1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999 Commission file number 1-5805
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THE CHASE MANHATTAN CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2624428
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
270 Park Avenue, New York, New York 10017
- ----------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 270-6000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Common Stock, $1 Par Value 845,268,072
- --------------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
April 30, 1999.
2
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FORM 10-Q INDEX
Part I - Financial Information Page
----
Item 1 Financial Statements - The Chase Manhattan Corporation:
Consolidated Balance Sheet at March 31, 1999 and
December 31, 1998. 3
Consolidated Statement of Income for three months
ended March 31, 1999 and March 31,1998. 4
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 1999 and March 31,1998. 5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and March 31,1998. 6
Notes to Consolidated Financial Statements. 7-10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11-36
Glossary of Terms. 37
Part II - Other Information
Item 1 Legal Proceedings. 38
Item 2 Sales of Unregistered Common Stock. 38
Item 6 Exhibits and Reports on Form 8-K. 38
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3
Part I
Item 1.
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED BALANCE SHEET
(in millions, except share data)
March 31, December 31,
1999 1998
--------- ---------
ASSETS
Cash and Due from Banks $ 18,306 $ 17,068
Deposits with Banks 3,437 7,212
Federal Funds Sold and Securities
Purchased Under Resale Agreements 24,867 18,487
Trading Assets:
Debt and Equity Instruments 27,572 24,844
Risk Management Instruments (Net of Allowance for Credit
Losses of $150 in 1999 and 1998) 28,362 32,848
Securities:
Available-for-Sale 55,297 62,803
Held-to-Maturity (Market Value: $1,330 at March 31,1999 and
$1,703 at December 31, 1998) 1,316 1,687
Loans (Net of Allowance for Loan Losses of $3,552 in 1999
and 1998) 169,297 169,202
Premises and Equipment 4,114 4,055
Due from Customers on Acceptances 987 1,223
Accrued Interest Receivable 2,243 2,316
Other Assets 25,460 24,130
--------- ---------
TOTAL ASSETS $ 361,258 $ 365,875
========= =========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 47,380 $ 47,541
Interest-Bearing 81,885 85,886
Foreign:
Noninterest-Bearing 4,221 4,082
Interest-Bearing 74,155 74,928
--------- ---------
Total Deposits 207,641 212,437
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 51,116 41,632
Commercial Paper 4,965 7,788
Other Borrowed Funds 5,982 7,239
Acceptances Outstanding 987 1,223
Trading Liabilities 35,675 38,502
Accounts Payable, Accrued Expenses and Other Liabilities, Including
the Allowance for Credit Losses of $170 in 1999 and 1998 12,708 14,291
Long-Term Debt 16,178 16,187
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 2,188 2,188
--------- ---------
TOTAL LIABILITIES 337,440 341,487
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note 9)
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,028 1,028
Common Stock (Authorized 1,500,000,000 Shares, Issued 881,857,276
Shares at March 31,1999 and 881,688,611 Shares at December 31,1998) 882 882
Capital Surplus 9,542 9,836
Retained Earnings 14,351 13,544
Accumulated Other Comprehensive Income (99) 392
Treasury Stock, at Cost (36,810,934 Shares at March 31, 1999
and 33,703,249 Shares at December 31, 1998) (2,436) (1,844)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 23,268 23,838
--------- ---------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 361,258 $ 365,875
========= =========
The Notes to Consolidated Financial Statements are an integral part
of these Statements.
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4
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31,
(in millions, except per share data)
1999 1998
------- -------
INTEREST INCOME
Loans $ 3,209 $ 3,405
Securities 835 889
Trading Assets 418 676
Federal Funds Sold and Securities Purchased
Under Resale Agreements 381 671
Deposits with Banks 184 152
------- -------
Total Interest Income 5,027 5,793
------- -------
INTEREST EXPENSE
Deposits 1,598 1,815
Short-Term and Other Borrowings 914 1,509
Long-Term Debt 311 305
------- -------
Total Interest Expense 2,823 3,629
------- -------
NET INTEREST INCOME 2,204 2,164
Provision for Loan Losses 381 332
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,823 1,832
------- -------
NONINTEREST REVENUE
Investment Banking Fees 317 361
Trust, Custody and Investment Management Fees 414 348
Credit Card Revenue 379 300
Fees for Other Financial Services 553 510
Trading Revenue 618 480
Provision for Risk Management Instrument
Credit Losses -- (12)
Securities Gains 156 83
Private Equity Gains 325 293
Other Revenue 178 96
------- -------
Total Noninterest Revenue 2,940 2,459
------- -------
NONINTEREST EXPENSE
Salaries 1,384 1,254
Employee Benefits 255 224
Occupancy Expense 218 189
Equipment Expense 243 209
Restructuring Costs -- 521
Other Expense 845 744
------- -------
Total Noninterest Expense 2,945 3,141
------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,818 1,150
Income Tax Expense 645 425
------- -------
NET INCOME $ 1,173 $ 725
======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 1,155 $ 691
======= =======
NET INCOME PER COMMON SHARE:
Basic $ 1.37 $ 0.82
======= =======
Diluted $ 1.32 $ 0.80
======= =======
The Notes to Consolidated Financial Statements are an integral part
of these Statements.
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5
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Three months Ended March 31,
(in millions)
1999 1998
-------- --------
PREFERRED STOCK
Balance at Beginning of Year $ 1,028 $ 1,740
Redemption of Stock -- (372)
-------- --------
Balance at End of Period 1,028 1,368
-------- --------
COMMON STOCK
Balance at Beginning and End of Period 882 (a) 441
-------- --------
CAPITAL SURPLUS
Balance at Beginning of Year 9,836 10,360
Shares Issued and Commitments to Issue
Common Stock for Employee Stock-Based Awards
and Related Tax Effects (294) (219)
-------- --------
Balance at End of Period 9,542 10,141
-------- --------
RETAINED EARNINGS
Balance at Beginning of Year 13,544 11,086
Net Income 1,173 725
Cash Dividends Declared:
Preferred Stock (18) (34)
Common Stock (348) (306)
-------- --------
Balance at End of Period 14,351 11,471
-------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at Beginning of Year 392 112
Other Comprehensive Income (Loss) (491) 22
-------- --------
Balance at End of Period (99) 134
-------- --------
TREASURY STOCK, AT COST
Balance at Beginning of Year (1,844) (1,997)
Purchase of Treasury Stock (1,661) (73)
Reissuance of Treasury Stock 1,069 556
-------- --------
Balance at End of Period (2,436) (1,514)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 23,268 $ 22,041
======== ========
COMPREHENSIVE INCOME
Net Income $ 1,173 $ 725
Other Comprehensive Income (Loss) (491) 22
-------- --------
Comprehensive Income $ 682 $ 747
======== ========
(a) Increase reflects shares issued in connection with a two-for-one stock
split, effective as of close of business on May 20, 1998.
The Notes to Consolidated Financial Statements are an integral part
of these Statements.
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6
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months Ended March 31,
(in millions)
1999 1998
-------- --------
OPERATING ACTIVITIES
Net Income $ 1,173 $ 725
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses 381 332
Provision for Risk Management Instrument Credit
Losses -- 12
Restructuring Costs -- 521
Depreciation and Amortization 340 242
Net Change In:
Trading-Related Assets 3,841 1,379
Accrued Interest Receivable 73 486
Other Assets (1,984) (3,301)
Trading-Related Liabilities (2,743) (4,300)
Accrued Interest Payable (176) (61)
Other Liabilities (1,742) 485
Other, Net 128 (867)
-------- --------
Net Cash Used by Operating Activities (709) (4,347)
-------- --------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 3,775 (579)
Federal Funds Sold and Securities Purchased
Under Resale Agreements (9,101) 5,966
Loans Due to Sales and Securitizations 10,461 9,320
Other Loans, Net (12,102) (9,175)
Other, Net 358 340
Proceeds from the Maturity of Held-to-Maturity
Securities 371 286
Purchases of Held-to-Maturity Securities -- (20)
Proceeds from the Maturity of Available-for-Sale
Securities 3,092 6,396
Proceeds from the Sale of Available-for-Sale
Securities 36,784 37,873
Purchases of Available-for-Sale Securities (33,525) (50,301)
Cash Used in Acquisitions (49) (254)
-------- --------
Net Cash Provided (Used) by Investing Activities 64 (148)
-------- --------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (161) (1,512)
Domestic Time and Savings Deposits (4,001) 5,797
Foreign Deposits (634) (1,877)
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 12,205 812
Other Borrowed Funds (4,080) 23
Other, Net (39) (147)
Proceeds from the Issuance of Long-Term Debt
and Capital Securities 1,075 1,831
Maturity and Redemption of Long-Term Debt (1,077) (662)
Proceeds from the Issuance of Stock 571 158
Redemption of Preferred Stock -- (372)
Treasury Stock Purchased (1,661) (73)
Cash Dividends Paid (323) (295)
-------- --------
Net Cash Provided by Financing Activities 1,875 3,683
-------- --------
Effect of Exchange Rate Changes on Cash and
Due from Banks 8 14
-------- --------
Net Increase (Decrease) in Cash and Due from Banks 1,238 (798)
Cash and Due from Banks at January 1, 17,068 15,704
-------- --------
Cash and Due from Banks at March 31, $ 18,306 $ 14,906
======== ========
Cash Interest Paid $ 2,999 $ 3,690
-------- --------
Taxes Paid $ 134 $ 159
-------- --------
The Notes to Consolidated Financial Statements are an integral part
of these Statements.
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Part I
Item 1. (continued)
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See Glossary of Terms on page 37 for definition of terms used throughout the
Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accounting and financial reporting policies of The Chase Manhattan
Corporation ("Chase") conform to generally accepted accounting principles
("GAAP") and prevailing industry practices for interim reporting. Additionally,
where applicable, the policies conform to the accounting and reporting
guidelines prescribed by bank regulatory authorities. The unaudited consolidated
financial statements prepared in conformity with GAAP require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expense and disclosure of contingent assets and
liabilities. In the opinion of management, all necessary adjustments have been
included for a fair presentation of this interim financial information. Certain
amounts in prior periods have been reclassified to conform to the current
presentation.
NOTE 2 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note One
of Chase's 1998 Annual Report.
Net gains from available-for-sale securities sold in the first quarters of 1999
and 1998 amounted to $156 million (gross gains of $211 million and gross losses
of $55 million) and to $83 million (gross gains of $134 million and gross losses
of $51 million), respectively. There were no sales of held-to-maturity
securities in the periods presented.
The amortized cost and estimated fair value of securities, including the impact
of related derivatives, were as follows for the dates indicated:
=====================================================================================================
March 31, 1999 December 31, 1998
---------------------- -----------------------
(in millions) Amortized Fair Amortized Fair
Available-for-Sale Securities: Cost Value (a) Cost Value (a)
--------- --------- --------- ---------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $32,486 $32,215 $42,916 $42,994
Collateralized Mortgage Obligations 188 189 260 260
U.S. Treasuries 10,800 10,627 8,844 9,116
Obligations of State and Political Subdivisions 204 205 226 227
Debt Securities Issued by Foreign Governments 10,123 10,122 8,176 8,226
Corporate Debt Securities 305 295 261 255
Equity Securities 811 1,028 832 1,058
Other, primarily Asset-Backed Securities (b) 580 616 628 667
------- ------- ------- -------
Total Available-for-Sale Securities (c) $55,497 $55,297 $62,143 $62,803
======= ======= ======= =======
Held-to-Maturity Securities:
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 816 $ 829 $ 898 $ 914
Collateralized Mortgage Obligations 431 432 720 720
U.S. Treasuries 66 66 65 65
Other, primarily Asset-Backed Securities (b) 3 3 4 4
------- ------- ------- -------
Total Held-to-Maturity Securities $ 1,316 $ 1,330 $ 1,687 $ 1,703
======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------
(a) Gross unrealized gains and losses on available-for-sale securities were
$409 million and $609 million, respectively, at March 31, 1999 and $771
million and $111 million, respectively, at December 31, 1998. Gross
unrealized gains on held-to-maturity securities were $14 million (there
were no gross unrealized losses), at March 31, 1999. Gross unrealized
gains and losses were $17 million and $1 million, respectively, at
December 31, 1998.
(b) Includes collateralized mortgage obligations of private issuers, which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
(c) Excludes securities classified as loans, which are subject to the
provisions of SFAS 115. The amortized cost and fair value of these loans
were $403 million and $377 million, respectively, at March 31, 1999. This
compares with $623 million and $569 million, respectively, at December 31,
1998.
================================================================================
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Part I
Item 1. (continued)
NOTE 3 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
There have been no changes related to the statutory business trusts during the
1999 first quarter. For a discussion of these business trusts, see page 57 of
Chase's 1998 Annual Report.
NOTE 4 - RESTRUCTURING COSTS
For a discussion of Chase's restructuring costs, refer to Note Twelve and page
28 of Chase's 1998 Annual Report.
During the 1998 first quarter, Chase incurred a pre-tax charge of $510 million
taken in connection with initiatives to streamline support functions and realign
certain business activities. As of March 31, 1999, the reserve balance was $300
million, of which $183 million related to staff reductions, $102 million related
to dispositions of certain premises and equipment and $15 million related to
other expenses.
NOTE 5 - COMPREHENSIVE INCOME
Comprehensive income for Chase includes net income as well as the change in
unrealized gains and losses on available-for-sale securities and foreign
currency translation (each of which includes the impact of related derivatives).
Chase has presented these items net of tax in the Statement of Changes in
Stockholders' Equity.
