
Chase Manhattan Bank - France France 100
Chase Manhattan Bank Luxembourg, S.A. Luxembourg 100
Chase Manhattan Bank Mexico, S.A. Mexico 100
Chase Manhattan Bank Norge, A.S. Norway 100
Chase Manhattan Holdings (Australia) Ltd. Delaware 100
Chase Manhattan International Bank, Inc. Puerto Rico 100
Chase Manhattan Securities S.A. Spain 100
Chase Manhattan Securities (C.I.) Limited Channel Islands 100
Chemical Asset Management Limited Channel Islands 100
Chase Manhattan (Thailand) Ltd. Thailand 100
Chase Manhattan Trading, S.A. Argentina 100
Chase Manhattan Trust Cayman Ltd. Cayman Islands 100
Chase Manhattan Trust Company (Hong Kong) Ltd. Hong Kong 100
Chase Manhattan (U.K.) Holdings Limited United Kingdom 100
Chase Export Finance Limited United Kingdom 100
Chase Asset Management (London) Limited United Kingdom 100
Chase Investment Bank Limited United Kingdom 100
Chase Manhattan International Ltd. United Kingdom 100
Chemco Equipment Finance Ltd. United Kingdom 100
Goldway Ltd. United Kingdom 100
Chase Trust Bank Japan 100
Chemical Asia Limited Hong Kong 100
Chemical Australia (Holdings) Limited Australia 100
Chase Securities Australia Limited Australia 100
Chemical Bank (Guernsey) Limited Channel Islands 100
2
List of Subsidiaries
(continued)
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ---------------------------------------------------------------------------------------------------------
Chemical International Trust Company Limited Cayman Islands 100%
Manufacturers Hanover Arrendamento Mercantil S.A. Brazil 100
Manhattan Card Co. Ltd Hong Kong 54
Norchem Leasing S.A. Arrendamento Mercantil Brazil 50
The Chase Manhattan Bank Australia, Ltd. Australia 100
The Chase Manhattan Bank of Canada Canada 100
The Chase Manhattan Private Bank & Trust Bahamas 100
Company (Bahamas) Limited Bahamas 100
The Chase Manhattan Private Bank (Switzerland), S.A. Switzerland 100
The Saudi Investment Bank Saudi Arabia 15
Chase Manhattan Mortgage Holdings, Inc. Delaware 100
Chase Mortgage Services, Inc. Delaware 100
Chase Manhattan Overseas Corporation New York 100
Chem Network Processing Services, Inc. New Jersey 100
Chemgraphics Systems, Inc. New Jersey 100
Chemical Acceptance Corporation Delaware 100
Chemical Mortgage Company Ohio 100
ChemLease Worldwide, Inc. New York 100
Manufacturers Hanover Leasing Corporation Delaware 100
Metal Holdings Inc. Liberia 100
MH Financial Management Systems, Inc. Delaware 100
Other Subsidiaries of the Corporation
Brown & Company Securities Corporation Massachusetts 100
Capital Markets Transactions, Inc. Delaware 100
CBC Capital Partners, Inc. Delaware 100
CBC - USA, Inc. Delaware 100
CCC Holding Inc. Delaware 100
Chase Commercial Corporation New Jersey 100
Chase Capital Financing Ltd. United Kingdom 100
Chase (Jersey) Ltd. United Kingdom 100
Chase Finance (Jersey) Ltd. United Kingdom 100
Chase Cardholder Services, Inc. Delaware 100
Chase Funding Inc. New York 100
Chase Futures & Options, Inc. Delaware 100
Chase Home Mortgage Corporation of the Southeast Florida 100
Chase Manhattan Leasing Corporation New York 100
Chase Manhattan National Holding Corporation New York 100
Chase Manhattan Private Bank, N.A. United States 100
Chase Manhattan Realty Leasing Corporation New York 100
Chase Securities Inc. Delaware 100
Chase Trade, Inc. Delaware 100
Chatham Ventures, Inc. New York 100
Chemical Business Credit Corp. Delaware 100
Chemical Capital Corporation New York 100
Chemical Educational Services Corporation Delaware 100
Chemical Equity Incorporated New York 100
