1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1994 Commission file number 1-5805
------------- ------
CHEMICAL BANKING CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2624428
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
270 Park Avenue, New York, New York 10017
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 270-6000
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes.X.. No....
Common Stock, $1 Par Value 247,521,125
---------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of
common stock on July 31, 1994.
2
- -----------------------------------------------------------------------------
FORM 10-Q INDEX
Part I Page
------ ----
Item 1 Financial Statements - Chemical Banking
Corporation and Subsidiaries:
Consolidated Balance Sheet at June 30, 1994 and
December 31, 1993. 3
Consolidated Statement of Income for the three
months ended June 30, 1994 and June 30, 1993. 4
Consolidated Statement of Income for the
six months ended June 30, 1994 and June 30, 1993. 5
Consolidated Statement of Cash Flows for the
six months ended June 30, 1994 and June 30, 1993. 6
Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 1994
and June 30, 1993. 7
Notes to Financial Statements. 7-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-52
Part II
-------
Item 1 Legal Proceedings 53
Item 4 Submission of Matters to a Vote of Security Holders 53
Item 6 Exhibits and Reports on Form 8-K. 54
- -----------------------------------------------------------------------------
-2-
3
Part I
Item 1.
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
JUNE 30, December 31,
1994 1993
-------- ------------
ASSETS
Cash and Due from Banks $ 9,463 $ 6,852
Deposits with Banks 4,461 6,030
Federal Funds Sold and Securities
Purchased Under Resale Agreements 12,803 10,556
Trading Assets:
Debt and Equity Instruments 10,935 11,679
Risk Management Instruments 20,632 ---
Securities:
Held-to-Maturity
(Market Value: $8,679 and $10,288) 8,923 10,108
Available-for Sale 16,606 15,840
Loans (Net of Unearned
Income: $466 and $477) 74,685 75,381
Allowance for Losses (2,676) (3,020)
Premises and Equipment 2,034 1,910
Due from Customers on Acceptances 1,202 1,077
Accrued Interest Receivable 1,029 1,106
Assets Acquired as Loan Satisfactions 735 934
Other Assets 8,089 11,435
-------- --------
TOTAL ASSETS $168,921 $149,888
======== ========
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 22,066 $ 23,443
Time and Savings 47,737 51,940
Foreign 22,153 22,894
-------- --------
Total Deposits 91,956 98,277
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 20,764 12,857
Other Borrowed Funds 12,604 11,908
Acceptances Outstanding 1,205 1,099
Accounts Payable and Accrued Liabilities 1,998 2,607
Other Liabilities 20,878 3,784
Long-Term Debt 8,336 8,192
-------- --------
TOTAL LIABILITIES 157,741 138,724
-------- --------
COMMITMENTS AND CONTINGENCIES
(SEE NOTE 8)
STOCKHOLDERS' EQUITY
Preferred Stock 1,854 1,654
Common Stock (Issued 253,981,906 and
253,397,864 Shares) 254 253
Capital Surplus 6,557 6,553
Retained Earnings 2,920 2,501
Net Unrealized Gain (Loss) on Securities
Available-for-Sale, Net of Taxes (291) 215
Treasury Stock, at Cost
(3,056,217 and 515,782 Shares) (114) (12)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 11,180 11,164
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $168,921 $149,888
======== ========
The Notes to Consolidated Financial Statements are an integral part
of these Statements.