=================================================================================================================================
Three months Ended March 31,
(in millions)
1999 1998
------------------------------------------------ -----------------------------------------------
Net Unrealized Accumulated Net Unrealized Accumulated
Accumulated Gain(Loss) on Other Accumulated Gain(Loss) on Other
Translation Securities Comprehensive Translation Securities Comprehensive
Adjustment Available-for-Sale Income Adjustment Available-for-Sale Income
---------- ------------------ ------ ---------- ------------------ ------
Beginning Balance $ 17 $ 375 $ 392 $ 17 $ 95 $ 112
Change During Period -- (491) (491) -- 22 22
----- ----- ----- ----- ----- -----
Ending Balance $ 17 $(116) (a) $ (99) $ 17 $ 117 (a) $ 134
===== ===== ===== ===== ===== =====
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Represents the after-tax difference between the fair value and amortized
cost of the available-for-sale securities portfolio including securities
classified as loans, which are subject to the provisions of SFAS 115. See
Note Two.
================================================================================
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of Chase's fair value methodologies, see Note Twenty-Two of the
1998 Annual Report. The following table presents the financial assets and
liabilities valued under SFAS 107.
=============================================================================================================================
March 31, 1999 December 31, 1998
------------------------------------------- -------------------------------------------
Carrying Estimated Appreciation/ Carrying Estimated Appreciation/
(in millions) Value Fair Value (Depreciation) Value Fair Value (Depreciation)
----- ---------- -------------- ----- ---------- --------------
Total Financial Assets $350,781 $352,985 $ 2,204 $355,738 $358,559 $ 2,821
======== ======== ======== ========
Total Financial Liabilities $336,592 $336,435 157 $340,643 $340,519 124
======== ======== -------- ======== ======== --------
Estimated Fair Value in Excess
of Carrying Value $ 2,361 $ 2,945
======== ========
=============================================================================================================================
Derivative contracts used in connection with Chase's ALM activities had an
unrecognized net gain of $11 million and $110 million at March 31, 1999 and
December 31, 1998, respectively, both of which are included in the above
amounts.
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9
Part I
Item 1. (continued)
NOTE 7 - CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note
Eighteen of Chase's 1998 Annual Report.
The following table presents the risk-based capital ratios for Chase and its
significant banking subsidiaries. At March 31,1999, Chase and each of its
depository institutions, including those listed in the table below, were "well
capitalized" as defined by banking regulators.
===================================================================================================================
March 31, 1999 The Chase Chase
(in millions, except ratios) Chase (a) Manhattan Bank Texas Chase USA
- -------------------------------------------------------------------------------------------------------------------
Tier 1 Capital (d) $ 23,980 $ 18,225 $ 1,454 $ 2,812
Total Capital 34,943 26,377 2,110 3,968
Risk-Weighted Assets (b) 287,073 229,131 19,698 32,864
Adjusted Average Assets 364,637 294,036 22,943 32,558
Tier 1 Capital Ratio (b)(d) 8.35% 7.95% 7.38% 8.56%
Total Capital Ratio (b)(d) 12.17% 11.51% 10.71% 12.07%
Tier 1 Leverage Ratio (c)(d) 6.58% 6.20% 6.34% 8.64%
- -------------------------------------------------------------------------------------------------------------------
(a) Assets and capital amounts for Chase's banking subsidiaries reflect
intercompany transactions, whereas the respective amounts for Chase
reflect the elimination of intercompany transactions.
(b) Tier 1 capital or Total capital, as applicable, divided by risk-weighted
assets. Risk-weighted assets include off-balance sheet risk-weighted
assets in the amounts of $92,719 million, $84,242 million, $4,029 million
and $3,844 million.
(c) Tier 1 capital divided by adjusted average assets (net of allowance for
credit losses, goodwill and certain intangible assets).
(d) The provisions of SFAS 115 do not apply to the calculation of the Tier 1
capital and Tier 1 leverage ratios.
================================================================================
NOTE 8 - DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
Chase utilizes various derivative and foreign exchange contracts for trading
purposes and for purposes other than trading, such as asset/liability management
("ALM"). For a discussion of the various financial instruments used and the
credit and market risks involved, see Note Nineteen of Chase's 1998 Annual
Report.
The following table summarizes the aggregate notional amounts of derivative and
foreign exchange contracts as well as the credit exposure related to these
instruments (after taking into account the effects of legally enforceable master
netting agreements).
=========================================================================================================================
Notional Amounts (a) Credit Exposure
March 31, December 31, March 31, December 31,
(in billions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Interest Rate Contracts $8,751.6 $8,171.9 $ 14.0 $ 13.0
Foreign Exchange Contracts 1,773.5 2,040.6 10.9 16.0
Debt, Equity, Commodity and Other Contracts 152.9 140.5 4.0 4.3
-------- --------
Total Credit Exposure Recorded on the Balance Sheet $ 28.9 $ 33.3
======== ========
- -------------------------------------------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and debt, equity, commodity and other contracts were
$981.9 billion, $1.5 billion and $9.0 billion, respectively, at March 31,
1999, compared with $699.3 billion, $3.3 billion and $3.9 billion,
respectively, at December 31,1998. The credit risk for these contracts was
minimal as exchange-traded contracts principally settle daily in cash.
================================================================================
NOTE 9 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
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10
Part I
Item 1. (continued)
NOTE 10 - SEGMENT INFORMATION
Effective December 31, 1998, Chase adopted SFAS 131 which defines the criteria
by which management determines the number and nature of its "operating segments"
and sets forth the financial information that is required to be disclosed about
these operating segments.
Chase's businesses are organized into three major franchises (segments): Global
Bank, National Consumer Services ("NCS") and Chase Technology Solutions ("CTS"),
which includes Global Services. These franchises are based on the nature of the
products and services provided, the type or class of customer, and Chase's
management organization.
Chase uses SVA, Operating Earnings and Cash Operating Earnings as its measures
of franchise profitability. For a discussion of these measurements, see
Management Performance Measurements in the Management's Discussion and Analysis
("MD&A") on page 19 and Note Twenty-three of the 1998 Annual Report. The
following table provides Chase's segment results.
=====================================================================================================================
(in millions) National Global Corporate/
Global Consumer Services Reconciling
Bank Services (within CTS) Items (a) Total
First Quarter 1999
Operating Revenue (b) $ 2,587 $ 2,161 $ 728 $ (63) $ 5,413
Intersegment Revenue (b) (25) (3) 19 9 --
Operating Earnings 834 309 99 (69) 1,173
Cash Operating Earnings (c) 844 350 114 (62) 1,246
Average Managed Assets 248,813 112,176 15,507 8,400 384,896
SVA 393 134 23 (49) 501
First Quarter 1998
Operating Revenue (b) $ 2,385 $ 1,931 $ 670 $ (71) $ 4,915
Intersegment Revenue (b) (26) (1) 19 8 --
Operating Earnings 751 247 114 (59) 1,053
Cash Operating Earnings (c) 761 287 119 (53) 1,114
Average Managed Assets 271,779 105,095 12,771 5,214 394,859
SVA 318 72 52 (14) 428
- ---------------------------------------------------------------------------------------------------------------------
(a) Corporate/Reconciling Items includes the non-global services portion of
Chase Technology Solutions, Chase's Global Asset Management and Mutual
Funds business, corporate staff areas and the net effect of management
accounting policies.
(b) Operating Revenue includes Intersegment Revenue, which includes revenue
and revenue sharing agreements between segments, net of intersegment
expenses. Transactions between business segments are primarily conducted
at fair value.
(c) Cash Operating Earnings excludes the impact of credit card
securitizations, restructuring costs, special items, and amortization of
goodwill and certain intangibles.
================================================================================
The table below presents a reconciliation of the combined segment information to
Chase's consolidated net income as included in the Consolidated Statement of
Income. For a further discussion concerning Chase's business franchise
(segments) results, see Lines of Business Results in the MD&A on pages 12-16.
- --------------------------------------------------------------------------------
First Quarter
---------------------
1999 1998
------- -------
(in millions)
Segments' Cash Operating Earnings $ 1,308 $ 1,167
Corporate/Reconciling Items (62) (53)
------- -------
Consolidated Cash Operating Earnings 1,246 1,114
Amortization of Goodwill and Certain Intangibles (73) (61)
------- -------
Consolidated Operating Earnings 1,173 1,053
Special Items and Restructuring Costs -- (328)
------- -------
Consolidated Net Income $ 1,173 $ 725
======= =======
- --------------------------------------------------------------------------------
================================================================================
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11
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
1999 1998
------- -------
(in millions, except per share First First Over(Under)
and ratio data) Quarter Quarter 1Qtr98
------- ------- ------
Operating Basis (a)
Operating Revenue $5,413 $4,915 10%
Operating Earnings 1,173 1,053 11%
Diluted Earnings Per Share 1.32 1.17 13%
Return on Average Common Equity 20.6% 20.3% 30 bp
Efficiency Ratio 54 53 100 bp
Shareholder Value Added $ 501 $ 428 17%
- --------------------------------------------------------------------------------
Reported Basis
Net Income $1,173 $ 725 62%
Diluted Net Income Per Share 1.32 0.80 65%
Return on Average Common Equity 20.6% 13.8% 680 bp
- --------------------------------------------------------------------------------
(a) Operating basis excludes the impact of credit card securitizations,
restructuring costs and special items. For a further discussion, see page
19 of Chase's 1998 Annual Report.
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
Operating diluted earnings per share were $1.32 in the first quarter of 1999,
compared to $1.17 per share in the first quarter of 1998. Reported diluted
earnings per share were $1.32 in the 1999 first quarter and $.80 in the first
quarter of 1998. Operating earnings and reported net income were each $1.17
billion in the first quarter of 1999, compared with $1.05 billion and $725
million, respectively, in the first quarter of 1998.
Operating highlights for first quarter of 1999 included:
- Operating revenue increased 10% to $5.4 billion.
- Operating EPS increased by 13% to $1.32.
- Shareholder Value Added ("SVA") increased 17% to $501 million.
- Return on common equity was 21%.
- Chase repurchased approximately $885 million of common stock, on a
net basis, in the quarter. Even so, the Tier 1 capital ratio rose to
8.4%.
Chase's first quarter results reflected double-digit growth in revenues,
earnings per share and shareholder value. Driving these results were the
strength and diversity of Chase's businesses and a disciplined approach to risk
and capital management. Chase's management continues to reaffirm its belief in
the strength and sustainability of earnings from Chase's diverse business mix.
Each of Chase's major business franchises is at scale, and maintains leadership
positions in its line of business. As a result, Chase's operating revenues
increased 10% in the 1999 first quarter, despite lower investment banking fees
and weaker results in Global Services. Trading-related revenue reached a record
high of $837 million. Credit costs remained stable in the first quarter: credit
card net charge-offs improved from the 1998 fourth quarter, and financial
conditions in Asia and Latin America have stabilized since the 1998 year-end. At
March 31, 1999, total assets on Chase's balance sheet declined by $4.6 billion
from the 1998 year-end, and Tier 1 capital and Total capital ratios increased to
8.4% and 12.2%, respectively, reflecting Chase's continued focus on SVA and
capital management.
This Management's Discussion and Analysis contains certain forward-looking
statements, including without limitation, statements related to credit, market
and operating risk. These forward-looking statements are subject to risks and
uncertainties and Chase's actual results may differ materially from those
included in these statements. Reference is made to Chase's reports filed with
the Securities and Exchange Commission, in particular the 1998 Annual Report,
for a discussion of factors that may cause such differences to occur. See
Glossary of Terms on page 37 for a definition of terms used throughout this Form
10-Q.
-11-
12
- --------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
- --------------------------------------------------------------------------------
Management measures Chase's financial performance and that of its business units
based on operating earnings, cash operating earnings, and SVA. For a description
of these concepts and the basis of presentation that management uses to measure
and evaluate business unit profitability, see page 19 of the 1998 Annual Report
Prior periods may be restated to reflect refinements in management reporting
policies or changes to the management organization.
The table below provides summary financial information on an operating basis for
Chase's three major business franchises. The discussion that follows the table
focuses on business unit performance within these franchises. See Note Ten of
this Form 10-Q for a further discussion of Chase's business segments.
=================================================================================================================
First Quarter Global Bank National Consumer Services
-------------------------------------- -------------------------------------
Ended March 31, 1999 Over/(Under) 1998 1999 Over/(Under) 1998
- -----------------------------------------------------------------------------------------------------------------
(in millions, except ratios)
Operating Revenue $ 2,587 $ 202 8% $ 2,161 $ 230 12%
Operating Earnings 834 83 11 309 62 25
Cash Operating Earnings (a) 844 83 11 350 63 22
Average Common Equity 13,736 537 4 6,577 158 2
Average Managed Assets 248,813 (22,966) (8) 112,176 7,081 7
Shareholder Value Added 393 75 24 134 62 86
Cash Return on Common Equity 24.6% -- 180 bp 21.3% -- 370 bp
Cash Efficiency Ratio 45 -- (100) 48 -- (100)
- -----------------------------------------------------------------------------------------------------------------
First Quarter Global Services Total (b)
-------------------------------------- -------------------------------------
Ended March 31, 1999 Over/(Under) 1998 1999 Over/(Under) 1998
- -----------------------------------------------------------------------------------------------------------------
(in millions, except ratios)
Operating Revenue $ 728 $ 58 9% $ 5,413 $ 498 10%
Operating Earnings 99 (15) (13) 1,173 120 11
Cash Operating Earnings (a) 114 (5) (4) 1,246 132 12
Average Common Equity 2,794 795 40 22,692 2,343 12
Average Managed Assets 15,507 2,736 21 384,896 (9,963) (3)
Shareholder Value Added 23 (29) (56) 501 73 17
Cash Return on Common Equity 16.3% -- (730) bp 21.9% -- 40 bp
Cash Efficiency Ratio 76 -- 500 53 -- 100
- -----------------------------------------------------------------------------------------------------------------
(a) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain intangibles.
(b) Total column includes Corporate results. See description of Corporate
results on page 16.
bp - Denotes basis points; 100bp equals 1%.
================================================================================
-12-
13
GLOBAL BANK
Global Bank combines the strengths of a leading commercial bank and a leading
investment bank to meet the needs of corporations, institutions, governments and
wealthy individuals around the world. With operations in approximately 50
countries, including major operations in all key international financial
centers, Global Bank integrates a broad range of leading product capabilities,
industry knowledge and geographic reach to produce superior customer solutions.