Chemical Holding Delaware Inc. Delaware 100
Chemical Trust Company of California California 100
CBC Holding (California) Inc. California 100
Van Deventer & Hoch California 50
Chemical International Capital Finance Limited United Kingdom 100
Chemical Investments, Inc. Delaware 100
3
List of Subsidiaries
(continued)
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ---------------------------------------------------------------------------------------------------------
Chemical Shareholder Services of California, Inc. Delaware 100%
Chemical Shareholder Services Partner, Inc. Delaware 100
ChaseMellon Shareholder Services L.L.C. Delaware 50
Chemical New York, N.V. Netherlands Antilles 100
Clintstone Properties Inc. New York 100
CMRCC, Inc. New York 100
Chase Manhattan Equities Corporation Delaware 100
Grovehill Corporation Delaware 100
Mexican Mine Holdings Inc. Delaware 100
Manufacturers Hanover Leasing International Corp. Delaware 100
Manufacturers Hanover Leasing (Nassau) Limited Bahamas 100
Octagon Credit Investors, Inc. Delaware 100
Offshore Equities, Inc. New York 100
Support Development Corporation Delaware 100
Texas Commerce Equity Holdings, Inc. Delaware 100
CBC Holding (Delaware) Inc. Delaware 100
A.S. Holding Corporation Delaware 100
Chase Manhattan Bank Delaware Delaware 100
Chase Agency Services, Inc. Delaware 100
Chase Insurance Agency, Inc. Delaware 100
Chemical Synthetic Leasing, Inc. Delaware 100
Chemical Data Services Corporation Delaware 100
Western Hemisphere Life Insurance Company Delaware 100
Chase Manhattan Bank U.S.A., National Association United States 100
Chase BankCard Services, Inc. Delaware 100
Chase Manhattan Financial Corporation, Ltd. Delaware 100
Margaretten Financial Corporation Delaware 100
Chase Manhattan Mortgage Corporation New Jersey 100
The CIT Group Holdings, Inc Delaware 20
Texas Commerce Bank National Association (Houston) United States 100
Texas Commerce Bank - San Angelo, N.A. United States 100
Texas Commerce Trust Company of New York New York 100
The Chase Manhattan Trust Company of California, N.A. United States 100
The names of certain other direct and indirect subsidiaries of the Corporation
have been omitted from the list above because such unnamed subsidiaries
considered in the aggregate as a single subsidiary would not constitute a
significant subsidiary.
1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-1 (Nos. 33-31653,
33-44425, 33-75680, 33-89058, 33-94460 and 33-99546), Form S-3 (Nos . 2-98344,
33-13062, 33-15230, 33-15266, 33-18640, 33-20950, 33-21488, 33-23088, 33-24224,
33-33220, 33-36164, 33-40485, 33-42367, 33-45228, 33-45266, 33-47105, 33-49965,
33-53306, 33-55295, 33-57104, 33-58144, 33-64261, 33-68724, 33-76724, 33-92950,
33-93570, 333-4607, 333-5205, 333-5271, 333-7575, 333-14959, 333-19719 and
333-22437) and in the Registration Statements on Form S-8 (Nos. 33-01776,
33-13457, 33-14997, 33-19852, 33-26523, 33-40272, 33-40675, 33-45017, 33-45018,
33-49909, 33-49911, 33-49913, 33-54547, 33-54949, 33-62453, 33-63833, 333-02073,
333-07941, 333-15281 and 333-22451) of The Chase Manhattan Corporation or
affiliates of our report dated January 21, 1997 appearing on page 62 of this
Form 10-K.
PRICE WATERHOUSE LLP
New York, New York
March 24, 1997
9
0000019617
THE CHASE MANHATTAN CORPORATION
1,000,000
U.S. DOLLAR
YEAR
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
12,359
2,862
2,672
19,909
6,038
11,569
8,340
897
135
11,144
3,811
2,461
0
0
2,461
5.02
4.94
3.21
1,021
434
0
0
3,784
1,289
290
3,549
3,103
446
0
