1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF THE REPORT: APRIL 16, 1996 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 (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
270 PARK AVENUE, NEW YORK, NEW YORK 10017-2070
- --------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 270-6000
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Items 5. Other Events.
On March 31, 1996, The Chase Manhattan Corporation ("Chase") merged
with and into Chemical Banking Corporation (the "Merger"), with Chemical Banking
Corporation ("Chemical") continuing as the surviving corporation under the name
"The Chase Manhattan Corporation". (Chemical, as the surviving corporation of
the Merger, and as so renamed, is hereinafter referred to as the "Corporation".)
The Corporation issued a press release reporting its earnings results
for the first quarter of 1996 on April 16, 1996 (the "Press Release"). A copy of
the Press Release is filed as an exhibit hereto.
On April 17, 1996, the Corporation mailed its 1995 Annual Report to
holders of record of its common stock as of April 8, 1996 in connection with its
solicitation of proxies for the Corporation's annual meeting of stockholders to
be held on May 21, 1996. The "Management's Discussion and Analysis" section of
the Annual Report ("MD&A"), together with the audited financial statements of
the Corporation and the notes thereto, and the report of Price Waterhouse LLP
thereon, are filed as an exhibit hereto. Also filed as an exhibit hereto is a
discussion of certain regulatory and supervisory matters relating to the
Corporation ("Regulatory Description").
Certain statements in the MD&A, the Regulatory Description and the
Press Release are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to risks
and uncertainties, and the Corporation's actual future results may differ
materially from those set forth in such forward-looking statements. Factors that
might cause the Corporation's future financial performance to vary include, but
are not limited to, those set forth in the MD&A and the Regulatory Description,
as well as the following:
1. The Merger. Because of the inherent uncertainties associated with
merging two large companies, there can be no assurance that the Corporation will
be able fully to realize the cost savings it currently expects to realize as a
result of the Merger or that such savings will be realized at the times
currently anticipated. Currently unforeseen changes in real estate markets or
personnel requirements, if they occur, could affect the timing and magnitude of
the anticipated savings. Further, the technology integration and systems
conversions to be undertaken in connection with the Merger include 67 major
suites of systems and over 1,500 underlying individual applications. Each suite
will be processing volumes at much higher levels than previously and operating
feeds to the selected suites have had to be adapted to conform to processing
requirements. Since these activities are highly complex and technologically
sophisticated, currently unanticipated problems, if they occur, could delay the
implementation timing or cost of the Merger more than currently anticipated.
3
2. Competition. The Corporation's revenue growth outlook for 1996 through
1998 assumes retention of major clients of Chase and Chemical with minimal
Merger-related revenue loss. However, the Corporation operates in a highly
competitive environment, which is expected to become increasingly competitive,
and there is no assurance that the current customers of Chemical and Chase will
continue to do the same level of business with the new Corporation following the
Merger.
The Corporation's bank subsidiaries compete with other domestic and
foreign banks, thrift institutions, credit unions, and money market and other
mutual funds for deposits and other sources of funds. In addition, the
Corporation and its bank and non-bank subsidiaries face increased competition
with respect to the diverse financial services and products they offer.
Competitors also include finance companies, brokerage firms, investment banking
companies, and a variety of other financial services and advisory companies.
Many of these competitors are not subject to the same regulatory restrictions as
are domestic bank holding companies and banks, such as the Corporation and its
bank subsidiaries.
The Corporation expects that competitive conditions will continue to
intensify as a result of technological advances. Technological advances have,
for example, made it possible for non- depository institutions to offer
customers automatic transfer systems and other automated payment systems
services that have been traditional banking products.
Competition is also expected to increase as a result of recently
enacted legislation permitting interstate banking. Legislation pending in
Congress, which would permit new types of affiliations between banks and
financial service companies, including securities firms, could, if enacted, also
have increased competitive effects (See, "Legislation and Pending Litigation"
below).
3. Foreign Operations. The Corporation does business throughout the world,
including in developing regions of the world commonly known as emerging markets.
The Corporation also invests in the securities of corporations located in such
emerging markets. The Corporation's businesses and revenues derived from
emerging markets securities are subject to risk of loss from unfavorable
political and diplomatic developments, currency fluctuations, social
instability, changes in governmental policies, expropriation, nationalization,
confiscation of assets and changes in legislation relating to foreign ownership.
In addition, foreign trading markets, particularly in emerging market countries
are often smaller, less liquid, and more volatile than the U.S. trading markets.
4. Government Monetary Policies and Economic Controls. The earnings and
business of the Corporation are affected by general economic conditions, both
domestic and international. In addition, fiscal or other policies that are
adopted by various regulatory authorities of the United States, by foreign
governments, and by international agencies can have important
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consequences for the financial performance of the Corporation. The Corporation
is particularly affected by the policies of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), which regulates the
national supply of bank credit. Among the instruments of monetary policy
available to the Federal Reserve Board are engaging in open-market operations in
United States Government securities; changing the discount rates of borrowings
of depository institutions; imposing or changing reserve requirements against
depository institutions' deposits and certain assets of foreign branches; and
imposing or changing reserve requirements against certain borrowings by banks
and their affiliates (including parent corporations such as the Corporation).
These methods are used in varying combinations to influence the overall growth
of bank loans, investments, and deposits, and the interest rates charged on
loans or paid for deposits.
The Corporation has economic, credit, legal, and other specialists who
monitor economic conditions, and domestic and foreign government policies and
actions. However, since it is difficult to predict changes in macroeconomic
conditions and in governmental policies and actions relating thereto, it is
difficult to foresee the effects of any such changes on the business and
earnings of the Corporation and its subsidiaries.
5. Legislation and Pending Litigation. Federal and state legislation
affecting the banking industry has played, and will continue to play, a
significant role in shaping the nature of the financial services industry. For
example, during 1994, legislation was enacted (the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994) that permitted, commencing
September 29, 1995, interstate banking (under certain conditions relating to
concentration of deposits) and will permit, commencing June 1, 1997 (subject to
enactment by any state of "opt-out" legislation), interstate branching by
consolidation across state lines, of banks under the common control of a bank
holding company. Furthermore, legislation is pending in Congress that would, if
enacted, substantially reform the regulatory structure under which U.S. bank
holding companies and other financial services institutions operate and could,
therefore, have important implications for the Corporation and other financial
services companies. Given the current status of these legislative efforts, it is
not possible for the Corporation to predict the extent to which the Corporation
and its subsidiaries may be affected by any of these initiatives.
There are also cases pending before Federal and state courts that seek
to expand or restrict interpretations of existing laws and their accompanying
regulations affecting the activities of bank holding companies and their
subsidiaries. For example, a number of lawsuits have been filed in several
states against credit card issuing banks (including the Corporation's credit
card- issuing bank) which allege that various fees and charges (such as late
fees, over-the-limit fees, returned check charges and annual membership fees)
that may be assessed against residents of such states by the credit card-issuing
bank located in another state are prohibited under such states' laws. At issue
is whether such states' laws prohibiting such fees and charges are pre- empted
by Federal law. The issue is currently pending before the United States Supreme
Court. Although the Corporation is not a party to the lawsuit pending before the
U.S. Supreme Court,
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a decision that is adverse to the credit card issuing bank in that case could
lead to the imposition of fines, penalties and refund requirements on other
credit card issuers, including the Corporation, and could have an adverse impact
on the Corporation's credit card operations. As another example, on March 26,
1996, the United States Supreme Court held that the Federal statute authorizing
national banks to sell insurance in small towns pre-empts a state statute
forbidding national banks from selling insurance in that state (Barnett Bank of
Marion County, N.A. v. Bill Nelson, Florida Insurance Commissioner, et. al. (S.
Ct. No. 94-1837). The Corporation believes this decision will enhance its
ability to expand its current insurance activities.
6. Business Conditions and General Economy. The Corporation has identified
its global markets, global services, investment banking, private banking and
national consumer business as businesses that it believes will be primarily
responsible for providing the anticipated revenue growth of the Corporation in
1996 and the years immediately beyond. However, there is no assurance that such
businesses will experience revenue growth at the rates currently anticipated.
The profitability of these businesses, as well as the Corporation's credit
quality, could be adversely affected by a worsening of general economic
conditions, particularly by a higher domestic interest rate environment, as well
as by foreign and domestic trading market conditions. An economic downturn or
significantly higher interest rates could increase the risk that a greater
number of the Corporation's customers would become delinquent on their loans or
other obligations to the Corporation, or would refrain from securing additional
debt. In addition, a higher level of domestic interest rates could affect the
amount of assets under management by the Corporation (for example, by affecting
the flows of moneys to or from the mutual funds managed by the Corporation),
impact the willingness of financial investors to participate in loan
syndications and underwritings managed by the Corporation's corporate finance
business, adversely impact the Corporation's loan and deposit spreads and affect
its domestic trading revenues. Revenues from foreign trading markets may also be
subject to negative fluctuations as a result of the impact of unfavorable
political and diplomatic developments, social instability and changes in the
policies of central banks or foreign governments, and the impact of these
fluctuations could be accentuated by the volatility and lack of relative
liquidity in some of these foreign trading markets.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
The following exhibits are filed with this Report:
Exhibit Number Description
- -------------- -----------
99.1 Press Release dated April 16, 1996
99.2 Management's Discussion and Analysis and audited
financial statements from the 1995 Annual Report of
the Corporation
99.3 Supervision and Regulation of The Chase Manhattan
Corporation
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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)
Dated: April 17, 1996 By /s/ John B. Wynne
-------------------------------
John B. Wynne
Secretary
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
99.1 Press Release dated April 16, 1996
99.2 Management's Discussion and Analysis and audited
financial statements from the 1995 Annual Report of
the Corporation
99.3 Supervision and Regulation of The Chase Manhattan
Corporation
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EXHIBIT 99.1
[CHASE LOGO]
THE CHASE MANHATTAN CORPORATION
270 Park Avenue
New York, NY 10017-2070
NEWS RELEASE
Investor Contact: John Borden Press Contacts: Kathleen Baum
212-270-7318 212-270-5089
John Stefans
For Immediate Release 212-270-7438
Tuesday, April 16, 1996
CHASE NET INCOME UP 44 PERCENT TO $937 MILLION BEFORE MERGER-RELATED CHARGE
New York, April 16, 1996 -- The Chase Manhattan Corporation today reported
first quarter 1996 net income of $937 million, before a previously-announced
restructuring charge, a 44 percent increase from first quarter 1995 results of
$650 million. Primary earnings per share in the first quarter of 1996 were
$1.98, before the charge, compared with $1.37 in the same 1995 period. Fully
diluted earnings per share in the first quarter of 1996 were $1.97, before the
charge, compared with $1.36 in the first quarter of 1995.
Including the merger-related charge of $1.65 billion (approximately $1
billion after tax), the corporation reported a net loss of $89 million in the
first quarter of 1996.
"Strong revenue growth, coupled with continued success in managing expenses,
got the new Chase off to an excellent start," said Walter V. Shipley, chairman
and chief executive officer. "The solid, balanced performance of our global
banking, regional banking and nationwide consumer franchises put the company
firmly on track to achieve the performance targets we announced for 1996."
The corporation's return on average common stockholders' equity, excluding
the restructuring charge, was 19.5 percent, compared with 14.6 percent in the
prior year first quarter. The efficiency ratio stood at 60 percent, compared
with 67 percent in the first quarter of 1995.
(More)
________________________________________________________________________________
NOTE: On March 31, 1996, The Chase Manhattan Corporation merged with and into
Chemical Banking Corporation. Upon consummation of the merger, Chemical changed
its name to The Chase Manhattan Corporation. The merger was accounted for as a
pooling-of-interests and, accordingly, the information included in this release
reports the combined results of Chase and Chemical as though the merger has been
in effect for all periods presented.
2
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SPECIAL ITEMS
As announced last month, the corporation recognized a number of special
items in the first quarter of 1996, including a charge of $102 million against
the corporation's allowance for credit losses, as a result of conforming
charge-off policies with respect to credit card receivables; a loss of $60
million ($37 million after tax) on the sale of a building in Japan; a charge of
$40 million ($25 million after tax) related to conforming pension liabilities;
and aggregate tax benefits and refunds of $132 million.
REVENUES
Total reported revenue in the quarter rose 13 percent to $4,035 million,
from $3,584 million in the first quarter of 1995. On an operating basis,
excluding one-time items in the first quarters of 1996 and 1995, revenue rose 15
percent.
Net interest income was $2,166 million, compared with $2,027 million in the
first quarter of 1995. The increase reflected $54 million of interest on tax
refunds recognized in the quarter and a higher level of interest-earning assets,
offset by the effect of higher credit card securitizations. Average
interest-earning assets were $254.7 billion, compared with $237.9 billion in the
prior year quarter. The net yield on average interest-earning assets was 3.43
percent, compared with 3.48 percent.
Noninterest revenue was $1,869 million, compared with $1,557 million.
Corporate finance and syndication fees were $224 million, a $55 million increase
from the first quarter of 1995, reflecting a higher level of investment banking
activity, including loan syndications and new issues of high yield bonds. Trust
and investment management fees in the first quarter of 1996 were $285 million,
compared with $240 million in the prior-year quarter, due primarily to higher
global services activity, reflecting, in part, the acquisition of the securities
processing businesses of U.S. Trust in the third quarter of 1995. Fees related
to credit cards were $233 million, up from $182 million, the result of an
increase in both securitization volume and active accounts.
Noninterest revenues from trading activities were $339 million, compared
with $99 million in the first quarter of 1995, when trading results were
adversely affected by major declines in the prices of emerging markets debt
instruments. Total revenues from trading were $487 million, including net
interest income of $148 million, as compared with total revenues from trading of
$183 million, including $84 million of net interest income in the first quarter
of 1995.
Other noninterest revenue included equity-related investments of $223
million, up from $181 million, benefiting from a broad-based portfolio of
investments in an active acquisition market. Also included were the previously
mentioned $60 million loss on the sale of a building in Japan, and a $35 million
charge related to the sale of emerging markets securities. In the 1995 first
quarter, other noninterest revenue included an $85 million gain from the sale of
the corporation's interest in Far East Bank and Trust.
(More)
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EXPENSES
Excluding the previously mentioned $40 million charge associated with
conforming pension liabilities, operating expenses were $2,406 million, up 2
percent from $2,360 million in 1995, driven primarily by costs related to
stronger revenues, including higher incentive costs.
The provision for losses in the first quarter of 1996 was $245 million,
compared with $185 million in the first quarter of 1995. Net charge-offs were
$347 million, compared with $207 million. The 1996 amount reflects the one-time
charge related to conforming credit card policies, as well as an increased
charge-off ratio and higher outstandings.
The corporation recognized income tax benefits of $214 million in the first
quarter of 1996, compared with income tax expense of $414 million in the first
quarter of 1995. The 1996 amount includes tax benefits related to the
restructuring charge, as well as aggregate tax benefits and refunds of $132
million. The corporation's operating tax rate was 38 percent in the current
first quarter and 39 percent in 1995 first quarter.
OTHER FINANCIAL DATA
At March 31, 1996, the allowance for credit losses was $3,683 million,
compared with $3,874 million on the same date a year ago.
Nonperforming assets at March 31, 1996, were $1,686 million, compared with
$1,664 million on December 31, 1995, and $2,057 million on March 31, 1995.
Nonperforming loans were $1,537 million, compared with $1,493 million on
December 31, 1995, and $1,902 million on March 31, 1995. Assets acquired as loan
satisfactions were $149 million on March 31, 1996, $171 million on December 31,
1995, and $155 million on March 31, 1995.
Total assets at March 31, 1996, were $302 billion, compared with $306
billion on the same date a year ago. Total loans at March 31, 1996, were $149
billion, compared with $145 billion at March 31, 1995. At end of the first
quarter of 1996, total deposits stood at $169 billion; that figure was $164
billion on March 31, 1995.
The return on average assets for the first quarter of 1996 was 1.20 percent,
before the restructuring charge, compared with .87 percent for the first 1995
quarter.
At March 31, 1996, the estimated Tier I risk-based capital ratio was 7.7
percent, compared with 8.0 percent at March 31, 1995. The estimated Total
risk-based capital ratio at March 31, 1996, was 11.7 percent, compared with 12.1
percent at March 31, 1995.
# # #
4
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(in millions, except per share and ratio data)
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
EARNINGS:
Income Before Restructuring Charge $ 937 $ 650
Restructuring Charge (after-tax) (1,026) --
------- -------
Income (Loss) After Restructuring Charge and Before
Effect of Accounting Change $ (89) $ 650
Effect of Change in Accounting Principle -- (11)(a)
------- -------
Net Income (Loss) $ (89) $ 639
======= =======
Net Income (Loss) Applicable to Common Stock $ (143) $ 578
======= =======
INCOME (LOSS) PER COMMON SHARE:
Primary:
Income Before Restructuring Charge $ 1.98 $ 1.37
Restructuring Charge (2.30) --
------- -------
Income (Loss) After Restructuring Charge and Before
Effect of Accounting Change $ (0.32) $ 1.37
Effect of Change in Accounting Principle -- (0.03)(a)
------- -------
Net Income (Loss) $ (0.32) $ 1.34
======= ==========
Assuming Full Dilution:
Income Before Restructuring Charge $ 1.97 $ 1.36
Restructuring Charge (2.29) --
------- -------
Income (Loss) After Restructuring Charge and Before
Effect of Accounting Change $ (0.32) $ 1.36
Effect of Change in Accounting Principle -- (0.03)(a)
------- -------
Net Income (Loss) $ (0.32) $ 1.33
======= ==========
Book Value at March 31, $ 39.41 $ 38.22
Market Value at March 31, $ 70.50 $ 37.75
Common Stock Dividends Declared (b) $ 0.56 $ 0.44
COMMON SHARES OUTSTANDING:
Average Common and Common Equivalent Shares 446.1 430.5
Average Common Shares Assuming Full Dilution 449.1 439.5
Common Shares at Period End 434.3 425.4
PERFORMANCE RATIOS: (AVERAGE BALANCES) (c)
Income Before Restructuring Charge:
Return on Assets 1.20% 0.87%
Return on Common Stockholders' Equity 19.53% 14.64%
Return on Total Stockholders' Equity 18.09% 13.74%
Net Income (Loss):
Return on Assets N/M 0.87%
Return on Common Stockholders' Equity N/M 14.64%
Return on Total Stockholders' Equity N/M 13.74%
(a) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for
other postretirement benefits relating to its foreign plans.
(b) The Corporation increased its quarterly common stock dividend from $0.50 per
share to $0.56 per share in the first quarter of 1996.
(c) Performance ratios are based on annualized net income amounts.
N/M - As a result of the loss, these ratios are not meaningful.
5
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data)
Three Months Ended
----------------------------------------
March 31, Dec. 31, March 31,
1996 1995 1995
----------- ----------- -----------
INTEREST INCOME
Loans $3,241 $3,252 $3,069
Securities 720 718 618
Trading Assets 429 402 359
Federal Funds Sold and Securities Purchased Under Resale Agreements 501 491 468
Deposits with Banks 172 187 225
------ ------ ------
Total Interest Income 5,063 5,050 4,739
------ ------ ------
INTEREST EXPENSE
Deposits 1,644 1,602 1,500
Short-Term and Other Borrowings 1,026 1,139 978
Long-Term Debt 227 231 234
------ ------ ------
Total Interest Expense 2,897 2,972 2,712
------ ------ ------
NET INTEREST INCOME 2,166 2,078 2,027
Provision for Losses 245 186 185
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 1,921 1,892 1,842
------ ------ ------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 224 220 169
Trust and Investment Management Fees 285 277 240
Credit Card Revenue 233 246 182
Service Charges on Deposit Accounts 99 101 104
Fees for Other Financial Services 378 363 367
Trading Revenue 339 274 99
Securities Gains (Losses) 52 25 (18)
Other Revenue 259 259 414
------ ------ ------
Total Noninterest Revenue 1,869 1,765 1,557
------ ------ ------
NONINTEREST EXPENSE
Salaries 1,076 1,130 997
Employee Benefits 305 206 234
Occupancy Expense 221 224 228
Equipment Expense 184 187 198
Foreclosed Property Expense (9) (15) (25)
Other Expense 660 632 703
------ ------ ------
Total Noninterest Expense Before Restructuring Charge 2,437 2,364 2,335
Restructuring Charge and Expenses 1,656 -- --
------ ------ ------
Total Noninterest Expense 4,093 2,364 2,335
------ ------ ------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
AND EFFECT OF ACCOUNTING CHANGE (303) 1,293 1,064
Income Tax Expense (Benefit) (214) 466 414
------ ------ ------
INCOME (LOSS) BEFORE EFFECT OF ACCOUNTING CHANGE (89) 827 650
Effect of Change in Accounting Principle -- -- (11)
------ ------ ------
NET INCOME (LOSS) $ (89) $ 827 $ 639
====== ====== ======
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (143) $ 773 $ 578
====== ====== ======
INCOME (LOSS) PER COMMON SHARE:
Primary:
Income (Loss) Before Effect of Accounting Change $(0.32) $ 1.73 $ 1.37
Effect of Change in Accounting Principle -- -- (0.03)
------ ------ ------
Net Income (Loss) $(0.32) $ 1.73 $ 1.34
------ ------ ------
Assuming Full Dilution:
Income (Loss) Before Effect of Accounting Change $(0.32) $ 1.73 $ 1.36
Effect of Change in Accounting Principle -- -- (0.03)
------ ------ ------
Net Income (Loss) $(0.32) $ 1.73 $ 1.33
====== ====== ======
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THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
NONINTEREST REVENUE DETAIL
(in millions)
THREE MONTHS ENDED
------------------------------------------
MARCH 31, DEC. 31, MARCH 31,
1996 1995 1995
----------- ----------- -----------
FEES FOR OTHER FINANCIAL SERVICES:
Commissions on Letters of Credit and Acceptances $ 89 $ 88 $ 91
Fees in Lieu of Compensating Balances 74 68 69
Mortgage Servicing Fees 50 53 54
Loan Commitment Fees 30 27 33
Other Fees 135 127 120
----- ----- -----
Total $ 378 $ 363 $ 367
===== ===== =====
TRADING REVENUE:
Interest Rate Contracts $ 111 $ 99 $ 54
Foreign Exchange Revenue 123 113 167
Debt Instruments and Other 105 62 (122)
----- ----- -----
Total $ 339 $ 274 $ 99
===== ===== =====
OTHER REVENUE:
Revenue from Equity-Related Investments $ 223 $ 131 $ 181
Net Gains (Losses) on Emerging Markets Securities Sales (35) 13 24
Gain on Sale of Investment in Far East Bank and Trust Company -- -- 85
Residential Mortgage Origination/Sales Activities 28 67 41
Loss on Sale of a Building in Japan (60) -- --
All Other Revenue 103 48 83
----- ----- -----
Total $ 259 $ 259 $ 414
===== ===== =====
_______________________________________________________________________________
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
NONINTEREST EXPENSE DETAIL
(IN MILLIONS)
THREE MONTHS ENDED
------------------------------------------
MARCH 31, DEC. 31, MARCH 31,
1996 1995 1995
----------- ----------- -----------
OTHER EXPENSE:
Professional Services $ 129 $ 152 $ 135
Marketing Expense 90 88 81
FDIC Assessments 1(a) 10(a) 57
Telecommunications 85 84 81
Amortization of Intangibles 43 43 47
All Other 312 255 302
----- ----- -----
Total $ 660 $ 632 $ 703
===== ===== =====
(a) Reflects the impact of a reduction in the FDIC assessment rate.
7
THE CHASE MANHATTAN CORPORATION and Subsidiaries
OPERATING FINANCIAL HIGHLIGHTS
(in millions, except per share and ratio data)
SUMMARY OF RESULTS FOR THE
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------
1996 1995
-------------------------------------- -----------------------------------
OPERATING SPECIAL AS OPERATING SPECIAL AS
EARNINGS ITEMS REPORTED EARNINGS ITEMS REPORTED
-------- ----- -------- -------- ----- --------
EARNINGS:
Net Interest Income $2,112 $ 54 (c) $2,166 $2,027 $ -- $ 2,027
Noninterest Revenue 1,929 (60)(d) 1,869 1,472 85(h) 1,557
------ ------- ------ ------ ----- -------
Total Operating Revenue 4,041 (6) 4,035 3,499 85 3,584
Operating Expense 2,406 40(e) 2,446 2,360 -- 2,360
Credit Costs (a) 236 -- 236 160 -- 160
------ ------- ------ ------ ----- -------
Income Before Restructuring Charge 1,399 (46) 1,353 979 85 1,064
Restructuring Charge -- 1,656(f) 1,656 -- -- --
------ ------- ------ ------ ----- -------
Income (Loss) After Restructuring Charge 1,399 (1,702) (303) 979 85 1,064
Tax Expense (Benefit) 532 (746)(g) (214) 380 34 414
------ ------- ------ ------ ----- -------
Net Income (Loss) Before Effect
of Accounting Change 867 (956) (89) 599 51 650
Effect of Change in Accounting Principle -- -- -- -- (11) (11)
------ ------- ------ ------ ----- -------
Net Income (Loss) $ 867 $ (956) $ (89) $ 599 $ 40 639
====== ======= ====== ====== ===== =======
INCOME (LOSS) PER COMMON SHARE:
Primary:
Income (Loss) Before Effect of Accounting Change $ 1.82 $(0.32) $ 1.25 $ 1.37
Effect of Change in Accounting Principle -- -- -- (0.03)
------ ------ ------ -------
Net Income (Loss) $ 1.82 $(0.32) 1.25 1.34
====== ====== ====== =======
Assuming Full Dilution:
Income (Loss) Before Effect of Accounting Change $ 1.81 $(0.32) 1.24 1.36
Effect of Change in Accounting Principle -- -- -- (0.03)
------ ------ ------ -------
Net Income (Loss) $ 1.81 $(0.32) 1.24 1.33
====== ====== ====== =======
PERFORMANCE RATIOS:
Return on Assets (b) 1.11% N/M 0.81% 0.87%
Return on Common Stockholders' Equity (b) 17.98% N/M 13.63% 14.64%
Return on Total Stockholders' Equity (b) 16.73% N/M 12.88% 13.74%
Efficiency Ratio 60% 61% 67% 66%
CAPITAL RATIOS AT MARCH 31:
Common Stockholders' Equity to Assets 6.0% 5.7% 5.3% 5.3%
Total Stockholders' Equity to Assets 6.9% 6.5% 6.2% 6.2%
Tier 1 Leverage 6.7% 6.4% 6.5% 6.5%
Risk-Based Capital:
Tier 1 (4.0% required) 8.1*% 7.7*% 8.0% 8.0%
Total (8.0% required) 12.2*% 11.7*% 12.1% 12.1%
(a) Credit Costs include the Provision for Losses and Foreclosed Property
Expense.
(b) Based on average balances and annualized net income amounts.
(c) Receipt of interest related to Federal and State tax audit settlements.
(d) Loss on sale of a building in Japan.
(e) Costs incurred in combining the Corporation's foreign retirement plans.
(f) In connection with the merger, a $1,650 million restructuring charge was
recorded on March 31, 1996. The remaining $6 million was incurred and
recognized under a recently issued accounting pronouncement.
(g) Includes tax benefits related to the restructuring charge as well as
aggregate tax benefits and refunds.
(h) Gain on the sale of investment in Far East Bank and Trust Company.
N/M - As a result of the loss, these ratios are not meaningful.
* Estimated
8
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
MARCH 31, MARCH 31,
1996 1995
--------- ---------
ASSETS
Cash and Due from Banks $ 10,846 $ 12,243
Deposits with Banks 6,257 9,239
Federal Funds Sold and Securities
Purchased Under Resale Agreements 19,292 22,391
Trading Assets:
Debt and Equity Instruments 24,804 18,047
Risk Management Instruments 23,641 43,380
Securities:
Available-for-Sale 38,646 24,302
Held-to-Maturity 4,398 10,485
Loans (Net of Unearned Income) 149,331 145,053
Allowance for Credit Losses (3,683) (3,874)
Premises and Equipment 3,801 3,965
Due from Customers on Acceptances 2,053 1,973
Accrued Interest Receivable 2,489 2,426
Other Assets 20,109 16,280
--------- ---------
TOTAL ASSETS $ 301,984 $ 305,910
========= =========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 28,518 $ 30,056
Interest-Bearing 68,085 66,879
Foreign:
Noninterest-Bearing 3,898 2,841
Interest-Bearing 68,433 63,942
--------- ---------
Total Deposits 168,934 163,718
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 37,369 34,850
Other Borrowed Funds 12,746 12,325
Acceptances Outstanding 2,060 1,979
Trading Liabilities 33,025 49,709
Accounts Payable, Accrued Expenses and Other Liabilities 15,106 11,212
Long-Term Debt 12,977 13,007
--------- ---------
TOTAL LIABILITIES 282,217 286,800
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,850
Common Stock 438 448
Capital Surplus 10,558 10,716
Retained Earnings 6,969 6,456
Net Unrealized Loss on Securities Available-for-Sale,
Net of Taxes (610) (510)
Treasury Stock, at Cost (238) (850)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 19,767 19,110
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 301,984 $ 305,910
========= =========
9
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(in millions)
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1995
-------- --------
PREFERRED STOCK:
Balance at Beginning of Year $ 2,650 $ 2,850
-- --
-------- --------
Balance at End of Period $ 2,650 $ 2,850
-------- --------
COMMON STOCK:
Balance at Beginning of Year $ 458 $ 447
Retirement of Treasury Stock (20)(a) --
Issuance of Common Stock -- 1
-------- --------
Balance at End of Period $ 438 $ 448
-------- --------
CAPITAL SURPLUS:
Balance at Beginning of Year $ 11,075 $ 10,671
Retirement of Treasury Stock (433)(a) --
Issuance of Common Stock (100) 44
Restricted Stock Granted, Net of Amortization 16 1
-------- --------
Balance at End of Period $ 10,558 $ 10,716
-------- --------
RETAINED EARNINGS:
Balance at Beginning of Year $ 7,997 $ 6,045
Net Income (89) 639
Retirement of Treasury Stock (557)(a) --
Cash Dividends Declared:
Preferred Stock (54) (61)
Common Stock (328) (177)
Accumulated Translation Adjustment -- 10
-------- --------
Balance at End of Period $ 6,969 $ 6,456
-------- --------
NET UNREALIZED LOSS ON SECURITIES
AVAILABLE-FOR-SALE:
Balance at Beginning of Year $ (237) $ (473)
Net Change in Fair Value of Securities
Available-for-Sale,
Net of Taxes (373) (37)
-------- --------
Balance at End of Period $ (610) $ (510)
-------- --------
COMMON STOCK IN TREASURY, AT COST:
Balance at Beginning of Year $ (1,107) $ (667)
Retirement of Treasury Stock 1,010(a) --
Purchase of Treasury Stock (708) (189)
Reissuance of Treasury Stock 567 6
-------- --------
Balance at End of Period $ (238) $ (850)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 19,767 $ 19,110
======== ========
(a) Reflects cancellation and retirement of all remaining shares of Chase common
stock held in Chase's Treasury.
10
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CREDIT RELATED INFORMATION
(in millions, except ratios)
LOANS OUTSTANDING NONPERFORMING ASSETS
------------------- --------------------
MARCH 31, MARCH 31,
1996 1995 1996 1995
-------- -------- ------ ------
Domestic Commercial:
Commercial Real Estate $ 6,514 $ 7,847 $ 442 $ 635
Other Commercial 38,101 36,659 476 524
-------- -------- ------ ------
Total Commercial Loans 44,615 44,506 918 1,159
-------- -------- ------ ------
Domestic Consumer:
Residential Mortgage 35,908 29,449 246 211
Credit Card 13,704 16,145 -- --
Other Consumer 19,449 18,695 37 45
-------- -------- ------ ------
Total Consumer Loans 69,061 64,289 283 256
-------- -------- ------ ------
Total Domestic Loans 113,676 108,795 1,201 1,415
Foreign 35,655 36,258 336 487
-------- -------- ------ ------
Total Loans $149,331 $145,053 1,537 1,902
======== ========
Assets Acquired as Loan Satisfactions 149 155
------ ------
Total Nonperforming Assets $1,686 $2,057
====== ======
ASSETS HELD FOR ACCELERATED DISPOSITION $ 212 $ 402
====== ======
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
----- -----
Net Charge-Offs:
Domestic Commercial:
Commercial Real Estate $ 4 $ 1
Other Commercial (48) (18)
----- -----
Total Commercial (44) (17)
----- -----
Domestic Consumer:
Residential (8) (12)
Credit Card (165) (158)
Other Consumer (37) (31)
----- -----
Total Consumer (210) (201)
----- -----
Total Domestic Net Charge-offs (254) (218)
Foreign 9 11
----- -----
Subtotal Net Charge-offs (245) (207)
Charge Related to Conforming Credit Card Charge-off Policies (102)
----- -----
Total Net Charge-offs $(347) $(207)
===== =====
AS OF OR FOR THE THREE MONTHS ENDED MARCH 31,
----------------------
1996 1995
------- -------
MANAGED CREDIT CARD PORTFOLIO:
Average Managed Credit Card Receivables $23,183 $19,276
Past Due 90 Days & Over and Accruing $ 495 $ 439
As a Percentage of Average Credit Card Receivables 2.15% 2.28%
Net Charge-offs $ 270(a) $ 189(a)
As a Percentage of Average Credit Card Receivables 4.66% 3.92%
(a) Includes $105 million and $31 million, respectively, of net charge-offs
related to securitized credit card receivables.
11
THE CHASE MANHATTAN CORPORATION and Subsidiaries
Condensed Average Consolidated Balance Sheet, Interest and Rates
(Taxable-Equivalent Interest and Rates; in millions)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
------------------------------------ ---------------------------------
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (ANNUALIZED) BALANCE INTEREST (ANNUALIZED)
-------- -------- ------------ -------- -------- ------------
ASSETS
Liquid Interest-Earning Assets $ 62,321 $ 1,102 7.11% $ 62,077 $1,052 6.87%
Securities 42,706 725 6.83% 34,620 626 7.34%
Loans 149,634 3,241 8.71% 141,168 3,075 8.83%
-------- -------- -------- ------
Total Interest-Earning Assets 254,661 5,068 8.01% 237,865 4,753 8.10%
Total Noninterest-Earning Assets 58,264 61,433
-------- --------
Total Assets $312,925 $299,298
======== ========
LIABILITIES
Total Interest-Bearing Deposits $134,873 1,644 4.90% $132,798 1,500 4.58%
Total Short-Term and Other Borrowings 66,742 1,026 6.20% 59,728 978 6.64%
Long-Term Debt 12,976 227 7.05% 13,054 234 7.28%
-------- -------- -------- ------
Total Interest-Bearing Liabilities 214,591 2,897 5.43% 205,580 2,712 5.35%
Total Noninterest-Bearing Liabilities 77,496 -------- 74,857 ------
-------- --------
Total Liabilities 292,087 280,437
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,850
Common Stockholders' Equity 18,188 16,011
-------- --------
Total Stockholders' Equity 20,838 18,861
-------- --------
Total Liabilities and Stockholders' Equity $312,925 $299,298
======== ========
INTEREST RATE SPREAD 2.58% 2.75%
==== ====
NET INTEREST INCOME AND NET YIELD
ON INTEREST-EARNING ASSETS $ 2,171 3.43% $2,041 3.48%
======== ==== ====== ====
1
EXHIBIT 99.2
INDEX TO EXHIBIT 99.2
Management's Discussion and Analysis:
- Summary of Selected Financial Data 21
- Overview 22
- Performance Targets 22
- Results of Operations 23
- Pro Forma Lines of Business Results 28
- Credit Risk Management 31
- Market Risk Management 40
- Operating Risk Management 45
- Capital and Liquidity Risk Management 45
- Accounting Developments 47
- Comparison Between 1994 and 1993 48
Management's Report on Responsibility for Financial Reporting 50
Report of Independent Accountants 50
Consolidated Financial Statements 51
Notes to Consolidated Financial Statements 55
Supplemental Schedules:
Quarterly Financial Information 82
Average Consolidated Balance Sheets, Interest and Rates 83
Chemical Bank and Chase Manhattan Bank, N.A.
Consolidated Balance Sheets 84
20
2
The Chase Manhattan Corporation
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Summary of Selected Financial Data
(in millions, except per share and ratio data)
As of or for the year ended December 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net Interest Income $ 8,202 $ 8,312 $ 8,291 $ 8,117 $ 7,380
Provision for Losses 758 1,050 2,254 2,585 2,430
Provision for Loans Held for Accelerated Disposition -- -- 566 -- --
Noninterest Revenue 6,758 6,701 7,181 5,420 5,074
Noninterest Expense 9,390 10,002 9,828 8,801 9,097
Income Before Income Tax Expense and Effect of
Accounting Changes 4,812 3,961 2,824 2,151 927
Income Tax Expense 1,842 1,475 798 428 257
Income Before Effect of Accounting Changes 2,970 2,486 2,026 1,723 670
Net Effect of Changes in Accounting Principles(a) (11) -- 368 -- --
Net Income $ 2,959 $ 2,486 $ 2,394 $ 1,723 $ 670
- --------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income Before Effect of Accounting Changes-Primary $ 6.23 $ 5.02 $ 4.00 $ 3.65 $ 1.35
Income Before Effect of Accounting Changes-Fully-Diluted 6.07 4.97 3.96 3.61 1.34
Net Income Per Share-Primary 6.20 5.02 4.85 3.65 1.35
Net Income Per Share-Fully-Diluted 6.04 4.97 4.79 3.61 1.34
Book Value at December 31, 41.81 37.37 36.10 31.84 30.36
Market Value at December 31, 58.75 35.88 40.13 38.63 21.25
Cash Dividends Declared(b) 1.94 1.64 1.37 1.20 1.05
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA(c)
Net Income $ 2,899 $ 2,589 $ 2,266 $ 1,564 $ 1,111
Net Income Per Common Share-Primary 6.06 5.26 4.55 3.25 2.71
Net Income Per Common Share-Fully-Diluted 5.91 5.20 4.51 3.22 2.68
Return on Average Common Stockholders' Equity 15.80% 14.51% 13.73% 10.58% 8.74%
- --------------------------------------------------------------------------------------------------------------------
TOTAL AT YEAR-END
Loans $150,207 $142,231 $137,117 $144,568 $152,022
Total Assets 303,989(d) 285,383(d) 251,948 235,502 237,115
Deposits 171,534 166,462 169,786 161,397 164,467
Long-Term Debt 12,825 13,061 13,833 13,711 12,350
Total Stockholders' Equity 20,836 18,873 19,101 16,353 12,598
- --------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on Average Total Assets .96%(d) .87%(d) .97% .72% .28%
Return on Average Common Stockholders' Equity 16.15 13.86 14.62 11.88 4.35
Return on Average Total Stockholders' Equity 15.06 13.06 13.44 11.29 5.32
Common Dividend Payout 29 30 26 33 96
Efficiency Ratio(e) 63 64 60 62 66
- --------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Tier 1 Leverage(f) 6.68% 6.63% 7.35% 6.79% 5.01%
Tier 1 Risk-Based Capital Ratio(f) 8.22 8.05 8.06 7.01 5.14
Total Risk-Based Capital Ratio(f) 12.27 12.23 12.35 11.22 9.25
- --------------------------------------------------------------------------------------------------------------------
(a) On January 1, 1995, The Chase Manhattan Corporation (the "Corporation")
adopted Statement of Financial Accounting Standards No. 106, "Employer's
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") for the
accounting for other postretirement benefits relating to the Corporation's
foreign plans. On January 1, 1993, the Corporation adopted SFAS 106 for its
domestic plans, which resulted in a pre-tax charge of $685 million, and
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109") which resulted in an income tax benefit of $1053 million.