Global Bank first quarter 1999 operating revenues rose $202 million, an increase
of 8% from first quarter 1998, due to increases in trading-related revenue,
securities gains and private equity gains. Cash operating earnings and SVA for
the first quarter 1999 increased $83 million and $75 million, respectively, over
the first quarter 1998.
The following table sets forth certain key financial performance measures of the
businesses within Global Bank.
=====================================================================================================================
1999 Over/(Under) 1998
------------------------------------------ -------------------------------------
First Quarter Ended Cash Cash Cash Cash
March 31, Operating Operating Efficiency Operating Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
Global Markets $ 1,278 $ 490 40% 29% 46% (800) bp
Global Investment Banking 220 5 98 (37) (94) 4,000
Corporate Lending 397 146 26 8 24 (400)
Chase Capital Partners 271 151 12 -- 1 100
Global Private Bank 215 43 66 4 -- 100
Middle Markets 247 55 57 (1) (4) 300
Other Global Bank (41) (46) NM NM NM NM
------- -------
Totals (a) $ 2,587 $ 844 45% 8% 11% (100) bp
======= =======
- ---------------------------------------------------------------------------------------------------------------------
(a) All product revenues and expenses for Chase Texas have been allocated to
the appropriate business units.
NM - Not meaningful
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
Global Markets
Global Markets' activities are diverse, by product and geography, and encompass
the trading and sale of foreign exchange, derivatives, fixed income securities
and commodities. Chase operates 24 hours a day covering the major international
cross-border financial markets, as well as many local markets. Also included
within Global Markets are Chase's domestic and international treasury units,
which have the primary responsibility for managing Chase's interest rate risk
exposures and investment securities activities. Treasury results are managed on
a total return basis with one of the primary objectives being the creation of
economic value over time. Total return combines reported revenues (net interest
income and securities gains/losses) and the change in the net unrealized
appreciation/depreciation of all financial instruments and underlying balance
sheet items.
Trading-related revenue for the first quarter of 1999 was a record $837 million,
an increase of 21% from the 1998 first quarter. Results reflect a strong
performance in traditional products, including interest rate derivatives, and
newer products, such as equity derivatives. Securities gains realized during the
first quarter were $156 million, an 88% increase over first quarter 1998
results. The total return (pretax before expenses) from interest rate risk
management activities amounted to $251 million for the first quarter of 1999,
compared with $86 million in the first quarter of 1998.
-13-
14
Global Investment Banking
Global Investment Banking advises corporations, financial institutions,
financial sponsors and governments by providing integrated one-stop financial
solutions and industry expertise to clients globally. Chase's corporate finance
client base is extensive and is managed through global client industry groups.
Product offerings encompass syndicated finance, high yield securities, mergers
and acquisitions advisory, project finance, real estate advisory and placement,
restructuring and private placements. Chase is the largest provider of U.S.
corporate debt, with a major presence in both the public and private debt
markets, and has built a strong presence in the advisory area by leveraging its
debt market leadership.
Global Investment Banking operating revenues for the first three months of 1999
decreased by $130 million, or 37%, to $220 million when compared with the same
quarter in 1998. The revenue decrease reflects lower investment banking fees due
to an overall market decline in leveraged financings and lower trading results
on high yield securities.
Corporate Lending
Corporate Lending provides credit and lending services to clients globally
within a strategy that emphasizes origination for distribution. An active
portfolio management effort is an integral part of corporate lending activities
and is focused on managing concentrations by product, borrower, risk grade,
industry and geography. The use of SVA for product and customer decisions
resulted in higher spreads on retained assets and the disposition of
less-SVA-attractive loans. Management expects to continue to manage commercial
loans for shareholder value rather than revenue growth. Revenues and cash
operating earnings increased 8% and 24%, respectively, for the 1999 first
quarter when compared with the same 1998 period.
Chase Capital Partners
Chase Capital Partners ("CCP") is one of the largest global private equity
organizations with approximately $7.1 billion under management, including $4.3
billion in direct equity and equity-related investments and $1.4 billion in fund
investments. CCP provides equity and mezzanine financing for a wide variety of
investment opportunities in the United States and, to a lesser extent, abroad.
For the first three months of 1999, CCP's direct investments totaled
approximately $312 million in 15 venture capital, management buyout,
recapitalization, growth equity and mezzanine transactions, compared with
approximately $371 million in 34 direct investments for the first quarter of
1998. Earnings reflected continued strength in the equity markets, a favorable
environment for technology initial public offerings (IPOs) and the positive
impact of maturing investments within the portfolio, partially offset by higher
costs to support a higher level of investments.
Global Private Bank
The Global Private Bank serves a global client base of high net worth
individuals and families, offering a full range of private banking services as
well as access to the broad product capabilities of the Global Bank. Services
include investment management, global capital market products and services, risk
management, alternative investments such as private equity funds, trust and
estate planning, global custody, mutual funds, credit and banking, and
philanthropic advisory services. Revenues increased 4% from the 1998 first
quarter reflecting double digit growth in the U.S., particularly in investment
management and trust fees, offset by lower revenues in selected international
markets.
Middle Markets
Chase is the premier provider of financial services to middle-market companies
(companies with sales ranging from $10 million to $500 million) regionally, with
a national focus in selected industries. It is the market leader in the New York
metropolitan tri-state area. Cash operating earnings decreased slightly in the
1999 first quarter, reflecting lower spreads and an increase in expenses.
-14-
15
NATIONAL CONSUMER SERVICES
National Consumer Services ("NCS") serves more than 30 million customers
nationwide offering a wide variety of financial products and services through a
diverse array of channels. Characterized by significant scale, and operating
under the strong Chase brand, NCS combines nationwide presence with a leading
consumer and small business banking franchise in the New York metropolitan
tri-state region and key Texas markets. NCS's strategy is driven by information
technology, which provides insights into customer behavior, requirements and
preferences, and enables the franchise to develop financial solutions that best
meet customer needs.
Cash operating earnings for the first quarter of 1999 increased $63 million, or
22%, over the same period in 1998. Revenue growth of 12% contributed to the
increase in cash operating earnings and reflects higher revenues and volumes
across all of NCS's businesses. SVA increased $62 million, or 86%, in the first
three months of 1999 from the same period in 1998.
The following table sets forth certain key financial performance measures of the
businesses within NCS.
- ---------------------------------------------------------------------------------------------------------------------
1999 Over/(Under) 1998
---------------------------------------- ------------------------------------
First Quarter Ended Cash Cash Cash Cash
March 31, Operating Operating Efficiency Operating Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
Chase Cardmember Services $ 1,001 $ 117 34% 8% 3% 100 bp
Regional Consumer Banking 577 101 70 7 25 (400)
Chase Home Finance 272 64 58 13 (2) 900
Diversified Consumer Services 291 58 48 41 205 (1,000)
Other NCS 20 10 NM NM NM NM
-------- --------
Totals (a) $ 2,161 $ 350 48% 12% 22% (100) bp
======== ========
- ---------------------------------------------------------------------------------------------------------------------
(a) All product revenues and expenses for Chase Texas have been allocated to
the appropriate business units.
NM - Not meaningful
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
Chase Cardmember Services
Chase Cardmember Services ("CCS") ranks as the fourth-largest bank card issuer
in the United States. CCS also reflects the results of Chase's international
consumer business, which includes Chase Manhattan Card Company Limited, the
third largest credit card issuer in Hong Kong, as well as consumer banking
activities in Hong Kong, Panama and the Eastern Caribbean. CCS's operating
revenues for the three months ended March 31, 1999 were $1.0 billion,
representing an 8% increase from the first quarter 1998, reflecting increased
purchase volume and the positive impact of pricing initiatives starting in the
1998 second quarter. Cash operating earnings reflect a higher level of marketing
expense.
Regional Consumer Banking
Regional Consumer Banking has a leading share of primary bank relationships
among consumers and small businesses in the New York metropolitan tri-state
area. It is also a leading retail institution in key Texas markets. Regional
Consumer Banking offers customers convenient access to financial services
through their choice of distribution channels, including the largest branch and
proprietary ATM networks in the New York metropolitan region, plus
state-of-the-art telephone, PC and Internet services. For the first quarter
1999, cash operating earnings increased 25% to $101 million, compared with the
same period in 1998, benefiting from higher net interest income and increased
fee income as a result of strong performance of the Chase debit banking card.
-15-
16
Chase Home Finance
Chase Home Finance serves more than 2 million customers nationwide and is the
largest originator and third-largest servicer of residential mortgage loans in
the U.S. It is also a leading provider of home-equity secured lending and
manufactured housing financing. During the first three months of 1999, $28
billion in residential first-mortgage loans, home-equity and manufactured
housing financing were originated, a 73% increase over the same period last
year. Chase Home Finance's servicing portfolio increased 27% from first quarter
1998 and totaled $226 billion at March 31, 1999. Operating revenues rose 13% in
the first quarter of 1999 compared with the first quarter of 1998 due to higher
origination volume and servicing balances. Partially offsetting this increase in
operating revenue was lower net interest income as a result of higher funding
costs associated with the increase in servicing balances. Cash operating
earnings decreased 2% in the first three months of 1999, reflecting higher
expenses stemming from greater business volume and technology investments.
Diversified Consumer Services
Diversified Consumer Services ("DCS") is the largest bank originator of auto
loans and leases in the United States and a leading provider of student loans
and unsecured consumer lending. In addition to its financing activities, DCS
offers brokerage services and investment products nationwide and is one of the
most diversified bank insurance providers in the U.S. During the first quarter
1999, auto finance originations were strong, increasing 14% when compared to the
same period in 1998. At March 31, 1999, Chase Auto Finance had $23 billion in
managed loans and $18 billion in balance sheet receivables. Cash operating
earnings for DCS in the first quarter of 1999, were driven by the strong growth
in auto finance and by higher revenues in Chase's investment and insurance
businesses. Also included in revenues was a gain on a sale of a student loan
portfolio.
CHASE TECHNOLOGY SOLUTIONS
Chase Technology Solutions ("CTS") is composed of Chase's Global Services
businesses, Information Technology and Operations, and Electronic Commerce
initiatives. Global Services is a leading provider of information and
transaction services globally and includes custody and other investor services,
treasury and cash management, trade finance, debt, agency and other fiduciary
services. As the world's largest provider of global custody and a leader in
trust and agency services, Global Services was custodian for over $5.0 trillion
in assets and serviced over $3.0 trillion in outstanding debt at March 31, 1999.
Global Services also operates the largest U.S. dollar funds transfer business in
the world and is a market leader in FedWire, ACH and CHIPS volume.
For the three months ended March 31, 1999, cash operating earnings and SVA for
Global Services decreased $5 million and $29 million, respectively, when
compared with the same period in 1998. Revenue growth increased 9% in the first
quarter 1999, driven by acquisitions and growth in core custody products.
Revenue growth was negatively affected by a decline in balance-related revenues,
the revaluation and reallocation of investment portfolios from emerging to
developed markets, and by a reduction in structured financings. Expenses in the
quarter grew more than revenues, reflecting ongoing investment spending and
costs related to Year 2000. Management anticipates that over the remainder of
1999, Global Services operating results should improve when compared to the
current quarter, primarily as a result of expense discipline and increasing
revenues from rebounding financial markets.
CORPORATE
Corporate includes Chase's Global Asset Management and Mutual Funds business,
which provides investment management for institutional investors globally and
manages the Chase Global Mutual Funds. Total assets under management amounted to
$208 billion at March 31, 1999. Corporate also includes Chase Business Services,
the shared services company created in 1998, and the effects remaining at the
Corporate level after the implementation of management accounting policies such
as credit provision and tax expense. For the three months ended March 31, 1999,
Corporate had a cash operating loss (including the non-Global Services portion
of CTS) of $62 million compared with a cash operating loss of $53 million in the
first quarter of 1998.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following section provides a discussion of Chase's results of operations as
reported under generally accepted accounting principles as well as on the
operating basis that is used by management in measuring Chase's financial
performance.
To further facilitate its analysis of Chase's financial results, management
categorizes Chase's revenue components as market-sensitive revenues or as
less-market-sensitive revenues. Market-sensitive revenues include trading
revenues (including trading-related net interest income), investment banking
fees, securities gains and private equity gains. The remaining revenue
components of the income statement are categorized as less-market-sensitive
revenue.
-16-
17
The following table provides a reconciliation between Chase's results as
reported in its Consolidated Financial Statements and as presented on an
operating basis.
