1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998 COMMISSION FILE NUMBER 1-5805
THE CHASE MANHATTAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2624428
(STATE OR OTHER JURISDICTION OF (IRS 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 845,784,888
- --------------------------------------------------------------------------------
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK ON
OCTOBER 31, 1998.
2
FORM 10-Q INDEX
PART I Page
Item 1 Financial Statements - The Chase Manhattan Corporation:
Consolidated Balance Sheet at September 30, 1998 and
December 31, 1997. 3
Consolidated Statement of Income for the three and nine months
ended September 30, 1998 and September 30, 1997. 4
Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended September 30, 1998 and September 30, 1997. 5
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1998 and September 30, 1997. 6
Notes to Financial Statements. 7-11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. 12-40
Glossary of Terms. 41
PART II
Item 1 Legal Proceedings. 42
Item 2 Sales of Unregistered Common Stock. 42
Item 6 Exhibits and Reports on Form 8-K. 42
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3
Part I
Item 1.
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30, December 31,
1998 1997
---------- -----------
ASSETS
Cash and Due from Banks $ 14,585 $ 15,704
Deposits with Banks 3,877 2,886
Federal Funds Sold and Securities
Purchased Under Resale Agreements 23,591 30,928
Trading Assets:
Debt and Equity Instruments 28,491 34,641
Risk Management Instruments, Net of Allowance for Credit
Losses of $150 in 1998 and $75 in 1997 33,313 37,752
Securities 57,465 52,738
Loans 166,572 168,454
Allowance for Credit Losses (3,554) (3,624)
---------- -----------
Net Loans 163,018 164,830
Premises and Equipment 3,946 3,780
Due from Customers on Acceptances 1,342 1,719
Accrued Interest Receivable 2,573 3,359
Other Assets 24,249 17,184
---------- -----------
TOTAL ASSETS $ 356,450 $ 365,521
========== ===========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 46,231 $ 46,603
Interest-Bearing 76,115 71,576
Foreign:
Noninterest-Bearing 3,877 3,205
Interest-Bearing 74,096 72,304
---------- -----------
Total Deposits 200,319 193,688
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 43,156 56,126
Commercial Paper 4,239 4,744
Other Borrowed Funds 7,761 6,861
Acceptances Outstanding 1,342 1,719
Trading Liabilities 44,491 52,438
Accounts Payable, Accrued Expenses and Other Liabilities, Including
the Allowance for Credit Losses of $170 in 1998 and 1997 14,970 12,526
Long-Term Debt 14,216 13,387
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 2,188 1,740
---------- -----------
TOTAL LIABILITIES 332,682 343,229
---------- -----------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 5)
PREFERRED STOCK OF SUBSIDIARY 550 550
---------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,028 1,740
Common Stock (Issued 881,549,790 and 881,506,592 Shares) 882 441
Capital Surplus 9,852 10,360
Retained Earnings 12,722 11,086
Accumulated Other Comprehensive Income 701 112
Treasury Stock, at Cost (36,029,776 and 39,577,640 Shares) (1,967) (1,997)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 23,218 21,742
---------- -----------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 356,450 $ 365,521
========== ===========
The Notes to Financial Statements are an integral part of these Statements.
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4
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
THIRD QUARTER NINE MONTHS
----------------------------- --------------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
INTEREST INCOME
Loans $ 3,287 $ 3,294 $ 10,008 $ 9,529
Securities 874 720 2,652 2,177
Trading Assets 604 732 1,996 2,063
Federal Funds Sold and Securities Purchased
Under Resale Agreements 517 623 1,742 1,879
Deposits with Banks 150 149 450 369
----------- ---------- ---------- ----------
Total Interest Income 5,432 5,518 16,848 16,017
----------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,524 1,714 5,123 4,797
Short-Term and Other Borrowings 1,378 1,451 4,365 4,263
Long-Term Debt 324 284 954 814
----------- ---------- ---------- ----------
Total Interest Expense 3,226 3,449 10,442 9,874
----------- ---------- ---------- ----------
NET INTEREST INCOME 2,206 2,069 6,406 6,143
Provision for Credit Losses 455 190 1,137 599
----------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 1,751 1,879 5,269 5,544
----------- ---------- ---------- ----------
NONINTEREST REVENUE
Investment Banking Fees 322 308 1,121 767
Trust, Custody and Investment Management Fees 398 338 1,129 969
Credit Card Revenue 381 281 1,046 766
Fees for Other Financial Services 522 505 1,541 1,466
Trading Revenue 114 505 927 1,401
Securities Gains 261 58 442 189
Revenue from Equity-Related Investments 60 249 723 605
Other Revenue 137 102 466 412
----------- ---------- ---------- ----------
Total Noninterest Revenue 2,195 2,346 7,395 6,575
----------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries 1,205 1,292 3,729 3,526
Employee Benefits 221 206 660 647
Occupancy Expense 198 194 578 574
Equipment Expense 219 192 640 575
Restructuring Costs -- 71 529 172
Other Expense 804 712 2,374 2,104
----------- ---------- ---------- ----------
Total Noninterest Expense 2,647 2,667 8,510 7,598
----------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 1,299 1,558 4,154 4,521
Income Tax Expense 462 576 1,518 1,687
----------- ---------- ---------- ----------
NET INCOME $ 837 $ 982 $ 2,636 $ 2,834
=========== ========== ========== ==========
NET INCOME APPLICABLE TO COMMON STOCK $ 815 $ 941 $ 2,556 $ 2,687
=========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $ 0.96 $ 1.11 $ 3.02 $ 3.15
=========== ========== ========== ==========
Diluted $ 0.94 $ 1.08 $ 2.93 $ 3.04
=========== ========== ========== ==========
The Notes to Financial Statements are an integral part of these Statements.
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5
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
1998 1997
------------ ----------
PREFERRED STOCK:
Balance at Beginning of Year $ 1,740 $ 2,650
Issuance of Stock 200 --
Redemption of Stock (912) (910)
------------ ----------
Balance at End of Period $ 1,028 $ 1,740
------------ ----------
COMMON STOCK:
Balance at Beginning of Year $ 441 $ 441
Issuance of Common Stock for a Two-for-One Stock Split 441 --
------------ ----------
Balance at End of Period $ 882 $ 441
------------ ----------
CAPITAL SURPLUS:
Balance at Beginning of Year $ 10,360 $ 10,459
Issuance of Common Stock for a Two-for-One Stock Split (441) --
Shares Issued and Commitments to Issue Common Stock
for Employee Stock-Based Awards and Related Tax Effects (67) (102)
------------ ----------
Balance at End of Period $ 9,852 $ 10,357
------------ ----------
RETAINED EARNINGS:
Balance at Beginning of Year $ 11,086 $ 8,610
Net Income 2,636 2,834
Cash Dividends Declared:
Preferred Stock (80) (147)
Common Stock (920) (789)
------------ ----------
Balance at End of Period $ 12,722 $ 10,508
------------ ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at Beginning of Year $ 112 $ (271)
Other Comprehensive Income 589 415
------------ ----------
Balance at End of Period $ 701 $ 144
------------ ----------
COMMON STOCK IN TREASURY, AT COST:
Balance at Beginning of Year $ (1,997) $ (895)
Purchase of Treasury Stock (1,038) (2,036)
Reissuance of Treasury Stock 1,068 907
------------ ----------
Balance at End of Period $ (1,967) $ (2,024)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY $ 23,218 $ 21,166
============ ==========
COMPREHENSIVE INCOME:
Net Income $ 2,636 $ 2,834
Other Comprehensive Income 589 415
------------ ----------
Comprehensive Income $ 3,225 $ 3,249
============ ==========
The Notes to Financial Statements are an integral part of these Statements.
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Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net Income $ 2,636 $ 2,834
Adjustments to Reconcile Net Income to Net Cash Provided (Used)
by Operating Activities:
Provision for Credit Losses 1,137 599
Restructuring Costs 529 172
Depreciation and Amortization 836 712
Net Change In:
Trading-Related Assets 10,498 (14,992)
Accrued Interest Receivable 786 (665)
Other Assets (6,181) (1,943)
Trading-Related Liabilities (7,947) 15,563
Accrued Interest Payable (384) 285
Other Liabilities 1,296 1,164
Other, Net (822) (421)
--------- ---------
Net Cash Provided by Operating Activities 2,384 3,308
--------- ---------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks (991) 4,192
Federal Funds Sold and Securities Purchased Under Resale Agreements 1,582 (16,519)
Loans Due to Sales and Securitizations 30,935 16,995
Other Loans, Net (30,226) (25,415)
Other, Net (118) (478)
Proceeds from the Maturity of Held-to-Maturity Securities 1,020 652
Purchases of Held-to-Maturity Securities (67) (54)
Proceeds from the Maturity of Available-for-Sale Securities 19,703 5,915
Proceeds from the Sale of Available-for-Sale Securities 129,014 60,348
Purchases of Available-for-Sale Securities (153,000) (64,626)
--------- ---------
Net Cash (Used) by Investing Activities (2,148) (18,990)
--------- ---------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (372) (3,595)
Domestic Time and Savings Deposits 4,539 2,401
Foreign Deposits 2,464 2,061
Federal Funds Purchased and Securities Sold Under Repurchase Agreements (7,215) 18,112
Other Borrowed Funds 47 (2,062)
Other, Net (384) (50)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 2,580 3,425
Repayments of Long-Term Debt (1,307) (1,446)
Proceeds from the Issuance of Stock 1,201 805
Redemption of Preferred Stock (912) (910)
Treasury Stock Purchased (1,038) (2,453)
Cash Dividends Paid (956) (916)
--------- ---------
Net Cash (Used)/Provided by Financing Activities (1,353) 15,372
--------- ---------
Effect of Exchange Rate Changes on Cash and Due from Banks (2) 72
--------- ---------
Net Decrease in Cash and Due from Banks (1,119) (238)
Cash and Due from Banks at January 1, 15,704 14,605
--------- ---------
Cash and Due from Banks at September 30, $ 14,585 $ 14,367
========= =========
Cash Interest Paid $ 10,826 $ 9,589
--------- ---------
Taxes Paid $ 1,025 $ 1,012
--------- ---------
The Notes to Financial Statements are an integral part of these Statements.
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7
Part I
Item 1. (continued)
See Glossary of Terms on page 41 for definition of terms used throughout the
Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of The Chase Manhattan Corporation ("Chase")
are prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all necessary
adjustments have been included for a fair presentation of this interim financial
information. In addition, certain amounts have been reclassified to conform to
the current presentation.
In March 1998, the AICPA issued SOP 98-1, which becomes effective for financial
statements for calendar year 1999. Chase elected early adoption beginning in the
first quarter of 1998. SOP 98-1 requires the capitalization of eligible costs of
specified activities related to computer software developed or obtained for
internal use. Chase capitalized $68 million of these costs during the first nine
months of 1998, of which $32 million was capitalized during the third quarter.
NOTE 2 - STOCK SPLIT
On May 19, 1998, the stockholders approved a two-for-one stock split of Chase
common stock. The additional shares issued as a result of the split were
distributed on June 12, 1998 to stockholders of record at the close of business
on May 20, 1998. A total of 440,767,205 shares of common stock were issued in
connection with the split, including 14,176,530 shares held in treasury. As a
result of the stock split, $441 million was reclassified from capital surplus to
common stock. The stock split did not cause any changes in the $1.00 par value
per share for the common stock or in total stockholders' equity. All references
to the number of common shares and per common share amounts have been restated
to reflect the effects of the stock split.
NOTE 3 - COMPREHENSIVE INCOME
Effective with the first quarter 1998, Chase adopted SFAS 130, which defines and
establishes the standards for reporting comprehensive income. Comprehensive
income for Chase includes net income as well as the change in unrealized gains
and losses on available-for-sale securities and foreign currency translation,
each of which includes the impact of related derivatives. Chase has presented
these items net of tax in the Statement of Changes in Stockholders' Equity.
Nine months Ended September 30,
(in millions)
1998 1997
--------------------------------------------- --------------------------------------------
NET UNREALIZED ACCUMULATED Net Unrealized Accumulated
ACCUMULATED GAIN(LOSS) ON OTHER Accumulated Gain(Loss) on Other
TRANSLATION SECURITIES COMPREHENSIVE Translation Securities Comprehensive
ADJUSTMENT AVAILABLE-FOR-SALE INCOME Adjustment Available-for-Sale Income
--------- ------- -------- --------- --------- ---------
Beginning Balance $ 17 $ 95 $ 112 $ 17 $ (288) $ (271)
Change During Period -- 589 589 1 414 415
--------- ------- -------- --------- --------- ---------
Ending Balance $ 17 $ 684 (a) $ 701 $ 18 $ 126 (a) $ 144
========= ======= ======== ========= ========= =========
(a) Represents the after-tax difference between the fair value and amortized
cost of available-for-sale securities portfolio including securities
classified as loans, which are subject to the provisions of SFAS 115. See
Note Four.
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Part I
Item 1. (continued)
NOTE 4 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note One
of Chase's 1997 Annual Report.
The amortized cost and estimated fair value of Chase's securities, including the
impact of related derivatives, are presented in the following table.
(in millions) SEPTEMBER 30, 1998 December 31, 1997
------------------------------ ----------------------------
AMORTIZED FAIR Amortized Fair
AVAILABLE-FOR-SALE SECURITIES COST VALUE (a) Cost Value (a)
----------- ---------- ---------- ----------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 33,557 $ 34,038 $ 27,849 $ 27,943
Collateralized Mortgage Obligations 1,653 1,660 2,013 2,018
Other, primarily U.S. Treasuries 10,287 10,804 11,492 11,461
Obligations of State and Political Subdivisions 213 214 274 276
Debt Securities Issued by Foreign Governments 6,875 6,919 6,153 6,138
Corporate Debt Securities 264 268 606 622
Equity Securities 824 1,022 876 1,015
Other Securities (b) 519 516 308 282
----------- ---------- ---------- ----------
Total Available-for-Sale Securities (c) $ 54,192 $ 55,441 $ 49,571 $ 49,755
=========== ========== ========== ==========
HELD-TO-MATURITY SECURITIES
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 987 $ 1,010 $ 1,256 $ 1,267
Collateralized Mortgage Obligations 969 969 1,660 1,661
Other, primarily U.S. Treasuries 65 65 52 52
Other Securities (b) 3 3 15 15
----------- ---------- ---------- ----------
Total Held-to-Maturity Securities $ 2,024 $ 2,047 $ 2,983 $ 2,995
=========== ========== ========== ==========
(a) Gross unrealized gains and losses on available-for-sale securities were
$1,381 million and $132 million, respectively, at September 30, 1998 and
$386 million and $202 million, respectively, at December 31, 1997. Gross
unrealized gains and losses on held-to-maturity securities were $24
million and $1 million, respectively, at September 30, 1998 and $16
million and $4 million, respectively, at December 31, 1997.
(b) Includes collateralized mortgage obligations of private issuers, which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
(c) Excludes securities classified as loans, which are subject to the
provisions of SFAS 115. The amortized cost and fair value of these loans,
including the impact of related derivatives, were $650 million and $555
million, respectively, at September 30, 1998. This compares with $1,005
million and $982 million, respectively, at December 31, 1997.
Net gains from available-for-sale securities sold in the third quarter of 1998
amounted to $261 million (gross gains of $354 million and gross losses of $93
million) and for the first nine months of 1998 amounted to $442 million (gross
gains of $632 million and gross losses of $190 million). Net gains on sales of
these types of securities for the same periods in 1997 amounted to $58 million
(gross gains of $132 million and gross losses of $74 million) and $189 million
(gross gains of $327 million and gross losses of $138 million), respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
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9
Part I
Item 1. (continued)
NOTE 6 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
For a discussion of these business trusts, see page 58 of Chase's 1997 Annual
Report.
The following is a summary of the outstanding capital securities, net of
discount, issued by each trust and the junior subordinated deferrable interest
debentures issued by Chase to each trust (which debentures are the sole assets
of each trust) as of September 30, 1998:
Amount of Principal
Capital Amount of Stated Maturity of Interest Rate of Interest
Name of Trust Securities, Chase Capital Securities Capital Securities Payment/Distribution
Net of Discount Debentures and Debentures and Debentures Dates
Issued by Trust Held by Trust
(in millions) (in millions)
(a) (b)
- --------------------------------------------------------------------------------------------------------------------------
Chase Capital I $ 600 $ 619 12/1/2026 7.67% Semi-annual-commencing 6/1/97
Chase Capital II 494 516 2/1/2027 LIBOR + .50% Quarterly-commencing 5/1/97
Chase Capital III 296 309 3/1/2027 LIBOR + .55% Quarterly-commencing 6/1/97
Chase Capital IV 350 361 12/6/2027 7.34% Quarterly-commencing 3/31/98
Chase Capital V 200 206 3/31/2028 7.03% Quarterly-commencing 3/31/98
Chase Capital VI 248 258 8/1/2028 LIBOR + .625% Quarterly-commencing 11/1/98
--------- ---------
Total $ 2,188 $ 2,269
========= =========
(a) Represents the amount of capital securities issued to the public by each
trust. These amounts are reflected as liabilities of Chase.
(b) Represents the amount of Chase debentures held as assets by each trust.
