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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1994
--------------------
Commission file number 1-5805
______
CHEMICAL BANKING CORPORATION
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2624428
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
270 Park Avenue, New York, New York 10017
-------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 270-6000
--------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes.X.. No....
Common Stock, $1 Par Value 244,432,831
-----------
Number of shares outstanding of each of the issuer's classes of
common stock on October 31, 1994.
2
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FORM 10-Q INDEX
Part I Page
------- ----
Item 1 Financial Statements - Chemical Banking Corporation
and Subsidiaries:
Consolidated Balance Sheet at September 30, 1994
and December 31, 1993. 3
Consolidated Statement of Income for the three
months ended September 30, 1994 and September
30, 1993. 4
Consolidated Statement of Income for the nine
months ended September 30, 1994 and
September 30, 1993. 5
Consolidated Statement of Cash Flows for
the nine months ended September 30, 1994 and
September 30, 1993. 6
Consolidated Statement of Changes in
Stockholders' Equity for the nine months ended
September 30, 1994 and September 30, 1993. 7
Notes to Financial Statements. 7-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-53
Part II
-------
Item 1 Legal Proceedings 54
Item 6 Exhibits and Reports on Form 8-K. 54
=================================================================
Part I
Item 1.
3
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions)
September 30, December 31,
1994 1993
------------- ------------
ASSETS
Cash and Due from Banks $ 8,080 $ 6,852
Deposits with Banks 5,256 6,030
Federal Funds Sold and Securities
Purchased Under Resale Agreements 13,173 10,556
Trading Assets:
Debt and Equity Instruments 11,467 11,679
Risk Management Instruments 18,711 ---
Securities:
Held-to-Maturity (Market Value: $8,327
and $10,288) 8,695 10,108
Available-for-Sale 16,271 15,840
Loans (Net of Unearned Income: $485
and $477) 77,138 75,381
Allowance for Losses (2,650) (3,020)
Premises and Equipment 2,114 1,910
Due from Customers on Acceptances 1,200 1,077
Accrued Interest Receivable 1,106 1,106
Assets Acquired as Loan Satisfactions 669 934
Other Assets 8,104 11,435
-------- --------
TOTAL ASSETS $169,334 $149,888
======== ========
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 20,430 $ 23,443
Time and Savings 46,338 51,940
Foreign 26,193 22,894
-------- --------
Total Deposits 92,961 98,277
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 19,469 12,857
Other Borrowed Funds 14,969 11,908
Acceptances Outstanding 1,207 1,099
Accounts Payable and Accrued Liabilities 2,385 2,607
Other Liabilities 18,980 3,784
Long-Term Debt 8,555 8,192
-------- --------
TOTAL LIABILITIES 158,526 138,724
-------- --------
COMMITMENTS AND CONTINGENCIES (See Note 8)
STOCKHOLDERS' EQUITY
Preferred Stock 1,450 1,654
Common Stock (Issued 254,013,527 and
253,397,864 Shares) 254 253
Capital Surplus 6,545 6,553
Retained Earnings 3,221 2,501
Net Unrealized Gain (Loss) on Securities
Available-for-Sale, Net of Taxes (296) 215
Treasury Stock, at Cost (9,638,616
and 515,782 Shares) (366) (12)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 10,808 11,164
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $169,334 $149,888
======== ========
The Notes to Consolidated Financial Statements are an integral part
of these Statements.
Part I
Item 1. (continued)
4 CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended September 30,
(in millions, except per share data)
1994 1993
------ ------
INTEREST INCOME
Loans $ 1,473 $ 1,372
Securities 422 428
Trading Assets 181 117
Federal Funds Sold and Securities
Purchased Under Resale Agreements 151 89
Deposits With Banks 86 67
-------- --------
Total Interest Income 2,313 2,073
-------- --------
INTEREST EXPENSE
Deposits 597 537
Short-Term and Other Borrowings 405 238
Long-Term Debt 134 135
-------- --------
Total Interest Expense 1,136 910
-------- --------
NET INTEREST INCOME 1,177 1,163
Provision for Losses 100 298
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES 1,077 865
-------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 104 97
Corporate Finance and Syndication Fees 97 95
Service Charges on Deposit Accounts 78 73
Fees for Other Banking Services 285 266
Trading Account and Foreign
Exchange Revenue 212 268
Securities Gains 6 51
Other Revenue 202 154
-------- --------
Total Noninterest Revenue 984 1,004
-------- --------
NONINTEREST EXPENSE
Salaries 574 518
Employee Benefits 108 94
Occupancy Expense 145 148
Equipment Expense 100 81
Foreclosed Property Expense 2 70
Restructuring Charge --- 115
Other Expense 382 344
-------- --------
Total Noninterest Expense 1,311 1,370
-------- --------
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) 750 499
Income Tax Expense (Benefit) 311 (3)
-------- --------
NET INCOME $ 439 $ 502
======== ========
NET INCOME APPLICABLE TO COMMON STOCK $ 396 $ 464
======== ========
NET INCOME PER COMMON SHARE $ 1.60 $ 1.84
======== ========
AVERAGE COMMON SHARES OUTSTANDING 246.6 252.1
The Notes to Financial Statements are an integral part of these
Statements.
Part I
Item 1. (continued)
5
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended September 30,
(in millions, except per share data)
1994 1993
------ ------
INTEREST INCOME
Loans $4,155 $4,270
Securities 1,270 1,299
Trading Assets 545 314
Federal Funds Sold and Securities
Purchased Under Resale Agreements 372 245
Deposits With Banks 280 201
-------- --------
Total Interest Income 6,622 6,329
-------- --------
INTEREST EXPENSE
Deposits 1,660 1,699
Short-Term and Other Borrowings 1,056 743
Long-Term Debt 401 400
-------- --------
Total Interest Expense 3,117 2,842
-------- --------
NET INTEREST INCOME 3,505 3,487
Provision for Losses 465 973
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES 3,040 2,514
-------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 322 297
Corporate Finance and Syndication Fees 272 250
Service Charges on Deposit Accounts 222 217
Fees for Other Banking Services 854 789
Trading Account and Foreign Exchange Revenue 600 818
Securities Gains 65 126
Other Revenue 447 474
-------- --------
Total Noninterest Revenue 2,782 2,971
-------- --------
NONINTEREST EXPENSE
Salaries 1,634 1,548
Employee Benefits 329 301
Occupancy Expense 431 438
Equipment Expense 275 244
Foreclosed Property Expense 39 226
Restructuring Charge 48 158
Other Expense 1,160 1,043
-------- --------
Total Noninterest Expense 3,916 3,958
-------- --------
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT OF
ACCOUNTING CHANGES 1,906 1,527
Income Tax Expense 791 305
-------- --------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGES 1,115 1,222
Net Effect of Changes in
Accounting Principles --- 35
-------- --------
NET INCOME $1,115 $1,257
======== ========
NET INCOME APPLICABLE TO COMMON STOCK $1,007 $1,140
======== ========
PER COMMON SHARE:
Income Before Effect of Accounting Changes $ 4.01 $ 4.41
Net Effect of Changes in
Accounting Principles --- .14
-------- --------
Net Income $ 4.01 $ 4.55
======== ========
AVERAGE COMMON SHARES OUTSTANDING 251.0 250.8
The Notes to Financial Statements are an integral part of these
Statements.
Part I
Item 1. (continued)
6
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(in millions)
1994 1993
-------- --------
Operating Activities
--------------------
Net Income $1,115 $ 1,257
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Losses 465 973
Restructuring Charge 48 158
Depreciation and Amortization 276 250
Net Changes In:
Trading Related Assets 742 (5,476)
Accrued Interest Receivable 28 (54)
Accrued Interest Payable 38 82
Other, Net (838) 747
-------- --------
Net Cash Provided (Used)
by Operating Activities 1,874 (2,063)
-------- --------
Investing Activities
--------------------
Net Change In:
Deposits with Banks 800 (3,059)
Federal Funds Sold and Securities Purchased
Under Resale Agreements (2,617) (3,650)
Loans Due to Sales and Securitizations 6,085 9,245
Other Loans, Net (8,001) (3,931)
Other, Net (210) (853)
Proceeds from the Maturity of
Held-to-Maturity Securities 2,465 3,816
Proceeds from the Sale of Held-to-Maturity
Securities --- 152
Purchases of Held-to-Maturity Securities (1,056) (5,630)
Proceeds from the Maturity of
Available-for-Sale Securities 2,555 772
Proceeds from the Sale of
Available-for-Sale Securities 13,861 3,559
Purchases of Available-for-Sale Securities (17,769) (3,149)
Cash Used in Acquisitions (373) (481)
-------- --------
Net Cash Used by Investing Activities (4,260) (3,209)
-------- --------
Financing Activities
--------------------
Net Change In:
Noninterest Bearing Domestic Demand Deposits (3,010) (1,745)
Domestic Time and Savings Deposits (5,585) (1,978)
Foreign Deposits 3,299 1,490
Federal Funds Purchased, Securities Sold
Under Repurchase Agreements and
Other Borrowed Funds 8,816 4,785
Other Liabilities 634 266
Other, Net 240 (172)
Proceeds from the Issuance of Long-Term Debt 1,592 3,301
Redemption and Maturity of Long-Term Debt (1,395) (2,036)
Proceeds from the Issuance of Common Stock 16 183
Issuance of Preferred Stock 200 387
Redemption of Preferred Stock (420) (394)
Treasury Stock (354) ---
Cash Dividends Paid (384) (359)
-------- --------
Net Cash Provided by Financing Activities 3,649 3,728
-------- --------
Effect of Exchange Rate Changes on
Cash and Due from Banks (35) 33
-------- --------
Net Increase (Decrease) in Cash
and Due from Banks 1,228 (1,511)
-------- --------
Cash and Due from Banks at January 1, 6,852 8,846
-------- --------
Cash and Due from Banks at September 30, $8,080 $ 7,335
======== ========
Cash Interest Paid $3,079 $ 2,760
Taxes Paid $ 687 $ 209
The Notes to Financial Statements are an integral part of these
Statements.
Part I
Item 1. (continued)
7
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30,
(in millions)
1994 1993
-------- --------
BALANCE AT JANUARY 1, $11,164 $ 9,851
-------- --------
Net Income 1,115 1,257
Dividends Declared:
Preferred Stock (96) (117)
Common Stock (299) (249)
Issuance of Preferred Stock 200 400
Redemption of Preferred Stock (404) (394)
Premium on Redemption of Preferred Stock (12) (6)
Issuance of Common Stock 16 183
Restricted Stock Granted (11) ---
Net Changes in Treasury Stock (354) ---
Net Change in Fair Value of Available-for-Sale
Securities, Net of Taxes (511) ---
Accumulated Translation Adjustment --- 2
-------- --------
Net Change in Stockholders' Equity (356) 1,076
-------- --------
BALANCE AT SEPTEMBER 30, $10,808 $10,927
======== ========
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The unaudited financial statements of Chemical Banking Corporation
and subsidiaries (the "Corporation") are prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim periods presented have been included.
Certain amounts in prior periods have been reclassified to conform
to the current presentation.
On January 1, 1994, the Corporation adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" ("FASI 39"), which changed
the reporting of unrealized gains and losses on interest rate and
foreign exchange contracts on the balance sheet. The
Interpretation requires that gross unrealized gains be reported as
assets and gross unrealized losses be reported as liabilities. The
Interpretation, however, permits netting of such unrealized gains
and losses with the same counterparty when master netting
agreements have been executed. The adoption of this Interpretation
has resulted in an increase of $17.0 billion in each of assets and
liabilities at September 30, 1994, with unrealized gains reported
as Trading Assets-Risk Management Instruments and unrealized losses
reported in Other Liabilities. Prior to the adoption of FASI 39,
unrealized gains and losses were reported net in Other Assets.
On December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). In
accordance with SFAS 115, cash flows from purchases, maturities and
sales of available-for-sale securities have been classified as cash
flows from investing activities and prior periods have been
similarly reclassified. Prior to the adoption of SFAS 115, cash
flows from these transactions were included as operating
activities. See Note 3 in this Form 10-Q for further discussion.
Part I
Item 1. (continued)
8
NOTE 2 - TRADING ASSETS-DEBT AND EQUITY INSTRUMENTS
---------------------------------------------------
Trading assets-debt and equity instruments, which are measured at
fair value, are presented in the following table for the dates
indicated:
September 30, December 31,
(in millions) 1994 1993
---------- ------------
U.S. Government and Federal Agencies $4,031 $ 2,792
Obligations of State and Political
Subdivisions 102 604
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,039 1,794
Debt Securities Issued by Foreign Governments 2,548 4,025
Foreign Financial Institutions 2,321 1,496
Other (a) 1,426 968
-------- --------
Total Trading Assets - Debt and
Equity Instruments $11,467 $11,679
======== ========
[FN]
Primarily includes corporate debt and eurodollar bonds.
NOTE 3 - SECURITIES
-------------------
On December 31, 1993, the Corporation adopted SFAS 115, which
addresses the accounting for investments in equity securities that
have readily determinable fair values and for investments in all
debt securities. Such securities are classified into three
categories and accounted for as follows: debt securities that the
Corporation has the positive intent and ability to hold to maturity
are classified as held-to-maturity and are measured at amortized
cost; debt and equity securities bought and held principally for
the purpose of selling in the near term are classified as trading
securities and are measured at fair value, with unrealized gains
and losses included in earnings; and debt and equity securities not
classified as either held-to-maturity or trading securities are
deemed available-for-sale and are measured at fair value, with
unrealized gains and losses, net of applicable taxes, reported in a
separate component of stockholders' equity.
SFAS 115 resulted in a net after-tax unfavorable impact of
$296 million on the Corporation's stockholders'
equity at September 30, 1994, compared with a net after-tax
favorable impact of $215 million at December 31, 1993. The net
change from the 1993 year-end was primarily the result of the
higher interest rate environment and the declining value of Brady
Bonds (as defined in Note 4). See Note 4 for further discussion.