(b) The 1991 amount excludes cash dividends of $.29 per share of Class B Common
Stock. The Class B Common Stock was converted into the Corporation's Common
Stock in the first quarter of 1992. (c) The pro forma section presents the
earnings on a fully-taxed basis and excludes the impact of changes in accounting
principles, restructuring charges, charges related to assets held for
accelerated disposition and gains on the sales of such assets, gains on emerging
markets past-due interest bond sales and foreclosed property expense. (d) On
January 1, 1994, the Corporation adopted Financial Accounting Standards Board
("FASB") Interpretation No. 39 ("FASI 39"). Excluding the gross-up impact of
FASI 39, the return on average assets for 1995 and 1994 was 1.07% and 0.95%,
respectively. (e) Excluding the items discussed in (c) above. (f) Risk-based
capital and leverage ratios exclude the assets and off-balance sheet financial
instruments of the Corporation's securities subsidiaries, as well as the
Corporation's investment in these subsidiaries.
21
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
On March 31, 1996, The Chase Manhattan Corporation ("Chase") merged with and
into Chemical Banking Corporation ("Chemical"). Upon consummation of the merger,
Chemical changed its name to "The Chase Manhattan Corporation" (the
"Corporation"). The merger was accounted for as a pooling of interests and,
accordingly, the information included in this annual report of the Corporation
presents the combined results of Chase and Chemical as if the merger had been in
effect for all periods presented. Certain forward-looking statements contained
herein are subject to risks and uncertainties. The Corporation's actual results
may differ materially from those set forth in such forward-looking statements.
Reference is made to the Corporation's reports filed with the Securities and
Exchange Commission for a discussion of factors that may cause such differences
to occur.
- --------------------------------------------------------------------------------
- - OVERVIEW
The Corporation reported record net income of $2,959 million for 1995, an
increase of 19% from net income of $2,486 million in 1994. The Corporation's
primary earnings per share were $6.20 in 1995, an increase of 24% from $5.02 in
1994. On a fully-diluted basis, earnings per share were $6.04 in 1995, compared
with $4.97 for the prior year. Reported return on average common stockholders'
equity increased to 16.15% in 1995 from 13.86% in 1994. The 1995 results were
characterized by improving performance trends, demonstrated expense management
and a disciplined use of capital.
Net income on a pro forma basis was $2,899 million in 1995, an increase of
12% from comparable earnings of $2,589 million in 1994. Pro forma primary
earnings per share were $6.06 in 1995, an increase of 15% from $5.26 in 1994,
while fully-diluted earnings per share were $5.91 in 1995, compared with $5.20
for the prior year. The pro forma results represent earnings on a fully-taxed
basis and exclude the impact of changes in accounting principles, restructuring
charges, charges related to assets held for accelerated disposition and gains on
the sales of such assets, gains on emerging markets past-due interest bond sales
and foreclosed property expense.
The merger of Chase and Chemical created a premier global financial services
company that is the largest banking institution in the United States, with over
$300 billion in assets, an estimated 25 million retail customers and leadership
positions in corporate banking, global finance and other major business lines.
The combination of the two companies represents a unique strategic fit, with
complementary product capabilities and market coverage and with the scale
necessary to support expansion and technological enhancements in all major
products and markets.
Under the terms of the merger agreement, approximately 183 million shares of
common stock were issued in exchange for all of the outstanding shares of
Chase's common stock (based on an exchange ratio of 1.04 shares of the
Corporation's common stock for each share of Chase's common stock). All of
Chase's series of preferred stock were exchanged on a one-for-one basis for a
corresponding series of the Corporation's preferred stock having substantially
the same terms as the Chase preferred stock so converted.
[GRAPH NUMBER 1]
[GRAPH NUMBER 2]
- --------------------------------------------------------------------------------
- - PERFORMANCE TARGETS
On March 21, 1996, the Corporation announced revised estimates of merger-related
costs and anticipated savings as well as financial targets for the Corporation
following the merger on March 31, 1996. The Corporation estimates that annual
cost savings from the merger to be $1.7 billion, of which 30 percent is expected
to be realized by the end of 1996, 70 percent by year-end 1997 and the total by
the end of 1998. These annual cost savings are expected to be realized without
job eliminations beyond those previously announced in August 1995.
22
4
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
In connection with the merger, $1.9 billion of one-time merger-related costs
have been identified, of which $1.65 billion (approximately $1.0 billion on an
after-tax basis) was taken as a restructuring charge on March 31, 1996. The
remaining $250 million will be substantially incurred over the next two years as
these costs do not qualify for immediate recognition under a recently issued
accounting pronouncement. The $1.9 billion of merger-related costs reflect
severance expenses associated with the elimination of approximately 12,000
positions from a combined staff at the merger announcement date of approximately
75,000 located in 39 states and 52 countries and expenses associated with the
elimination of redundant offices and operations. The impact of the merger charge
is not reflected in the 1995 results.
In connection with the merger, the Corporation announced longer-term
financial targets of double-digit operating earnings per share growth in each of
the three years through 1998, an efficiency ratio in the low 50 percent range
and a return on average common shareholders' equity of 18 percent or higher by
the end of 1998. For 1996, the operating goals for the Corporation are as
follows:
- Earnings per share growth in excess of 15 percent
- Efficiency ratio in the high 50 percent range
- Operating revenue growth of 5 to 7 percent
- Noninterest expenses of approximately $9.1 billion
- Return on average common stockholders' equity of 17 percent
- --------------------------------------------------------------------------------
- - RESULTS OF OPERATIONS
NET INTEREST INCOME
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Net Interest Income:
Domestic $ 6,402 $ 6,431
Overseas 1,800 1,881
- --------------------------------------------------------------------------------
Total Net Interest Income 8,202 8,312
Taxable-Equivalent Adjustment 45 49
- --------------------------------------------------------------------------------
Net Interest Income-Taxable-Equivalent Basis(a) $ 8,247 $ 8,361
- --------------------------------------------------------------------------------
Average Interest-Earning Assets:
Domestic $176,058 $163,022
Overseas 68,449 64,248
- --------------------------------------------------------------------------------
Total Average Interest-Earning Assets $244,507 $227,270
- --------------------------------------------------------------------------------
Net Yield on Interest-Earning Assets:
Domestic 3.66% 3.97%
Overseas 2.64 2.94
- --------------------------------------------------------------------------------
Consolidated Net Yield on Interest-Earning Assets 3.37% 3.68%
- --------------------------------------------------------------------------------
(a) Reflected on a taxable equivalent basis in order to permit comparisons of
yields on tax-exempt and taxable assets.
Reported net interest income for 1995 was $8,202 million, compared with
$8,312 million in 1994. The reduction in 1995 net interest income from 1994
reflects a higher level of credit card receivable securitizations and the sale
of certain New Jersey operations in the fourth quarter, which reduced net
interest income by $94 million and $33 million, respectively. Excluding the
impact of these factors, the improvement in 1995 was primarily due to an
increase in interest-earning assets (led by growth in consumer loans) and higher
levels of trading-related net interest income, partially offset by narrower
spreads.
The interest rate spread, which is the difference between the average rate on
interest-earning assets and the average rate on interest-bearing liabilities,
was 2.58% for 1995, compared with 3.02% for 1994. The net yield on
interest-earning assets, which is the average rate for interest-earning assets
less the average rate paid for all sources of funds, including the impact of
interest-free funds, was 3.37% in 1995, compared with 3.68% in 1994. The
declines in 1995 principally reflected narrower loan spreads due to increased
pressure on loan pricings, the impact of higher interest rates on wholesale
funding, and the securitization of credit card receivables. These factors were
partially offset by an increased contribution from noninterest-bearing funds due
to an increase in compensating balances as a result of higher short-term
interest rates in 1995.
[GRAPH NUMBER 3]
[GRAPH NUMBER 4]
23
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table reflects the composition of interest-earning assets as a
percentage of total earning assets, as well as the interest rate spread and the
net yield on interest-earning assets, for the periods indicated.
AVERAGE INTEREST-EARNING ASSET MIX
Year Ended December 31, (in billions) 1995 1994
- --------------------------------------------------------------------------------
Consumer Loans $ 69.5 28% $ 59.6 26%
Commercial Loans 77.0 32 77.1 34
- --------------------------------------------------------------------------------
Total Loans 146.5 60 136.7 60
Securities 36.7 15 33.3 15
Liquid Interest-Earning Assets 61.3 25 57.3 25
- --------------------------------------------------------------------------------
Total Interest-Earning Assets $244.5 100% $227.3 100%
- --------------------------------------------------------------------------------
Interest Rate Spread 2.58% 3.02%
- --------------------------------------------------------------------------------
Consolidated Net Yield on
Interest-Earning Assets 3.37% 3.68%
- --------------------------------------------------------------------------------
The Corporation's average total loans in 1995 were $146.5 billion, compared
with $136.7 billion in 1994. The increase reflected the continued growth in
consumer loans (principally from residential mortgage and credit card
activities) and commercial lending, partially offset by a reduction in the
commercial real estate portfolio.
The growth in interest-earning assets was funded by a $14.4 billion increase
in interest-bearing liabilities. For 1995, average interest-bearing liabilities
were $209.0 billion, compared with $194.6 billion for 1994, principally due to a
higher level of foreign interest-bearing deposits and Federal funds purchased
and securities sold under repurchase agreements. The Corporation utilizes
repurchase agreements as a source of short-term funding for trading-related
positions and for its securities portfolio.
The negative impact on net interest income from nonperforming loans in 1995
was $94 million, compared with $106 million in 1994, reflecting the continued
reduction in the level of the Corporation's nonperforming loans.
For additional information on average balances and net interest income, see
Average Consolidated Balance Sheet, Interest and Rates on page 83.
Management anticipates that, given its current expectations for interest rate
movements in 1996, the Corporation's net interest income in 1996 will be
approximately 3 to 4 percent higher than in 1995 (prior to the impact of
securitizations to be undertaken during 1996).
PROVISION FOR LOSSES
The provision for losses in 1995 was $758 million, a decline of 28% from $1,050
million in 1994, reflecting a significant improvement in the Corporation's
credit quality and an increase in commercial loan recoveries. Management
anticipates that the provision for losses in 1996 will increase over the 1995
level due to a lower level of commercial loan recoveries and higher credit card
charge-offs. For a discussion of the Corporation's net charge-offs, see page 33.
[GRAPH NUMBER 5]
NONINTEREST REVENUE
Noninterest revenue totaled $6,758 million in 1995, an increase of $57 million
when compared with 1994. The 1995 results reflected a 7% increase in fees and
commissions, principally from corporate finance and syndication activities and
credit card revenue, partially offset by declines in trading revenue and lower
other revenue. Other revenue declined in 1995 due to the absence of nonrecurring
gains that were included in the 1994 results.
The following table presents the components of noninterest revenue for the
periods indicated.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Corporate Finance and Syndication Fees $ 796 $ 593
Trust and Investment Management Fees 1,018 1,056
Credit Card Revenue 834 754
Service Charges on Deposit Accounts 417 408
Fees for Other Financial Services 1,453 1,413
- --------------------------------------------------------------------------------
Total Fees and Commissions 4,518 4,224
Trading Revenue 1,016 1,173
Securities Gains 132 65
Other Revenue 1,092 1,239
- --------------------------------------------------------------------------------
Total Noninterest Revenue $6,758 $6,701
- --------------------------------------------------------------------------------
FEES AND COMMISSIONS
Total fees and commissions were $4,518 million in 1995, a 7% increase from
$4,224 million in 1994.
Corporate finance and syndication fees include revenue from managing and
syndicating loan arrangements; providing financial advisory services in
connection with leveraged buyouts, recapitalizations and mergers and
acquisitions; and arranging private placements and underwriting public debt and
equity securities. Corporate finance and syndication fees in 1995 reached a
record level of $796 million, a 34% increase from the prior year, principally
reflecting increases in global investment banking activities, especially loan
syndications and new issues of high-yield securities.
24
6
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
During 1995, the Corporation acted as agent or co-agent for approximately $533
billion of syndicated credit facilities, compared with $392 billion in 1994, a
reflection of the Corporation's large client base and strong emphasis on
distribution.
Trust and investment management fees are primarily generated from services
provided to corporate, institutional and private banking clients on a global
basis. The Corporation's corporate and institutional trust area provides
customers with a full range of services such as trustee and securities
processing and custody, as well as investment advisory and administrative
functions for customers' pension and other employee benefit plans. The
Corporation's Global Asset Management and Private Banking area provides asset
management to institutions, as well as investment management, personal trust,
custody and a full range of financial services to high-net worth individuals.
The Corporation's families of proprietary mutual funds, the Vista Family of
Mutual Funds and The Hanover Funds, are managed within the Global Asset
Management and Private Banking area. As of December 31, 1995, the Corporation
directly managed in excess of $100 billion of assets.
Trust and investment management fees were $1,018 million, a decline of 4%
from the 1994 level largely due to the absence of $46 million in fees in 1995
related to the joint venture with Mellon Bank Corporation. As a result of the
shareholder services joint venture between the Corporation and Mellon Bank
Corporation, effective January 1, 1995, revenues and expenses of the affected
business units were reflected on an equity basis within other revenue. Partially
offsetting this decline was business growth and revenue from the securities
processing businesses acquired from the U.S. Trust Corporation ("U.S. Trust") in
September 1995. Investment management fees in 1995 remained consistent with that
of the prior year, as an increase in assets under management was offset by
pricing pressures affecting the business.
[GRAPH NUMBER 6]
Credit card revenue increased $80 million from the 1994 level due to an
increased volume of retail credit card receivables from a growing cardholder
base, as well as increased fees related to the securitization of $4.75 billion
in credit card outstandings in 1995. For a further discussion of the credit card
portfolio and related securitization activity, see pages 34-35.
Fees for other financial services for 1995 were $1,453 million, an increase
of $40 million from a year ago. The following table reflects the components of
fees for other financial services for the periods indicated.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Commissions on Letters of Credit and Acceptances $ 350 $ 334
Fees in Lieu of Compensating Balances 281 314
Mortgage Servicing Fees 212 180
Loan Commitment Fees 123 116
Other 487 469
- --------------------------------------------------------------------------------
Total Fees for Other Financial Services $1,453 $1,413
- --------------------------------------------------------------------------------
Mortgage servicing fees increased $32 million in 1995 reflecting a higher
level of mortgage servicing volume resulting from the acquisitions of
Margaretten Financial Corporation ("Margaretten") in July 1994, and American
Residential Holding Corporation ("AmRes") in September 1994, as well as
additions to the portfolio from purchases of servicing portfolios and mortgage
originations during 1995. The Corporation's residential mortgage servicing
portfolio increased $13.8 billion to $132.1 billion in 1995. For a further
discussion on the Corporation's mortgage banking activities, see the residential
mortgage section on page 34.
The improvement in other fees for 1995 reflected higher brokerage commissions
of $17 million, due to higher transaction volume at the Corporation's discount
brokerage firm, Brown and Company.
Fees in lieu of compensating balances decreased by $33 million in 1995 when
compared with 1994. Customers often pay for cash management or other banking
services by maintaining noninterest-bearing deposits. As interest rates
increase, the required compensating balance for a given level of service will
decrease. As a result, during 1995, when short-term interest rates were higher
than in 1994, a greater volume of customers maintained a compensating balance in
lieu of paying a fee for services.
25
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TRADING REVENUE
The following table sets forth the components of total trading-related revenue
for 1995 and 1994. Net interest income related to trading activities should be
reviewed in conjunction with the trading revenue amounts in the following table.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Trading Revenue $1,016 $1,173
Net Interest Income Impact(a) 442 166
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,458 $1,339
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $ 445 $ 492
Foreign Exchange Contracts(c) 584 431
Debt Instruments and Other(d) 429 416
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,458 $1,339
- --------------------------------------------------------------------------------
(a) Net interest income attributable to trading activities includes accruals on
interest-earning and interest-bearing trading-related positions as well as a
management allocation reflecting the funding cost or benefit associated with
trading positions.
(b) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures, and forward rate agreements
and related hedges.
(c) Includes foreign exchange spot and option contracts.
(d) Includes U.S. and foreign government and government agency securities,
corporate debt securities, emerging markets debt instruments, debt-related
derivatives, equity securities, equity derivatives, and commodity derivatives.
The $47 million decrease in revenue from interest rate contracts during 1995
was primarily due to unexpected volatility in certain European and U.S. interest
rate markets. During 1995, combined foreign exchange revenue increased $153
million, benefiting from anticipated volatility in the currency markets and from
the Corporation's market-making activities, which increase during periods of
volatility. The 1994 foreign exchange amount reflects a $70 million loss
resulting from unauthorized foreign exchange transactions involving the Mexican
peso. Revenue in 1995 from combined debt instruments and other was consistent
with the prior year, as modest decreases in certain of the Corporation's
activities were more than offset by modest increases in other activities,
reflecting the diversification of the Corporation's trading activities.
Trading revenues are affected by many factors including volatility of
currencies and interest rates, the volume of transactions executed by the
Corporation on behalf of its customers, the Corporation's success in proprietary
positioning, the credit standing of the Corporation, and the steps taken by
central banks and governments that affect financial markets. The Corporation
expects its trading revenues will fluctuate as these factors will vary from
period to period.
OTHER NONINTEREST REVENUE
The following table presents securities gains and the composition of other
revenue for 1995 and 1994.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Securities Gains $ 132 $ 65
- --------------------------------------------------------------------------------
Other Revenue:
Revenue from Equity-Related Investments $ 626 $ 577
Net Gains (Losses) on Emerging Markets
Securities Sales (49) 233
Gains on the Sale of Nonstrategic Businesses 85 84
Accelerated Disposition Gains -- 104
Residential Mortgage Origination/Sales Activities 179 34
All Other Revenue 251 207
- --------------------------------------------------------------------------------
Total Other Revenue $1,092 $1,239
- --------------------------------------------------------------------------------
Securities gains were $132 million in 1995, an increase of $67 million from
1994. The higher level of securities gains, all of which resulted from sales
from the available-for-sale portfolio, were made in connection with the
Corporation's asset/liability management ("ALM") activities. For further
discussion of the Corporation's securities, see Note Four of the Notes to
Consolidated Financial Statements.
The Corporation's other revenue was $1,092 million in 1995, compared with
$1,239 million in 1994. Revenue from equity-related investments, which includes
income from venture capital activities and emerging markets investments, was
$626 million in 1995, an increase of 8% from 1994. At December 31, 1995, the
Corporation had equity-related investments with a carrying value of $2.7
billion. Average revenue from equity-related investments was approximately $150
million per quarter, based upon revenues during the last eight quarterly
periods. The Corporation believes that equity-related investments will continue
to make contributions to the Corporation's earnings, although the timing of the
recognition of gains from such activities is unpredictable and revenues from
such activities could vary significantly from period to period.
The 1995 results included net losses of $49 million related to the
disposition of emerging markets available-for-sale securities. Such dispositions
are part of the Corporation's ongoing efforts to manage its exposure in its
available-for-sale portfolio. The 1994 results included net gains of $233
million from sales of emerging markets securities.
Gains on the sale of nonstrategic businesses included $85 million in 1995
from the sale of the investment in Far East Bank and Trust Company. The 1994
results included gains of $55 million from the sale of Chase Bank of Arizona and
$29 million from the sale of the deposit-taking business of Chase Bank of
Florida.
Residential mortgage origination/sales activities in 1995 increased by $145
million from 1994 results primarily due to a more favorable interest rate
environment in 1995 and the inclusion of a full year of revenue relating to the
aforementioned acqui-
26
8
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
sitions of Margaretten and AmRes in July and September 1994, respectively. Also
contributing to the increase was the impact of the adoption in 1995 of Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"). For a further discussion of SFAS 122, see Note One of the
Notes to Consolidated Financial Statements.
All other revenue includes the Corporation's share of net income from its
interest in CIT which, after purchase accounting adjustments, was $77 million in
1995, an increase from $73 million in 1994. On December 15, 1995, the
Corporation sold half of its 40% interest in CIT.
NONINTEREST EXPENSE
Noninterest expense in 1995 was $9,390 million, compared with $10,002 million in
1994. Excluding restructuring charges and foreclosed property expense in both
years, noninterest expense for 1995 decreased by $37 million from the 1994
level.
The improvement from the prior year reflects the benefits of:
- - Certain expense-reduction initiatives (the Actions to Improve Earnings Per
Share and the Voluntary Retirement and other productivity initiatives)
announced by each of the predecessor institutions in 1994.
- - Lower FDIC premium expense of $133 million reflecting a reduction in the FDIC
assessment rate.
- - The sale of the southern and central New Jersey banking operations of
Chemical New Jersey Holdings to PNC Bank Corp.
- - The shareholder services joint venture with Mellon Bank Corporation.
The decrease in noninterest expense from 1994 was partially offset by:
- - The inclusion of a full year of noninterest expense relating to Margaretten
and AmRes, both of which were acquired in the second half of 1994.
- - The acquisition of the securities processing businesses of U.S. Trust in
September 1995.
The following table presents the components of noninterest expense for the
periods indicated.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Salaries $4,208 $ 3,978
Employee Benefits 899 883
Occupancy Expense 897 968
Equipment Expense 755 724
Foreclosed Property Expense (75) 50
Restructuring Charge 15 465
Other Expense 2,691 2,934
- --------------------------------------------------------------------------------
Total Noninterest Expense $9,390 $10,002
- --------------------------------------------------------------------------------
The Corporation's efficiency ratio improved to 63.2% in 1995 compared with
64.2% in 1994. The computation of the efficiency ratio (noninterest expense as a
percentage of the total of net interest income and noninterest revenue) excludes
any restructuring charges, charges related to assets held for accelerated
disposition and gains on the sales of such assets, emerging markets past-due
interest bond sales and foreclosed property expense.
[GRAPH NUMBER 7]
SALARIES AND EMPLOYEE BENEFITS
The increase in salaries in 1995 was primarily due to higher incentive costs as
a result of improved earnings for most businesses and a competitive recruiting
environment for specialized skills in selected businesses. Also contributing to
the increase in salaries was the vesting of various stock-based incentive awards
due to the improvement in the predecessor institutions' stock prices during
1995, the continued growth in the Corporation's securities underwriting
business, and the additional staff costs resulting from the Margaretten, AmRes
and U.S. Trust acquisitions. Partially offsetting these increases were the
impact of personnel reductions undertaken in 1995.
The following table presents the Corporation's full-time equivalent employees
at the dates indicated.
December 31, 1995 1994
- --------------------------------------------------------------------------------
Domestic Offices 60,904 65,678
Foreign Offices 11,792 12,226
- --------------------------------------------------------------------------------
Total Full-Time Equivalent Employees 72,696 77,904
- --------------------------------------------------------------------------------
At December 31, 1995, there were approximately 2,800 positions eliminated
from the 3,700 positions targeted for elimination, and 1,200 voluntary
retirements accepted from offers extended to 2,600 eligible employees, as part
of both predecessor institutions' expense reduction programs.
27
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense was $897 million in 1995, a decrease of $71 million from 1994.
The decline from 1994 is largely the result of the consolidation of operational
and branch facilities and other expense-reduction initiatives.
Equipment expense in 1995 was $755 million, compared with $724 million in
1994. For 1995, the higher level of equipment expense was due to continued
technology enhancements to support the Corporation's investment in certain key
businesses (in particular its trading, consumer banking, trust, and transactions
and information service businesses).
FORECLOSED PROPERTY EXPENSE
Foreclosed property expense was a credit of $75 million in 1995, compared with
an expense of $50 million in 1994, reflecting the significant progress made in
reducing the Corporation's real estate portfolio as a result of improved real
estate market conditions. The 1995 amount included proceeds received on the sale
of certain foreclosed properties previously written down.
RESTRUCTURING CHARGE
In connection with the merger, $1.9 billion of one-time merger-related costs
have been identified, of which $1.65 billion were recorded on March 31, 1996.
The remaining $250 million will be substantially incurred over the next two
years as these costs do not qualify for immediate recognition under a recently
issued accounting pronouncement. These costs will be reflected in the
restructuring charge caption when incurred. The $1.9 billion of merger-related
costs reflect severance and other termination-related costs to be incurred in
connection with anticipated staff reductions (approximately $600 million), costs
in connection with planned dispositions of certain facilities, premises and
equipment (approximately $700 million), and other merger-related expenses,
including costs to eliminate redundant back office and other operations of
Chemical and Chase and other expenses related directly to the merger
(approximately $600 million). Management does not anticipate that this
restructuring charge will have a material impact on the Corporation's future
liquidity.
During 1995, the Corporation recorded a $15 million restructuring charge
primarily related to exiting a futures brokerage business.
During 1994, a restructuring charge of $260 million was taken by the
Corporation in connection with a program to improve earnings per share.
Additionally, a charge of $157 million was incurred relating to a voluntary
retirement program and for other productivity initiatives, such as exiting from
certain consumer activities overseas, regionalizing foreign operations, and for
further streamlining of the domestic infrastructure. The Corporation also
recorded a restructuring charge of $48 million in 1994, related to the closing
of 50 New York branches and a staff reduction of 650. For a further discussion
of the Corporation's restructuring charges, see Note Fifteen of the Notes to
Consolidated Financial Statements.
OTHER EXPENSE
The following table presents the components of other expense for the periods
indicated.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Other Expense:
Professional Services $ 559 $ 564
Marketing Expense 372 371
FDIC Assessments 117 250
Telecommunications 333 294
Amortization of Intangibles 182 192
All Other 1,128 1,263
- --------------------------------------------------------------------------------
Total Other Expense $2,691 $2,934
- --------------------------------------------------------------------------------
FDIC assessments declined $133 million during 1995 reflecting a reduction in
the FDIC assessment rate. All other expense, which includes various smaller
expense categories such as stationery and other supplies, postage, shipping,
travel and insurance, decreased by 11% in 1995 when compared with 1994,
reflecting the Corporation's sourcing and other expense-reduction initiatives.
Partially offsetting these declines was higher telecommunications expense in
1995 when compared with 1994.
INCOME TAXES
The following table presents the Corporation's income tax expense and effective
tax rate for the periods indicated.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Income Tax Expense $1,842 $1,475
Effective Tax Rate 38.3% 37.2%
- --------------------------------------------------------------------------------
For additional information, refer to Note Sixteen of the Notes to
Consolidated Financial Statements.
- --------------------------------------------------------------------------------
- - PRO FORMA LINES OF BUSINESS RESULTS
Profitability of the Corporation is tracked with an internal management
information system that produces lines-of-business performance for all sectors.
The current presentation of the lines-of-business results is based on existing
management accounting policies at both Chemical and Chase. A uniform set of
management accounting policies is being developed and will be implemented in
1996 (to ensure that the reported results reflect the economics of their
businesses). Lines-of-business results will continue to be subject to further
restatement as appropriate whenever there are refinements in management
reporting policies,
28
10
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
changes to the management organization or to reflect future changes in internal
management reporting.
Guidelines exist for assigning expenses that are not directly incurred by
businesses, such as overhead and taxes, as well as for allocating shareholders'
equity and the provision for losses, utilizing a risk-based methodology. Also
incorporated in the guidelines is a process for matching assets and liabilities
with similar maturity, liquidity and interest characteristics within each
business. Noninterest expenses of the Corporation are fully allocated to the
business units except for special corporate one-time charges. Management has
developed a risk-adjusted capital methodology that quantifies different types of
risk - credit, market, and operating/business within various businesses and
assigns capital accordingly. Credit risk is computed using a risk-grading system
that is consistently applied throughout the Corporation. A long-term expected
tax rate is assigned in evaluating the Corporation's businesses.
PRO FORMA LINES OF BUSINESS RESULTS
Regional and Terminal
Year Ended December 31, Global Bank Consumer Banking Global Services (LDC and Real Estate) Total(a)
(in millions, except ratios) 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 2,265 $ 2,124 $ 5,565 $ 5,711 $ 751 $ 674 $ 95 $ 125 $ 8,202 $ 8,312
Noninterest Revenue 3,218 2,864 2,233 1,994 1,071 1,097 42 512 6,758 6,701
Noninterest Expense 3,057 2,895 4,819 4,972 1,410 1,345 70 118 9,465(b) 9,952(b)
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Margin 2,426 2,093 2,979 2,733 412 426 67 519 5,495 5,061
Credit Provision(c) 292 333 1,073 1,016 -- 1 (15) 284 758 1,050
Foreclosed Property Expense (1) 1 (20) (10) -- -- (57) 44 (75) 50
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 2,135 1,759 1,926 1,727 412 425 139 191 4,812 3,961
Income Taxes 791 665 741 675 154 165 64 87 1,842 1,475
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income Before
Accounting Change 1,344 1,094 1,185 1,052 258 260 75 104 2,970 2,486
Accounting Change (SFAS 106) -- -- -- -- -- -- -- -- (11) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,344 $ 1,094 $ 1,185 $ 1,052 $ 258 $ 260 $ 75 $ 104 $ 2,959 $ 2,486
- ---------------------------------------------------------------------------------------------------------------------------------
Average Assets $178,465 $165,421 $106,980 $99,148 $8,725 $8,457 $7,747 $11,324 $307,385 $287,073
Return on Common Equity 18.5% 15.4% 16.7% 16.1% 18.7% 29.6% NM NM 16.2% 13.9%
Return on Average Assets 0.75% 0.66% 1.11% 1.06% 2.96% 3.07% NM NM 0.96% 0.87%
Efficiency Ratio(d) 55.8% 58.0% 61.8% 63.9% 77.4% 75.9% NM NM 63.2% 64.2%
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Total column includes Corporate sector. See description of Corporate sector
on page 31.
(b) Includes restructuring charges of $15 million in 1995 and $465 million in
1994.
(c) The provision is allocated to each sector utilizing a credit risk
methodology which is computed using a risk-grading system for that sector's loan
portfolio. The difference between the risk-based provision and the Corporation's
provision is included in the Corporate sector.
(d) The computation of the efficiency ratio (noninterest expense as a percentage
of the total of net interest income and noninterest revenue) excludes the impact
of changes in accounting principles, restructuring charges, charges related to
assets held for accelerated disposition and gains on the sales of such assets,
gains on emerging markets past-due interest bond sales and foreclosed property
expense.
NM - Not meaningful.
[GRAPH NUMBER 8]
[GRAPH NUMBER 9]
29
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GLOBAL BANK
The Global Bank provides banking, financial advisory, trading and investment
services to corporations and public-sector clients worldwide through a network
of offices in 52 countries, including major operations in all key international
financial centers. Its network enables the Corporation to identify users and
sources of capital on a global basis and to serve the cross-border requirements
of clients through integrated delivery across all of its businesses.
The Global Bank includes a dedicated Global Client Management organization
(focusing on corporate clients, credit and general advisory); Global Investment
Banking (including acquisition finance, syndicated finance, high yield finance,
private placements, leasing, mergers and acquisitions, and other global
investment banking activities); Global Markets & International (foreign exchange
dealing and trading, derivatives trading (including equity and commodity
derivatives) and structuring, risk management, and securities structuring,
underwriting, trading and sales, and the Corporation's funding and securities
investment activities); Equity Investments; and Global Trade. In addition, the
Global Asset Management and Private Banking group serves high net worth
individuals worldwide with banking and investment services, including the
Hanover Funds, Vista family of mutual funds and Vista unit trust funds. The
Global Bank seeks to optimize its risk profile and profitability by emphasizing
a client focus and originations, underwriting, distribution and risk management
products.
The Global Bank's net income in 1995 was $1,344 million, an increase of $250
million from 1994. The sector's return on equity in 1995 was 18.5%, compared
with 15.4% in 1994. The increase in the 1995 results reflected a 16% increase in
fee revenue, a gain related to the sale of the Corporation's investment in Far
East Bank and Trust Company and higher securities gains.
The increase in fee revenue from last year was primarily the result of the
Corporation's leading market share in the loan syndication business and higher
revenue from high-yield securities underwriting. Total trading-related revenue
increased in 1995 when compared with 1994, primarily due to increased foreign
exchange revenue as a result of anticipated volatility in the currency markets
and from the Corporation's market making activities, which increase during
periods of volatility.
REGIONAL AND CONSUMER BANKING
Regional and Consumer Banking includes Credit Cards; Deposits and Investments
(consumer banking and commercial and professional banking); Mortgage Banking;
National Consumer Finance (home equity secured lending, student lending, and
other consumer lending); International Consumer (consumer activities in Asia and
Latin America); Middle Market/Community Development (regional commercial
banking); Texas Commerce Equity Holdings Inc. ("Texas Commerce") the holding
company for Texas Commerce Bank National Association; and the Corporation's
franchise in northeastern New Jersey, where it has 39 branches and private
banking operations. The Corporation maintains a leading market share position in
serving the financial needs of consumers, middle market commercial enterprises
and small businesses in the New York metropolitan area. Texas Commerce is a
leader in providing financial products and services to businesses and
individuals throughout Texas and is the primary bank for more large corporations
and middle market companies than any other bank in Texas.
For 1995, Regional and Consumer Banking's net income was $1,185 million, an
increase of $133 million from the prior year. The 1994 results included a $48
million restructuring charge ($28 million after-tax) related to the closing of
50 New York branches and a staff reduction of 650. Excluding the restructuring
charge, Regional and Consumer Banking's earnings for 1995 increased by $105
million when compared with 1994 due to lower noninterest expense of $105 million
(relating to the reduced FDIC premium expense) and higher noninterest revenue of
$239 million. These factors were partially offset by a higher credit provision
of $57 million. The higher credit provision in 1995 reflects the substantial
growth in credit card outstandings.
The following table sets forth the significant components of Regional and
Consumer Banking's total revenue by business for the periods indicated.
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Total Revenue:(a)
Credit Cards $2,511 $2,553
Deposits and Investments 1,892 1,862
Mortgage Banking 635 564
National Consumer Finance 409 398
International Consumer 208 186
Middle Market/Community Development 899 816
Texas Commerce 1,126 1,087
- --------------------------------------------------------------------------------
(a) Insurance products managed within Deposits and Investments but included for
reporting purposes in Credit Cards, Mortgage Banking, and National Consumer
Finance, generated revenues of $75 million and $52 million in 1995 and 1994,
respectively.
Credit Cards revenue decreased $42 million, or 2%, in 1995, compared with
1994 due to the impact of competitive repricing in 1995. Partially offsetting
this unfavorable impact was an increase in Shell MasterCard outstandings and
resulting fee growth. The Corporation is a leading provider of credit cards and
unsecured revolving credit products in the U.S. with approximately $25.3 billion
in managed revolving credit balances in 1995.
Deposits and Investments had revenue growth of $30 million in 1995, an
increase of 2% when compared with 1994. The improvement in 1995 was due mainly
to targeted customer segmentation and repricing initiatives. The 1994 results
included one-time gains recognized from the sale of regional banks in 1994.
Mortgage Banking continues to be faced with fierce competition due to
industry overcapacity which has adversely affected the 1995 results. Despite
these factors, during 1995, Mortgage Banking recorded increased revenues of 13%,
when compared with 1994, primarily due to the implementation of SFAS 122 and
higher servicing-related revenues as a result of the acquisitions of Margaretten
and AmRes.
30
12
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
National Consumer Finance revenues increased $11 million, or 3%, in 1995,
when compared with 1994. National Consumer Finance outstandings increased in
1995 by more than 25% over 1994. Despite the increase in outstandings,
competitive pricing pressures largely offset the favorable impact from the
higher level of outstandings.
International consumer revenues increased 12% in 1995, compared with 1994,
primarily due to increased revenue in Hong Kong as credit card outstandings and
the number of accounts increased.
Middle Market/Community Development revenues increased 10% in 1995, when
compared with 1994, due to higher revenues from business services to middle
market and small business customers. During 1995, Middle Market experienced
favorable deposit spreads and a reduction in the level of nonperforming assets;
however, loan spreads and deposit volumes decreased primarily due to heightened
competition.
Texas Commerce revenue increased $39 million, or 4%, in 1995, compared with
1994. The improvement in 1995 was due to higher net interest income resulting
from growth in loan volume and more favorable interest rate spreads. Also
contributing to the increase in earnings for 1995 was lower foreclosed property
expense. The substantial decrease in foreclosed property expense is attributable
to the improvement in the Texas real estate market and payments received related
to certain foreclosed properties that were previously written down.
GLOBAL SERVICES
Global Services includes custody, cash management, trade services, trust and
other fiduciary services. At year-end 1995, the Corporation was custodian or
trustee for approximately $2.9 trillion. The strategy for Global Services is to
build world class product capabilities in transaction and information services.
The results for Global Services were essentially flat in 1995, when compared
with 1994. Revenue increased in 1995 due to higher net interest income
reflecting deposit balance growth and an increase in income related to treasury
management products. These factors were partially offset by a decline in trust
revenue. The results for 1995 reflect the acquisition of the securities
processing businesses of U.S. Trust in September 1995. Effective January 1,
1995, revenues and expenses of the business units that contributed to the
shareholder services joint venture with Mellon Bank Corporation were reflected
on an equity basis.
TERMINAL BUSINESSES (LDC AND REAL ESTATE)
Terminal Businesses represent discontinued portfolios that are primarily the
refinancing country debt portfolio and the Corporation's nonperforming
commercial real estate portfolio, primarily at Chase Manhattan Bank and Chemical
Bank. Terminal Businesses had net income of $75 million for 1995, compared with
net income of $104 million in 1994, and included losses of $49 million related
to the disposition of available-for-sale emerging markets securities in 1995
(compared with gains of $233 million from sales of such securities in 1994). Net
interest income decreased $30 million in 1995 due to a decline in loan
outstandings. The improvements in credit provision and foreclosed property
expense reflects the significant progress made in managing the Corporation's
real estate portfolio. Total nonperforming refinancing country debt and real
estate assets at December 31, 1995 were $433 million, down $304 million from
$737 million at December 31, 1994, as a result of increased liquidity in the
real estate markets and successful workout activities.