These amounts represent an intercompany transaction and are eliminated in
Chase's consolidated financial statements.
NOTE 7 - RESTRUCTURING COSTS
During the 1998 first quarter, Chase incurred a one-time pre-tax charge of $510
million in connection with initiatives to streamline support functions and
realign certain business activities. The majority of these costs relate to
anticipated staff reductions of approximately 4,500 existing positions
(approximately $338 million), costs in connection with planned dispositions of
certain premises and equipment (approximately $144 million) and other expenses
(approximately $28 million). As of September 30, 1998, the reserve balance was
$424 million.
There were no residual merger-related expenses incurred in the third quarter of
1998 (compared with $71 million in the 1997 third quarter) relating to the
merger of The Chase Manhattan Corporation and Chemical Banking Corporation. For
the nine month period, merger-related expenses were $19 million in 1998 compared
with $172 million in 1997. No further residual merger-related expenses are
expected to be taken by Chase. For a further discussion of Chase's
merger-related restructuring costs, refer to Note Twelve and page 29 of Chase's
1997 Annual Report.
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Part I
Item 1. (continued)
NOTE 8 - RISK-BASED CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note
Seventeen of Chase's 1997 Annual Report.
The following table presents the capital ratios for Chase and its significant
banking subsidiaries. Assets and capital amounts for Chase's banking
subsidiaries reflect intercompany transactions, whereas the respective amounts
for Chase reflect the elimination of intercompany transactions.
SEPTEMBER 30, 1998 The Chase Chase
($ in millions, except ratios) Chase (a) Manhattan Bank Texas Chase USA
- --------------------------------------------------------------------------------------------------
Tier 1 Capital Ratio (b)(d) 8.34% 7.61% 7.86% 9.66%
Total Capital Ratio (b)(d) (e) 12.06% 11.17% 10.73% 13.31%
Tier 1 Leverage Ratio (c)(d) 6.59% 5.94% 6.73% 9.85%
Tier 1 Capital $ 23,781 $ 17,456 $ 1,522 $ 3,029
Total Qualifying Capital 34,392 25,624 2,076 4,173
Risk-Weighted Assets 285,287 229,458 19,353 31,355
Adjusted Average Assets 361,055 293,706 22,625 30,745
(a) The assets and off-balance sheet financial instruments, and related
capital, of Chase's securities subsidiary, Chase Securities Inc., are
included in the calculation of these ratios.
(b) Tier 1 Capital or Total Capital, as applicable, divided by risk-weighted
assets. Risk-weighted assets include assets and off-balance sheet
positions, weighted by the type of instruments and the risk weight of the
counterparty, collateral or guarantor.
(c) Tier 1 Capital divided by adjusted average assets (net of allowance for
credit losses, goodwill and certain intangible assets).
(d) The provisions of SFAS 115 do not apply to the calculation of the Tier 1
Capital and Tier 1 Leverage ratios.
(e) Effective September 30, 1998, the risk-based capital guidelines were
changed to permit the inclusion of 45% of the pre-tax unrealized gain on
certain equity securities. This change in the risk-based guidelines had an
immaterial impact on Chase's September 30, 1998 Total Capital ratio.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of Chase's fair value methodologies, see Note Twenty-One of the
1997 Annual Report. The following table presents the financial assets and
liabilities valued under SFAS 107.
SEPTEMBER 30, 1998 December 31, 1997
---------------------------------------- -----------------------------------------
CARRYING ESTIMATED APPRECIATION/ Carrying Estimated Appreciation/
(in millions) VALUE FAIR VALUE (DEPRECIATION) Value Fair Value (Depreciation)
- -------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 347,336 $ 350,242 $ 2,906 $ 357,077 $ 359,975 $ 2,898
========== =========== =========== ===========
Total Financial Liabilities $ 331,848 $ 331,234 614 $ 342,501 $ 341,700 801
========== =========== --------- =========== =========== ----------
Estimated Fair Value in Excess
of Carrying Value $ 3,520 $ 3,699
========= ==========
Derivative contracts used for ALM activities had an unrecognized net gain of $26
million at September 30, 1998 and an unrecognized net loss of $489 million at
December 31, 1997, both of which are included in the above amounts. Derivative
contracts used by Chase to reduce its exposure to prepayment risks associated
with its mortgage servicing rights that are not required to be fair valued under
SFAS 107 are excluded from the above table. At September 30, 1998 and December
31, 1997, these derivative contracts had an unrecognized net gain of $442
million and $100 million, respectively. Also not included in the above table are
gross unrecognized net losses from daily margin settlements on open futures
contracts of $15 million and $3 million at September 30, 1998 and December 31,
1997, respectively.
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11
Part I
Item 1. (continued)
NOTE 10 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
Chase utilizes various derivative and foreign exchange financial instruments for
trading purposes and for purposes other than trading, such as asset/liability
management ("ALM"). For a discussion of the various financial instruments used
and the credit and market risks involved, see Note Eighteen of Chase's 1997
Annual Report.
The following table summarizes the aggregate notional amounts of derivative and
foreign exchange contracts as well as the credit exposure related to these
instruments (after taking into account the effects of legally enforceable master
netting agreements).
NOTIONAL AMOUNTS CREDIT EXPOSURE
SEPTEMBER 30, December 31, SEPTEMBER 30, December 31,
(in billions) 1998 1997 1998 1997
----------- ---------- ---------- --------
INTEREST RATE CONTRACTS
Interest Rate Swaps
Trading $ 4,183.5 $ 3,206.0 $ 12.2 $ 14.0
ALM 108.2 98.2 0.1 0.6
Futures, Forwards and Forward Rate Agreements
Trading 2,081.5 1,643.7 0.5 0.3
ALM 79.3 42.6 -- --
Purchased Options
Trading 396.4 316.1 1.9 1.7
ALM 59.1 13.1 -- --
Written Options
Trading 530.7 395.7 -- --
ALM 33.1 0.2 -- --
----------- ---------- ---------- --------
Total Interest Rate Contracts $ 7,471.8 $ 5,715.6 $ 14.7 $ 16.6
=========== ========== ========== ========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,715.7 $ 1,521.7 $ 9.5 $ 14.4
ALM 84.0 72.6 -- --
Other Foreign Exchange Contracts (a)
Trading 425.1 358.7 5.0 5.8
ALM 4.7 5.2 -- --
----------- ---------- ---------- --------
Total Foreign Exchange Contracts $ 2,229.5 $ 1,958.2 $ 14.5 $ 20.2
=========== ========== ========== ========
EQUITY, COMMODITY AND OTHER CONTRACTS
Trading $ 127.2 $ 64.4 $ 4.3 $ 1.6
----------- ---------- ---------- --------
Total Equity, Commodity and Other Contracts $ 127.2 $ 64.4 $ 4.3 $ 1.6
=========== ========== ========== ========
Total Credit Exposure Recorded on the Balance Sheet $ 33.5 $ 38.4
(a) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $140.6 billion, $145.4 billion and
$143.8 billion, respectively, at September 30, 1998, compared with $123.9
billion, $126.6 billion and $113.4 billion, respectively, at December 31,
1997.
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12
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
Nine Months Ended
(As of or for the period ended) Third Quarter % September 30, %
1998 1997 Change 1998 1997 Change
----------------------------------- --------------------------------------
AS REPORTED BASIS:
Total Revenues $ 4,401 $ 4,415 --% $ 13,801 $ 12,718 9%
Noninterest Expenses
(excluding Restructuring Costs) 2,647 2,596 2 7,981 7,426 7
Restructuring Costs -- 71 NM 529 172 208
Provision for Credit Losses 455 190 139 1,137 599 90
Net Income $ 837 $ 982 (15) $ 2,636 $ 2,834 (7)
Net Income Per Common Share:
Basic $ 0.96 $ 1.11 (14) $ 3.02 $ 3.15 (4)
Diluted 0.94 1.08 (13) 2.93 3.04 (4)
Cash Dividends Declared 0.36 0.31 16 1.08 0.93 16
Book Value at Period End 26.24 23.10 14 26.24 23.10 14
Market Value at Period End 43.13 59.00 (27) 43.13 59.00 (27)
Performance Ratios:
Return on Average Common Equity (a) 14.9% 19.6% 16.3% 19.3%
Return on Average Total Assets (a) 0.92 1.08 0.95 1.08
OPERATING BASIS: (b)
Operating Revenues $ 4,508 $ 4,664 (3) $ 14,474 $ 13,404 8
Operating Noninterest Expenses 2,614 2,505 4 7,942 7,282 9
Credit Costs (c) 749 445 68 2,003 1,338 50
Operating Net Income 738 1,081 (32) 2,870 2,999 (4)
Operating Net Income Per Common Share:
Basic $ 0.84 $ 1.23 (32) $ 3.29 $ 3.35 (2)
Diluted 0.82 1.19 (31) 3.20 3.22 (1)
Performance Ratios:
Operating Return on Average Common Equity (a) 13.1% 21.7% 17.8% 20.5%
Return on Average Total Assets (a) 0.81 1.19 1.03 1.15
Common Dividend Payout Ratio 42 25 33 28
Efficiency Ratio 58 53 55 54
Cash Operating Basis:
Cash Operating Earnings (d) $ 801 $ 1,122 (29) $ 3,058 $ 3,122 (2)
Diluted Net Income Per Common Share 0.89 1.24 (28) 3.42 3.36 2
Shareholder Value Added (SVA) 68 458 (85) 936 1,170 (20)
Cash Return on Average Common Equity (a) 14.3% 22.6% 19.0% 21.4%
Selected Balance Sheet Items: (e)
Loans $ 185,544 $ 178,892 4
Total Assets 375,422 382,379 (2)
(a) Based on annualized amounts.
(b) Excludes the impact of credit card securitizations, restructuring costs
and special items. See Glossary of Terms on page 41.
(c) Includes provision for credit losses, foreclosed property expenses and
charge-offs related to the securitized credit card portfolio.
(d) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain intangibles.
(e) Excludes the impact of credit card securitizations.
NM - Not meaningful
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Certain forward-looking statements contained in this Form 10-Q are subject to
risks and uncertainties. Chase's actual results may differ materially from those
included in these forward-looking statements. Reference is made to Chase's
reports filed with the Securities and Exchange Commission, in particular the
1997 Annual Report, for a discussion of factors that may cause such differences
to occur. See Glossary of Terms on page 41 for a definition of terms used
throughout this Form 10-Q.
OVERVIEW
Operating net income for the 1998 third quarter was $738 million, compared with
$1.08 billion in the same quarter of 1997. Diluted operating earnings per share
were $0.82 for the third quarter of 1998, a decrease of 31% from the same 1997
period. The 1998 third quarter reflected a difficult global market environment.
During the 1998 third quarter:
- National Consumer Services and Global Services businesses each
reported double-digit revenue growth during the third quarter, which
offset the 20% decline in Global Banking revenue.
- Chase's risk management strategies, particularly its use of stress
testing and value-at-risk, significantly reduced its potential
market risk exposure.
- Continued financial discipline resulted in a $10 billion reduction
in assets on the balance sheet. At the same time, Chase was able to
repurchase net $351 million of its common stock during the quarter
and still increase its Tier 1 Capital ratio to 8.3%.
- Chase continued its expense discipline, as demonstrated by a
reduction in operating noninterest expenses by approximately $100
million, or 4%, from the second quarter of 1998.
Operating net income for the 1998 first nine months decreased to $2.87 billion
from $3.00 billion for the same 1997 period. Diluted operating earnings per
share were $3.20 for 1998, a slight decrease when compared with $3.22 for the
same 1997 nine month period.
For the third quarter of 1998, reported net income was $837 million or $0.94 per
share on a diluted basis, compared with $982 million or $1.08 per share on a
diluted basis for the 1997 third quarter. Special items in the third quarter of
1998 included $191 million of pre-tax interest income ($123 million after tax),
resulting from prior years' tax refunds, and a $37 million pre-tax charge ($24
million after tax) for the accelerated vesting of stock-based awards.
For the first nine months of 1998, reported net income was $2.64 billion or
$2.93 per share on a diluted basis, compared with $2.83 billion or $3.04 per
share on a diluted basis for the same 1997 period. The results for the 1998
first nine months reflected (in addition to the special items mentioned above) a
previously-announced, one-time charge of $510 million ($320 million after-tax)
taken in connection with initiatives to streamline support functions and realign
certain business functions. For a reconciliation of operating earnings to
reported net income, see page 19.
Chase's exposure to Japan, Russia, and Latin America declined significantly over
the past nine months. See pages 28 and 29 for a discussion of Chase's hedge fund
and cross-border exposure.
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LINES OF BUSINESS RESULTS
As of January 1, 1998, Chase adopted Shareholder Value Added (SVA) as its
primary measure of business unit performance. SVA represents operating earnings
excluding the amortization of goodwill and certain intangibles (i.e., cash
operating earnings) less an explicit charge for allocated capital. Additional
refinements have been made to the methodology for the allocation of capital to
the various lines of business. Prior periods have been restated to reflect these
changes. For a further discussion of Chase's line of business franchises and its
capital allocation method under SVA, see pages 21 and 24-25 of the 1997 Annual
Report.
LINES OF BUSINESS RESULTS
Management measures Chase's financial performance and that of its business units
based on operating earnings, which excludes the impact of credit card
securitizations, restructuring costs and special items. See page 19 for
reconciliation of reported results to operating results.
For Three Months Ended Global National
September 30, Banking (a) Consumer Services (a) Global Services (a) Total (b)
----------------------- ----------------------- --------------------- -----------------------
(in millions, except ratios) 1998 1997 1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- --------- --------- ---------- ----------
Net Interest Income $ 704 $ 811 $ 1,358 $ 1,328 $ 279 $ 261 $ 2,244 $ 2,246
Noninterest Revenue 1,186 1,540 697 526 387 340 2,264 2,418
Noninterest Expense 1,091 1,066 1,067 940 474 424 2,614 2,505
---------- ---------- ---------- ---------- --------- --------- ---------- ----------
Operating Margin 799 1,285 988 914 192 177 1,894 2,159
Credit Costs 75 92 560 451 -- -- 749 445
---------- ---------- ---------- ---------- --------- --------- ---------- ----------
Income Before Taxes 724 1,193 428 463 192 177 1,145 1,714
Income Taxes 284 449 165 178 75 69 407 633
---------- ---------- ---------- ---------- --------- --------- ---------- ----------
Operating Earnings $ 440 $ 744 $ 263 $ 285 $ 117 $ 108 $ 738 $ 1,081
========== ========== ========== ========== ========= ========= ========== ==========
Cash Operating Earnings (c) $ 451 $ 753 $ 302 $ 308 $ 122 $ 112 $ 801 $ 1,122
========== ========== ========== ========== ========= ========= ========== ==========
Average Common Equity $ 13,919 $ 12,971 $ 6,636 $ 5,351 $ 1,734 $ 1,678 $ 21,681 $ 19,023
Operating Average Assets $ 259,540 $ 266,624 $ 106,493 $ 95,942 $ 8,928 $ 9,818 $ 381,327 $ 374,736
Shareholder Value Added $ (20) $ 301 $ 78 $ 122 $ 63 $ 53 $ 68 $ 458
Cash Return on Common Equity 12.4% 22.2% 17.7% 22.1% 27.4% 25.7% 14.3% 22.6%
Efficiency Ratio 58% 45% 52% 51% 71% 71% 58% 53%
For Nine Months Ended Global National
September 30, Banking (a) Consumer Services (a) Global Services (a) Total (b)
----------------------- ----------------------- --------------------- ---------------------
(in millions, except ratios) 1998 1997 1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Net Interest Income $ 2,212 $ 2,426 $ 4,081 $ 3,906 $ 832 $ 751 $ 6,767 $ 6,617
Noninterest Revenue 4,706 4,282 1,908 1,511 1,105 971 7,707 6,787
Noninterest Expense 3,420 3,094 3,080 2,830 1,383 1,239 7,942 7,282
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Operating Margin 3,498 3,614 2,909 2,587 554 483 6,532 6,122
Credit Costs 264 302 1,652 1,335 1 1 2,003 1,338
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Income Before Taxes 3,234 3,312 1,257 1,252 553 482 4,529 4,784
Income Taxes 1,235 1,228 485 486 209 185 1,659 1,785
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Operating Earnings $ 1,999 $ 2,084 $ 772 $ 766 $ 344 $ 297 $ 2,870 $ 2,999
========== ========== ========== ========== ========= ========= ========= =========
Cash Operating Earnings (c) $ 2,030 $ 2,110 $ 894 $ 834 $ 359 $ 308 $ 3,058 $ 3,122
========== ========== ========== ========== ========= ========= ========= =========
Average Common Equity $ 13,878 $ 12,900 $ 6,641 $ 5,303 $ 1,728 $ 1,679 $ 20,999 $ 18,583
Operating Average Assets $ 268,669 $ 258,617 $ 105,892 $ 93,364 $ 9,182 $ 9,110 $ 389,377 $ 363,492
Shareholder Value Added $ 632 $ 764 $ 226 $ 282 $ 185 $ 133 $ 936 $ 1,170
Cash Return on Common Equity 19.1% 20.9% 17.5% 20.1% 27.3% 23.5% 19.0% 21.4%
Efficiency Ratio 49% 46% 51% 52% 71% 72% 55% 54%
(a) Only the global banking portion of Chase Texas is reported in the total
Global Banking line of business results. The consumer- and global
services-related results for Chase Texas are reported as part of National
Consumer Services ("NCS") and Global Services lines of business results,
respectively. Global Services are part of Chase Technology Solutions, see
description on page 18.