Part I
Item 1. (continued)
9
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity
securities were as follows for the dates indicated:
Part I
Item 1. (continued)
10
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale
securities were as follows for the dates indicated:
Part I
Item 1. (continued)
11
NOTE 5 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
----------------------------------------------------
The Corporation provides postretirement health care and life
insurance benefits ("benefits") to substantially all domestic
employees who meet certain age and length-of-service requirements
at retirement. The amount of benefits provided varies with length
of service and date of hire. The Corporation has not funded these
benefits.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106"). SFAS
106 requires recognition, during the years of the employees' active
service, of the employer's expected cost and obligation of
providing postretirement health care and other postretirement
benefits other than pensions to employees and eligible dependents.
The Corporation elected to expense the entire unrecognized
accumulated obligation (the "transition obligation") as of the date
of adoption of SFAS 106 via a one-time charge of $415 million (or
$1.67 per common share), based on the domestic benefits design.
NOTE 6 - RESTRUCTURING CHARGES
------------------------------
During the 1994 first quarter, the Corporation included in
noninterest expense a restructuring charge of $48 million ($28
million after-tax) related to the closing of 50 New York branches
and a staff reduction of 650. The restructuring charge primarily
comprises real estate costs and severance costs associated with the
closing of the 50 New York branches. Also included in the
restructuring charge are severance costs involved in optimizing the
branch staff at existing branches. This rationalization of the
branch system is part of an ongoing Corporate-wide program to
improve productivity. At September 30, 1994, the reserve balance
associated with this restructuring charge was approximately $25
million.
The 1993 first quarter results included a one-time restructuring
charge of $43 million ($30 million after-tax) related to the
Federally-assisted acquisition in February 1993 of certain assets
and liabilities of four former banks (the "First City Banks") of
First City Bancorporation of Texas, Inc. ("First City") by the
Corporation's subsidiary, Texas Commerce Bancshares, Inc. ("Texas
Commerce"). At September 30, 1994, the reserve balance associated
with this restructuring charge had been substantially utilized and
no significant additional costs are expected in the future.
During the third quarter of 1993, the Corporation completed an
assessment of costs associated with the merger of the Corporation
and Manufacturers Hanover Corporation ("MHC") and as a result,
included in noninterest expense for the 1993 third quarter was a
charge of $115 million ($67 million after-tax). This charge was
related principally to changes in the Corporation's facilities
plans since the merger announcement in July, 1991 and revised
estimates of occupancy-related costs associated with headquarters
and branch consolidations. At September 30, 1994, the merger
reserve balance was approximately $46 million.
NOTE 7 - INCOME TAXES
---------------------
The Corporation adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), as of January
1, 1993 and, after taking into account the additional tax benefits
associated with the adoption of SFAS 106 (see Note 5), the
Corporation recognized a favorable cumulative effect on income tax
expense of $450 million (or $1.81 per common share).
The Corporation recognized its remaining available Federal income
tax benefits in the third quarter of 1993. As a result, the
Corporation's earnings, beginning in the fourth quarter of 1993,
have been reported on a fully-taxed basis.
Part I
Item 1. (continued)
12
The Corporation's Federal valuation reserve (which had been
established as of January 1, 1993 in accordance with the
requirements of SFAS 109) has a balance of $124 million at
September 30, 1994, relating to tax benefits which are subject to
tax law limitations on realization. Additionally, a valuation
reserve approximating $148 million at September 30, 1994, was
established as of January 1, 1993 against all New York State and
City deferred tax assets. Foreign deferred taxes are not material.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
For a discussion of certain legal proceedings, see Part II, Item 1
of this Form 10-Q. The Corporation and its subsidiaries are
defendants in a number of legal proceedings. After reviewing with
counsel all actions and proceedings pending against or involving
the Corporation and its subsidiaries, management does not expect
the aggregate liability or loss, if any, resulting therefrom to
have a material adverse effect on the consolidated financial
condition of the Corporation.
NOTE 9 - PREFERRED STOCK
------------------------
On June 8, 1994, the Corporation issued 2 million shares of
Adjustable Rate Cumulative Preferred Stock, Series L, with a stated
value of $100 per share. Dividends are cumulative and are payable
quarterly commencing June 30, 1994. The quarterly dividend rate
will be equal to 84% of the highest of the Treasury Bill Rate, the
Ten Year Constant Maturity Rate and the Thirty Year Constant
Maturity Rate (as each of such terms are defined in the Certificate
of Designations relating to the preferred stock), but not less than
4.50% per annum or more than 10.50% per annum.
On July 15, 1994, the Corporation redeemed all outstanding shares
of its Adjustable Rate Cumulative Preferred Stock, Series C (stated
value $12.00 per share). The redemption price was $12.36 per share
(which included a premium of $.36 per share) plus accrued but
unpaid dividends to the date of redemption. Approximately 33.6
million shares of stock were redeemed. The effect on net income
per common share as a result of the one-time premium related to the
redemption was a $.05 per share reduction in the 1994 third
quarter.
NOTE 10 - COMMON STOCK REPURCHASE
---------------------------------
In the third quarter of 1994, the Corporation completed the
repurchase of 10 million shares of its common stock in the open
market under a stock repurchase plan originally announced on May
27, 1994.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
-----------------------------------------------------------
Derivatives and Foreign Exchange Products: In the normal course of
its business, the Corporation utilizes various financial
instruments to meet the financing needs of its customers, to
generate revenues through its trading activities, and to manage its
exposure to fluctuations in interest and currency rates.
Derivatives and foreign exchange transactions involve, to varying
degrees, credit risk and market risk. Credit risk is the
possibility that a loss may occur because a party to a transaction
fails to perform according to the terms of the contract. Market
risk is the possibility that a change in interest or currency rates
will cause the value of a financial instrument to decrease or
become more costly to settle.
Credit exposures for various products of the Corporation are
summarized in the following table for the dates indicated. The
table should be read in conjunction with the descriptions of such
products and their risks included on pages B71-B74 of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993. The amount of mark-to-market exposure presented
in the table below takes into account the impact of master netting
agreements in effect at the respective dates.
Part I
Item 1. (continued)
13
September 30, December 31,
(in billions) 1994 1993
------------- ------------
Credit Exposure:
Interest Rate Contracts $ 10.2 $ 8.6
Foreign Exchange Contracts 8.3 8.1
Stock Index Option and
Commodity Contracts 0.3 0.2
------ ------
Total Credit Exposure 18.8 16.9
Less: Amounts Recorded as Assets
on Consolidated Balance Sheet 18.8 3.3
------ ------
Credit exposure not on balance sheet $ --- $ 13.6
====== ======
[FN]
Increase due to adoption of FASI 39 on January 1, 1994.
The increases in the credit exposure related to interest rate
contracts and foreign exchange contracts at September 30, 1994
compared with December 31, 1993 was primarily due to increased
volume at September 30, 1994 coupled with the decline in the value
of the U.S. dollar against certain foreign currencies.
The following table summarizes the aggregate notional amounts of
interest rate, foreign exchange, stock index options and commodity
derivative contracts for the dates indicated. The table should be
read in conjunction with the descriptions of these products and
their risks included on pages B71-B74 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993 and the
Off-Balance Sheet Analysis section in Part I, Item 2 of this Form
10-Q.
Part I
Item 1. (continued)
14
Credit-Related Financial Instruments: The following table
summarizes the Corporation's credit risk at September 30, 1994 and
at December 31, 1993 represented by contract amounts relating to
the credit-related financial instruments listed in the table. The
table should be read in conjunction with the description of these
credit-related products and their risks included on pages B71-B74
of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993. These credit-related products are not
derivatives or foreign exchange related products.
OFF-BALANCE SHEET INSTRUMENTS-CREDIT-RELATED
FINANCIAL INSTRUMENTS
September 30, December 31,
(in millions) 1994 1993
------------- ------------
Commitments to Extend Credit $46,265 $ 47,540
Standby Letters of Credit (Net of Risk
Participations of $4,656 and $1,285) 11,758 11,224
Other Letters of Credit 3,047 2,325
Customers' Securities Lent 17,085 14,530
[FN]
Excludes credit card commitments of $19.1 billion and $18.0
billion at September 30, 1994 and December 31, 1993,
respectively.
NOTE 12 - ACQUISITION OF MARGARETTEN FINANCIAL CORPORATION
----------------------------------------------------------
In July 1994, the Corporation, through Chemical Bank National
Association, a wholly-owned bank subsidiary of the Corporation,
acquired Margaretten Financial Corporation through a cash tender
offer. The cost of the acquired company was $372.6 million. The
acquisition was recorded using the purchase method of accounting.
Under this method of accounting, the purchase price is allocated to
the respective assets acquired and liabilities assumed based on
their estimated fair values. Goodwill in the amount of $182.5
million is being amortized over 15 years. This acquisition is
reflected in the 1994 third quarter results and prior periods have
not been restated.
Part I
Item 2.
15
16
-----------------------------------------------------------------
OVERVIEW
-----------------------------------------------------------------
Chemical Banking Corporation (the "Corporation") reported net
income of $439 million, or $1.60 per common share, for the 1994
third quarter, an increase of 24% from earnings on a comparable
basis of $355 million, or $1.26 per share, in the third quarter of
1993. Reported net income in the 1993 third quarter was $502
million, or $1.84 per share, which included the recognition of
income tax benefits of $214 million and a one-time merger-related
charge of $115 million ($67 million after tax). The Corporation
recognized its remaining available Federal tax benefits in the
third quarter of 1993 and, as a result, the Corporation's earnings,
commencing with the fourth quarter of 1993, have been reported on a
fully-taxed basis.
For the first nine months of 1994, the Corporation's net income was
$1.115 billion, an increase of 16% from $958 million on a
comparable basis for the first nine months of 1993. Reported net
income for the first nine months of 1993 was $1.257 billion, a
period in which the Corporation benefited from $366 million in
accounting changes and tax benefits partially offset by the
aforementioned one-time merger-related charge.
The 1993 year-to-date results included the impact of two
significant accounting changes. On January 1, 1993, the Corporation
adopted Statement of Financial Accounting Standards No. 106,
"Employers Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), which resulted in a charge of $415 million
and Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which resulted in an
income tax benefit of $450 million. The net favorable impact of
the adoption of these new accounting standards was $35 million.
The Corporation's 1994 third quarter earnings benefited from solid
performances in several core businesses, including national
consumer services and capital markets-related activities, while
credit costs continued to decrease significantly. The Corporation
remains committed to improving its operating margins and return
levels. To achieve this end, revenue initiatives and productivity
programs are currently under way (and additional programs are being
planned) throughout the Corporation, and management believes such
programs will contribute to improvements in its operating margins
and return levels.
During the 1994 third quarter, several significant capital actions
were completed reflecting management's continued positive outlook
for the Corporation. On September 20, 1994, the Corporation
increased the quarterly dividend on the outstanding shares of its
common stock to 44 cents per share, up 16% from 38 cents per share.
On an annual basis, this represents an increase in the dividend
rate to $1.76, from $1.52 per share. Since March 1993, the
Corporation has increased the common dividend by 47%. In addition,
during the third quarter, the Corporation completed the repurchase
of 10 million shares of its common stock in the open market under a
stock repurchase plan originally announced on May 27, 1994.
On July 1, 1994, the Corporation completed its tender offer for the
outstanding common stock and the depositary shares representing the
preferred stock of Margaretten Financial Corporation
("Margaretten"). This acquisition is reflected in the 1994 third
quarter results and prior periods have not been restated.
The Corporation's nonperforming assets at September 30, 1994 were
$2.19 billion, a decrease of $300 million, or 12%, from June 30,
1994 and a decrease of $1.33 billion, or 38%, from $3.53 billion at
December 31, 1993. Moreover, after peaking in the 1992 third
quarter, nonperforming assets have declined by $4.39 billion, or
67%, since September 30, 1992. As a result of the continued
decline in nonperforming assets, the ratio of the allowance for
losses to nonperforming loans reached 174% at September 30, 1994,
compared with 117% at the 1993 year-end and 98% at September 30,
1993.
At September 30, 1994, the Corporation's ratios of Tier 1 Capital
to risk-weighted assets and Total Capital to risk-weighted assets
were 8.2% and 12.3%, respectively, well in excess of the minimum
ratios specified by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board").
Part I
Item 2 (continued)
17
-----------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------------------------------------------------
NET INTEREST INCOME
Net interest income for the third quarter of 1994 was $1,177
million, compared with $1,163 million for the comparable 1993
period. For the first nine months of 1994, net interest income was
$3,505 million, versus $3,487 million for the same period of 1993.
The increases from last year were due to a higher level of
interest-earning assets offset by a lower net yield on interest-
earning assets.
Part I
Item 2 (continued)
18
The following table reflects the composition of the interest-
earning assets as a percentage to total earning assets for the
periods indicated.
PERCENTAGE COMPOSITION OF AVERAGE INTEREST-EARNING ASSETS
3rd 2nd 3rd Nine Nine
Quarter Quarter Quarter Months Months
1994 1994 1993 1994 1993
----- ----- ----- ----- -----
Loans 58% 57% 62% 58% 64%
Securities 20 21 19 20 19
Liquid Interest-Earning Assets 22 22 19 22 17
---- ---- ---- ---- ----
Total Interest-Earning Assets 100% 100% 100% 100% 100%
Loans represented 58% of average interest-earning assets for the
1994 third quarter, down from 62% for the same period a year ago,
but up from 57% in the 1994 second quarter. The higher level of
loans for the 1994 third quarter period from the prior quarter
reflects the aforementioned increases in the consumer and
commercial loan portfolios.
The negative impact on net interest income from nonperforming loans
in the third quarter of 1994 was $1 million, down from $36 million
in the same quarter in 1993. For the first nine months, the
negative impact was $58 million in 1994, compared with a negative
impact of $134 million in 1993. The improvement in both 1994
periods is principally due to the significant reduction in the
level of the Corporation's nonperforming loans.
Management anticipates that the level of net interest income and
the net yield on interest-earning assets for the fourth quarter of
1994 will be slightly lower than the third quarter of 1994.
At the present time, management believes 1995 net interest income
will be somewhat lower than the full year 1994 level.
For additional information on average balances and net interest
income, see Average Consolidated Balance Sheet, Interest and Rates
on pages 51-52. For a further discussion of the Corporation's
loans, see the Credit Portfolio section in this Form 10-Q.