========================================================================================================
First Quarter 1999
-------------------------------------------------------------------
(in millions, except Reported Credit Credit Special Operating
per share data) Results Costs Card Items Basis
(a) (b) (c) (d)
------ ------ ------ ------ ------
Market-Sensitive Revenue $1,635 $ -- $ -- $ -- $1,635
Less-Market-Sensitive Revenue 3,509 -- 269 -- 3,778
------ ------ ------ ------ ------
Total Revenue 5,144 269 -- 5,413
Noninterest Expense 2,945 (5) -- -- 2,940
------ ------ ------ ------ ------
Operating Margin 2,199 5 269 -- 2,473
Credit Costs 381 5 269 -- 655
------ ------ ------ ------ ------
Income Before
Restructuring Costs 1,818 -- -- -- 1,818
Restructuring Costs -- -- -- -- --
------ ------ ------ ------ ------
Income Before Taxes 1,818 -- -- -- 1,818
Tax Expense 645 -- -- -- 645
------ ------ ------ ------ ------
Net Income $1,173 $ -- $ -- $ -- $1,173
====== ====== ====== ====== ======
NET INCOME PER COMMON SHARE
Basic $ 1.37 $ 1.37
Diluted $ 1.32 $ 1.32
- --------------------------------------------------------------------------------------------------------
First Quarter 1998
-------------------------------------------------------------------
(in millions, except Reported Credit Credit Special Operating
per share data) Results Costs Card Items Basis
(a) (b) (c) (d)
------ ------ ------ ------ ------
Market-Sensitive Revenue $1,417 $ 12 $ -- $ -- $1,429
Less-Market-Sensitive Revenue 3,206 -- 280 -- 3,486
------ ------ ------ ------ ------
Total Revenue 4,623 12 280 -- 4,915
Noninterest Expense 2,620 (4) -- -- 2,616
------ ------ ------ ------ ------
Operating Margin 2,003 16 280 -- 2,299
Credit Costs 332 16 280 -- 628
------ ------ ------ ------ ------
Income Before
Restructuring Costs 1,671 -- -- -- 1,671
Restructuring Costs 521 -- -- (521) --
------ ------ ------ ------ ------
Income Before Taxes 1,150 -- -- 521 1,671
Tax Expense 425 -- -- 193 618
------ ------ ------ ------ ------
Net Income $ 725 $ -- $ -- $ 328 $1,053
====== ====== ====== ====== ======
NET INCOME PER COMMON SHARE
Basic $ 0.82 $ 1.21
Diluted $ 0.80 $ 1.17
- --------------------------------------------------------------------------------------------------------
(a) Represents results as reported in Chase's financial statements, except
that revenues are categorized between market-sensitive revenues and
less-market-sensitive revenues and restructuring costs have been
separately displayed.
(b) For purposes of operating basis presentation, the provision for risk
management instrument credit losses is reclassified from noninterest
revenue to credit costs and foreclosed property expense is reclassified
from noninterest expense to credit costs.
(c) This column excludes the impact of credit card securitizations. For
securitized receivables, amounts that would previously have been reported
as net interest income and as provision for loan losses are instead
reported as components of noninterest revenue (credit card revenue and
other revenue).
(d) Includes restructuring costs and special items. For a description of
special items, see Glossary of Terms on page 37.
================================================================================
-17-
18
MARKET-SENSITIVE REVENUE
Market-sensitive revenues are, in management's view, typically more sensitive to
changes in general market conditions than those revenue components management
considers as less-market-sensitive. While components of market-sensitive
revenues experience volatility (particularly on a quarter-to-quarter basis),
over the past ten years total market-sensitive revenue has increased at a
compound annual growth rate ("CAGR") of 14% and has exhibited limited annual
volatility around the regression trendline.
For the first quarter, market-sensitive revenues in 1999 increased 14% over
1998, reflecting increases in trading-related revenues and securities gains. A
discussion of the components within market-sensitive revenue is presented below.
Investment Banking Fees
Investment banking fees were $317 million, 12 percent lower than in the same
1998 quarter, reflecting the overall market decline in leveraged financings,
offset in part by stronger fees in mergers and acquisitions advisory activity
and investment grade bond underwriting. Chase continues to be a leading provider
of corporate debt, ranking first in global loan syndications, while improving
its market share in public debt underwriting. Management anticipates that
revenues from Investment Banking should rebound next quarter, as a result of
increased leveraged financing activities.
Trading-Related Revenue
Trading revenues and related net interest income rose 21 percent to $837
million, a new record, benefiting from strong performance in traditional
products, including interest rate derivatives, and newer products, such as
equity derivatives.
================================================================================
First Quarter
----------------
(in millions) 1999 1998
---- ----
Trading Revenue - Reported $618 $480
Net Interest Income Impact (a) 219 212
---- ----
Total Trading-Related Revenue $837 $692
==== ====
Product Diversification:
Interest Rate Contracts (b) $322 $141
Foreign Exchange Spot and Option Contracts (c) 199 286
Debt Instruments, Equities and Commodities (d) 316 265
---- ----
Total Trading-Related Revenue $837 $692
==== ====
- --------------------------------------------------------------------------------
(a) Trading-related net interest income includes interest recognized on
interest-earning and interest-bearing trading-related positions as well as
management allocations reflecting the funding cost or benefit associated
with trading positions. This amount is included in net interest income on
the Consolidated Statement of Income.
(b) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures and options, 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 instruments, emerging markets debt instruments,
debt-related derivatives, equity securities, equity derivatives and
commodity derivatives.
================================================================================
Interest rate contract revenues increased as a result of Chase having
successfully positioned itself for the commencement of the euro and from
interest rate movements in the European markets in the 1999 first quarter.
Foreign exchange spot and option revenue declined this quarter, due to reduced
volume because of lower liquidity in the Asian markets.
The increase in debt instruments, equities and commodities revenue resulted from
continued improvement in emerging markets activities and high-grade bonds as
well as from increased revenues from Chase's equity derivative products as a
result of favorable market conditions in the 1999 first quarter. Equities and
commodities revenue was $115 million in the 1999 first quarter compared with
$74 million in the prior year quarter.
Securities Gains
Securities gains realized for the 1999 first quarter were $156 million compared
with $83 million in the prior year's first quarter. These gains were largely
from sales of U.S. Government and agency securities. Unrealized net losses in
Chase's available-for-sale securities portfolio were approximately $226 million,
before taxes, at March 31, 1999, a decrease from a net unrealized gain of
approximately $600 million, before taxes, at year-end 1998, reflecting a rise in
interest rates during the current quarter.
Private Equity Gains
Private equity gains include income from a wide variety of investments in the
United States and, to a lesser extent, abroad. Private equity gains in the 1999
first quarter were $325 million, 11 percent higher than in the first quarter of
1998, reflecting continued strength in the equity markets and a more favorable
environment for technology IPOs, as well as the positive impact of maturing
investments within the portfolio.
-18-
19
LESS-MARKET-SENSITIVE REVENUE
The less-market-sensitive revenue captions are generally subject to less market
volatility than market-sensitive revenues. However, certain components within
less-market-sensitive revenue are subject to market volatility, particularly
assets that are held-for-sale and are accounted for on either a mark-to-market
basis or lower-of-cost-or-market basis.
Less-market-sensitive revenues increased by 8% in the 1999 first quarter
reflecting increases across all categories. A discussion of the components
within less-market-sensitive revenue is presented below.
Net Interest Income
Reported net interest income for the 1999 first quarter was $2.20 billion, an
increase of 2% from the 1998 first quarter. Reported results include
trading-related net interest income of $219 million, an increase of 3% from the
prior year. For purposes of internal analysis, management combines
trading-related net interest income with trading revenue, as discussed under the
Trading-Related Revenue caption in the Market-Sensitive Revenue section.
The following table provides a reconciliation between reported net interest
income as presented on the Consolidated Statement of Income and operating net
interest income, which excludes trading-related net interest income and the
impact of credit card securitizations.
================================================================================================
First Quarter
Net Interest Income -------------------------------------------
(in millions) 1999 1998 Change
--------- --------- ------
Reported Net Interest Income $ 2,204 $ 2,164 2%
Less Trading-Related Net Interest Income (219) (212)
--------- ---------
Subtotal 1,985 1,952 2%
Add Impact of Credit Card Securitizations 327 348
--------- ---------
Operating Net Interest Income $ 2,312 $ 2,300 1%
========= =========
Average Interest-Earning Assets
(in billions)
Reported $ 290.8 $ 301.5 (4)%
Add Credit Card Securitizations 18.0 17.3
Less Trading-Related Assets (49.0) (69.6)
--------- ---------
Managed $ 259.8 $ 249.2 4%
========= =========
Net Yield on Interest-Earning Assets (a)
Reported 3.08% 2.92% 16 bp
Add Impact of Securitizations 0.25 0.28 (3)
Impact of Trading-Related NII 0.29 0.55 (26)
--------- ---------
Managed 3.62% 3.75% (13) bp
========= =========
- ------------------------------------------------------------------------------------------------
(a) Disclosed on a taxable equivalent basis.
bp - Denotes basis points; 100 bp equals 1%.
================================================================================
Operating net interest income was $2.31 billion in the 1999 first quarter, an
increase of 1% from 1998. The increase was primarily due to higher average
managed interest earning assets, particularly securities, domestic consumer
loans (auto financings and residential mortgages), and domestic commercial
loans. This increase was partially offset by a decline in the foreign commercial
loan portfolio, as Chase significantly reduced its exposure to emerging markets
during 1998. The growth in managed interest-earning assets in 1999 was funded by
interest-bearing deposits.
The net yield on a managed basis was 3.62%, a decrease of 13 basis points in
comparison with 1998. As a result of decreases in both the volume and rate
earned on interest-free funds, interest-free funds contributed 62 basis points
to the net yield in the first quarter of 1999, compared to 85 basis points in
the first quarter of 1998.
-19-
20
Trust, Custody and Investment Management Fees
Trust, custody and investment management fees continued their strong performance
by increasing 19% to $414 million in the 1999 first quarter. These favorable
results were largely attributable to portfolio acquisitions of custody and
corporate trust businesses in late 1998 and growth in core custody products.
Credit Card Revenue
Credit card revenue on a reported basis rose $79 million, or 26%, in the 1999
first quarter as a result of increased purchase volume and the implementation of
pricing initiatives starting in the 1998 second quarter.
The following table provides a reconciliation between reported credit card
revenue as presented on the Consolidated Statement of Income and operating
credit card revenue, which excludes the impact of credit card securitizations.
================================================================================
First Quarter
-------------------
(in millions) 1999 1998
----- -----
Reported Credit Card Revenue $ 379 $ 300
Less Impact of Credit Card Securitizations (51) (66)
----- -----
Operating Credit Card Revenue $ 328 $ 234
===== =====
================================================================================
Fees for Other Financial Services
- --------------------------------------------------------------------------------
First Quarter
----------------
(in millions) 1999 1998
---- ----
Service Charges on Deposit Accounts $ 89 $ 91
Fees in Lieu of Compensating Balances 87 80
Commissions on Letters of Credit and Acceptances 69 74
Mortgage Servicing Fees 65 57
Brokerage and Investment Services 43 32
Insurance Fees (a) 39 31
Loan Commitment Fees 31 38
Other Fees 130 107
---- ----
Total $553 $510
==== ====
- --------------------------------------------------------------------------------
(a) Insurance amount excludes certain insurance fees related to credit cards
and mortgage products, which are included in those revenue captions.
================================================================================
-20-
21
The rise in fees in lieu of compensating balances reflects, in part, higher fees
for services paid by customers, rather than the customer maintaining a higher
level of compensating balances. Mortgage servicing fees increased in the 1999
first quarter largely due to a larger servicing balance. The servicing portfolio
approximated $226 billion at March 31, 1999, a 27% increase from prior year
levels. Brokerage and investment services rose $11 million due to a significant
increase in transaction volume as a result of favorable market conditions, as
well as a price reduction implemented late in the first quarter of 1998. Higher
fees related to insurance products reflected increased volume. Other fees rose
21% for the first quarter 1999, when compared to the same period in 1998, mainly
due to increased business volume, ATM fees for non-Chase customers and new cash
management products.
Other Revenue
================================================================================
First Quarter
----------------
(in millions) 1999 1998
---- ----
Residential Mortgage Origination/Sales Activities $ 92 $ 52
All Other Revenue 79 42
---- ----
Operating Other Revenue 171 94
Other Revenue - Credit Card Securitizations 7 2
---- ----
Reported Other Revenue $178 $ 96
==== ====
================================================================================
The 1999 first quarter operating and reported results included higher revenue
from residential mortgage originations and sales activities, a reflection of the
continued favorable interest-rate environment. All other operating revenue
increased by $37 million in the 1999 first quarter as a result of a $25 million
gain from the sale of a student loan portfolio. Also contributing to the
increase was higher revenues from a portfolio of assets that had been previously
transferred into a trust, the shares of which are being sold to institutional
investors. This trust was established late in the 1998 first quarter.
NONINTEREST EXPENSE
Total reported noninterest expense was $2.95 billion in the 1999 first quarter,
a decrease of 6% from the prior year's first quarter. Operating noninterest
expense was $2.94 billion in the first quarter of 1999, 12% above the comparable
1998 quarter, reflecting technology-related costs, incentive costs tied to
higher market-sensitive revenues and the impact of a change in the components of
the long-term compensation program of the Global Bank. This change in the
compensation program (replacing options with restricted stock) contributed 2% to
the growth rate of salaries and employee benefits. Management of Chase expects
moderating expense growth for the remainder of the year.
================================================================================
First Quarter
-----------------------
(in millions, except ratios) 1999 1998
------ ------
Salaries $1,384 $1,254
Employee Benefits 255 224
Occupancy Expense 218 189
Equipment Expense 243 209
Other Expense 840 740
------ ------
Operating Noninterest Expense 2,940 2,616
Restructuring Costs -- 521
Foreclosed Property Expense (a) 5 4
------ ------
Reported Noninterest Expense $2,945 $3,141
====== ======
Efficiency Ratio (b) 57% 56%
Operating Efficiency Ratio (b) (c) 54 53
- --------------------------------------------------------------------------------
(a) Included within Other Expense on the Consolidated Statement of Income. For
purposes of reviewing the results on an operating basis, these expenses
are reflected in Credit Costs.
(b) Excludes restructuring costs, foreclosed property expense, provision for
risk management instrument credit losses, costs associated with the REIT
and special items.
(c) Excludes the impact of credit card securitizations.
================================================================================
-21-
22
The increase in salaries and employee benefits for the first quarter 1999 was
due to higher incentive costs, mainly driven by higher market-sensitive revenues
and the aforementioned change in the long-term compensation program of the
Global Bank. Also contributing to the increase was the net addition of 3,063
full-time equivalent employees as a result of growth in select businesses and
acquisitions (particularly in the mortgage, credit card, and custody and
fiduciary services businesses).