(b) Total column includes Corporate and the Information Technology and
Operations and Electronic Commerce Initiatives portions of Chase
Technology Solutions. See description of Chase Technology Solutions
and Corporate on page 18.
(c) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain intangibles.
Chase's financial performance goals over the next several years include an
average return on common equity of 18% or higher, growth in operating revenues
accelerating to 10% per year and double-digit growth in operating earnings per
share.
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GLOBAL BANKING
Global Banking operating revenues declined $461 million, or 20%, in the 1998
third quarter compared with the 1997 third quarter. Cash operating earnings and
SVA decreased $302 million and $321 million, respectively, for the same
comparable period. A significant factor in the decline of third quarter revenue
and earnings was the decrease in equity-related investment gains and
trading-related revenues. For the first nine months of 1998, operating revenues
rose $210 million, or 3%, due to higher investment banking fees. Cash operating
earnings and SVA for the first nine months of 1998 decreased $80 million and
$132 million, respectively, reflecting higher incentive costs.
The following table sets forth certain key financial performance measures of the
businesses within Global Banking for the periods indicated.
GLOBAL BANKING:
1998 1997
----------------------------------- -----------------------------------
THREE MONTHS ENDED CASH Cash
SEPTEMBER 30, OPERATING OPERATING EFFICIENCY Operating Operating Efficiency
(in millions, except ratios) REVENUES EARNINGS RATIO Revenues Earnings Ratio
--------- -------- -------- --------- -------- --------
Global Markets $ 749 $ 180 59% $ 916 $ 306 46%
Global Investment Banking 205 22 86 275 74 55
Corporate Lending 402 134 31 378 126 30
Chase Capital Partners (29) (35) NM 222 124 12
Global Asset Management
and Private Banking 198 34 71 190 40 64
Middle Market 197 43 57 203 50 50
Chase Texas (consolidated) 412 118 57 357 96 58
NINE MONTHS ENDED SEPTEMBER 30,
(in millions, except ratios)
Global Markets $ 2,580 $ 799 50% $ 2,708 $ 943 45%
Global Investment Banking 951 226 60 673 160 60
Corporate Lending 1,169 377 31 1,147 379 31
Chase Capital Partners 587 316 15 541 294 14
Global Asset Management
and Private Banking 594 109 68 530 101 67
Middle Market 587 130 55 616 154 49
Chase Texas (consolidated) 1,185 325 57 1,021 263 60
NM - Not Meaningful
GLOBAL MARKETS
Global Markets' activities encompass the trading and sales of foreign exchange,
derivatives, fixed income securities and commodities. Chase operates 24 hours a
day covering the major international cross-border financial markets, as well as
many local markets, in both developed and emerging countries, and is a
recognized world leader in such key activities as foreign exchange, interest
rate swaps and emerging markets debt. Also included within Global Markets are
Chase's domestic and international treasury units, which have the primary
responsibility for Chase's asset/liability management activities ("ALM"). ALM
activities in the treasury units are managed on a total return basis with one of
the primary objectives being the creation of economic value over time. Total
return combines the reported revenues (net interest income and securities
gains/losses) and the change in the net unrealized appreciation/depreciation of
all financial instruments and underlying balance sheet items.
Trading-related revenue for the third quarter of 1998 was $259 million, a
decrease of 60% from 1997 third quarter's results due to difficult global market
conditions, in particular the emerging markets of Asia, Russia and Latin
America. These conditions also contributed to a 20% decline in trading-related
revenue for the first nine months of 1998. This unfavorable impact was partially
offset by $261 million of securities gains realized during the 1998 third
quarter representing a portion of the increased value in Chase's
available-for-sale ("AFS") investment portfolio, which is managed as part of
Chase's overall market risk management process. Remaining unrealized gains in
Chase's AFS investment portfolio were approximately $1 billion, before taxes, at
September 30, 1998. In the third quarter and first nine months of 1998, the
total return (pre-tax before expenses) from ALM activities amounted to $342
million and $513 million, respectively. The 1997 third quarter and first nine
months amounts were $134 million and $557 million, respectively.
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GLOBAL INVESTMENT BANKING
Global Investment Banking finances and advises corporations, financial
institutions, financial sponsors and governments by providing integrated
one-stop financial solutions and industry expertise to clients globally. Client
industry groups include chemicals, financial institutions, healthcare,
insurance, media and telecommunications, multinationals, natural resources, oil
and gas, power and environmental, real estate, retail, sports advisory and
finance, transportation and broker/dealers. The product offerings encompass
syndicated finance, high-yield securities, mergers and acquisitions advisory,
project finance, real estate advisory and placement, restructuring and private
placements. Chase continues to maintain its lead position in loan syndications
and in leveraged finance. Operating revenues in the third quarter of 1998
decreased $70 million, or 26%, to $205 million reflecting difficult high-yield
market conditions. For the first nine months of 1998, operating revenues
increased by $278 million, or 41%, to $951 million when compared with the same
1997 period. The 1998 nine month operating revenues reflect strong growth for
all major business lines, including loan syndications, high-yield securities and
mergers and acquisitions advisory activity.
CORPORATE LENDING
Corporate Lending provides credit and lending services to clients globally. The
product offerings encompass global corporate lending, credit analysis and agent
bank services for all industry groups. An active portfolio management effort is
an integral part of corporate lending activities. Cash operating earnings in the
third quarter of 1998 rose $8 million or 6% and were flat for the first nine
months of 1998 when compared with the same 1997 periods. The favorable third
quarter 1998 results were driven by the accumulated effects of the intensive
capital management initiative, which has been in place since the first quarter
of 1998. These initiatives have resulted in higher spreads on retained assets
and the disposition of less attractive loans.
CHASE CAPITAL PARTNERS
Chase Capital Partners ("CCP") is a global private equity organization with
approximately $6.7 billion under management, including $5.0 billion in
equity-related investments. CCP provides equity and mezzanine financing in the
United States and, to a lesser extent, abroad. During the first nine months of
1998, CCP's direct investments approximated $1.2 billion in 84 venture capital,
management buyout, recapitalization, growth equity and mezzanine transactions,
compared with approximately $370 million in 68 direct investments during the
same period in 1997. The difficult market conditions that existed for the 1998
third quarter resulted in unrealized mark-to-market losses on the investment
portfolio and contributed to CCP's cash operating loss of $35 million, a $159
million decline from 1997. For the first nine months of 1998, cash operating
earnings rose $22 million, or 8%, to $316 million reflecting CCP's accelerated
pace of investment activities over the last several years.
GLOBAL ASSET MANAGEMENT AND PRIVATE BANKING
The Global Asset Management and Private Banking Group serves a global client
base of high net worth individuals and families, and institutional, mutual fund
and self-directed investors. Services include investment management for
institutional investors globally, Chase Vista Mutual Funds (at September 30,
1998, the third largest bank-managed mutual fund family in the U.S.) and a full
range of integrated private banking capabilities, investment management and
advisory services, trust and estate planning, global custody, global mutual
funds, credit and banking, and philanthropic advisory services. Total assets
under management amounted to $181 billion at September 30, 1998. Earnings for
the first nine months of 1998 were driven by a 12% growth in revenue, benefiting
from increased fee income, particularly related to private client trust and
investment management activities, and the accelerating growth of Chase's asset
management and mutual fund businesses.
MIDDLE MARKET
Chase is the premier provider of financial services to middle-market companies
(companies with sales ranging from $10 million to $500 million) regionally, with
a national focus in selected industries. It is also the market leader in the New
York metropolitan tri-state area where it has relationships with 53% of middle
market companies and is lead bank for 25% of these companies. Cash operating
earnings decreased in the third quarter and first nine months of 1998 when
compared with the 1997 results reflecting lower spreads, an increase in expenses
and lower securities gains.
CHASE TEXAS
Chase Texas is the primary bank for more large corporations and middle market
companies than any other bank in Texas. Chase Texas also maintains a strong
consumer banking presence through its 123 locations. Additionally, Chase Texas
is the largest bank for personal and corporate trust services in the Southwest.
Operating revenues increased 15% for the 1998 third quarter and 16% for the
first nine months of 1998 when compared with the same periods in 1997,
reflecting increased corporate finance fees, higher loan and deposit volumes,
and securities gains.
NATIONAL CONSUMER SERVICES (NCS)
Cash operating earnings for the 1998 third quarter was essentially flat with
year-ago levels and for the first nine months of 1998, NCS's cash operating
earnings increased $60 million or 7%, over the same 1997 period. The nine month
increase in cash operating earnings is attributable to an 11% increase in
revenue due primarily to the acquisition of The Bank of New York's ("BONY")
credit card portfolio in November 1997. NCS's expenses increased in 1998 as a
result of the BONY credit card acquisition, co-branded activities, and from
higher volumes across all of the NCS businesses. Additionally, credit costs
increased for both 1998 periods primarily due to the BONY portfolio. SVA was
down $44 million in the third quarter of 1998 and $56 million in the first nine
months of 1998 due to increased capital allocation to NCS as a result of recent
acquisitions, primarily the BONY portfolio.
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Chase's National Consumer Services businesses are large, diverse and almost
totally domestic-based, providing counterbalance to Chase's global wholesale
businesses. Chase believes that continued efforts to moderate expense growth,
together with stable credit costs and continuing consolidation of these markets,
will enable Chase to solidify its leadership positions in these businesses.
The following table sets forth certain key financial performance measures of the
businesses within NCS for the periods indicated.
NATIONAL CONSUMER SERVICES:
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
-------------------------------------- ---------------------------------------
(in millions, except ratios) CASH Cash
OPERATING OPERATING EFFICIENCY Operating Operating Efficiency
REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- -------- -------- -------- --------
Cardmember Services $ 979 $ 104 38% $ 840 $ 110 37%
Regional Consumer Banking 591 97 70 562 91 71
Chase Home Finance 262 66 56 242 64 52
Diversified Consumer Services 247 58 47 211 49 46
NINE MONTHS ENDED SEPTEMBER 30,
(in millions, except ratios)
Cardmember Services $ 2,882 $ 345 37% $ 2,423 $ 265 39%
Regional Consumer Banking 1,727 268 72 1,685 276 71
Chase Home Finance 748 189 55 710 182 53
Diversified Consumer Services 686 142 49 605 131 47
CARDMEMBER SERVICES
Chase Cardmember Services ("CCS") ranks as the fourth largest bank card issuer
in the United States. CCS also reflects the results of Chase's international
consumer business, which includes Chase Manhattan Card Company Limited, the
third-largest credit card issuer in Hong Kong (which became wholly owned in
1998), and includes consumer banking activities in Hong Kong, Panama and the
Eastern Caribbean. At September 30, 1998, CCS had a $32 billion worldwide
managed credit card portfolio. CCS's operating revenues for the third quarter of
1998 were $979 million, a $139 million or 16% increase, while cash operating
earnings were $104 million, a $6 million or 5% decrease, compared with 1997,
reflecting the anticipated effect of charge-offs from the BONY portfolio.
Earnings for the first nine months of 1998 rose 30% to $345 million. The
increase was driven by 19% revenue growth reflecting the aforementioned BONY
acquisition and increased co-branded activities. These positive results were
partially offset by increased charge-offs and the effect of the economic
environment in Asia on Chase's international consumer businesses.
REGIONAL CONSUMER BANKING
At September 30, 1998, Regional Consumer Banking has a leading share of primary
bank relationships among consumers and small businesses in the New York
metropolitan tri-state area. It is also a leading retail institution in key
Texas markets. Regional Consumer Banking offers customers convenient access to
financial services through the largest branch and proprietary ATM networks in
the New York metropolitan region plus state-of-the-art telephone, PC and
Internet services. Cash operating earnings for the 1998 third quarter rose $6
million or 7% to $97 million reflecting higher fee income from product and
pricing initiatives. For the first nine months of 1998, cash operating earnings
were 3% lower when compared with 1997, reflecting higher expenses related to
systems integration and enhancements, particularly within Chase Texas' retail
businesses.
CHASE HOME FINANCE
At September 30, 1998, Chase Home Finance is the third-largest originator and
fourth-largest servicer of residential first mortgage loans in the U.S. It is
also a leading provider of home-equity secured lending and manufactured housing
financing. Chase Home Finance serves more than 2 million customers nationwide.
At September 30, 1998, Chase's residential first mortgage servicing portfolio
totaled $184 billion. During the first nine months of 1998, $54 billion in
residential first mortgage loans were originated, which was a 96% increase over
the same period last year. Cash operating earnings increased 3% in the 1998
third quarter and 4% for the first nine months of 1998, when compared with the
same periods in 1997. Operating revenues improved in 1998 benefiting from a
significantly higher volume of mortgage originations partially offset by the
impact of higher levels of prepayments on the loan servicing and mortgage
portfolio.
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DIVERSIFIED CONSUMER SERVICES
Diversified Consumer Services ("DCS") is the largest bank originator of auto
loans and leases in the United States, and a leading provider of student loans
and unsecured consumer lending. In addition to its financing activities, DCS
offers brokerage services and investment products nationwide and is one of the
most diversified bank insurance providers in the U.S. At September 30, 1998,
Chase Auto Finance had $14 billion in retained outstandings with $9 billion in
new originations for the nine months of 1998. Cash operating earnings rose $9
million or 19% in the 1998 third quarter and $11 million or 8% for the first
nine months of 1998 reflecting the continued growth in Chase's auto finance,
insurance and consumer investment businesses.
CHASE TECHNOLOGY SOLUTIONS
Chase Technology Solutions ("CTS") combines Chase's Global Services businesses,
Information Technology and Operations, and Electronic Commerce initiatives into
a single group. Global Services is a leading provider of information and
transaction services globally and includes custody, cash management, trust and
other fiduciary services. As the world's largest provider of global custody and
a leader in trust and agency services, Global Services was custodian for over
$4.8 trillion in assets and serviced over $3 trillion in outstanding debt at
September 30, 1998. Global Services also operates the largest U.S. dollar funds
transfer business in the world and is a market leader in FedWire, ACH and CHIPS
volume. Cash operating earnings for Global Services in the third quarter of 1998
were $122 million, an increase of $10 million or 9% from the 1997 third quarter.
For the first nine months of 1998, cash operating earnings increased $51 million
or 17% from the same 1997 period. SVA for Global Services in the 1998 third
quarter and the first nine months of 1998 increased $10 million and $52 million,
respectively, when compared with the same 1997 periods. These improvements
resulted from revenue growth across all three businesses within Global Services
(Chase Treasury Solutions, Global Investor Services and Global Trust),
reflecting increased balances, new business initiatives and market appreciation,
as well as higher fees resulting from an acquisition in the fourth quarter of
1997. Earnings also benefited from continued productivity gains, tempered by
technology investments related to preparations for Year 2000 and European
Monetary Union ("EMU") initiatives.
CORPORATE
Corporate includes the effects remaining at the Corporate level after the
implementation of management accounting policies, including residual credit
provision and tax expense. Corporate also includes unallocated special items.
For the third quarter of 1998, Corporate had a cash operating loss (including
the non-Global Services portion of CTS) of $74 million compared with a cash
operating loss of $51 million in 1997. For the first nine months of 1998,
Corporate had a cash operating loss of $225 million compared with a cash
operating loss of $130 million in 1997.
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RECONCILIATION OF REPORTED RESULTS TO OPERATING RESULTS
The following supplemental information provides a reconciliation between Chase's
reported results and results on an operating basis.