Part I
Item 2 (continued)
19
PROVISION FOR LOSSES
The Corporation's provision for losses was $100 million for the
1994 third quarter, down from $160 million in the 1994 second
quarter and 66% lower than the $298 million in the 1993 third
quarter. For the first nine months, the provision for losses was
$465 million in 1994 versus $973 million in 1993. The provision
for the first nine months of 1993 included a $55 million charge
related to the decision to accelerate the disposition of certain
nonperforming residential mortgage loans.
As a result of management's evaluation of the continuing
improvement in the Corporation's credit profile, the provision for
losses in the 1994 third quarter and first nine months was lower
than the Corporation's net charge-offs in each of those periods.
The Corporation expects the provision for losses for the 1994
fourth quarter to be at a level comparable to the 1994 third
quarter. A discussion of the Corporation's credit portfolio, net
charge-offs and allowance for losses appears in the Credit
Portfolio section in this Form 10-Q.
NONINTEREST REVENUE
Third Quarter Nine Months
------------- ------------
(in millions) 1994 1993 1994 1993
---- ---- ---- ----
Trust and Investment Management Fees $104 $ 97 $ 322 $ 297
Corporate Finance and
Syndication Fees 97 95 272 250
Service Charges on Deposit Accounts 78 73 222 217
Fees for Other Banking Services 285 266 854 789
Trading Account and Foreign
Exchange Revenue 212 268 600 818
Securities Gains 6 51 65 126
Other Revenue 202 154 447 474
------ ------ ------ ------
Total $984 $1,004 $2,782 $2,971
====== ====== ====== ======
The decrease in noninterest revenue for the 1994 third quarter and
first nine months, when compared with the corresponding 1993
periods, reflected lower trading account and foreign exchange
revenue, as well as lower securities gains. The aforementioned
decreases were partially offset by increased revenues from equity-
related investments, credit card services fees, trust and
investment management fees and corporate finance fees. Gains on
the sales of LDC past-due interest bonds were higher in the 1994
third quarter versus the prior year period, but declined for the
first nine months of 1994 when compared with the same period in
1993.
Trust and investment management fees are primarily comprised of
corporate, institutional and personal trust activities provided to
corporations and individuals on a global basis. The Corporation's
corporate and institutional trust area provides customers with a
full range of services such as trustee and securities processing as
well as investment advisory and administrative functions for
customers' pension and other employee benefit plans. The personal
trust area provides professional asset management and
administration services for individual trusts and estates and the
safekeeping and servicing of substantial securities portfolios.
The Corporation's proprietary family of mutual funds, The Hanover
Funds, is also administered under the personal trust area, which is
also responsible for the development and implementation of
financial plans for individuals. The following table presents the
components of trust and investment management fees for the periods
indicated.
Part I
Item 2 (continued)
20
Third Quarter Nine Months
-------------- ------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Trust and Investment Management Fees:
Personal Trust Fees $ 49 $ 46 $ 156 $ 143
Corporate and Institutional
Trust Fees 45 40 136 125
Other, primarily Foreign
Asset Management 10 11 30 29
----- ----- ----- -----
Total $104 $ 97 $ 322 $ 297
===== ===== ===== =====
For the third quarter and first nine months of 1994, personal trust
fees rose 7% and 9%, respectively, from the comparable 1993 periods
primarily reflecting new customer relationships developed as a
result of the acquisition of Ameritrust Texas Corporation
("Ameritrust"). Corporate and institutional trust fees increased
13% in the 1994 third quarter from the same period in 1993, also
largely due to the Ameritrust acquisition; however, these fees were
flat when compared to the 1994 second quarter as pricing
pressures continued to affect this business.
Corporate finance and syndication fees were $97 million in the 1994
third quarter, an increase from $95 million in the comparable 1993
period. For the first nine months, such fees were $272 million in
1994, an increase of 9% from $250 million in 1993. The increases
for both 1994 periods from the respective periods of 1993 reflect
higher global loan origination and distribution volume by the
Corporation. During the first nine months of 1994, the Corporation
acted as agent or co-agent for approximately $263 billion of
syndicated credit facilities, a reflection of the Corporation's
large client base and strong emphasis on distribution.
The following table sets forth the components of fees for other
banking services for the periods indicated.
Third Quarter Nine Months
-------------- ------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Fees for Other Banking Services:
Credit Card Services Revenue $ 79 $ 59 $ 229 $ 167
Fees in Lieu of Compensating
Balances 49 52 156 156
Commissions on Letters of Credit
and Acceptances 40 39 116 119
Loan Commitment Fees 21 23 66 69
Mortgage Servicing Fees 23 16 57 48
Other Fees 73 77 230 230
----- ----- ----- -----
Total $285 $ 266 $ 854 $ 789
===== ===== ===== =====
The higher level of credit card services revenue for both 1994
periods included fees from the new Shell MasterCard, reflecting
increased volume of retail credit cards from a growing cardholder
base. The Corporation's co-branded Shell MasterCard added 1.6
million new active accounts in the twelve months since September
30, 1993. During the same twelve-month period, outstandings in the
credit card lending portfolio grew $1.9 billion to $8.3 billion at
September 30, 1994. Of the $1.9 billion increase, $1.5 billion
related to the Shell program with the remaining increase resulting
from increased marketing and more competitive programs for the
Corporation's more traditional Visa and MasterCards.
Part I
Item 2 (continued)
21
Combined trading account and foreign exchange revenues in the 1994
third quarter were $212 million, down from $268 million in the same
period in 1993, but an increase from $203 million and $185 million
in the 1994 second and first quarters, respectively. The
consistent results of the past three quarters in 1994 reflects the
Corporation's emphasis on market-making and customer-related
activities in its trading business. For the first nine months,
combined trading account and foreign exchange revenues were $600
million in 1994, compared with $818 million in 1993.
The following table sets forth the components of trading account
and foreign exchange revenues for the third quarter and first nine
months of 1994 and 1993.
Third Quarter Nine Months
-------------- ------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Trading Account and Foreign
Exchange Revenue:
Interest Rate Contracts $ 95 $ 116 $ 318 $ 342
Foreign Exchange Revenue 56 79 156 243
Debt Instruments and Other (c) 61 73 126 233
----- ----- ----- -----
Total $212 $ 268 $ 600 $ 818
===== ===== ===== =====
[FN]
Includes interest rate swaps, currency swaps, foreign exchange
forward contracts, interest rate futures, and forward rate
agreements and related hedges.
Includes foreign exchange spot and option contracts.
(c) Includes U.S. government and foreign government agency and
corporate debt securities, emerging markets debt instruments,
debt-related derivatives, equity securities, equity
derivatives, and commodity derivatives.
The trading environment during the first nine months of 1994 was
difficult, when compared to the same period in 1993, and positions
taken in foreign exchange markets and European bond markets have
not been as profitable as in prior periods. The decreases in
revenue from interest rate contracts and from foreign exchange
contracts were primarily due to the recent unanticipated volatility
in the interest rate and currency markets. The interest rate
environment in the U.S. and European markets has been unstable
during the 1994 periods, contributing to the decrease in interest
rate contract revenue. Foreign exchange revenue decreased during
the first nine months of 1994 primarily due to unexpected movements
in the U.S. dollar. The decrease in debt instrument revenue was
primarily due to difficult conditions in the emerging debt markets,
as well as in the European government bond markets.
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, its credit
ratings, and steps taken by central banks and governments to affect
financial markets. The Corporation believes that its trading
business is a significant core business and that its improved
credit standing will benefit the Corporation's trading revenues by
enabling the Corporation to utilize a wider array of products with
additional counterparties. However, the Corporation expects that
its trading revenues will fluctuate as factors, such as market
volatility, governmental actions, or success in proprietary
positioning, may vary from period to period.
Securities gains were $6 million in the 1994 third quarter,
compared with $51 million for the same period in 1993. For the
first nine months, securities gains were $65 million in 1994,
versus $126 million in 1993. The decrease in securities gains in
each 1994 period, when compared to the same 1993 period, is due to
the higher interest rate environment exerting downward pressure on
market prices.
Part I
Item 2 (continued)
22
The following table presents the composition of other noninterest
revenue for the periods indicated.
Third Quarter Nine Months
-------------- ------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Other Revenue:
Revenue from Equity-Related
Investments $ 86 $ 57 $ 235 $ 200
Net Gains on LDC-Related
Interest Bond Sales 80 52 125 152
All Other Revenue 36 45 87 122
----- ----- ----- -----
Total $202 $ 154 $ 447 $ 474
===== ===== ===== =====
Revenue from equity-related investments, which includes income from
venture capital activities and emerging markets investments, was
$86 million in the 1994 third quarter and $235 million for the
first nine months of 1994, increasing 51% and 18%, respectively,
from the comparable periods last year. At September 30, 1994, the
Corporation had equity-related investments with a carrying value of
$1.9 billion. The Corporation believes that equity-related
investments will continue to make substantial contributions to the
Corporation's earnings, although the timing of the recognition of
gains from such activities is unpredictable and it is expected that
revenues from such activities will vary significantly from period
to period. For further discussion of the Corporation's venture
capital activities, see page B30 of the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1993.
In the 1994 third quarter, the Corporation had net gains of $80
million from sales of LDC-related past-due interest bonds versus
net gains of $52 million in the 1993 third quarter. For the first
nine months, net gains from sales of LDC-related past-due interest
bonds was $125 million in 1994, compared with $152 million in 1993.
As of September 30, 1994, the Corporation had approximately $97
million face value of LDC-related past-due interest bonds that
were unsold, including $64 million of Brazilian Eligible Interest ("EI")
bonds.
All other revenue includes the Corporation's share of CIT's net
income which, after purchase accounting adjustments, was $19
million in the 1994 third quarter and $55 million in the first nine
months, increasing 13% from each of the comparable 1993 periods.
Also included in all other revenue for the third quarter of 1994
and the third quarter of 1993 was a net gain of $4 million, for
each period, in connection with the Corporation's residential
mortgage sales activities. For the first nine months of 1994, the
Corporation's residential mortgage sales activities incurred a $27
million net loss compared with a net gain of $16 million for the
first nine months of 1993.
NONINTEREST EXPENSE
Third Quarter Nine Months
-------------- ------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Salaries $ 574 $ 518 $1,634 $1,548
Employee Benefits 108 94 329 301
Occupancy Expense 145 148 431 438
Equipment Expense 100 81 275 244
Foreclosed Property Expense 2 70 39 226
Restructuring Charge --- 115 48 158
Other Expense 382 344 1,160 1,043
------ ------ ------ ------
Total $1,311 $1,370 $3,916 $3,958
====== ====== ====== ======
Part I
Item 2 (continued)
23
Noninterest expense in the 1994 third quarter was $1,311 million,
compared with $1,370 million in the third quarter of 1993.
Included in noninterest expense for the 1993 third quarter was a
$115 million charge related to the completion of the assessment of
costs associated with the merger with Manufacturers Hanover
Corporation. Noninterest expense for the third quarter of 1994 included
approximately $28 million of operating expenses resulting from the
July 1, 1994 acquisition of Margaretten. Expenses for the third
quarter of 1994 also reflected operating costs of approximately $11
million associated with the acquisition of Ameritrust and $30
million in operating costs connected with the Shell MasterCard
(including marketing expenses of $13 million largely reflecting the
advertising campaign for the co-branded program).
For the first nine months, noninterest expense was $3,916 million
in 1994 versus $3,843 million (excluding the aforementioned merger
related charge of $115 million) in 1993. Included in the results
for the first nine months of 1994 was a $48 million restructuring
charge, recorded in the first quarter, related to the closing of 50
New York State branches. The results for the first nine months of
1993 included a restructuring charge of $43 million associated with
the Federally-assisted acquisition of the First City Banks by Texas
Commerce. Excluding the restructuring charges in both years,
noninterest expense for the first nine months of 1994 increased by
$68 million or less than 2% from the 1993 period. Noninterest
expense for the first nine months of 1994, when compared with the
same 1993 period, reflected higher expenses associated with
investments in certain key businesses partially offset by lower
foreclosed property expense. The investments included the 1993
acquisitions by Texas Commerce (which contributed approximately $48
million in additional operating expenses), operating costs of $96
million related to the co-branded Shell MasterCard program in the
first nine months of 1994 and $28 million of operating expenses
resulting from the acquisition of Margaretten.
The ratio of noninterest operating expense (excluding nonrecurring
charges) to total operating revenue was 60.7% in the 1994 third
quarter, compared with 57.9% in the same 1993 period. This ratio
for the first nine months of 1994 was 61.5% compared with 58.5% for
the first nine months of 1993. The Corporation remains committed
to improving its operating margins and return levels. To achieve
this end, revenue initiatives and productivity programs are
currently under way (and additional programs are being planned)
throughout the Corporation, and management believes such programs
will contribute to improvements in its operating margins and return
levels.
The increases in salaries for the 1994 third quarter and first nine
months were primarily due to additional staff costs resulting from
the 1993 acquisitions by Texas Commerce, the implementation of the
Shell MasterCard program and the recent Margaretten acquisition, as
well as higher incentives due to improved performance. Total staff
at September 30, 1994 amounted to 42,492 (including 1,574 from the
Margaretten acquisition) compared with 41,670 at September 30,
1993. Excluding the impact of Margaretten, the increase in staff
from areas with revenue growth initiatives were more than offset by
staff reductions attributable to continued integration and
productivity efforts.
In the third quarter and first nine months of 1994, employee
benefits increased by $14 million and $28 million, respectively,
from the prior year periods reflecting the 1993 Texas Commerce
acquisitions, a change in actuarial assumptions used for pension
expense and for Other Postretirement Benefits ("OPEB") expense.
Total 1994 pension expense is expected to be higher than the 1993
level, as a result of a decrease to 7.5% in the discount rate
utilized in determining the benefit obligation.