CORPORATE
Corporate includes the management results attributed to the parent company; the
Corporation's investment in CIT; and some effects remaining at the corporate
level after the implementation of management accounting policies, including
residual credit provision and tax expense. Corporate had net income of $97
million for 1995, which included an $11 million after-tax charge due to the
adoption of SFAS 106 for foreign employees and a $6 million writedown associated
with certain nonperforming residential mortgages. In 1994, the net loss of $24
million included after-tax restructuring charges of $152 million associated with
a program to improve earnings per share and $65 million for a voluntary
retirement program, partially offset by a Federal tax benefit of $70 million.
- --------------------------------------------------------------------------------
- - CREDIT RISK MANAGEMENT
Credit risk for both lending-related products and derivative and foreign
exchange products represents the possibility that a loss may occur if a borrower
or counterparty fails to honor fully the terms of a contract. Under the
direction of the Chief Credit Officer, risk policies and guidelines are
formulated, approved and communicated throughout the Corporation; and senior
credit executives, representing the major lines of business, are responsible for
maintaining a sound credit process, addressing risk issues, and reviewing the
portfolio.
The Corporation's credit risk management is an integrated process operating
concurrently at the transaction and portfolio levels. For credit origination,
business professionals formulate strategies, target markets, and determine
acceptable levels of risk. Credit executives work with business originators
during the underwriting process to review adherence to risk policies.
31
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Portfolio diversification lowers the Corporation's risk profile. In addition
to the diversification achieved by the expanse of the Corporation's businesses,
the Corporation diversifies by securitizing and selling credit assets such as
loans, thereby seeking to avoid unacceptable risk concentrations.
Loan Portfolio: The consumer and commercial segments of the portfolio have
different risk characteristics and different techniques are utilized to measure
and manage their respective credit risks. The consumer loan risk management
process utilizes sophisticated credit scoring and other analytical methods to
differentiate risk characteristics. Risk management procedures include
monitoring both loan origination credit standards and loan performance quality
indicators. The consumer portfolio review process also includes evaluating
product-line performance, geographic diversity and consumer economic trends.
Within the commercial segment, each credit facility is risk graded.
Facilities are subject to hold targets based on risk, and are often syndicated
in order to lower potential concentration risks. Syndication consists of
arranging a credit facility between a borrower and a group of lenders in which
each lender assumes a share of the facility, thereby limiting the Corporation's
risk with regard to the facility as the syndicated portions are not recorded on
the Corporation's consolidated balance sheet. These activities enable the
Corporation to function as a financial intermediary between other suppliers and
users of funds. In contrast, loan sales occur only after a loan is funded by the
Corporation. Such loans are generally sold to maturity and without recourse to
the Corporation.
Real estate problem assets are managed in special units staffed for
restructuring, workout and collection. The Corporation reassesses the market
value of real estate owned for possible impairment on a continual basis.
The loan review process includes industry specialists and country risk
managers who provide expert insight into the portfolio. Industries and countries
are also evaluated in a process which is incorporated into credit-risk decisions
through the facility-risk grading system and by direct consultation with
originating officers.
Overseas extensions of credit require not only the normal credit-risk
analysis associated with the decision to extend financing to a particular
customer, but also an assessment of country risk. Country risk arises from
economic, social and political factors that might affect a borrower's ability to
repay in the currency of the extension of credit. Cross-border credit exposures
are those that borrowers must repay in a currency other than their local
currency or to a lender in a different country. One of the major risk factors
associated with cross-border credit exposures is the possibility that a
country's foreign exchange reserves may be insufficient or unavailable to permit
timely repayment by borrowers domiciled in that country, even if the borrowers
possess sufficient local currency. In addition, global economic, social and
political conditions, local and foreign government actions and associated events
can affect business activities in a country and a borrower's ability and/or
willingness to repay external debt obligations.
The Corporation has a country risk assessment process by which it monitors
and analyzes the economic, social and political environments in all countries in
which it conducts business or in which its borrowers reside. These in-depth
assessments, conducted by a team of economists and political analysts, in
conjunction with local management, are utilized by the Corporation as part of
its system of managing total country exposures.
Derivative and Foreign Exchange Financial Instruments: The Corporation seeks to
control the credit risk arising from derivative and foreign exchange
transactions through its credit approval process and the use of risk control
limits and monitoring procedures. The Corporation uses the same credit
procedures when entering into derivative and foreign exchange transactions as it
does for traditional lending products. The credit approval process involves
evaluating each counterparty's creditworthiness, then, where appropriate,
assessing the applicability of off-balance sheet instruments to the risks the
counterparty is attempting to manage, and determining if there are specific
transaction characteristics which alter the risk profile. Credit limits are
calculated and monitored on the basis of potential exposure which takes into
consideration current market value and estimates of potential future movements
in market values. If collateral is deemed necessary to reduce credit risk, then
the amount and nature of the collateral obtained is based on management's credit
evaluation of the customer. Collateral held varies but may include cash,
investment securities, accounts receivable, inventory, property, plant and
equipment, and real estate.
LOAN PORTFOLIO
The Corporation's loans outstanding totaled $150.2 billion at December 31, 1995,
an increase of $8.0 billion from the 1994 year-end reflecting growth in both the
domestic consumer and the commercial and industrial loan portfolios.
[GRAPH NUMBER 10]
32
14
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
The Corporation's nonperforming assets at December 31, 1995 were $1,664
million, a decrease of $462 million from the 1994 year-end level. The reduction
in nonperforming assets reflects the improvement in the Corporation's credit
profile as a result of a lower level of loans being placed on nonperforming
status, repayments, charge-offs and the Corporation's continuing loan workout
and collection activities.
Total net charge-offs were $840 million in 1995, compared with $1,464 million
in 1994. The 1994 amount excluded a $148 million charge related to the decision
to designate certain real estate assets as held for accelerated disposition. For
a further discussion of nonperforming assets and net charge-offs, see the
various credit portfolio sections that follow.
The following table presents the Corporation's loan and nonperforming asset
balances by portfolio at December 31, 1995 and 1994 and the related net
charge-off amounts for the periods indicated. Additionally, loans which were
past due 90 days and over as to principal or interest but not characterized as
nonperforming are also included in the table below.
Past Due
90 Days and Over
As of or for the year ended Loans Nonperforming Assets Net Charge-offs and Accruing
December 31, (in millions) 1995 1994 1995 1994 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Domestic Consumer:
Residential Mortgage(a) $ 34,060 $ 28,823 $ 238 $ 190 $ 62 $ 60 $ -- $ --
Credit Card 17,078 16,994 -- -- 675 583 352 343
Auto Loans 6,290 7,999 20 7 8 7 13 7
Other Consumer(b) 12,003 9,816 19 35 114 118 151 123
- --------------------------------------------------------------------------------------------------------------------
Total Domestic Consumer 69,431 63,632 277 232 859 768 516 473
- --------------------------------------------------------------------------------------------------------------------
Domestic Commercial:
Commercial and Industrial 32,276 30,492 496 463 (4) 84 38 38
Commercial Real Estate(c) 6,660 7,703 375 422 31 290 66 38
Financial Institutions 5,714 5,237 2 11 (12) 12 -- --
- --------------------------------------------------------------------------------------------------------------------
Total Domestic Commercial 44,650 43,432 873 896 15 386 104 76
- --------------------------------------------------------------------------------------------------------------------
Total Domestic 114,081 107,064 1,150 1,128 874 1,154 620 549
- --------------------------------------------------------------------------------------------------------------------
Foreign, primarily Commercial 36,126 35,167 343 461 (34) 310 44 181
- --------------------------------------------------------------------------------------------------------------------
Total Loans $150,207 $142,231 $1,493 $1,589 $840 $1,464 $664 $730
- --------------------------------------------------------------------------------------------------------------------
Assets Acquired as Loan Satisfactions -- -- 171 537 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets -- -- $1,664 $2,126 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Assets Held for Accelerated Disposition -- -- $ 412 $ 526 -- $ 148 -- --
- --------------------------------------------------------------------------------------------------------------------
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance) and student loans. There are essentially no credit losses in the
student loan portfolio due to the existence of Federal and State government
agency guarantees. At December 31, 1995 and 1994, student loans which were past
due 90 days and over and still accruing were approximately $107 million and $105
million, respectively.
(c) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
[GRAPH NUMBER 11]
[GRAPH NUMBER 12]
33
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
DOMESTIC CONSUMER PORTFOLIO
The domestic consumer loan portfolio consists of one-to-four family residential
mortgages, credit cards and other consumer loans. The domestic consumer loan
portfolio totaled $69.4 billion at December 31, 1995, an increase of 9% from the
prior year-end. As a percentage of the total loan portfolio, consumer loans grew
to 46% at the end of 1995, from 45% at December 31, 1994.
Residential Mortgage Loans: Residential mortgage loans at December 31, 1995 were
$34.1 billion, an increase of $5.3 billion from the 1994 year-end, primarily
reflecting increases in adjustable-rate loan outstandings.
The following table presents the residential mortgage loan outstandings by
geographic region at the dates indicated.
RESIDENTIAL MORTGAGE LOANS BY GEOGRAPHIC REGION
December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
New York City $ 3,399 $ 3,438
New York (Excluding New York City) 4,467 5,284
Remaining Northeast 6,210 6,766
- --------------------------------------------------------------------------------
Total Northeast 14,076 15,488
Southeast 3,586 2,379
Midwest 3,154 2,103
Southwest(a) 2,345 2,048
West(b) 10,899 6,805
- --------------------------------------------------------------------------------
Total $34,060 $28,823
- --------------------------------------------------------------------------------
(a) Includes mortgage loans in the Texas market of $2,179 million and $1,934
million at December 31, 1995 and 1994, respectively.
(b) Includes mortgage loans in the California market of $8,030 million and
$4,967 million at December 31, 1995 and 1994, respectively.
Total nonperforming residential mortgage loans at December 31, 1995 were $238
million, compared with $190 million at December 31, 1994. Total net charge-offs
of residential mortgage loans were $62 million in 1995, compared with $60
million in 1994. The percentage of net charge-offs to average residential
mortgage loans for 1995 declined to .20% from .22% for the prior year.
During the 1995 fourth quarter, the Corporation transferred $421 million of
residential mortgage loans into the accelerated disposition portfolio. For a
further discussion of the transfer, see the Assets Held for Accelerated
Disposition section on page 38.
The Corporation both originates and services residential mortgage loans as
part of its mortgage banking activities. After origination, the Corporation
typically sells loans to investors, primarily in the secondary market, while
retaining the rights to service such loans. In addition to originating mortgage
servicing rights, the Corporation also purchases and sells mortgage servicing
rights. The Corporation may purchase bulk rights to service a loan portfolio or
the Corporation may purchase loans directly and then sell such loans while
retaining the servicing rights. As disclosed in Note One of the Notes to
Consolidated Financial Statements, the Corporation adopted SFAS 122 in the 1995
second quarter. SFAS 122 requires that when a definitive plan exists to sell or
securitize mortgage loans and to retain the servicing rights related thereto, a
mortgage banking enterprise should recognize as separate assets the rights to
service mortgage loans for others, irrespective of whether those servicing
rights are acquired through the purchase or origination of mortgage loans.
The Corporation's residential mortgage servicing portfolio amounted to $132.1
billion at December 31, 1995, compared with $118.3 billion at December 31, 1994.
The following table presents the residential mortgage servicing portfolio
activity for 1995 and 1994.
Year Ended December 31, (in billions) 1995 1994
- --------------------------------------------------------------------------------
Balance at Beginning of Year $118.3 $ 80.9
Originations 27.6 26.6
Acquisitions 11.0 37.6
Repayments (14.7) (17.1)
Sales (10.1) (9.7)
- --------------------------------------------------------------------------------
Balance at End of Year $132.1 $118.3
- --------------------------------------------------------------------------------
Mortgage servicing rights (included in other assets) amounted to $1,242
million at December 31, 1995, compared with $1,120 million at December 31, 1994.
The increase reflects the corresponding increase in the Corporation's
residential mortgage servicing portfolio, the effects of purchases of servicing
portfolios during the first half of 1995, and the recognition of originated
mortgage servicing rights as assets beginning in 1995 pursuant to SFAS 122.
Capitalized mortgage servicing rights are amortized into income in proportion
to, and over the period of, the estimated future net servicing income stream of
the underlying mortgage loans. The Corporation utilizes an amortization method
based on adjusted cash flows to amortize mortgage servicing rights. The mortgage
loans to which the Corporation's servicing rights relate are, to a substantial
degree, of recent vintage (i.e., originated in the period 1992 through 1995 when
interest rates were relatively low). The Corporation continually evaluates
prepayment exposure of the portfolio, adjusting the balance and remaining life
of the servicing rights as a result of prepayments, and utilizes derivative
contracts to reduce its exposure to such prepayment risks. For a further
discussion of derivatives used in connection with mortgage servicing, see page
44.
Credit Card Loans: The Corporation evaluates its credit card exposure based on
its "managed receivables" which include credit card receivables on the balance
sheet as well as credit card receivables which have been securitized. During
1995, the Corporation securitized $4.8 billion of credit card receivables. There
were no new credit card securitizations during 1994; although securitized
balances existed in 1994 from securitizations that occurred in 1993 and prior
years. At December 31, 1995, the Corporation had $23.7 billion of managed
receivables ($17.1 billion of receivables on the balance sheet) compared with
$19.7 billion ($17.0 billion on the balance sheet) at year-end 1994, reflecting
the continued strong growth in credit card outstandings, principally due to the
co-branded Shell MasterCard and other solicitation programs.
34
16
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
[GRAPH NUMBER 13]
[GRAPH NUMBER 14]
The following table presents the Corporation's domestic credit card
receivables by geographic region at the dates indicated.
DOMESTIC CREDIT CARD RECEIVABLES BY GEOGRAPHIC REGION
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
New York City $ 1,412 $ 1,553
New York (Excluding New York City) 1,377 1,516
Remaining Northeast 3,448 3,563
- --------------------------------------------------------------------------------
Total Northeast 6,237 6,632
Southeast 2,446 2,325
Midwest 3,275 3,375
Southwest(a) 1,673 1,554
West(b) 3,447 3,108
- --------------------------------------------------------------------------------
Total $17,078 $16,994
- --------------------------------------------------------------------------------
(a) Includes credit card receivables in the Texas market of $1,196 million and
$1,119 million at December 31, 1995 and 1994, respectively.
(b) Includes credit card receivables in the California market of $2,383 million
and $2,137 million at December 31, 1995 and 1994, respectively.
Total credit card net charge-offs were $675 million in 1995, an increase of
$92 million from the 1994 level, primarily as a result of growth in average
outstandings in the credit card portfolio.
The following table presents the Corporation's average managed credit card
receivables (credit card receivables on the balance sheet plus securitized
credit card receivables); the amount of these receivables past due 90 days and
over and accruing; net charge-offs related to the credit card portfolio; and
related ratios for the managed credit card portfolio for the periods presented.
As of or for the year ended December 31,
(in millions) 1995 1994
- --------------------------------------------------------------------------------
Average Managed Credit Card Receivables $20,980 $17,341
Past Due 90 Days & Over and Accruing 538 428
As a Percentage of Average Credit Card Receivables 2.56% 2.47%
Net Charge-offs 849(a) 745(a)
As a Percentage of Average Credit Card Receivables 4.05% 4.30%
- --------------------------------------------------------------------------------
(a) Includes $174 million and $162 million, respectively, of net charge-offs
related to securitized credit card receivables.
A higher level of credit card net charge-offs is expected during 1996 as a
result of the growth in outstandings experienced during 1995 and further
anticipated growth in receivables in 1996, and from anticipated higher levels of
delinquencies and personal bankruptcies. Credit card net charge-offs as a
percentage of average managed credit card receivables are expected to
approximate 4.5% during 1996.
Credit Card Securitization: In a credit card securitization, the Corporation
takes a portion of its credit card receivables and packages them into
securities. The securitization of credit card receivables does not significantly
affect the Corporation's reported net income. The initial gain on the sale of
the securitized receivables is recorded at the time of the securitization. Due
to the revolving nature of the credit card receivables sold, the recognition of
servicing fees results in a pattern of income recognition that is substantially
similar to the pattern that would be experienced if the receivables had not been
sold.
The securitization of credit card receivables changes the Corporation's
status from that of a lender to that of a loan servicer. There is a change in
the classification in which the revenue associated with the securitization is
reported in the income statement. For securitized receivables, amounts that
would previously have been reported as net interest income and as provision for
losses are instead reported as components of noninterest revenue (i.e., as
credit card revenue and as other revenue). Because credit losses become a
component of the cash flows arising from the securitized transaction, the
Corporation's revenues over the terms of a securitization transaction may vary
depending upon the credit performance of the securitized receivables. However,
the Corporation's exposure to credit losses on the securitized receivables is
contractually limited to these cash flows. In 1995, $752 million of previously
securitized credit card receivables were returned to the balance sheet. In 1996,
an additional $1,375 million of previously securitized credit card receivables
are scheduled to return to the balance sheet.
35
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table outlines the impact of the securitizations of credit card
receivables by showing the favorable (unfavorable) change in the reported
Consolidated Statement of Income line items.
Favorable (Unfavorable)
Impact
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Net Interest Income $(360) $(266)
Provision for Losses 170 161
Credit Card Revenue 173 105
Other Revenue 24 --
- --------------------------------------------------------------------------------
Pre-tax Income Impact of Securitization $ 7 $ --
- --------------------------------------------------------------------------------
Auto and Other Consumer Loans: These consumer loans consist of installment loans
(direct and indirect types of consumer finance), automobile financings and
student loans.
Automobile financing loans were $6.3 billion at the 1995 year-end, compared
with $8.0 billion at December 31, 1994. The decrease in automobile financing
loans was due mainly to the securitization of $3.0 billion of these loans,
partially offset by increased demand during the year. Net charge-offs of auto
loans were $8 million in 1995, compared with $7 million in 1994.
Other consumer loans were $12.0 billion at December 31, 1995, an increase of
22% when compared with $9.8 billion at December 31, 1994. Net charge-offs of
other consumer loans were $114 million in 1995, a decrease of $4 million from
the 1994 level.
DOMESTIC COMMERCIAL PORTFOLIO
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $32.3 billion at December 31, 1995, compared with
$30.5 billion at December 31, 1994. The portfolio consists primarily of loans
made to large corporate and middle market customers and is diversified
geographically and by industry. The largest industry concentration is oil and
gas which approximates $3.2 billion, or 2.1% of total loans. All of the other
remaining industries are each less than 2% of total loans.
The Corporation is a leading participant in loan originations and sales. This
activity is comprised of the sale of loans and lending commitments to investors,
generally without recourse. These sales include syndication, assignment and
participation, and include both short- and medium-term transactions. This loan
distribution capability allows the Corporation to compete aggressively and
profitably in wholesale lending markets by enabling it to reduce larger
individual credit exposures and thereby to price more flexibly than if all loans
were held as permanent investments. The Corporation also benefits from increased
liquidity. During 1995, the Corporation acted as agent or co-agent for
approximately $533 billion in syndicated credit facilities, compared with $392
billion in 1994.
Nonperforming domestic commercial and industrial loans were $496 million at
December 31, 1995, compared with $463 million at December 31, 1994.
In 1995, the Corporation had net recoveries of domestic commercial and
industrial loans of $4 million, compared with net charge-offs of $84 million in
1994. Management believes that the credit quality of the Corporation's
commercial and industrial loan portfolio will remain relatively stable in 1996,
as compared to 1995 (although it expects to have net charge-offs in its
commercial and industrial loan portfolio in 1996 because of lower gross
recoveries).
Domestic Commercial Real Estate Portfolio: The domestic commercial real estate
portfolio represents loans secured primarily by real property, other than loans
secured by one-to-four family residential properties (which are included in the
consumer loan portfolio). The domestic commercial real estate loan portfolio
totaled $6.7 billion at December 31, 1995, a decline from $7.7 billion at
December 31, 1994. The decrease from the 1994 year-end is principally
attributable to repayments from borrowers.
The following table sets forth the major components of the domestic
commercial real estate loan portfolio at the dates indicated.
December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Commercial Mortgages $5,512 $6,123
Construction Loans 1,148 1,580
- --------------------------------------------------------------------------------
Total Domestic Commercial Real Estate Loans $6,660 $7,703
- --------------------------------------------------------------------------------
Commercial mortgages provide financing for the acquisition or refinancing of
commercial properties, and typically have terms ranging from two-to-five years.
Construction loans are generally originated to finance the construction of real
estate projects. When the real estate project has cash flows sufficient to
support a commercial mortgage, the loan is transferred from construction status
to commercial mortgage status.
The largest concentration of domestic commercial real estate loans is in the
New York/New Jersey and Texas markets, representing 48% and 23%, respectively,
of the portfolio. No other state represents more than 5% of the domestic
commercial real estate loan portfolio.
Nonperforming domestic commercial real estate loans were $375 million at
December 31, 1995, compared with $422 million at December 31, 1994. The
improvement in nonperforming domestic commercial real estate loan levels in 1995
is the result of increased liquidity in the commercial real estate markets
coupled with successful workout activities.
Domestic commercial real estate net charge-offs in 1995 totaled $31 million,
compared with $290 million in the prior year (excluding the charge related to
the accelerated disposition portfolio). The lower net charge-offs are due in
part to the decision in December 1994 to designate certain real estate assets
for accelerated disposition, and from a higher level of recoveries as a result
of payments received on certain loans which had been previously written down.
For a more detailed discussion, see Assets Held for Accelerated Disposition on
page 38.
36
18
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
Domestic Financial Institutions Portfolio: The domestic financial institutions
portfolio includes loans to commercial banks and companies whose businesses
primarily involve lending, financing, investing, underwriting, or insurance.
Loans to domestic financial institutions were $5.7 billion at December 31, 1995,
or 4% of total loans outstanding at December 31, 1995, compared with $5.2
billion at December 31, 1994. Loans to domestic financial institutions are
predominantly secured loans to broker-dealers, domestic commercial banks and
domestic branches of foreign banks. The portfolio maintained its strong credit
quality during 1995 as the Corporation had net recoveries of $12 million in 1995
compared with net charge-offs of $12 million in 1994.
FOREIGN PORTFOLIO
The foreign portfolio includes commercial and industrial loans, loans to
financial institutions, commercial real estate loans, loans to foreign
governments and official institutions, and consumer loans. At December 31, 1995,
the Corporation's total foreign loans were $36.1 billion, compared with $35.2
billion at December 31, 1994.
Included in foreign loans were commercial and industrial loans of $20.8
billion at the end of 1995, an increase of $2.4 billion from the 1994 year-end.
Total foreign commercial real estate loans at December 31, 1995 were $.8
billion, unchanged from the 1994 year-end.
Foreign nonperforming loans at December 31, 1995 were $343 million, a
decrease from $461 million at December 31, 1994.
The foreign portfolio experienced net recoveries of $34 million in 1995,
compared with net charge-offs of $310 million in 1994. A $291 million charge was
incurred in 1994 in connection with the Corporation's final valuation of its
emerging markets portfolio, at which time its medium- and long-term outstandings
to the various emerging markets countries were adjusted to the estimated net
recoverable values of such loans. The remaining emerging markets allowance was
transferred to the general allowance for credit losses.
For year-end loan balances by type of loan included in the foreign portfolio,
refer to Note Five of the Notes to Consolidated Financial Statements.
CROSS-BORDER OUTSTANDINGS
The extension of credits denominated in a currency other than that of the
country in which a borrower is located, such as dollar-denominated loans made
overseas, are called "cross-border" credits.
The following table lists all countries in which the Corporation's
cross-border outstandings exceeded 1% of consolidated assets as of any of the
dates specified. The Corporation does not have significant local currency
outstandings in the individual countries listed in the following table that are
not hedged or funded by local currency borrowings.
CROSS-BORDER OUTSTANDINGS EXCEEDING ONE PERCENT OF TOTAL ASSETS(A)
Cross-Border
Total Outstandings
Cross-Border as a Percentage
(in millions) At December 31 Public Banks Other Outstandings(b) of Total Assets
- ----------------------------------------------------------------------------------------------------------------
Japan 1995 $ 905 $2,708 $1,724 $5,337(c) 1.76%
1994 248 5,280 1,538 7,066(c) 2.48
1993 47 5,585 587 6,219(c) 2.47
Germany 1995 4,315 339 413 5,067(d) 1.67%
1994 1,490 496 883 2,869(d) 1.01
1993 2,021 384 576 2,981(d) 1.18
United Kingdom 1995 192 915 3,314 4,421 1.45%
1994 165 1,215 3,024 4,404 1.54
1993 156 1,205 2,916 4,277 1.70
Brazil 1995 1,029 424 1,856 3,309 1.09%
1994 1,088 262 1,877 3,227 1.13
1993 1,801 259 1,068 3,128 1.24
(a) Outstandings (including loans and accrued interest, interest-bearing
deposits with banks, securities, acceptances and other monetary assets, except
equity investments) represent those of both the public and private sectors and
are presented on a risk basis, i.e., net of written guarantees and tangible
liquid collateral when held outside the foreign country. At December 31, 1995
and 1994, outstandings to Korea were $2,809 million and $2,164 million,
respectively, which were in excess of .75% of total assets. At December 31,
1994, outstandings to Hong Kong and Mexico were $2,603 million and $2,259
million, respectively, which were in excess of .75% of total assets.
(b) Outstandings exclude equity received in debt-for-equity conversions, which
is recorded initially at fair market value and generally accounted for under the
cost method. Commitments (outstanding letters of credit, standby letters of
credit, guarantees and unused legal commitments) are excluded. At December 31,
1995, off-balance sheet commitments, after adjusting for transfers of risk,
amounted to $2,422 million for Japan, $1,690 million for the United Kingdom,
$991 million for Germany, and $55 million for Brazil.
(c) The average outstandings to Japan during 1995, 1994 and 1993 (based on
quarter-end amounts) were approximately $5.2 billion, $6.5 billion and $5.8
billion, respectively.
(d) The average outstandings to Germany during 1995, 1994 and 1993 (based on
quarter-end amounts) were approximately $4.2 billion, $2.8 billion and $1.7
billion, respectively.
37
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The majority of outstandings to Japan, Germany and Brazil are short-term in
nature, which mitigates the credit risk as transactions settle quickly. These
outstandings generally represent interbank placements (in the case of Japan) and
trading assets (in the case of Germany and Brazil). Due to the short-term nature
of interbank placements and trading assets, the Corporation's balances with
Japan, Germany and Brazil tend to fluctuate greatly and the amount of
outstandings at year-end tends to be a function of timing, rather than
representing a consistent trend.
ASSETS HELD FOR ACCELERATED DISPOSITION
In the fourth quarter of 1995, the Corporation transferred $421 million of
residential mortgage loans into the Assets Held for Accelerated Disposition
portfolio. This was done as part of a decision to accelerate the disposition of
residential mortgage loans originally extended several years earlier under a
reduced documentation mortgage program that was discontinued.
In December 1994, the Corporation segregated real estate loans and real
estate owned and designated such assets as Assets Held for Accelerated
Disposition. In conjunction with this transfer, the Corporation reevaluated its
carrying values for these assets to facilitate their rapid disposition and
recorded a charge of $148 million to the allowance for credit losses. As a
result of these actions, these assets were excluded from the December 31, 1995
and 1994 nonperforming assets category.
The following table presents the reconciliation of Assets Held for
Accelerated Disposition for 1995 and 1994.
Carrying Value
Year Ended December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Balance at Beginning of Year $ 526 $ --
Additions 421 526
Sales (535) --
- --------------------------------------------------------------------------------
Balance at End of Year(a) $ 412 $526
- --------------------------------------------------------------------------------
(a) Includes $412 million and $87 million of loans that were performing at
December 31, 1995 and 1994, respectively.
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
In the normal course of its business, the Corporation utilizes various
derivative and foreign exchange financial instruments to meet the financial
needs of its customers, to generate revenues through its trading activities, and
to manage its exposure to fluctuations in interest and currency rates.
Derivative and foreign exchange instruments represent contracts with
counterparties where payments are made to or from the counterparty based upon
specific interest rates, currency levels, other market rates, or on terms
predetermined by the contract. These instruments can provide a cost-effective
alternative to assuming and mitigating risk associated with traditional
on-balance sheet instruments.
Derivative and foreign exchange transactions involve, to varying degrees,
credit risk and market risk. The effective management of credit and market risk
is vital to the success of the Corporation's trading and ALM activities. Because
of the changing market environment, the monitoring and managing of these risks
is a continual process. For a further discussion of market risk, see the Market
Risk Management section on page 40.
The Corporation believes the true measure of credit risk exposure is the
replacement cost of the derivative or foreign exchange product (i.e., the cost
to replace the contract at current market rates should the counterparty default
prior to the settlement date). This is also referred to as repayment risk or the
mark-to-market exposure amount. The notional principal of derivative and foreign
exchange instruments is the amount on which interest and other payments in a
transaction are based. For derivative transactions, the notional principal
typically does not change hands; it is simply a quantity that is used to
calculate payments. While notional principal is the most commonly used volume
measure in the derivative and foreign exchange markets, it is not a measure of
credit or market risk. The notional principal of the Corporation's derivative
and foreign exchange products greatly exceeds the possible credit and market
loss that could arise from such transactions. As a result, the Corporation does
not consider the notional principal to be indicative of its credit or market
risk exposure.
Mark-to-market exposure is a measure, at a point in time, of the value of a
derivative or foreign exchange contract in the open market. When the
mark-to-market is positive, it indicates the counterparty owes the Corporation
and, therefore, creates a repayment risk for the Corporation. When the
mark-to-market is negative, the Corporation owes the counterparty. In this
situation, the Corporation does not have repayment risk.
When the Corporation has more than one transaction outstanding with a
counterparty, and there exists a legally enforceable master netting agreement
with the counterparty, the "net" mark-to-market exposure represents the netting
of the positive and negative exposures with the same counterparty. If there is a
net negative number, then the Corporation's exposure to the counterparty is
considered to be zero. Net mark-to-market is, in the Corporation's view, the
best measure of credit risk when there is a legally enforceable master netting
agreement between the Corporation and the counterparty.
Many of the Corporation's contracts are short-term, which mitigates the
credit risk as transactions settle quickly. The following table provides the
remaining maturities of derivative and foreign exchange contracts outstanding at
December 31, 1995. Percentages are based upon remaining contract life of
mark-to-market exposure amounts.
38
20
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
Interest Foreign
Rate Exchange
Contracts Contracts Total
-----------------------------------------
At December 31, 1995
- --------------------------------------------------------------------------------
Less than 3 months 11% 55% 29%
3 to 6 months 8 27 15
6 to 12 months 8 13 10
1 to 5 years 45 5 29
Over 5 years 28 -- 17
- --------------------------------------------------------------------------------
Total 100% 100% 100%
- --------------------------------------------------------------------------------
The Corporation routinely enters into derivative and foreign exchange
transactions with regulated financial institutions, which the Corporation
believes have relatively low credit risk. At December 31, 1995, approximately
81% of the mark-to-market exposure of such transactions were with commercial
bank and financial institution counterparties most of whom are dealers in these
products. Non-financial institutions accounted for only approximately 19% of the
Corporation's derivative and foreign exchange mark-to-market exposure.
The Corporation does not deal, to any significant extent, in derivatives,
which dealers of derivatives (such as other banks and financial institutions)
consider to be leveraged. As a result, the mark-to-market exposure as well as
the notional amount of such derivatives were insignificant at December 31, 1995.
The following table summarizes the aggregate notional amounts of interest
rate and foreign exchange contracts as well as the credit exposure related to
these instruments (after taking into account the net effects of master netting
agreements) for the dates indicated below.
Notional Amounts(a) Credit Exposure
December 31, (in billions) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------
Interest Rate Contracts $3,190.4 $2,996.3 $12.8 $10.9
Foreign Exchange Contracts 1,606.2 1,549.2 12.4 14.6
Stock Index Options and Commodity Contracts 37.7 20.6 1.0 0.8
- -------------------------------------------------------------------------------------
Total $4,834.3 $4,566.1 $26.2 $26.3
- -------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and stock index options and commodity contracts were $417.7
billion, $10.6 billion and $5.1 billion, respectively, at December 31, 1995. The
credit risk exposure for these contracts was minimal since exchange-traded
contracts principally settle daily in cash.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb potential credit losses
from the entire loan portfolio, as well as derivative and foreign exchange
transactions. The Corporation deems its allowance for credit losses at December
31, 1995 to be adequate. Although the Corporation considers that it has
sufficient reserves to absorb losses that may currently exist in the portfolio,
but are not yet identifiable, the precise loss content is subject to continuing
review based on quality indicators, industry and geographic concentrations,
changes in business conditions, and other external factors such as competition,
legal and regulatory requirements. The Corporation will continue to reassess the
adequacy of the allowance for credit losses.
[GRAPH NUMBER 15]
During 1995, 1994 and 1993, the Corporation's actual credit losses arising
from derivative and foreign exchange transactions were immaterial. Additionally,
at December 31, 1995 and 1994, nonperforming derivatives contracts were
immaterial.
The following tables reflect the activity in the Corporation's allowance for
credit losses for the years ended December 31, 1995 and 1994, as well as the
allowance coverage ratios.
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------------------------
Total Allowance at January 1 $ 3,894 $ 4,445
Provision for Losses 758 1,050
Charge-Offs (1,278) (1,970)
Recoveries 438 506
- -------------------------------------------------------------------------------
Net Charge-Offs (840) (1,464)
Charge for Assets Transferred to Held for
Accelerated Disposition -- (148)
Other (28)(a) 11
- -------------------------------------------------------------------------------
Total Allowance at December 31 $ 3,784 $ 3,894
- -------------------------------------------------------------------------------
(a) Includes $28 million related to sale of Chemical's banking operations in
southern and central New Jersey.
ALLOWANCE COVERAGE RATIOS
December 31, 1995 1994
- --------------------------------------------------------------------------------
Allowance for Credit Losses to:
Loans at Period-End 2.52% 2.74%
Average Loans 2.58 2.85
Nonperforming Loans 253.45 245.06
39
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- - MARKET RISK MANAGEMENT
Market risk can be defined as the risk of loss resulting from changes in the
prices of financial instruments in the markets in which the Corporation
participates, such as changes in the value of foreign exchange or fixed income
securities. The market risk management function is responsible for the
measurement, monitoring and control of market risk, and the communication of
risk limits throughout the Corporation in connection with its trading activities
and asset/liability management activities.
TRADING ACTIVITIES
The Corporation uses its trading assets and liabilities to meet the financial
needs of its customers and to generate revenues through its trading activities.
The Corporation seeks to manage the market risks associated with its trading
activities through geographic and product diversification. Trading activities
are undertaken in more than 20 countries, with the majority of the transactions
in the developed countries. The Corporation trades a wide range of products,
including foreign exchange, derivatives, commodities and domestic and
international securities, including emerging market debt instruments. A more
complete description of the classes of debt and equity instruments and risk
management instruments used in the Corporation's trading activities, as well as
the credit risk and market risk factors involved in such activities, are
disclosed in Notes Three and Eighteen of the Notes to Consolidated Financial
Statements.
The Corporation has four fundamental trading activities which generate
revenue. The Corporation is primarily engaged in the relatively stable
businesses of market-making, sales and arbitrage, while placing less emphasis on
the potentially less-stable business of positioning.
Market-making: The Corporation trades with the intention of making a profit
based on the spread between bid and ask prices. Market-making, compared with
other trading activities, is considered to be a relatively stable business by
the Corporation because revenue is related principally to market volumes, rather
than to anticipating correctly material changes in the prices of various
financial instruments. The Corporation considers market-making to be a key
trading activity in its over-the-counter trading businesses.
Sales: The Corporation provides products for its clients at competitive prices.
The Corporation considers sales to be a relatively stable business because
revenue is related principally to the volume of products sold to the
Corporation's worldwide client base.
Arbitrage: The Corporation enters into a risk position and offsets that risk in
different, but closely related, markets or instruments. Because of the nature of
trading markets, where there are numerous instruments that relate to one
another, the Corporation believes it can effectively utilize this strategy. The
Corporation considers arbitrage to be a key fundamental of its trading business.
Positioning: The Corporation takes certain positions in a market in anticipation
of changes that may occur within such market. This strategy has the lowest
stability of all four trading activities and the Corporation's emphasis in this
area is less than in the other trading activities.
Management believes that a risk management process, that encourages
risk-taking within defined limits, is integral to creating shareholder value and
competitive advantage through effective employment of risk capital. To that end,
the Corporation has defined several fundamental risk management principles,
including:
- - Formal definition of risk management governance;
- - Measurement of risk in accordance with "value-at-risk" methodologies, as well
as non-statistical measures; and
- - Continual evaluation of risk appetite, communicated through risk limits.
The risk management governance structure at the Corporation begins with the
broad oversight responsibilities of the Board of Directors, which approves
general risk management policies and reviews aggregate levels of risk, risk
capital and returns on risk. A subcommittee of the Board, the Risk Policy
Committee, has been delegated the responsibility for the review of the
Corporation's risk management policies and control framework and the evaluation
of its returns on risk.
The Corporation's risk management governance structure then extends into the
business areas in order to move the focus from oversight to active day-to-day
management of risk. The Office of the Chairman's Risk Committee, made up of
senior business-line and finance executives of the Corporation, provides
direction for the market risk profile of the Corporation, as well as a forum for
discussion of those market risk issues that may require increased corporate
awareness. Finally, the risk management governance structure extends to the
Market Risk Committee, made up of senior business-line managers and managers
independent of the business lines, who have direct accountability for all
corporate-wide market risk. The Market Risk Committee reviews and approves
market risk measurement methodologies, risk limits and risk capital assessments.
Market risk is measured and monitored on a daily basis through a
value-at-risk ("VAR") methodology. VAR is defined as the potential overnight
dollar loss from adverse market movements, with 97.5% confidence based on
historical prices and market rates. The quantification of market risk through a
VAR methodology requires a number of key assumptions including confidence level
for losses, number of days of price history, the holding period, the measurement
of inter-business correlation, and the treatment of risks outside the VAR
methodology, including event risk and liquidity risk. The approach utilized for
these other methodological issues varies among institutions.
40
22
Based on actual 1995 trading results, which capture historical correlation
among business units, 95% of the variation in the Corporation's daily trading
results fell within a $31 million band centered on the daily average amount for
the year.
VAR is not an absolute measure of market risk under all conditions for all
products. In addition to VAR calculations, the Corporation performs alternative
scenario analyses to estimate the economic impact of sudden market movements on
selected portions of the trading portfolio. The results of these analyses, along
with the professional judgments of experienced business managers, are used to
supplement the VAR methodology and capture additional market-related risks,
including concentration, liquidity, event, and historical volatility and
correlation reliance risks.