THIRD QUARTER 1998 Third Quarter 1997
------------------------------------------------ ----------------------------------------------
(in millions, except REPORTED CREDIT CARD SPECIAL OPERATING Reported Credit Card Special Operating
per share data) RESULTS SECURITIZATIONS ITEMS BASIS Results Securitizations Items Basis
Revenue: (a) (b) (c) (a) (b) (c)
--------- -------- -------- -------- ------- ------- -------- --------
Market-Sensitive $ 902 $ -- $ -- $ 902 $ 1,262 $ -- $ -- $ 1,262
All Other 3,499 298 (191) 3,606 3,153 249 -- 3,402
--------- -------- -------- -------- ------- ------- -------- --------
Total Revenue 4,401 298 (191) 4,508 4,415 249 -- 4,664
Noninterest Expense 2,651 -- (37) 2,614 2,590 -- (85) 2,505
--------- -------- -------- -------- ------- ------- -------- --------
Operating Margin 1,750 298 (154) 1,894 1,825 249 85 2,159
Credit Costs 451 298 -- 749 196 249 -- 445
--------- -------- ------- -------- ------- ------- ------- --------
Income Before
Restructuring Costs 1,299 -- (154) 1,145 1,629 -- 85 1,714
Restructuring Costs -- -- -- -- 71 -- (71) --
--------- -------- ------- -------- ------- ------- ------- --------
Income Before Taxes 1,299 -- (154) 1,145 1,558 -- 156 1,714
Tax Expense 462 -- (55) 407 576 -- 57 633
--------- -------- -------- -------- ------- ------- ------- --------
Net Income $ 837 $ -- $ (99) $ 738 $ 982 $ -- $ 99 $ 1,081
========= ======== ======== ======== ======= ======= ======= ========
NET INCOME PER COMMON SHARE
Basic $ 0.96 $ 0.84 $ 1.11 $ 1.23
Diluted $ 0.94 $ 0.82 $ 1.08 $ 1.19
NINE MONTHS 1998 Nine Months 1997
------------------------------------------ ------------------------------------------
Revenue:
Market-Sensitive $ 3,754 $ -- $ -- $ 3,754 $ 3,401 $ -- $ -- $ 3,401
All Other 10,047 864 (191) 10,720 9,317 730 (44) 10,003
-------- -------- ------- -------- -------- ------- ------- --------
Total Revenue 13,801 864 (191) 14,474 12,718 730 (44) 13,404
Noninterest Expense 7,979 -- (37) 7,942 7,417 -- (135) 7,282
-------- -------- ------- -------- -------- ------- ------- --------
Operating Margin 5,822 864 (154) 6,532 5,301 730 91 6,122
Credit Costs 1,139 864 -- 2,003 608 730 -- 1,338
-------- -------- ------- -------- -------- ------- ------- --------
Income Before
Restructuring Costs 4,683 -- (154) 4,529 4,693 -- 91 4,784
Restructuring Costs 529 -- (529) -- 172 -- (172) --
-------- -------- ------- -------- -------- ------- -------- --------
Income Before Taxes 4,154 -- 375 4,529 4,521 -- 263 4,784
Tax Expense 1,518 -- 141 1,659 1,687 -- 98 1,785
-------- -------- ------- -------- -------- ------- ------- --------
Net Income $ 2,636 $ -- $ 234 $ 2,870 $ 2,834 $ -- $ 165 $ 2,999
======== ======== ======= ======== ======== ======= ======= ========
NET INCOME PER COMMON SHARE
Basic $ 3.02 $ 3.29 $ 3.15 $ 3.35
Diluted $ 2.93 $ 3.20 $ 3.04 $ 3.22
(a) Represents results as reported in Chase's financial statements, except
restructuring costs have been separately displayed and foreclosed property
expense is included in credit costs.
(b) Represents the impact of credit card securitizations. For the third
quarter, the line items on the income statement impacted are net interest
income ($374 million in 1998 and $319 million in 1997), provision for
credit losses ($298 million in 1998 and $249 million in 1997), credit card
revenue ($69 million in 1998 and $58 million in 1997) and other revenue
($7 million in 1998 and $12 million in 1997). For the first nine months,
the line items on the income statement impacted are net interest income
($1,093 million in 1998 and $913 million in 1997), provision for credit
losses ($864 million in 1998 and $730 million in 1997), credit card
revenue ($222 million in 1998 and $152 million in 1997) and other revenue
($7 million in 1998 and $31 million in 1997).
(c) Includes restructuring costs and special items. Restructuring costs for
the first nine months of 1998 reflect the $510 million pre-tax charge
($320 million after-tax) taken in connection with initiatives to
streamline support functions, and residual costs of $19 million pre-tax
($13 million after-tax) related to the merger restructuring charge. For a
description of special items, see the Glossary of Terms on page 41.
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20
To facilitate analysis of Chase's financial results, management categorizes
certain revenue components of the operating income statement as market-sensitive
revenues. Chase's market-sensitive revenues include trading revenues (including
trading-related net interest income), investment banking fees, securities gains
and revenue from equity-related investments.
Over the past ten years (1988-1997), Chase's market sensitive revenues have
grown at a compound annual growth rate ("CAGR") of 14%. However,
market-sensitive revenues are affected by many factors. These include Chase's
credit standing and its success in proprietary positioning, as well as general
economic conditions (both domestic and international), the fiscal policies of
central banks and governments which affect the financial markets (including
domestic and foreign interest rates), the volatility of interest rates, equity
and debt markets and currencies (including volatility associated with the
introduction of the euro), and other political, social and economic
developments.
Chase's market-sensitive revenues will, therefore, experience volatility from
time to time. This was demonstrated during 1998. After achieving higher than
historical growth rates in the first two quarters of 1998, market-sensitive
revenues declined during the third quarter by approximately $500 million from
the second quarter of 1998 and approximately $360 million from the third quarter
of 1997, to a level below that implied by the long-term growth rate. The third
quarter decline resulted primarily from lower gains in private-equity
investments and lower trading revenues. There are, however, more stable revenue
streams within market-sensitive revenues such as transaction-related revenue
from the trading businesses.
Chase expects market-sensitive revenues to continue to grow at a CAGR of
approximately 14%, although results in any particular quarter may be better or
worse than the level implied by this long-term growth rate, depending on the
factors described above.
All other revenue captions are generally subject to less market volatility.
Certain components of these revenue captions are subject to market volatility,
particularly assets that are held-for-sale and are accounted for on either a
mark-to-market basis or lower of cost or market basis. All other revenues
increased by 6% in the 1998 third quarter and 7% for the 1998 first nine months,
when compared with the same 1997 periods. The increases were the result of
higher trust, custody and investment management fees and credit card revenue.
REPORTED RESULTS OF OPERATIONS
The section below discusses Chase's reported results of operations. Reported
results include the impact of credit card securitizations, restructuring costs
and special items.
NET INTEREST INCOME
Third Quarter Nine Months
--------------------------------------- -------------------------------------
1998 1997 Change 1998 1997 Change
---------- --------- --------- --------- --------- ---------
NET INTEREST INCOME (in millions)
Excluding Impact of Securitizations
and Tax Refunds $ 2,389 $ 2,388 -- % $ 7,308 $ 7,056 4%
Impact of Securitizations (374) (319) (1,093) (913)
---------- --------- --------- ---------
Excluding Impact of Tax Refunds 2,015 2,069 (3)% 6,215 6,143 1%
Impact of Tax Refunds 191 -- 191 --
---------- --------- --------- ---------
Reported $ 2,206 $ 2,069 7% $ 6,406 $ 6,143 4%
========== ========= ========= =========
AVERAGE INTEREST-EARNING ASSETS
(in billions)
Excluding Impact of Securitizations $ 305.3 $ 304.4 -- % $ 313.8 $ 295.2 6%
Impact of Securitizations (18.4) (14.8) (18.0) (14.1)
---------- --------- --------- ---------
Reported $ 286.9 $ 289.6 (1)% $ 295.8 $ 281.1 5%
========== ========= ========= =========
NET YIELD ON INTEREST-EARNING ASSETS
ON A TAXABLE EQUIVALENT BASIS
Excluding Impact of Securitizations
and Tax Refunds 3.11% 3.12% (1)bp 3.12% 3.20% (8)bp
Impact of Securitizations (.30) (.28) (2)bp (.30) (.27) (3)bp
---------- --------- --------- ---------
Excluding Impact of Tax Refunds 2.81 2.84 (3)bp 2.82 2.93 (11)bp
Impact of Tax Refunds .25 -- 25 bp .08 -- 8 bp
---------- --------- --------- ---------
Reported 3.06% 2.84% 22 bp 2.90% 2.93% (3)bp
========== ========= ========= =========
bp - Denotes basis points
Reported net interest income for the 1998 third quarter was $2,206 million and
for the first nine months of 1998 was $6,406 million. Excluding the impact of
$191 million of interest income resulting from prior years' tax refunds which
were recognized in the 1998 third quarter, net interest income decreased 3% for
the quarter and increased 1% for the first nine months from comparable 1997
periods. Excluding the impact of the tax refund, the net yield on
interest-earning assets declined 3 basis points during the 1998 third quarter
and 11 basis points during the first nine months of 1998 from comparable 1997
periods. This was primarily due to generally narrower spreads on loans.
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AVERAGE INTEREST-EARNING ASSETS
(in billions) Third Quarter
----------------------------------------------------------
1998 1997
---------------------- ----------------------
Loans $ 166.1 58% $ 161.2 56%
Securities 56.9 20 45.0 15
Liquid Assets 63.9 22 83.4 29
-------- -------- -------- --------
Reported Average Interest-Earning Assets $ 286.9 100% $ 289.6 100%
======== ======== ======== ========
Nine Months
----------------------------------------------------------
1998 1997
---------------------- ----------------------
Loans $ 168.1 57% $ 156.9 56%
Securities 56.5 19 44.3 16
Liquid Assets 71.2 24 79.9 28
-------- -------- -------- --------
Reported Average Interest-Earning Assets $ 295.8 100% $ 281.1 100%
======== ======== ======== ========
Average interest-earning assets retained on the balance sheet decreased slightly
in the third quarter of 1998 but increased 5% in the first nine months of 1998
when compared with the same 1997 periods. Loan and securities volume increased
in both periods, offset by a decline in liquid assets. Average loans retained on
the balance sheet increased $4.9 billion in the 1998 third quarter and $11.2
billion in the first nine months of 1998, when compared with the same periods in
1997. The increase in average loans retained was divided between the domestic
consumer and commercial portfolios, while the increase in securities was
principally in the domestic available-for-sale portfolio. The foreign commercial
loan portfolio declined in the 1998 third quarter as Chase continued to reduce
its exposure to emerging markets. Interest-earning assets in both 1998 periods
were funded by a higher percentage of deposits than in the comparable 1997
periods, a reflection of liquidity within the consumer sector.
PROVISION FOR CREDIT LOSSES
Chase's provision for credit losses, which equaled net charge-offs, amounted to
$455 million in the 1998 third quarter and $1,137 million for the first nine
months of 1998, compared with $190 million and $599 million, respectively, for
the prior-year periods. For a discussion of Chase's net charge-offs, see the
Credit Risk Management Section on pages 26-31.
As a result of increased charge-offs from the foreign commercial portfolio,
particularly Asia and Russia, the provision for credit losses for full-year 1998
will be higher than the full-year 1997 provision.
NONINTEREST REVENUE
The 1998 third quarter and the 1998 first nine months continued to benefit from
Chase's diversified revenue streams with strong increases in several areas
(notably securities gains, investment banking fees, trust fees and credit card
revenue). The difficult global market conditions resulted in significant
declines in trading and equity-related revenues for the third quarter.
NONINTEREST REVENUE Third Quarter Nine Months
------------------------- -------------------------
(in millions) 1998 1997 1998 1997
--------- --------- --------- ---------
Investment Banking Fees $ 322 $ 308 $ 1,121 $ 767
Trust, Custody and Investment Management Fees 398 338 1,129 969
Credit Card Revenue 381 281 1,046 766
Fees for Other Financial Services 522 505 1,541 1,466
--------- --------- --------- ---------
Total Fees and Commissions 1,623 1,432 4,837 3,968
Trading Revenue 114 505 927 1,401
Securities Gains 261 58 442 189
Revenue from Equity-Related Investments 60 249 723 605
Other Revenue 137 102 466 412
--------- --------- --------- ---------
Total $ 2,195 $ 2,346 $ 7,395 $ 6,575
========= ========= ========= =========
Investment banking fees of $322 million in the 1998 third quarter and $1,121
million for the 1998 first nine months were higher by 5% and 46%, respectively,
than the same 1997 periods. In the 1998 third quarter, strong growth in fee
income from loan syndications and merger and acquisition advisory activity was
offset by reduced underwriting fees in high yield and emerging markets. The nine
months' results reflect revenue growth in all major business lines, in
particular investment-grade bond underwriting, loan syndications, and mergers
and acquisitions advisory activity.
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TRUST, CUSTODY AND INVESTMENT MANAGEMENT FEES Third Quarter Nine Months
-------------------- --------------------
(in millions) 1998 1997 1998 1997
------- ------- ------- -------
Institutional (a) $ 205 $ 174 $ 591 $ 504
Personal (a) 106 108 341 311
Mutual Fund Fees (a) 38 28 102 75
Other Trust Fees 49 28 95 79
------- ------- ------- -------
Total Trust, Custody and Investment Management Fees $ 398 $ 338 $ 1,129 $ 969
======= ======= ======= =======
(a) For the definitions of the above captions, see page 26 of Chase's 1997
Annual Report.
Trust, custody and investment management fees continued their record setting
pace by rising 18% to a new record of $398 million in the 1998 third quarter,
and by increasing 17% to $1,129 million in the first nine months. These
favorable results were largely attributable to growth in assets under custody,
expanded securities lending activity, a higher level of assets under management
(including at the Chase Vista mutual funds which grew 30% from the 1997 third
quarter to $42 billion at the end of the 1998 third quarter), as well as from
portfolio acquisitions.
Credit card revenue rose $100 million, or 36%, in the 1998 third quarter and
$280 million, or 37%, in the 1998 first nine months as a result of continued
growth in managed credit card receivables, including the acquisition of BONY's
credit card portfolio in late 1997, and increased co-branded activities. The
increases in revenue were partially offset by a rise in net charge-offs on the
securitized portfolio, which reduced the excess servicing fees Chase received
from the securitizations. Average managed worldwide credit card receivables grew
to $31.6 billion in the third quarter of 1998, compared with $27.6 billion for
the prior year's third quarter. For a further discussion of the credit card
portfolio, see page 27 of this Form 10-Q.
FEES FOR OTHER FINANCIAL SERVICES Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1998 1997 1998 1997
-------- -------- -------- --------
Service Charges on Deposit Accounts $ 92 $ 94 $ 275 $ 280
Fees in Lieu of Compensating Balances 85 81 256 236
Commissions on Letters of Credit and Acceptances 72 78 218 224
Mortgage Servicing Fees 43 59 149 177
Loan Commitment Fees 31 30 101 86
Insurance Fees (a) 40 27 103 62
Brokerage and Investment Services 35 34 102 93
Other Fees 124 102 337 308
-------- -------- -------- --------
Total $ 522 $ 505 $ 1,541 $ 1,466
======== ======== ======== ========
(a) Insurance amount excludes certain insurance fees related to credit cards
and mortgage products, which are included in those revenue captions.
The rise in fees in lieu of compensating balances reflects, in part, higher fees
for services paid by customers, rather than customers maintaining a higher level
of compensating balances in the current lower interest-rate environment.
Mortgage servicing fees declined in both the 1998 third quarter and first nine
months largely due to the impact of prepayments as a result of a lower
interest-rate environment; however, lower interest rates benefited mortgage
originations and sales revenues, which are reported in other revenues, as
discussed on page 23 of this Form 10-Q. The higher level of loan commitment fees
for the first nine months of 1998 was largely a reflection of increased activity
in Chase's acquisition financing business. Higher fees related to insurance
products, investment services, and loans serviced (notably auto loans), also
contributed to the increase.
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TRADING REVENUE Third Quarter Nine Months
------------------------- --------------------------
(in millions) 1998 1997 1998 1997
------- -------- -------- --------
Trading Revenue $ 114 $ 505 $ 927 $ 1,401
Net Interest Income Impact (a) 145 142 541 439
------- -------- -------- --------
Total Trading-Related Revenue $ 259 $ 647 $ 1,468 $ 1,840
======= ======== ======== ========
Product Diversification:
Interest Rate Contracts (a) $ 142 $ 157 $ 378 $ 539
Foreign Exchange Contracts (a) 263 226 819 562
Debt Instruments and Other (a) (146) 264 271 739
------- -------- -------- --------
Total Trading-Related Revenue $ 259 $ 647 $ 1,468 $ 1,840
======= ======== ======== ========
(a) For a definition of trading-related net interest income and the classes of
financial instruments included, see Note Two of Chase's 1997 Annual
Report.
Total trading revenues were $259 million for the 1998 third quarter, a 60%
decline from the 1997 third quarter and a 50% decline from the 1998 second
quarter. Total trading revenues for the first nine months of 1998 were down 20%
from the same 1997 period.
Interest rate contract revenues declined for both periods, mainly due to weaker
results in the U.S., especially in several structured products. The rise in
foreign exchange revenue reflected strong earnings across a broad spectrum of
currencies, with particular emphasis on the Asian markets where volatility
continued to remain high. The decline in debt instruments and other revenue was
attributable to weak markets in Asia, Russia and Latin America.
Securities gains realized for the 1998 third quarter were $261 million and for
the 1998 first nine months were $442 million. These gains were largely from
sales of U.S. Government and agency securities. Due to the adverse market
conditions during the 1998 third quarter, many investors chose safer
investments, such as U.S. Treasuries. Remaining unrealized gains in Chase's AFS
securities portfolio were approximately $1 billion, before taxes, at September
30, 1998, up from approximately $150 million, before taxes, three months ago.
Chase's AFS portfolio is managed as part of its overall risk management process
and a portion of the unrealized gains in the securities portfolio may be
considered as an economic offset to its trading portfolio.
Revenue from equity-related investments includes income from a wide variety of
investments in the United States and, to a lesser extent, abroad. The 1998 third
quarter results of $60 million were unfavorably impacted by the volatility of
the global markets and were 76% lower than the prior year's quarter and
significantly lower than the quarterly average of approximately $224 million for
the previous eight quarters. For the first nine months of 1998, these results
increased 20% to $723 million reflecting the benefit of Chase's accelerated pace
of investment activities over the last several years as well as the favorable
market conditions during the first six months of 1998. At September 30, 1998,
Chase's equity-related investments under management approximated $5.0 billion.