================================================================================
Full-Time Equivalent Employees March 31, March 31,
1999 1998
--------- ---------
Domestic Offices 62,163 59,738
Foreign Offices 11,159 10,521
------ ------
Total Full-Time Equivalent Employees 73,322 70,259
====== ======
================================================================================
Occupancy and Equipment Expense
Occupancy expense increased $29 million in the 1999 first quarter, primarily due
to increased amortization of leasehold improvements from renovations resulting
from business expansions and acquisitions. The higher level of equipment expense
during the 1999 first quarter was due to an increase in depreciation expense
from the capitalization of costs relating to more advanced hardware systems
across all business units. Also contributing to the increase was higher software
expenses associated with Year 2000 efforts. For a further discussion of Year
2000 efforts, see Operating Risk Management Section on page 32.
Other Expense
================================================================================
First Quarter
--------------------
(in millions) 1999 1998
---- ----
Professional Services $162 $142
Marketing Expense 114 90
Telecommunications 91 77
Amortization of Intangibles 73 61
Travel and Entertainment 50 52
Minority Interest (a) 13 12
Foreclosed Property Expense 5 4
All Other 337 306
---- ----
Total $845 $744
==== ====
- --------------------------------------------------------------------------------
(a) Includes REIT minority interest expense of $11 million in each quarter.
================================================================================
Other expense for the 1999 first quarter increased $101 million when compared
with the first quarter of 1998. Professional services costs for the first
quarter of 1999 reflects a higher level of contract computer professionals
associated with Year 2000 efforts. The $24 million increase in marketing expense
in the first three months of 1999 is primarily due to higher marketing costs at
Chase Cardmember Services. The $14 million rise in telecommunications costs in
the 1999 first quarter covers both installation and usage and reflects the
growth in business volume at all of Chase's major business franchises. The
purchase of a global custody business during the fourth quarter 1998 contributed
to the increase in amortization of intangibles expense. All other expenses
increased $31 million, reflecting a growth in business volume at Chase
Cardmember Services and the global custody acquisition.
Restructuring Costs
For a discussion of Chase's restructuring costs, see Note Four on page 8 of this
Form 10-Q. It is anticipated that savings from the one-time charge of $510
million, taken in the first quarter of 1998 in connection with initiatives to
streamline support functions and realign certain business functions, will amount
to approximately $460 million annually. Depending on its view of revenue
opportunities, Chase may or may not reinvest all or a portion of these savings
into its revenue-generating activities.
-22-
23
CREDIT COSTS
Credit costs include provisions for loan losses and for risk management
instrument credit losses, foreclosed property expense and credit costs
associated with credit card securitizations.
The following table shows the components of credit costs.
================================================================================
First Quarter
--------------
(in millions) 1999 1998
---- ----
Provision for Loan Losses $381 $332
Provision for Risk Management Instrument Credit Losses (a) -- 12
---- ----
Total Provision for Credit Losses 381 344
Foreclosed Property Expense (b) 5 4
Credit Costs Associated with Credit Card Securitizations 269 280
---- ----
Operating Credit Costs $655 $628
==== ====
- --------------------------------------------------------------------------------
(a) Included in Noninterest Revenue on the Consolidated Statement of Income.
(b) Included in Other Expense on the Consolidated Statement of Income.
================================================================================
Credit costs in the 1999 first quarter were $655 million, an increase of $27
million from the 1998 level, primarily due to higher credit losses in the
domestic commercial portfolio and the credit card portfolio. For a discussion of
Chase's net charge-offs, see page 25.
INCOME TAXES
Chase recognized income tax expense of $645 million in the first quarter of 1999
compared with $425 million in the first quarter of 1998. The effective tax rates
were 35.5% and 37.0%, respectively.
-23-
24
- --------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following discussion of Chase's credit risk management focuses primarily on
developments since December 31, 1998 and should be read in conjunction with
pages 29-35 and 50-51 of Chase's 1998 Annual Report.
The following table presents Chase's credit-related information for the dates
indicated.
====================================================================================================================
Past Due 90 Days & Over
Credit-Related Assets Nonperforming Assets and Still Accruing
March 31, Dec 31, March 31, Dec 31, March 31, Dec 31,
(in millions) 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
Consumer:
Domestic Consumer:
1-4 Family Residential Mortgages $ 41,822 $ 41,831 $ 314 $ 313 $ 2 $ 3
Credit Card - Reported 13,013 14,229 -- -- 253 302
Credit Card Securitizations (a) 18,382 18,033 -- -- 363 379
-------- -------- -------- -------- -------- --------
Credit Card - Managed 31,395 32,262 -- -- 616 681
Auto Financings 17,575 16,456 51 50 17 20
Other Consumer 7,911 8,375 8 6 50 97
-------- -------- -------- -------- -------- --------
Total Domestic Consumer 98,703 98,924 373 369 685 801
Foreign Consumer 3,933 3,807 26 23 13 10
-------- -------- -------- -------- -------- --------
Total Consumer 102,636 102,731 399 392 698 811
-------- -------- -------- -------- -------- --------
Commercial:
Domestic Commercial:
Commercial and Industrial 43,736 43,123 344 331 22 42
Commercial Real Estate 4,019 3,984 59 41 18 1
Financial Institutions 6,667 6,583 39 1 -- --
-------- -------- -------- -------- -------- --------
Total Domestic Commercial 54,422 53,690 442 373 40 43
Foreign Commercial:
Commercial and Industrial 24,331 24,664 601 603 3 7
Commercial Real Estate 353 367 -- -- -- --
Financial Institutions 5,015 4,537 31 22 20 24
Foreign Governments 4,474 4,798 44 50 -- --
-------- -------- -------- -------- -------- --------
Total Foreign Commercial 34,173 34,366 676 675 23 31
Derivative and FX Contracts 28,850 33,255 32 50 -- --
-------- -------- -------- -------- -------- --------
Total Commercial Credit-Related 117,445 121,311 1,150 1,098 63 74
-------- -------- -------- -------- -------- --------
Total Managed Credit-Related $220,081 $224,042 $ 1,549 $ 1,490 $ 761 $ 885
======== ======== -------- -------- ======== ========
Assets Acquired as Loan Satisfactions 125 116
-------- --------
Total Nonperforming Assets $ 1,674 $ 1,606
======== ========
=====================================================================================
Average Annual
Net Charge-offs Net Charge-off Rate
------------------- ---------------------
First Quarter First Quarter
------------------- ---------------------
(in millions, except ratios) 1999 1998 1999 1998
------- ------- ------- -------
Consumer:
Domestic Consumer:
1-4 Family Residential Mortgages $ 1 $ 10 .01% .10%
Credit Card - Reported 216 179 6.44 4.93
Credit Card Securitizations (a) 269 280 5.99 6.49
------- -------
Credit Card-Managed 485 459 6.18 5.77
Auto Financings 19 23 .45 .69
Other Consumer 48 41 2.23 1.80
------- -------
Total Domestic Consumer 553 533 2.24 2.23
Foreign Consumer 9 3 .99 .30
------- -------
Total Consumer 562 536 2.20 2.15
------- -------
Commercial:
Domestic Commercial:
Commercial and Industrial 20 9 .19 .09
Commercial Real Estate (9) (3) NM NM
Financial Institutions 25 -- 1.46 --
------- -------
Total Domestic Commercial 36 6 .27 .05
Foreign Commercial:
Commercial and Industrial 52 56 .84 .81
Commercial Real Estate -- -- -- --
Financial Institutions (1) 15 NM .95
Foreign Governments -- (1) -- NM
------- -------
Total Foreign Commercial 51 70 .58 .71
Derivative and FX Contracts -- 12 -- .12
------- -------
Total Commercial Credit-Related 87 88 .29 .27
------- -------
Total Managed Credit-Related $ 649 $ 624 1.17% 1.09%
======= =======
- -------------------------------------------------------------------------------------
(a) Represents the portion of Chase's credit card receivables that have been
securitized.
NM - Not meaningful
================================================================================
-24-
25
Chase's managed credit-related assets totaled $220 billion at March 31, 1999, a
decrease of $4 billion, or 2%, compared with year-end 1998. The decrease was
primarily due to lower derivative and foreign exchange receivables, while loan
balances remained relatively stable.
Chase's nonperforming assets at March 31, 1999 increased $68 million, or 4%,
from the 1998 year-end level primarily due to an increase in the nonperforming
domestic commercial loan portfolio. The foreign commercial loan portfolio
remained stable during the 1999 first quarter.
Total net charge-offs on a retained basis increased by $36 million during the
1999 first quarter. Total net charge-offs on a managed basis were $649 million
in the 1999 first quarter, compared with $624 million in the first quarter of
1998. The increases in net charge-offs on both a managed and retained basis are
due to increased charge-off levels in the retained credit card portfolio and
lower recoveries in the domestic commercial and industrial loan portfolio. These
increases were partially offset by lower levels of securitized credit card and
foreign commercial net charge-offs.
Management expects that credit costs in 1999, on a managed basis, will remain
relatively stable over the remainder of 1999 and will be of a similar magnitude
to total credit costs incurred in 1998. For the consumer portfolio, management
expects net charge-off rates will be approximately the same as in 1998; however,
reported net charge-offs will vary depending on the level of credit card
securitizations completed during the year. The commercial charge-off rate varies
more than the consumer charge-off rate, and over time Chase expects annual
commercial net charge-offs to be in a range of 30-50 bp.
Consumer Loan Portfolio
Residential Mortgage Loans: Residential mortgage loans outstanding remained
stable at March 31, 1999, when compared with year-end balances, as did the level
of nonperforming domestic residential mortgage loans. The loss rate of .01% for
the 1999 first quarter was unusually low due to exceptionally high recoveries.
This portfolio's asset quality continues to be strong.
Credit Card Loans: Chase analyzes its credit card portfolio on a managed basis,
which includes credit card receivables on the balance sheet as well as credit
card receivables that have been securitized.
Average managed credit card receivables for the three months ended March 31,
1999 decreased 1% when compared with the same period in 1998. The increase in
the net charge-off percentage rate for the first quarter of 1999 was due to
slower growth in credit card outstandings, driven by increased consumer
liquidity. While credit costs increased from first quarter 1998, the charge-off
rate declined from 1998 fourth quarter level, as a result of lower bankruptcy
levels, higher recoveries and improvement in the credit quality of a portfolio
acquired in 1998.
Managed Credit Card Portfolio (a)
================================================================================
As of or For the
Three Months Ended
March 31,
--------------------
(in millions, except ratios) 1999 1998
------- -------
Average Credit Card Receivables $32,093 $32,430
Past Due 90 Days or More and Accruing $ 627 $ 656
As a Percentage of Average Credit Card Receivables 1.95% 2.02%
Net Charge-offs $ 490 $ 462
As a Percentage of Average Credit Card Receivables 6.11% 5.70%
- --------------------------------------------------------------------------------
(a) Includes domestic and international credit card activity.
================================================================================
Auto Financings: Auto financings outstanding increased 7%, reflecting continued
strong consumer demand due to favorable pricing programs. Total originations
were $3.4 billion in the first three months of 1999, an increase of 14% when
compared with the same 1998 period. The 1999 charge-off rate of .45% is
indicative of the selective approach to asset origination.
-25-
26
Commercial Portfolio
The domestic commercial portfolio had net charge-offs of $36 million during the
1999 first quarter, compared with $6 million in the prior year period. While the
net charge-off amount did increase during the 1999 first quarter, the net
charge-off rate of .27% for the portfolio remained at a low level, indicative of
the portfolio's diversification and strong credit quality.
The foreign commercial portfolio totaled $34.2 billion at March 31, 1999 and
remained relatively stable when compared with the 1998 year-end. Nonperforming
loan levels at March 31, 1999 also remained stable. Net charge-off levels for
the 1999 first quarter decreased in comparison with the prior year by $19
million, or 27%, due to stabilizing financial conditions in Asia.
Country Exposure
The following table presents Chase's country exposure to Asia and Latin America.
Country disclosure is based on the Federal Financial Institutions Examination
Council ("FFIEC") guidelines governing the determination of cross-border risk.
For a further discussion of Chase's country exposure, see pages 33-34 of Chase's
1998 Annual Report.
====================================================================================================================================
Selected Country Exposure (a)
At March 31, 1999 At Dec 31, 1998
--------------------------------------------------------------------------- -----------------------
Gross Net Country Related Country
Lending- Trading- Local Less Cross-Border Resale Net Related
(in billions) Related Related Country Local Exposure Agreements Cross-Border Resale
(b) (c) Assets Funding (a) (a) Exposure Agreements
------- ------- ------- ----- -------- ---------- ------------ ----------
LATIN AMERICA
Brazil $1.4 $0.3 $1.2 $(0.7) $2.2 $1.0 $2.3 $0.9
Argentina 2.0 0.4 0.3 (0.2) 2.5 0.6 2.3 0.5
Mexico 1.2 0.5 0.4 (0.2) 1.9 0.6 1.8 0.4
Chile 0.9 -- 0.2 (0.2) 0.9 -- 0.9 --
Colombia 0.8 -- -- -- 0.8 -- 0.8 --
Venezuela 0.2 0.1 -- -- 0.3 -- 0.4 --
All Other Latin America (d) 0.1 0.2 0.7 (0.7) 0.3 0.1 1.0 --
---- ---- ---- ----- ---- ---- ---- ----
Total Latin America $6.6 $1.5 $2.8 $(2.0) $8.9 $2.3 $9.5 $1.8
==== ==== ==== ===== ==== ==== ==== ====
ASIAN IMF COUNTRIES
South Korea $0.9 $0.3 $1.1 $(0.4) $1.9 $0.1 $2.4 $ --
Indonesia 1.0 0.1 0.1 (0.1) 1.1 -- 1.2 --
Thailand 0.1 0.1 0.9 (0.2) 0.9 -- 0.9 --
---- ---- ---- ----- ---- ---- ---- ----
Subtotal 2.0 0.5 2.1 (0.7) 3.9 0.1 4.5 --
OTHER EMERGING ASIA
Hong Kong 0.5 0.2 5.0 (5.0) 0.7 -- 0.8 --
Singapore 0.7 0.1 0.4 (0.4) 0.8 -- 0.8 --
Philippines 0.2 -- 0.3 (0.1) 0.4 -- 0.6 --
Malaysia 0.2 -- 0.6 (0.1) 0.7 -- 0.6 --
China 0.5 0.1 0.3 (0.2) 0.7 -- 0.6 --
All Other Asia 0.4 -- 0.3 (0.1) 0.6 -- 0.5 --
---- ---- ---- ----- ---- ---- ---- ----
Total Asia excluding Japan,
Australia and New Zealand $4.5 $0.9 $9.0 $(6.6) $7.8 $0.1 $8.4 $--
==== ==== ==== ===== ==== ==== ==== ====
Japan $3.1 $2.4 $2.0 $(2.0) $5.5 $0.5 $5.2 $1.7
Australia 0.4 0.5 2.3 (1.6) 1.6 -- 1.9 --
New Zealand 0.6 -- -- -- 0.6 -- 0.6 --
---- ---- ---- ----- ---- ---- ---- ----
Total Japan, Australia
and New Zealand $4.1 $2.9 $4.3 $(3.6) $7.7 $0.5 $7.7 $1.7
==== ==== ==== ===== ==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Country exposure is based on the FFIEC guidelines governing the
determination of cross-border risk. Under FFIEC guidelines, resale
agreements are reported by the country of the issuer of the underlying
security. Chase, however, does not consider the cross border risk of
resale agreements to depend upon the country of the issuer of the
underlying security and as a result, has presented these amounts
separately in the above table.