In addition to VAR limits, the Corporation's overall risk management process
incorporates two other types of risk limits: non-statistical limits, and
stop-loss advisories. Non-statistical measures include net open positions, basis
point values, position concentrations and position turnover. Stop-loss
advisories are also used to advise senior management when losses of a certain
threshold are sustained from a business activity. The use of non-statistical
measures and stop-loss advisories to complement VAR limits reduces the
likelihood that potential trading losses will reach the daily VAR limit.
The Corporation manages the market risk associated with its trading
activities on an aggregate basis at the business unit level. Criteria for risk
limits include, among other factors, relevant market analysis, market liquidity,
prior track record, business strategy, and management experience and depth. Risk
limits are reviewed regularly to ensure consistency with the historical and
anticipated financial performance of a business, including returns achieved on
risk.
[GRAPH NUMBER 16]
The preceding chart contains a histogram of the Corporation's daily market
risk-related revenue for 1995. Market risk-related revenue is defined as the
daily change in value in marked-to-market trading portfolios plus any
trading-related net interest income or other revenue. Net interest income
related to funding and investment activity is excluded. The histogram covers the
Corporation's major trading units, which constitute approximately 98% of its
trading activity.
For the twelve months ended December 31, 1995, the Corporation posted
positive daily market risk-related revenue for 232 out of 260 business trading
days for international and domestic units. For 234 of the 260 days, the
Corporation's daily market risk-related revenue or losses occurred within the
negative $5 million to positive $15 million range, which is representative of
the Corporation's emphasis on market-making and sales activities. The two worst
losses shown on the histogram were due to unusual volatility in emerging market
countries in the first quarter of 1995. The loss in the $30-$35 million range
was also sustained in the first quarter of 1995 and resulted from losses in both
European interest rate and emerging market activities.
ASSET/LIABILITY MANAGEMENT
The objective of the Corporation's ALM process is to manage and control the
sensitivity of the Corporation's income to changes in market interest rates. The
process operates under the authority and direction of the Asset and Liability
Policy Committee, comprised of the Office of the Chairman and senior business
and finance executives. The Committee seeks to ensure that the risk to earnings
from adverse movements in interest rates are kept within specified limits deemed
acceptable by the Corporation.
The Corporation's net interest income is affected by changes in the level of
market interest rates based upon differences in timing between the contractual
maturity or the repricing (the "repricing") of its assets and liabilities.
Interest rate sensitivity arises in the ordinary course of the Corporation's
banking business as the repricing characteristics of its loans do not
necessarily match those of its deposits and other borrowings. This sensitivity
can be managed by altering the repricing of the Corporation's assets or
liabilities, and with the use of derivative instruments.
The Corporation, as part of its ALM process, employs a variety of cash and
derivative instruments in managing its exposure to fluctuations in market
interest rates. The Corporation uses derivative instruments to adjust the
interest rate repricing characteristics of specific on-balance sheet assets and
liabilities, or groups of assets and liabilities with similar repricing
characteristics. Derivative instruments include interest rate swaps, futures,
41
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
forward rate agreements and options (See Note One of the Notes to Consolidated
Financial Statements for a discussion of the Corporation's accounting policy
relative to derivative instruments used for asset/liability management).
Risk Management and Control: A key element of the Corporation's ALM process is
that it allows the assumption of interest sensitivity at a decentralized level
by a limited number of authorized units with close contacts to the markets.
The Asset and Liability Policy Committee has ultimate responsibility for the
Corporation's consolidated interest rate exposure. In managing exposure, the
Corporation uses quantifications of net gap exposure, earnings at risk and net
interest income simulation.
Measuring Interest Rate Sensitivity: Management uses a variety of techniques to
measure its interest rate sensitivity. One such tool is aggregate net gap
analysis, an example of which is presented below. Assets and liabilities are
placed in gap intervals based on their repricing dates. Assets and liabilities
for which no specific repricing dates exist are placed in gap intervals based on
management's judgment concerning their most likely repricing behaviors.
Derivatives used in interest rate sensitivity management are also included in
the applicable gap intervals.
A net gap for each time period is calculated by subtracting the liabilities
repricing in that interval from the assets repricing. A negative gap - more
liabilities repricing than assets - will benefit net interest income in a
declining interest rate environment and will detract from net interest income in
a rising interest rate environment. Conversely, a positive gap - more assets
repricing than liabilities - will benefit net interest income if rates are
rising and will detract from net interest income in a falling rate environment.
INTEREST SENSITIVITY TABLE
Over
At December 31, 1995 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Deposits With Banks $ 7,064 $ 840 $ 188 $ 277 $ 99 $ 8,468
Federal Funds Sold and Securities Purchased
Under Resale Agreements 17,461 -- -- -- -- 17,461
Trading Assets 52,037 -- -- -- -- 52,037
Securities 4,105 1,929 2,276 16,536 16,923 41,769
Loans 78,781 12,941 9,222 35,924 13,339 150,207
Noninterest Earning Assets 13,675 436 903 3,708 15,325 34,047
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 173,123 $ 16,146 $ 12,589 $ 56,445 $ 45,686 $303,989
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits $ 104,090 $ 11,208 $ 13,002 $ 21,003 $ 22,231 $171,534
Short-Term and Other Borrowings 49,043 1,763 367 5 21 51,199
Long-Term Debt 4,026 713 12 3,128 4,946 12,825
Other Liabilities 34,366 8 8 70 13,143 47,595
Stockholders' Equity -- -- -- -- 20,836 20,836
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 191,525 $ 13,692 $ 13,389 $ 24,206 $ 61,177 $303,989
- -------------------------------------------------------------------------------------------------------------------------------
Balance Sheet (18,402) 2,454 (800) 32,239 (15,491) --
- -------------------------------------------------------------------------------------------------------------------------------
Derivative Instruments Affecting
Interest-Rate Sensitivity(a) (787) (799) (3,137) (1,945) 6,668 --
- -------------------------------------------------------------------------------------------------------------------------------
Interest-Rate-Sensitivity Gap (19,189) 1,655 (3,937) 30,294 (8,823) --
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative Interest-Rate Sensitivity Gap $ (19,189) $(17,534) $(21,471) $ 8,823 $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
% of Total Assets (6)% (6)% (7)% 3% -- --
- -------------------------------------------------------------------------------------------------------------------------------
(a) Represents net repricing effect of derivative positions, which include
interest rate swaps, futures, forward rate agreements and options, that are used
as part of the Corporation's overall asset/liability management activities.
At December 31, 1995, the Corporation had $21,471 million more liabilities
than assets repricing within one year (including net repricing effect of
derivative positions), amounting to 7% of total assets. The consolidated gaps
include exposure to U.S. dollar interest rates as well as exposure to non-U.S.
dollar rates in currency markets in which the Corporation does business. Since
U.S. interest rates and non-U.S. interest rates may not move in tandem, the
overall cumulative gaps may tend to overstate the exposures of the Corporation.
Gap analysis is the simplest representation of the Corporation's interest
rate sensitivity. However, it cannot reveal the impact of factors such as
administered rates (e.g., the prime lending rate), pricing strategies on
consumer and business deposits, changes in balance sheet mix, or the effect of
various options embedded in balance sheet instruments. Accordingly, the Asset
and Liability Policy Committee conducts simulations of net interest income
42
24
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
under a variety of market interest rate scenarios. These simulations which
consider forecasted balance sheet changes, such as asset sales/securitizations,
and forecasted changes in interest rate spreads provide the Committee with an
estimate of earnings at risk for given changes in interest rates.
At December 31, 1995, based on these simulations, earnings at risk to an
immediate 100 basis point rise in market interest rates was estimated to be less
than three percent of projected 1996 after-tax net income (excluding the
merger-related restructuring charge). An immediate 100 basis point rise in
interest rates is a hypothetical rate scenario, used to calibrate risk, and does
not necessarily represent management's current view of future market
developments.
All the measurements of risk described above are made based upon the
Corporation's business mix and interest rate exposures at the particular point
in time. The exposures change continuously as a result of the Corporation's
ongoing business and its risk management initiatives. While management believes
these measures provide a meaningful representation of the Corporation's interest
rate sensitivity, they do not necessarily take into account all business
developments that have an effect on net income, such as changes in credit
quality or the size and composition of the balance sheet.
Interest rate swaps: Interest rate swaps are one of the various financial
instruments used in the Corporation's ALM activities. Although the Corporation
believes the results of its ALM activities should be evaluated on an integrated
basis, taking into consideration all on-balance sheet and related derivative
instruments and not a specific group of financial instruments, the interest rate
swap maturity table, which follows, provides an indication of the Corporation's
interest rate swap activity.
The following table summarizes the outstanding ALM interest rate swap
notional amounts at December 31, 1995, by yearly intervals. The decrease in
notional amounts from one period to the next period represents maturities of the
underlying contracts. The weighted-average interest rates to be received and
paid on such swaps are presented for each yearly interval. Variable rates
presented are generally based on the short-term interest rates for relevant
currencies such as the London Interbank Offered Rate (LIBOR). Basis swaps are
interest rate swaps based on two floating rate indices (e.g., LIBOR and prime).
The table was prepared under the assumption that variable interest rates
remain constant at December 31, 1995 levels and, accordingly, the actual
interest rates to be received or paid will be different to the extent that such
variable rates fluctuate from December 31, 1995 levels. However, the Corporation
expects the impact of any interest rate changes to be largely mitigated by
corresponding changes in the interest rates and values associated with the
linked assets and liabilities.
OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY
INTERVALS
For the Year Beginning January 1, (in millions) 1996 1997 1998 1999 2000 Thereafter
- ----------------------------------------------------------------------------------------------------------------------
RECEIVE FIXED SWAPS:
Notional amount $35,998 $22,574 $14,558 $12,384 $10,857 $8,254
Weighted-average:
Receive rate 6.77% 7.03% 7.28% 7.36% 7.25% 7.16%
Pay rate 5.48 5.73 5.93 5.95 5.93 5.97
PAY FIXED SWAPS:
Notional amount $28,307 $15,763 $ 9,550 $ 7,192 $ 5,030 $3,106
Weighted-average:
Receive rate 5.59% 5.59% 5.71% 5.76% 5.70% 5.65%
Pay rate 7.11 7.32 7.43 7.51 7.46 7.53
BASIS SWAPS:
Notional amount $ 5,437 $ 3,910 $ 2,984 $ 2,065 $ 767 $ 612
Weighted-average:
Receive rate 6.35% 5.82% 5.89% 5.91% 5.94% 5.94%
Pay rate 6.18 5.45 5.82 5.89 5.93 5.92
- ----------------------------------------------------------------------------------------------------------------------
Total Notional Amounts(a) $69,742 $42,247 $27,092 $21,641 $16,654 $1,972
- ----------------------------------------------------------------------------------------------------------------------
(a) At December 31, 1995, approximately $17 billion of notional amounts are
interest rate swaps that, as part of the Corporation's asset/liability
management, are used in place of cash market instruments. Of this amount, $10
billion is expected to mature in 1996, $4 billion in 1997 with the remaining $3
billion in 1998 and thereafter. (See Note One of the Notes to Consolidated
Financial Statements).
43
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table summarizes the Corporation's assets and liabilities at
December 31, 1995 with the notional amount of related derivatives used for ALM
purposes.
Derivative Contracts and Related Balance Sheet Positions
Notional Amount(a)
------------------------
Balance Interest Other ALM
December 31, (in millions) Sheet Amount Rate Swaps Contracts(b)
- --------------------------------------------------------------------------------
Deposits with Banks $ 8,468 $ 100 $ 400
Securities - Available-for-Sale 37,141 2,724 660
Loans 150,207 23,597 47,571
Other Assets 14,843 905 4,393
Deposits 171,534 20,043 20,544
Long-Term Debt 12,825 5,110 600
- --------------------------------------------------------------------------------
(a) At December 31, 1995, notional amounts of approximately $17 billion for
interest rate swaps and $3 billion for other ALM contracts, both of which are
used in place of cash instruments (See Note One of the Notes to Consolidated
Financial Statements), have been excluded from the above table.
(b) Includes futures, forward rate agreements and options.
The favorable impact on net interest income from the Corporation's ALM
derivative activities, whereby derivative instruments are used to alter the
yield on certain of the Corporation's assets and liabilities, was $153 million
for 1995, compared with $459 million for 1994. The Corporation also has
derivatives that affect noninterest revenue (such as derivatives linked to
mortgage servicing rights).
The preceding table includes various derivative contracts used by the
Corporation to reduce risks associated with its mortgage servicing and loans
held for sale. The value of the Corporation's mortgage servicing rights is
affected by the level of prepayments made by mortgage holders, which in turn is
affected by changes in interest rates. Interest rate swaps, futures and
purchased option contracts are used to mitigate such risk. The Corporation also
originates certain mortgage and consumer loans for sale or securitization to
third-party investors. To reduce the risk of changes in value between the time
that such loans are originated and the date of sale, the Corporation enters into
futures, forward, and purchased option contracts.
Derivative notional amounts of approximately $5.2 billion related to mortgage
servicing assets and approximately $9.1 billion related to mortgage and consumer
loans held for sale were outstanding at December 31, 1995. The weighted average
maturity of contracts linked to mortgage servicing assets is approximately four
years. Contracts related to loans held for sale generally mature within one
year.
Foreign currency exposures primarily represent the net investment in overseas
entities and are managed through the use of foreign exchange forward contracts
matching outstanding foreign currency positions on a currency by currency basis.
These contracts, which are not included in the preceding table, hedge the impact
of foreign exchange rate changes on the Corporation's net investment in its
overseas entities.
The following table reflects the deferred gains/losses and unrecognized
gains/losses of the Corporation's ALM derivative contracts for 1995 and 1994.
December 31, (in millions) 1995 1994 Change
- --------------------------------------------------------------------------------
ALM Derivative Contracts:
Net Deferred Gains (Losses) $ (98) $ (73) $ (25)
Net Unrecognized Gains (Losses) 184(a) (1,456) 1,640
- -------------------------------------------------------------------------------
Net ALM Derivative Gains (Losses) $ 86 $(1,529) $ 1,615
- --------------------------------------------------------------------------------
(a) Amount includes $69 million in net unrecognized gains from mortgage
servicing rights, and $99 million in net unrecognized losses from daily margin
settlements on open futures contracts. For additional information, see Note
Twenty One of the Notes to Consolidated Financial Statements.
Net deferred gains/losses relate to futures, forward contracts and swaps used
in connection with available-for-sale securities, loans, deposits and debt. The
unrecognized gains/losses relating to ALM activities are primarily the result of
interest rate swap, option, forward and futures contracts.
The net deferred losses at December 31, 1995 are expected to be amortized as
yield adjustments in interest income or interest expense over the periods
reflected in the following table.
Amortization of Net Deferred Gains (Losses) on Closed ALM Contracts
Year Ended December 31, (in millions)
- --------------------------------------------------------------------------------
1996 $ 32
1997 (15)
1998 (56)
1999 (55)
2000 and After (4)
- --------------------------------------------------------------------------------
Total $(98)
- --------------------------------------------------------------------------------
The Consolidated Balance Sheet includes unamortized premiums on open ALM
option contracts which will be amortized as a reduction to net interest income
over the periods indicated in the following table.
AMORTIZATION OF PREMIUMS ON OPEN ALM OPTIONS CONTRACTS
Year Ended December 31, (in millions)
- --------------------------------------------------------------------------------
1996 $ 32
1997 21
1998 22
1999 17
2000 and After 63
- --------------------------------------------------------------------------------
Total $155
- --------------------------------------------------------------------------------
44
26
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
- - OPERATING RISK MANAGEMENT
The Corporation, like all large financial institutions, is exposed to many types
of operating risk, including the risk of fraud by employees or outsiders,
unauthorized transactions by employees, and errors relating to computer and
telecommunications systems. The Corporation maintains a system of controls that
is designed to keep operating risk at appropriate levels in view of the
financial strength of the Corporation, the characteristics of the businesses and
markets in which the Corporation operates, competitive circumstances and
regulatory considerations. However, from time to time in the past, the
Corporation has suffered losses from operating risk and there can be no
assurance that the Corporation will not suffer such losses in the future.
- - CAPITAL AND LIQUIDITY RISK MANAGEMENT
CAPITAL
The Corporation's level of capital at December 31, 1995 remained strong, with
capital ratios well in excess of regulatory guidelines. The Corporation's Tier 1
and Total Capital ratios were 8.22% and 12.27%, respectively, at December 31,
1995. These ratios, as well as the leverage ratio discussed below, exclude the
assets and off-balance sheet financial instruments of the Corporation's
securities subsidiaries as well as the Corporation's investment in such
subsidiaries. In addition, the provisions of SFAS 115 do not apply to the
calculation of these ratios.
Total capitalization (the sum of Tier 1 Capital and Tier 2 Capital as
discussed below) increased by $2.0 billion during 1995 to $28.3 billion at
December 31, 1995. The Corporation manages its capital to execute its strategic
business plans and support its growth and investments, including acquisition
strategies in its core businesses.
During 1995, the Corporation repurchased approximately 26.3 million shares of
its outstanding common stock in the open market. These repurchases were largely
undertaken to meet the anticipated needs of the Corporation's employee stock
option and incentive plans. During 1995, approximately 18.0 million shares were
issued (of which 14.5 million were from treasury) under various employee stock
option and incentive plans, and 7.6 million shares were issued (from treasury)
in connection with the conversion of the Corporation's 10% convertible preferred
stock. Additionally, 6.9 million shares were issued in connection with the
acquisition of the U.S. Trust securities processing businesses.
The Corporation raised the cash dividend on its common stock to $.56 per
share, an increase from $.50 per share, commencing with the dividend payable on
April 30, 1996. Management's current expectation is that the dividend policy of
the Corporation will generally be to pay a common stock dividend equal to
approximately 25-35% of the Corporation's net income (excluding restructuring
charges) less preferred dividends. Future dividend policies will be determined
by the Board of Directors in light of the earnings and financial condition of
the Corporation and its subsidiaries and other factors, including applicable
governmental regulations and policies.
The Corporation's total stockholders' equity at the 1995 year-end was $20.8
billion, compared with $18.9 billion at December 31, 1994. The $1.9 billion
increase primarily reflected the retention of earnings (net income of $3.0
billion less total common and preferred stock dividends of $1.0 billion)
generated during 1995.
The tables which follow set forth various capital ratios and components of
capital at the dates indicated.
CAPITAL RATIOS Minimum
Regulatory
December 31, 1995 1994 Requirement
- --------------------------------------------------------------------------------
Tier 1 Capital Ratio(a)(c) 8.22% 8.05% 4.00%
Total Capital Ratio(a)(c) 12.27 12.23 8.00
Tier 1 Leverage Ratio(b)(c) 6.68 6.63 3.00-5.00
Common Stockholders' Equity to
Total Assets 5.98 5.61 --
Total Stockholders' Equity to
Total Assets 6.85 6.61 --
- --------------------------------------------------------------------------------
(a) Tier 1 Capital or Total Capital divided by risk-weighted assets.
Risk-weighted assets include assets and off-balance sheet positions, weighted by
the type of instrument and the risk weight of the counterparty, collateral or
guarantor.
(b) Tier 1 Capital divided by adjusted average assets.
(c) Including the Corporation's securities subsidiaries, the December 31, 1995
Tier 1 Capital, Total Capital and Tier 1 Leverage ratios were 8.37%, 12.67% and
6.27%, respectively, compared with 8.22%, 12.64% and 6.21%, respectively, at
December 31, 1994.
COMPONENTS OF CAPITAL
December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
TIER 1 CAPITAL:
Common Stockholders' Equity $ 18,424 $ 16,496
Nonredeemable Preferred Stock 2,650 2,850
Minority Interest 162 143
Less: Goodwill 1,446 1,379
Non-Qualifying Intangible Assets 116 169
50% Investment in Securities Subsidiaries 698 624
- --------------------------------------------------------------------------------
Tier 1 Capital 18,976 17,317
- --------------------------------------------------------------------------------
TIER 2 CAPITAL:
Long-Term Debt Qualifying as Tier 2 7,139 6,910
Qualifying Allowance for Credit Losses 2,907 2,713
Less: 50% Investment in Securities Subsidiaries 698 624
- --------------------------------------------------------------------------------
Tier 2 Capital 9,348 8,999
- --------------------------------------------------------------------------------
Total Qualifying Capital $ 28,324 $ 26,316
- --------------------------------------------------------------------------------
Risk-Weighted Assets(a) $230,887 $215,105
- --------------------------------------------------------------------------------
(a) Includes off-balance sheet risk-weighted assets in the amount of $68,153
million and $61,416 million, respectively, at December 31, 1995 and 1994.
45
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
[GRAPH NUMBER 17]
Under the risk-based capital guidelines of the Federal Reserve Board, banking
organizations are required to maintain certain ratios of "Qualifying Capital" to
"risk-weighted assets". "Qualifying Capital" is classified into two tiers,
referred to as Tier 1 Capital and Tier 2 Capital. In addition, the Federal
Reserve Board has established another capital measure, the Tier 1 leverage
ratio. The Tier 1 leverage ratio is defined as Tier 1 Capital (as defined under
the risk-based capital guidelines) divided by average total assets (net of
allowance for credit losses, goodwill and certain intangible assets). Under the
guidelines, to be "well capitalized," a banking organization must have a Tier 1
Capital ratio of at least 6%, Total Capital ratio of at least 10%, and Tier 1
leverage ratio of at least 5%. At December 31, 1995, the capital ratios for each
of the Corporation's banking subsidiaries, including The Chase Manhattan Bank,
Chemical Bank and Texas Commerce Bank, N.A., exceeded the above ratios required
to be well capitalized.
As part of the Corporation's commitment to a disciplined capital policy,
management has targeted a Tier 1 capital ratio for the Corporation of 8 to
8.25%. As part of this policy, management would divest or take other appropriate
action to address any nonstrategic businesses determined by the Corporation to
be underperforming, and would also return excess capital to shareholders. In
addition, the Corporation has revised its previously announced buy-back program
to terminate at September 30, 1996 and to provide that purchases of shares of
common stock of the Corporation under the plan to such date would be in
accordance with the pooling-of-interests accounting rules.
LIQUIDITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Corporation's financial commitments and
to capitalize on opportunities for the Corporation's business expansion.
Liquidity management addresses the Corporation's ability to meet deposit
withdrawals either on demand or at contractual maturity, to repay borrowings as
they mature, and to make new loans and investments as opportunities arise.
Liquidity is managed on a daily basis at both the parent company and the
subsidiary levels, enabling senior management to monitor effectively changes in
liquidity and to react accordingly to fluctuations in market conditions.
Contingency plans exist and could be implemented on a timely basis to minimize
the risk associated with dramatic changes in market conditions.
In managing liquidity, the Corporation takes into account the various legal
limitations on the extent to which banks may pay dividends to their parent
companies or finance or otherwise supply funds to certain of their affiliates.
The primary source of liquidity for the bank subsidiaries of the Corporation
derives from their ability to generate core deposits (which includes all
deposits except noninterest-bearing time deposits, foreign deposits and
certificates of deposit of $100,000 or more). The Corporation considers funds
from such sources to comprise its subsidiary banks' "core" deposit base because
of the historical stability of such sources of funds. These deposits fund a
portion of the Corporation's asset base, thereby reducing the Corporation's
reliance on other, more volatile, sources of funds. The average core deposits at
the Corporation's bank subsidiaries for 1995 were $76 billion and the
Corporation's average core deposits as a percentage of average loans was 52% for
1995. Foreign deposits generated in the Corporation's global wholesale and
retail businesses are also considered to be an additional source of liquidity
for the Corporation.
[GRAPH NUMBER 18]
46
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The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
The Corporation holds marketable securities and other short-term investments
which can be readily converted to cash. As part of the Corporation's on-going
capital management process, loan syndication networks and retail securitization
programs are maintained in order to facilitate the timely disposition of assets,
if and when deemed desirable.
The Corporation is an active participant in the capital markets. In addition
to issuing commercial paper and medium-term notes, the Corporation raises funds
through the issuance of long-term debt, common stock and preferred stock.
The Corporation's long-term debt at December 31, 1995 was $12,825 million, a
decrease of $236 million from the 1994 year-end. The decrease resulted primarily
from maturities of $1,476 million of the Corporation's long-term debt (including
$614 million of senior medium-term notes and $862 million of other senior notes)
and the redemption of $637 million of senior notes. These decreases were
partially offset by additions to the Corporation's long-term debt of $1,840
million (including $360 million of senior medium-term notes, $399 million of
subordinated medium-term notes, $531 million of other senior notes and $550
million of other subordinated notes).
As previously discussed, during the second quarter of 1995, the Corporation
called all of the outstanding shares of its 10% convertible preferred stock for
redemption. Substantially all of the 10% convertible preferred stock was
converted prior to the redemption date, at the option of the holders, into
approximately 7.6 million shares of the Corporation's common stock. The shares
of common stock issued upon such conversion were issued from treasury. The
Corporation will continue to evaluate the opportunity for future redemptions of
its outstanding debt and preferred stock in light of current market conditions.
The following table shows the debt ratings of the Corporation, Chemical Bank
and The Chase Manhattan Bank at December 31, 1995. After the merger
announcement, Moody's upgraded its debt ratings of both Chemical and Chase.
Rating upgrades should continue to enhance the Corporation's access to global
capital and money markets, a primary source of liquidity for an international
money-center institution. The ability to access this geographically diverse
assortment of distribution channels and to issue a wide variety of capital and
money market instruments at various maturities provides the Corporation with a
full array of alternatives for managing its liquidity position.
DEBT RATINGS
December 31, 1995 Corporation(a) Banks(b)
- --------------------------------------------------------------------------------
Moody's
Senior A1 Aa3
Subordinated A2 A1
Standard & Poor's
Senior A A+
Subordinated A- A
- --------------------------------------------------------------------------------
(a) Represents the debt ratings for each of the predecessor institutions.
(b) Represents the debt ratings for each of Chemical Bank and The Chase
Manhattan Bank.
- - ACCOUNTING DEVELOPMENTS
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based compensation plans. Such plans include all
arrangements by which employees or others receive shares of stock or other
equity instruments of the Corporation, or arrangements by which the Corporation
incurs liabilities in amounts based on the price of the Corporation's stock.
Examples are stock options, restricted stock, restricted stock units, stock
appreciation rights and stock purchase plans.
SFAS 123 allows two alternative accounting methods: (1) a fair-value-based
method, or (2) an intrinsic-value-based method which is already prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Both the accounting and disclosure requirements of SFAS
123 are effective for fiscal years beginning after December 15, 1995. The
Corporation intends to continue accounting for its employee stock compensation
plans under its current method (APB 25), and will adopt the disclosure
requirements of SFAS 123 in 1996.
47
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- - COMPARISON BETWEEN 1994 AND 1993
OPERATING HIGHLIGHTS
The Corporation's reported net income for 1994 was $2,486 million, compared with
net income of $2,394 million in 1993. The Corporation's primary earnings per
share were $5.02 in 1994, an increase from $4.85 in 1993. On a fully-diluted
basis, earnings per share in 1994 were $4.97, compared with $4.79 for the prior
year.
Net income on a pro forma basis was $2,589 million in 1994, an increase of
14% from comparable earnings of $2,266 million in 1993. Pro forma primary
earnings per share were $5.26 in 1994, an increase of 16% from $4.55 in 1993,
while fully-diluted earnings per share were $5.20 in 1994, compared with $4.51
for the prior year. The pro forma results represent earnings on a fully-taxed
basis and exclude the impact of changes in accounting principles, restructuring
charges, charges related to assets held for accelerated disposition and gains on
the sales of such assets, gains on emerging markets past-due interest bond sales
and foreclosed property expense.
NET INTEREST INCOME
The Corporation's net interest income was $8,312 million in 1994, compared with
$8,291 million in 1993. The increase in 1994 was attributable to a higher level
of average interest-earning assets, which was partially offset by narrower
spreads due to the effect of rising interest rates.
Average interest-earning assets were $227.3 billion in 1994, an increase of
6% from $214.8 billion in 1993, reflecting a higher level of liquid assets and
securities. The composition of average interest-earning assets shifted during
the latter part of 1993 and early part of 1994 to support the Corporation's
trading businesses.
PROVISION FOR LOSSES AND NET CHARGE-OFFS
The provision for losses in 1994 was $1,050 million, compared with $2,254
million in 1993, a decline of 53%. Net charge-offs were $1,612 million compared
with $2,618 million in 1993, a decline of 38%. The 1994 results included a $148
million charge related to the decision to designate certain assets as
held-for-accelerated disposition as well as a $291 million charge incurred in
connection with management's final valuation of its emerging markets portfolio.
In 1993, the Corporation also recorded a special provision of $566 million
relating to its loans held for accelerated disposition portfolio.
NONINTEREST REVENUE
Noninterest revenue totaled $6,701 million in 1994, compared with $7,181 million
in 1993. The decrease from the prior year reflected lower trading revenue, a
decline in securities gains, and a decline in gains on the sale of emerging
markets-related past-due interest bonds (included in other revenue). These
decreases were partially offset by increased fee-based revenue as well as
increased revenues from equity-related investments (included in other revenue).
Corporate finance and syndication fees in 1994 were $593 million, a 19%
increase from the prior year, principally resulting from the continued strong
growth in loan syndication and other investment banking activities.
Trust and investment management fees in 1994 were $1,056 million, an increase
of $133 million from $923 million in 1993. The higher level of fees reflected an
increase in personal trust fees principally due to new customer relationships
developed as a result of the acquisition of Ameritrust Texas Corporation
("Ameritrust") by Texas Commerce and growth in the global private banking
businesses.
Credit card revenue in 1994 was $754 million, an increase of 6% from 1993,
reflecting a growing cardholder base, primarily as a result of the Corporation's
co-branded Shell MasterCard program, which was launched in the fourth quarter of
1993.
Service charges on deposit accounts totaled $408 million in 1994, an increase
of 3% over 1993, principally reflecting pricing initiatives during the first
half of 1994 related to retail accounts, partially offset by a slightly smaller
deposit base.
Fees for other financial services for 1994 were $1,413 million, an increase
of $70 million from 1993, primarily due to increased mortgage servicing fees
reflecting a higher level of mortgage servicing volume from the Margaretten and
AmRes acquisitions, as well as additions to the portfolio from mortgage
originations.
Trading-related revenue in 1994 was $1,339 million, a decrease of 29% from
the prior year, due to a difficult trading environment during 1994, when
compared with 1993. The interest rate environment in the U.S. and European
markets was volatile during 1994, while difficult conditions existed in the
emerging debt markets and European government bond markets. Additionally, the
Corporation incurred a $70 million loss resulting from unauthorized foreign
exchange transactions involving the Mexican peso.
Securities gains were $65 million in 1994, compared with $189 million in
1993. The decrease was due to the higher interest rate environment exerting
downward pressure on market prices.
48
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The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
The Corporation's other noninterest revenue for 1994 was $1,239 million,
compared with $1,350 million in 1993. Revenue from equity-related investments,
which includes income from venture capital activities and emerging markets
investments, was $577 million in 1994, an increase of 7% from 1993. Included in
other noninterest revenue were net gains of $233 million from the sale of
emerging markets-related securities, compared with net gains of $469 million in
1993. Also included in 1994 other noninterest revenue were $104 million of net
gains from the sale of assets held for accelerated disposition, compared with
$291 million in 1993, and equity income from CIT of $73 million, an increase of
12% from 1993.
NONINTEREST EXPENSE
Noninterest expense in 1994 was $10,002 million, compared with $9,828 million in
1993. Included in the results for 1994 was a $260 million restructuring charge,
taken in connection with a program to improve earnings per share, a $48 million
restructuring charge related to the closing of 50 New York branches, and a
charge of $157 million related to productivity initiatives. The 1993 results
included a $115 million MHC merger-related charge, a $43 million charge
associated with the acquisition of certain assets of the First City
Bancorporation of Texas, Inc. by Texas Commerce, and a $45 million charge for
the consolidation of data centers and other facilities. The 1993 results also
included a special provision of $318 million relating to the Corporation's other
real estate assets held for accelerated disposition. For a further discussion
regarding the restructuring charges taken by the Corporation during 1994 and
1993, see Note Fifteen of the Notes to Consolidated Financial Statements.
Excluding restructuring charges and foreclosed property expense in both
years, noninterest expense for 1994, when compared with the prior year,
reflected higher expenses associated with investments in certain key businesses
such as the Shell MasterCard program, the trading and securities businesses, and
the Corporation's acquired businesses such as Margaretten, Ameritrust and AmRes.
Salaries and employee benefits expenses in 1994 were $4,861 million, compared
with $4,489 million in 1993. The increase in 1994 was primarily due to
additional staff costs resulting from business acquisitions made in 1994 and the
latter part of 1993, the implementation of the Shell MasterCard program, and
increased incentives related to higher earnings.
Occupancy expense was $968 million in 1994, a decrease of $23 million from
1993. The decline from 1993 principally resulted from the termination of a
facilities lease in London at the beginning of 1994, the impact of branch
divestitures, and the continuing consolidation of the New York branch system.
Partially offsetting these factors were additional occupancy expenses related to
acquisitions, as well as costs associated with the consolidation and relocation
of certain data centers.
Equipment expense in 1994 was $724 million, an increase of $60 million,
principally due to higher costs incurred for system enhancements to support the
Corporation's trading activities, the consolidation of its data centers, and for
upgrades to its ATM technology.
Foreclosed property expense was $50 million in 1994, compared with $509
million in 1993, reflecting significant progress in managing the Corporation's
real estate portfolio.
For 1994, other expense was $2,934 million, an increase of 11% from the 1993
level. The increase reflected costs relating to expanded marketing programs in
support of certain businesses (particularly credit cards and transaction and
information services), higher professional services and telecommunication costs,
as well as the impact in 1994 of expenses associated with the Corporation's
business acquisitions during 1994 and the latter part of 1993.
INCOME TAXES
The Corporation recorded income tax expense of $1,475 million in 1994, compared
with $798 million in 1993. Included in the 1993 income tax expense were
approximately $331 million of Federal income tax benefits.
The Corporation's effective tax rate was 37.2% in 1994 compared with 28.3% in
1993. Excluding $70 million of benefits recognized under SFAS 109 in 1994, and
$331 million of such benefits in 1993, the Corporation's effective tax rate
would have been 39.0% in 1994 and 40.0% in 1993.
NONPERFORMING ASSETS
The Corporation's total nonperforming assets at December 31, 1994 were $2,126
million, a decline of 62% from $5,630 million at December 31, 1993. This
improvement in the Corporation's credit profile is a result of a significantly
lower level of loans being placed on nonperforming status, repayments,
charge-offs, and the Corporation's continuing loan workout and collection
activities.
In December 1994, the Corporation segregated approximately $735 million of
real estate loans and real estate owned (approximately $580 million
nonperforming assets) and designated such assets as Assets Held for Accelerated
Disposition. These assets were excluded from the December 31, 1994 nonperforming
assets category.
ALLOWANCE FOR CREDIT LOSSES
The total allowance for credit losses at December 31, 1994 was $3,894 million,
or 2.74% of total loans and 245% of nonperforming loans, compared with $4,445
million, or 3.24% of total loans and 122% of nonperforming loans at the 1993
year-end.
49
31
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
- --------------------------------------------------------------------------------
- - TO OUR STOCKHOLDERS
The management of The Chase Manhattan Corporation and its subsidiaries has the
responsibility for preparing the accompanying consolidated financial statements
and for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles. The consolidated
financial statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
Management maintains a comprehensive system of internal control to assure the
proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. The Corporation maintains a
strong internal auditing program that independently assesses the effectiveness
of the system of internal control and recommends possible improvements thereto.
Management believes that as of December 31, 1995, the Corporation maintains an
effective system of internal control.
The Audit Committee of the Board of Directors reviews the systems of internal
control and financial reporting. The Committee meets and consults regularly with
management, the internal auditors and the independent accountants to review the
scope and results of their work.
The accounting firm of Price Waterhouse LLP has performed an independent
audit of the Corporation's financial statements. Management has made available
to Price Waterhouse LLP all of the Corporation's financial records and related
data, as well as the minutes of stockholders' and directors' meetings.
Furthermore, management believes that all representations made to Price
Waterhouse LLP during its audit were valid and appropriate. The firm's report
appears below.
/s/ Walter V. Shipley
Walter V. Shipley
Chairman of the Board and Chief Executive Officer
/s/ Thomas G. Labrecque
Thomas G. Labrecque
President and Chief Operating Officer
/s/ Peter J. Tobin
Peter J. Tobin
Chief Financial Officer
/s/ Joseph L. Sclafani
Joseph L. Sclafani
Senior Vice President and Controller
March 31, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PRICE WATERHOUSE LLP 1177 AVENUE OF THE AMERICAS, NEW YORK, NY 10036
To the Board of Directors and Stockholders of The Chase Manhattan Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Chase Manhattan Corporation and its subsidiaries at December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements, which give effect to
the March 31, 1996 merger of The Chase Manhattan Corporation and Chemical
Banking Corporation, are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Notes Four, Thirteen and Sixteen to the consolidated
financial statements, in 1993 the Corporation changed its method of accounting
for certain investments in debt and marketable equity securities, postretirement
benefits other than pensions, and income taxes.