OTHER NONINTEREST REVENUE Third Quarter Nine Months
------------------------- -------------------------
(in millions) 1998 1997 1998 1997
-------- -------- -------- --------
Residential Mortgage Origination/Sales Activities $ 105 $ 37 $ 241 $ 98
Gain on Sale of a Partially-Owned Foreign Investment -- -- -- 44
All Other Revenue 32 65 225 270
-------- -------- -------- --------
Total Other Noninterest Revenue $ 137 $ 102 $ 466 $ 412
======== ======== ======== ========
The 1998 third quarter and first nine months results included higher revenue
from residential mortgage originations and portfolio sales activities, a
reflection of the continued favorable lower interest-rate environment.
Contributing to the decline in all other revenue in both 1998 periods was a net
unrealized loss from marking to market a loan and securities portfolio that has
been previously transferred into a trust, the shares of which are being sold to
institutional investors. The 1997 first nine months results included a $44
million gain on the sale of a partially-owned foreign investment. The 1997 third
quarter and first nine months also included $16 million and $48 million,
respectively, of equity income from Chase's investment in CIT Group Holdings,
Inc. (Chase's remaining 20% interest in CIT was sold in the fourth quarter of
1997).
-23-
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NONINTEREST EXPENSE
Noninterest expenses, excluding restructuring costs, were $2,647 million in the
1998 third quarter, an increase of 2% from the prior year's quarter, and were
$7,981 million for the first nine months of 1998, an increase of 7% from the
same 1997 period. The increase for both 1998 periods reflects operating costs
related to portfolio acquisitions, investment spending on new product offerings
and Year 2000, EMU and other technology spending. Noninterest expenses including
restructuring costs were $8,510 million for the first nine months of 1998, an
increase of 12% from the 1997 first nine months.
NONINTEREST EXPENSE Third Quarter Nine Months
-------------------------- ----------------------------
(in millions, except ratios) 1998 1997 1998 1997
---------- --------- ---------- ---------
Salaries $ 1,205 $ 1,292 $ 3,729 $ 3,526
Employee Benefits 221 206 660 647
Occupancy Expense 198 194 578 574
Equipment Expense 219 192 640 575
Other Expense 804 712 2,374 2,104
---------- --------- ---------- ---------
Total Before Restructuring Costs 2,647 2,596 7,981 7,426
Restructuring Costs -- 71 529 172
---------- --------- ---------- ---------
Total $ 2,647 $ 2,667 $ 8,510 $ 7,598
========== ========= ========== =========
Efficiency Ratio (a) 62% 56% 58% 57%
Efficiency Ratio - Operating (a) (b) 58% 53% 55% 54%
(a) Excludes restructuring costs, foreclosed property expense, costs
associated with the REIT and special items.
(b) Excludes the impact of credit card securitizations.
The decrease in salaries for the 1998 third quarter substantially reflected
lower incentive costs. The increase in salaries for the first nine months of
1998, and the increase in employee benefits for both 1998 periods was primarily
due to the net addition of approximately 3,000 full-time equivalent employees.
The increased head count reflects the net impact of investments in selected
growth businesses (including through acquisitions), less staff reductions
related to initiatives to streamline support functions and realign certain
business activities. Included in the 1998 and 1997 nine month results were $37
million and $135 million ($85 million in the third quarter), respectively, for
the accelerated vesting of stock-based incentive awards.
FULL-TIME EQUIVALENT EMPLOYEES SEPTEMBER 30, September 30,
1998 1997
-------- --------
Domestic Offices 60,538 58,164
Foreign Offices 10,806 10,232
-------- --------
Total Full-Time Equivalent Employees 71,344 68,396
======== ========
The higher level of equipment expense during the 1998 third quarter and first
nine months was due to an increase in depreciation expense from recently
capitalized equipment across all business units. The 1998 third quarter and
first nine months were also impacted by increased software expense related to
Year 2000 and EMU efforts. For a further discussion of Year 2000 and EMU
efforts, see the Operating Risk Management Section on page 34.
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OTHER EXPENSE Third Quarter Nine Months
----------------------- ------------------------
(in millions) 1998 1997 1998 1997
--------- --------- ---------- ---------
Professional Services $ 180 $ 139 $ 483 $ 408
Marketing Expense 108 90 306 300
Telecommunications 90 77 258 225
Travel and Entertainment 58 49 177 161
Amortization of Intangibles 63 41 188 123
Minority Interest 12 19 36 58
Foreclosed Property Expense (4) 6 2 9
All Other 297 291 924 820
--------- --------- ---------- ---------
Total $ 804 $ 712 $ 2,374 $ 2,104
========= ========= ========== =========
Other expense for the 1998 third quarter and first nine months increased $92
million and $270 million, respectively, when compared with the third quarter and
first nine months of 1997. Professional services costs for both 1998 periods
reflected higher levels of contract computer professionals associated with Year
2000 and the EMU efforts. The $18 million increase in marketing expense in the
1998 third quarter is primarily due to higher marketing acquisition costs at
Chase Cardmember Services. The $13 million rise in telecommunications costs in
the 1998 third quarter and $33 million increase for the first nine months of
1998 covers both installation and usage and reflects the growth in business
volume at all of Chase's major business franchises. The purchase of the BONY
credit card portfolio in late 1997 contributed to the increase in amortization
of intangibles expense, while the increased servicing costs for the portfolio
contributed to the increase in all other expense. These increases were partially
offset by a decline in minority interest expense due to the acquisition of
minority interest in a foreign investment in the 1998 first quarter.
For a discussion of Chase's restructuring costs, see Note Seven on page 9 of
this Form 10-Q. It is anticipated that the annual savings from the one-time
charge of $510 million, taken in the first quarter of 1998 in connection with
initiatives to streamline support functions and realign certain business
functions, will amount to approximately $460 million. Depending on its view of
revenue opportunities, Chase may or may not reinvest all or a part of these
expense savings in its revenue-generating activities.
INCOME TAXES
Chase recognized income tax expense of $462 million in the third quarter of 1998
compared with $576 million in the third quarter of 1997. The effective tax rate
for each period was 35.6% and 37.0%, respectively. For the first nine months,
Chase recorded income tax expense of $1.52 billion in 1998, compared with $1.69
billion in 1997, at an effective tax rate of 36.5% and 37.3%, respectively.
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26
CREDIT RISK MANAGEMENT
The following discussion of Chase's credit risk management focuses primarily on
developments since December 31, 1997 and should be read in conjunction with
pages 29-37 and 52 of Chase's 1997 Annual Report.
The following table presents Chase's credit-related information for the dates
indicated.
PAST DUE 90 DAYS OR MORE
CREDIT-RELATED ASSETS NONPERFORMING ASSETS & STILL ACCRUING
------------------------- ----------------------- ---------------------
SEPT 30, Dec 31, SEPT 30, Dec 31, SEPT 30, Dec 31,
(in millions) 1998 1997 1998 1997 1998 1997
---------- ---------- --------- -------- -------- --------
CONSUMER:
Domestic Consumer:
1-4 Family Residential Mortgages $ 39,250 $ 38,680 $ 343 $ 340 $ 3 $ 2
Credit Card 12,472 15,631 -- -- 259 256
Auto Financings 14,694 13,243 46 31 16 20
Other Consumer 8,786 8,543 8 7 91 142
---------- ---------- --------- -------- -------- --------
Total Domestic Consumer 75,202 76,097 397 378 369 420
Foreign Consumer 3,951 3,976 21 21 11 7
---------- ---------- --------- -------- -------- --------
TOTAL CONSUMER 79,153 80,073 418 399 380 427
---------- ---------- --------- -------- -------- --------
COMMERCIAL:
Domestic Commercial:
Commercial and Industrial 41,792 37,931 352 258 54 18
Commercial Real Estate (a) 5,071 5,030 53 75 7 14
Financial Institutions 6,219 6,652 1 1 -- --
---------- ---------- --------- -------- -------- --------
Total Domestic Commercial 53,082 49,613 406 334 61 32
Total Foreign Commercial 34,337 38,768 559 175 38 --
---------- ---------- --------- -------- -------- --------
TOTAL COMMERCIAL 87,419 88,381 965 509 99 32
---------- ---------- --------- -------- -------- --------
TOTAL LOANS (b) 166,572 168,454 1,383 908 479 459
---------- ---------- --------- -------- -------- --------
Derivative and FX Contracts 33,547 38,476 19 -- -- 1
---------- ---------- --------- -------- -------- --------
TOTAL CREDIT-RELATED ASSETS $ 200,119 $ 206,930 1,402 908 $ 479 $ 460
========== ========== --------- -------- ======== ========
Assets Acquired as Loan Satisfactions 131 110
--------- --------
TOTAL NONPERFORMING ASSETS $ 1,533 $ 1,018
========= ========
NET CHARGE-OFFS
---------------------------------------------------
Third Quarter Nine Months
------------------------ ---------------------
(in millions) 1998 1997 1998 1997
---------- --------- -------- --------
CONSUMER:
Domestic Consumer:
1-4 Family Residential Mortgages $ 6 $ 8 $ 22 $ 21
Credit Card 187 132 550 403
Auto Financings 17 15 58 42
Other Consumer 39 41 123 129
---------- --------- -------- --------
Total Domestic Consumer 249 196 753 595
Foreign Consumer 6 3 14 9
---------- --------- -------- --------
TOTAL CONSUMER 255 199 767 604
---------- --------- -------- --------
COMMERCIAL:
Domestic Commercial:
Commercial and Industrial (59) 14 (77) 32
Commercial Real Estate (a) (3) (13) (9) (23)
---------- --------- -------- --------
Total Domestic Commercial (62) 1 (86) 9
Total Foreign Commercial 154 (10) 326 (14)
---------- --------- -------- --------
TOTAL COMMERCIAL 92 (9) 240 (5)
DERIVATIVE AND FX CONTRACTS 108 -- 130 --
---------- --------- -------- --------
TOTAL NET CHARGE-OFFS $ 455 $ 190 $ 1,137 $ 599
========== ========= ======== ========
(a) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
(b) Total managed loans, at September 30, 1998 and December 31, 1997 were
$185,544 million and $185,306 million, respectively.
-26-
27
CREDIT PORTFOLIO SUMMARY
The decrease at September 30, 1998 in retained loans outstanding from December
31, 1997 levels is the result of slight decreases in both the consumer and
commercial loan portfolios. Based upon industry classifications utilized by
Chase, there were no commercial and industrial industry segments that exceeded
5% of total commercial and industrial loans outstanding. During the 1998 third
quarter, exposures to Asia and Latin America continued to decrease.
Chase's nonperforming assets at September 30, 1998 increased $515 million from
the 1997 year-end level primarily due to an increase in nonperforming Asian
assets. Management expects that during the remainder of 1998, there will be an
increase in nonperforming assets from the September 30, 1998 level, primarily as
a result of continuing uncertainty in the financial conditions of certain Asian
countries.
Total net charge-offs on a retained basis increased by $265 million during the
1998 third quarter and by $538 million for the first nine months, when compared
to the same 1997 periods. Total net charge-offs on a managed basis were $753
million in the 1998 third quarter, compared with $439 million in the third
quarter of 1997. For the first nine months of 1998, total net charge-offs on a
managed basis were $2,001 million, compared with $1,329 million in 1997. The
increases in net charge-offs on both a managed and retained basis are due to the
generally lower credit quality of the BONY credit card portfolio, a factor which
was anticipated at the time of its acquisition, and increased foreign commercial
charge-offs, primarily as a result of conditions in Asia and Russia.
Commercial net charge-offs totaled $200 million during the 1998 third quarter.
Net recoveries of $62 million in the domestic commercial portfolio were offset
by net charge-offs in the foreign commercial portfolio. Approximately 80% of the
foreign commercial net charge-offs related to Russia. For the nine months ended
September 30, 1998, commercial net charge-offs of $370 million represented net
recoveries of approximately $86 million in the domestic commercial portfolio,
offset by net charge-offs of $456 million in Chase's foreign commercial
portfolio.
CONSUMER PORTFOLIO
Residential Mortgage Loans: Residential mortgage loans were $39.3 billion at
September 30, 1998, a $570 million increase from year-end, reflecting increased
origination activity due to lower interest rates. At September 30, 1998,
nonperforming domestic residential mortgage loans, as a percentage of the
domestic residential mortgage loan portfolio, was 0.87%, down slightly from the
1997 year-end level.
Credit Card Loans: Chase analyzes its credit card portfolio on a managed basis,
which includes credit card receivables on the balance sheet as well as credit
card receivables that have been securitized.
The following table presents credit-related information for Chase's aggregate
domestic and international managed credit card receivables.
As of or for the As of or for the
Three Months Ended Nine Months Ended
September 30, (a) September 30, (a)
----------------------- -----------------------
(in millions, except ratios) 1998 1997 1998 1997
--------- --------- --------- ---------
Average Managed Credit Card Receivables $ 31,607 $ 27,630 $ 31,991 $ 26,527
Past Due 90 Days or More and Accruing $ 675 $ 528 $ 675 $ 528
As a Percentage of Average Credit Card Receivables 2.14% 1.91% 2.11% 1.99%
Net Charge-offs $ 489 $ 379 $ 1,425 $ 1,125
As a Percentage of Average Credit Card Receivables 6.19% 5.49% 5.94% 5.65%
(a) For the three months ended September 30, 1998 and 1997 and for the nine
months ended September 30, 1998 and 1997, Chase's average domestic managed
credit card receivables were $31.0 billion, $27.1 billion, $31.4 billion
and $26.0 billion, respectively. Net charge-offs as a percentage of
average domestic managed credit card receivables for each of these periods
were 6.27%, 5.57%, 6.01% and 5.74%, respectively.
The increases in average managed credit card receivables for both the three and
nine month periods ended September 30, 1998, when compared with the same periods
in 1997, were largely the result of the purchase of a domestic credit card
portfolio in late 1997, totaling approximately $4.0 billion in outstandings. The
increase in the net charge-off percentage for both 1998 periods is due to the
anticipated lower credit quality of the BONY portfolio and to a decrease in
growth of credit card outstandings driven by increased consumer liquidity.
Management expects that credit card net charge-offs, as a percentage of average
managed credit card receivables, will increase in 1998 when compared with 1997.
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28
Auto Financings: Auto financings outstanding increased 11% reflecting continued
strong consumer demand due to favorable pricing programs, partially offset by
the impact of auto loan securitizations. Total originations were $9.0 billion in
the first nine months of 1998, compared with $8.2 billion in the same 1997
period. Net charge-offs related to auto financings increased in the 1998 third
quarter and in the first nine months, compared with the same 1997 periods. The
increased level of net charge-offs for both 1998 periods primarily reflects
growth in the portfolio. The 1998 first nine months also includes the
unfavorable performance in a discontinued product line.
COMMERCIAL PORTFOLIO
Domestic Commercial: The domestic commercial portfolio had net recoveries during
the 1998 third quarter and the portfolio continued to maintain its strong credit
quality.
Foreign Commercial: The foreign commercial portfolio totaled $34.3 billion at
September 30, 1998, a decrease of $4.4 billion from the 1997 year-end as Chase
continued to reduce its exposure to emerging markets in Asia and Latin America.
Nonperforming loan levels at September 30, 1998, as well as net charge-off
levels for the 1998 third quarter and first nine months, increased in comparison
with the respective prior year periods, due to financial conditions in Asia and
Russia.
Total nonperforming assets in Asia, including derivatives, increased by $263
million from 1997 year-end to $345 million at September 30, 1998. Asian
commercial net charge-offs, including derivatives, for the 1998 third quarter
were $52 million and for the first nine months of 1998 were $266 million,
compared with $11 million and $13 million, respectively, in the same 1997
periods. Russian-related commercial net charge-offs, including derivatives, were
$208 million for the third quarter and first nine months of 1998. Of this
amount, $109 million were net charge-offs on resale agreements. There were no
Russian-related commercial net charge-offs in the same 1997 periods.
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
For a discussion of the derivative and foreign exchange financial instruments
utilized in connection with Chase's trading and ALM activities, see pages 35-36
and Notes One and Eighteen of Chase's 1997 Annual Report. At September 30, 1998,
the majority of these transactions were with commercial bank and financial
institution counterparties, most of which are dealers in these products. The
following table provides the remaining maturities of derivative and foreign
exchange contracts outstanding at September 30, 1998 and December 31, 1997. The
lengthening of the maturity profile since year-end is the result of the improved
creditworthiness of Chase over the last several years (as evidenced by credit
rating upgrades) and the maturation of the derivatives market where longer
maturities are becoming more commonplace.