(b) Includes loans and accrued interest, interest-bearing deposits with banks,
acceptances, other monetary assets, issued letters of credit and undrawn
commitments to extend credit.
(c) Includes cross-border trading debt and equity instruments and the
mark-to-market exposure of foreign exchange and derivative contracts. The
amounts associated with foreign exchange and derivative contracts are
presented after taking into account the impact of legally enforceable
master netting agreements.
(d) Excludes Bermuda and Cayman Islands.
================================================================================
-26-
27
At March 31, 1999, Chase had approximately $97 million in lending and trading
related exposure to Russia. Chase also had approximately $83 million in resale
agreements with non-Russian counterparties collateralized by non-ruble
denominated Russian debt.
Chase significantly reduced its exposure to emerging markets in Asia and Latin
America from a year ago (by 35% and 20%, respectively) and further lowered its
exposure to Asia from year-end (by 6%). Total nonperforming assets in Asia
increased by $27 million from 1998 year-end to $528 million at March 31, 1999.
Asian commercial net charge-offs for the 1999 first quarter were $59 million,
compared with $92 million, including derivatives, in 1998. There were no
charge-offs for Latin American commercial loans during the 1999 first quarter.
Chase's management has recently completed a strategic review of its cross-border
activities. As a result of that review, management believes that Chase's current
levels of cross-border exposure reflect appropriate levels of business, market,
credit and capital risk in light of Chase's cross-border business activities
and, accordingly, management currently does not expect there will be significant
changes in Chase's cross-border exposures over the balance of 1999.
Derivative and Foreign Exchange Contracts
For a discussion of the derivative and foreign exchange contracts utilized in
connection with Chase's trading and ALM activities, see pages 34-35 and Notes
One and Nineteen of Chase's 1998 Annual Report. Chase's counterparties in
derivatives and foreign exchange are primarily investment grade financial
institutions, most of which are dealers in these products. The following table
provides the remaining maturities of derivative and foreign exchange contracts
outstanding at March 31, 1999 and December 31, 1998. The lengthening of the
maturity profile since year-end is the result of the improved creditworthiness
of Chase over the last several years (as evidenced by credit rating upgrades)
and the maturation of the derivatives market where longer maturities are
becoming more commonplace.
====================================================================================================================================
At March 31, 1999 At December 31, 1998
---------------------------------------------- ----------------------------------------------
Interest Foreign Equity, Interest Foreign Equity,
Rate Exchange Commodity and Rate Exchange Commodity and
Contracts Contracts Other Contracts Total Contracts Contracts Other Contracts Total
--------- --------- --------------- ----- --------- --------- --------------- -----
Less than 1 year 15% 92% 27% 32% 15% 93% 38% 37%
1 to 5 years 51 5 70 42 48 5 59 37
Over 5 years 34 3 3 26 37 2 3 26
--- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
====================================================================================================================================
Chase had no net charge-offs arising from derivative and foreign exchange
transactions in the 1999 first quarter compared with $12 million for the same
1998 period. At March 31, 1999, nonperforming derivative contracts were $32
million, compared with $50 million at December 31, 1998. The decreases in both
net charge-offs and nonperforming derivative contracts were due to the
stabilizing of financial conditions in Asia since the 1998 fourth quarter.
-27-
28
Allowance for Credit Losses
The following discussion of Chase's allowance for credit losses focuses
primarily on developments since December 31, 1998 and should be read in
conjunction with page 35 and Notes One and Five of Chase's 1998 Annual Report.
======================================================================================
First Quarter
------------------------
(in millions, except ratios) 1999 1998
--------- ---------
Allowance for Loan Losses at Beginning of Period $ 3,552 $ 3,624
Provision for Loan Losses 381 332
Charge-Offs (452) (407)
Recoveries 72 75
------- -------
Net Charge-Offs (380) (332)
Other (1) (2)
------- -------
Allowance for Loan Losses at End of Period $ 3,552 $ 3,622
======= =======
- --------------------------------------------------------------------------------------
March 31, March 31,
Allowance for Credit Losses: 1999 1998
--------- ---------
Loans $ 3,552 $ 3,622
Risk Management Instruments 150(a) 75
Lending-Related Commitments 170 170
------- -------
Aggregate Allowance $ 3,872 $ 3,867
======= =======
- --------------------------------------------------------------------------------------
Allowance for Loan Losses to:
Nonperforming Loans 234% 311%
Loans at Period-End 2.05 2.16
Average Loans 2.05 2.12
- --------------------------------------------------------------------------------------
Aggregate Allowance for Loan Losses and
Risk Management Instrument Credit Losses to:
Nonperforming Credit-Related Assets 239% 307%
Credit-Related Assets at Period-End 1.84 1.82
Average Credit-Related Assets 1.82 1.75
- --------------------------------------------------------------------------------------
(a) During the third quarter of 1998, as part of the trading valuation
process, the allowance for risk management instrument credit losses was
increased by $75 million through the provision for credit losses, in
response to the adverse market conditions in Asia and Russia.
================================================================================
Chase deems its allowance for credit losses at March 31, 1999 to be adequate
(i.e., sufficient to absorb losses that may currently exist for all credit
activities, but are not yet identifiable). Estimating losses is inherently
uncertain and depends on many factors, including general macroeconomic and
political conditions, rating migration, structural changes within industries
which alter competitive positions, event risk, unexpected correlations within
the portfolio, and other external factors such as legal and regulatory
requirements. Chase periodically reviews such factors and reassesses the
adequacy of the allowance for credit losses.
-28-
29
- --------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following discussion of Chase's market risk management focuses primarily on
developments since December 31, 1998 and should be read in conjunction with
pages 36-39 and Notes One and Nineteen of Chase's 1998 Annual Report.
The total VAR for Chase's trading portfolio, market risk-related ALM portfolio,
and aggregate portfolio as of and for the twelve-month period ended March 31,
1999 were as follows:
====================================================================================================================================
Marked-to-Market Trading Portfolio Market Risk-Related ALM Activities
-------------------------------------- ------------------------------------------
Twelve-Month Period Twelve-Month Period
Ended March 31, 1999 Ended March 31, 1999
------------------------------ At ------------------------------- At
March 31, March 31,
Average Minimum Maximum 1999 Average Minimum Maximum 1999
(in millions) VAR VAR VAR VAR VAR VAR VAR VAR
----- ----- ----- ----- ----- ----- ----- -----
Interest Rate VAR $21.9 $10.7 $36.8 $15.5 $61.1 $37.3 $94.0 $74.3
Foreign Exchange VAR 8.4 2.2 21.6 9.6 -- -- -- --
Commodities VAR 3.4 1.9 5.0 3.8 -- -- -- --
Equities VAR 4.3 1.9 10.1 8.8 -- -- -- --
Less:
Portfolio Diversification (13.2) NM NM (18.9) -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total VAR $24.8 $12.3 $44.9 $18.8 $61.1 $37.3 $94.0 $74.3
===== ===== ===== ===== ===== ===== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate Portfolio
----------------------------------------------------------------------
Average VAR
Twelve-Month Period Ended VAR at
-------------------------------- ---------------------------------
March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998
-------------- -------------- -------------- --------------
Marked-to-Market Trading Portfolio $24.8 $23.1 $18.8 $20.5
Market Risk-Related ALM Activities 61.1 50.6 74.3 46.2
Less: Portfolio Diversification (21.9) (17.4) (16.6) (18.1)
----- ----- ----- -----
Aggregate VAR $64.0 $56.3 $76.5 $48.6
===== ===== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------
NM: Because the minimum and maximum VARs may occur on different days for
different risk components, it is not meaningful to compute a portfolio
diversification effect.
================================================================================
Chase's average aggregate VAR (VAR for both trading and ALM activities) for the
twelve-month period ended March 31, 1999 was $64.0 million and at March 31, 1999
was $76.5 million. Chase's aggregate average and period-end VARs are less than
the sum of the respective trading and ALM VARs shown in the above table (by
$21.9 million and $16.6 million, respectively) due to risk offsets, resulting
from portfolio diversification which occurs across the trading and ALM
portfolios.
Chase conducts daily VAR backtesting for both regulatory compliance with the
Basle Committee on Banking Supervision market risk capital rules and for
internal evaluation of VAR against trading revenues. For mark-to-market
activities, there were 2 days during the twelve months ended March 31, 1999 in
which a daily trading loss exceeded that day's VAR. These losses occurred during
the third quarter of 1998 and resulted from the adverse market conditions in
effect at that time.
The following chart contains a histogram of Chase's daily market risk-related
revenue, which is defined as the daily change in value of mark-to-market trading
portfolios plus any trading-related net interest income or other revenue. Based
on actual trading results for the twelve months ended March 31, 1999, Chase
posted positive daily market risk-related revenue for 226 out of 259 business
trading days, with 56 business days exceeding positive $20 million. Chase
incurred six daily trading losses in excess of negative $20 million over the
past twelve months. Five of the six daily trading losses occurred in the 1998
third quarter and resulted from the adverse global market conditions of that
period.
-29-
30
[Graphic of Daily Changes in Market Risk-Related Revenue - See Appendix I]
Asset/Liability Management
Measuring Interest Rate Sensitivity: As noted in the 1998 Annual Report,
oversight of Chase's ALM interest rate risk and Market Risk Management functions
was consolidated under the Market Risk Committee at the beginning of 1999. At
that time, Chase began to extend the market risk procedures and measurements
utilized for its trading and investment portfolios to its ALM activities.
Chase, as part of its ALM process, employs a variety of instruments, including
securities and derivatives in managing its exposure to fluctuations in interest
rates. In the past, Chase has presented its market risk exposure in the form of
an aggregate net gap position. In net gap analysis, assets, liabilities and
derivative instruments are placed in gap intervals based on their repricing
dates. For a more complete discussion of gap analysis, see page 38 of the 1998
Annual Report. Although gap analysis is a widely used representation of interest
rate risk, it is limited in that it does not include the impact of factors such
as basis risk. Basis risk results from the fact that assets may be repriced on a
different interest rate index than liabilities (for instance, LIBOR vs. prime
rate repricing). In addition, the position risk presented in gap analysis cannot
reveal the impact of other factors, such as pricing strategies on consumer and
business deposits or changes in balance sheet mix, on Chase's earnings or
economic value.
In order to improve its management of interest rate exposure and as part of the
convergence of the ALM and market risk management processes, Chase implemented
during the first quarter of 1999 a new measure to estimate the potential change
in value to Chase's ALM portfolio as a result of changes in interest rates. This
new measure is used in conjunction with existing earnings simulation measures.
The new measure, which is called "Basis Point Value" (BPV), quantifies the
change in the value of Chase's non-trading on- and off- balance sheet positions
that would result from a 1 basis point change in interest rates. This same
measure is also used to quantify the economic value sensitivity of the
non-trading on- and off- balance sheet positions to basis risk.
At March 31, 1999, Chase had a BPV value of $4.0 million (pre-tax), indicating
that the economic value of Chase's non-trading on- and off- balance sheet
positions would decline $4.0 million for every 1 basis point increase in
interest rates, assuming all rates moved in parallel together. This compares
with a BPV of $6.4 million at December 31, 1998. The BPV measure is generally
"symmetrical"; that is, a 1 basis point decrease in interest rates at March 31,
1999 would result in a $4.0 million (pre-tax) increase in Chase's economic
value. The BPV measure includes exposure to U.S. dollar interest rates as well
as exposure to non-U.S. dollar interest rates in currency markets in which Chase
does business. Since U.S. dollar interest rates and non-U.S. dollar interest
rates may not move in tandem, the reported BPV value may not represent the
actual change in economic value of Chases' ALM portfolio.
-30-
31
At March 31, 1999, based on Chase's simulation models and applying immediate
increases to various market interest rates, earnings at risk over the next
twelve months are estimated to be approximately 3% of projected 1999 net income.
Chase's earnings at risk to an immediate rise in interest rates was on average
less than 4% of projected net income for 1998. The hypothetical rate shocks are
used to calculate risk that Chase believes to be reasonably possible of
occurring in the near term, but these scenarios do not necessarily represent
management's current view of future market interest rate developments.
Impact of ALM Derivative Activity:
The following table reflects the deferred gains/losses on closed derivative
contracts and unrecognized gains/losses on open derivative contracts utilized in
Chase's ALM activities at March 31, 1999 and December 31, 1998.