Price Waterhouse LLP
March 31, 1996
50
32
The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
December 31, (in millions, except share data) 1995 1994
- ----------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 14,794 $ 13,545
Deposits with Banks 8,468 12,440
Federal Funds Sold and Securities Purchased Under Resale Agreements 17,461 20,077
Trading Assets:
Debt and Equity Instruments 26,212 17,926
Risk Management Instruments 25,825 25,985
Securities:
Available-for-Sale 37,141 23,140
Held-to-Maturity (Market Value: $4,659 in 1995 and $10,160 in 1994) 4,628 10,650
Loans (Net of Unearned Income: $1,073 in 1995 and $895 in 1994) 150,207 142,231
Allowance for Credit Losses (3,784) (3,894)
Premises and Equipment 3,757 3,951
Due from Customers on Acceptances 1,896 1,608
Accrued Interest Receivable 2,541 2,466
Other Assets 14,843 15,258
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 303,989 $ 285,383
- ----------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 35,414 $ 33,389
Interest-Bearing 64,640 68,063
Foreign:
Noninterest-Bearing 3,702 2,444
Interest-Bearing 67,778 62,566
- ----------------------------------------------------------------------------------------------------------
Total Deposits 171,534 166,462
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 37,263 32,410
Other Borrowed Funds 13,936 11,780
Acceptances Outstanding 1,915 1,629
Trading Liabilities 34,341 30,356
Accounts Payable, Accrued Expenses and Other Liabilities 11,339 10,812
Long-Term Debt 12,825 13,061
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 283,153 266,510
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (See Note Twenty Three)
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,850
Common Stock (Authorized 750,000,000 Shares,
Issued 457,587,675 Shares in 1995 and 447,110,332 Shares in 1994) 458 447
Capital Surplus 11,075 10,671
Retained Earnings 7,997 6,045
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (237) (473)
Treasury Stock, at Cost (22,583,225 Shares in 1995 and 18,337,533 Shares in 1994) (1,107) (667)
- ----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 20,836 18,873
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 303,989 $ 285,383
- ----------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
51
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The Chase Manhattan Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, (in millions, except per share data) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $12,842 $11,004 $11,207
Securities 2,591 2,329 2,412
Trading Assets 1,464 1,282 762
Federal Funds Sold and Securities Purchased Under Resale Agreements 1,889 1,827 1,368
Deposits with Banks 824 869 985
- -----------------------------------------------------------------------------------------------
Total Interest Income 19,610 17,311 16,734
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 6,291 4,704 4,255
Short-Term and Other Borrowings 4,175 3,447 3,163
Long-Term Debt 942 848 1,025
- -----------------------------------------------------------------------------------------------
Total Interest Expense 11,408 8,999 8,443
- -----------------------------------------------------------------------------------------------
Net Interest Income 8,202 8,312 8,291
Provision for Losses 758 1,050 2,254
Provision for Loans Held for Accelerated Disposition -- -- 566
- -----------------------------------------------------------------------------------------------
Net Interest Income After Provisions for Losses 7,444 7,262 5,471
- -----------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 796 593 500
Trust and Investment Management Fees 1,018 1,056 923
Credit Card Revenue 834 754 710
Service Charges on Deposit Accounts 417 408 397
Fees for Other Financial Services 1,453 1,413 1,343
Trading Revenue 1,016 1,173 1,769
Securities Gains 132 65 189
Other Revenue 1,092 1,239 1,350
- -----------------------------------------------------------------------------------------------
Total Noninterest Revenue 6,758 6,701 7,181
- -----------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 4,208 3,978 3,660
Employee Benefits 899 883 829
Occupancy Expense 897 968 991
Equipment Expense 755 724 664
Foreclosed Property Expense (75) 50 509
Provision for Other Real Estate Held for Accelerated Disposition -- -- 318
Restructuring Charge 15 465 203
Other Expense 2,691 2,934 2,654
- -----------------------------------------------------------------------------------------------
Total Noninterest Expense 9,390 10,002 9,828
- -----------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Effect of Accounting Changes 4,812 3,961 2,824
Income Tax Expense 1,842 1,475 798
- -----------------------------------------------------------------------------------------------
Income Before Effect of Accounting Changes 2,970 2,486 2,026
Net Effect of Changes in Accounting Principles (11) -- 368
- -----------------------------------------------------------------------------------------------
Net Income $ 2,959 $ 2,486 $ 2,394
- -----------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 2,732 $ 2,221 $ 2,099
- -----------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Primary:
Income Before Effect of Accounting Changes $ 6.23 $ 5.02 $ 4.00
Net Effect of Changes in Accounting Principles (0.03) -- .85
- -----------------------------------------------------------------------------------------------
Net Income $ 6.20 $ 5.02 $ 4.85
- -----------------------------------------------------------------------------------------------
Assuming Full Dilution:
Income Before Effect of Accounting Changes $ 6.07 $ 4.97 $ 3.96
Net Effect of Changes in Accounting Principles (0.03) -- .83
- -----------------------------------------------------------------------------------------------
Net Income $ 6.04 $ 4.97 $ 4.79
- -----------------------------------------------------------------------------------------------
Average Common and Common Equivalent Shares 440.8 442.2 433.1
- -----------------------------------------------------------------------------------------------
Average Common Shares Assuming Full Dilution 453.5 450.9 441.7
- -----------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
52
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The Chase Manhattan Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended December 31, (in millions) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at Beginning of Year $ 2,850 $ 3,053 $ 3,325
Issuance of Stock -- 428 572
Redemption of Stock (200) (631) (844)
- ------------------------------------------------------------------------------------------------------
Balance at End of Year 2,650 2,850 3,053
- ------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at Beginning of Year 447 445 409
Issuance of Stock 11 2 36
- ------------------------------------------------------------------------------------------------------
Balance at End of Year 458 447 445
- ------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at Beginning of Year 10,671 10,652 9,700
Issuance of Stock 397 40 969
Premium on Redemption of Preferred Stock -- (12) (17)
Restricted Stock Granted, Net of Amortization 7 (9) --
- ------------------------------------------------------------------------------------------------------
Balance at End of Year 11,075 10,671 10,652
- ------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 6,045 4,484 2,931
Net Income 2,959 2,486 2,394
Cash Dividends Declared:
Preferred Stock (227) (253) (296)
Common Stock (789) (672) (549)
Accumulated Translation Adjustment(a) 9 -- 4
- ------------------------------------------------------------------------------------------------------
Balance at End of Year 7,997 6,045 4,484
- ------------------------------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES
Balance at Beginning of Year (473) 479 --
Impact of Accounting Change -- -- 479
Net Change in Fair Value of Securities Available-for-Sale, Net of Taxes 236 (952) --
- ------------------------------------------------------------------------------------------------------
Balance at End of Year (237) (473) 479
- ------------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY, AT COST
Balance at Beginning of Year (667) (12) (12)
Purchase of Treasury Stock (1,389) (693) --
Reissuance of Treasury Stock 949 38 --
- ------------------------------------------------------------------------------------------------------
Balance at End of Year (1,107) (667) (12)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $20,836 $18,873 $19,101
- ------------------------------------------------------------------------------------------------------
(a) Balance was $11 million, $2 million and $2 million at December 31, 1995,
1994 and 1993, respectively.
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
53
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The Chase Manhattan Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, (in millions) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 2,959 $ 2,486 $ 2,394
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Net Effect of Changes in Accounting Principles 11 -- (368)
Provision for Losses 758 1,050 3,138
Restructuring Charge 15 465 203
Depreciation and Amortization 866 765 779
Net Change In:
Trading-Related Assets (6,466) (1,523) (12,228)
Accrued Interest Receivable (86) (460) 83
Other Assets 328 331 2,242
Trading-Related Liabilities 3,423 3,026 --
Accrued Interest Payable 12 331 (139)
Other Liabilities (1,430) 1,373 1,835
Other, Net (746) (2,740) (944)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities (356) 5,104 (3,005)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 4,054 (840) (3,873)
Federal Funds Sold and Securities Purchased Under Resale Agreements 2,094 (2,936) (4,819)
Loans Due to Sales and Securitizations 32,987 22,872 25,882
Other Loans, Net (44,455) (29,138) (22,485)
Other, Net (1,281) (250) 1,629
Proceeds from the Maturity of Held-to-Maturity Securities 2,395 3,554 5,624
Proceeds from the Sale of Held-to-Maturity Securities -- -- 152
Purchases of Held-to-Maturity Securities (1,052) (2,614) (7,181)
Proceeds from the Maturity of Available-for-Sale Securities 7,427 5,357 4,341
Proceeds from the Sale of Available-for-Sale Securities 54,290 23,086 12,027
Purchases of Available-for-Sale Securities (69,311) (30,497) (18,366)
Cash Used in Acquisitions (10) (721) (683)
Proceeds from Divestitures of Nonstrategic Businesses 1,050 -- --
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (11,812) (12,127) (7,752)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 2,588 (4,268) 1,704
Domestic Time and Savings Deposits (1,279) (10,107) (3,147)
Foreign Deposits 6,153 11,134 7,485
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 5,287 11,677 (1,305)
Other Borrowed Funds 2,199 1,125 6,033
Other, Net 378 782 (751)
Proceeds from the Issuance of Long-Term Debt 1,876 2,413 4,553
Repayments of Long-Term Debt (2,076) (3,369) (4,578)
Proceeds from the Issuance of Stock 665 511 1,548
Redemption of Preferred Stock -- (643) (913)
Treasury Stock Purchased (1,389) (693) --
Cash Dividends Paid (978) (914) (825)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 13,424 7,648 9,804
- -------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks (7) -- 19
Net Increase (Decrease) in Cash and Due from Banks 1,249 625 (934)
Cash and Due from Banks at the Beginning of the Year 13,545 12,920 13,854
- -------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at the End of the Year $ 14,794 $ 13,545 $ 12,920
- -------------------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 11,248 $ 8,533 $ 8,512
- -------------------------------------------------------------------------------------------------------------------
Taxes Paid $ 1,309 $ 1,139 $ 551
- -------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
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36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On March 31, 1996, The Chase Manhattan Corporation ("Chase") merged with and
into Chemical Banking Corporation ("Chemical"). Upon consummation of the merger,
Chemical changed its name to "The Chase Manhattan Corporation" (the
"Corporation"). The Corporation is a bank holding company organized under the
laws of the State of Delaware in 1968 and registered under the Bank Holding
Company Act of 1956, as amended. The merger was accounted for as a pooling of
interests and, accordingly, the information included in the financial statements
and consolidated notes of the Corporation presents the combined results of Chase
and Chemical as if the merger had been in effect for all periods presented. In
addition, certain amounts have been reclassified to conform to the current
presentation.
The Corporation provides diversified financial services principally through
the Global Bank, Regional and Consumer Banking and Global Services. The Global
Bank provides domestic and international corporate finance, wholesale banking,
and investment services and emphasizes originations, underwriting, distribution,
risk management products and private banking. Regional and Consumer Banking
serves a wide range of customer needs and includes consumer, commercial,
professional and middle market customers. Global Services include custody, cash
management, trade services, trust and other fiduciary services.
The Corporation conducts its domestic and international financial services
businesses through various bank and non-bank subsidiaries. The principal bank
subsidiaries of the Corporation are Chemical Bank, a New York State bank
("Chemical Bank"), The Chase Manhattan Bank, N.A., a national bank ("The Chase
Manhattan Bank"), Texas Commerce Bank National Association, a subsidiary of
Texas Commerce Equity Holdings, Inc., a bank holding company organized under the
laws of the State of Delaware ("Texas Commerce"), and The Chase Manhattan Bank
(USA)("Chase USA"), a Delaware bank. The principal non-bank subsidiary of the
Corporation is Chase Securities Inc.
The accounting and financial reporting policies of the Corporation and its
subsidiaries conform to generally accepted accounting principles and prevailing
industry practices and, where applicable, the accounting and reporting
guidelines prescribed by the Securities and Exchange Commission and bank
regulatory authorities. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The following is a description of significant
accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after eliminating material intercompany
balances and transactions. Equity investments in less than majority-owned
companies (20%-50% ownership interest) are generally accounted for in accordance
with the equity method of accounting and are reported in Other Assets. The
Corporation's pro-rata share of earnings (losses) of these companies is included
in Other Revenue.
Assets held in an agency or fiduciary capacity by commercial banking
subsidiaries and by trust and investment advisory subsidiaries are not assets of
the Corporation and, accordingly, are not included in the Consolidated Balance
Sheet.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars using prevailing rates of exchange. Gains and losses on foreign currency
translation from operations for which the functional currency is other than the
U.S. dollar, together with related hedges and tax effects, are reported in
Stockholders' Equity. For foreign operations for which the U.S. dollar is the
functional currency, gains and losses resulting from converting foreign currency
assets and liabilities to the U.S. dollar, including the related hedges, are
reported in the Income Statement.
TRADING ACTIVITIES
The Corporation trades debt and equity instruments and risk management
instruments, as discussed below. These instruments are carried at their
estimated fair value. Quoted market prices, when available, are used as the
basis to determine the fair value of trading instruments. If quoted market
prices are not available, then fair values are estimated on the basis of pricing
models, quoted prices of instruments with similar characteristics, or discounted
cash flows.
Realized and unrealized gains (losses) on these instruments are recognized
in Trading Revenue. A portion of the market valuation relating to certain risk
management instruments is deferred and accreted to income over the life of the
instruments to match ongoing servicing costs and credit risks, as appropriate.
Interest earned on debt and dividends earned on equity instruments and interest
payable on securities sold but not yet purchased are reported as interest income
and interest expense, respectively.
Debt and Equity Instruments and Securities Sold, Not Yet Purchased: Debt and
equity instruments which includes securities, loans, and other credit
instruments held for trading purposes are reported as Trading Assets.
Obligations to deliver securities sold but not yet purchased are reported as
Trading Liabilities.
55
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk Management Instruments: The Corporation primarily deals in interest rate,
foreign exchange, precious metals and commodity contracts to generate trading
revenues. Such contracts include futures, forwards, swaps, and options
(including interest rate caps and floors). The estimated fair value of such
contracts are reported on a gross basis as Trading Assets-Risk Management
Instruments (positive fair values) and Trading Liabilities (negative fair
values), except for contracts executed with the same counterparty under legally
enforceable master netting agreements, which are presented on a net basis.
DERIVATIVES USED IN ASSET/LIABILITY MANAGEMENT ACTIVITIES
As part of its asset/liability management activities ("ALM"), the Corporation
predominantly uses interest rate swaps and futures and, to a lesser degree,
forward rate agreements and option contracts (including interest rate caps and
floors) to hedge exposures or to modify the interest rate characteristics of
related balance sheet instruments. Futures contracts are designated as hedges
when they reduce risk and there is high correlation between the futures contract
and the item being hedged, both at inception and throughout the hedge period.
Interest rate swaps, forward rate agreements, and option contracts are generally
used to modify the interest rate characteristics of balance sheet instruments
and are linked to specific assets or groups of similar assets or specific
liabilities or groups of similar liabilities.
The instruments that meet the above criteria are accounted for under the
accrual method or available-for-sale fair value method, as discussed below.
Accrual Method: Under the accrual method, interest income or expense on the
derivative contract is accrued and there is no recognition of unrealized gains
and losses on the derivative in the balance sheet. Premiums on option contracts
are amortized to interest income or interest expense over the life of such
contracts.
Available-for-Sale Fair Value Method: Derivatives linked to available-for-sale
securities are carried at fair value. The accrual of interest receivable or
interest payable on these derivatives is reported in Interest Income on
Securities. Changes in the market values of these derivatives, exclusive of net
interest accruals, are reported in Stockholders' Equity, net of applicable
taxes, consistent with the reporting of unrealized gains and losses on the
related securities.
For both the accrual and available-for-sale fair value method, realized
gains and losses from the settlement or termination of derivatives contracts are
deferred on the balance sheet and are amortized to interest income or interest
expense over the appropriate risk management periods. Amortization commences
when the contract is settled or terminated. If the related assets or liabilities
are sold or otherwise disposed, then the deferred gain or loss on the derivative
contract is recognized as an adjustment to the gain or loss on disposition of
the related assets or liabilities.
Prior to January 1, 1995, the Corporation used interest rate swaps in place
of cash market instruments. Effective January 1, 1995, this practice was
discontinued. Accordingly, interest rate contracts entered into subsequent to
January 1, 1995 that do not meet the hedge or linkage criteria described above
are designated as trading activities and are accounted for at fair value.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS
The Corporation enters into short-term purchases of securities under agreements
to resell (resale agreements) and sales of securities under agreements to
repurchase (repurchase agreements) of substantially identical securities. The
amounts advanced under resale agreements and the amounts borrowed under
repurchase agreements are carried on the balance sheet at the amount advanced or
borrowed plus accrued interest. Interest earned on resale agreements and
interest incurred on repurchase agreements are reported as interest income and
interest expense, respectively. The Corporation offsets resale and repurchase
agreements executed with the same counterparty under legally enforceable netting
agreements that meet the applicable netting criteria.
It is the Corporation's policy to obtain control or take possession of
securities purchased under resale agreements. The Corporation monitors the
market value of securities and adjusts the level of collateral for resale and
repurchase agreements, as appropriate.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
Effective December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). For a further discussion of SFAS 115 and the
Financial Accounting Series Special Report on SFAS 115, issued during the 1995
fourth quarter, see Note Four.
Securities that may be sold in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or other factors, are classified
as Available-for-Sale and are carried at fair value. Unrealized gains and losses
on these securities, along with any unrealized gains and losses on related
derivatives, are reported, net of applicable taxes, in Stockholders' Equity.
Securities that the Corporation has the positive intent and ability to hold to
maturity are classified as Held-to-Maturity and are carried at amortized cost.
During 1993, securities that might have been sold prior to maturity were carried
at the lower of aggregate cost or market value, with any valuation adjustments
reported in Securities Gains.
Interest and dividend income on securities, including amortization of
premiums and accretion of discounts, are reported in Interest Income on
Securities. Interest income is recognized using the interest method. The
specific identification method is used to determine realized gains and losses on
sales of securities, which are reported in Securities Gains. The carrying value
of
56
38
individual securities is reduced through writedowns against Securities Gains to
reflect other-than-temporary impairments in value.
The Corporation anticipates prepayments of principal in the calculation of
the effective yield for collateralized mortgage obligations ("CMO") and
mortgage-backed securities. The prepayment of CMOs and mortgage-backed
securities is actively monitored through the Corporation's portfolio management
function. The Corporation typically invests in CMOs and mortgage-backed
securities with stable cash flows and relatively short duration, thereby
limiting the impact of interest rate fluctuations on the portfolio. Management
regularly does simulation testing regarding the impact that interest and market
rate changes would have on its CMO and mortgage-backed securities portfolios.
CMOs and mortgage-backed securities that management believes have high
prepayment risk are included in the available-for-sale portfolio.
LOANS
Loans are generally reported at the principal amount outstanding, net of
unearned income and net deferred loan fees (nonrefundable yield-related loan
fees, net of related direct origination costs), if any. Loans held for sale are
carried at the lower of aggregate cost or fair value. Certain loans meeting the
accounting definition of a security are classified as loans but are measured
pursuant to SFAS 115. Interest income is recognized using the interest method or
on a basis approximating a level rate of return over the term of the loan.
The Corporation sells or securitizes certain commercial and consumer loans.
Such sales are generally without recourse to the Corporation. A limited number
of assets are sold with recourse for which appropriate reserves are provided.
Gains or losses, as appropriate, are reported in Other Revenue.
Nonaccrual loans are those loans on which the accrual of interest has
ceased. Loans, other than certain consumer loans discussed below, are placed on
nonaccrual status immediately if, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan
agreement, or when principal or interest is past due 90 days or more and
collateral, if any, is insufficient to cover principal and interest. Interest
accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Interest
income on nonaccrual loans is recognized only to the extent received in cash.
However, where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Consumer loans (exclusive of residential mortgage products which are
accounted for in accordance with the nonaccrual loan policy discussed above) are
generally charged to the allowance for credit losses upon reaching specified
stages of delinquency. Accrued interest is reversed against interest income when
such consumer loans are charged off.
Renegotiated loans are those for which concessions, such as the reduction
of interest rates or deferral of interest or principal payments, have been
granted due to a deterioration in the borrowers' financial condition. Interest
on renegotiated loans is accrued at the renegotiated rates. Certain renegotiated
loan agreements call for additional interest to be paid on a deferred or
contingent basis. Such interest is recognized in income only as collected.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"). SFAS 114 requires that the carrying value of an
impaired loan be based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price, or the fair value of the collateral, if
the loan is collateral dependent. Under SFAS 114, a loan is considered impaired
when, based on current information, it is probable that the borrower will be
unable to pay contractual interest or principal payments as scheduled in the
loan agreement. SFAS 114 applies to all loans except smaller-balance homogeneous
consumer loans, loans carried at fair value or the lower of cost or fair value,
debt securities and leases. Generally, the Corporation applies SFAS 114 to
nonaccrual commercial loans and renegotiated loans. In addition, SFAS 114
modified the accounting for in-substance foreclosures ("ISF"). Effective January
1, 1995, a collateralized loan is considered an ISF and reclassified to Assets
Acquired as Loan Satisfactions only when the Corporation has taken physical
possession of the collateral regardless of whether formal foreclosure
proceedings have taken place.
SFAS 118 permits a creditor to use existing methods for recognizing
interest revenue on impaired loans. The Corporation recognizes interest income
on impaired loans pursuant to the discussion above for nonaccrual and
renegotiated loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses provides for risks of losses inherent in the
credit extension process. The allowance is a general allowance and is based on
periodic reviews and analyses of the portfolio, which comprises primarily loans
and derivatives and foreign exchange contracts. The periodic analyses include
consideration of such factors as the risk rating of individual credits, the size
and diversity of the portfolio, economic and political conditions, prior loss
experience and results of periodic credit reviews of the portfolio. The
allowance for credit losses is increased by provisions for losses charged
against income and is reduced by
57
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
charge-offs, net of recoveries. Charge-offs are recorded when, in the judgment
of management, an extension of credit is deemed uncollectible, in whole or in
part. Other charges to the allowance include amounts related to loans
transferred to Assets Held for Accelerated Disposition.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Capital leases are included in
premises and equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization of premises are included in Occupancy Expense,
while depreciation of equipment is included in Equipment Expense. Depreciation
and amortization are computed using the straight-line method over the estimated
useful life of the owned asset and, for leasehold improvements, over the
estimated useful life of the related asset or the lease term, whichever is
shorter. Maintenance and repairs are charged to expense as incurred, while major
improvements are capitalized.
OTHER ASSETS
Assets Acquired as Loan Satisfactions: Assets acquired in full or partial
satisfaction of loans are reported at the lower of cost or estimated fair value
less costs to sell. These assets are primarily real estate. Writedowns at the
date of transfer from Loans to Assets Acquired as Loan Satisfactions and within
six months after the date of transfer are charged to the Allowance for Credit
Losses. Writedowns of such assets subsequent to six months from the date of
transfer are included in Foreclosed Property Expense. Operating expenses, net of
related revenue, and gains and losses on sales of such assets are reported net
in Foreclosed Property Expense.
Assets Held for Accelerated Disposition: Assets held for accelerated
disposition, which consist primarily of real estate loans and real estate assets
acquired as loan satisfactions, are reported in Other Assets. At the date of
transfer to the accelerated disposition portfolio, these assets are recorded at
their initial estimated disposition value less costs to sell. Assets held for
accelerated disposition are carried at the lower of cost or current estimated
disposition value. Interest income relating to these assets is recognized either
in income or applied to reduce the carrying value of loans depending on
management's judgment of collectibility. Any adjustments to the carrying value
of these assets or realized gains and losses as assets are sold are reported in
Other Revenue.
Equity and Equity-Related Investments: Equity and equity-related investments,
which include venture capital activities and emerging markets investments, are
reported in Other Assets. Nonmarketable holdings are carried at cost, net of
other-than-temporary impairment losses. Marketable holdings are marked-to-market
at a discount to the public value. Income from these investments is reported in
Other Revenue.
Intangibles: Goodwill and other acquisition intangibles, such as core deposits
and credit card relationships, are reported in Other Assets and are amortized
over the estimated periods to be benefited generally ranging from 10 to 25
years. An impairment review is performed periodically on these assets.
Mortgage Servicing Rights: In 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"). SFAS 122 amends Statement of Financial Accounting
Standards No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS
65"), to require that when a definitive plan exists to sell or securitize
mortgage loans and to retain the servicing rights related thereto, a mortgage
banking enterprise should recognize as separate assets the rights to service
mortgage loans for others, irrespective of whether those servicing rights are
acquired through the purchase or the origination of the mortgage loans. Under
SFAS 65, only purchased mortgage servicing rights were permitted to be
recognized as separate assets. Capitalized mortgage servicing assets are
reported in Other Assets and are amortized into noninterest revenue in
proportion to, and over the period of, the estimated future net servicing income
stream of the underlying mortgage loans. SFAS 122 requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights. The Corporation's policy for evaluating impairment is to stratify
the mortgage servicing rights by interest rate bands. Fair value is determined
considering market prices for similar assets or based on discounted cash flows
using market based prepayment estimates for similar coupons and incremental
direct and indirect costs.
FEE-BASED REVENUE
Corporate finance and syndication fees primarily include fees received for
managing and syndicating loan arrangements; providing financial advisory
services in connection with leveraged buyouts, recapitalizations, and mergers
and acquisitions; and arranging private placements and underwriting debt and
equity securities.
Trust and investment management fees primarily include fees received in
connection with personal, corporate, and employee benefit trust and investment
management activities.
Credit card revenues primarily include fees received in connection with
credit card activities such as annual, late payment, cash advance and
interchange fees, as well as servicing fees earned in connection with
securitization activities.
Fees for other financial services primarily include fees received in
connection with mortgage servicing, loan commitments, standby letters of credit,
compensating balances and other fees.
Corporate finance and syndication fees are recognized when services to
which they relate have been provided. In addition, recognition of syndication
fees is subject to certain tests being satisfied. Trust and investment
management fees and fees for other financial services are generally recognized
over the period
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40
the related service is provided. Credit card revenues are generally recognized
as billed, except for annual fees, which are recognized over a twelve-month
period.
INCOME TAXES
The Corporation recognizes both the current and deferred tax consequences of all
transactions that have been recognized in the financial statements. Calculations
are based on the provisions of enacted tax laws and the tax rates in effect for
current and future years. The deferred tax liability (asset) is determined based
on enacted tax rates which will be in effect when the underlying items of income
and expense are expected to be reported to the taxing authorities. Net deferred
tax assets, whose realization is dependent on taxable earnings of future years,
are recognized when a more-likely-than-not criterion is met. Annual deferred tax
expense (benefit) is equal to the change in the deferred tax liability (asset)
account from the beginning to the end of the year. A current tax liability
(asset) is recognized for the estimated taxes payable or refundable for the
current year.
EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income after deducting
preferred stock dividends by average common and common equivalent shares
outstanding, which reflect the dilutive effect of stock options and warrants
during the respective period. The dilutive effect of stock options and warrants
is computed under the treasury stock method using the average market price of
the Corporation's common stock for the period.
Earnings per common share, assuming full dilution, is computed based on the
average number of common shares outstanding during the period, including the
dilutive effect of stock options, warrants, and any convertible preferred stock
outstanding during the period. The dilutive effect of outstanding stock options
and warrants is computed using the greater of the closing market price or the
average market price of the Corporation's common stock for the period. Any stock
options or warrants exercised or any preferred stock converted are assumed to
have occurred at the beginning of the period. Net income applicable to common
stock is adjusted for dividends on the convertible preferred stock.
During 1995, the Corporation changed its reporting of earnings per share
("EPS") for all periods from "simple" EPS (which is based solely on the average
number of common shares outstanding) to reporting "primary" and "fully-diluted"
EPS. Previously, the Corporation reported simple EPS, since the differences
between simple EPS and primary EPS or simple EPS and fully-diluted EPS were not
material (less than 3%).
STATEMENT OF CASH FLOWS
For purposes of preparing the Consolidated Statement of Cash Flows, the
Corporation defines cash and cash equivalents as those amounts included in the
balance sheet caption Cash and Due from Banks. Cash flows from loans and
deposits are reported on a net basis. Changes in assets and liabilities are net
of the effects of sales and acquisitions.
2. MERGER BETWEEN CHASE AND CHEMICAL
On March 31, 1996, Chase merged with and into Chemical (the "merger") resulting
in a corporation with over $300 billion in total assets and $20 billion in
shareholders' equity.
Under the terms of the merger agreement, 183 million shares of the
Corporation's common stock were issued in exchange for all of the outstanding
shares of Chase's common stock (based on an exchange ratio of 1.04 shares of the
Corporation's common stock for each share of Chase's common stock). All of
Chase's series of preferred stock were exchanged on a one-for-one basis for a
corresponding series of the Corporation's preferred stock having substantially
the same terms as the Chase preferred stock so converted. The merger was
accounted for as a pooling of interests.
In connection with the merger, $1.9 billion of one-time merger-related
costs have been identified, of which $1.65 billion was taken as a restructuring
charge on March 31, 1996. The remaining $250 million will be substantially
incurred over the next two years as these costs do not qualify for immediate
recognition under a recently issued accounting pronouncement. These costs will
be reflected in the restructuring charge caption when incurred. The $1.9 billion
of merger-related costs reflects severance and other termination-related costs
to be incurred in connection with anticipated staff reductions (approximately
$600 million), costs in connection with planned dispositions of certain
facilities, premises and equipment (approximately $700 million), and other
merger-related expenses, including costs to eliminate redundant back office and
other operations of Chemical and Chase and other expenses related directly to
the merger (approximately $600 million).
59
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. TRADING ACTIVITIES
The Corporation uses its trading assets and liabilities to meet the financial
needs of its customers and to generate revenue through its trading activities.
The Corporation generates such trading revenue through market-making, sales,
arbitrage and, to a lesser degree, positioning. A description of the classes of
derivative and foreign exchange instruments used in the Corporation's trading
activities as well as the credit and market risk factors involved in such
activities are disclosed in Note Eighteen.
TRADING REVENUE
The following table sets forth the components of total trading-related revenue.
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------
Trading Revenue $1,016 $1,173 $1,769
Net Interest Income Impact(a) 442 166 127
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,458 $1,339 $1,896
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $ 445 $ 492 $ 640
Foreign Exchange Contracts(c) 584 431(e) 668
Debt Instruments and Other(d) 429 416 588
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $1,458 $1,339 $1,896
- --------------------------------------------------------------------------------
(a) Net interest income attributable to trading activities includes accruals on
interest-earning and interest-bearing trading-related positions as well as a
management allocation reflecting the funding cost or benefit associated with
trading positions.
(b) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures, and forward rate agreements
and related hedges.
(c) Includes foreign exchange spot and option contracts.
(d) Includes U.S. and foreign government and government agency securities,
corporate debt securities, emerging markets debt instruments, debt-related
derivatives, equity securities, equity derivatives, and commodity derivatives.
(e) Reflects $70 million reduction as a result of losses sustained from
unauthorized foreign exchange transactions involving the Mexican peso.
TRADING ASSETS AND LIABILITIES
Trading assets include debt and equity instruments and risk management
instruments with positive fair values. Trading liabilities are comprised of
securities sold, not yet purchased and risk management instruments with negative
fair values. Trading assets and trading liabilities (which are carried at
estimated fair value, after taking into account the effects of legally
enforceable master netting agreements on risk management instruments) are
presented in the following table for the dates indicated.
DECEMBER 31, (IN MILLIONS) 1995 1994
- -----------------------------------------------------------------------------------
Trading Assets - Debt and Equity Instruments:
U.S. Government, Federal Agencies and
Municipal Securities $ 9,601 $ 4,001
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 2,560 2,381
Debt Securities Issued by Foreign Governments 6,318 4,078
Debt Securities Issued by Foreign Financial Institutions 3,467 3,356
Loans 666 894
Corporate Securities 2,224 2,075
Other 1,376 1,141
- -----------------------------------------------------------------------------------
Total Trading Assets-Debt and Equity Instruments(a)(b) $26,212 $17,926
- -----------------------------------------------------------------------------------
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $12,408 $10,684
Foreign Exchange Contracts 12,384 14,597
Stock Index Options and Commodity Contracts 1,033 704
- -----------------------------------------------------------------------------------
Total Trading Assets-Risk Management Instruments(c) $25,825 $25,985
- -----------------------------------------------------------------------------------
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $13,975 $ 9,413
Foreign Exchange Contracts 13,295 14,078
Stock Index Options and Commodity Contracts 831 460
- -----------------------------------------------------------------------------------
Trading Liabilities-Risk Management Instruments(c) $28,101 $23,951
- -----------------------------------------------------------------------------------
Securities Sold, Not Yet Purchased $ 6,240 $ 6,405
- -----------------------------------------------------------------------------------
Total Trading Liabilities $34,341 $30,356
- -----------------------------------------------------------------------------------
(a) Includes emerging markets instruments of $1,301 million in 1995 and $1,350
million in 1994.
(b) The average fair value of Trading Assets - Debt and Equity Instruments was
$20,935 million during 1995 and $19,436 million during 1994.
(c) The average fair value of Trading Assets - Risk Management Instruments and
Trading Liabilities - Risk Management Instruments was $30,397 million and
$31,665 million, respectively, during 1995. The average fair value of Trading
Assets - Risk Management Instruments and Trading Liabilities - Risk Management
Instruments was $27,956 million and $25,918 million, respectively, during 1994.
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4. SECURITIES
See Note One for a discussion of the accounting policies relating to securities.
The amortized cost and estimated fair value of available-for-sale securities and
held-to-maturity securities, including the impact of related derivatives, were
as follows for the dates indicated:
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE(A) COST GAINS LOSSES VALUE(A)
DECEMBER 31, (IN MILLIONS) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale Securities
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $19,029 $205 $ 2 $19,232 $ 8,203 $554 $ 595 $ 8,162
Collateralized Mortgage Obligations 1,132 -- 8 1,124 948 6 56 898
Other, primarily U.S. Treasuries 5,020 4 53 4,971 8,859 52 430 8,481
Obligations of State and Political Subdivisions 633 6 -- 639 89 -- 1 88
Debt Securities Issued by Foreign Governments 8,084 234 146 8,172 3,561 22 155 3,428
Corporate Debt Securities 716 31 10 737 478 23 7 494
Collateralized Mortgage Obligations(b) 246 -- 1 245 339 1 4 336
Equity Securities 999 169 4 1,164 662 86 -- 748
Other, primarily Asset-Backed Securities 853 9 5 857 515 1 11 505
- -----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities $36,712 $658 $229 $37,141 $23,654 $745 $1,259 $23,140
- -----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $ 1,782 $ 24 $ 1 $ 1,805 $ 3,749 $ -- $ 214 $ 3,535
Collateralized Mortgage Obligations 2,624 11 6 2,629 4,189 -- 253 3,936
Other, primarily U.S. Treasuries 82 -- -- 82 245 -- 2 243
Obligations of State and Political Subdivisions 1 -- -- 1 453 4 4 453
Debt Securities Issued by Foreign Governments -- -- -- -- 734 2 10 726
Corporate Debt Securities -- -- -- -- 130 -- -- 130
Collateralized Mortgage Obligations(b) 48 2 -- 50 173 1 4 170
Other, primarily Asset-Backed Securities 91 1 -- 92 977 2 12 967
- -----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities $ 4,628 $ 38 $ 7 $ 4,659 $10,650 $ 9 $ 499 $10,160
- -----------------------------------------------------------------------------------------------------------------------------------
(a) The Corporation's portfolio of securities generally consists of
investment-grade securities. The fair value of actively-traded securities is
determined by the secondary market, while the fair value for non-actively-traded
securities is based on independent broker quotations.
(b) Collateralized mortgage obligations of private issuers generally have
underlying collateral consisting of obligations of U.S. Government and Federal
agencies and corporations.
Cash proceeds from the sale of available-for-sale securities during 1995,
1994 and 1993 were $54,290 million, $23,086 million and $12,027 million,
respectively. Net gains from available-for-sale securities sold in 1995, 1994
and 1993 amounted to $130 million (gross gains of $570 million and gross losses
of $440 million), $65 million (gross gains of $157 million and gross losses of
$92 million) and $186 million (gross gains of $237 million and gross losses of
$51 million), respectively. There were no sales of held-to-maturity securities
during 1995 and 1994. During 1995, early redemption of certain held-to-maturity
securities by their issuers resulted in a $2 million gain. Cash proceeds from
the sales of held-to-maturity securities during 1993 were $152 million. Gross
gains from held-to-maturity securities sold in 1993 amounted to $3 million
(there were no losses from sales of such securities in 1993).
During the fourth quarter of 1995, the Financial Accounting Standards Board
issued Financial Accounting Series Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115 Implementation Guide"). In accordance with the adoption
of the Implementation Guide, the Corporation reassessed the classification of
all securities held. The result of the one-time reassessment was the
reclassification of $4.7 billion of held-to-maturity securities to
available-for-sale securities and $11 million of held-to-maturity securities to
trading assets. Unrealized net gains related to the transfer of held-to-maturity
securities to available-for-sale securities were $21 million after-tax. The
amortized cost of held-to-maturity securities transferred to trading assets
approximated the fair value. See Note Five for a discussion of loans accounted
for pursuant to SFAS 115.
The amortized cost, estimated fair value, and average yield at December 31,
1995 of the Corporation's available-for-sale and held-to-maturity securities by
contractual maturity range and type of security are presented in the table which
follows:
61
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MATURITY SCHEDULE OF AVAILABLE-FOR-SALE SECURITIES DUE IN 1 DUE AFTER 1 DUE AFTER 5 DUE AFTER
DECEMBER 31, 1995 (IN MILLIONS, EXCEPT YIELDS) YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS 10 YEARS(A) TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Federal Agency/Corporation Obligations:
Amortized Cost $1,856 $2,365 $2,302 $18,658 $25,181
Fair Value 2,085 2,120 2,261 18,861 25,327
Average Yield(b) 6.50% 5.42% 5.70% 7.36% 6.96%
- -----------------------------------------------------------------------------------------------------------------------------------
Obligations of State and Political Subdivisions:
Amortized Cost $ 389 $ 94 $ 60 $ 90 $ 633
Fair Value 390 97 61 91 639
Average Yield(b) 4.06% 6.81% 6.63% 6.46% 5.05%
- -----------------------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $2,466 $4,911 $2,160 $ 1,361 $10,898
Fair Value 2,470 5,014 2,168 1,523 11,175
Average Yield(b) 6.88% 6.51% 7.91% 3.41% 6.48%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities:
Amortized Cost $4,711 $7,370 $4,522 $20,109 $36,712
Fair Value 4,945 7,231 4,490 20,475 37,141
Average Yield(b) 6.50% 6.16% 6.77% 7.09% 6.79%
- -----------------------------------------------------------------------------------------------------------------------------------
Maturity Schedule of Held-to-Maturity Securities Due in 1 Due After 1 Due After 5 Due After
December 31, 1995 (in millions, except yields) Year or less Through 5 Years Through 10 Years 10 Years(a) Total
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Federal Agency/Corporation Obligations:
Amortized Cost $ 81 $ 649 $ 936 $ 2,822 $ 4,488
Fair Value 81 655 942 2,838 4,516
Average Yield(b) 5.05% 6.39% 7.04% 6.77% 6.74%
- -----------------------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $ -- $ 3 $ 83 $ 54 $ 140
Fair Value -- 3 84 56 143
Average Yield(b) --% 6.50% 7.28% 9.34% 8.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities:
Amortized Cost $ 81 $ 652 $1,019 $ 2,876 $ 4,628
Fair Value 81 658 1,026 2,894 4,659
Average Yield(b) 5.05% 6.39% 7.06% 6.82% 6.78%
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Securities with no stated maturity are included with securities with a
remaining maturity of ten years or more. Substantially all of the Corporation's
mortgage-backed securities and CMOs are due in ten years or more based on
contractual maturity. The estimated duration of mortgage-backed securities and
CMOs, which reflects anticipated future prepayments based on a consensus of
dealers in the market, is approximately 5 years.
(b) The average yield is based on amortized cost balances at the end of the
year. Yields are derived by dividing interest income, adjusted for the effect of
related derivatives on available-for-sale securities and the amortization of
premiums and accretion of discounts, by total amortized cost. Taxable-equivalent
yields are used, where applicable.