Equipment expense in the 1994 third quarter was $100 million
compared with $81 million in the same 1993 period. For the first
nine months, equipment expense was $275 million in 1994, versus
$244 million in 1993. The Corporation continues to enhance its
technology to support investments in certain key businesses and to
maintain a leadership position in transaction and information
processing. As a result, higher costs were incurred for system
enhancements to support the Corporation's trading activities and in
connection with the consolidation of its data centers and its ATM
technology. Additionally, the higher equipment expense reflects
the Margaretten and the Texas Commerce acquisitions.
Part I
Item 2 (continued)
24
Foreclosed property expense was $2 million in the 1994 third
quarter, compared with $70 million in the 1993 third quarter. For
the first nine months, foreclosed property expense was $39 million
in 1994 versus $226 million in 1993. The declines in both 1994
periods reflect significant progress in managing the Corporation's
real estate portfolio. Included in the first nine months of 1993
amount was $20 million related to the decision to accelerate the
disposition of certain foreclosed residential properties arising
from loans originally extended several years ago under a reduced
documentation mortgage program that was discontinued in 1990.
Management expects that foreclosed property expense for the 1994
fourth quarter will approximate the same level of expense as in the
1994 third quarter and, accordingly, foreclosed property expense
for the full year 1994 will be significantly lower than the full
year 1993 level.
The following table presents the components of other expense for
the periods indicated.
Third Quarter Nine Months
-------------- ------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Other Expense:
Professional Services $ 55 $ 48 $ 160 $ 145
Marketing Expense 45 40 142 108
FDIC Assessments 39 42 122 134
Telecommunications 39 30 102 84
Amortization of Intangibles 29 26 85 76
All Other 175 158 549 496
------ ------ ------ ------
Total $ 382 $ 344 $1,160 $1,043
====== ====== ====== ======
Other expense for the 1994 third quarter was $382 million, compared
with $344 million in the same period in 1993. The 1994 third
quarter includes $25 million in connection with the Shell
MasterCard and additional operating costs of $9 million from the
Margaretten acquisition. Also contributing to the quarter-over-
quarter increase in other expense were higher professional service
fees, reflecting increased use of contract computer consultants
associated with the Corporation's ongoing technology enhancement
efforts. Telecommunications expense in the 1994 third quarter
increased by $9 million from the comparable 1993 period, reflecting
increased costs for market data services related to trading
activities, as well as installations and technology upgrades
throughout the Corporation and the aforementioned acquisitions.
For the first nine months of 1994, other expense was $1,160
million, compared with $1,043 million for the prior year. The
increase principally reflects higher marketing expenses,
professional services and telecommunication costs, as well as the
nine month impact in 1994 of expenses associated with the First
City Banks and Ameritrust acquisitions, and the third quarter
impact of Margaretten. Included in other expense for the first
nine months of 1994 was approximately $33 million related to the
amortization of goodwill and other intangible assets associated
with the First City Banks, Ameritrust and Margaretten acquisitions.
As a result of these acquisitions, total amortization of goodwill
and intangibles amounted to $85 million in the first nine months of
1994, an increase of 12% from the same period in 1993. Marketing
expenses for the first nine months of 1994 was $142 million, an
increase of $34 million from the comparable period in 1993,
reflecting the marketing campaign for the co-branded Shell
MasterCard program, as well as increased promotional advertising
related to the Corporation's retail banking business.
The Corporation expects that total noninterest operating expense in
1994 will be higher than that in 1993, reflecting costs
associated with the continued investment by the Corporation to grow
key businesses.
Part I
Item 2 (continued)
25
INCOME TAXES
The Corporation's effective tax rate was 41.5% in the third quarter
and the first nine months of 1994. Tax expense in the 1993 third
quarter and first nine months included income tax benefits of $214
million and $331 million, respectively. Because the Corporation
recognized its remaining available Federal tax benefits in the
third quarter of 1993, the Corporation's earnings, beginning in the
fourth quarter of 1993, have been reported on a fully-taxed basis.
-----------------------------------------------------------------
LINES OF BUSINESS RESULTS
-----------------------------------------------------------------
Profitability of the Corporation is tracked with an internal
management information system that produces lines-of-business
performance within the Global Bank, Regional Bank, Real Estate and
Corporate sectors. A set of management accounting policies has
been developed and implemented to ensure that the reported results
of the groups reflect the economics of their businesses. Certain
amounts reported in prior periods have been restated to conform
with the current 1994 presentation. Lines-of-business results are
subject to further restatement as appropriate to reflect future
refinements in management reporting policies or changes to the
management organization.
Part I
Item 2 (continued)
26
Part I
Item 2 (continued)
27
Part I
Item 2 (continued)
28
Guidelines exist for assigning expenses that are not directly
incurred by businesses, such as overhead and taxes, as well as for
allocating shareholders' equity and the provision for credit
losses, utilizing a risk-based methodology. 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, operating and market -- within various
businesses and assigns capital accordingly. Credit risk is
computed using a risk-grading system that is consistently applied
throughout the Corporation. A long-term expected tax rate is
assigned in evaluating the Corporation's businesses. Texas
Commerce's results are tracked and reported on a legal entity
basis, including the return on equity calculation.
-----------------------------------------------------------------
Global Bank
-----------------------------------------------------------------
The Global Bank is organized into four principal management
entities: Banking & Corporate Finance (worldwide wholesale client
management and venture capital activities); Structured Finance
(loan syndications, high-yield securities and mergers &
acquisitions); Asia, Europe & Capital Markets (securities, foreign
exchange, and derivatives trading, the Corporation's treasury
functions, and the administration of the international branch
system in Asia and Europe); and Emerging Markets (cross-border
investment banking, local merchant banking, and trade finance).
The Global Bank seeks to optimize its risk profile by emphasizing
underwriting, distribution, and risk management skills.
The Global Bank's net income in the third quarter of 1994 was $266
million, a decrease of $30 million from the third quarter of 1993.
The decline was primarily due to decreases in noninterest revenue
of $67 million and in net interest income of $33 million, partially
offset by a $28 million lower credit provision and $16 million
lower foreclosed property expense. The Global Bank's net income
for the first nine months of 1994 was $714 million compared with
$901 million in the same period in 1993. The lower results reflect
decreases in noninterest revenue of $280 million and in net
interest income of $171 million, coupled with higher noninterest
expense of $15 million. These unfavorable factors were partially
offset by a $111 million decline in credit provision and $27
million lower foreclosed property expense.
The decrease in noninterest revenue was primarily due to a decline
in trading revenues to $206 million for the third quarter of 1994,
compared with trading revenues of $268 million in the 1993 third
quarter. For the first nine months, trading revenues were $582
million in 1994, down from $801 million in 1993. For a further
discussion of the Global Bank's trading results, see the trading
revenues section of this Form 10-Q. Securities gains were $4
million in the 1994 third quarter, a decrease of $44 million from
the same period in 1993. For the first nine months, securities
gains were $72 million in 1994, versus $130 million in 1993. The
decreases in trading revenues and securities gains were partially
offset by higher revenues from equity-related investments for the
third quarter of 1994, when compared with the comparable period in
1993. Also in the 1994 third quarter, gains on sales of LDC-
related past-due interest bonds were $80 million versus gains from
the sales of such bonds of $52 million in the 1993 third quarter.
The first nine months of 1994 included the recognition of $125
million in net gains from sales of LDC-related past-due interest
bonds, compared with net gains of $152 million in the same period a
year ago.
The decreases in net interest income for both 1994 periods were due
to the rising interest rate environment, combined with a change in
the mix of earning assets from loans to lower interest-earning
liquid assets. The decline in credit provision is attributable to
substantially improved credit quality in Banking & Corporate Finance.
For the first nine months of 1994, noninterest expense rose $15
million, compared to the same period in 1993, reflecting the Global
Bank's continued investment in the securities business. The
decline in foreclosed property expense was due to lower writedowns
on properties in the United Kingdom. The substantial increase in
average assets is primarily due to the adoption of FASI 39.
Part I
Item 2 (continued)
29
-----------------------------------------------------------------
Regional Bank
-----------------------------------------------------------------
The Regional Bank includes Retail Banking (New York Markets --
consumer banking and commercial and professional banking; Retail
Card Services; and National Consumer Business), Regional
Relationship Banking (Middle Market -- regional commercial banking;
Private Banking; and Chemical New Jersey Holdings, Inc.) and
Geoserve (cash management, funds transfer, trade, corporate trust
and securities services worldwide). The Corporation's Technology
and Operations group is also managed within this organizational
structure. The Corporation maintains a leading market share
position in serving the financial needs of Middle Market commercial
enterprises in the New York metropolitan area. Private Banking
serves a high net worth clientele with banking and investment
services. The Regional Bank's results for the third quarter of
1994 include the acquisition of Margaretten and prior periods have
not been restated.
The Regional Bank's net income of $145 million for the third
quarter of 1994 increased from last year's third quarter results of
$141 million. The increase in net income is primarily due to
improvements in net interest income of $36 million and noninterest
revenue of $30 million, coupled with a lower credit provision and
foreclosed property expense of $7 million and $7 million,
respectively. These improvements were partially offset by higher
noninterest expense of $71 million. For the first nine months of
1994, the Regional Bank's net income of $398 million improved from
$386 million in the comparable 1993 period. The results for the
first nine months of 1994 included a restructuring charge of $48
million ($28 million after-tax) related to the closing of 50 New
York branches and a staff reduction of 650. Excluding this one-
time charge, the Regional Bank's net income was $426 million and
its return on equity was 20.0%. The increase in earnings
(excluding the restructuring charge) can be attributable to
increases in net interest income of $76 million and noninterest
revenue of $58 million, as well as reductions in credit provision
of $34 million and in foreclosed property expense of $29 million,
partially offset by higher noninterest expense of $117 million.
The increases in net interest income for both of the 1994 periods
were primarily due to higher demand deposit volumes, wider deposit
spreads in New York Markets, a higher level of loans in credit
card and consumer lending, as well as the contribution from Margaretten.
The increase of $30 million in noninterest revenue in the 1994 third
quarter reflected the higher fees from revolving credit products in
Retail Card Services primarily due to the launch of the co-branded
Shell MasterCard in the fourth quarter of 1993. Also contributing
to the improvement were higher deposit servicing fees in New York
Markets and the inclusion of Margaretten's operating revenues in
the 1994 third quarter. Partially offsetting these factors were
lower corporate finance fees in Middle Market. The lower credit
provision resulted from improvements in credit quality for Middle
Market and Chemical New Jersey Holdings, Inc. Foreclosed
property expense decreased primarily in Chemical New Jersey
Holdings, Inc. and in the National Consumer Business.
The increase in noninterest expense is primarily due to the
aforementioned launch of the Shell MasterCard, resulting in higher
operating expenses of $30 million in the 1994 third quarter and $96
million in the first nine months. Also, noninterest expenses in
the National Consumer Business for the third quarter of 1994
increased $42 million from the comparable 1993 period, of which
approximately $28 million related to the acquisition of Margaretten
and the remainder to higher expenses due to increased Consumer
Finance revenues (primarily from loan origination activities).
Part I
Item 2 (continued)
30
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Texas Commerce Bancshares
-----------------------------------------------------------------
Texas Commerce is a leader in providing financial products and
services to businesses and individuals throughout Texas. Texas
Commerce is the primary bank for more large corporations and middle
market companies than any other bank in Texas. As of September 30,
1994, Texas Commerce had approximately $20 billion in total assets
with 117 locations statewide.
Texas Commerce's net income in the third quarter of 1994 was $57
million, comparable with the prior year's third quarter results.
On a pre-tax basis, Texas Commerce recorded income of $89 million
for the third quarter of 1994, up 16% from the third quarter of
1993. The increase in the 1994 third quarter period, compared with
the 1993 third quarter period, was primarily due to decreases in
foreclosed property costs of $22 million and in the credit
provision of $6 million coupled with higher net interest income of
$2 million. These positive factors were partially offset by higher
noninterest expense of $10 million and lower noninterest revenue of
$8 million. For the first nine months, Texas Commerce's net income
increased to $168 million in 1994, compared with $146 million in
1993. This increase resulted from lower foreclosed property
expense of $68 million coupled with a lower credit provision of $36
million and higher noninterest revenue of $10 million. These
results were partially offset by higher noninterest expense of $41
million and a $13 million decline in net interest income. The $146
million net income for the first nine months of 1993 excludes the
restructuring charge ($43 million pre-tax; $30 million after-tax)
related to the acquisition of the First City Banks and a positive
$14 million after-tax net effect from the implementation of SFAS
106 and SFAS 109.
Based on continuing improvements in asset quality and Texas
Commerce's already adequate allowance for losses, Texas Commerce
recorded a credit to the provision for losses in the first nine
months of 1994. The improved asset quality also led to the
substantial decline in foreclosed property expense. Noninterest
revenue decreased during the 1994 third quarter, when compared to
the prior year's comparable period, due to one-time gains from
asset sales included in the 1993 third quarter
amount. The increase in noninterest revenue for the first nine
months of 1994 is due primarily to strong growth in trust income
(which was up 36% from the 1993 comparable period) reflecting both
increased demand for Texas Commerce's services as well as the
effects of the acquisitions of the First City Banks and Ameritrust
in 1993. For the first nine months of 1994, net interest income
decreased as a result of lower loan volume and lower interest rate
spreads.
The increase in noninterest expense is attributable to the
operating expenses associated with the 1993 acquisitions of the
First City Banks and Ameritrust.
Nonperforming assets declined to $174 million at September 30,
1994, down $3 million from the 1994 second quarter. The decrease
represented the 25th consecutive quarterly decline from a peak of
$1,303 million in mid-1988.
-----------------------------------------------------------------
Real Estate
-----------------------------------------------------------------
Real Estate includes the management of the Corporation's commercial
real estate portfolio, exclusive of those in Chemical Bank New
Jersey Holdings, Inc. (included in Regional Bank section) and in
Texas Commerce. Real Estate had a net loss of $18 million for the
third quarter of 1994 compared with a net loss of $45 million in
the third quarter of 1993. For the first nine months, Real
Estate's net loss was $97 million in 1994, compared with $139
million in 1993. The improvement in results was primarily due to a
decrease in credit provision and lower foreclosed property expense
reflecting the continued progress in managing the Corporation's
real estate portfolio. Total nonperforming assets at September 30,
1994 were $1,007 million, down 6% from $1,074 million in the second
quarter of 1994 and down 29% from $1,412 million in the third
quarter of 1993.