-3-
4
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA)
1994 1993
------ ------
INTEREST INCOME
Loans $1,375 $ 1,433
Securities 432 443
Trading Assets 191 103
Federal Funds Sold and Securities
Purchased Under Resale Agreements 121 80
Deposits With Banks 100 73
------- -------
Total Interest Income 2,219 2,132
------- -------
INTEREST EXPENSE
Deposits 543 569
Short-Term and Other Borrowings 359 253
Long-Term Debt 132 135
------- -------
Total Interest Expense 1,034 957
------- -------
NET INTEREST INCOME 1,185 1,175
PROVISION FOR LOSSES 160 363
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES 1,025 812
------- -------
NONINTEREST REVENUE
Trust and Investment Management Fees 108 102
Corporate Finance and Syndication Fees 93 84
Service Charges on Deposit Accounts 75 77
Fees for Other Banking Services 279 272
Trading Account and Foreign Exchange Revenues 203 298
Securities Gains 13 5
Other Revenue 96 204
------- -------
Total Noninterest Revenue 867 1,042
------- -------
NONINTEREST EXPENSE
Salaries 542 529
Employee Benefits 102 105
Occupancy Expense 140 145
Equipment Expense 91 88
Foreclosed Property Expense 2 85
Other Expense 404 360
------- -------
Total Noninterest Expense 1,281 1,312
------- -------
INCOME BEFORE INCOME TAXES 611 542
INCOME TAX EXPENSE 254 161
------- -------
NET INCOME $ 357 $ 381
======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 324 $ 341
======= =======
NET INCOME PER COMMON SHARE $ 1.28 $ 1.35
======= =======
AVERAGE COMMON SHARES OUTSTANDING 253.1 251.7
The Notes to Financial Statements are an integral part of these
Statements.
-4-
5
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA)
1994 1993
------- -------
INTEREST INCOME
Loans $2,682 $2,898
Securities 848 871
Trading Assets 364 197
Federal Funds Sold and Securities
Purchased Under Resale Agreements 221 156
Deposits With Banks 194 134
-------- --------
Total Interest Income 4,309 4,256
-------- --------
INTEREST EXPENSE
Deposits 1,063 1,162
Short-Term and Other Borrowings 651 505
Long-Term Debt 267 265
-------- --------
Total Interest Expense 1,981 1,932
-------- --------
NET INTEREST INCOME 2,328 2,324
Provision for Losses 365 675
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES 1,963 1,649
-------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 218 200
Corporate Finance and Syndication Fees 175 155
Service Charges on Deposit Accounts 144 144
Fees for Other Banking Services 569 523
Trading Account and Foreign Exchange Revenues 388 550
Securities Gains 59 75
Other Revenue 245 320
-------- --------
Total Noninterest Revenue 1,798 1,967
-------- --------
NONINTEREST EXPENSE
Salaries 1,060 1,030
Employee Benefits 221 207
Occupancy Expense 286 290
Equipment Expense 175 163
Foreclosed Property Expense 37 156
Restructuring Charge 48 43
Other Expense 778 699
-------- --------
Total Noninterest Expense 2,605 2,588
-------- --------
INCOME BEFORE INCOME TAX EXPENSE AND
EFFECT OF ACCOUNTING CHANGES 1,156 1,028
Income Tax Expense 480 308
-------- --------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGES 676 720
Net Effect of Changes in
Accounting Principles --- 35
-------- --------
NET INCOME $ 676 $ 755
======== ========
NET INCOME APPLICABLE TO COMMON STOCK $ 611 $ 676
======== ========
PER COMMON SHARE:
Income Before Effect of
Accounting Changes $ 2.41 $ 2.56
Net Effect of Changes in
Accounting Principles --- .14
-------- --------
Net Income $ 2.41 $ 2.70
======== ========
AVERAGE COMMON SHARES OUTSTANDING 253.1 250.1
The Notes to Financial Statements are an integral part of these
Statements.