(c) Includes investments in debt securities issued by foreign governments,
corporate debt securities, collateralized mortgage obligations of private
issuers, equity and other debt securities.
62
44
5. LOANS
The composition of the loan portfolio at each of the dates indicated was as
follows:
DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL
DECEMBER 31, (IN MILLIONS) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial:
Commercial Real Estate $ 6,662 $ 810 $ 7,472 $ 7,705 $ 786 $ 8,491
Commercial and Industrial 32,972 20,936 53,908 30,990 18,490 49,480
Financial Institutions 5,766 5,422 11,188 5,277 5,591 10,868
Foreign Governments and Official Institutions -- 6,076 6,076 -- 7,859 7,859
- -----------------------------------------------------------------------------------------------------------------------------------
Total Commercial 45,400 33,244 78,644 43,972 32,726 76,698
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer:
Residential Mortgage 34,118 1,102 35,220 28,865 1,038 29,903
Credit Card 17,078 493 17,571 16,994 390 17,384
Auto Loans 6,360 -- 6,360 8,056 -- 8,056
Other Consumer 12,040 1,445 13,485 9,843 1,242 11,085
- -----------------------------------------------------------------------------------------------------------------------------------
Total Consumer 69,596 3,040 72,636 63,758 2,670 66,428
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans 114,996 36,284 151,280 107,730 35,396 143,126
Unearned Income (915) (158) (1,073) (666) (229) (895)
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $114,081 $36,126 $150,207 $107,064 $35,167 $142,231
- -----------------------------------------------------------------------------------------------------------------------------------
Certain loans that meet the accounting definition of a security are
classified as loans and are measured pursuant to SFAS 115, along with related
derivatives. Bonds that have been issued by foreign governments (such as Mexico,
Venezuela and Brazil) to financial institutions, including the Corporation, as
part of a debt renegotiation (i.e., "Brady Bonds") are subject to the provisions
of SFAS 115.
In connection with the adoption of the SFAS 115 Implementation Guide in the
fourth quarter of 1995, the Corporation reassessed the classification of all
securities held. The result of the one-time reassessment was the
reclassification of the entire held-to-maturity portfolio of Brady Bonds, other
loans, and related derivatives (measured pursuant to SFAS 115) to the
available-for-sale category. The amount of the reclassification was $1,972
million at amortized cost. Unrealized net losses related to the transfer were
$454 million after-tax.
A significant portion of the Brady Bonds within the available-for-sale
portfolio are collateralized by zero-coupon U.S. Treasury obligations. Up to two
years' interest on Brady Bonds is also collateralized by U.S. Treasury
obligations. Management continually evaluates and monitors the ability of each
of the countries within the portfolio to perform and believes that any
unrealized losses on its available-for-sale portfolio are temporary in nature.
The amortized cost and estimated fair value of loans measured pursuant to SFAS
115, including the impact of related derivatives, for the dates indicated were
as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 (IN MILLIONS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------
Total (all Available-for-Sale) $2,849 $ 47 $ 917 $1,979
- -----------------------------------------------------------------------------------------------
December 31, 1994
- -----------------------------------------------------------------------------------------------
Available-for-Sale $2,158 $150 $ 466 $1,842
Held-to-Maturity 1,998 10 848 1,160
- -----------------------------------------------------------------------------------------------
Total $4,156 $160 $1,314 $3,002
- -----------------------------------------------------------------------------------------------
The 1995 results included a net loss of $49 million (gross gains of $204
million and gross losses of $253 million) related to the disposition of emerging
market securities previously recorded as available-for-sale. Such dispositions
are part of the Corporation's ongoing efforts to manage its emerging markets
exposure in its available-for-sale portfolio. The 1994 results included a net
gain of $233 million (gross gains of $348 million and gross losses of $115
million) on the disposition of emerging market securities. Cash proceeds from
the sales of these available-for-sale loans during 1995 and 1994 were $1,193
million and $1,079 million, respectively.
63
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ALLOWANCE FOR CREDIT LOSSES
The table below summarizes the changes in the allowance for credit losses during
1995, 1994 and 1993.
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Total Allowance at January 1 $ 3,894 $ 4,445 $ 4,938
Provision for Losses 758 1,050 2,254
Provision for Loans Held for Accelerated Disposition -- -- 566
Charge-Offs (1,278) (1,970) (3,135)
Recoveries 438 506 517
- ---------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (840) (1,464) (2,618)
Charge for Assets Transferred to Held for Accelerated Disposition -- (148) (701)
Allowance Related to Purchased (Disposed) Subsidiaries (31)(a) 4 9
Foreign Exchange Translation Adjustment and Other 3 7 (3)
- ---------------------------------------------------------------------------------------------------------------------------
Total Allowance at December 31 $ 3,784 $ 3,894 $ 4,445
- ---------------------------------------------------------------------------------------------------------------------------
(a) Includes $28 million related to the sale of banking operations in southern
and central New Jersey.
7. NONPERFORMING ASSETS
The following table sets forth the nonperforming assets and contractually
past-due loans of the Corporation at the dates indicated.
NONPERFORMING ASSETS
DECEMBER 31, (IN MILLIONS) 1995 1994
- ---------------------------------------------------------------
Total Domestic Nonperforming Loans $1,150 $1,128
Total Foreign Nonperforming Loans 343 461
- ---------------------------------------------------------------
Total Nonperforming Loans 1,493(a) 1,589
Assets Acquired as Loan Satisfactions
(primarily Real Estate) 171 537
- ---------------------------------------------------------------
Total Nonperforming Assets $1,664 $2,126
- ---------------------------------------------------------------
Contractually Past-due Loans (b) $ 664 $ 730
- ---------------------------------------------------------------
(a) Includes $1,221 million of loans considered impaired under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114").
(b) Accruing loans past-due 90 days or more as to principal and interest, which
are not characterized as nonperforming loans. Consumer loans are generally not
classified as nonperforming loans but rather are charged-off on a formula basis.
Included within consumer loans is the student loan portfolio. There are
essentially no credit losses in the student loan portfolio due to the existence
of Federal and State government agency guarantees. At December 31, 1995 and
1994, student loans which were past due 90 days and over and still accruing were
approximately $107 million and $105 million, respectively.
The table below presents the Corporation's assets held for accelerated
disposition at the dates indicated:
ASSETS HELD FOR ACCELERATED DISPOSITION
DECEMBER 31, (IN MILLIONS) 1995 1994
- -----------------------------------------------------------------
Loans(a) $412 $336
Real Estate Owned -- 190
- -----------------------------------------------------------------
Total Assets Held for Accelerated Disposition $412 $526
- -----------------------------------------------------------------
(a) Includes $412 million and $87 million of loans that were performing at
December 31, 1995 and 1994, respectively.
The following table presents the amount of interest income recorded by the
Corporation on its nonaccrual and renegotiated loans and the amount of interest
income on the carrying value of such loans that would have been recorded if
these loans had been current in accordance with their original terms (interest
at original rates).
IMPACT OF NONPERFORMING LOANS ON INTEREST INCOME(a)
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- -------------------------------------------------------------------------
Domestic:
Gross Amount of Interest That Would Have
Been Recorded at the Original Rate $ 94 $116 $ 234
Interest That Was Recognized in Income (23) (32) (44)
- -------------------------------------------------------------------------
Negative Impact-Domestic 71 84 190
- -------------------------------------------------------------------------
Foreign:
Gross Amount of Interest That Would Have
Been Recorded at the Original Rate 34 34 86
Interest That Was Recognized in Income (11) (12) (122)
- -------------------------------------------------------------------------
Negative (Positive) Impact-Foreign 23 22 (36)
- -------------------------------------------------------------------------
Total Negative Impact on Interest Income $ 94 $106 $ 154
- -------------------------------------------------------------------------
(a) Excludes loans held for accelerated disposition.
The table below sets forth impaired loans disclosures. The Corporation uses
the discounted cash flow method as its primary method for valuing its impaired
loans.
IMPAIRED LOANS
DECEMBER 31, (IN MILLIONS)
- -----------------------------------------------------------------
Impaired Loans with an Allowance $ 481
Impaired Loans without an Allowance(a) 740
- -----------------------------------------------------------------
Total Impaired Loans $1,221
- -----------------------------------------------------------------
Allowance for Impaired Loans under SFAS 114(b) $ 152
- -----------------------------------------------------------------
Average Balance of Impaired Loans During the
Year-ended December 31, 1995 $1,534
- -----------------------------------------------------------------
Interest Income Recognized on Impaired Loans During
the Year-ended December 31, 1995 $ 26
- -----------------------------------------------------------------
(a) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the loan. Such loans do not
require an allowance under SFAS 114.
(b) The allowance for impaired loans under SFAS 114 is a part of the
Corporation's overall Allowance for Credit Losses.
64
46
8. SHORT-TERM AND OTHER BORROWED FUNDS
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------
Federal funds purchased and securities sold under repurchase agreements:
Balance at year-end $37,263 $32,410 $20,747
Average daily balance during the year 44,720 34,419 26,730
Maximum month-end balance 52,655 42,828 28,141
Weighted-average rate at December 31 5.82% 5.47% 4.10%
Weighted-average rate during the year 6.01% 4.66% 3.90%
- --------------------------------------------------------------------------------
Other Borrowed Funds-Commercial paper:
Balance at year-end $ 6,275 $ 5,841 $ 3,888
Average daily balance during the year 5,672 4,403 3,918
Maximum month-end balance 6,275 5,841 4,354
Weighted-average rate at December 31 5.52% 5.31% 2.93%
Weighted-average rate during the year 5.77% 4.25% 3.31%
- --------------------------------------------------------------------------------
Other Borrowed Funds-Other borrowings:
Balance at year-end $ 7,661 $ 5,939 $ 6,244
Average daily balance during the year 5,956 5,565 5,206
Maximum month-end balance 9,117 8,936 11,677
Weighted-average rate at December 31(a) 6.96% 6.29% 22.76%
Weighted-average rate during the year(a) 11.08% 20.86% 32.76%
- --------------------------------------------------------------------------------
(a) The average interest rates denoted above reflect the high levels of local
interest rates prevailing in certain Latin American countries with highly
inflationary economies. The 1995 and 1994 rates reflect lower interest rates due
to the significant decrease in Brazilian inflation beginning in the third
quarter of 1994.
Federal funds purchased represents overnight funds. Securities sold under
repurchase agreements generally mature between one day and three months.
Commercial paper is generally issued in amounts not less than $100,000 and with
maturities of 270 days or less. Other borrowings consist of demand notes, term
federal funds purchased, and various other borrowings in domestic and foreign
offices that generally have maturities of one year or less.
At December 31, 1995, the Corporation had unused lines of credit available
for general corporate purposes, including the payment of commercial paper
borrowings, amounting to $1.5 billion.
9. FEES FOR OTHER FINANCIAL SERVICES AND OTHER REVENUE
Details of fees for other financial services were as follows:
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- -------------------------------------------------------------------------------
Commissions on Letters of Credit and Acceptances $ 350 $ 334 $ 325
Fees in Lieu of Compensating Balances 281 314 334
Mortgage Servicing Fees 212 180 79
Loan Commitment Fees 123 116 122
Other 487 469 483
- -------------------------------------------------------------------------------
Total Fees for Other Financial Services $1,453 $1,413 $1,343
- -------------------------------------------------------------------------------
Details of other revenue were as follows:
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- ---------------------------------------------------------------------------
Revenue from Equity-Related Investments $ 626 $ 577 $ 537
Net Gains (Losses) on Emerging Markets
Securities Sales (49) 233 469
Gains on the Sale of Nonstrategic Businesses 85 84 --
Accelerated Disposition Gains -- 104 291
Residential Mortgage Origination/Sales
Activities 179 34 (115)(a)
All Other Revenue 251 207 168
- ---------------------------------------------------------------------------
Total Other Revenue $1,092 $1,239 $1,350
- ---------------------------------------------------------------------------
(a) Includes $161 million of accelerated mortgage servicing writedowns.
10. LONG-TERM DEBT
The accompanying table is a summary of long-term debt (net of unamortized
original issue debt discount, where applicable) displayed by remaining maturity
at December 31, 1995. The distribution by remaining maturity is based on
contractual maturity of the debt.
65
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under After 1995 1994
By remaining maturity at December 31, (in millions) 1 year 1-5 years 5 years Total Total
- -----------------------------------------------------------------------------------------------------------------------------------
Parent Company:
Senior Debt:
Fixed Rate $ 393 $1,090 $ 20 $ 1,503 $ 1,497
Variable Rate 805 1,189 325 2,319 2,631
Modified Interest Rates(a) 5.56 - 9.80% 5.30 - 8.31% 5.73 - 10.21% 5.30 - 10.21% 3.23 - 10.85%
Subordinated Debt:
Fixed Rate -- 1,900 3,537 5,437 4,451
Variable Rate -- 567 708 1,275 1,311
Modified Interest Rates(a) -- 6.19 - 10.38% 5.71 - 9.38% 5.71 - 10.38% 5.33 - 10.38%
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,198 4,746 4,590 10,534 9,890
- ------------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Senior Debt:
Fixed Rate 30 477 209 716 918
Variable Rate 10 -- -- 10 710
Modified Interest Rates(a) 4.75 - 14.00% 2.67 - 14.50% 4.00 - 10.50% 2.67 - 14.50% 3.50 - 10.52%
Subordinated Debt:
Fixed Rate -- -- 969 969 947
Variable Rate -- 346 250 596 596
Modified Interest Rates(a) -- 5.75 - 6.21% 6.00 - 7.25% 5.75 - 7.25% 5.64 - 7.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 40 823 1,428 2,291 3,171
- ------------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $1,238 $5,569 $6,018 $12,825 $13,061
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The interest rates shown have been adjusted to reflect the effect of ALM
derivative contracts, primarily interest rate swaps, used to convert a majority
of the Corporation's fixed rate debt to variable rates. The interest rates shown
for variable rate issues, including those converted to variable rate, are those
in effect at December 31, 1995.
The Corporation issues long-term debt denominated in various currencies,
predominately in U.S. dollars, with both fixed and variable interest rates.
Fixed-rate debt outstanding at December 31, 1995 matures at various dates
through 2013 at contractual interest rates ranging from 2.67% to 14.50%. The
consolidated weighted-average interest rates on fixed-rate debt at December 31,
1995 and 1994 were 7.81% and 7.67%, respectively. Variable-rate debt
outstanding, with contractually-determined interest rates ranging from 5.34% to
6.63% at December 31, 1995, matures at various dates through 2009. The
consolidated weighted-average interest rates on variable-rate debt at December
31, 1995 and 1994 were 5.99% and 5.79%, respectively.
Included in long-term debt are equity commitment notes and equity contract
notes totaling $968 million at both December 31, 1995 and 1994.
Equity commitment notes require that the Corporation issue, prior to their
maturity, shares of common stock or perpetual preferred stock or other
securities of the Corporation (collectively, "Capital Securities") approved by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") equal to 100% of the original aggregate principal amount of the notes.
Equity contract notes require the Corporation to exchange the notes at
maturity for Capital Securities with a market value equal to the principal
amount of the notes or, at the Corporation's option, to pay the principal of the
notes from amounts representing designated proceeds from the sale of Capital
Securities.
At December 31, 1995, the Corporation had designated proceeds from the sale
of Capital Securities in an amount sufficient to satisfy fully the dedication
requirements of its equity commitment and equity contract notes.
The Corporation has guaranteed several long-term debt issues of its
subsidiaries. Such guaranteed debt totaled $420 million and $435 million at
December 31, 1995 and 1994, respectively.
At December 31, 1995, long-term debt aggregating $1.7 billion was
redeemable at the option of the Corporation, in whole or in part, prior to
maturity, based on the terms specified in the respective notes.
The aggregate principal amount of debt that matures in each of the five
years subsequent to December 31, 1995 are $1,238 million in 1996, $1,493 million
in 1997, $860 million in 1998, $1,559 million in 1999, and $1,657 million in
2000.
66
48
11. PREFERRED STOCK
The Corporation is authorized to issue 200 million shares of preferred stock, in
one or more series, with a par value of $1 per share. At December 31, 1995 and
1994, approximately 82.0 million and 86.0 million shares, respectively, of
preferred stock were outstanding.
During 1995, the Corporation called all of the outstanding shares of its
10% Convertible Preferred Stock for redemption. Substantially all of the 10%
Convertible Preferred Stock was converted prior to the redemption date, at the
option of the holders thereof, into approximately 7.6 million shares of the
Corporation's common stock. The shares of common stock issued upon the
conversion were issued from treasury.
At December 31, 1995, four million shares of preferred stock designated as
Junior Participating Preferred Stock were reserved for issuance under the
Corporation's Shareholders' Rights Plan (see Note Twenty Four).
During 1994, the Corporation redeemed all 33.6 million outstanding shares
of its Adjustable Rate Cumulative Preferred Stock, Series C. The redemption
price was $12.36 per share (which included a premium of $.36 per share) plus
accrued but unpaid dividends to the date of redemption. Also during 1994, the
Corporation redeemed all 4.5 million shares of Floating Rate Preferred Stock,
Series F at a price of $50.00 per share plus accrued but unpaid dividends to the
date of redemption. Two issues of preferred stock were issued during 1994
totaling $428 million.
Dividends on shares of each preferred stock issue are payable quarterly and
are cumulative. All the preferred stocks outstanding have preference over the
Corporation's common stock with respect to the payment of dividends and the
distribution of assets in the event of a liquidation or dissolution of the
Corporation.
The following is a summary of the Corporation's preferred stocks
outstanding at December 31, 1995 and 1994:
(DOLLARS AND SHARES IN MILLIONS, STATED OUTSTANDING AT DECEMBER 31 EARLIEST REDEMPTION RATES IN EFFECT AS
EXCEPT PER SHARE DATA) VALUE SHARES 1995 1994 REDEMPTION DATE PRICE(B) DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
10.50% Cumulative $ 25.00 5.6 $ 140 $ 140 9/30/1998 $ 25.00 10.500%
9.76% Cumulative 25.00 4.0 100 100 9/30/1999 25.00 9.760
10.96% Cumulative 25.00 4.0 100 100 6/30/2000 25.00 10.960
10.84% Cumulative 25.00 8.0 200 200 6/30/2001 25.00 10.840
10.00% Convertible 50.00 4.0 -- 200 -- -- --
9.08% Cumulative 25.00 6.0 150 150 3/31/1997 25.00 9.080
8.375% Cumulative 25.00 14.0 350 350 6/1/1997 25.00 8.375
8.50% Cumulative 25.00 6.8 170 170 6/30/1997 25.00 8.500
8.32% Cumulative 25.00 9.6 240 240 9/30/1997 25.00 8.320
7.92% Cumulative 100.00 2.0(a) 200 200 10/1/1997 100.00 7.920
8.40% Cumulative 25.00 6.9 172 172 3/31/1998 25.00 8.400
7.58% Cumulative 100.00 2.0(a) 200 200 4/1/1998 100.00 7.580
7.50% Cumulative 100.00 2.0(a) 200 200 6/1/1998 100.00 7.500
Adjustable Rate, Series L 100.00 2.0 200 200 6/30/1999 100.00 5.502(c)
Adjustable Rate, Series N 25.00 9.1 228 228 6/30/1999 25.00 5.568(c)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock $2,650 $2,850
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Shares of each series are represented by 8.0 million depositary shares, each
representing .25 of a share.
(b) Plus accrued but unpaid dividends.
(c) Floating rates are based on certain money market rates. The minimum and
maximum rates are 4.50% and 10.50%, respectively, for each of Series L and
Series N Preferred.
12. COMMON STOCK
The Corporation is authorized to issue 750 million shares of common stock (par
value $1.00 per share). At December 31, 1995, 1994 and 1993, the number of
shares of common stock issued and outstanding were as follows:
DECEMBER 31, 1995 1994 1993
- ----------------------------------------------------------------
Issued 457,587,675 447,110,332 445,059,974
Held in Treasury (22,583,225) (18,337,533) (515,782)
- ----------------------------------------------------------------
Outstanding 435,004,450 428,772,799 444,544,192
- ----------------------------------------------------------------
During 1995, the Corporation repurchased approximately 26.3 million shares
of its outstanding common stock in the open market. These repurchases were
largely undertaken to meet the anticipated needs of the Corporation's employee
stock option and incentive plans. During 1995, approximately 18.0 million shares
were issued (of which 14.5 million were from treasury) under various employee
stock option and incentive plans, and 7.6 million shares were issued (from
treasury) in connection with the conversion of the Corporation's 10% convertible
preferred stock. Additionally, 6.9 million shares were issued in connection with
the acquisition of the U.S. Trust securities processing businesses.
67
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
As of December 31, 1995, approximately 51 million shares of common stock
were reserved for issuance under various employee incentive, option and stock
purchase plans and under the Corporation's Dividend Reinvestment Plan. In
addition, as of December 31, 1995, the Corporation had reserved 3,389,741 shares
of common stock for issuance upon the exercise of warrants which had originally
been issued during 1993 by Chase in settlement of a legal action. As a result of
the merger, each warrant represents the right to acquire upon exercise thereof
1.04 shares of common stock at an exercise price of $34.6125 per warrant. The
warrants expire June 30, 1996.
Under the Corporation's Dividend Reinvestment Plan, stockholders may
reinvest all or part of their quarterly dividends in shares of common stock.
Common stock issued, or distributed from treasury, during 1995, 1994 and
1993 was as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Employee Benefit and
Compensation Plans 17,649,425(a) 2,104,924 2,855,111
Conversion of 10% Convertible
Preferred Stock 7,639,424 -- --
Acquisition of U.S. Trust 6,883,685 -- --
Dividend Reinvestment
and Stock Purchase Plans 385,513 998,665 2,426,380
Stock Warrants 53,362 2,222 2,273
Public Offerings -- -- 30,112,000
- -------------------------------------------------------------------------------
Total Shares Issued or Distributed
from Treasury(b) 32,611,409 3,105,811 35,395,764
- -------------------------------------------------------------------------------
(a) Amount includes 11,385,569 of common stock issued related to broad-based
employee stock option plans of both predecessor corporations. See Note Fourteen
for a discussion of the Corporation's Employee Stock Option Plans.
(b) During 1995 and 1994, 22,132,496 and 1,055,455, respectively, of these
shares were distributed from treasury. No shares were distributed from treasury
in 1993.
13. POSTRETIREMENT EMPLOYEE BENEFITS PLANS
The Corporation is currently in the process of reviewing the benefit plans of
both predecessor institutions, including the postretirement employee benefit
plans. New plans for the Corporation are expected to be approved in 1996.
PENSION PLANS
The Corporation currently has two separate noncontributory pension plans that
provide defined benefits to substantially all domestic employees of Chase and
Chemical. Chase's domestic plan employs, subject to approval from the Internal
Revenue Service, a cash balance form of defined benefit formula that provides
for benefits based on salary and service, subject to a minimum benefit level.
Chemical's domestic plan also provides for defined benefits, which include both
a cash balance feature and a final-average-pay feature. Contributions are made
to the Corporation's defined benefit pension plans within the range of levels
permitted under applicable law.
There are also a number of other defined benefit plans which provide
benefits to certain domestic and overseas employees. The Corporation's funding
strategy for these plans is based on legal requirements, plan documents and
local practice. The assumptions used to value such plans generally are
consistent with those used to value the plans that cover substantially all
domestic employees, adjusted for local conditions.
The accompanying tables present the aggregate funded status and the net
asset and liability amounts included in Other Assets or Other Liabilities,
respectively, and the components of expense included in Employee Benefits
expense for the Corporation's defined benefit pension plans.
FUNDED STATUS OF PENSION PLANS
ACCUMULATED ACCUMULATED
ASSETS EXCEED BENEFITS ASSETS EXCEED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS(A) ACCUMULATED BENEFITS EXCEED ASSETS(A)
DECEMBER 31, (IN MILLIONS) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Actuarial Present Value of Benefit Obligation:
Accumulated Benefit Obligation - Vested Benefits $(1,724) $(193) $(1,452) $(159)
Accumulated Benefit Obligation - Nonvested Benefits (71) (15) (76) (12)
Additional Benefits Based on Future Salary Levels (226) (39) (193) (35)
- ------------------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation for Service Rendered
to Date (2,021) (247) (1,721) (206)
Plan Assets at Fair Value(b) 2,419 68 2,022 41
- ------------------------------------------------------------------------------------------------------------------------------------
Plan Assets in Excess of (Less than) Projected
Benefit Obligation 398 (179) 301 (165)
Unrecognized Net Loss 83 14 219 6
Unrecognized Net (Asset) Obligation (49) 4 (67) 5
Unrecognized Prior Service (Benefit) Cost (16) 7 (11) 7
Minimum Liability Adjustment -- (16) -- (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost $ 416 $(170) $ 442 $(152)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Annualized Actuarial Assumptions:
Discount Rate 7.25% 8.64%
Rate of Increase in Future Compensation 5.00 5.42
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Consists primarily of domestic plans not subject to Title IV of the Employee
Retirement Income Security Act of 1974 ("ERISA") and overseas pension plans
where funding strategies vary according to legal requirements and local
practice.
(b) Consists primarily of listed stocks, fixed income securities, commingled
funds and participation rights.
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The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------
In 1996, pension expense is expected to increase as a result of the
decrease in the discount rate to 7.25% at December 31, 1995.
COMPONENTS OF NET PENSION EXPENSE
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- -----------------------------------------------------------------
Cost of Benefits Earned $ 179 $ 197 $ 175
Interest Cost on Projected Benefit
Obligation 155 125 117
Actual (Gain) Loss on Plan Assets (458) 27 (240)
Net Amortization and Deferral 257 (224) 47
- -----------------------------------------------------------------
Net Periodic Pension Expense $ 133 $ 125 $ 99
- -----------------------------------------------------------------
Weighted-Average Annualized
Actuarial Assumptions:
Discount Rate 8.65% 7.39% 8.48%
Assumed Rate of Long-Term Return
on Plan Assets 9.32 8.50 9.14
Rate of Increase in Future
Compensation 5.41 5.42 6.00
- -----------------------------------------------------------------
During 1994, Chase offered and completed a voluntary retirement program in
which eligible participants in the postretirement plans received accelerated and
enhanced benefits if they elected to retire under the program. As a result of
this voluntary retirement program, a restructuring charge of $105 million was
taken, primarily relating to pension benefits.
The Corporation has several defined contribution plans. The most
significant are the Thrift Incentive Plan ("TIP") offered to domestic employees
of Chase and the Savings Incentive Plan ("SIP") offered to domestic employees of
Chemical. Subject to certain limits, the TIP and the SIP allow employees to make
tax-deferred investments and earn matching contributions from the Corporation.
Employee Benefits expense related to all defined contribution plans totaled $94
million in 1995, $86 million in 1994 and $74 million in 1993.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
The Corporation provides postretirement medical and life insurance benefits to
substantially all domestic employees and to certain foreign employees who meet
certain age and length-of-service requirements at retirement. The amount of
benefits provided varies with length of service and date of hire. The medical
plans are contributory and the life insurance plans are noncontributory.
Employees hired by Chemical after April 15, 1992 pay the full cost of their
benefits. The plans for both Chemical and Chase employees provide for limits on
the Corporation's share of covered medical benefits. The Corporation has not
prefunded these benefits.
Effective January 1, 1993, the Corporation adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106") for benefits provided to domestic employees. SFAS 106 requires
recognition, during the years of the employees' active service, of the
employer's expected cost and obligation of providing postretirement benefits
other than pensions to employees and eligible dependents. The Corporation
elected to expense the entire unrecognized accumulated obligation (for both
predecessor institutions) in 1993 as of the date of adoption of SFAS 106 via a
one-time pre-tax charge of approximately $685 million.
Effective January 1, 1995, the Corporation adopted SFAS 106 for
postretirement medical benefits for its eligible foreign employees. Consistent
with the January 1, 1993 adoption of SFAS 106 for domestic employees, the
Corporation elected to expense the entire unrecognized accumulated obligation as
of the date of adoption of SFAS 106 related to its foreign employees via a
one-time pre-tax charge of $17 million ($11 million after-tax).
The accompanying tables present the components of the liability included in
Accrued Expenses, and the periodic expense included in Employee Benefits expense
related to providing postretirement medical and life insurance benefits. The
discount rates and rates of increase in future compensation used to determine
the actuarial values for these benefits generally are consistent with those used
for the Corporation's defined benefit pension plans. For 1995, the assumed
weighted average medical benefits cost trend rate used to measure the expected
cost of benefits covered was 10.4% for 1996, declining gradually to a floor of
5.7%. The effect of a 1% increase in the assumed medical benefits cost trend
rate would be to increase the December 31, 1995 accumulated obligation and
related periodic expense each by approximately 6%.
COMPONENTS OF POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
DECEMBER 31, (IN MILLIONS) 1995 1994
- -----------------------------------------------------------------
Accumulated Benefit Obligation:
Retirees $651 $567
Active Employees 167 114
- -----------------------------------------------------------------
Accumulated Benefit Obligation 818 681
Unrecognized Net Gain (Loss) (40) 50
- -----------------------------------------------------------------
Accrued Postretirement Medical and
Life Insurance Benefits $778 $731
- -----------------------------------------------------------------
The unrecognized net loss at December 31, 1995 resulted primarily from the
change in the discount rate at December 31, 1995.
COMPONENTS OF NET POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- -----------------------------------------------------------------
Cost of Benefits Earned $ 9 $10 $ 9
Interest Cost on Accumulated Benefit
Obligation 59 52 56
Amortization of Net Gain(a) (3) (1) --
- -----------------------------------------------------------------
Net Postretirement Medical and Life
Insurance Expense $65 $61 $65
- -----------------------------------------------------------------
(a) For 1995, only individual plans with an unrecognized net gain met the
accounting requirements for amortization.
In 1996, postretirement medical and life insurance expense is expected to
remain relatively unchanged.
69
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. EMPLOYEE STOCK INCENTIVE PLANS
EXECUTIVE INCENTIVE PLANS
The Corporation has several long-term stock incentive plans that provide for
stock-based awards, including stock options, restricted stock and restricted
stock units to certain key employees.
Prior to the merger, Chemical had in effect a long-term stock incentive
plan (the "Chemical LTIP"), pursuant to which stock options have been issued at
prices at least equal to the market value of the Corporation's common stock on
the grant date. Generally, options cannot be exercised until one year after the
grant date and become exercisable over various periods as determined at the time
of grant. Options generally expire ten years after the grant date. Under
generally accepted accounting principles, no compensation expense is required to
be recognized in conjunction with granted or exercised options; amounts received
upon the exercise of options are recorded as common stock and capital surplus.
Restricted stock and restricted stock units are issued under the Chemical
LTIP at no cost to the recipient. Restricted stock is awarded subject to the
risk of forfeiture until certain restrictions, including continued employment
for a specified number of years, have lapsed. The recipient is, however,
entitled to the voting rights and dividends on the stock. Restricted stock units
entitle their holders to receive shares of common stock after a certain period
of continued employment. The holders of restricted stock units are entitled to
receive cash payments equivalent to the dividends that would have been received
if the units were shares of common stock.
Most restricted shares and restricted stock units awarded under the
Chemical LTIP during 1995 and 1994 vest when Chemical's common stock price
reaches and sustains targeted prices for a minimum period of time. During 1995,
restricted stock and restricted stock units totaling 858,680 were issued under
the Chemical LTIP. The number of such awards issued under the Chemical LTIP
during 1994 totaled 901,300. At December 31, 1995, more than half of all such
awards had vested as a result of the first two stock price targets having been
attained. The third and final stock price target was attained in the 1996 first
quarter.
Compensation expense relating to most restricted shares and restricted
stock units (e.g., for awards where the number of shares to be issued at the end
of the restricted period is determined on the grant date) is equal to the market
value of the Corporation's common stock on the grant date; for other awards,
compensation expense generally is equal to the market value on the date the
restrictions lapse (e.g., for awards that are forfeitable in the event that
targets are not attained or that are payable in cash). Compensation expense is
recognized over the restricted period.
A separate plan, the Chase Long-Term Incentive Plan (the "Chase LTIP"), in
effect prior to the merger,provided for awards to selected key personnel of
Chase in the form of options to purchase shares of common stock with or without
related stock appreciation rights ("SARs") and restricted stock units. Options
issued under the Chase LTIP are similar to those issued under the Chemical LTIP.
Restricted stock units under the Chase LTIP entitle their holders to receive
shares of common stock after a certain period of continued employment. During
1995 and 1994, 488,800 and 156,000 restricted stock units, respectively, were
issued under the Chase LTIP. SARs permit their holders to surrender their
related options in exchange for cash or shares in an amount equal to the excess
of the market price per share of the stock on the date the right is exercised
over the related option price. SARs related to nonqualified stock options are
recorded as compensation expense based on the excess of the fair market value of
the number of shares of stock covered by a SAR over the option price. No further
awards will be made under the Chase LTIP after the merger. As a result of the
merger, the Corporation assumed all unexercised awards previously granted under
the Chase LTIP at a conversion rate of 1.04 for each outstanding award.
The following table presents a summary of the aggregate option transactions
for the Chemical and Chase LTIPs during 1995 and 1994.
STOCK STOCK OPTIONS STOCK STOCK OPTIONS
OPTIONS WITH SARS OPTION PRICE OPTIONS WITH SARS OPTION PRICE
YEAR ENDED DECEMBER 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, January 1 21,378,667 545,114 $10.22 - $43.13 17,210,853 792,130 $10.22--$43.13
Granted 4,936,692 -- 33.06 - 54.93 6,032,785 -- 21.80-- 40.19
Exercised (4,252,101) (137,204) 10.22 - 43.13 (1,274,365) (130,131) 10.22-- 39.06
Cancelled (439,251) (195,606) 10.22 - 46.80 (590,606) (116,885) 10.22-- 43.13
- ------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 21,624,007 212,304 $10.22 - $54.93 21,378,667 545,114 $10.22--$43.13
- ------------------------------------------------------------------------------------------------------------------------------
Options Exercisable at December 31 12,535,615 212,304 $10.22 - $51.25 12,247,582 545,114 $10.22--$43.13
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995 and 1994, 16,727,850 and 19,078,482 shares,
respectively, of the Corporation's common stock were reserved for issuance and
available for future awards under the Chemical and Chase LTIPs. In January of
1995 and 1996, the Corporation, pursuant to the terms of the Chemical LTIP,
reserved additional shares equal to 1.5% of its outstanding shares of common
stock for future awards under the Chemical LTIP.
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The Chase Manhattan Corporation
and Subsidiaries
- -------------------------------------------------------------------------------
EMPLOYEE STOCK OPTION PLANS
In addition to the awards granted under the Chemical and Chase LTIPs, the
Corporation adopted a broad-based employee stock option plan in June 1994 and,
as a result of the merger, assumed Chase's broad-based employee stock option
plan, originally adopted in January 1994. Under the Chemical plan, Chemical
granted 20,025,250 non-qualified stock options to purchase shares of its common
stock to all full-time (500 options each) and part-time (250 options each)
employees (excluding senior officers). These options were granted at the $40.50
market price of Chemical's common stock on June 15, 1994 and were exercisable in
three installments if Chemical's common stock price closed at, or above, certain
targeted prices for a pre-specified period. During 1995, all three minimum
target prices were met and maintained for the specified periods giving grant
recipients the right to exercise all of their options. Any options not exercised
by June 14, 2004 will be forfeited as of that date.
Under the Chase Plan, substantially all full-time employees were awarded
options to purchase 400 shares of common stock, and substantially all part-time
employees were awarded options to purchase 200 shares of common stock, at an
exercise price of $35.50 per share. Employees who began employment after January
19, 1994 were awarded options to purchase a proportionately reduced number of
shares based on the time remaining between the commencement of employment and
the first date the options could be exercised. When granted, the options, which
expire on January 19, 2004, were exercisable on January 19, 2003, with early
exercise permitted commencing as early as January 1997, upon the occurrence of
certain events. The options were accelerated to become exercisable on December
11, 1995 as a result of shareholder approval of the merger. The Corporation has
assumed all such options that remained unexercised at the time of the merger.
Neither the grant nor the exercise of such employee stock options result in
a charge to the Corporation's earnings under current accounting rules.
The following table presents the activity in the broad-based employee stock
option plans of Chemical and Chase during 1995 and 1994.
NUMBER OF NUMBER OF
OPTIONS OPTION PRICE OPTIONS OPTION PRICE
YEAR ENDED DECEMBER 31, 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Options Outstanding, January 1 32,497,662 $30.77 - $40.50 -- $ -- $ --
Granted 449,448 34.19 - 45.32 36,202,427 30.77 - 40.50
Exercised (11,385,569) 30.77 - 45.32 -- --
Cancelled (3,025,818) 30.77 - 45.32 (3,704,765) 30.77 - 40.50
- -----------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 18,535,723 $30.77 - $45.32 32,497,662 $ 30.77 - $40.50
- -----------------------------------------------------------------------------------------------------------------
15. RESTRUCTURING CHARGES AND OTHER EXPENSE
Restructuring Charges: The 1995 results include a $15 million restructuring
charge, taken by the Corporation relating to the exiting from a futures
brokerage business.
The 1994 results include a pre-tax restructuring charge of $260 million
taken by the Corporation in connection with the program to improve earnings per
share. At December 31, 1995, the reserve balance associated with this charge was
approximately $115 million relating substantially to the disposition of certain
facilities, premises and equipment and the termination of leases. Additionally,
a charge of $105 million was incurred by the Corporation relating to a voluntary
retirement program offered to eligible employees. The Corporation also expensed
$52 million for other productivity initiatives, such as exiting from certain
consumer activities overseas, regionalizing foreign operations and for further
streamlining of the domestic infrastructure. Further, during 1994, the
Corporation incurred a restructuring charge of $48 million related to the
closing of 50 New York branches and a staff reduction of 650.
The 1993 results include a charge of $115 million taken by the Corporation
after it completed an assessment of costs associated with the merger of Chemical
and Manufacturers Hanover Corporation on December 31, 1991. Also in 1993, the
Corporation's Texas Commerce subsidiary incurred a restructuring charge of $43
million in connection with the acquisition of assets and assumption of
liabilities of four banks (the "First City Banks") of the former First City
Bancorporation of Texas, Inc. from the Federal Deposit Insurance Corporation
("FDIC"). In 1993, the Corporation incurred a $45 million restructuring charge
for the consolidation of data centers and other facilities.
At December 31, 1995, the remaining reserves related to the above-mentioned
restructuring charges (other than the reserve related to the program to improve
earnings per share) were immaterial.
Other Expense: Details of other expense were as follows:
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- ----------------------------------------------------------------------
Other Expense:
Professional Services $ 559 $ 564 $ 486
Marketing Expense 372 371 348
FDIC Assessments 117(a) 250 272
Telecommunications 333 294 244
Amortization of Intangibles 182 192 184
All Other 1,128 1,263 1,120
- ----------------------------------------------------------------------
Total Other Expense $2,691 $2,934 $ 2,654
- ----------------------------------------------------------------------
(a) Reflects the impact of a reduction in the FDIC assessment rate.