================================================================================
March 31, December 31,
(in millions) 1999 1998 Change
-------- ----------- ------
ALM Derivative Contracts:
Net Deferred Gains $431 $402 $ 29
Net Unrecognized Gains (a) 11 110 (99)
---- ---- ----
Net ALM Derivative Gains $442 $512 $(70)
==== ==== ====
- --------------------------------------------------------------------------------
(a) These net unrecognized gains/(losses) do not include the net
unfavorable/(favorable) impact from the assets/liabilities being hedged by
these derivative contracts.
================================================================================
- --------------------------------------------------------------------------------
LIQUIDITY RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following liquidity and capital discussion should be read in conjunction
with the Liquidity Risk Management section on pages 40-41 and Note Eighteen of
Chase's 1998 Annual Report.
Liquidity
During the first quarter of 1999, Chase issued $1.1 billion of long-term debt,
offsetting $950 million of long-term debt that matured and $127 million that was
redeemed.
Capital
Chase's capital levels at March 31, 1999 remained strong, with capital ratios
well in excess of regulatory guidelines. At March 31, 1999, the Tier 1 and Total
Capital ratios were 8.4% and 12.2%, respectively, and the Tier 1 leverage ratio
was 6.6%.
Management believes a reasonable long-term growth rate for balance sheet assets
is approximately 6% - 7%. However, management anticipates that growth in balance
sheet assets in the near term will be below these levels as a result of
continued focus on removing non-positive SVA assets from the balance sheet. In
the 1999 first quarter, the Tier 1 capital ratio increased from year-end 1998,
notwithstanding net equity purchases during the quarter of approximately $885
million. Management intends to continue Chase's disciplined approach to asset
growth utilizing SVA. Management's current intention is to target a Tier 1 ratio
in the range of 8% to 8.25% over the long term, recognizing that the Tier 1
ratio may be outside that range from time to time, as it was at the end of the
first quarter of 1999. Capital generated in excess of this target ratio will be
used to purchase Chase common stock or for future reinvestment and acquisition
opportunities.
The following table shows the sources and uses of Chase's free cash flow.
- --------------------------------------------------------------------------------
First Quarter
------------------
(in billions) 1999 1998
---- ----
Sources of Free Cash Flow
Reported Earnings $1.2 $0.7
Less: Dividends (0.4) (0.3)
Capital for Internal Growth 0.2 0.4
---- ----
Total Sources of Free Cash Flow $1.0 $0.8
==== ====
Uses of Free Cash Flow
Increases in Capital Ratios $0.1 $0.4
Acquisitions -- 0.3
Net Repurchases (Issuances) 0.9 (0.3)
Preferred Stock Redemption -- 0.4
---- ----
Total Uses of Free Cash Flow $1.0 $0.8
==== ====
================================================================================
-31-
32
In the first quarter of 1999, Chase raised the cash dividend on its common stock
to $.41 per share from $.36 per share. Chase has over the past several years
been paying a common stock dividend that has generally been equal to
approximately 25% to 35% of Chase's operating net income, less preferred stock
dividends. Chase's future dividend policies will be determined by its Board of
Directors taking into consideration Chase's earnings and financial condition and
applicable governmental regulation and policies.
Under a new repurchase program, effective January 4, 1999, Chase may repurchase
up to $3 billion of its common stock in the open market or through negotiated
transactions, in addition to any amounts that may need to be purchased to
provide for issuances under Chase's dividend reinvestment plan and its various
stock-based employee benefit plans. As of March 31, 1999, Chase repurchased
net $885 million.
At March 31, 1999, the total capitalization of Chase (the sum of Tier 1 and Tier
2 capital) was $34.9 billion, an increase of $114 million from December 31,
1998. This increase reflects retained earnings (net income less common and
preferred dividends) generated during the period and new debt issuances
qualifying as Tier 2 capital, partially offset by common stock repurchases.
- --------------------------------------------------------------------------------
OPERATING RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following discussion of Chase's operating risk management focuses primarily
on developments since December 31, 1998.
Year 2000: Chase's Year 2000 efforts, including a description of each of the
items listed in the table below, are discussed on pages 41-42 of Chase's 1998
Annual Report. The information below updates Chase's Year 2000 disclosures.
During the 1999 first quarter, Chase continued to make progress on its Year 2000
remediated and testing efforts. The following table sets forth Chase's progress
in the first quarter, as compared with its forecast as reported in the 1998
Annual Report, and its forecast of progress for June 30, 1999.
- ---------------------------------------------------------------------------------------------------------
% Remediated at March 31, 1999
-------------------------------
Forecasted Actual Projected for June 30, 1999
---------- ------ ---------------------------
Type of System
Technical Infrastructure 100% 100% (a) 100% (b)
Business Software Applications 98% 99% (c) 100% (b)
Facility Systems 92% 93% 100% (b)
Desktop Systems 69% 80% 100% (b)
- ---------------------------------------------------------------------------------------------------------
(a) The actual percent remediated is 99.7%.
(b) While activities are scheduled to be completed by the dates indicated,
efforts will continue around external testing and certification throughout
the year.
(c) For Business Software Applications, of the 99% of the systems remediated,
95% have also been tested to be Year 2000 compliant. For the remaining
types of systems listed in the table, the percent remediated also
indicates the percent tested to be Year 2000 compliant.
================================================================================
As remediation of systems is completed, attention is being directed to ensuring
that those software application systems that have been remediated, tested and
certified as Year 2000-compliant remain compliant. This entails continued
re-certification of systems throughout the remainder of the year. In addition,
Chase is increasing its tracking and risk management of third party providers.
Another major focus of 1999 will be continued customer and "street" (i.e.,
industry-wide) testing. Chase expects to participate in industry tests as they
are scheduled throughout 1999. As just one example, in the second weekend of
June, the Federal Reserve Board, The New York Clearing House and the Society for
Worldwide Interbank Financial Telecommunication will conduct a cross-border test
of the major global payments systems. Testing with third parties is critical,
since a failure of a major external interface could have a material adverse
effect on Chase's operations.
-32-
33
Chase's Year 2000 testing methods include a technique for future date
simulation, testing in the isolated environments of time machines, and the
selected use of independent validation and verification. Time machines are
computer configurations created to allow systems to be tested in an environment
where the system clock has been set to a date in the future. These environments
allow the operation of all system components together to confirm they will
interact and operate properly before, through, and after the century date
change. Independent validation and verification is a means of uncovering
potential Year 2000 errors in remediated code that may have been missed in
testing. Independent systems analysts, utilizing sophisticated Year 2000 code
analytic tools, have been contracted by Chase to identify remaining potential
Year 2000 errors for a majority of Chase's internal mission-critical software
applications. If any are found, the affected programs will be corrected
immediately and retested.
Chase's Business Risk Council, established January 1, 1999, has also been active
during the 1999 first quarter in identifying potential business risks and
coordinating business planning and readiness efforts related to the Year 2000.
The Council's focus this quarter has been on: business continuity and
contingency planning; procedures for early identification of any operational,
credit, liquidity, market or legal risks that may arise as a result of the Year
2000; and communication plans that will enable appropriate business units to
coordinate their contingency efforts.
At March 31, 1999, Chase's cost estimate to remediate its Year 2000 issues
remains at approximately $363 million. This includes costs incurred during 1997
and 1998 as well as costs expected to be incurred during 1999. Chase currently
estimates that full year 1999 Year 2000 costs will be approximately $127
million. Chase's Year 2000 cost estimate includes remediation, testing, third
party assessment, and contingency planning, but do not include approximately $33
million of depreciation costs for Year 2000-compliant equipment that will be
expensed beyond December 31, 1999.
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 1-4 of Chase's 1998 Annual Report.
Dividends
Chase's bank subsidiaries could, without the approval of their relevant banking
regulators, pay dividends to their respective bank holding companies in amounts
up to the limitations imposed upon such banks by regulatory restrictions. These
dividend limitations, in the aggregate, totaled approximately $2.9 billion at
March 31, 1999.
- --------------------------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
- --------------------------------------------------------------------------------
Derivatives
In June 1998, the FASB issued SFAS 133, which establishes accounting and
reporting standards for all derivative instruments, including certain derivative
instruments embedded in other financial instruments (collectively referred to as
derivatives), and for hedging activities. SFAS 133 requires that an entity
measure all derivatives at fair value and recognize those derivatives as either
assets or liabilities in the balance sheet. The change in a derivative's fair
value is generally recognized in current period earnings. However, if certain
conditions are met, a derivative may be specifically designated as a hedge of an
exposure to changes in fair value, variability of cash flows, or certain foreign
currency exposures. Based on the hedge designation, special hedge accounting
rules allow the derivative's change in value to be recognized either in current
period earnings together with the offsetting change in value of the risk being
hedged, or, to the extent the hedge is effective, in comprehensive income and
subsequently reclassified into earnings when the hedged item affects earnings.
SFAS 133 is effective for all fiscal years beginning after June 15, 1999
(calendar year 2000), with early adoption permitted. Chase already recognizes
the derivatives used in its trading activities on its balance sheet at fair
value with changes in the fair values of such derivatives included in earnings.
This represents the substantial majority of the derivatives utilized by Chase.
With respect to those other derivatives used as hedges of its assets,
liabilities and commitments, Chase is assessing the impact of the adoption of
SFAS 133 on its hedging activities and its effect on its financial condition and
operating performance.
-33-
34
================================================================================
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(in millions, except per share data and ratios)
1999 1998
------- -----------------------------------------------------
First Over(Under) Fourth Third Second First
Quarter 1Qtr98 Quarter Quarter Quarter Quarter
------- ------ ------- ------- ------- -------
AS REPORTED BASIS
Revenue $ 5,144 11% $ 5,060 $ 4,218 $ 4,755 $ 4,623
Noninterest Expense
(excluding Restructuring Costs) 2,945 12 2,873 2,647 2,714 2,620
Restructuring Costs -- NM -- -- 8 521
Provision for Loan Losses 381 15 411 272 328 332
Net Income $ 1,173 62 $ 1,146 $ 837 $ 1,074 $ 725
Net Income Per Common Share:
Basic $ 1.37 67 $ 1.34 $ 0.96 $ 1.24 $ 0.82
Diluted 1.32 65 1.31 0.94 1.20 0.80
Cash Dividends Declared 0.41 14 0.36 0.36 0.36 0.36
Book Value at Period End 26.32 8 26.90 26.24 25.14 24.27
Share Price at Period End 81.38 21 71.00 43.13 75.50 67.44
Performance Ratios:
Return on Average Common Equity (a) 20.6% 680 bp 20.1% 14.9% 20.1% 13.8%
Return on Average Assets (a) 1.30 52 1.20 0.92 1.15 0.78
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING BASIS (b)
Operating Revenue $ 5,413 10% $ 5,350 $ 4,508 $ 5,051 $ 4,915
Operating Noninterest Expense 2,940 12 2,870 2,614 2,712 2,616
Credit Costs (c) 655 4 704 749 626 628
Operating Earnings $ 1,173 11 $ 1,146 $ 738 $ 1,079 $ 1,053
Operating Earnings Per Common Share:
Basic $ 1.37 13 $ 1.34 $ 0.84 $ 1.24 $ 1.21
Diluted 1.32 13 1.31 0.82 1.21 1.17
Operating Performance Ratios:
Return on Average Common Equity (a) 20.6% 30 bp 20.1% 13.1% 20.2% 20.3%
Return on Average Managed Assets (a) 1.24 16 1.15 0.77 1.10 1.08
Common Dividend Payout Ratio 30 -- 27 42 29 30
Efficiency Ratio 54 100 52 58 53 53
Cash Operating Basis:
Cash Operating Earnings (d) $ 1,246 12% $ 1,219 $ 801 $ 1,143 $ 1,114
Diluted Net Income Per Common Share 1.41 13 1.39 0.89 1.28 1.25
Shareholder Value Added (SVA) 501 17 470 68 440 428
Cash Return on Average Common Equity (a) 21.9% 40 bp 21.4% 14.3% 21.4% 21.5%
Selected Balance Sheet Items: (e)
Managed Loans $191,231 3% $190,787 $185,544 $186,924 $186,067
Total Managed Assets 379,640 (1) 383,908 375,422 385,214 383,838
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Based on annualized amounts.
(b) Excludes the impact of credit card securitizations, restructuring costs
and special items. See Glossary of Terms on page 37.
(c) Includes provision for loan losses, provision for risk management
instrument credit losses, foreclosed property expenses and credit costs
related to the securitized credit card portfolio.
(d) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain intangibles.