-5-
6
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
1994 1993
------- -------
OPERATING ACTIVITIES
Net Income $ 676 $ 755
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Losses 365 675
Restructuring Charge 48 43
Depreciation and Amortization 146 146
Net Changes In:
Trading Related Assets 318 (4,545)
Accrued Interest Receivable 77 (32)
Accrued Interest Payable 45 138
Other, Net (444) 759
------- -------
Net Cash Provided (Used)
by Operating Activities 1,231 (2,061)
------- -------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 1,581 (1,902)
Federal Funds Sold and Securities
Purchased Under Resale Agreements (2,247) (1,532)
Loans Due to Sales and Securitizations 4,787 6,255
Other Loans (4,919) (1,950)
Other, Net (102) (296)
Proceeds from the Maturity of
Held-to-Maturity Securities 1,925 2,667
Purchases of Held-to-Maturity Securities (761) (4,885)
Proceeds from the Maturity of
Available-for-Sale Securities 1,925 448
Proceeds from the Sale of
Available-for-Sale Securities 11,252 2,016
Purchases of Available-for-Sale Securities (14,775) (1,114)
Cash Used in Acquisitions --- (333)
------- --------
Net Cash Used by Investing Activities (1,334) (626)
------- -------
FINANCING ACTIVITIES
Net Change In:
Noninterest Bearing Domestic Demand Deposits (1,374) (1,395)
Domestic Time and Savings Deposits (4,186) (1,794)
Foreign Deposits (741) 80
Federal Funds Purchased, Securities Sold Under
Repurchase Agreements and Other
Borrowed Funds 8,538 3,276
Other Liabilities 353 204
Other, Net 106 (200)
Proceeds from the Issuance of Long-Term Debt 1,215 2,611
Redemption and Maturity of Long-Term Debt (1,080) (1,214)
Proceeds from the Issuance of Common Stock 16 163
Issuance of Preferred Stock 200 387
Redemption of Preferred Stock --- (394)
Treasury Stock (56) ---
Cash Dividends Paid (257) (238)
------- -------
Net Cash Provided by Financing Activities 2,734 1,486
------- -------
Effect of Exchange Rate Changes
on Cash and Due from Banks (20) 5
------- -------
Net Increase (Decrease) in Cash
and Due from Banks 2,611 (1,196)
------- -------
Cash and Due from Banks at January 1, 6,852 8,846
------- -------
Cash and Due from Banks at June 30, $ 9,463 $7,650
======= =======
Cash Interest Paid $ 1,936 $1,794
Taxes Paid $ 564 $ 122
The Notes to Financial Statements are an integral part of these
Statements.
-6-
7
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
1994 1993
------- -------
BALANCE AT JANUARY 1, $11,164 $9,851
-------- --------
Net Income 676 755
Dividends Declared:
Preferred Stock (65) (78)
Common Stock (192) (166)
Issuance of Preferred Stock 200 400
Redemption of Preferred Stock --- (394)
Issuance of Common Stock 16 163
Restricted Stock Granted (11) ---
Net Changes in Treasury Stock (102) ---
Net Change in Fair Value of
Available-for-Sale Securities,
Net of Taxes (506) ---
Accumulated Translation Adjustment --- 2
-------- --------
Net Change in Stockholders' Equity 16 682
-------- --------
BALANCE AT JUNE 30, $11,180 $10,533
======== ========
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The unaudited financial statements of Chemical Banking Corporation
and subsidiaries (the "Corporation") are prepared in accordance with
generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim periods presented have been included. Certain
amounts in prior periods have been reclassified to conform to the current
presentation.
On January 1, 1994, the Corporation adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" ("FASI 39"), which changed the
reporting of unrealized gains and losses on interest rate and
foreign exchange contracts on the balance sheet. The Interpretation
requires that gross unrealized gains be reported as assets and gross
unrealized losses be reported as liabilities. The Interpretation,
however, permits netting of such unrealized gains and losses with
the same counterparty when master netting agreements have been
executed. The adoption of this Interpretation has resulted in an
increase of $19.0 billion in each of assets and liabilities at June
30, 1994, with unrealized gains reported as Trading Assets-Risk
Management Instruments and unrealized losses reported in Other
Liabilities. Prior to the adoption of FASI 39, unrealized gains and
losses were reported net in Other Assets.
On December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). In accordance with SFAS
115, cash flows from purchases, maturities and sales of available-
for-sale securities have been classified as cash flows from
investing activities and prior periods have been similarly
reclassified. Prior to the adoption of SFAS 115, cash flows from
these transactions were included as operating activities. See Note
3 of this Form 10-Q for further discussion.