Part I
Item 2 (continued)
31
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Corporate
-----------------------------------------------------------------
Corporate had a net loss of $11 million for the 1994 third quarter
and a net loss of $68 million for the first nine months of 1994,
compared with net income of $53 million and a net loss of $37
million, respectively, for the comparable 1993 periods. Corporate
includes the management results attributed to the parent company;
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. Included in the $37 million net loss for the first nine
months of 1993 were the following one-time items: the recognition
of $331 million in Federal tax benefits, a noninterest expense
charge of $67 million ($115 million pre tax) as a result of a
reassessment of costs associated with the merger with MHC; an
after-tax loss of $53 million ($75 million pre-tax) due to the
writedown associated with the planned disposition of residential
mortgages, a net $35 million gain from the adoption of SFAS 106 and
SFAS 109 and a $30 million after-tax restructuring charge ($43
million pre-tax) related to the acquisition of the First City
Banks.
-----------------------------------------------------------------
BALANCE SHEET ANALYSIS
-----------------------------------------------------------------
The Corporation's total assets were $169.3 billion at September 30,
1994, an increase of $19.4 billion from the 1993 year-end. As a
result of the adoption of FASI 39 on January 1, 1994, total assets
and liabilities each increased by approximately $17.0 billion at
September 30, 1994, with unrealized gains reported as Trading
Assets-Risk Management Instruments and unrealized losses reported
in Other Liabilities. Prior to the adoption of FASI 39, unrealized
gains and losses were reported net in Other Assets. See Note 1 in
this Form 10-Q for a further discussion of FASI 39.
SECURITIES
As of December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). As a
result of the adoption of SFAS 115, available-for-sale debt and
equity securities that were previously measured either at amortized
cost or at the lower of aggregate amortized cost or market are
currently measured at fair value. See Note 3 of the Notes to
Consolidated Financial Statements for a further discussion of SFAS
115.
The prepayment trends of mortgage-backed securities and
collateralized mortgage obligations ("CMOs") is actively monitored
through the Corporation's portfolio management function. The
Corporation typically invests in CMOs that the Corporation believes
have stable cash flows and relatively short duration, thereby
limiting the impact of interest rate fluctuations on the portfolio.
Management regularly does simulation testing of the impact that
interest and market rate changes would have on its CMO portfolio.
Mortgage-backed securities and CMOs which management believes have
high prepayment risk are included in the available-for-sale
portfolio.
CREDIT PORTFOLIO
The following loan review discussion focuses primarily on
developments since December 31, 1993 and should be read in
conjunction with the Credit Portfolio section on pages B34 - B42 of
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993.
The Corporation's loans outstanding totaled $77.1 billion at
September 30, 1994, an increase of $1.8 billion from year-end 1993,
but $.7 billion lower than September 30, 1993. The growth in
loans outstanding from the December 31, 1993 level reflects an
increase in the consumer and commercial and industrial loan
portfolios. The loan portfolio at September 30, 1994 reflects a
second consecutive quarter-end increase in loans outstanding, in
comparison to the declines previously experienced in the
Corporation's total loan portfolio. Management believes that the
increase in loan demand will continue in the 1994 fourth quarter
and into 1995.
Part I
Item 2 (continued)
32
The Corporation is a leading participant in loan originations and
sales. This activity is comprised of the origination and sale of
loans and lending commitments to investors, generally without
recourse. These sales include syndication, assignment and
participation, and include both short- and medium-term
transactions. This loan distribution capability allows the
Corporation to compete aggressively and profitably in wholesale
lending markets by enabling it to originate and subsequently reduce
larger individual credit exposures and thereby to price more
flexibly than if all loans were held as permanent investments. The
Corporation also benefits from increased liquidity. During the
1994 third quarter and nine months, the Corporation acted as agent
or co-agent for approximately $134 billion and $263 billion,
respectively, in syndicated credit facilities.
The Corporation's loan balances were as follows for the dates
indicated:
September 30, December 31, September 30,
(in millions) 1994 1993 1993
------------- ----------- ------------
LOANS
Domestic Commercial:
Commercial Real Estate $ 6,361 $ 7,338 $ 7,797
Commercial and Industrial 20,783 18,874 23,770
Financial Institutions 3,084 4,816 3,081
-------- -------- --------
Total Commercial Loans 30,228 31,028 34,648
-------- -------- --------
Domestic Consumer:
Residential Mortgage 13,152 12,244 11,492
Credit Card 8,329 7,176 6,436
Other Consumer (c) 6,990 6,266 6,084
-------- -------- --------
Total Consumer Loans 28,471 25,686 24,012
-------- -------- --------
Total Domestic Loans 58,699 56,714 58,660
Foreign, primarily
Commercial 18,439 18,667 19,119
-------- -------- --------
Total Loans $ 77,138 $ 75,381 $ 77,779
======== ======== ========
[FN]
Represents loans secured primarily by real property, other than
loans secured by mortgages on 1-4 family residential
properties.
Consists of 1-4 family residential mortgages.
(c) Consists of installment loans (direct and indirect types of
consumer finance) and student loans.
Includes loans previously classified as LDC loans. Previously
reported loan amounts have been reclassified to conform with
the current presentation.
NONPERFORMING ASSETS
For a description of the Corporation's accounting policies for its
nonperforming loans, renegotiated loans and assets acquired as loan
satisfactions, see Note One of the Notes to the Consolidated
Financial Statements on pages B57-B58 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993. For a
description of the Corporation's shared-loss assets acquired from
First City which are subject to loss-sharing provisions of the
Purchase and Assumption Agreements between the Federal Deposit
Insurance Corporation ("FDIC") and Texas Commerce, see Note Seven
of the Notes to the Consolidated Financial Statements on page B64
of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993. At September 30, 1994, nonperforming shared-
loss assets acquired from First City were $59 million. Such assets
are not included in the amount of nonperforming assets below.
Part I
Item 2 (continued)
33
The following table sets forth the nonperforming assets and
contractually past-due loans of the Corporation at September 30,
1994, December 31, 1993 and September 30, 1993.
September 30, December 31, September 30,
(in millions) 1994 1993 1993
------------- ------------ -----------
NONPERFORMING LOANS:
Domestic Commercial:
Commercial Real Estate $ 570 $ 682 $ 767
Commercial and Industrial 460 867 1,111
Financial Institutions 14 24 39
-------- -------- --------
Total Commercial Loans 1,044 1,573 1,917
-------- -------- --------
Domestic Consumer:
Residential Mortgage 147 101 93
Other Consumer 23 24 22
-------- -------- --------
Total Consumer Loans 170 125 115
-------- -------- --------
Total Domestic 1,214 1,698 2,032
Foreign, primarily
Commercial 310 893 1,014
-------- -------- --------
Total Nonperforming Loans $ 1,524 $ 2,591 $ 3,046
Assets Acquired as
Loan Satisfactions 669 934 1,086
-------- -------- --------
Total Nonperforming Assets $ 2,193 $ 3,525 $ 4,132
======== ======== ========
Contractually Past-Due Loans :
Consumer $ 268 $ 299 $ 287
Commercial and Other Loans 42 24 49
-------- -------- --------
Total Contractually
Past-Due Loans $ 310 $ 323 $ 336
======== ======== ========
[FN]
Includes nonperforming loans previously classified as LDC
nonperforming loans. Previously reported amounts have been
restated to conform with the current presentation.
Accruing loans past-due 90 days or more as to principal and
interest, which are not characterized as nonperforming loans.
The Corporation's total nonperforming assets at September 30, 1994
were $2,193 million, a decrease of $1,332 million from the 1993
year-end level and a decrease of $1,939 million from last-year's
comparable quarter. This improvement in the Corporation's credit
profile is a result of a significantly lower level of loans being
placed on nonperforming status as well as the impact of repayments,
charge-offs, and the Corporation's continuing loan workout and
collection activities. In October 1994, the Corporation agreed to
sell a $341 million portfolio of commercial mortgage loans and real
estate assets to The Morgan Stanley Real Estate Fund, L.P., and
Lennar Florida Partners. The purchase price for the portfolio,
which contained approximately 86% nonperforming loans and
foreclosed properties, was more than approximately 60% of face value
and in excess of the Corporation's carrying value for those assets.
This transaction provided the Corporation with the opportunity to take
advantage of recent increases in prices paid for distressed real
estate assets, while at the same time alleviating the
administrative burden of working out these assets.
As a result of the foregoing sale, as well as the Corporation's
other initiatives, management expects a further reduction in the
level of its nonperforming assets during the remainder of 1994 and
continuing into 1995.
Part I
Item 2 (continued)
34
The following table presents the reconciliation of nonperforming
assets for the third quarter and first nine months of 1994 and
1993.
RECONCILIATION OF NONPERFORMING ASSETS
Third Quarter Nine Months
-------------- --------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Balance at beginning of period $2,493 $4,863 $3,525 $6,092
Additions:
Loans placed on
nonperforming status 196 256 708 1,255
Deductions:
Payments 263 521 907 1,205
Sales 79 59 212 268
Charge-offs 89 245 457 807
Write-downs 5 54 52 187
Return to performing status 60 108 412 661
Transfer to held-for-sale
(other assets) --- --- --- 87
------ ------ ------ ------
Balance at end of period $2,193 $4,132 $2,193 $4,132
====== ====== ====== ======
[FN]
Excludes those consumer charge-offs that are recorded on a
formula basis.
ALLOWANCE FOR LOSSES
The accompanying table reflects the activity in the allowance for
losses for the third quarter and nine months ended September 30,
1994 and 1993.
Third Quarter Nine Months
-------------- --------------
(in millions) 1994 1993 1994 1993
----- ----- ----- -----
Non-LDC Allowance:
Balance at Beginning of Period $2,676 $2,421 $2,423 $2,206
Provision for Losses 100 298 465 973
Charge-Offs (201) (327) (720) (1,082)
Recoveries 76 29 180 109
------ ------ ------ ------
Net Charge-Offs (125) (298) (540) (973)
Transfer from LDC Allowance --- --- 300 200
Other (1) 8 2 23
------ ------ ------ ------
Balance at End of Period 2,650 2,429 2,650 2,429
------ ------ ------ ------
LDC Allowance:
Balance at Beginning of Period --- 570 597 819
Provision for Losses --- --- --- ---
Charge-Offs --- (39) (296) (59)
Recoveries --- 38 57 129
------ ------ ------ ------
Net (Charge-Offs) Recoveries --- (1) (239) 70
Losses on Sales and Swaps --- (26) (58) (146)
Transfer to Non-LDC Allowance --- --- (300) (200)
------ ------ ------ ------
Balance at End of Period --- 543 0 543
------ ------ ------ ------
Total Allowance for Losses $2,650 $2,972 $2,650 $2,972
====== ====== ====== ======
[FN]
Primarily related to the First City Banks acquisition.
Part I
Item 2 (continued)
35
Completion of the Brazilian refinancing package during the 1994
second quarter brought to a close the broad rescheduling programs
begun in the mid-1980s. In connection with completion of the
Brazilian refinancing program, the Corporation performed a final
valuation of its LDC portfolio, adjusting its medium- and long-term
outstandings to the various LDC countries constituting the
portfolio to amounts that management believed to be the estimated
net recoverable values of each of such loans at June 30, 1994. The
final valuation resulted in a $291 million charge in the 1994
second quarter. The remaining LDC allowance of $300 million (after
taking the aforementioned charge-off) was transferred to the
general allowance for losses.
The following table presents the Corporation's allowance coverage
ratios at September 30, 1994, December 31, 1993 and September 30,
1993.
ALLOWANCE COVERAGE RATIOS
September 30, December 31, September 30,
For the Period Ended: 1994 1993 1993
------------- ------------ -------------
Allowance for Losses to:
Loans at Period-End 3.44% 4.01% 3.82%
Average Loans 3.55 3.84 3.73
Nonperforming Loans 173.88 116.56 97.57
The Corporation deems its allowance for losses at September 30,
1994 to be adequate. Although the Corporation considers that it
has sufficient reserves to absorb losses that may currently exist
in the portfolio, but are not yet identifiable, the precise loss
content from the loan portfolio, as well as from other balance
sheet and off-balance sheet credit-related instruments, is subject
to continuing review based on quality indicators, concentrations,
changes in business conditions, and other external factors such as
competition and legal and regulatory requirements.
NET CHARGE-OFFS
Third Quarter Nine Months
-------------- --------------
(in millions) 1994 1993 1994 1993
----- ----- ----- ------
Net Charge-Offs:
Domestic Commercial:
Commercial Real Estate $ 20 $ 51 $ 143 $ 178
Commercial and Industrial 9 117 97 316
Financial Institutions --- 1 (1) 15
------ ------ ------ ------
Total Commercial Net
Charge-Offs 29 169 239 509
------ ------ ------ ------
Domestic Consumer:
Residential Mortgage 12 2 24 65
Credit Card 84 76 247 245
Other Consumer 4 6 13 20
------ ------ ------ ------
Total Consumer Net
Charge-Offs 100 84 284 330
------ ------ ------ ------
Total Domestic Net Charge-Offs 129 253 523 839
Foreign (4) 72 314 210
------ ------ ------ ------
Total Net Charge-Offs $ 125 $ 325 $ 837 $1,049
====== ====== ====== ======
[FN]
There are essentially no credit losses in the student loan
portfolio due to the existence of Federal and State government
agency guarantees.
Includes charge-offs previously classified as LDC charge-offs
and losses on sales and swaps. Previously reported net charge-
off amounts have been reclassified to conform with the current
presentation.
Part I
Item 2 (continued)
36
For a discussion of net charge-offs, see the various credit
portfolio sections in this Form 10-Q. Management expects total net
charge-offs in the 1994 fourth quarter to be at a level comparable
with the level of the 1994 third quarter.
DOMESTIC COMMERCIAL REAL ESTATE
The domestic commercial real estate portfolio represents loans
secured primarily by real property, other than loans secured by
one-to-four family residential properties, which are included in
the consumer loan portfolio. The domestic commercial real estate
loan portfolio totaled $6.4 billion at September 30, 1994, a
decline from $7.3 billion at December 31, 1993 and a decline from
$7.8 billion at September 30, 1993. The decreases from the 1993
year-end and prior year periods are attributable to repayments,
transfers to real estate owned and charge-offs.