AT SEPTEMBER 30, 1998 At December 31, 1997
------------------------------------------------- ------------------------------------------------
INTEREST FOREIGN EQUITY, Interest Foreign Equity,
RATE EXCHANGE COMMODITY AND Rate Exchange Commodity and
CONTRACTS CONTRACTS OTHER CONTRACTS TOTAL Contracts Contracts Other Contracts Total
------ ------ ------ ------ ------ ------ ------ ------
Less than 1 year 15% 91% 39% 36% 27% 95% 51% 54%
1 to 5 years 49 6 58 38 47 5 48 32
Over 5 years 36 3 3 26 26 -- 1 14
------ ------ ------ ------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100% 100% 100% 100%
====== ====== ====== ====== ====== ====== ====== ======
Chase's net charge-offs arising from derivative and foreign exchange
transactions were $108 million in the 1998 third quarter and $130 million for
the first nine months of 1998. There were no net charge-offs on these types of
transactions during the first nine months of 1997. At September 30, 1998,
nonperforming derivative contracts were $19 million, compared with none in 1997.
The increases in both net charge-offs and nonperforming derivative contracts
were due to the financial conditions in Asia and Russia.
HEDGE FUNDS
The following table presents Chase's credit exposure to hedge funds at September
30, 1998.
(in billions) SEPTEMBER 30, 1998
---------
Collateralized by U.S. Government and Agency Securities $ 1.7
Collateralized by Other Securities 0.4
Collateralized by Fund Assets 0.3
---------
Total Collateralized 2.4
Uncollateralized 0.3
---------
Total Credit Exposure (a) $ 2.7
=========
(a) Includes loans, resale agreements, mark-to-market foreign exchange and
derivative contracts and undrawn commitments to extend credit.
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In addition to its credit exposure to hedge funds, Chase has made a $300 million
investment in Long-Term Capital Management and had, at September 30, 1998,
approximately $400 million invested in other hedge funds, with no single
investment larger than $25 million at the time the investment was made. These
other investments are marked-to-market and have produced a year-to-date return
of negative four percent.
CROSS-BORDER EXPOSURE
Credits denominated in a currency other than that of the country in which a
borrower is located, such as dollar-denominated loans made overseas, are called
"cross-border" credits. The financial turmoil in Asia and Latin America, which
started in July 1997, affected many countries where Chase has had long-standing
commercial and investment banking relationships. The following table presents
Chase's cross-border exposure to Asian and Latin American countries. For a
further discussion of Chase's cross-border exposure, see pages 34-35 of Chase's
1997 Annual Report.
SEPTEMBER 30, 1998 (a) December 31, 1997
-------------------------------------------------------------- --------
LENDING- FOREIGN TOTAL Total
RELATED EXCHANGE & RESALE CROSS-BORDER Cross-Border
(in billions) AND OTHER (b) DERIVATIVES (c) AGREEMENTS (d) EXPOSURE Exposure
--------- --------- --------- --------- --------
ASIA
Japan $ 3.8 $ 1.9 $ 0.1 $ 5.8 $ 9.6
Australia 2.3 1.1 -- 3.4 5.0
Korea 2.0 0.5 -- 2.5 5.4
Hong Kong 2.0 0.3 -- 2.3 3.6
Indonesia 1.2 0.2 -- 1.4 2.6
Thailand 1.2 0.2 -- 1.4 2.1
Singapore 1.1 0.3 -- 1.4 1.8
Philippines 0.7 -- -- 0.7 1.1
Malaysia 0.5 0.1 -- 0.6 1.1
China 0.6 0.2 -- 0.8 0.8
Taiwan 0.7 -- -- 0.7 0.8
All Other Asia 0.4 -- 0.1 0.5 0.1
--------- --------- --------- --------- --------
Total Asia $ 16.5 $ 4.8 $ 0.2 $ 21.5 $ 34.0
========= ========= ========= ========= ========
LATIN AMERICA
Brazil $ 2.8 $ 0.1 $ 0.9 $ 3.8 $ 4.9
Argentina 2.3 0.1 0.5 2.9 3.3
Mexico 1.5 0.6 0.5 2.6 3.0
Chile 1.1 -- -- 1.1 1.6
Colombia 0.9 -- -- 0.9 0.8
Venezuela 0.4 -- 0.1 0.5 1.0
All Other Latin America (e) 0.8 0.2 -- 1.0 1.5
--------- --------- --------- --------- --------
Total Latin America $ 9.8 $ 1.0 $ 2.0 $ 12.8 $ 16.1
========= ========= ========= ========= ========
(a) Cross-border disclosure is based on Chase's credit-risk management
policies in assessing Chase's cross-border risk.
(b) Includes loans and accrued interest, interest-bearing deposits with banks,
trading debt and equity instruments, acceptances, other monetary assets,
issued letters of credit, undrawn commitments to extend credit and local
currency assets, net of local currency liabilities.
(c) Foreign exchange largely represents the mark-to-market exposure of spot
and forward contracts. Derivatives largely represent the mark-to-market
exposure of risk management instruments. Mark-to-market exposure is a
measure, at a point in time, of the value of a foreign exchange or
derivative contract in the open market. The impact of legally enforceable
master netting agreements on these foreign exchange and derivative
contracts reduced exposure by $16.7 billion at September 30, 1998 and
$12.7 billion at December 31, 1997.
(d) Approximately $1.2 billion of the aggregate exposure represents resale
agreements with investment grade counterparties from G-7 (Group of 7)
countries. G-7 countries are the United States, United Kingdom, Germany,
Japan, Italy, France, and Canada.
(e) Excludes Bermuda and Cayman Islands.
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In addition, at September 30, 1998, Chase had approximately $200 million in the
aggregate of lending and foreign exchange/derivative related exposure to Russia,
a decline of over $250 million from August 31, 1998. Chase also had
approximately $450 million in resale agreements collateralized by non-ruble
denominated Russian debt at September 30, 1998.
ALLOWANCE FOR CREDIT LOSSES
The following discussion of Chase's allowance for credit losses focuses
primarily on developments since December 31, 1997 and should be read in
conjunction with pages 36-37 and Note Five of Chase's 1997 Annual Report.
The accompanying tables reflect: the activity in and composition of Chase's
allowance for credit losses; and certain coverage ratios related to the
allowance for credit losses on loans, and on derivative and foreign exchange
contracts for the periods indicated.
Third Quarter Nine Months
------------------------ ------------------------
(in millions, except ratios) 1998 1997 1998 1997
-------- -------- -------- --------
Aggregate Allowance at Beginning of Period $ 3,874 $ 3,691 $ 3,869 $ 3,694
Provision for Credit Losses 455 190 1,137 599
Charge-Offs (574) (277) (1,430) (808)
Recoveries 119 87 293 209
-------- -------- -------- --------
Net Charge-Offs (455) (190) (1,137) (599)
Other, Primarily Allowance Related to
Purchased Portfolios -- 16 5 13
-------- -------- -------- --------
Aggregate Allowance at End of Period $ 3,874 (a) $ 3,707 $ 3,874 (a) $ 3,707
======== ======== ======== ========
SEPTEMBER 30, September 30,
1998 1997
-------- --------
Composition of Allowance for Credit Losses:
Loans $ 3,554 $ 3,462
Derivative and Foreign Exchange Contracts 150 (b) 75
Lending-Related Commitments 170 170
-------- --------
Aggregate Allowance $ 3,874 $ 3,707
======== ========
Allowance for Credit Losses on Loans to:
Nonperforming Loans 257% 372%
Loans at Period-End 2.13 2.12
Average Loans (Nine months) 2.11 2.21
Aggregate Allowance for Credit Losses on Loans and
Derivative and Foreign Exchange Contracts to:
Nonperforming Credit-Related Assets 264% 380%
Credit-Related Assets at Period-End 1.85 1.80
Average Credit-Related Assets (Nine months) 1.81 1.85
(a) The increase in the aggregate allowance from the September 30, 1997 level
is due in large part to the acquisition of the Bank of New York credit
card portfolio in late 1997.
(b) During the third quarter of 1998, the allowance for credit losses on
derivatives and foreign exchange contracts was increased by $75 million
through the provision for credit losses, in response to the adverse market
conditions in Asia and Russia. The total provision for credit losses
relating to trading activities was $183 million for the third quarter of
1998.
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The allowance for credit losses provides for risks of losses inherent in the
credit extension process for loans, derivative and foreign exchange financial
instruments and lending-related commitments. Chase deems its allowance for
credit losses at September 30, 1998 to be adequate (i.e., sufficient to absorb
losses that may currently exist for all credit activities, but are not yet
identifiable). Estimating potential future losses is inherently uncertain and
depends on many factors, including general macroeconomic and political
conditions, rating migration, structural changes within industries which alter
competitive positions, event risk, unexpected correlations within the portfolio,
and other external factors such as legal and regulatory requirements. Chase
periodically reviews such factors and reassesses the adequacy of the allowance
for credit losses.
MARKET RISK MANAGEMENT
The following discussion of Chase's market risk management focuses primarily on
developments since December 31, 1997 and should be read in conjunction with
pages 37-41 and Notes One and Eighteen of Chase's 1997 Annual Report.
Chase uses both historic simulation and Monte Carlo statistical techniques to
estimate a daily value-at-risk ("VAR"). The VAR calculation is performed for all
material trading portfolios and market risk-related ALM portfolios, with results
reported by business unit and in the aggregate. The total VAR for Chase's
trading portfolio and market risk-related ALM portfolio as of or for the
twelve-month period ended September 30, 1998 were as follows:
Marked-to-Market Trading Portfolio Market Risk-Related ALM Activities
---------------------------------------------- ---------------------------------------------
Twelve-Month Period Twelve-Month Period
Ended September 30, 1998 Ended September 30, 1998
-------------------------------- At ---------------------------------- At
Sept 30, Sept 30,
Average Minimum Maximum 1998 Average Minimum Maximum 1998
(in millions) VAR VAR VAR VAR VAR VAR VAR VAR
-------- -------- -------- -------- -------- -------- -------- --------
Interest Rate VAR $ 24.4 $ 15.1 $ 51.4 $ 22.0 $ 48.6 $ 37.3 $ 67.3 $ 59.1
Foreign Exchange VAR 9.3 3.1 21.6 5.6 -- -- -- --
Commodities VAR 3.3 1.1 4.9 3.5 -- -- -- --
Equities VAR 4.0 1.9 11.4 4.2 -- -- -- --
Less:
Portfolio Diversification (13.7) NM NM (10.6) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total VAR $ 27.3 $ 15.6 $ 51.5 $ 24.7 $ 48.6 $ 37.3 $ 67.3 $ 59.1
======== ======== ======== ======== ======== ======== ======== ========
Twelve-Month Period At
Ended September 30, 1998 September 30, 1998
Average VAR VAR
--------- ---------
Marked-to-Market Trading Portfolio $ 27.3 $ 24.7
Market Risk-Related ALM Activities 48.6 59.1
Less: Portfolio Diversification (21.9) (33.3)
--------- ---------
Aggregate VAR $ 54.0 $ 50.5
========= =========
NM: Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect.
Chase's average aggregate VAR (VAR for both trading and ALM activities) for the
twelve-month period ended September 30, 1998 was $54.0 million. Chase's
aggregate VAR at September 30, 1998 was $50.5 million. Chase's aggregate average
and period-end VARs are less than the sum of the respective trading and ALM VARs
shown in the above table (by $21.9 million and $33.3 million, respectively) due
to risk offsets, resulting from portfolio diversification which occurs across
the trading and ALM portfolios.
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Both for regulatory compliance with the Basle Committee on Banking Supervision
market risk capital rules and for internal evaluation of VAR, Chase conducts
daily backtesting of its VAR against trading revenues. For mark-to-market
activities, there were two days in the third quarter of 1998 in which a daily
trading loss exceeded that day's VAR.
Management believes stress tests are an essential complement to VAR. At Chase,
stress tests are an integral part of an effective risk management process, and
have assumed an equal standing to VAR as a risk measurement and control
technique for market risk. As of September 30, 1998, Chase's corporate monthly
stress tests consist of five historical and three hypothetical scenarios for all
material trading portfolios and market risk-related ALM portfolios. Since
December 31, 1997, stress test results have been incorporated into Chase's
internal capital allocation methodology, which provides a significant incentive
for active management of aggregate exposures to difficult market environments.
TRADING ACTIVITIES
The following chart contains a histogram of Chase's daily market risk-related
revenue, which is defined as the daily change in value of marked-to-market
trading portfolios plus any trading-related net interest income.
[Graphic of Daily Changes in Market Risk-Related Trading Revenue - See
Appendix 1]
Based on actual trading results for the twelve months ended September 30, 1998,
Chase posted positive daily market risk-related revenue for 210 out of 259
business trading days, with 48 business days exceeding positive $20 million over
the past twelve months. Chase incurred ten daily trading losses in excess of
negative $20 million over the past twelve months. Five of these ten days of
losses occurred in late August and September 1998 and resulted from the adverse
market conditions which occurred in the third quarter.
ASSET/LIABILITY MANAGEMENT
Measuring Interest Rate Sensitivity: Chase, as part of its ALM process, employs
a variety of cash (primarily securities) and derivatives instruments in managing
its exposure to fluctuations in market interest rates. In managing exposure,
Chase uses quantifications of net gap exposure and measurements of earnings at
risk (the risk to earnings from adverse movements in interest rates) based on
earnings simulations. An example of aggregate net gap analysis is presented
below.
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CONDENSED INTEREST-RATE SENSITIVITY TABLE
(in millions) 1-3 4-6 7-12 1-5 OVER
AT SEPTEMBER 30, 1998 MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
--------- --------- --------- --------- --------- -------
Balance Sheet $ (26,151) $ 1,235 $ 4,113 $ 36,099 $ (15,296) $ --
Derivative Instruments Affecting
Interest-Rate Sensitivity (589) (378) (2,723) (3,342) 7,032 --
Interest-Rate Sensitivity Gap (26,740) 857 1,390 32,757 (8,264) --
Cumulative Interest-Rate
Sensitivity Gap (26,740) (25,883) (24,493) 8,264 -- --
% of Total Assets (8)% (7)% (7)% 2% -- --
At September 30, 1998, Chase had $24.5 billion more liabilities than assets
repricing within one year (including the net repricing effects of derivative
positions) or 7% of total assets. This compares with $17.8 billion more
liabilities than assets repricing within one year, or 5% of total assets, at
December 31, 1997. This negative gap (more liabilities repricing than assets)
will benefit earnings in a declining interest rate environment and will detract
from earnings in a rising interest rate environment.
At September 30, 1998, based on Chase's simulation model and applying immediate
increases in various market interest rates (100 bp increase for US
dollar-denominated positions and a range from 100 bp to 1500 bp increases for
non-US dollar-denominated positions), earnings at risk over the next twelve
months are estimated to be approximately 3.1% of projected 1998 after-tax income
(before restructuring costs). Chase's earnings at risk to an immediate rise in
interest rates was estimated to be approximately 3.5% of after-tax net income at
December 31, 1997. The hypothetical rate shocks are used to calibrate risk that
Chase believes to be reasonably possible of occurring in the near-term, but
these scenarios do not necessarily represent management's current view of future
market developments.
Impact of ALM Derivative Activity:
The following table reflects the deferred gains/losses on closed derivative
contracts and unrecognized gains/losses on open derivative contracts utilized in
Chase's ALM activities at September 30, 1998 and December 31, 1997.
SEPTEMBER 30, December 31,
(in millions) 1998 1997 Change
--------- -------- --------
ALM Derivative Contracts:
Net Deferred Gains (Losses) $ 189 $ -- $ 189
Net Unrecognized Gains (Losses) (a) 453 (392) 845
--------- -------- --------
Net ALM Derivative Gains (Losses) $ 642 $ (392) $ 1,034
========= ======== ========
(a) These net unrecognized gains/(losses) do not include the net
unfavorable/(favorable) impact from the assets/liabilities being hedged by
these derivative contracts.
CAPITAL AND LIQUIDITY RISK MANAGEMENT
The following capital and liquidity discussion should be read in conjunction
with the Capital and Liquidity Risk Management section on pages 41-43 and Note
Seventeen of Chase's 1997 Annual Report.
CAPITAL
Chase's capital levels at September 30, 1998 remained well in excess of
regulatory guidelines. At September 30, 1998, Tier 1 and Total Capital ratios
were 8.3% and 12.1%, respectively, and the Tier 1 leverage ratio was 6.6%. At
September 30, 1998, the total capitalization of Chase (the sum of Tier 1 and
Tier 2 Capital) was $34.4 billion, an increase of $1.1 billion from December 31,
1997. This increase for the first nine months of 1998 reflects retained earnings
(net income less common and preferred dividends) generated during the period,
plus the issuance of $448 million (net of discount) of capital securities issued
by certain Chase subsidiaries (see Note Six of this Form 10-Q) and the issuance
of $200 million of fixed/adjustable rate noncumulative preferred stock. The
increase was partially offset by the redemption during the same period of $912
million of preferred stock bearing higher dividend rates.
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In the first quarter of 1998, Chase raised the cash dividend on its Common Stock
to $.36 per share from $.31 per share. Chase has over the past several years
been paying a common stock dividend that has generally been equal to
approximately 25% to 35% of Chase's operating net income, less the amount of
preferred stock dividends. Chase's future dividend policies will be determined
by its Board of Directors taking into consideration Chase's earnings and
financial condition and applicable governmental regulation and policies.
From inception of a stock buyback program authorized by Chase's Board of
Directors in October 1996 through September 30, 1998, Chase repurchased 82.5
million shares of its Common Stock ($4.2 billion) and reissued from treasury
approximately 46.6 million shares of its Common Stock ($2.1 billion) under its
benefit plans, resulting in a net repurchase of 35.9 million shares ($2.1
billion).