(e) Excludes the impact of credit card securitizations.
bp - Denotes basis points; 100 bp equals 1%
NM - Not meaningful
================================================================================
-34-
35
The Chase Manhattan Corporation
Average Consolidated Balance Sheet, Interest and Rates
(Taxable-Equivalent Interest and Rates; in millions)
Three months Ended Three months Ended
March 31, 1999 March 31, 1998
-------------------------------------- -----------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
Deposits with Banks $ 6,956 $ 184 10.74% $ 4,180 $ 152 14.78%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 27,096 381 5.70% 37,882 671 7.19%
Trading Assets-Debt and Equity
Instruments 24,727 418 6.86% 33,310 676 8.24%
Securities:
Available-for-Sale 57,645 816 5.74% (b) 52,750 848 6.52% (b)
Held-to-Maturity 1,487 23 6.19% 2,837 46 6.63%
Loans 172,918 3,209 7.53% 170,491 3,405 8.10%
--------- ------ --------- ------
Total Interest-Earning Assets 290,829 5,031 7.02% 301,450 5,798 7.80%
Allowance for Loan Losses (3,489) (3,558)
Cash and Due from Banks 15,929 14,173
Trading Assets Risk
Management Instruments 29,459 39,369
Other Assets 34,201 26,158
--------- ---------
Total Assets $ 366,929 $ 377,592
========= =========
LIABILITIES
Domestic Retail Deposits $ 61,220 510 3.38% $ 58,934 572 3.95%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 22,442 201 3.63% 15,441 187 4.89%
Deposits in Foreign Offices 79,313 887 4.54% 76,935 1,056 5.56%
--------- ------ --------- ------
Total Time and Savings
Deposits 162,975 1,598 3.98% 151,310 1,815 4.86%
--------- ------ --------- ------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 50,945 569 4.53% 68,259 947 5.63%
Commercial Paper 5,264 60 4.65% 4,134 54 5.30%
Other Borrowings (c) 13,352 285 8.65% 17,482 508 11.79%
--------- ------ --------- ------
Total Short-Term and
Other Borrowings 69,561 914 5.33% 89,875 1,509 6.81%
Long-Term Debt 18,686 311 6.75% 15,707 305 7.88%
--------- ------ --------- ------
Total Interest-Bearing Liabilities 251,222 2,823 4.56% 256,892 3,629 5.73%
--------- ------ --------- ------
Noninterest-Bearing Deposits 47,980 44,566
Trading Liabilities Risk
Management Instruments 29,187 39,077
Other Liabilities 14,270 14,478
--------- ---------
Total Liabilities 342,659 355,013
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,028 1,680
Common Stockholders' Equity 22,692 20,349
--------- ---------
Total Stockholders' Equity 23,720 22,029
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 366,929 $ 377,592
========= =========
INTEREST RATE SPREAD 2.46% 2.07%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $2,208 (a) 3.08% $2,169 (a) 2.92%
====== ===== ====== =====
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the three months ended March 31, 1999 and March 31, 1998, the
annualized rate for available-for-sale securities based on historical cost
was 5.76% and 6.55%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-35-
36
THE CHASE MANHATTAN CORPORATION
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1999 1998
------- ----------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Interest Income
Loans $ 3,209 $ 3,381 $ 3,287 $ 3,316 $ 3,405
Securities 835 964 874 889
889
Trading Assets 418 435 604 716 676
Federal Funds Sold and Securities
Purchased Under Resale Agreements 381 469 517 554 671
Deposits with Banks 184 192 150 148 152
------- ------- ------- ------- -------
Total Interest Income 5,027 5,441 5,432 5,623 5,793
------- ------- ------- ------- -------
Interest Expense
Deposits 1,598 1,717 1,524 1,784 1,815
Short-Term and Other Borrowings 914 1,247 1,378 1,478 1,509
Long-Term Debt 311 317 324 325 305
------- ------- ------- ------- -------
Total Interest Expense 2,823 3,281 3,226 3,587 3,629
------- ------- ------- ------- -------
Net Interest Income 2,204 2,160 2,206 2,036 2,164
Provision for Loan Losses 381 411 272 328 332
------- ------- ------- ------- -------
Net Interest Income After
Provision For Loan Losses 1,823 1,749 1,934 1,708 1,832
------- ------- ------- ------- -------
Noninterest Revenue
Investment Banking Fees 317 381 322 438 361
Trust, Custody and Investment
Management Fees 414 414 398 383 348
Credit Card Revenue 379 428 381 365 300
Fees for Other Financial Services 553 552 522 509 510
Trading Revenue 618 522 114 333 480
Provision for Risk Management
Instrument Credit Losses -- (6) (183) (10) (12)
Securities Gains 156 167 261 98 83
Private Equity Gains 325 244 60 370 293
Other Revenue 178 198 137 233 96
------- ------- ------- ------- -------
Total Noninterest Revenue 2,940 2,900 2,012 2,719 2,459
------- ------- ------- ------- -------
Noninterest Expense
Salaries 1,384 1,296 1,205 1,270 1,254
Employee Benefits 255 194 221 215 224
Occupancy Expense 218 220 198 191 189
Equipment Expense 243 250 219 212 209
Restructuring Costs -- -- -- 8 521
Other Expense 845 913 804 826 744
------- ------- ------- ------- -------
Total Noninterest Expense 2,945 2,873 2,647 2,722 3,141
------- ------- ------- ------- -------
Income Before Income Tax Expense 1,818 1,776 1,299 1,705 1,150
Income Tax Expense 645 630 462 631 425
------- ------- ------- ------- -------
Net Income $ 1,173 $ 1,146 $ 837 $ 1,074 $ 725
======= ======= ======= ======= =======
Net Income Applicable To
Common Stock $ 1,155 $ 1,128 $ 815 $ 1,050 $ 691
======= ======= ======= ======= =======
Net Income Per Common Share:
Basic $ 1.37 $ 1.34 $ 0.96 $ 1.24 $ 0.82
======= ======= ======= ======= =======
Diluted $ 1.32 $ 1.31 $ 0.94 $ 1.20 $ 0.80
-36-
37
- --------------------------------------------------------------------------------
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
The page numbers included after each definition represent the pages in this Form
10-Q where the term is primarily used.
1998 Annual Report: Annual Report on Form 10-K for the year ended December 31,
1998. (Pages 7-12, 18, 20, 24, 26-33, 38, 41)
Asset/Liability Management ("ALM"): The management of the sensitivity of Chase's
income to changes in market interest rates. (Pages 8, 9, 29-31)
BPV: Basis Point Value. This measurement quantifies the change in the value of
Chase's non-trading balance sheet positions (interest rate risk) that would
result from a 1 basis point change in interest rates. (Page 30)
Cash Operating Earnings: Operating earnings excluding the impact of amortization
of goodwill and certain intangibles. (Pages 10, 12-16, 34)
Chase Texas: Chase Bank of Texas, National Association. (Pages 9, 13, 15)
Chase USA: Chase Manhattan Bank USA, National Association. (Page 9)
Derivative and Foreign Exchange ("FX") Contracts: Interest rate swaps, forward
rate agreements, futures, forwards, options, debt, equity, commodity and other
contracts used for asset/liability management or trading purposes. The
instruments represent contracts with counterparties where payments are made to
or from the counterparty based upon specific interest rates, currency levels,
other market rates, or on terms predetermined by the contract. (Pages 9, 24-25,
27)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding restructuring costs,
foreclosed property expense, provision for risk management instrument credit
losses, special items and costs associated with the REIT). (Pages 11-13, 15, 21,
34)
FASB: Financial Accounting Standards Board. (Page 33)
Managed Credit Card Receivables or Managed Basis: Consistent with industry
practice, Chase uses this terminology to define its credit card receivables on
the balance sheet plus securitized credit card receivables. (Page 19, 25, 34)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Pages 19, 35)
Operating Basis or Operating Earnings: Reported results excluding the impact of
credit card securitizations, restructuring costs and special items. (Pages
10-12, 16-17, 21, 34)
REIT: A real estate investment trust subsidiary of Chase. (Pages 21, 22)
SFAS: Statement of Financial Accounting Standards.
SFAS 107: "Disclosures about Fair Value of Financial Instruments." (Page 8)
SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities."
(Pages 7-9)
SFAS 131: "Disclosure about Segments of an Enterprise and Related Information."
(Page 10)
SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Page
33)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
amortization of goodwill and certain intangibles (i.e., cash operating earnings)
minus preferred dividends and an explicit charge for capital. (Pages 10-16, 31,
34)
Special Items: There were no special items in the 1999 or 1998 first quarter.
(Pages 10, 17, 21, 34)
Value-at-Risk ("VAR"): The potential overnight loss from adverse market
movements. (Page 29)
Year 2000: The problem of many existing computer programs not being able to
recognize properly a year beginning with "20" instead of "19", as these programs
only use the last two digits to refer to a year. (Pages 16, 22, 32-33)
-37-
38
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of Legal Proceedings, see Chase's 1998 Annual
Report on page 6.
Item 2. Sales of Unregistered Common Stock
During the first quarter of 1999, shares of common stock of Chase
were issued in transactions exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof. Shares of
common stock were issued to retired executive officers who had
deferred receipt of such common stock pursuant to the Corporate
Performance Incentive Plan as follows: January 4, 1999 - 1,136
shares; and January 6, 1999 - 7,109 shares. Shares of common stock
were issued to retired directors who had deferred receipt of such
common stock pursuant to the Deferred Compensation Plan for
Non-Employee Directors as follows: January 4, 1999 - 1,078 shares.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
11 - Computation of earnings per common share.
12(a) - Computation of ratio of earnings to fixed charges.
12(b) - Computation of ratio of earnings to fixed charges and
preferred stock dividend requirements.
27 Financial Data Schedule
(B) Reports on Form 8-K:
Chase filed three reports on Form 8-K during the quarter ended March
31, 1999, as follows:
Form 8-K dated January 19, 1999: Chase announced the results of
operations for the fourth quarter of 1998.
Form 8-K dated March 16, 1999: Chase announced an increase in its
quarterly common stock dividend.
Form 8-K dated March 24, 1999: Chase announced that William B.
Harrison Jr., had been elected President and CEO succeeding Walter
V. Shipley, 63, who will continue in his capacity as Chairman of the
Board, each effective June 1, 1999. Also effective June 1, 1999,
Thomas G. Labrecque, 60, President and COO, will retire.
-38-
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
------------------------------------------
(Registrant)
Date May 17, 1999 By /s/ Joseph L. Sclafani
------------ ---------------------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-39-
40
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
- ----------- -------- ---------------------
11 Computation of earnings 41
per common share
12(a) Computation of ratio of 42
earnings to fixed charges
12(b) Computation of ratio of 43
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 44
-40-
41
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 and Results of Operations.
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------- ---- -----------
1 30 Bar Graph entitled "Histogram of Daily Changes in Market Risk-Related Revenue for
the twelve months ended March 31, 1999" presenting the following information:
Millions of Dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30
------------------- ----- ------ ------- ------- ------- -------
Number of trading
days revenue was
within the above
prescribed positive
range 33 47 54 36 29 9
30 - 35 Over 35
------- -------
8 10
Millions of Dollars 0 - (5) (5 - 10) (10 - 15) (15 - 20) (20 - 25)
------------------- ------- -------- --------- --------- ---------
Number of trading
days revenue was
within the above
prescribed negative
range 12 8 4 3 1
(25 - 30) Over (30)
--------- ---------
3 2
1
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION
Computation of earnings per common share
For a discussion of the computation of basic and diluted earnings per common
share, see Note Ten of Chase's 1998 Annual Report.
(in millions, except per share amounts) Three Months Ended
March 31,
------------------------
1999 1998
- ---------------------------------------------------------------------------------------
Basic Earnings Per Share
Earnings:
Net Income $ 1,173 $ 725
Less: Preferred Stock Dividends 18 34
--------- ---------
Net Income Applicable to Common Stock $ 1,155 $ 691
========= =========
Shares: (a)
Basic Average Common Shares Outstanding 843.6 844.8
Net Income Per Share $ 1.37 $ 0.82
========= =========
Diluted Earnings Per Share
Earnings:
Net Income Applicable to Common Stock $ 1,155 $ 691
Shares: (a)
Basic Average Common Shares Outstanding 843.6 844.8
Additional Shares Issuable Upon Exercise of Stock Options
for Dilutive Effect 28.3 22.6
--------- ---------
Average Common Shares Outstanding Assuming Dilution 871.9 867.4
Net Income Per Share $ 1.32 $ 0.80
========= =========
- ---------------------------------------------------------------------------------------
(a) Share-related data for the prior period have been restated to reflect a
two-for-one common stock split, effective as of close of business on May
20, 1998.
================================================================================
-41-
1
EXHIBIT 12(a)
THE CHASE MANHATTAN CORPORATION
Computation of ratio of earnings to fixed charges
(in millions, except ratios)
Three months Ended
March 31, 1999
------------------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 1,818
-------
Fixed charges:
Interest expense 1,225
One third of rents, net of income from subleases (a) 32
-------
Total fixed charges 1,257
-------
Less: Equity in undistributed income of affiliates (29)
-------
Earnings before taxes and fixed charges,
excluding capitalized interest $ 3,046
=======
Fixed charges, as above $ 1,257
=======
Ratio of earnings to fixed charges 2.42
=======
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 1,257
Add: Interest on deposits 1,598
-------
Total fixed charges and interest on deposits $ 2,855
=======
Earnings before taxes and fixed charges, excluding
capitalized interest, as above $ 3,046
Add: Interest on deposits 1,598
-------
Total earnings before taxes, fixed charges,
and interest on deposits $ 4,644
=======
Ratio of earnings to fixed charges 1.63
=======
================================================================================
(a) The proportion deemed representative of the interest factor.
-42-
1
EXHIBIT 12(b)
THE CHASE MANHATTAN CORPORATION
Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
(in millions, except ratios)
Three months Ended
March 31, 1999
------------------
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 1,818
-------
Fixed charges:
Interest expense 1,225
One third of rents, net of income from subleases (a) 32
-------
Total fixed charges 1,257
-------
Less: Equity in undistributed income of affiliates (29)
-------
Earnings before taxes and fixed charges,
excluding capitalized interest $ 3,046
=======
Fixed charges, as above $ 1,257
Preferred stock dividends 18
-------
Fixed charges including preferred stock dividends $ 1,275
=======
Ratio of earnings to fixed charges and
preferred stock dividend requirements 2.39
=======
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends,
as above $ 1,275
Add: Interest on deposits 1,598
-------
Total fixed charges including preferred stock
dividends and interest on deposits $ 2,873
=======
Earnings before taxes and fixed charges,
excluding capitalized interest, as above $ 3,046
Add: Interest on deposits 1,598
-------
Total earnings before taxes, fixed charges,
and interest on deposits $ 4,644
=======
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.62
=======
================================================================================
(a) The proportion deemed representative of the interest factor.
-43-
9
0000019617
THE CHASE MANHATTAN CORPORATION
1,000,000
U.S. DOLLARS
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
1
18,306
3,437
24,867
55,934
55,297
1,316
1,330
172,849
3,552
361,258
207,641
62,063
48,383
16,178
0
1,028
882
21,358
361,258
3,209
835
565
5,027
1,598
2,823
2,204
381
156
2,945
1,818
1,173
0
0
1,173
1.37
1.32
3.08
1,118
398
0
0
3,552
452
72
3,552
0
0
0