The table below sets forth the major components of the domestic
commercial real estate loan portfolio at the dates indicated.
September 30, December 31, September 30,
(in millions) 1994 1993 1993
------------- ------------ -------------
Commercial Mortgages $5,258 $5,917 $6,213
Construction 1,103 1,421 1,584
------ ------ ------
Total Domestic Commercial
Real Estate Loans $6,361 $7,338 $7,797
====== ====== ======
Commercial mortgages provide financing for the acquisition or
refinancing of commercial properties, and typically have terms
ranging from three-to-seven years. 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.
Part I
Item 2 (continued)
37
The following table shows the Corporation's domestic commercial
real estate loans, nonperforming loans and foreclosed commercial
real estate, by property type and geographic location.
Part I
Item 2 (continued)
38
The largest concentration of domestic commercial real estate loans
is in the New York/New Jersey and Texas markets, representing 52%
and 26%, respectively, of the domestic commercial real estate
portfolio. No other state represented more than 3% of the domestic
commercial real estate loan portfolio.
Nonperforming domestic commercial real estate assets were $1,108
million at September 30, 1994, a 25% decrease from December 31,
1993 and a decrease of $578 million, or 34%, from September 30,
1993. The improvement in nonperforming domestic commercial real
estate asset levels for the first nine months of 1994 is the result
of increased liquidity in the commercial real estate markets as
well as successful workout activities.
The third quarter of 1994 was the seventh consecutive quarter in
which reductions to nonperforming domestic commercial real estate
assets in the form of payments, returns to accrual status, and
sales of real estate owned were greater than the additions to
nonperforming assets. Domestic commercial real estate net charge-
offs in the third quarter of 1994 totaled $20 million, compared
with $51 million in the same period a year ago. For the first nine
months, such charge-offs were $143 million in 1994, compared with
$178 million in 1993. Writedowns of commercial real estate owned
totaled $48 million for the first nine months of 1994, compared
with $136 million in first nine months of 1993. Approximately $75
million and $195 million in commercial real estate owned were sold
during the 1994 third quarter and first nine months, respectively.
Generally, these assets were sold at or above carrying value.
In October 1994, the Corporation agreed to sell a $341 million
portfolio of distressed real estate assets. The sale significantly
reduces the amount of the Corporation's nonperforming real estate
assets. For additional information regarding this transaction, see
the Nonperforming Assets section in this Form 10-Q.
Domestic commercial real estate net charge-offs, writedowns, and
nonperforming assets for the full year 1994 are expected to be
below the full year 1993 levels.
DOMESTIC COMMERCIAL AND INDUSTRIAL PORTFOLIO
The domestic commercial and industrial portfolio totaled $20.8
billion at September 30, 1994, compared with $18.9 billion at
December 31, 1993 and $23.8 billion at September 30, 1993. The
portfolio is diversified geographically and by industry. The
largest industry concentrations are oil and gas and retailing, each
of which approximate 2.2% of total loans. All of the other
remaining industries are each less than 2% of total loans.
Included in the domestic commercial and industrial portfolio are
loans related to highly leveraged transactions ("HLT's"). The
Corporation originates and syndicates loans in HLTs, which include
acquisitions, leveraged buyouts and recapitalizations. HLT loans
at September 30, 1994 totaled approximately $1.5 billion, compared
with $1.9 billion at December 31, 1993 and $2.0 billion at
September 30, 1993. The substantial reduction in the HLT loan
portfolio from September 30, 1993 can be largely attributed to
repayments and reclassifications to non-HLT status.
At September 30, 1994, the Corporation had
$131 million in nonperforming HLT loans compared with $269 million
at the end of 1993 and $373 million at the end of the same period
last year. Net recoveries related to HLTs for the nine months
ended September 30, 1994 totaled $13 million, versus net charge-
offs of $63 million for the comparable 1993 period.
DOMESTIC FINANCIAL INSTITUTIONS PORTFOLIO
The domestic financial institutions portfolio includes commercial
banks and companies whose businesses primarily involve lending,
financing, investing, underwriting, or insuring. Loans to domestic
financial institutions were $3.1 billion at September 30, 1994 or
4% of total loans outstanding. Loans to domestic financial
institutions are predominantly to broker-dealers, which comprise
over half the domestic financial institution total.
Part I
Item 2 (continued)
39
DOMESTIC CONSUMER PORTFOLIO
The consumer loan portfolio consists of one-to-four family
residential mortgages, credit cards and other consumer loans. The
domestic consumer loan portfolio totaled $28.5 billion at September
30, 1994, representing 37% of total loans, an increase from
$25.7 billion or 34% of total loans at December 31, 1993 and an
increase from $24.0 billion or 31% of total loans at September
30, 1993.
The following table presents the composition of the Corporation's
domestic consumer loans at the dates indicated.
September 30, December 31, September 30,
(in millions) 1994 1993 1993
------------- ------------ -------------
Residential Mortgages $13,152 $12,244 $ 11,492
Credit Cards 8,329 7,176 6,436
Other Consumer Loans 6,990 6,266 6,084
------- ------- -------
Total $28,471 $25,686 $ 24,012
======= ======= =======
[FN]
Includes installment and student loans.
Residential mortgage loans at September 30, 1994 increased $1.7
billion from the comparable 1993 period in part due to the
Margaretten acquisition in July 1994. Credit card receivables at
September 30, 1994 increased $1.9 billion from the same period a
year ago, of which approximately $1.5 billion is related to the co-
branded Shell MasterCard program, which was introduced in the
fourth quarter of 1993. Management expects continued growth in the
level of Shell credit card outstandings for the fourth quarter of
1994. Management is exploring other opportunities in the credit
card area, including the feasibility of other co-branded card
programs.
Total nonperforming domestic consumer loans at September 30, 1994
were $170 million and were comprised of $147 million of loans
secured by residential real estate and $23 million of other
consumer loans. Total nonperforming domestic consumer loans at
December 31, 1993 were $125 million and were comprised of $101
million of loans secured by residential real estate and $24 million
of other consumer loans. At September 30, 1993, total
nonperforming domestic consumer loans were $115 million and were
comprised of $93 million of loans secured by residential real
estate and $22 million of other consumer loans. The rise in
nonperforming domestic consumer residential loans since September
30, 1993 primarily reflects increases in the nonperforming status
of certain loans originally extended several years ago under a
reduced documentation mortgage program that was discontinued in
1990.
Management expects consumer loan net charge-offs in the fourth
quarter of 1994 will be somewhat higher than the fourth quarter of
1993 due to the growth of the consumer portfolio, including the
higher level of credit card receivables outstanding as a result of
the Shell MasterCard program.
Part I
Item 2 (continued)
40
MORTGAGE BANKING ACTIVITIES
During the 1994 third quarter, the Corporation acquired Margaretten
Financial Corporation. See Note 12 on page 14 of this Form 10-Q
for a further discussion. Subsequently, during the 1994 third
quarter, the Corporation sold to Bank of America, FSB, a
BankAmerica Corporation subsidiary, Margaretten's mortgage
servicing operations located in Richmond, Virginia. This
transaction included the assumption of the lease and fixed assets
of the Richmond facility as well as the servicing rights to a
portion of the GNMA portfolio and private investor portfolio that
were serviced at that facility.
The Corporation both originates and services residential mortgage
loans as part of its mortgage banking activities. After
origination, the Corporation typically sells loans to investors,
primarily in the secondary market, while retaining the rights to
service such loans. In accordance with current accounting
standards, the value of such servicing rights related to
originating mortgage loans is not recorded as an asset in the
financial statements. The Corporation originated $3.2 billion of
mortgages in the third quarter of 1994 versus $3.5 billion in the
same 1993 period. For the first nine months, the Corporation
originated $10.2 billion of mortgages in 1994, compared with $10.1
billion originated in 1993. For the first nine months of 1994, the
Corporation sold to investors approximately 75% of the residential
mortgage loans it had originated, compared with 91% in 1993.
In addition to originating mortgage servicing rights, the
Corporation also purchases mortgage servicing rights. The
Corporation may purchase bulk rights to service a loan portfolio or
the Corporation may purchase loans directly and then sell such
loans while retaining the servicing rights. The Corporation's
servicing portfolio amounted to $55.9 billion at September 30, 1994
compared with $36.4 billion at December 31, 1993 and $36.1 billion
at September 30, 1993. Purchased mortgage servicing rights
(included in other assets) amounted to $473 million at September
30, 1994 compared with $249 million at December 31, 1993 and $231
million at September 30, 1993. The increases in the servicing
portfolio and in purchased mortgage servicing rights at September
30, 1994 were primarily due to the Margaretten acquisition. The
mortgage loans to which the Corporation's servicing rights
relate are, to a substantial degree, of recent vintage
(i.e., originated within the past two years when interest
rates have been relatively low). The Corporation utilizes
an amortization method based on adjusted cash
flows to amortize purchased mortgage servicing rights. The
Corporation continually evaluates prepayment exposure of the
portfolio, adjusting the balance and remaining life of the
servicing rights as a result of prepayments.
FOREIGN PORTFOLIO
The foreign portfolio includes foreign commercial and industrial
loans, loans to foreign financial institutions, foreign commercial
real estate, loans to foreign governments and official
institutions, and foreign consumer loans. At September 30, 1994,
the Corporation's total foreign loans were $18.4 billion, compared
with $18.7 billion at December 31, 1993 and $19.1 billion at
September 30, 1993. Included in foreign loans were foreign
commercial and industrial loans of $7.4 billion at the end of the
1994 third quarter, an increase of $.8 billion from the 1993 year-
end and $.6 billion from September 30, 1993.
Total foreign commercial real estate loans at September 30, 1994
were $.5 billion, slightly reduced from $.6 billion at December 31,
1993 and unchanged from September 30, 1993. A significant portion
of the foreign real estate portfolio is located in the United
Kingdom and Hong Kong.
BRAZIL
For a discussion of significant developments with respect to the
restructuring of Brazilian debt, see pages B41 and B42 of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993 and page 38 of the Corporation's Form 10-Q for
the quarter ended June 30, 1994. The following significant events
have occurred since June 30, 1994: Principal bonds ($50
million) and EI bonds (approximately $26 million)
that the Corporation received on April 15, 1994 as part of
the Brazilian exchange and which were held in escrow since that
date were released from escrow on September 22, 1994. As of
September 30, 1994, the Corporation had sold approximately $125
million face value of EI bonds and had approximately $64 million
face value (which includes the aforementioned $26 million released
from escrow on September 22, 1994) of EI bonds remaining unsold.
Part I
Item 2 (continued)
41
The aforementioned bonds received by the Corporation through the
exchange are measured subject to the provisions of SFAS 115. The
Corporation classified all the bonds it received in the exchange as
available-for-sale, and therefore such bonds are valued at fair
value. As a result of the exchange, the Corporation removed
approximately $270 million of Brazilian loans from nonperforming
status during 1994. Future sales by the Corporation, of the
remaining EI bonds it holds, will depend upon market conditions
during the remainder of 1994 and 1995.
-----------------------------------------------------------------
CAPITAL
-----------------------------------------------------------------
The following capital discussion focuses primarily on developments
since December 31, 1993. Accordingly, it should be read in
conjunction with the Capital section on pages B42 - B44 of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993.
Total stockholders' equity was $10.8 billion at September 30, 1994,
down from $11.2 billion at December 31, 1993 and $10.9 billion at
September 30, 1993. The lower level of stockholders' equity at
September 30, 1994 from the 1993 year-end reflects a $511 million
net reduction in the fair value of available-for-sale securities
accounted for under SFAS 115; the redemption of $404 million of
Adjustable Rate Cumulative Preferred Stock, Series C ("Series C
Preferred Stock"); the net increase in treasury stock of $354
million, principally from the aforementioned repurchase of 10
million shares of the Corporation's common stock; and common and
preferred dividends totaling $395 million. Partially offsetting
the decline was an increase of $1,115 million from the net income
generated during the nine month period as well as an increase of
$200 million from the issuance of Adjustable Rate Cumulative
Preferred Stock, Series L ("Series L Preferred Stock").
Total capitalization (total stockholders' equity under risk-based
capital guidelines and senior and subordinated debt that qualifies
as Tier 2 Capital) increased by $179 million during the first nine
months of 1994.
LONG-TERM DEBT
In the first nine months of 1994, additions to the Corporation's
long-term debt were $1,742 million (including $792 million of
medium-term notes, $350 million of subordinated debt that qualifies
as Tier 2 Capital, $450 million of other long-term debt and the
inclusion of $150 million from the acquisition of Margaretten). These
additions were offset by maturities of $1,210 million of long-term
debt (including $470 million of medium-term notes, $415 million of
senior notes and $325 million of other long-term debt) and the
redemption of $185 million of long-term debt. See Liquidity
Management section for further discussion of the Corporation's
long-term debt redemptions.
COMMON STOCK DIVIDENDS
On September 20, 1994, the Board of Directors of the Corporation
increased the quarterly dividend on the outstanding shares of its
common stock to $.44 per share (an increase of 16 percent from $.38
per share), payable on October 31, 1994 to stockholders of record
at the close of business on October 6, 1994. On an annual basis,
this represents an increase in the dividend rate to $1.76 per
share, from $1.52 per share.
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.
Part I
Item 2 (continued)
42
RISK-BASED CAPITAL RATIOS
At September 30, 1994, the Corporation's ratios of Tier 1 Capital
to risk-weighted assets and Total Capital to risk-weighted assets
were 8.15% and 12.32%, respectively, well in excess of the minimum
ratios specified by the Federal Reserve Board. These ratios, as
well as the leverage ratio discussed below, do not reflect any
adjustment in stockholders' equity due to the adoption of SFAS 115.
At September 30, 1994, Chemical Bank's ratios of Tier 1 Capital and
Total Capital to risk-weighted assets, were 7.86% and 12.34%,
respectively. At such date, Chemical Bank and Texas Commerce Bank
National Association were each "well capitalized," as defined by
the Federal Reserve Board. 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%.