Management is committed to maintaining a disciplined capital policy for Chase.
That policy is intended to increase SVA, to employ capital to support growth,
including through acquisitions or other investment opportunities, and to return
excess capital to stockholders. During the third quarter of 1998, Chase's Tier 1
capital ratio rose to 8.3%. During the same period, Chase repurchased net 7.4
million shares (net $351 million) of common stock under its buyback program.
Management intends to continue Chase's disciplined approach to asset growth and
maintain Chase's Tier 1 capital ratio within its target range of 8% - 8.25%.
Capital generated in excess of this target ratio will be used for continued
purchases of Chase's common stock or for future reinvestment and acquisition
opportunities, including previously announced acquisitions that will close in
the fourth quarter.
LIQUIDITY
Chase manages its liquidity in order to ensure the availability of sufficient
cash flows to meet all of Chase's financial commitments and to capitalize on
opportunities for Chase's business expansion. Chase is an active participant in
the capital markets and issues commercial paper, medium-term notes, long-term
debt, and common and preferred stock. During the first nine months of 1998,
Chase issued $200 million of preferred stock and redeemed $912 million of
higher-coupon preferred stock, and issued $448 million (net of discount) of
capital securities through its subsidiaries. During the same period, Chase
issued $2.1 billion of long-term debt, offsetting $644 million of long-term debt
that matured and $663 million that was redeemed. During the third quarter of
1998, $140 million of 10.5% cumulative preferred stock was redeemed, $248
million (net of discount) of capital securities were issued through its
subsidiaries, and $75 million of long-term debt was issued (during the same
period $78 million of long-term debt matured and $235 million was redeemed).
Chase constantly evaluates the opportunities to redeem its outstanding debt and
preferred stock and to issue new debt and preferred stock in light of current
market conditions.
OPERATING RISK MANAGEMENT
YEAR 2000 AND EMU: For a discussion of Chase's Year 2000 and the EMU efforts,
see pages 28-29 of Chase's 1997 Annual Report. The information below updates
Chase's Year 2000 and EMU disclosures:
YEAR 2000
Overview: Chase recognized the need to create a coordinated approach to managing
the Year 2000 problem in mid-1995, when it established an enterprise-wide
program to provide strong, comprehensive management of the issue. A Year 2000
Enterprise Program Office, together with 34 business area project offices,
coordinates, manages and monitors all aspects of the Year 2000 effort on a
global basis, both technical- and business-related. The Program Office reports
directly to the Executive Committee of Chase and is responsible for Chase's Year
2000 efforts. In addition, a Year 2000 Core Team, consisting of senior managers
from internal audit, technology risk and control, financial management, the
technology infrastructure division, legal and the Year 2000 Enterprise Program
Office, provides independent oversight of the process. The Core Team, which also
reports directly to the Executive Committee of Chase, is charged with
identifying key risks and ensuring necessary management attention for timely
resolution of project issues. The Core Team reviews progress on a monthly basis
and conducts formal quarterly reviews of all project offices.
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Chase's Year 2000 Program initially focused on technology assessment and
planning, and the upgrading of internal systems; as these milestones were
reached, the Program has shifted towards mitigating external sources of business
risk, internal and external testing and contingency planning.
Current Status: Chase's Year 2000 Program is tracked against a well-defined set
of milestones. During its inventory and assessment phases, which were completed
on schedule on September 30, 1997, Chase identified hardware and software that
required modification, developed implementation plans, prioritized tasks and
established implementation time frames. The scope of Chase's Year 2000 Program
involves (i) approximately 180,000 technical infrastructure components (e.g. LAN
servers and data center equipment) ("TICs"); (ii) approximately 3,900 business
software applications (of which approximately 1,000 are provided by third-party
vendors) ("Software Applications"); (iii) 1,400 locations worldwide, at which up
to 21 building systems at each location are being assessed ("Facility Systems");
and (iv) over 77,000 desktops ("Desktop Systems").
During the second quarter of 1998, Chase reached a major Program milestone: Year
2000 compliance of its technical infrastructure and systems software. This
milestone was met with 97% of Chase's identified TICs being made Year 2000
compliant. At September 30, 1998, approximately 61% of Chase's Software
Applications had been remediated (from approximately 32% at June 30);
approximately 85% of Chase's Facility Systems had been remediated (from
approximately 80% at June 30, 1998) and approximately 53% of Chase's Desktop
Systems (excluding non-critical data files) had been remediated (from
approximately 37% at June 30).
By December 31, 1998, Chase expects that substantially all of its Software
Applications will have been remediated, including Software Applications required
to be remediated by third-party vendors. The majority of internal testing of
these Software Applications systems will have been completed as well. Completion
of these milestones by year-end exceeds the milestones established by Chase's
banking regulators.
In addition, Chase has set June 30, 1999 as its target date for completion of
all remediation and testing of all its TICs, Software Applications, Facility
Systems and Desktop Systems (including non-critical data files).
As systems remediation and internal testing is completed, increased focus is
being directed to external testing. During the third quarter of 1998, Chase
participated in tests with eight external agencies, including tests sponsored by
the Depository Trust Company, the Federal Reserve Bank of New York, the New York
Clearing House Association, the Hong Kong Clearing House and the Singapore
Interbank GIRO. Over a dozen additional external tests have been scheduled with
a range of world-wide organizations, including among others, Cedel; Euroclear;
and S.W.I.F.T. Chase expects to continue to participate in testing organized by
major industry and governmental infrastructure organizations as they are
scheduled during the remainder of 1998 and 1999. Testing with third parties is
critical, since a failure of a major external interface could have a material
adverse effect on the operations of Chase.
In addition to its technology-related efforts, Chase has made significant
progress on its major customer and business-partner due diligence. By September
30, 1998, Chase had completed the evaluation of its major credit customers,
assessed their Year 2000 efforts and incorporated any Year 2000 customer risks
into its credit risk analysis processes. Chase is also in the process of
evaluating any potential Year 2000 impact upon its funding capability in order
to incorporate any such risks into its capital and liquidity planning, and is
completing evaluation of its sub-custodian and international correspondent
networks for Year 2000 readiness. Chase's outside service providers have been
identified and prioritized, based upon how critical their function is to Chase,
and contact has been made with critical third party service providers to
determine their Year 2000 readiness. The results of Chase's ongoing assessments
and monitoring will be incorporated into its risk management processes over the
remainder of 1998 and 1999. This planning includes determining the extent to
which any contingency plans will need to be executed.
Costs: At December 31, 1997, Chase estimated the cost to remediate its Year 2000
issues at approximately $300 million. This included costs incurred during 1997
as well as costs expected to be incurred during 1998 and 1999. As a result of
several recent acquisitions, an anticipated need to increase the level of
testing in 1999 and strategic business decisions to accelerate systems upgrades,
Chase is revising, as of September 30, 1998, its estimate of costs to remediate
its Year 2000 issues for the 1997-1999 period to approximately $363 million. At
September 30, 1998, Chase estimates that its full year 1998 Year 2000 costs will
be approximately $186 million. In addition, Chase currently estimates that full
year 1999 Year 2000 costs will be approximately $127 million. These costs
include the costs of remediation, testing, third party assessment, and
contingency planning, and will be expensed as incurred, but do not include
approximately $33 million of capitalizable costs for Year 2000-compliant
equipment that will be depreciated beyond December 31, 1999.
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Risk Management and Contingency Planning: In its normal course of business,
Chases manages many types of risk. Chase recognizes that the risks presented by
Year 2000 are unique given the pervasive nature of the problem and the fact that
there may be a higher likelihood that Year 2000 risk may present itself in
multiple, simultaneous impacts. Because of this, Chase has adjusted and will
continue to adjust its risk management processes and contingency plans to take
the most probable anticipated Year 2000 effects into account. Although it is too
early to predict accurately what "fails" may occur, Chase believes sufficient
planning, communication, coordination and testing will mitigate potential
material disruption. In this regard, Chase has begun its "event planning" for
the Year 2000. In addition to the internal and external testing, and the credit,
operational and liquidity assessments and planning discussed above, Chase's Year
2000 "event planning" includes creation of command centers; establishment of
special rapid response technology teams; scheduling availability of key
personnel; additional training, testing and simulation activities; and
establishment of rapid decision processes.
Chase's expectations about completion of its Year 2000 remediation and testing
efforts, the anticipated costs to complete the project and anticipated business,
operational and financial risks to Chase are subject to a number of
uncertainties. Chase's estimates as to the cost to prepare for the Year 2000 are
based on numerous assumptions regarding future events including, among others,
expectations regarding third party modification plans and the nature and amount
of testing that may be required as well as continued availability of trained
personnel. For example, if Chase is affected by the inability of vendors,
service providers, customers or securities exchanges to successfully implement
their Year 2000 plans and continue operations, if Chase is unsuccessful in
identifying or fixing all Year 2000 problems in its critical operations, or if
Chase is unable to retain the staff or third party consultants necessary to
implement its Year 2000 plans at currently projected costs and timetables,
Chase's operations or financial results could be materially impacted. The
disclosure contained in this 10-Q as well as the information previously filed by
Chase regarding its Year 2000 readiness during the period January 1, 1996 to
October 19, 1998 are designated as Year 2000 readiness disclosure related to the
Year 2000 Information and Readiness Disclosure Act.
EMU
As a worldwide provider of foreign exchange, custody, cash management and funds
transfer services, and because Chase has an extensive international branch and
subsidiary network, Chase has also been actively preparing for the introduction
of the "euro" on January 1, 1999. At that time, the exchange rates of the
currencies of those countries participating in the European Economic and
Monetary Union will be fixed; the euro will become a currency in its own right;
and, although currencies of participating countries will continue to exist for a
three year transition period, they will do so only as fixed denominations of the
euro. Chase anticipates rapid acceptance of the new currency, particularly by
the financial markets and large, wholesale customers. As a result, Chase intends
to conduct all risk management and internal accounting entirely in euros from
the January 1, 1999 introduction date, while still retaining the flexibility to
service clients who continue to transact business in national currency units. In
addition, Chase has established Chase Frankfurt as its electronic hub for all
euro payments in order to promote centralized payment flow and information
reporting. Chase believes this strategy offers the best means to manage the
complexity of the conversion and mitigate associated operating risks.
A dedicated EMU project team has been in place since November 1, 1996 to ensure
that necessary modifications to Chase's products, technology, business
operations and customer service functions will be complete by January 1, 1999. A
detailed timeline was established and risk assessment reviews are made regularly
to track progress against the timeline. Remediation of all critical operating
systems has been completed, and Chase has begun testing of impacted systems
worldwide. Two "dress rehearsals" have been completed and a third will be
completed during November 1998. As a result of these first two dress rehearsals,
Chase believes that it will be able to pursue its businesses without material
interruption or alteration after the implementation weekend on January 1, 1999.
In addition, as part of its preparations, Chase has been working closely with
its customers, counterparties, agent banks and regulatory agencies to mitigate
the payment and settlement risks resulting from the euro's introduction. This
includes the testing of interfaces with clients and establishing and testing
electronic links with national and pan-European clearing and payment systems.
Chase has also been actively developing contingency plans to deal with any
liquidity issues that may result if changes in payment, clearing, or settlement
procedures result in an increase in misrouted funds. Chase estimates that the
costs to remediate its systems to prepare for the introduction of the euro will
approximate $60 million to $75 million in 1998. These costs will be expensed as
they are incurred.
For a further discussion of Chase's management of its operating risk, see page
41 of Chase's 1997 Annual Report.
-36-
37
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 1-5 of Chase's 1997 Annual Report.
DIVIDENDS
Chase's bank subsidiaries could, without the approval of their relevant banking
regulators, pay dividends to their respective bank holding companies in amounts
up to the limitations imposed upon such banks by regulatory restrictions. These
dividend limitations, in the aggregate, totaled approximately $2.7 billion at
September 30, 1998.
ACCOUNTING DEVELOPMENTS
DERIVATIVES
In June 1998, the FASB issued SFAS 133, which establishes accounting and
reporting standards for all derivative instruments, including certain derivative
instruments embedded in other financial instruments (collectively referred to as
derivatives), and for hedging activities. SFAS 133 requires that an entity
measure all derivatives at fair value and recognize those derivatives as either
assets or liabilities in the balance sheet. The change in a derivative's fair
value is generally recognized in current period earnings. However, if certain
conditions are met, a derivative may be specifically designated as a hedge of an
exposure to changes in fair value, variability of cash flows, or certain foreign
currency exposures. Based on the hedge designation, special hedge accounting
rules allow the derivative's change in value to be recognized either in current
period earnings together with the offsetting change in value of the risk being
hedged, or, to the extent the hedge is effective, in comprehensive income and
subsequently reclassified into earnings when the hedged item affects earnings.
SFAS 133 is effective for all fiscal years beginning after June 15, 1999, with
early adoption permitted. Chase already recognizes the derivatives used in its
trading activities on its balance sheet at fair value with changes in the fair
values of such derivatives included in earnings. This represents the substantial
majority of the derivatives utilized by Chase. With respect to those other
derivatives used as hedges of its assets, liabilities and commitments, Chase is
assessing the impact of the adoption of SFAS 133 on its hedging activities and
its effect on its financial condition and operating performance.
MORTGAGE-BACKED SECURITIES
In October 1998, the FASB issued SFAS 134, which becomes effective for financial
statements beginning in the first quarter of 1999, with early adoption
encouraged. Chase is adopting SFAS 134 in the fourth quarter of 1998. SFAS 134
further amends SFAS 65 to require that after the securitization of mortgage
loans held for sale, an entity engaged in mortgage banking activities, such as
Chase, classify the resulting mortgage-backed securities, or other retained
interests, based on its ability and intent to sell or hold those investments.
Chase believes that the adoption of SFAS 134 will not have a material effect on
its earnings, liquidity or capital resources.
OTHER EVENTS
On May 7, 1998, Chase and Morgan Stanley Dean Witter & Co. ("Morgan Stanley")
reached a definitive agreement under which Chase will acquire the global custody
business of Morgan Stanley, which has more than $400 billion of assets under
custody. The acquisition was completed in the 1998 fourth quarter. The clients
and staff joining Chase will be integrated into Chase Global Investor Services,
which is part of Chase's Global Services business.
-37-
38
THE CHASE MANHATTAN CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
THREE MONTHS ENDED Three Months Ended
SEPTEMBER 30, 1998 September 30, 1997
--------------------------------------- ---------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
---------- ------- ---------- ---------- -------- ----------
ASSETS
Deposits with Banks $ 5,312 $ 150 11.15% $ 5,424 $ 149 10.88%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 30,270 517 6.77% 39,862 623 6.20%
Trading Assets-Debt and Equity
Instruments 28,271 604 8.47% 38,045 732 7.63%
Securities:
Available-for-Sale 54,721 845 6.12%(b) 41,691 670 6.37%(b)
Held-to-Maturity 2,176 34 6.26% 3,348 55 6.52%
Loans 166,134 3,288 7.86% 161,247 3,296 8.11%
---------- ------- ---------- --------
Total Interest-Earning Assets 286,884 5,438 7.52% 289,617 5,525 7.57%
Allowance for Credit Losses on Loans (3,573) (3,394)
Cash and Due from Banks 13,743 14,206
Risk Management Instruments 36,295 33,983
Other Assets 29,516 25,902
---------- ----------
Total Assets $ 362,865 $ 360,314
========== ==========
LIABILITIES
Domestic Retail Deposits $ 59,671 586 3.89% $ 57,300 583 4.03%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 15,986 (52)(d) (1.27)% 11,963 190 6.31%
Deposits in Foreign Offices 75,130 990 5.23% 69,828 941 5.35%
---------- ------- ---------- --------
Total Time and Savings
Deposits 150,787 1,524 4.01% 139,091 1,714 4.89%
---------- ------- ---------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 55,819 818 5.81% 66,308 871 5.21%
Commercial Paper 4,286 56 5.24% 4,445 60 5.39%
Other Borrowings (c) 14,509 504 13.78% 22,940 520 8.98%
---------- ------- ---------- --------
Total Short-Term and
Other Borrowings 74,614 1,378 7.33% 93,693 1,451 6.14%
Long-Term Debt 16,362 324 7.87% 14,552 284 7.75%
---------- ------- ---------- --------
Total Interest-Bearing Liabilities 241,763 3,226 5.29% 247,336 3,449 5.53%
---------- ------- ---------- --------
Noninterest-Bearing Deposits 45,684 41,935
Risk Management Instruments 37,797 35,730
Other Liabilities 14,224 13,763
---------- ----------
Total Liabilities 339,468 338,764
---------- ----------
PREFERRED STOCK OF SUBSIDIARY 550 550
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,166 1,977
Common Stockholders' Equity 21,681 19,023
---------- ----------
Total Stockholders' Equity 22,847 21,000
---------- ----------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 362,865 $ 360,314
========== ==========
INTEREST RATE SPREAD 2.23% 2.04%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 2,212(a) 3.06%(d) $ 2,076(a) 2.84%
======= ==== ======== ====
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the three months ended September 30, 1998 and September 30, 1997, the
annualized rate for available-for-sale securities based on historical cost
was 6.19% and 6.37%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
(d) Includes $191 million pre-tax income for prior years' tax refunds.