-7-
8
Part I
Item 1. (continued)
NOTE 2 - TRADING ASSETS-DEBT AND EQUITY INSTRUMENTS
---------------------------------------------------
Trading assets-debt and equity instruments, which are measured at
fair value, are presented in the following table for the dates
indicated:
===================================================================
June 30, December 31,
(in millions) 1994 1993
-------------------------------------------------------------------
U.S. Government and Federal Agencies $ 3,739 $ 2,792
Obligations of State and
Political Subdivisions 77 604
Certificates of Deposit, Bankers'
Acceptances, and Commercial Paper 822 1,794
Debt Securities Issued by
Foreign Governments 3,391 4,025
Foreign Financial Institutions 1,834 1,496
Other (a) 1,072 968
------- -------
Total Trading Assets - Debt and
Equity Instruments $10,935 $11,679
======= =======
--------------------------------------------------------------------
[FN]
(a) Primarily includes corporate debt and eurodollar bonds.
====================================================================
NOTE 3 - SECURITIES
-------------------
On December 31, 1993, the Corporation adopted SFAS 115, which
addresses the accounting for investments in equity securities that
have readily determinable fair values and for investments in all
debt securities. Such securities are classified into three
categories and accounted for as follows: debt securities that the
Corporation has the positive intent and ability to hold to maturity
are classified as held-to-maturity and are measured at amortized
cost; debt and equity securities bought and held principally for the
purpose of selling in the near term are classified as trading
securities and are measured at fair value, with unrealized gains and
losses included in earnings; and debt and equity securities not
classified as either held-to-maturity or trading securities are
deemed available-for-sale and are measured at fair value, with
unrealized gains and losses, net of applicable taxes, reported in a
separate component of stockholders' equity.
SFAS No. 115 resulted in a net after-tax unfavorable impact of
approximately $291 million on the Corporation's stockholders' equity
at June 30, 1994, compared with a net after-tax favorable impact of
$215 million at December 31, 1993. The net change from the 1993
year-end was primarily the result of the higher interest rate
environment and the declining value of Brady Bonds (as defined in
Note 4). See Note 4 for further discussion.
-8-
9
Part I
Item 1. (continued)
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity
securities were as follows for the dates indicated:
====================================================================================================
JUNE 30, 1994 (IN MILLIONS) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- -----
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 3,545 $ 1 $ 111 $ 3,435
Collateralized Mortgage Obligations 4,266 4 139 4,131
Other, primarily U.S. Treasuries 159 --- --- 159
Obligations of State and Political
Subdivisions 32 --- --- 32
Collateralized Mortgage Obligations (b) 160 4 2 162
Other 761 3 4 760
------- ------- ------- -------
Total Held-to-Maturity Securities (c) $ 8,923 $ 12 $ 256 $ 8,679
======= ======= ======= =======
----------------------------------------------------------------------------------------------------
December 31, 1993 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
-------- ---------- ---------- -----
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 3,666 $ 132 $ --- $ 3,798
Collateralized Mortgage Obligations 5,375 45 11 5,409
Other, primarily U.S. Treasuries 101 --- --- 101
Obligations of State and Political
Subdivisions 13 1 --- 14
Collateralized Mortgage Obligations (b) 153 5 1 157
Other 800 9 --- 809
------- ------- ------- -------
Total Held-to-Maturity Securities (c) $10,108 $ 192 $ 12 $ 10,288
======= ======= ======= =======
----------------------------------------------------------------------------------------------------
(a) The Corporation's portfolio of securities generally consists of
investment grade securities. The market value of actively
traded securities is determined by the secondary market, while
the market value for non-actively traded securities is based on
independent broker quotations.
(b) Collateralized mortgage obligations of private issuers generally
have underlying collateral consisting of obligations
of U.S. Government and Federal agencies and corporations.
(c) See Note 4 for loans accounted for pursuant to SFAS 115.