71
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. INCOME TAXES
As of January 1, 1993, the Corporation adopted SFAS 109 and, as a result,
recognized a favorable cumulative effect on income tax expense of $1,053
million.
A valuation reserve was established as of January 1, 1993, in accordance
with the requirements of SFAS 109, for tax benefits available to the Corporation
but for which realization was in doubt. The Corporation's valuation reserve for
Federal taxes was $115 million at December 31, 1995, relating primarily to tax
benefits associated with foreign operations which are subject to tax law
limitations on realization.
Deferred income tax expense (benefit) results from differences between
amounts of assets and liabilities as measured for income tax return and
financial reporting purposes. The significant components of Federal deferred tax
assets and liabilities as of December 31, 1995 and 1994 are reflected in the
following table.
DECEMBER 31, (IN MILLIONS) 1995 1994
- ----------------------------------------------------------------
Federal Deferred Tax Assets:
Reserves for Credit Losses $ 933 $ 983
Reserves Other Than Credit Losses 716 817
Fair Value Adjustments-Available-for-
Sale-Securities 137 248
Interest and Fee Accrual Differences 101 279
Foreign Operations 285 197
Securities Marked-to-Market for Tax
Purposes 14 --
Postretirement Benefits 270 250
Other 201 259
- ----------------------------------------------------------------
Gross Federal Deferred Tax Assets $2,657 $3,033
- ----------------------------------------------------------------
Federal Deferred Tax Liabilities:
Leasing Transactions $1,120 $1,144
Pension Benefits 129 152
Depreciation and Amortization 83 107
Securities Marked-to-Market for Tax
Purposes -- 226
Other 113 131
- ----------------------------------------------------------------
Gross Federal Deferred Tax Liabilities $1,445 $1,760
- ----------------------------------------------------------------
Deferred Federal Tax Asset Valuation
Reserve $ 115 $ 144
- ----------------------------------------------------------------
Net Federal Deferred Tax Asset After
Valuation Reserve $1,097 $1,129
- ----------------------------------------------------------------
A valuation reserve of $148 million as of December 31, 1995, has been
established against all New York State and City deferred tax assets. The
Corporation has recorded deferred New York State and City tax liabilities of
approximately $140 million, net of deferred tax assets and related valuation
reserve, as of December 31, 1995. Foreign deferred taxes are approximately $321
million as of December 31, 1995 and a Federal deferred tax asset has been
recorded in accordance with SFAS 109. The Corporation expects that when paid,
these foreign taxes will be creditable against its Federal income tax liability.
The components of income tax expense included in the Consolidated Statement
of Income were as follows:
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- ------------------------------------------------------------------
Current Income Tax Expense:
Federal $1,232 $ 605 $ 389
Foreign 381 258 343
State and Local 264 239 242
- ------------------------------------------------------------------
Total Current 1,877 1,102 974
- ------------------------------------------------------------------
Deferred Income Tax Expense (Benefit):
Federal (164) 266 (169)
Foreign 111 42 (28)
State and Local 18 65 21
- ------------------------------------------------------------------
Total Deferred (35) 373 (176)
- ------------------------------------------------------------------
Total Income Tax Expense $1,842 $1,475 $ 798
- ------------------------------------------------------------------
Not reflected in the preceding table are the tax effects of unrealized
gains and losses, with respect to available-for-sale securities that are
recorded directly in stockholders' equity, pursuant to SFAS 115, and certain tax
benefits associated with the Corporation's employee stock plans. Stockholders'
equity decreased by $38 million and $319 million, respectively, in 1995 and 1993
and increased by $676 million in 1994 as a result of the tax effects.
The tax expense applicable to securities gains and losses for the years
1995, 1994 and 1993 was $68 million, $73 million, and $77 million, respectively.
A reconciliation of the income tax expense computed at the applicable
statutory U.S. income tax rate to the actual income tax expense for the past
three years is shown in the following table.
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- ----------------------------------------------------------------
Statutory U.S. Federal Tax Expense $1,684 $1,386 $ 988
Increase (Decrease) in Tax Expense
Resulting From:
(Recognized) Unrecognized Tax Benefits -- (70) (331)
Tax-Exempt Interest and Dividends (50) (48) (52)
State and Local Income Taxes, Net of
Federal Income Tax Benefit 183 197 170
Nondeductible Expense 81 41 43
Other--Net (56) (31) (20)
- ----------------------------------------------------------------
Total Income Tax Expense $1,842 $1,475 $ 798
- ----------------------------------------------------------------
The 1994 and 1993 income tax expense was reduced by $70 million and $331
million, respectively, of tax benefits recognized in accordance with SFAS 109.
The following table presents the domestic and foreign components of income
before income taxes for the past three years.
YEAR ENDED DECEMBER 31, (IN MILLIONS) 1995 1994 1993
- ---------------------------------------------------------------
Domestic $3,710 $2,369 $1,569
Foreign(a) 1,102 1,592 1,255
- ---------------------------------------------------------------
Income Before Income Taxes $4,812 $3,961 $2,824
- ---------------------------------------------------------------
(a) For purposes of this disclosure, foreign income is defined as income
generated from operations located outside the United States.
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The Chase Manhattan Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
17. RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS
Federal Reserve Board regulations require depository institutions to maintain
cash reserves with a Federal Reserve Bank. The average amount of reserve
balances deposited by the Corporation with various Federal Reserve Banks was
approximately $1.2 billion during 1995 and $1.6 billion during 1994.
Restrictions imposed by Federal law prohibit the Corporation and certain
other affiliates from borrowing from banking subsidiaries unless the loans are
secured in specified amounts. Such secured loans to the Corporation or to each
of certain other affiliates generally are limited to 10% of the banking
subsidiary's capital and surplus; the aggregate amount of all such loans is
limited to 20% of the banking subsidiary's capital and surplus. The Corporation
was well within these limits throughout the year.
The principal sources of the Corporation's income (on a parent company-only
basis) are dividends and interest from The Chase Manhattan Bank, Chemical Bank
and the other banking and non-banking subsidiaries of the Corporation. Federal
law imposes limitations on the payment of dividends by the subsidiaries of the
Corporation that are state member banks of the Federal Reserve System (a "state
member bank") or are national banks. Under such limitations, dividend payments
by such banks are limited to the lesser of (i) the amount of "undivided profits"
(as defined) and (ii) absent regulatory approval, an amount not in excess of
"net income" (as defined) for the current year plus "retained net income" (as
defined) for the preceding two years. Non-bank subsidiaries of the Corporation
are not subject to such limitations.
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1996, without the approval of their relevant banking
regulators, pay dividends of approximately $2.5 billion to their respective bank
holding companies, plus an additional amount equal to their net income from
January 1, 1996 through the date in 1996 of any such dividend payment.
- --------------------------------------------------------------------------------
18. DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
The Corporation utilizes various derivative and foreign exchange financial
instruments for trading purposes and for purposes other than trading, such as
ALM. These financial instruments represent contracts with counterparties where
payments are made to or from the counterparty based upon specific interest
rates, currency levels, other market rates or on terms predetermined by the
contract. Such derivative and foreign exchange transactions involve, to varying
degrees, credit risk and market risk. For a discussion of the credit and market
risks involved with derivative and foreign exchange financial instruments,
reference is made to the first three paragraphs of the Derivative and Foreign
Exchange Financial Instruments section of the Management's Discussion and
Analysis ("MD&A") on page 38, the first ten paragraphs of the Credit Risk
Management section of the MD&A on pages 31-32, and paragraphs one, two and eight
through ten of the Market Risk Management section of the MD&A on page 40.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR TRADING PURPOSES: The
credit risk associated with the Corporation's trading activities is disclosed on
the balance sheet. The effects of any market risk (gains or losses) on the
Corporation's trading activities have been reflected in trading revenue, as the
trading instruments are marked-to-market on a daily basis. See Note One for a
discussion of the Corporation's trading activities and Note Three for the types
and categories of these trading instruments.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR PURPOSES OTHER THAN
TRADING: The Corporation's principal objective in using derivatives for purposes
other than trading is for its ALM activities. For a further discussion of the
Corporation's objectives and strategies for employing derivative and foreign
exchange instruments for ALM activities, reference is made to the first three
paragraphs of the Asset/Liability Management discussion of the MD&A on page 41
and paragraphs three through five on page 44.
The majority of the Corporation's derivatives used for ALM are transacted
through its trading units.
For the disclosure of the fair value associated with the Corporation's ALM
activities, see Note Twenty One.
At December 31, 1995, gross deferred gains and gross deferred losses
relating to closed derivative contracts used in ALM activities were $528 million
and $626 million, respectively. See Note One for the accounting method used for
these contracts and the Amortization of Net Deferred Gains/Losses on Closed ALM
Contracts table on page 44 of the MD&A.
The Corporation also uses selected derivative financial instruments to
manage the sensitivity to changes in market interest rates on anticipated
transactions; however, such transactions are not significant. Accordingly, at
December 31, 1995, deferred gains and losses associated with such transactions
were insignificant.
The following table summarizes the aggregate notional amounts of interest
rate and foreign exchange contracts as well as the credit exposure related to
these instruments (after taking into account the effects of legally enforceable
master netting agreements) for the dates indicated below. The table should be
read in conjunction with the preceding narrative as well as the descriptions of
these products and their risks immediately following.
73
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTIONAL AMOUNTS(A) CREDIT EXPOSURE
DECEMBER 31, (IN BILLIONS) 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------
INTEREST RATE CONTRACTS
Futures, Forwards and Forward Rate Agreements
Trading $ 1,047.5 $ 1,203.3 $ 1.3 $ 0.9
Asset and Liability Management 40.0 47.5 0.1 --
Interest Rate Swaps
Trading 1,692.6 1,358.0 10.4 9.2
Asset and Liability Management 69.7 101.8 0.3 0.3
Purchased Options
Trading 147.2 118.4 0.7 0.5
Asset and Liability Management 26.0 22.2 -- --
Written Options
Trading 161.0 141.7 -- --
Asset and Liability Management 6.4 3.4 -- --
- ----------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $ 3,190.4 $ 2,996.3 $ 12.8 $ 10.9
- ----------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,352.1 $ 1,335.9 $ 8.8 $ 11.0
Asset and Liability Management 10.9 13.4 -- --
Other Foreign Exchange Contracts(b)
Trading 241.6 199.2 3.6 3.6
Asset and Liability Management 1.6 0.7 -- --
- ----------------------------------------------------------------------------------------------------
Total Foreign Exchange Contracts $ 1,606.2 $ 1,549.2 $ 12.4 $ 14.6
- ----------------------------------------------------------------------------------------------------
STOCK INDEX OPTIONS AND COMMODITY CONTRACTS
Trading $ 37.7 $ 20.6 $ 1.0 $ 0.8
- ----------------------------------------------------------------------------------------------------
Total Stock Index Options and Commodity Contracts $ 37.7 $ 20.6 $ 1.0 $ 0.8
- ----------------------------------------------------------------------------------------------------
Total Credit Exposure Recorded on the Balance Sheet $ 26.2 $ 26.3
- ----------------------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and stock index options and commodity contracts were $417.7
billion, $10.6 billion and $5.1 billion, respectively, at December 31, 1995. The
credit risk amounts of these contracts were minimal since exchange-traded
contracts principally settle daily in cash.
(b) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $92.2 billion, $92.4 billion and $58.6
billion, respectively, at December 31, 1995, compared with $71.0 billion, $87.4
billion and $41.5 billion, respectively, at December 31, 1994.
CLASSES OF DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS: The following classes of
derivative and foreign exchange instruments refer to instruments that are used
by the Corporation for purposes of both trading and ALM.
Interest rate futures and forwards are contracts for the delayed delivery of
securities or money market instruments in which the seller agrees to deliver on
a specified future date, a specified instrument, at a specified price or yield.
The credit risk inherent in futures and forwards is the risk that the exchange
party may default. Futures contracts settle in cash daily and, therefore, there
is minimal credit risk to the Corporation. The credit risk inherent in forwards
arises from the potential inability of counterparties to meet the terms of their
contracts. Both futures and forwards are also subject to the risk of movements
in interest rates or the value of the underlying securities or instruments.
Forward rate agreements are contracts to exchange payments on a certain
future date, based on a market change in interest rates from trade date to
contract settlement date. The notional amount on which the interest payments are
based is not exchanged. The maturity of these agreements is typically less than
two years.
Interest rate swaps are contracts in which a series of interest rate flows in
a single currency are exchanged over a prescribed period. The notional amount on
which the interest payments are based is not exchanged. Most interest rate swaps
involve the exchange of fixed and floating interest payments. Cross-currency
interest rate swaps are contracts that involve the exchange of both interest and
principal amounts in two different currencies. The risks inherent in interest
rate and cross-currency swap contracts are the potential inability of a
counterparty to meet the terms of its contract and the risk associated with
changes in the market values of the contracts due to movements in the underlying
interest rates.
Interest rate options, which include caps and floors, are contracts which
transfer, modify, or reduce interest rate risk in exchange for the payment of a
premium when the contract is initiated. As a writer of interest rate caps,
floors, and other options, the Corporation receives a premium in exchange for
bearing the risk of unfavorable changes in interest rates. Conversely, as a
purchaser of an option, the Corporation pays a premium for the right, but not
the obligation, to buy or sell a financial instrument
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and Subsidiaries
- --------------------------------------------------------------------------------
or currency at predetermined terms in the future. Foreign currency options are
similar to interest rate option contracts, except that they are based on
currencies instead of interest rates.
The Corporation's use of written options as part of its ALM is permitted only
in those circumstances where they are specifically linked to purchased options
and in order to mitigate interest rate risk. All unmatched written options are
included in the trading portfolio and are marked-to-market.
Foreign exchange contracts are contracts for the future receipt or delivery
of foreign currency at previously agreed-upon terms. The risks inherent in these
contracts are the potential inability of a counterparty to meet the terms of its
contract and the risk associated with changes in the market values of the
underlying currencies.
Stock index option contracts are contracts to pay or receive cash flows from
counterparties based upon the increase or decrease in the underlying index.
Commodity contracts include swaps, caps and floors and are similar to interest
rate contracts, except that they are based on commodity indices instead of
interest rates.
To reduce its exposure to market risk related to the above-mentioned classes
of derivative and foreign exchange instruments, the Corporation may enter into
offsetting positions.
To reduce credit risk, management may deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on management's credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment, and
real estate.
Derivatives and foreign exchange instruments are generally either negotiated
over-the-counter ("OTC") contracts or standardized contracts executed on a
recognized exchange. Standardized exchange-traded derivatives primarily include
futures and options. Negotiated OTC derivatives are generally entered into
between two counterparties that negotiate specific agreement terms, including
the underlying instrument, amount, exercise price and maturity.
Included as part of the financial instruments presented in the preceding
notional table are transactions involving "when-issued securities" which the
Corporation enters into primarily as part of its trading activities. When-issued
securities are commitments to purchase or sell securities authorized for
issuance, but not yet actually issued, and are not recorded on the balance sheet
until issued. However, these commitments are marked-to-market with the resulting
gains or losses reflected in trading revenue.
- --------------------------------------------------------------------------------
19 OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
In addition to using derivative and foreign exchange financial instruments, the
Corporation also utilizes lending-related financial instruments in order to meet
the financing needs of its customers. The Corporation issues commitments to
extend credit, standby and other letters of credit and guarantees, and also
provides securities-lending services. For these instruments, the contractual
amount of the financial instrument represents the maximum potential credit risk
if the counterparty does not perform according to the terms of the contract. A
large majority of these commitments expire without being drawn upon. As a
result, total contractual amounts are not representative of the Corporation's
actual future credit exposure or liquidity requirements for such commitments.
The following table summarizes the contract amounts relating to the
Corporation's lending-related financial instruments at December 31, 1995 and
1994.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Commitments to Extend Credit $95,555(a) $82,766(a)
Standby Letters of Credit and Guarantees (Net of
Risk Participations of $4,861 and $6,241) 24,745 22,797
Other Letters of Credit 5,907 5,806
Customers' Securities Lent 27,169 21,227
- --------------------------------------------------------------------------------
(a) Excludes credit card commitments of $47.6 billion and $47.5 billion at
December 31, 1995 and 1994, respectively.
Unfunded commitments to extend credit are agreements to lend to a customer
who has complied with predetermined contractual conditions. Commitments
generally have fixed expiration dates.
Standby letters of credit and guarantees are conditional commitments issued
by the Corporation generally to guarantee the performance of a customer to a
third party in borrowing arrangements, such as commercial paper, bond financing,
construction and similar transactions. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan facilities to customers and may be reduced by participations to third
parties. The Corporation holds collateral to support those standby letters of
credit and guarantees written for which collateral is deemed necessary. At
December 31, 1995, all of the Corporation's standby letters of credit and
guarantees written expire in less than five years.
Customers' securities lent are customers' securities held by the Corporation,
as custodian, which are lent to third parties. The Corporation obtains
collateral, with a market value exceeding 100% of the contract amount, for
customers' securities lent, which is used to indemnify customers against
possible losses resulting from third-party defaults.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
20 SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
Concentrations of credit risk indicate the relative sensitivity of the
Corporation's performance to both positive and negative developments affecting a
particular industry. Based on the nature of the banking business, management
does not believe that any of these concentrations are unusual.The accompanying
table presents the Corporation's significant concentrations of credit risk for
on-balance sheet (principally loans) and off-balance sheet (principally
commitments to extend credit) financial instruments. The Corporation has
procedures to monitor counterparty credit risk and to obtain collateral when
deemed necessary. Accordingly, management believes that the credit exposure
shown below is not representative of the potential risk of loss inherent in the
portfolio.
Credit On-Balance Off-Balance Credit On-Balance Off-Balance
Exposure Sheet Sheet Exposure Sheet Sheet
December 31, (in billions) 1995 Distributions 1994 Distributions
- ------------------------------------------------------------------------------------------------------------------------------
Residential Mortgages $ 37.4 $35.2 $ 2.2 $ 32.4 $29.9 $ 2.5
Credit Cards 65.2 17.6 47.6 64.9 17.4 47.5
Commercial Real Estate 8.4 7.5 0.9 9.1 8.5 0.6
- ------------------------------------------------------------------------------------------------------------------------------
Total $111.0 $60.3 $50.7 $106.4 $55.8 $50.6
- ------------------------------------------------------------------------------------------------------------------------------
The Corporation's balance sheet exposure to consumers is mainly residential
mortgages and credit card outstandings, with off-balance sheet exposure
concentrated in unfunded credit card commitments. For a geographic concentration
of residential mortgages and credit card outstandings, reference is made to the
tables entitled Residential Mortgage Loans by Geographic Region and Domestic
Credit Card Receivables by Geographic Region within the Domestic Consumer
Portfolio section of the MD&A on pages 34 and 35, respectively.
Geographic concentrations are a factor most directly affecting the credit
risk of the real estate and emerging markets segments of the Corporation's loan
portfolio. The Corporation's real estate portfolio is primarily concentrated in
the New York Metropolitan area and in Texas. Its emerging markets portfolio is
largely concentrated in Latin America, principally Mexico, Brazil and Venezuela.
For a further discussion of the emerging markets portfolio, reference is made to
the Cross-Border Outstandings section of the MD&A on page 37.
- --------------------------------------------------------------------------------
21 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires the Corporation disclose
fair value information about financial instruments for which it is practicable
to estimate the value, whether or not such financial instruments are recognized
on the balance sheet. Fair value is the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation, and is best evidenced by a quoted market price,
if one exists.
Quoted market prices are not available for a significant portion of the
Corporation's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may not
be indicative of the net realizable value. In addition, the calculation of
estimated fair value is based on market conditions at a specific point in time
and may not be reflective of future fair values.
Certain financial instruments and all nonfinancial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 provide only a partial estimate of the fair value of the Corporation;
for example, the values associated with the various ongoing businesses which the
Corporation operates are excluded. The Corporation has developed long-term
relationships with its customers through its deposit base and its credit card
accounts, commonly referred to as core deposit intangibles and credit card
relationships. Customer relationships with mortgage servicing customers also
provide significant economic value. As discussed in Note One, servicing rights,
except those associated with certain mortgages originated after the adoption of
SFAS 122, are not currently reflected in the balance sheet. In the opinion of
management, these items in the aggregate add significant value to the
Corporation, but their fair value is not disclosed in this Note.
Fair values among financial institutions are not comparable due to the wide
range of permitted valuation techniques and numerous estimates that must be
made. This lack of objective valuation standard introduces a great degree of
subjectivity to these derived or estimated fair values. Therefore, readers are
cautioned in using this information for purposes of evaluating the financial
condition of the Corporation compared with other financial institutions.
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and Subsidiaries
- --------------------------------------------------------------------------------
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Corporation's financial instruments required to
be valued pursuant to SFAS 107.
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value: The fair value of
certain financial assets carried at cost, including cash and due from banks,
deposits with banks, federal funds sold and securities purchased under resale
agreements, due from customers on acceptances, short-term receivables and
accrued interest receivable is considered to approximate their respective
carrying values due to their short-term nature and negligible credit losses. The
fair value of loans held for accelerated disposition is also considered to
approximate carrying value. As discussed in Note One, such loans are carried at
the lower of cost or current estimated disposition value.
Trading Assets: The Corporation carries trading assets, which includes debt and
equity instruments as well as the positive fair value on derivative and foreign
exchange instruments at estimated fair value. The fair value of these
instruments were valued using either quoted market prices, pricing models,
quoted market prices of financial instruments with similar characteristics or
discounted cash flows. For the fair value of trading assets, see Note Three.
Securities: Securities held-to-maturity are carried at amortized cost.
Securities available-for-sale and interest rate contracts used in connection
with the available-for-sale portfolio are carried at fair value. The valuation
methodologies for securities are discussed in Note Four.
Loans: Loans were valued using methodologies suitable for each loan type.
Certain of these methodologies and key assumptions made are discussed below.
The fair value of the Corporation's commercial loan portfolio was estimated
by assessing the two main risk components of the portfolio: credit and interest.
The estimated cash flows were adjusted to reflect the inherent credit risk and
then discounted, using rates appropriate for each maturity that incorporate the
effects of interest rate changes. Generally, emerging market loans were valued
based on secondary market prices.
For consumer installment loans and residential mortgages for which market
rates for comparable loans are readily available, the fair value was estimated
by discounting cash flows, adjusted for prepayments. The discount rates used for
consumer installment loans were current rates offered by commercial banks and
thrifts; for residential mortgages, secondary market yields for comparable
mortgage-backed securities, adjusted for risk, were used. The fair value of
credit card receivables was estimated by discounting expected cash flows. The
discount rates used incorporated the effects of interest rate changes only,
since the estimated cash flows were adjusted for credit risk.
Other Assets: Other Assets consist primarily of equity investments, including
venture capital investments. The fair value of these investments was determined
on an individual basis. The valuation methodologies included market values of
publicly-traded securities, independent appraisals, and cash flow analyses.
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value: SFAS 107 requires
that the fair value disclosed for deposit liabilities with no stated maturity
(i.e., demand, savings and certain money market deposits) be equal to the
carrying value. SFAS 107 does not allow for the recognition of the inherent
funding value of these instruments.
The fair value of foreign deposits, federal funds purchased and securities
sold under repurchase agreements, other borrowed funds, acceptances outstanding,
short-term payables and accounts payable and accrued liabilities are considered
to approximate their respective carrying values due to their short-term nature.
Domestic Time Deposits: The fair value of time deposits was estimated by
discounting cash flows based on contractual maturities at the interest rates for
raising funds of similar maturity.
Trading Liabilities: The Corporation carries trading liabilities which include
securities sold, not yet purchased as well as derivatives and foreign exchange
instruments at estimated fair value. These instruments were valued using either
quoted market prices, pricing models, quoted market prices of financial
instruments with similar characteristics or discounted cash flows. For the
estimated fair value of trading liabilities, see Note Three.
Long-Term Debt: The valuation of long-term debt takes into account several
factors, including current market interest rates and the Corporation's credit
rating. Quotes were gathered from various investment banking firms for
indicative yields for the Corporation's securities over a range of maturities.
UNUSED COMMITMENTS AND LETTERS OF CREDIT
The Corporation has reviewed the unfunded portion of commitments to extend
credit as well as standby and other letters of credit, and has determined that
the fair value of such financial instruments is not material.
77
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables present the carrying value and estimated fair value at
December 31, 1995 and 1994 of financial assets and liabilities valued under SFAS
107 and certain derivative contracts used for ALM activities related to such
financial assets and liabilities.
Financial Assets/Financial Liabilities
--------------------------------------
Estimated
Carrying Fair
December 31, 1995 (in millions) Value(a)(b) Value(a)(b)
- --------------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates Carrying Value $ 52,235 $ 52,235
Trading Assets - Debt and Equity Instruments 26,212 26,212
Trading Assets - Risk Management Instruments 25,825 25,825
Securities Available-for-Sale 37,141 37,141
Securities Held-to-Maturity 4,628 4,659
Loans, Net of Unearned Income 150,207 151,078
Allowance for Credit Losses (3,784) --
Derivatives in Lieu of Cash Market Instruments(d) 68 117
Other Assets 2,095 2,612
- --------------------------------------------------------------------------------------------------------
Total Financial Assets $ 294,627 $299,879
- --------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $ 208,786 $208,790
Domestic Time Deposits 27,113 27,368
Trading Liabilities 34,341 34,341
Long-Term Debt 12,825 13,199
- --------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 283,065 $283,698
- --------------------------------------------------------------------------------------------------------
December 31, 1994 (in millions)
- --------------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates Carrying Value $ 56,693 $ 56,693
Trading Assets - Debt and Equity Instruments 17,926 17,939
Trading Assets - Risk Management Instruments 25,985 25,985
Securities Available-for-Sale 23,140 23,140
Securities Held-to-Maturity 10,650 10,160
Loans, Net of Unearned Income 142,231 140,394
Allowance for Credit Losses (3,894) --
Derivatives in Lieu of Cash Market Instruments(d) 97 175
Other Assets 2,025 2,324
- --------------------------------------------------------------------------------------------------------
Total Financial Assets $ 274,853 $276,810
- --------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $ 197,406 $197,406
Domestic Time Deposits 26,450 27,657
Trading Liabilities 30,356 30,356
Long-Term Debt 13,061 13,016
- --------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 267,273 $268,435
- --------------------------------------------------------------------------------------------------------
Derivative Contracts Used for ALM Activities
---------------------------------------------------------
Gross Gross Estimated
Carrying Unrecognized Unrecognized Fair
December 31, 1995 (in millions) Value(c) Gains Losses Value(e)
- --------------------------------------------------------------------------------------------------------------------------------
Assets for Which Fair Value Approximates Carrying Value $ (1) $ 4 $ (1) $ 2
Trading Assets - Debt and Equity Instruments -- -- -- --
Trading Assets - Risk Management Instruments -- -- -- --
Securities Available-for-Sale (78) -- -- (78)
Securities Held-to-Maturity -- -- -- --
Loans, Net of Unearned Income 103 159 (370) (108)
Allowance for Credit Losses -- -- -- --
Derivatives in Lieu of Cash Market Instruments(d) 68 276 (227) 117
Other Assets -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 92 $439 $ (598) $ (67)
- --------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $ 6 $ 93 $ (50) $ 49
Domestic Time Deposits 235 462 (254) 443
Trading Liabilities -- -- -- --
Long-Term Debt 29 163 (41) 151
- --------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 270 $718 $ (345) $ 643
December 31, 1994 (in millions)
- --------------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates Carrying Value $ 8 $-- $ (1) $ 7
Trading Assets - Debt and Equity Instruments -- -- -- --
Trading Assets - Risk Management Instruments -- -- -- --
Securities Available-for-Sale 572 -- -- 572
Securities Held-to-Maturity -- -- -- --
Loans, Net of Unearned Income 128 166 (185) 109
Allowance for Credit Losses -- -- -- --
Derivatives in Lieu of Cash Market Instruments(d) 97 194 (116) 175
Other Assets -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 805 $360 $ (302) $ 863
- --------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Carrying Value $ 12 $ 13 $ (49) $ (24)
Domestic Time Deposits 241 104 (1,234) (889)
Trading Liabilities -- -- -- --
Long-Term Debt 43 5 (311) (263)
- --------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 296 $122 $(1,594) $(1,176)
- --------------------------------------------------------------------------------------------------------------------------------
(a) The carrying value and estimated fair value include the carrying value and
estimated fair value of derivative contracts used for ALM activities.
(b) The carrying value and estimated fair value of daily margin settlements on
open futures contracts are primarily included in Other Assets on the balance
sheet, except when used in connection with available-for-sale securities, which
are carried at fair value and are included in Securities: Available-for-Sale on
the balance sheet. The Corporation uses these contracts in its ALM activities to
modify the interest rate characteristics of balance sheet instruments such as
securities available-for-sale, loans and deposits. Gross unrecognized gains and
losses from daily margin settlements on open futures contracts were $4 million
and $103 million, respectively, at December 31, 1995.
(c) The carrying value of derivatives used for asset/liability management is
recorded as receivables and payables and is primarily included in Other Assets
on the balance sheet, except derivatives used in connection with
available-for-sale securities which are carried at fair value and are included
in Securities: Available-for-Sale on the balance sheet.
(d) Represents derivative contracts that, as part of the Corporation's ALM
activities, are used in place of cash market instruments.
(e) Derivative Contracts Used for ALM Activities were valued using market prices
or pricing models consistent with methods used by the Corporation in valuing
similar instruments used for trading purposes.
In addition to the derivative contracts in the above tables, the Corporation
also uses derivative contracts (interest rate swaps, futures and purchased
option contracts) to manage the risk associated with its mortgage servicing
rights that are not required to be fair valued under SFAS 107. At December 31,
1995, the carrying value was $7.7 million, and gross unrecognized gains and
losses were $71.9 million and $3.4 million, respectively, resulting in an
estimated fair value of $76.2 million.
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22 INTERNATIONAL OPERATIONS
The accompanying table presents average assets and income statement information
for 1995, 1994 and 1993 relating to international and domestic operations of the
Corporation by major geographic areas, based on the domicile of the customer.
The Corporation defines international activities as business transactions that
involve customers residing outside of the United States. However, a definitive
separation of the Corporation's domestic and foreign businesses cannot be
performed because many of the Corporation's domestic operations service
international business.
As these operations are highly integrated, estimates and subjective
assumptions have been made to apportion revenue and expenses between domestic
and international operations. Estimates of the following are allocated on a
management accounting basis: stockholders' equity, interest costs charged to
users of funds, and overhead, administrative and other expenses incurred by one
area on behalf of another. The provision for losses is allocated based on
charge-off experience and risk characteristics of the portfolio.
The Corporation considers the balance in the allowance for credit losses to
be available for both domestic and foreign exposures; however, a portion of the
allowance is allocated to international operations based on a methodology
consistent with the allocation of the provision for losses.
Average Income Before Net
For the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income
- ----------------------------------------------------------------------------------------------------------------------------
1995
Europe $ 45,376 $ 1,471 $ 928 $ 543 $ 342
Asia and Pacific 30,348 1,124 730 394 251
Latin America and the Caribbean 19,833 800 433 367 232
Middle East and Africa 1,635 67 34 33 21
Other(c) 1,731 20 12 8 5
- ----------------------------------------------------------------------------------------------------------------------------
Total International 98,923 3,482 2,137 1,345 851
Total Domestic 208,462 11,478 8,011 3,467 2,108
- ----------------------------------------------------------------------------------------------------------------------------
Total Corporation $307,385 $14,960 $10,148 $4,812 $2,959
- ----------------------------------------------------------------------------------------------------------------------------
1994
Europe $ 44,969 $ 1,385 $ 922 $ 463 $ 293
Asia and Pacific 22,717 872 689 183 125
Latin America and the Caribbean 19,549 1,469 628 841 553
Middle East and Africa 1,509 63 27 36 26
Other(c) 1,141 37 20 17 8
- ----------------------------------------------------------------------------------------------------------------------------
Total International 89,885 3,826 2,286 1,540 1,005
Total Domestic 197,188 11,187 8,766 2,421 1,481
- ----------------------------------------------------------------------------------------------------------------------------
Total Corporation $287,073 $15,013 $11,052 $3,961 $2,486
- ----------------------------------------------------------------------------------------------------------------------------
1993
Europe $ 27,985 $ 1,504 $ 1,109 $ 395 $ 243
Asia and Pacific 15,499 1,025 620 405 235
Latin America and the Caribbean 20,402 1,405 447 958 857
Middle East and Africa 1,339 59 23 36 22
Other(c) 1,163 35 22 13 13
- ----------------------------------------------------------------------------------------------------------------------------
Total International 66,388 4,028 2,221 1,807 1,370
Total Domestic 181,170 11,444 10,427 1,017 1,024
- ----------------------------------------------------------------------------------------------------------------------------
Total Corporation $247,558 $15,472 $12,648 $2,824 $2,394
- ----------------------------------------------------------------------------------------------------------------------------
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue.
(b) Expense is comprised of Noninterest Expense and Provisions.
(c) No geographic region included in Other International amounts to more than
10% of the total for the Corporation.
- --------------------------------------------------------------------------------
23 COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Corporation and its subsidiaries were obligated under
a number of noncancelable operating leases for premises and equipment used
primarily for banking purposes. Certain leases contain rent escalation clauses
for real estate taxes and other operating expenses and renewal option clauses
calling for increased rents. No lease agreement imposes any restrictions on the
Corporation affecting its ability to pay dividends, engage in debt or equity
financing transactions, or enter into further lease agreements. Future minimum
rental payments required under operating leases with initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1995 were as
follows:
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61
- --------------------------------------------------------------------------------
Year Ended December 31, (in millions)
- --------------------------------------------------------------------------------
1996 $ 384
1997 340
1998 296
1999 262
2000 233
After 1,337
- --------------------------------------------------------------------------------
Total Minimum Payments Required $2,852
- --------------------------------------------------------------------------------
Less: Sublease Rentals Under Noncancelable Subleases $(285)
- --------------------------------------------------------------------------------
Net Minimum Payment Required $2,567
- --------------------------------------------------------------------------------
Total rental expense in 1995, 1994 and 1993 was as follows:
Year Ended December 31, (in millions) 1995 1994 1993
- --------------------------------------------------------------------------------
Gross Rentals $ 558 $ 579 $ 612
Sublease Rentals (173) (153) (121)
- --------------------------------------------------------------------------------
Total $ 385 $ 426 $ 491
- --------------------------------------------------------------------------------
At December 31, 1995 and 1994, assets amounting to $57 billion and $48
billion, respectively, were pledged to secure public deposits and for other
purposes. The significant components of the $57 billion of assets pledged at
December 31, 1995 were as follows: $21 billion were loans, $16 billion were
securities, and the remaining $20 billion were primarily trading account assets.
These amounts compare with $19 billion of loans, $12 billion of securities, and
$17 billion of trading account assets pledged at December 31, 1994.
The Corporation and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all such actions and proceedings
pending against or involving the Corporation and its subsidiaries, management
does not expect the aggregate liability or loss, if any, resulting therefrom to
have a material adverse effect on the consolidated financial condition of the
Corporation.
The Corporation may guarantee the obligations of its subsidiaries. These
guarantees rank on a parity with all other unsecured and unsubordinated
indebtedness of the Corporation. See Note Ten for a discussion of the
Corporation's guarantees of long-term debt issues for its subsidiaries.
- --------------------------------------------------------------------------------
24 SHAREHOLDERS' RIGHTS PLAN
At December 31, 1995, the Corporation had in place a Shareholders' Rights Plan.
The Shareholders' Rights Plan contained provisions intended to protect
stockholders in the event of unsolicited offers or attempts to acquire the
Corporation, including offers that do not treat all stockholders equally,
acquisitions in the open market of shares constituting control without offering
fair value to all stockholders, and other coercive or unfair takeover tactics
that could impair the Board of Directors' ability to represent stockholders'
interests fully. The Shareholders' Rights Plan provides that attached to each
share of common stock is one right (a "Right") to purchase a unit consisting of
one one-hundredth of a share of Junior Participating Preferred Stock for an
exercise price of $150 per unit, subject to adjustment.
At December 31, 1995, Chase also had in place a rights agreement with
provisions similar to that of the Corporation. As a result of the merger, the
Chase rights agreement has been extinguished.
On January 18, 1996, the Corporation announced that it would redeem all
outstanding rights issued under its Shareholders' Rights Plan. The redemption
was effective on the first regular common stock dividend record date occurring
after the consummation of the merger on March 31, 1996. Accordingly, the rights
were redeemed from all stockholders of record on the common stock dividend
record date of April 4, 1996. Since the record date occurred after the effective
date of the merger, all stockholders of the Corporation on the record date,
whether they were former Chase or former Chemical stockholders, were entitled to
receive the redemption price.
Under the Shareholder Rights Plan, the redemption price is $0.01 per right.
Payment of the redemption price will be made at the same time as the 1996
first-quarter common stock dividend.
- --------------------------------------------------------------------------------
25 PARENT COMPANY
Condensed financial information of The Chase Manhattan Corporation, the Parent
Company, is presented below.
For purposes of preparing the Statement of Cash Flows, cash and cash
equivalents are those amounts included in the balance sheet caption Cash with
Banks.
80
62
- --------------------------------------------------------------------------------
PARENT COMPANY - BALANCE SHEET
December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
Assets
Cash with Banks $ 336 $ 87
Deposits with Banking Subsidiaries 6,220 4,796
Securities Purchased Under Resale Agreements 515 925
Available-for-Sale Securities 188 295
Short-Term Advances to Banking Subsidiaries 3 24
Short-Term Advances to Nonbanking Subsidiaries 2,085 1,896
Long-Term Advances to Banking Subsidiaries 4,467 4,797
Long-Term Advances to Nonbanking Subsidiaries 580 350
Investment (at Equity) in Banking Subsidiaries 20,976 19,377
Investment (at Equity) in Nonbanking Subsidiaries 2,325 1,910
Other Assets 652 859
- --------------------------------------------------------------------------------
Total Assets $38,347 $35,316
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other Borrowed Funds, primarily Commercial Paper $ 6,329 $ 5,747
Other Liabilities 508 666
Long-Term Debt(a) 10,674 10,030
- --------------------------------------------------------------------------------
Total Liabilities 17,511 16,443
Stockholders' Equity 20,836 18,873
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $38,347 $35,316
- --------------------------------------------------------------------------------
(a) At December 31, 1995, aggregate annual maturities for all issues for the
years 1996 through 2000 were $1,198 million, $1,271 million, $794 million $1,545
million and $1,130 million, respectively.