LEVERAGE RATIOS
The Tier 1 leverage ratio is defined as Tier 1 Capital (as defined
under the risk-based capital guidelines) divided by average total
assets (net of allowance for losses, goodwill, and certain
intangible assets). The minimum leverage ratio is 3% for banking
organizations that have well-diversified risk (including no undue
interest risk); excellent asset quality; high liquidity; good
earnings; and, in general, are considered strong banking
organizations (rated composite 1 under the BOPEC rating system for
bank holding companies). 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 circumstances or risk
profile of a given banking organization. The Federal Reserve Board
has not advised the Corporation of any specific minimum Tier 1
leverage ratio applicable to it. The Corporation's Tier I leverage
ratio was 5.92% at September 30, 1994, compared with 6.77% at
December 31, 1993. At September 30, 1994, Chemical Bank's Tier 1
leverage ratio was 5.93%, compared with 6.97% at December 31, 1993.
The declines in the leverage ratios for both the Corporation and
Chemical Bank reflect the adoption of FASI 39 on January 1, 1994.
Assuming that FASI 39 had not been adopted, the Corporation's Tier
1 leverage ratio would have been 6.74% and Chemical Bank's Tier 1
leverage ratio would have been 7.03% at September 30, 1994.
Part I
Item 2 (continued)
43
The table which follows sets forth the Corporation's Tier 1
Capital, Tier 2 Capital and risk-weighted assets, and the
Corporation's risk-based Tier 1 and Total Capital ratios and Tier 1
leverage ratios for the dates indicated.
CAPITAL AND RATIOS UNDER FEDERAL RESERVE BANK FINAL GUIDELINES
September 30, December 31,
(in millions, except ratios) 1994 1993
------------- ------------
Tier 1 Capital
Common Stockholders' Equity $ 9,654 $ 9,295
Nonredeemable Preferred Stock 1,450 1,654
Minority Interest 69 66
Less: Goodwill 1088 941
Non-Qualifying Intangible Assets 151 211
-------- --------
Tier 1 Capital $ 9,934 $ 9,863
Tier 2 Capital
Long-Term Debt Qualifying as Tier 2 $ 3,544 $ 3,437
Qualifying Allowance for Losses 1,537 1,536
-------- --------
Tier 2 Capital $ 5,081 $ 4,973
-------- --------
Total Qualifying Capital $ 15,015 $ 14,836
======== ========
Risk-Weighted Assets $ 121,853 $ 121,446
Tier 1 Capital Ratio 8.15% 8.12%
Total Capital Ratio 12.32% 12.22%
Tier 1 Leverage Ratio 5.92% 6.77%
[FN]
Includes off-balance sheet risk-weighted assets in the amount
of $38,158 million, and $36,777 million, respectively, at
September 30, 1994 and December 31, 1993.
Excluding the Corporation's securities subsidiary, Chemical
Securities Inc., the September 30, 1994 ratios of Tier 1 Leverage,
Tier 1 Capital to risk-weighted assets and Total Capital to
risk-weighted assets were 6.3%, 8.0% and 12.0%, respectively,
compared with 7.2%, 7.9% and 11.9%, respectively, at December 31,
1993.
-----------------------------------------------------------------
LIQUIDITY MANAGEMENT
-----------------------------------------------------------------
The following liquidity management discussion focuses primarily on
developments since December 31, 1993 and should be read in
conjunction with the Liquidity Management section on pages B44 and
B45 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993.
The primary source of liquidity for the Corporation's bank
subsidiaries derives from their ability to generate core deposits
(which includes all deposits except noninterest bearing time
deposits, foreign deposits and certificates of deposit of $100,000
or more). The Corporation considers funds from such sources to
comprise its subsidiary banks' "core" deposit base because of the
historical stability of such sources of funds. The average core
deposits at the Corporation's bank subsidiaries for the first nine
months of 1994 were $59 billion, a slight decrease from $60 billion
for the comparable period in 1993. These deposits fund a portion
of the Corporation's asset base, thereby reducing the Corporation's
reliance on other, more volatile, sources of funds. For the first
nine months of 1994, the Corporation's percentage of average core
deposits to average interest-earning assets was 45%, compared with
48% in the first nine months of 1993. Average core deposits as a
percentage of average loans was 79% for the first nine months of
1994, compared with 75% for the same period a year ago.
Part I
Item 2 (continued)
44
The Corporation is an active participant in the capital markets.
In addition to issuing commercial paper and medium-term notes, the
Corporation raises funds through the issuance of long-term debt,
common stock and preferred stock. During the first nine months of
1994, the Corporation issued $200 million of preferred stock, $350
million of subordinated debt, $792 million of senior debt through
its medium-term note program and $450 million of other long-term
debt.
During the first nine months of 1994, the Corporation redeemed $185
million of its long-term debt. On July 15, 1994, the Corporation
redeemed all outstanding shares of its Series C Preferred Stock.
The redemption price was $12.36 per share (which included a premium
of $.36 per share) plus accrued but unpaid dividends to the date of
redemption. Approximately 33.6 million shares of the stock were
redeemed. A portion of the redemption was funded by net proceeds
received from the issuance of Adjustable Rate Cumulative Preferred
Stock, Series L. The redemptions were undertaken by the
Corporation in light of its ability (as a result of market
conditions in general and the upgrades in the Corporation's credit
ratings in particular) to access the credit markets on terms more
favorable than that of the redeemed debt and preferred stock.
These redemptions were part of the Corporation's plan to improve
its capital position by achieving lower financing costs, reducing
interest-rate risk and lengthening maturities. The Corporation
will continue to evaluate the opportunity for future redemptions of
its outstanding debt and preferred stock in light of current market
conditions.
On May 27, 1994, the Corporation announced its intention to
repurchase up to 10 million shares of its common stock on the open
market from time to time during the twelve months following such
announcement. As of the end of the third quarter, the Corporation
had repurchased 10 million shares of its common stock and has
completed this program.
The following comments apply to the Consolidated Statement of Cash
Flows.
Cash and due from banks increased $1.2 billion during the first
nine months of 1994, as net cash provided by financing and
operating activities exceeded net cash used by investing
activities. The $3.6 billion net cash provided by financing
activities was due to increases in Federal funds purchased,
securities sold under repurchase agreements and other borrowed
funds ($8.8 billion) and foreign deposits ($3.3 billion), partially
offset by decreases in domestic deposits ($8.6 billion). The $1.9
billion of net cash provided by operating activities was
principally due to earnings adjusted for noncash charges and
credits. The $4.3 billion net cash used in investing activities
was largely the result of cash outflows from purchases of
securities ($18.8 billion), from Federal funds sold and securities
purchased under resale agreements ($2.6 billion) and increases in
net loans ($1.9 billion), partially offset by cash inflows from the
sales and maturities of securities ($13.9 billion and $5.0 billion,
respectively), as well as decreases in deposits with banks ($0.8
billion).
Cash and due from banks decreased $1.5 billion during the first
nine months of 1993, as net cash used by investing and operating
activities exceeded the net cash provided by financing activities.
The $3.2 billion of net cash used in investing activities was
largely the result of cash outflows from purchases of securities
($8.8 billion), as well as increases in Federal funds sold and
securities purchased under resale agreements ($3.7 billion) and in
deposits with banks ($3.1 billion), partially offset by cash
inflows from the net decrease in loans ($5.3 billion), proceeds
from the maturity of securities ($4.6 billion) and sales of
securities ($3.7 billion). The $2.1 billion net cash used in
operating activities was primarily due to a net increase in trading
account assets ($5.5 billion), partially offset by earnings. The
$3.7 billion net cash provided by financing activities was due to
increases in Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds ($4.8 billion), net
proceeds from the issuance of long-term debt ($3.3 billion), and
foreign deposits ($1.5 billion), partially offset by increases in
domestic deposits ($3.7 billion), and repayments and maturities of
long-term debt ($2.0 billion).
Part I
Item 2 (continued)
45
The Corporation's anticipated cash requirements (on a parent
company only basis) for maturing medium- and long-term debt, for
anticipated dividend payments on the Corporation's common stock and
preferred stock, and for other ordinary-course parent company
operations for the fourth quarter of 1994 amount to approximately
an aggregate of $600 million. The Corporation considers the
sources of liquidity available to the parent company to be more
than sufficient to meet its obligations. The sources of liquidity
available to the Corporation (on a parent company only basis)
include its liquid assets (including deposits with its bank
subsidiaries and short-term advances to and repurchase agreements
with its securities subsidiaries) as well as dividends and the
repayment of intercompany advances from its bank and non-bank
subsidiaries. In addition, as of September 30, 1994, the
Corporation had available to it $750 million in committed credit
facilities from a syndicate of domestic and international banks.
The facilities included a $375 million 36-month facility and a $375
million 364-day facility.
-----------------------------------------------------------------
OFF-BALANCE SHEET ANALYSIS
-----------------------------------------------------------------
The following off-balance sheet analysis discussion focuses
primarily on developments since December 31, 1993. Accordingly, it
should be read in conjunction with the Off-Balance Sheet Analysis
section on pages B45 - B49 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1993. For a discussion
of the Corporation's accounting policies related to off-balance
sheet instruments, see Note One on page B58 of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1993.
The Corporation utilizes various off-balance sheet financial
instruments in two ways: trading and asset/liability management.
Certain of these instruments, commonly referred to as
"derivatives", 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. Derivatives, along with foreign
exchange contracts, can provide a cost-effective alternative to
assuming and mitigating risk associated with traditional on-balance
sheet instruments. Such derivative and foreign exchange
transactions involve, to varying degrees, market risk (i.e., the
possibility that a change in interest or currency rates will cause
the value of a financial instrument to decrease or become more
costly to settle) and credit risk (i.e., the possibility that a
loss may occur because a party to a transaction fails to perform
according to the terms of a contract).
Derivatives and foreign exchange products are generally either
negotiated over-the-counter ("OTC") contracts or standardized
contracts executed on a recognized exchange (such as the Chicago
Board of Options Exchange). Standardized exchange-traded
derivatives primarily include futures and options. Negotiated
over-the-counter derivatives are generally entered into between two
counterparties that negotiate specific agreement terms, including
the underlying instrument, amount, exercise price and maturity.
All the Corporation's interest rate swaps and forwards are OTC-
traded and all of the Corporation's financial futures contracts are
exchange-traded. As of September 30, 1994, approximately 24% of
the Corporation's options activity was exchange-traded, with the
balance being OTC-traded. As of December 31, 1993, approximately
53% of the Corporation's options activity was exchange-traded, with
the balance being OTC-traded. The percentage of options activity
that is exchange-traded versus OTC-traded will change from quarter
to quarter depending upon conditions in the market place.
Market Risk: The Corporation's business strategy is to manage the
market risks associated with its trading activities through
geographic, product and functional diversification. Because of the
changing market environment, the monitoring and managing of these
risks is a continuous process.
The Corporation's trading activities are geographically diverse.
Trading activities are undertaken in more than 20 countries,
although a majority of the Corporation's transactions are executed
in the United States, Japan, Singapore and Western Europe, areas
which the Corporation believes have the most developed laws
regarding derivatives and foreign exchange businesses. The
Corporation trades in a wide range of products which include not
only foreign exchange and derivatives but also securities,
including LDC debt.
Part I
Item 2 (continued)
46
The effects of any market 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.
Credit Risk: The effective management of credit risk is a vital
ingredient of the Corporation's off-balance sheet activities. The
Corporation routinely enters into derivative and foreign exchange
product transactions with regulated financial institutions that it
believes have relatively low credit risk. At September 30, 1994,
approximately 95% of the notional volume of such activities were
with commercial bank and financial institution counterparties.
Non-financial institutions accounted for only 5% of the
Corporation's derivatives and foreign exchange notional volumes.
The great majority of the Corporation's derivatives and foreign
exchange transactions are with counterparties that are banks and
financial institutions which are dealers in these products.
The majority of the Corporation's derivative and foreign exchange
mark-to-market exposure amounts are outstanding for less than one
year. At September 30, 1994, 35% of outstanding mark-to-market
exposure amounts were scheduled to expire within three months, 18%
within three to six months, 12% within six months to one year, 18%
within one to three years and 17% greater than three years. The
short-term nature of these transactions mitigates credit risk as
transactions settle quickly.
The Corporation's actual credit losses arising from derivatives and
foreign exchange transactions have been immaterial during 1993,
1992 and 1991. During 1994 there were no credit losses.
Additionally, at September 30, 1994, nonperforming derivatives
contracts were immaterial.
The Corporation does not deal, to any material extent, in
derivatives which dealers of derivatives (such as other banks and
financial institutions) consider to be "complex" (i.e., exotic
and/or leveraged). As a result, the notional amount of such
derivatives were immaterial at September 30, 1994.
INTEREST RATE SENSITIVITY
The Corporation's net interest income is affected by changes in the
level of market interest rates based upon mismatches between the
repricing of its assets and liabilities. Interest rate sensitivity
arises in the ordinary course of the Corporation's banking business
as the repricing characteristics of its loans do not necessarily
match those of its deposits and other borrowings. This sensitivity
can be altered by adjusting investments and the maturities of
wholesale funding and with the use of off-balance sheet derivatives
instruments. The Corporation, as part of its asset/liability
management program, does utilize derivatives, such as interest rate
swaps, options, futures and forward rate agreements. These
instruments are utilized to adjust the interest rate risk of
specific assets, long-term debt and groups of similar assets and
similar deposits.
Management uses a variety of techniques to measure its interest
rate sensitivity. One such tool is aggregate net gap analysis, an
example of which is presented below. Assets and liabilities are
placed in maturity ladders based on their contractual maturities or
repricing dates. Assets and liabilities for which no specific
contractual maturity or repricing dates exist are placed in ladders
based on management's judgments concerning their most likely
repricing behaviors.
Part I
Item 2 (continued)
47
Part I
Item 2 (continued)
48
INTEREST RATE SWAPS
Interest rate swaps are one of the various financial instruments
used in the Corporation's asset/liability management activities.