====================================================================================================
-9-
10
Part I
Item 1. (continued)
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale
securities were as follows for the dates indicated:
====================================================================================================
JUNE 30, 1994 (IN MILLIONS) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- --------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 8,561 $ 402 $ 435 $ 8,528
Collateralized Mortgage Obligations 383 1 12 372
Other, primarily U.S. Treasuries 4,126 12 247 3,891
Debt Securities Issued by Foreign Governments 2,514 6 99 2,421
Corporate Debt Securities 343 15 4 354
Collateralized Mortgage Obligations (b) 361 1 3 359
Other 691 1 11 681
------- ------- ------- -------
Total Available-for-Sale Securities
Carried at Fair Value (c) $16,979 $ 438 $ 811 $ 16,606
======= ======= ======= =======
----------------------------------------------------------------------------------------------------
December 31, 1993 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
-------- ---------- ---------- -----
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 8,298 $ 349 $ 14 $ 8,633
Collateralized Mortgage Obligations 837 4 2 839
Other, primarily U.S. Treasuries 2,400 42 17 2,425
Debt Securities Issued by Foreign Governments 2,174 49 9 2,214
Corporate Debt Securities 326 11 3 334
Collateralized Mortgage Obligations (b) 618 3 1 620
Other 791 --- 16 775
------- ------- ------- -------
Total Available-for-Sale Securities
Carried at Fair Value (c) $15,444 $ 458 $ 62 $ 15,840
======= ======= ======= =======
----------------------------------------------------------------------------------------------------
(a) The Corporation's portfolio of securities generally consists of
investment grade securities. The market value of actively
traded securities is determined by the secondary market, while
the market value for non-actively traded securities is based on
independent broker quotations.
(b) Collateralized mortgage obligations of private issuers generally
have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
(c) See Note 4 for loans accounted for pursuant to SFAS 115.
====================================================================================================
NOTE 4 - LOANS
--------------
As discussed in Note 3, the Corporation adopted SFAS 115 effective
December 31, 1993. Certain loans that meet the accounting
definition of a security are classified as loans and are measured
pursuant to SFAS 115. Bonds that have been issued by foreign
governments (such as Mexico, Venezuela and Brazil) to financial
institutions, including the Corporation, as part of a debt
renegotiation (i.e. "Brady Bonds") are subject to the provisions of
SFAS 115. At June 30, 1994, $3,452 million of loans, primarily
renegotiated loans, were measured under SFAS 115, including $1,965
million of loans that are classified as held-to-maturity and that
are carried at amortized cost. Pre-tax gross unrealized gains and
gross unrealized losses related to these held-to-maturity
-10-
11
Part I
Item 1. (continued)
loans totaled $9 million and $735 million, respectively, at June 30, 1994.
Loans that were designated as available-for-sale at June 30, 1994
are carried at fair value in the amount of $1,487 million. Pre-tax
gross unrealized gains and gross unrealized losses on these loans
totaled $139 million and $274 million, respectively, and are
reported net of taxes in a separate component of stockholders'
equity. Cash proceeds from the sale of available-for-sale loans
during the first half of 1994 were $318 million (all of these
proceeds were recorded in the 1994 first quarter).
NOTE 5 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
----------------------------------------------------
The Corporation provides postretirement health care and life
insurance benefits ("benefits") to substantially all domestic
employees who meet certain age and length-of-service requirements at
retirement. The amount of benefits provided varies with length of
service and date of hire. The Corporation has not funded these
benefits.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106"). SFAS 106
requires recognition, during the years of the employees' active
service, of the employer's expected cost and obligation of providing
postretirement health care and other postretirement benefits other
than pensions to employees and eligible dependents.
The Corporation elected to expense the entire unrecognized
accumulated obligation (the "transition obligation") as of the date
of adoption of SFAS 106 via a one-time charge of $415 million (or
$1.67 per common share), based on the domestic benefits design.