PARENT COMPANY - STATEMENT OF INCOME
Year Ended December 31, (in millions) 1995 1994 1993
- --------------------------------------------------------------------------------
Income
Dividends from Banking Subsidiaries $1,601 $1,606 $ 895
Dividends from Nonbanking Subsidiaries 15 102 61
Interest from Banking Subsidiaries 530 497 480
Interest from Nonbanking Subsidiaries 232 142 155
Interest on Available-for-Sale Securities 16 11 17
All Other Income 162 89 52
- --------------------------------------------------------------------------------
Total Income 2,556 2,447 1,660
- --------------------------------------------------------------------------------
Expense
Interest on:
Other Borrowed Funds, primarily
Commercial Paper 328 175 123
Long-Term Debt 744 618 632
All Other Expense 61 83 145
- --------------------------------------------------------------------------------
Total Expense 1,133 876 900
- --------------------------------------------------------------------------------
Income Before Income Tax Benefit
and Equity in Undistributed Net Income
of Subsidiaries 1,423 1,571 760
Income Tax Benefit 73 46 39
Equity in Undistributed Net Income
of Subsidiaries 1,463 869 1,595
- --------------------------------------------------------------------------------
Net Income $2,959 $2,486 $2,394
- --------------------------------------------------------------------------------
PARENT COMPANY - STATEMENT OF CASH FLOWS
Year Ended December 31, (in millions) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 2,959 $ 2,486 $ 2,394
Less--Net Income of Subsidiaries 3,079 2,577 2,551
- ------------------------------------------------------------------------------------------------------------
Parent Company Net Loss (120) (91) (157)
Add--Dividends from Subsidiaries 1,616 1,708 956
Other--Net (60) 221 (219)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,436 1,838 580
- ------------------------------------------------------------------------------------------------------------
Investing Activities
Net (Increase) Decrease in Deposits with Banking Subsidiaries (1,424) (2,628) (580)
Net (Increase) Decrease in Short-Term Advances to Subsidiaries (168) 1,045 1,184
Net (Increase) Decrease in Long-Term Advances to Subsidiaries 100 (245) 390
Net (Increase) Decrease in Investment (at Equity) in Subsidiaries (218) (189) (870)
Net (Increase) Decrease in Securities Purchased Under Resale Agreement 410 111 (611)
Proceeds from the Maturity of Available-for-Sale Securities 105 425 250
Proceeds from the Sale of Available-for-Sale Securities 13 13 102
Purchase of Available-for-Sale Securities (40) (323) (258)
Proceeds from Divestitures of Nonstrategic Businesses 490 -- --
Other--Net (12) (101) --
- ------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (744) (1,892) (393)
- ------------------------------------------------------------------------------------------------------------
Financing Activities
Net Change in Other Borrowed Funds 581 2,186 137
Proceeds from the Issuance of Long-Term Debt 1,804 1,679 3,502
Repayments of Long-Term Debt (1,201) (2,062) (3,688)
Proceeds from the Issuance of Stock 740 511 1,548
Purchase of Treasury Stock (1,389) (693) --
Redemption of Preferred Stock -- (643) (913)
Cash Dividends Paid (978) (914) (825)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (443) 64 (239)
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 249 10 (52)
Cash with Banks at the Beginning of the Year 87 77 129
- ------------------------------------------------------------------------------------------------------------
Cash with Banks at the End of the Year $ 336 $ 87 $ 77
- ------------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 1,060 $ 784 $ 747
Taxes Paid (Refunded) $ 957 $ (178) $ 37
- ------------------------------------------------------------------------------------------------------------
81
63
QUARTERLY FINANCIAL INFORMATION 1995-1994
(in millions, except per share and stock price data) 1995
- -------------------------------------------------------------------------------------
4th 3rd 2nd 1st
Net Interest Income $ 2,078 $ 2,069 $ 2,028 $ 2,027
Provision for Losses 186 192 195 185
Noninterest Revenue 1,765 1,710 1,726 1,557
Noninterest Expense 2,364 2,332 2,359 2,335
- -------------------------------------------------------------------------------------
Income Before Income Tax Expense
and Effect of Accounting Change 1,293 1,255 1,200 1,064
Income Tax Expense 466 491 471 414
- -------------------------------------------------------------------------------------
Income Before Effect of
Accounting Change 827 764 729 650
Effect of Change in Accounting
Principle -- -- -- (11)(a)
- -------------------------------------------------------------------------------------
Net Income $ 827 $ 764 $ 729 $ 639
- -------------------------------------------------------------------------------------
Per Common Share:
Primary:
Income Before Effect of
Accounting Change $ 1.73 $ 1.58 $ 1.54 $ 1.37
Effect of Change in Accounting
Principle -- -- -- (.03)(a)
- -------------------------------------------------------------------------------------
Net Income $ 1.73 $ 1.58 $ 1.54 $ 1.34
- -------------------------------------------------------------------------------------
Assuming Full Dilution:
Income Before Effect of
Accounting Change $ 1.73 $ 1.55 $ 1.52 $ 1.36
Effect of Change in Accounting
Principle -- -- -- (.03)(a)
- -------------------------------------------------------------------------------------
Net Income $ 1.73 $ 1.55 $ 1.52 $ 1.33
- -------------------------------------------------------------------------------------
Cash Dividends Declared Per Share $ .50 $ .50 $ .50 $ .44
Average Common and Common
Equivalent Shares 446.0 448.4 436.2 430.5
Average Common Shares Assuming
Full Dilution 447.7 456.4 444.4 439.5
- -------------------------------------------------------------------------------------
Stock Price Per Common Share:(c)
High $ 64.75 $ 61.63 $ 48.75 $ 40.88
Low 53.88 46.25 37.50 35.75
Close 58.75 60.88 47.25 37.75
- -------------------------------------------------------------------------------------
(in millions, except per share and stock price data) 1994
- -------------------------------------------------------------------------------------
4th 3rd 2nd 1st
- -------------------------------------------------------------------------------------
Net Interest Income $ 2,059 $ 2,079 $ 2,092 $ 2,082
Provision for Losses 175 200 310 365
Noninterest Revenue 1,501 1,724 1,679 1,797
Noninterest Expense 2,875 2,385 2,361 2,381
- -------------------------------------------------------------------------------------
Income Before Income Tax Expense
and Effect of Accounting Change 510 1,218 1,100 1,133
Income Tax Expense 107 478 440 450
- -------------------------------------------------------------------------------------
Income Before Effect of
Accounting Change 403 740 660 683
Effect of Change in Accounting
Principle -- -- -- --
- -------------------------------------------------------------------------------------
Net Income $ 403(b) $ 740 $ 660 $ 683
- -------------------------------------------------------------------------------------
Per Common Share:
Primary:
Income Before Effect of
Accounting Change $ .79 $ 1.51 $ 1.32 $ 1.38
Effect of Change in Accounting
Principle -- -- -- --
- -------------------------------------------------------------------------------------
Net Income $ .79(b) $ 1.51 $ 1.32 $ 1.38
- -------------------------------------------------------------------------------------
Assuming Full Dilution:
Income Before Effect of
Accounting Change $ .79 $ 1.49 $ 1.30 $ 1.37
Effect of Change in Accounting
Principle -- -- -- --
- -------------------------------------------------------------------------------------
Net Income $ .79(b) $ 1.49 $ 1.30 $ 1.37
- -------------------------------------------------------------------------------------
Cash Dividends Declared Per Share $ .44 $ .44 $ .38 $ .38
Average Common and Common
Equivalent Shares 433.3 440.4 448.8 448.1
Average Common Shares Assuming
Full Dilution 441.7 448.9 459.2 456.8
- -------------------------------------------------------------------------------------
Stock Price Per Common Share:(c)
High $ 38.63 $ 40.00 $ 40.88 $ 42.13
Low 33.63 34.88 33.88 34.50
Close 35.88 35.00 38.50 36.38
- -------------------------------------------------------------------------------------
(a) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for
other postretirement benefits relating to the Corporation's foreign plans.
(b) Excluding the impact of the $417 million restructuring charge ($249 million
after-tax) and the Federal tax benefits of $70 million recognized in the 1994
fourth quarter, pro forma net income was $582 million or $1.20 per primary share
and $1.19 per fully-diluted share.
(c) The Corporation's common stock is listed and traded on the New York Stock
Exchange and the International Stock Exchange of the United Kingdom and Republic
of Ireland. The high, low and closing prices of the Corporation's common stock
are from the New York Stock Exchange Composite Transaction Tape.
82
64
The Chase Manhattan Corporation
and Subsidiaries
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
Year Ended December 31,
(Taxable-Equivalent Interest and Rates; in millions) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Balance Interest Rate Balance Interest Rate
Assets
Deposits with Banks $ 10,877 $ 824 7.58% $ 12,478 $ 869 6.96%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 29,465 1,889 6.41 25,333 1,827 7.21
Trading Assets-Debt and Equity Instruments 20,935 1,464 6.99 19,436 1,282 6.60
Securities:
Available-for-Sale 26,946 1,948 7.23(a) 22,399 1,575 7.03(a)
Held-to-Maturity 9,756 667 6.84 10,911 779 7.14
- -------------------------------------------------------------------------------------------------------------------------------
Total Securities 36,702 2,615 7.12 33,310 2,354 7.07
- -------------------------------------------------------------------------------------------------------------------------------
Domestic Loans 110,752 9,725 8.78 101,440 8,258 8.14
Foreign Loans 35,776 3,138 8.77 35,273 2,770 7.85
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans 146,528 12,863(b) 8.78 136,713 11,028(b) 8.07
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 244,507 19,655 8.04% 227,270 17,360 7.64%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses (3,840) (4,302) --
Cash and Due from Banks 13,874 14,541 --
Trading Assets-Risk Management Instruments 30,397 27,956 --
All Other Assets 22,447 21,608 --
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 307,385 $ 287,073 --
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities
Domestic Retail Deposits $ 55,389 1,962 3.54% $ 60,043 1,486 2.47%
Domestic Negotiable Certificates of Deposit
and Other Deposits 11,831 624 5.27 12,973 578 4.46
Deposits in Foreign Offices 65,276 3,705 5.68 56,106 2,640 4.71
- -------------------------------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 132,496 6,291 4.75 129,122 4,704 3.64
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term and Other Borrowings:
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 44,720 2,686 6.01 34,419 1,603 4.66
Commercial Paper 5,672 327 5.77 4,403 187 4.25
All Other Borrowings(c) 13,033 1,162 8.92 13,029 1,657 12.72
- -------------------------------------------------------------------------------------------------------------------------------
Total Short-Term and Other Borrowings 63,425 4,175 6.58 51,851 3,447 6.65
Long-Term Debt 13,080 942 7.20 13,628 848 6.22
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 209,001 11,408 5.46 194,601 8,999 4.62
- -------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 35,815 37,580 --
Trading Liabilities-Risk Management Instruments 31,665 25,918 --
All Other Liabilities 11,261 9,932 --
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 287,742 268,031 --
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred Stock 2,730 3,020 --
Common Stockholders' Equity 16,913 16,022 --
- -------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 19,643(d) 19,042(d) --
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 307,385 $ 287,073 --
- -------------------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 2.58% 3.02%
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 8,247 3.37% $ 8,361 3.68%
- -------------------------------------------------------------------------------------------------------------------------------
(a) For the years ended December 31, 1995 and 1994, the annualized rate for
securities available-for-sale based on amortized cost was 7.26% and 7.04%,
respectively.
(b) Fees and commissions on loans included in loan interest amounted to $167
million in 1995 and $194 million in 1994.
(c) Includes securities sold but not yet purchased.
(d) The ratio of average stockholders' equity to average assets was 6.4% for
1995 and 6.6% for 1994.
83
65
The Chase Manhattan Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
THE CHASE MANHATTAN
CHEMICAL BANK BANK, N.A.
AND SUBSIDIARIES AND SUBSIDIARIES
December 31, (in millions, except share data) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 6,371 $ 6,258 $ 5,576 $ 4,518
Deposits with Banks 2,544 5,484 5,950 7,002
Federal Funds Sold and Securities Purchased Under
Resale Agreements 5,621 5,898 3,385 3,824
Trading Assets:
Debt and Equity Instruments 10,338 8,088 4,848 4,815
Risk Management Instruments 17,625 17,694 8,121 8,273
Securities:
Available-for-Sale 26,348 16,362 6,314 4,076
Held-to-Maturity(a) 3,807 6,316 -- 1,760
Loans(b) 67,079 62,272 57,335 51,033
Allowance for Credit Losses (2,021) (2,022) (1,114) (1,092)
Premises and Equipment 1,355 1,409 1,723 1,759
Due from Customers on Acceptances 1,166 1,064 717 520
Accrued Interest Receivable 1,053 989 918 966
Other Assets 3,464 3,702 6,384 6,525
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 144,750 $ 133,514 $ 100,157 $ 93,979
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 15,508 $ 15,143 $ 13,704 $ 11,648
Interest-Bearing 31,996 31,868 18,779 17,888
Foreign:
Noninterest-Bearing 147 124 3,555 2,320
Interest-Bearing 36,831 31,106 34,030 33,645
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 84,482 78,241 70,068 65,501
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements 17,172 16,183 2,079 2,580
Other Borrowed Funds 7,174 6,654 2,264 2,308
Acceptances Outstanding 1,180 1,081 722 525
Trading Liabilities 19,467 16,950 9,146 8,066
Accounts Payable, Accrued Expenses and Other Liabilities 3,653 3,029 5,460 5,194
Long-Term Debt 1,575 2,303 393 443
Long-Term Debt Payable to Parent Company 1,867 1,867 1,960 2,360
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 136,570 126,308 92,092 86,977
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common Stock(c) 620 620 921 916
Capital Surplus 4,665 4,501 5,285 4,656
Retained Earnings 3,185 2,495 1,852 1,495
Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Taxes (290) (410) 7 (65)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 8,180 7,206 8,065 7,002
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $ 144,750 $ 133,514 $ 100,157 $ 93,979
- -----------------------------------------------------------------------------------------------------------------------------------
(a) The market value of held-to-maturity securities for Chemical Bank was $3,830
million and $5,981 million, at December 31, 1995 and 1994, respectively. The
market value of held-to-maturity securities for The Chase Manhattan Bank was
$1,739 million at December 31, 1994.
(b) Loans are net of unearned income of $434 million and $405 million, at
December 31, 1995 and 1994, respectively, for Chemical Bank. Loans are net of
unearned income of $317 million and $194 million, at December 31, 1995 and 1994,
respectively, for The Chase Manhattan Bank.
(c) Chemical Bank has issued and outstanding 51,633,170 shares of its common
stock with a $12 par value as of December 31, 1995 and 1994. The Chase Manhattan
Bank has issued and outstanding 61,425,980 shares of its common stock as of
December 31, 1995 and 61,038,415 shares as of December 31, 1994, each with a $15
par value.
84
66
APPENDIX I
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition.
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
1 22 Bar graph entitled "Reported Net Income and Return on Common Stockholders' Equity in millions of dollars
except ratios" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Net Income $ 670 $ 1,723 $ 2,394 $ 2,486 $ 2,959
Return on Common
Equity 4.35% 11.88% 14.62% 13.86% 16.15%
2 22 Bar graph entitled "Pro Forma Net Income and Return on Common Stockholders' Equity in millions of dollars,
except ratios" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Pro Forma Net Income
calculated on a fully-taxed
basis and excluding the
impact of changes in
accounting principles,
restructuring charges,
charges related to assets
held for accelerated
disposition and gains on
the sales of such assets,
gains on emerging markets
past-due interest bond
sales and foreclosed
property expense $ 1,111 $ 1,564 $ 2,266 $ 2,589 $ 2,899
Return on Common
Equity calculated
using pro forma
net income 8.74% 10.58% 13.73% 14.51% 15.80%
67
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
3 23 Pie chart entitled "Average Earning Assets Mix, year ended December 31, 1995" presenting the following
information:
Commercial Loans 32%
Consumer Loans 28%
Securities 15%
Liquid Assets 25%
4 23 Pie chart entitled "Average Funding Mix, year ended December 31, 1995" presenting the following information:
Interest-Bearing Deposits 54%
Short-Term and Other
Borrowings 26%
Long-Term Debt 5%
Noninterest-Bearing Funds 15%
5 24 Bar graph entitled "Provision for Losses in millions of dollars" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Provision for losses $ 2,430 $ 2,585 $ 2,254 $ 1,050 $ 758
The 1993 amount excludes the special provision for loans held for accelerated disposition recorded that year.
6 25 Bar graph entitled "Noninterest Revenue in millions of dollars" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Total Noninterest Revenue $ 5,074 $ 5,420 $ 7,181 $ 6,701 $ 6,758
=========== =========== =========== =========== ===========
Percentage increase of
fees & commissions from
the prior year 4% 7% 9% 7%
7 27 Bar graph entitled "Noninterest Expense in millions of dollars" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Noninterest expense
excluding restructuring
charges and foreclosed
property expense and, in
1993, the provision for
other real estate held for
accelerated disposition $ 8,203 $ 8,388 $ 8,798 $ 9,487 $ 9,450
68
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
8 29 Pie chart entitled "1995 Total Revenue (Total Net Interest Income and Noninterest Revenue)" presenting the
following information:
Global Bank 36%
Regional and Consumer
Banking 51%
Global Services 12%
Terminal (LDC and
Real Estate) 1%
9 29 Pie chart entitled "1994 Total Revenues (Total Net Interest Income and Noninterest Revenue)" presenting the
following information:
Global Bank 33%
Regional and Consumer
Banking 51%
Global Services 12%
Terminal (LDC and
Real Estate) 4%
10 32 Pie chart entitled "Loans at December 31, 1995" presenting the make-up of the loan portfolio as follows:
Domestic Residential
Mortgage 23%
Domestic Credit Card 11%
Domestic Other Consumer 12%
Domestic Commercial
and Industrial 22%
Domestic Commercial
Real Estate 4%
Domestic Financial
Institutions 4%
Foreign 24%
11 33 Bar graph entitled "Nonperforming Assets in millions of dollars" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Nonperforming Assets $ 11,414 $ 11,181 $ 5,630 $ 2,126 $ 1,664
=========== =========== =========== =========== ===========
12 33 Line graph entitled "Net Charge-offs in millions of dollars" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Total Net Charge-offs $ 4,232 $ 2,875 $ 2,618 $ 1,464 $ 840
=========== =========== =========== =========== ===========
69
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
13 35 Bar graph entitled "Managed Credit Card Receivables in billions of dollars" presenting the following
information:
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
-------- -------- -------- -------- --------
Owned $ 13.4 $ 12.5 $ 13.6 $ 17.0 $ 17.1
=========== =========== =========== =========== ===========
Managed $ 16.4 $ 16.3 $ 17.4 $ 19.7 $ 23.7
=========== =========== =========== =========== ===========
14 35 Bar graph entitled "Credit Card Net Charge-offs to Average Managed Receivables in million of dollars, except
ratios" presenting the following information:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Net Charge-offs of Managed
Credit Card Receivables $ 781 $ 877 $ 779 $ 745 $ 849
Net Charge-offs of Managed
Credit Card Receivables as
a percentage of Average
Managed Credit Card
Receivables 5.25% 5.59% 4.91% 4.30% 4.05%
15 39 Bar graph entitled "Total Allowance for Credit Losses and Allowance Coverage Ratio in millions of dollars,
except ratios" presenting the following information:
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
-------- -------- -------- -------- --------
Total Allowance for
Credit Losses $ 5,235 $ 4,938 $ 4,445 $ 3,894 $ 3,784
Total Allowance as a
Percentage of Total
Nonperforming Loans 58% 56% 122% 245% 253%
16 41 Bar graph entitled "Histogram of Daily Market Risk-Related Trading Revenue for 1995" presenting the following
information:
Millions of dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30
----- ------ ------- ------- ------- -------
Number of trading days
trading revenue was within
the above prescribed
positive dollar range 58 99 60 12 2 1
70
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
Millions of dollars 0 - (5) (5) - (10) (10) - (15) (15) - (20) (20) - (25) (25) - (30)
Number of trading days
trading revenue was within
the above prescribed
negative dollar range 17 6 2 0 0 0
Millions of dollars (30) - (35) (35) - (40) (40) - (45) (45) - (50) (50) - (55)
----------- ----------- ----------- ----------- -----------
Number of trading days
trading revenue was within
the above prescribed
negative dollar range 1 1 0 0 1
17 46 Bar graph entitled "Risk-Based Capital Ratios" presenting the following information:
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
-------- -------- -------- -------- --------
Total Risk-Based
Capital Ratio 9.25% 11.22% 12.35% 12.23% 12.27%
Tier 1 Risk-Based
Capital Ratio 5.14% 7.01% 8.06% 8.05% 8.22%
Tier 1 Leverage Ratio 5.01% 6.79% 7.35% 6.63% 6.68%
The minimum regulatory requirements for the above ratios are as follows:
Minimum Total Risk-Based Capital
Ratio 8%
Minimum Tier 1 Risk-Based Capital
Ratio 4%
Minimum Tier 1 Leverage Ratio 3%
18 46 Bar graph entitled "Market Capitalization in billions of dollars" presenting the following information:
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
-------- -------- -------- -------- --------
Market Capitalization $ 7.0 $ 15.8 $ 17.8 $ 15.4 $ 25.6
1
Exhibit 99.3
SUPERVISION AND REGULATION OF THE CHASE MANHATTAN CORPORATION
On March 31, 1996, The Chase Manhattan Corporation merged with and into
Chemical Banking Corporation, with Chemical Banking Corporation continuing as
the surviving corporation under the name "The Chase Manhattan Corporation" (the
"Corporation"). Following is a description of certain supervisory and regulatory
matters relating to the Corporation.
General
The Corporation is subject to regulation as a registered bank holding
company under the Bank Holding Company Act of 1956, as amended ("BHCA"). As
such, the Corporation is required to file with the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") an annual report and other
information required quarterly pursuant to the BHCA. The Corporation is also
subject to the examination powers of the Federal Reserve Board.
Under the BHCA, the Corporation may not engage in any business other
than managing and controlling banks or furnishing certain specified services to
subsidiaries, and may not acquire voting control of non-banking corporations,
except those corporations engaged in businesses or furnishing services which the
Federal Reserve Board deems to be so closely related to banking as "to be a
proper incident thereto". Further, the Corporation is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any corporation that is engaged in activities that
are not closely related to banking, and may not acquire direct or indirect
ownership or control of more than 5% of the voting shares of any domestic bank
without the prior approval of the Federal Reserve Board.
The principal bank subsidiaries of the Corporation, as of the date
hereof, are The Chase Manhattan Bank (National Association), a national banking
association ("Chase Bank"), Chemical Bank, a New York banking corporation, and
Texas Commerce Bank National Association, a national banking association
("TCB"), and a subsidiary of Texas Commerce Equity Holdings, Inc., a Delaware
holding company subsidiary of the Corporation. Chase Bank and Chemical Bank have
entered into an agreement pursuant to which Chase Bank will merge with and into
Chemical Bank, with Chemical Bank continuing as the surviving corporation in the
bank merger with the name "The Chase Manhattan Bank". The bank merger is
expected to be completed in July 1996.
2
Dividend Restrictions
Federal law imposes limitations on the payment of dividends by the
subsidiaries of the Corporation that are state member banks of the Federal
Reserve System (a "state member bank") or national banks. Non-bank subsidiaries
of the Corporation are not subject to such limitations. The amount of dividends
that may be paid by a state member bank, such as Chemical Bank, or by a national
bank, such as Chase Bank or TCB, is limited to the lesser of the amounts
calculated under a "recent earnings" test and an "undivided profits" test. Under
the recent earnings test, a dividend may not be paid if the total of all
dividends declared by a bank in any calendar year is in excess of the current
year's net income combined with the retained net income of the two preceding
years unless the bank obtains the approval of its appropriate Federal banking
regulator (which, in the case of a state member bank, is the Federal Reserve
Board and, in the case of a national bank, is the Office of the Comptroller of
the Currency (the "Comptroller of the Currency"). Under the undivided profits
test, a dividend may not be paid in excess of a bank's "undivided profits".
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1996, without the approval of their relevant banking
regulators, pay dividends of approximately $2.5 billion to their respective bank
holding companies, plus an additional amount equal to their net income from
January 1, 1996 through the date in 1996 of any such dividend payment.
In addition to the dividend restrictions described above, the Federal
Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance
Corporation ("FDIC") have authority under the Financial Institutions Supervisory
Act to prohibit or to limit the payment of dividends by the banking
organizations they supervise, including the Corporation and its subsidiaries
that are banks or bank holding companies, if, in the banking regulator's
opinion, payment of a dividend would constitute an unsafe or unsound practice in
light of the financial condition of the banking organization.
Risk-Based Capital
The Federal banking regulators have also adopted risk-based capital and
leverage guidelines, which require that the Corporation's capital-to-assets
ratios meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and
specified off-balance sheet financial instruments into four weighted categories,
with higher levels of capital being required for the categories perceived as
representing greater risk. Under the guidelines, a banking corporation's capital
is divided into two tiers. Tier 1 Capital includes common equity, qualifying
perpetual preferred stock, minority interests in the equity accounts of
consolidated
3
subsidiaries, less goodwill and other non-qualifying intangibles and other
assets. Tier 2 Capital includes, among other items, perpetual preferred equity
not qualifying for Tier 1, limited-life preferred stock with an original
maturity of greater than 20 years, mandatory convertible debt, subordinated debt
and intermediate-term preferred stock with an original weighted-average maturity
of at least five years, qualifying allowance for credit losses, less required
deductions as provided by regulation. The amount of Tier 2 Capital may not
exceed the amount of Tier 1 Capital. Total Capital is the sum of Tier 1 Capital
and Tier 2 Capital.
Banking organizations are required to maintain a Total risk-based
capital ratio (Total Capital to risk-weighted assets) of 8%, of which at least
4% must be Tier 1 Capital.
The Federal banking regulators have also established minimum leverage
ratio guidelines. The leverage ratio is defined as Tier 1 Capital divided by
average total assets (net of allowance for credit losses, goodwill and certain
intangible assets). The minimum leverage ratio is 3% for banking organizations
that have well-diversified risk (including no undue interest rate risk);
excellent asset quality; high liquidity; good earnings; and, in general, are
considered strong banking organizations. Other banking organizations are
expected to have ratios of at least 4%- 5% depending upon their particular
condition and growth plans. Higher capital ratios could be required if warranted
by the particular circumstance or risk profile of a given banking organization.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each Federal banking regulator to revise its risk-based
capital standards within 18 months of enactment of the statute to ensure that
those standards take adequate account of interest rate risk, concentration of
credit risk and the risk of nontraditional activities. On December 15, 1994, the
Federal banking regulators adopted amendments to their respective risk- based
capital requirements that explicitly identify concentration of credit risk and
certain risks arising from nontraditional activities, and the management of such
risks, as important factors to consider in assessing an institution's overall
capital adequacy. The amendments do not, however, mandate any specific
adjustments to the risk-based capital calculations as a result of such factors.
On July 25, 1995, the Federal banking regulators issued a proposal to
amend the risk- based capital rules to incorporate a measure for market risk in
foreign exchange and commodity activities and in the trading of debt and equity
instruments. Under the proposal, banking organizations with relatively large
trading activities, such as the Corporation, could calculate the amount of
capital required to be maintained for market risk by using their own internal
value-at- risk models (subject to parameters set by the regulators) or,
alternatively, risk management techniques developed by the regulators. The
effect of the proposed rules would be that, in addition to existing capital
requirements for credit risk, the Corporation would be required to maintain
additional capital for market risk. This additional requirement may be
satisfied, in
4
part, by issuing short-term subordinated debt that qualified as "Tier 3
Capital". The proposed rule would go into effect at the end of 1997.
On August 2, 1995, the Federal banking regulators published amendments
to their risk- based capital rules that include interest-rate risk as a
qualitative factor to be considered in assessing capital adequacy. Concurrent
with the publication of the amendments, the Federal banking regulators proposed
a system for measuring interest rate risk and announced their intention, after a
trial period to evaluate the reliability and accuracy of the proposed system, to
initiate a rulemaking process for the purpose of amending the risk-based capital
rules to include an explicit capital charge for interest-rate risk that will be
based upon the level of a banking organization's measured interest-rate risk
exposure.
FDICIA
FDICIA also required the FDIC to establish a risk-based assessment
system for FDIC deposit insurance and revised certain provisions of the Federal
Deposit Insurance Act, as well as certain other Federal banking statutes. In
general, FDICIA provides for expanded regulation of depository institutions and
their affiliates, including parent holding companies, by such institutions'
Federal banking regulators, and requires the Federal banking regulator to take
"prompt corrective action" with respect to a depository institution if such
institution does not meet certain capital adequacy standards.
Prompt Corrective Action: Pursuant to FDICIA, the Federal Reserve
Board, the FDIC and the Comptroller of the Currency adopted regulations setting
forth a five-tier scheme for measuring the capital adequacy of the depository
institutions they supervise. Under the regulations (commonly referred to as the
"prompt corrective action" rules), an institution would be placed in one of the
following capital categories: (i) well capitalized (an institution that has a
Total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a Tier 1 leverage ratio of at least 5%); (ii)
adequately capitalized (an institution that has a Total risk-based capital ratio
of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1
leverage ratio of at least 4%); (iii) undercapitalized (an institution that has
a Total risk-based capital ratio of under 8% or a Tier 1 risk-based capital
ratio under 4% or a Tier 1 leverage ratio under 4%); (iv) significantly
undercapitalized (an institution that has a Total risk-based capital ratio of
under 6% or a Tier 1 risk-based capital ratio under 3% or a Tier 1 leverage
ratio under 3%), and (v) critically undercapitalized (an institution that has a
ratio of tangible equity to total assets of 2% or less).
Supervisory actions by the appropriate Federal banking regulator will
depend upon an institution's classification within the five categories. All
institutions are generally prohibited from declaring any dividends, making any
other capital distribution, or paying a management fee to any controlling
person, if such payment would cause the institution to become
5
undercapitalized. Additional supervisory actions are mandated for an institution
falling into one of the three "undercapitalized" categories, with the severity
of supervisory action increasing at greater levels of capital deficiency. For
example, critically undercapitalized institutions are, among other things,
restricted from making any principal or interest payments on subordinated debt
without prior approval of their Federal banking regulator. The regulations apply
only to banks and not to bank holding companies, such as the Corporation;
however, the Federal Reserve Board is authorized to take appropriate action at
the holding company level based on the undercapitalized status of such holding
company's subsidiary banking institution. In certain instances relating to an
undercapitalized banking institution, the bank holding company would be required
to guarantee the performance of the undercapitalized subsidiary and may be
liable for civil money damages for failure to fulfill its commitments on such
guarantee.
As of the date hereof, each of the Corporation's banking subsidiaries
were "well capitalized".
Brokered Deposits: The ability of depository institutions to accept
brokered deposits is regulated under FDICIA. The term "brokered deposits" is
defined to include deposits that are solicited by a bank's affiliates on its
behalf. A significant portion of Chemical Bank's and Chase Bank's wholesale
deposits are solicited on their behalf by broker-dealer affiliates and are
considered brokered deposits. Under the rule, (i) an "undercapitalized"
institution is prohibited from accepting, renewing or rolling over brokered
deposits, (ii) an "adequately capitalized" institution must obtain a waiver from
the FDIC before accepting, renewing or rolling over brokered deposits and is not
permitted to pay interest on brokered deposits accepted in such institution's
normal market area at rates that "significantly exceed" rates paid on deposits
of similar maturity in such area, and (iii) a "well capitalized" institution may
accept, renew or roll over brokered deposits without restriction. The
definitions of "well capitalized", "adequately capitalized", and
"undercapitalized" are the same as those utilized in the "prompt corrective
action" rules described above.
FDIC Insurance Assessments: Under the FDIC's risk-based insurance
premium assessment system, each depository institution is assigned to one of
nine risk classifications based upon certain capital and supervisory measures
and, depending upon its classification, is assessed insurance premiums on its
deposits. Effective January 1, 1996, depository institutions in the top risk
classification category will pay only the statutory minimum of $2,000 annually
for deposit insurance and remaining depository institutions will pay premiums
ranging from 3 basis points to 30 basis points of domestic deposits. Each of the
Corporation's banks, including Chemical Bank, Chase Bank and TCB, will pay the
statutory minimum premium. The rate schedule is subject to future adjustments by
the FDIC. In addition, the FDIC has authority to impose special assessments from
time to time.
There is a substantial disparity between assessment rates for deposits
insured by the Bank-Insurance Fund ("BIF") and deposits insured by the Savings
Association Insurance Fund
6
("SAIF"). Various government agencies are considering a number of proposals to
recapitalize the SAIF, including proposals to recapitalize the SAIF through a
special assessment or by a merger of BIF and SAIF. The Corporation cannot
predict the effect, if any, the adoption of any such proposals would have on the
operations of its bank subsidiaries.
Powers of the FDIC Upon Insolvency of an Insured Depository Institution
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") imposes liability on an FDIC-insured depository institution
(such as the Corporation's bank subsidiaries) for costs incurred by the FDIC in
connection with the insolvency of other FDIC-insured institutions under common
control with such institution (commonly referred to as "cross-guarantees" of
insured depository institutions). An FDIC cross-guarantee claim against a
depository institution is superior in right of payment to claims of the holding
company and its affiliates against such depository institution.
In the event an insured depository institution becomes insolvent, or
upon the occurrence of certain other events specified in the Federal Deposit
Insurance Act, whenever the FDIC is appointed the conservator or receiver of
such insured depository institution, the FDIC has the power: (i) to transfer any
of such bank's assets and liabilities to a new obligor (including, but not
limited to, another financial institution acquiring all or a portion of the
bank's business, assets or liabilities), without the approval of such bank's
creditors; (ii) to enforce the terms of such bank's contracts pursuant to their
terms, or (iii) to repudiate or disaffirm any contract or lease to which such
depository institution is a party, the performance of which is determined by the
FDIC to be burdensome and the disaffirmance or repudiation of which is
determined by the FDIC to promote the orderly administration of such depository
institution's assets. Such provisions of the Federal Deposit Insurance Act would
be applicable to obligations and liabilities of those of the Corporation's
subsidiaries that are insured depository institutions, such as Chemical Bank,
Chase Bank and TCB, including without limitation, obligations under senior or
subordinated debt issued by such banks to investors (hereinafter referred to as
"public noteholders") in the public markets.
In its resolution of the problems of an insured depository institution
in default or in danger of default, the FDIC is not permitted to take any action
that would have the effect of increasing the losses to a deposit insurance fund
by protecting depositors for more than the insured portion of their deposits or
by protecting creditors of the insured depository institution (including public
noteholders), other than depositors. In addition, the FDIC is authorized to
settle all uninsured and unsecured claims in the insolvency of an insured
institution by making a final settlement payment after the declaration of
insolvency based upon a percentage determined by the FDIC reflecting an average
of the FDIC's receivership recovery experience, regardless of the assets of the
insolvent institution actually available for distribution to creditors.
7
Such a payment would constitute full payment and disposition of the FDIC's
obligations to claimants.
The Omnibus Budget Reconciliation Act of 1993 included a "depositor
preference" provision, which provided that the claims of a receiver of an
insured depository institution for administrative expenses and the claims of
holders of deposit liabilities (including the FDIC, as subrogee of such holders)
have priority over the claims of other unsecured creditors of such institution,
including public noteholders, in the event of the liquidation or other
resolution of such institution.
As a result of the provisions described above, whether or not the FDIC
ever sought to repudiate any obligations held by public noteholders of any
subsidiary of the Corporation that is an insured depository institution, such as
Chemical Bank, Chase Bank or TCB, the public noteholders would be treated
differently from, and could receive, if anything, substantially less than,
holders of deposit obligations of such depository institution.
Other Supervision and Regulation
Under Federal Reserve Board policy, the Corporation is expected to act
as a source of financial strength to each bank subsidiary and to commit
resources to support such bank subsidiary in circumstances where it might not do
so absent such policy. Any loans by a bank holding company to any of its
subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of the subsidiary banks. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a Federal
bank regulatory agency to maintain the capital of a subsidiary bank at a certain
level will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
The bank subsidiaries of the Corporation are subject to certain
restrictions imposed by Federal law on extensions of credit to, and certain
other transactions with, the Corporation and certain other affiliates and on
investments in stock or securities thereof. Such restrictions prevent the
Corporation and other affiliates from borrowing from a bank subsidiary unless
the loans are secured in specified amounts. Without the prior approval of the
Federal Reserve Board, secured loans, other transactions and investments by any
bank subsidiary are generally limited in amount as to the Corporation and as to
each of the other affiliates to 10% of the bank's capital and surplus and as to
the Corporation and all such other affiliates to an aggregate of 20% of the
bank's capital and surplus. Federal law also requires that transactions between
a bank subsidiary and the Corporation or certain non-bank affiliates, including
extensions of credit, sales of securities or assets and the provision of
services, be conducted on terms at least as favorable to the bank subsidiary as
those that apply or that would apply to comparable transactions with
unaffiliated parties.
8
The Corporation's bank and non-bank subsidiaries are subject to direct
supervision and regulation by various other Federal and state authorities.
Chemical Bank, as a New York State-chartered bank and member bank of the Federal
Reserve System, is subject to supervision and regulation of the New York State
Banking Department as well as by the Federal Reserve Board and the FDIC. The
Corporation's national bank subsidiaries, such as Chase Bank, TCB and Chemical
Bank, N.A., are subject to substantially similar supervision and regulation by
the Comptroller of the Currency. Supervision and regulation by each of the
foregoing regulatory agencies generally include comprehensive annual reviews of
all major aspects of the relevant bank's business and condition, as well as the
imposition of periodic reporting requirements and limitations on investments and
other powers. The activities of the Corporation's broker-dealers are subject to
the regulations of the Securities and Exchange Commission ("SEC") and the
National Association of Securities Dealers, Inc., and, in the case of Chase
Securities Inc. (the Corporation's "Section 20" subsidiary ("CSI")), are subject
to the supervision and regulation of the Federal Reserve Board (which has
subjected CSI's activities to certain conditions and limitations, including
limiting CSI's gross revenues from underwriting and dealing in bank-ineligible
corporate debt and equity securities to 10% of CSI's total gross revenues). The
Corporation's mutual funds include the Hanover Funds and the Vista Family of
Funds. The business of such funds, as well as the means by which they may be
distributed in the United States, are subject to regulation by the SEC and the
Federal Reserve Board. Numerous Federal and state consumer laws impose
requirements on the making, enforcement and collection of consumer loans, and on
the types of disclosures that need to be made in connection with such loans. The
types of activities in which the foreign branches of Chemical Bank and Chase
Bank and the international subsidiaries of the Corporation may engage are
subject to various restrictions imposed by the Federal Reserve Board. Such
foreign branches and international subsidiaries are also subject to the laws and
banking authorities of the countries in which they operate.