Excluding this amount, the net yield on interest-earning assets would be
2.81% for the 1998 third quarter.
-38-
39
THE CHASE MANHATTAN CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
NINE MONTHS ENDED Nine months Ended
SEPTEMBER 30, 1998 September 30, 1997
--------------------------------------- -----------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
---------- ------- ---------- ---------- -------- ----------
ASSETS
Deposits with Banks $ 4,705 $ 450 12.78% $ 5,033 $ 369 9.80%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 34,493 1,742 6.75% 39,574 1,879 6.35%
Trading Assets-Debt and Equity
Instruments 31,989 1,996 8.34% 35,221 2,063 7.83%
Securities:
Available-for-Sale 54,003 2,548 6.31%(b) 40,793 2,013 6.60%(b)
Held-to-Maturity 2,508 120 6.40% 3,536 177 6.69%
Loans 168,128 10,012 7.96% 156,942 9,535 8.12%
---------- ------- ---------- --------
Total Interest-Earning Assets 295,826 16,868 7.62% 281,099 16,036 7.63%
Allowance for Credit Losses on Loans (3,560) (3,427)
Cash and Due from Banks 14,273 13,209
Risk Management Instruments 36,264 34,205
Other Assets 28,646 24,483
---------- ----------
Total Assets $ 371,449 $ 349,569
========== ==========
LIABILITIES
Domestic Retail Deposits $ 59,389 1,754 3.95% $ 57,440 1,641 3.82%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 16,071 314(d) 2.62% 9,992 493 6.60%
Deposits in Foreign Offices 75,780 3,055 5.39% 67,900 2,663 5.24%
---------- ------- ---------- --------
Total Time and Savings
Deposits 151,240 5,123 4.53% 135,332 4,797 4.74%
---------- ------- ---------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 63,592 2,651 5.57% 64,001 2,580 5.39%
Commercial Paper 4,330 170 5.26% 4,258 170 5.34%
Other Borrowings (c) 16,188 1,544 12.75% 20,789 1,513 9.73%
---------- ------- ---------- --------
Total Short-Term and
Other Borrowings 84,110 4,365 6.94% 89,048 4,263 6.40%
Long-Term Debt 16,190 954 7.88% 14,040 814 7.75%
---------- ------- ---------- --------
Total Interest-Bearing Liabilities 251,540 10,442 5.55% 238,420 9,874 5.54%
---------- ------- ---------- --------
Noninterest-Bearing Deposits 45,340 41,302
Risk Management Instruments 37,297 34,756
Other Liabilities 14,358 13,587
---------- ----------
Total Liabilities 348,535 328,065
---------- ----------
PREFERRED STOCK OF SUBSIDIARY 550 550
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,365 2,371
Common Stockholders' Equity 20,999 18,583
---------- ----------
Total Stockholders' Equity 22,364 20,954
---------- ----------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 371,449 $ 349,569
========== ==========
INTEREST RATE SPREAD 2.07% 2.09%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 6,426(a) 2.90%(d) $ 6,162(a) 2.93%
======= ==== ======== ====
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the nine months ended September 30, 1998 and September 30, 1997, the
annualized rate for available-for-sale securities based on historical cost
was 6.35% and 6.65%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
(d) Includes $191 million pre-tax income for prior years' tax refunds.
Excluding this amount, the net yield on interest-earning assets would be
2.82% for the 1998 first nine months.
-39-
40
THE CHASE MANHATTAN CORPORATION
QUARTERLY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
1998 1997
------------------------------------- ------------------------------------------------
THIRD Second First Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter Quarter Quarter
---------- ---------- --------- --------- --------- --------- ---------
INTEREST INCOME
Loans $ 3,287 $ 3,316 $ 3,405 $ 3,392 $ 3,294 $ 3,106 $ 3,129
Securities 874 889 889 851 720 735 722
Trading Assets 604 716 676 707 732 705 626
Federal Funds Sold and Securities
Purchased Under Resale Agreements 517 554 671 728 623 697 559
Deposits with Banks 150 148 152 156 149 114 106
---------- ---------- --------- --------- --------- --------- ---------
Total Interest Income 5,432 5,623 5,793 5,834 5,518 5,357 5,142
---------- ---------- --------- --------- --------- --------- ---------
INTEREST EXPENSE
Deposits 1,524 1,784 1,815 1,764 1,714 1,568 1,515
Short-Term and Other Borrowings 1,378 1,478 1,509 1,640 1,451 1,510 1,302
Long-Term Debt 324 325 305 320 284 273 257
---------- ---------- --------- --------- --------- --------- ---------
Total Interest Expense 3,226 3,587 3,629 3,724 3,449 3,351 3,074
---------- ---------- --------- --------- --------- --------- ---------
NET INTEREST INCOME 2,206 2,036 2,164 2,110 2,069 2,006 2,068
Provision for Credit Losses 455 338 344 205 190 189 220
---------- ---------- --------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,751 1,698 1,820 1,905 1,879 1,817 1,848
---------- ---------- --------- --------- --------- --------- ---------
NONINTEREST REVENUE
Investment Banking Fees 322 438 361 369 308 283 176
Trust, Custody and Investment
Management Fees 398 383 348 338 338 321 310
Credit Card Revenue 381 365 300 322 281 224 261
Fees for Other Financial Services 522 509 510 517 505 487 474
Trading Revenue 114 333 480 (78) 505 491 405
Securities Gains 261 98 83 123 58 30 101
Revenue from Equity-Related Investments 60 370 293 226 249 192 164
Other Revenue 137 233 96 163 102 119 191
---------- ---------- --------- --------- --------- --------- ---------
Total Noninterest Revenue 2,195 2,729 2,471 1,980 2,346 2,147 2,082
---------- ---------- --------- --------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries 1,205 1,270 1,254 1,072 1,292 1,110 1,124
Employee Benefits 221 215 224 192 206 219 222
Occupancy Expense 198 191 189 193 194 193 187
Equipment Expense 219 212 209 217 192 193 190
Restructuring Costs -- 8 521 20 71 71 30
Other Expense 804 826 744 802 712 698 694
---------- ---------- --------- --------- --------- --------- ---------
Total Noninterest Expense 2,647 2,722 3,141 2,496 2,667 2,484 2,447
---------- ---------- --------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 1,299 1,705 1,150 1,389 1,558 1,480 1,483
Income Tax Expense 462 631 425 515 576 555 556
---------- ---------- --------- --------- --------- --------- ---------
NET INCOME $ 837 $ 1,074 $ 725 $ 874 $ 982 $ 925 $ 927
========== ========== ========= ========= ========= ========= =========
NET INCOME APPLICABLE TO
COMMON STOCK $ 815 $ 1,050 $ 691 $ 839 $ 941 $ 874 $ 872
========== ========== ========= ========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 0.96 $ 1.24 $ 0.82 $ 1.00 $ 1.11 $ 1.03 $ 1.01
========== ========== ========= ========= ========= ========= =========
Diluted $ 0.94 $ 1.20 $ 0.80 $ 0.97 $ 1.08 $ 1.00 $ 0.99
========== ========== ========= ========= ========= ========= =========
-40-
41
GLOSSARY OF TERMS
The page numbers included after each definition represent the pages in the 10-Q
where the term is primarily used.
1997 Annual Report: Annual Report on Form 10-K for the year ended December 31,
1997. (Pages 8-11, 13-14, 22, 26, 28-30, 31, 33-34, 36, 42, 45)
AICPA: "American Institute of Certified Public Accountants." (Page 7)
Asset/Liability Management ("ALM"): The management and control of the
sensitivity of Chase's income to changes in market interest rates and other
market risks. (Page 32)
Derivative and Foreign Exchange ("FX") Instruments: Interest rate swaps, forward
rate agreements, futures, forwards, options, equity, commodity and other
contracts used for asset/liability management or trading purposes. The
instruments represent contracts with counterparties where payments are made to
or from the counterparty based upon specific interest rates, currency levels,
other market rates, or on terms predetermined by the contract. (Pages 11, 28)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding restructuring costs,
foreclosed property expense, special items and costs associated with the REIT).
(Pages 12, 24)
FASB: Financial Accounting Standards Board. (Page 37)
Managed Credit Card Receivables or Managed Basis: Consistent with industry
practice, Chase uses this terminology to define its credit card receivables on
the balance sheet plus securitized credit card receivables. (Page 27)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Page 20)
Operating Basis or Operating Earnings: Reported results excluding the impact of
credit card securitizations, restructuring costs and special items. (Pages 12,
19)
Operating Net Income: Reported net income excluding restructuring costs and
special items. (Pages 12-13)
REIT: A real estate investment trust subsidiary of Chase. (Page 24)
SFAS: Statement of Financial Accounting Standards.
SFAS 65: "Accounting for Certain Mortgage Banking Activities." (Page 37)
SFAS 107: "Disclosures About Fair Value of Financial Instruments." (Page 10)
SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities."
(Pages 7-8, 10)
SFAS 130: "Reporting Comprehensive Income." (Page 7)
SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Page
37)
SFAS 134: "Accounting for Mortgage-Backed Securities Retained after the
securitization of Mortgaged Loans Held for Sale by a Mortgage Banking
Enterprise." (Page 37)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
amortization of goodwill and certain intangibles (i.e., cash operating earnings)
less an explicit charge for allocated capital. (Pages 12, 14)
Special Items: Special items in the third quarter and first nine months of 1998
included $191 million in pre-tax interest income ($123 million after tax),
resulting from prior years' tax refunds, and a $37 million pre-tax charge ($24
million after tax) for the accelerated vesting of stock-based awards. Special
items for the 1997 third quarter included an $85 million pre-tax charge ($54
million after-tax) for the accelerated vesting of stock-based awards. Special
items for the 1997 first nine months included a $44 million pre-tax gain ($28
million after-tax) from the sale of a partially owned foreign investment and
$135 million pre-tax charge ($85 million after-tax) for accelerated vesting of
stock-based incentive awards. (Pages 13, 19)
Statement of Position ("SOP") 98-1: "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." (Page 7)
Value-at-Risk ("VAR"): The potential overnight loss from adverse market
movements. (Page 31)
-41-
42
APPENDIX 1
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
GRAPHIC
NUMBER PAGE DESCRIPTION
1 32 Bar Graph entitled "Histogram of Daily Changes in Market
Risk-Related Trading Revenue for the twelve months ended
September 30, 1998" presenting the following information:
Millions of Dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30
------------------- ----- ------ ------- ------- ------- -------
Number of trading
days revenue was
within the above
prescribed positive
range 37 45 45 35 19 12
30 - 35 Over - 35
------- ---------
7 10
Millions of Dollars 0-(5) (5)-(10) (10)-(15) (15)-(20) (20)-(25)
------------------- ----- ------ ------- ------- -------
Number of trading
days revenue was
within the above
prescribed negative
range 15 12 8 4 1
(25)-(30) Over-(30)
------- -------
5 4
43
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of Legal Proceedings, see Chase's 1997 Annual
Report on page 6.
Item 2. Sales of Unregistered Common Stock
During the third quarter of 1998, shares of common stock of Chase
were issued in transactions exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof, as follows:
On July 6, 1998, 312 shares of common stock were issued to retired
directors who had deferred receipt of such common stock pursuant to
the Deferred Compensation Plan for Non-Employee Directors.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
11 - Computation of net income per share.
12(a) - Computation of ratio of earnings to fixed charges.
12(b) - Computation of ratio of earnings to fixed charges and
preferred stock dividend requirements.
27 - Financial Data Schedule
(B) Reports on Form 8-K:
Chase filed five reports on Form 8-K during the quarter ended
September 30, 1998, as follows:
Form 8-K dated July 21, 1998: Chase announced the results of
operations for the second quarter of 1998.
Form 8-K dated September 2, 1998: Chase announced the impact of
global markets events.
Form 8-K dated September 8, 1998: Chase filed certain financial
information relating to cross-border exposure to Latin American
countries.
Form 8-K dated September 10, 1998: Chase disclosed percent of
cross-border exposure by instrument relating to its Current Report
on Form 8-K filed on September 8, 1998.
Form 8-K dated September 29, 1998: Chase disclosed an increase in
value of its liquid investments held by global markets, and that its
available-for-sale portfolio is managed as part of its overall risk
management.
-42-
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
---------------------------------------
(Registrant)
Date November 16, 1998 By /s/ Joseph L. Sclafani
------------------- ------------------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-43-
45
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
- ----------- -------- ---------------------
11 Computation of net income 45
per share
12(a) Computation of ratio of 46
earnings to fixed charges
12(b) Computation of ratio of 47
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 48
-44-
1
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION
COMPUTATION OF NET INCOME PER SHARE
Net income for basic and diluted EPS is computed by subtracting from the
applicable earnings the dividend requirements on preferred stock to arrive at
earnings applicable to common stock. Basic EPS is computed by dividing net
income available to common shares outstanding by the weighted-average number of
common shares outstanding for the period. Diluted EPS is computed using the same
method as basic EPS, but reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For a further discussion of Chase's earnings per share
computation, see Note Ten of Chase's 1997 Annual Report.
(in millions, except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
EARNINGS PER SHARE 1998 1997 1998 1997
--------- --------- --------- ---------
BASIC
Earnings:
Net Income $ 837 $ 982 $ 2,636 $ 2,834
Less: Preferred Stock Dividend Requirements 22 41 80 147
--------- --------- --------- ---------
Net Income Applicable to Common Stock $ 815 $ 941 $ 2,556 $ 2,687
========= ========= ========= =========
Shares:
Weighted-Average Basic Shares Outstanding 848.3 844.8 847.4 851.4
Basic Earnings Per Share:
Net Income $ 0.96 $ 1.11 $ 3.02 $ 3.15
========= ========= ========= =========
DILUTED
Earnings:
Net Income Applicable to Common Stock $ 815 $ 941 $ 2,556 $ 2,687
Shares:
Weighted-Average Basic Shares Outstanding 848.3 844.8 847.4 851.4
Additional Shares Issuable Upon Exercise of Stock Options
for Dilutive Effect 22.8 24.6 23.8 33.0
--------- --------- --------- ---------
Weighted-Average Diluted Shares Outstanding 871.1 869.4 871.2 884.4
Diluted Earnings Per Share:
Net Income $ 0.94 $ 1.08 $ 2.93 $ 3.04
========= ========= ========= =========
-45-
1
EXHIBIT 12(A)
THE CHASE MANHATTAN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIOS)
Nine Months Ended
September 30, 1998
----------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 4,154
----------
Fixed charges:
Interest expense 5,319
One third of rents, net of income from subleases (a) 84
----------
Total fixed charges 5,403
----------
Less: Equity in undistributed income of affiliates (13)
----------
Earnings before taxes and fixed charges, excluding capitalized interest $ 9,544
==========
Fixed charges, as above $ 5,403
==========
Ratio of earnings to fixed charges 1.77
==========
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 5,403
Add: Interest on deposits 5,123
----------
Total fixed charges and interest on deposits $ 10,526
==========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 9,544
Add: Interest on deposits 5,123
----------
Total earnings before taxes, fixed charges, and interest on deposits $ 14,667
==========
Ratio of earnings to fixed charges 1.39
==========
(a) The proportion deemed representative of the interest factor.
-46-
1
EXHIBIT 12(B)
THE CHASE MANHATTAN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(IN MILLIONS, EXCEPT RATIOS)
Nine Months Ended
September 30, 1998
----------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 4,154
----------
Fixed charges:
Interest expense 5,319
One third of rents, net of income from subleases (a) 84
----------
Total fixed charges 5,403
----------
Less: Equity in undistributed income of affiliates (13)
----------
Earnings before taxes and fixed charges, excluding capitalized interest $ 9,544
==========
Fixed charges, as above $ 5,403
Preferred stock dividends 80
----------
Fixed charges including preferred stock dividends $ 5,483
==========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.74
==========
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends, as above $ 5,483
Add: Interest on deposits 5,123
----------
Total fixed charges including preferred stock
dividends and interest on deposits $ 10,606
==========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 9,544
Add: Interest on deposits 5,123
----------
Total earnings before taxes, fixed charges, and interest on deposits $ 14,667
==========
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.38
==========
(a) The proportion deemed representative of the interest factor.
-47-
9
0000019617
THE CHASE MANHATTAN CORPORATION
1,000,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
14,585
3,877
23,591
61,804
55,441
2,024
2,047
166,572
3,554
356,450
200,319
55,156
59,461
14,216
0
1,028
882
21,308
356,450
10,008
2,652
2,192
16,848
5,123
10,442
6,406
1,137
442
8,510
4,154
2,636
0
0
2,636
3.02
2.93
2.90
1,383
479
0
0
3,869
1,430
293
3,874
0
0
0
ON MAY 19, 1998, STOCKHOLDERS OF CHASE APPROVED A 2 FOR 1 COMMON STOCK SPLIT,
EFFECTIVE JUNE 15, 1998.
AGGREGATE ALLOWANCE FOR CREDIT LOSSES ON LOANS, DERIVATIVE AND FOREIGN EXCHANGE
CONTRACTS, AND LENDING RELATED COMMITMENTS.