Although the Corporation believes the results of its
asset/liability management activities should be evaluated on an
integrated basis, taking into consideration all on- and related
off-balance sheet instruments and not a specific financial
instrument, the interest rate table below provides an indication of
the Corporation's interest rate swap activity utilized in its
asset/liability management.
The table that follows summarizes the expected maturities and
weighted-average interest rates to be received and paid on domestic
and international interest rate swaps utilized in the Corporation's
asset/liability management at September 30, 1994. The table was
prepared under the assumption that variable interest rates remain
constant at September 30, 1994 levels and, accordingly, the actual
interest rates to be received or paid will be different to the
extent that such variable rates fluctuate from September 30, 1994
levels. Variable rates presented are generally based on the short-
term interest rates for the relevant currencies (e.g., London
Interbank Offered Rate (LIBOR)). Basis swaps are interest rate
swaps based on two floating rate indices.
By expected maturities After
(in millions) 1994 1995 1996 1997 1998 1998 Total
---- ---- ---- ---- ----- ---- -----
Receive fixed swaps
Notional amount $ 1,455 $ 7,969 $ 4,908 $ 4,339 $ 1,097 $ 2,700 $22,468
Weighted-average:
Receive rate 7.40% 5.68% 6.43% 6.55% 6.93% 6.74% 6.31%
Pay rate 5.21 4.54 4.40 5.12 5.36 5.35 4.80
Pay fixed swaps
Notional amount $ 894 $ 5,325 $ 4,935 $ 1,633 $ 430 $ 2,303 $15,520
Weighted-average:
Receive rate 4.23% 4.83% 4.98% 5.05% 5.11% 5.09% 4.91%
Pay rate 5.13 5.36 6.08 6.48 7.73 6.70 5.96
Basis Swaps
Notional amount $ 335 $ 2,575 $ 1,057 $ 140 $ 342 $ 460 $ 4,909
Weighted-average:
Receive rate 5.28% 5.07% 5.11% 5.14% 5.07% 6.01% 5.18%
Pay rate 5.26 5.04 5.20 4.92 5.45 5.39 5.15
Forward Starting
Notional amount $ 542 $ 303 $ 149 $ 325 $ 17 $ 122 $ 1,458
Weighted-average:
Receive rate 5.42% 5.11% 3.59% 4.83% 6.65% 4.98% 5.02%
Pay rate 6.28 6.06 5.59 5.16 6.65 5.67 5.87
-------- -------- -------- -------- -------- -------- --------
Total notional amount $ 3,226 $16,172 $11,049 $ 6,437 $ 1,886 $ 5,585 $44,355
======== ======== ======== ======== ======== ======== ========
Part I
Item 2 (continued)
49
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ACCOUNTING DEVELOPMENTS
-----------------------------------------------------------------
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114"). In October 1994, the FASB issued Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures"
(SFAS 118), as an amendment to SFAS 114. SFAS 114 requires that
the carrying value of impaired loans be measured based on the
present value of expected 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. Under SFAS 114, a loan is
considered impaired 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.
SFAS 114 is applicable to all loans that are identified for
evaluation, uncollateralized as well as collateralized, with
certain exceptions.
SFAS 118 amends SFAS 114 to allow creditors to use existing methods
for recognizing interest income on impaired loans and requires
creditors to disclose how interest income on impaired loans is
recognized.
SFAS 114, as amended by SFAS 118, applies to financial statements
for fiscal years beginning after December 15, 1994. Management
believes that the adoption of SFAS 114 will not have a material
effect on the Corporation's earnings, liquidity or capital
resources. The Corporation believes that its impaired loans are
generally those currently reported as nonperforming and expects to
continue to use existing methods for recognizing interest income on
these loans.
DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" ("SFAS 119").
SFAS 119 requires the Corporation to make certain disclosures about
derivative financial instruments - futures, forwards, swaps, and
options contracts, and other financial instruments with similar
characteristics - including their effect on trading results,
assets/liability management and credit risk.
SFAS 119 is effective for financial statements issued for fiscal
years ending after December 15, 1994. Management believes that its
current disclosures are substantially in compliance with the
disclosure requirements of SFAS 119. While the adoption of SFAS
119 will result in some modifications to the disclosure currently
made by the Corporation concerning its derivative activities, the
adoption of SFAS 119 will have no effect on the Corporation's
earnings, liquidity or capital resources.
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SUPERVISION AND REGULATION
-----------------------------------------------------------------
The following supervision and regulation discussion focuses
primarily on developments since December 31, 1993 and should be
read in conjunction with the Supervision and Regulation section on
pages A3-A8 of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993.
DIVIDENDS
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. Two different calculations are performed to measure the
amounts of dividends that may be paid: a "recent earnings" test and
an "undivided profits" test. New York State banks like Chemical
Bank are also subject to substantially similar restrictions of the
New York State Banking Department. Non-bank subsidiaries of the
Corporation are not subject to such limitations.
Part I
Item 2 (continued)
50
At September 30, 1994, in accordance with the dividend restrictions
applicable to them, the Corporation's bank subsidiaries could,
without the approval of their relevant banking regulators, pay
dividends of approximately $1.9 billion to their respective bank
holding companies, plus an additional amount equal to their net
profits from October 1, 1994 through the date in 1994 of any such
dividend payment.
In addition to the dividend restrictions described above, the
Federal Reserve Board, the Office of the Comptroller of the
Currency and the FDIC have authority under the Financial
Institutions Supervisory Act to prohibit or to limit the payment of
dividends by the banking organizations they supervise, including
the Corporation and its subsidiaries that are banks or bank holding
companies, if, in the banking regulator's opinion, payment of a
dividend would constitute an unsafe or unsound practice in light of
the financial condition of the banking organization.
FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. Among other
things, FDICIA requires the FDIC to establish a risk-based
assessment system for FDIC deposit insurance. FDICIA also contains
provisions limiting certain activities and business methods of
depository institutions. Finally, FDICIA provides for expanded
regulation of depository institutions and their affiliates,
including parent holding companies, by such institutions'
appropriate Federal banking regulator. Chemical Bank and Texas
Commerce Bank National Association were each "well capitalized" as
that term is defined under the various regulations promulgated
under FDICIA and, therefore, the Corporation does not expect such
regulations to have a material adverse impact on their business
operations.
Part I
Item 2 (continued)
51
Part I
Item 2 (continued)
52
Part I
Item 2 (continued)
53
CHEMICAL BANKING CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1994 1993
----------------------- ---------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
INTEREST INCOME
Loans $1,473 $1,375 $1,307 $ 1,350 $ 1,372
Securities 422 432 416 428 428
Trading Assets 181 191 173 135 117
Federal Funds Sold and Securities
Purchased Under Resale Agreements 151 121 100 94 89
Deposits With Banks 86 100 94 67 67
------ ------ ------ ------ ------
Total Interest Income 2,313 2,219 2,090 2,074 2,073
------ ------ ------ ------ ------
INTEREST EXPENSE
Deposits 597 543 520 542 537
Short-Term and Other Borrowings 405 359 292 249 238
Long-Term Debt 134 132 135 134 135
------ ------ ------ ------ ------
Total Interest Expense 1,136 1,034 947 925 910
------ ------ ------ ------ ------
NET INTEREST INCOME 1,177 1,185 1,143 1,149 1,163
Provision for Losses 100 160 205 286 298
------ ------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES 1,077 1,025 938 863 865
------ ------ ------ ------ ------
NONINTEREST REVENUE
Trust and Investment Management Fees 104 108 110 109 97
Corporate Finance and Syndication Fees 97 93 82 88 95
Service Charges on Deposit Accounts 78 75 69 71 73
Fees for Other Banking Services 285 279 290 278 266
Trading Account and Foreign
Exchange Revenues 212 203 185 255 268
Securities Gains 6 13 46 16 51
Other Revenue 202 96 149 236 154
------ ------ ------ ------ ------
Total Noninterest Revenue 984 867 931 1,053 1,004
------ ------ ------ ------ ------
NONINTEREST EXPENSE
Salaries 574 542 518 522 518
Employee Benefits 108 102 119 95 94
Occupancy Expense 145 140 146 149 148
Equipment Expense 100 91 84 93 81
Foreclosed Property Expense 2 2 35 61 70
Restructuring Charge --- --- 48 --- 115
Other Expense 382 404 374 415 344
------ ------ ------ ------ ------
Total Noninterest Expense 1,311 1,281 1,324 1,335 1,370
------ ------ ------ ------ ------
INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT) 750 611 545 581 499
Income Tax Expense (Benefit) 311 254 226 234 (3)
------ ------ ------ ------ ------
NET INCOME $ 439 $ 357 $ 319 $ 347 $ 502
====== ====== ====== ====== ======
Net Income Applicable To Common Stock $ 396 $ 324 $ 287 $ 309 $ 464
====== ====== ====== ====== ======
Net Income Per Common Share $ 1.60 $ 1.28 $ 1.13 $ 1.23 $ 1.84
Average Common Shares Outstanding 246.6 253.1 253.2 252.5 252.1
Part I
Item 2 (continued)
54
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is made to the Corporation's Annual
Report on Form 10-K for the year ended December
31, 1993 and to the Corporation's Forms 10-Q for
the quarters ended March 31, 1994 and June 30,
1994 with respect to the proceedings involving
Best Products Co., Inc., in the United States
Bankruptcy Court for the Southern District of New
York.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
11 - Computation of net income per common share
12(a) - Computation of ratio of earnings to fixed
charges
12(b) - Computation of ratio of earnings to fixed
charges and preferred stock dividend
requirements.
27 - Financial Data Schedule
(B) Reports on Form 8-K:
The Corporation filed three reports on Form 8-K during
the quarter ended September 30, 1994, as follows:
Form 8-K Dated July 7, 1994: July 7, 1994 Press Release -
Chemical Bank, N.A. completed tender offer of Margaretten
Financial Corporation.
Form 8-K Dated July 21, 1994: July 20, 1994 Press Release
- Results of Operations for Second Quarter 1994.
Form 8-K Dated September 28, 1994: September 20, 1994 Press
Release - Dividend increase announced and Supplemental Indenture
among Margaretten Financial Corporation, Chemical Banking
Corporation and The Bank of New York, as trustee.
55
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CHEMICAL BANKING CORPORATION
----------------------------
(Registrant)
Date November 14, 1994 By s/Joseph L. Sclafani
----------------- --------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
56
INDEX TO EXHIBITS
-----------------
SEQUENTIALLY NUMBERED
---------------------
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
----------- -------- ---------------------
11 Computation of net income 57
per common share
12 (a) Computation of ratio of 58
earnings to fixed charges
12 (b) Computation of ratio of 59
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 60
57
EXHIBIT 11
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of net income per common share
-----------------------------------------
Net income per common share is computed by dividing net income
after deducting dividends on preferred stock, by the weighted
average number of common shares outstanding during the period.
Common share equivalents, such as stock options, are not required
to be included in the calculation since the applicable dilution
tests are not met.
Net income per common share:
----------------------------
(In millions, except per share data)
Net income
Period Ended Average common applicable to Net income
September 30 shares outstanding common shares per share
------------ -------------------- --------------- ---------
Three months 1994 246.6 $ 396 $1.60
1993 252.1 $ 464 $1.84
Nine months 1994 251.0 $1,007 $4.01
1993 250.8 $1,140 $4.55
[FN]
After dividends on the preferred stock of $43 million
(including $12 million premium on redemption of preferred
stock) and $38 million for the three months ended
September 30, 1994 and 1993, respectively, and of $108
million (including $12 million premium on redemption of
preferred stock) and $117 million for the nine months
ended September 30, 1994 and 1993, respectively.
On January 1, 1993, the Corporation adopted SFAS 106
which resulted in a charge of $415 million or $1.67 per
common share relating to postretirement benefits and also
adopted SFAS 109 which resulted in an income tax benefit
of $450 million or $1.81 per common share. Net income
before the effect of accounting changes was $4.41 per
common share. The changes in accounting principles
increased net income per common share by $0.14.
58
EXHIBIT 12(a)
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
-------------------------------------------------
(in millions, except ratios)
Nine Months Ended
September 30, 1994
------------------
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes $ 1,906
-------
Fixed charges:
Interest expense 1,457
One third of rents, net of income from subleases 77
-------
Total fixed charges 1,534
-------
Less: Equity in undistributed income of affiliates (83)
-------
Earnings before taxes and fixed charges, excluding
capitalized interest $ 3,357
=======
Fixed charges, as above $ 1,534
=======
Ratio of earnings to fixed charges 2.19
=======
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges, as above $ 1,534
Add: Interest on deposits 1,660
-------
Total fixed charges and interest on deposits $ 3,194
=======
Earnings before taxes and fixed charges, excluding
capitalized interest, as above $ 3,357
Add: Interest on deposits 1,660
-------
Total earnings before taxes, fixed charges and
interest on deposits $ 5,017
=======
Ratio of earnings to fixed charges 1.57
=======
[FN]
The proportion deemed representative of the interest factor.
59
EXHIBIT 12(b)
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
-------------------------------------------------
and preferred stock dividend requirements
----------------------------------------
(in millions, except ratios)
Nine Months Ended
September 30, 1994
------------------
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes $ 1,906
------
Fixed charges:
Interest expense 1,457
One third of rents, net of income from subleases 77
------
Total fixed charges 1,534
------
Less: Equity in undistributed income of affiliates (83)
------
Earnings before taxes and fixed charges, excluding
capitalized interest $ 3,357
======
Fixed charges, as above $ 1,534
Preferred stock dividends 96
------
Fixed charges including preferred stock dividends $ 1,630
======
Ratio of earnings to fixed charges and
preferred stock dividend requirements 2.06
======
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges including preferred stock dividends $ 1,630
Add: Interest on deposits 1,660
------
Total fixed charges including preferred stock
dividends and interest on deposits $ 3,290
======
Earnings before taxes and fixed charges, excluding
capitalized interest, as above $ 3,357
Add: Interest on deposits 1,660
------
Total earnings before taxes, fixed charges and
interest on deposits $ 5,017
======
Ratio of earnings to fixed charges
and preferred stock dividend requirement 1.52
======
[FN]
The proportion deemed representative of the interest factor.