NOTE 6 - RESTRUCTURING CHARGES
------------------------------
During the 1994 first quarter, the Corporation included in
noninterest expense a restructuring charge of $48 million ($28
million after-tax) related to the closing of 50 New York branches
and a staff reduction of 650. The restructuring charge primarily
comprises real estate costs and severance costs associated with the
closing of the 50 New York branches. Also included in the
restructuring charge are severance costs involved in optimizing the
branch staff at existing branches. This rationalization of the
branch system is part of an ongoing Corporate-wide program to
improve productivity. At June 30, 1994, the reserve balance
associated with this restructuring charge was approximately $30
million.
The 1993 first quarter results included a one-time restructuring
charge of $43 million ($30 million after-tax) related to the
Federally-assisted acquisition in February 1993 of certain assets
and liabilities of four former banks (the "First City Banks") of
First City Bancorporation of Texas, Inc. ("First City") by the
Corporation's subsidiary, Texas Commerce Bancshares, Inc. ("Texas
Commerce"). At June 30, 1994, the reserve balance associated with
this restructuring charge had been substantially utilized and no
significant additional costs are expected in the future.
In 1993, the Corporation completed an assessment of costs associated
with the merger of the Corporation and Manufacturers Hanover
Corporation. These costs related principally to changes in the
Corporation's facilities plans since the merger announcement in
July, 1991 and revised estimates of occupancy-related costs
associated with headquarters and branch consolidations. At June 30,
1994, the merger reserve balance was approximately $62 million.
NOTE 7 - INCOME TAXES
---------------------
The Corporation adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), as of January
1, 1993 and, after taking into account the additional tax benefits
associated with the adoption of SFAS 106 (see Note 5), the
Corporation recognized a favorable cumulative effect on income tax
expense of $450 million (or $1.81 per common share).
The Corporation recognized its remaining available Federal income
tax benefits in the third quarter of 1993. As a result, the
Corporation's earnings beginning in the fourth quarter of 1993 were
reported on a fully-taxed basis.
-11-
12
Part I
Item 1. (continued)
The Corporation's Federal valuation reserve (which had been
established as of January 1, 1993 in accordance with the
requirements of SFAS 109) has a balance of $124 million at June 30,
1994, relating to tax benefits which are subject to tax law
limitations on realization. At this time, the Corporation believes
that realization of these benefits is sufficiently in doubt to
preclude recognition in accordance with the criteria of SFAS 109.
Additionally, a valuation reserve approximating $148 million at June
30, 1994, was established as of January 1, 1993 against all New York
State and City deferred tax assets. Because of the lack of any loss
carryover provision under New York statutes, the Corporation is
uncertain at this time whether these tax benefits can be realized.
Foreign deferred taxes are not material.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
For a discussion of certain legal proceedings, see Part II, Item 1
of this Form 10-Q. The Corporation and its subsidiaries are
defendants in a number of legal proceedings. After reviewing with
counsel all actions and proceedings pending against or involving the
Corporation and its subsidiaries, management does not expect the
aggregate liability or loss, if any, resulting therefrom to have a
material adverse effect on the consolidated financial condition of
the Corporation.
NOTE 9 - PREFERRED STOCK
------------------------
On June 8, 1994, the Corporation issued 2 million shares of
Adjustable Rate Cumulative Preferred Stock, Series L, with a stated
value of $100 per share. Dividends are cumulative from June 8, 1994
and are payable quarterly commencing June 30, 1994. The dividend
rate for the initial dividend period from June 8, 1994 to June 30,
1994 was 6.28% per annum. Thereafter, the quarterly dividend rate
will be equal to 84% of the highest of the Treasury Bill Rate, the
Ten Year Constant Maturity Rate and the Thirty Year Constant
Maturity Rate (as each of such terms are defined in the Certificate
of Designations relating to the preferred stock), but not less than
4.50% per annum or more than 10.50% per annum. The shares of
preferred stock are not redeemable prior to June 30, 1999. On or
after such date, the shares of preferred stock are redeemable at the
option of the Corporation, in whole or in part, at a redemption
price of $100 per share, plus accrued and unpaid dividends to the
date of redemption.
NOTE 10 - COMMON STOCK REPURCHASE
---------------------------------
On May 27, 1994, the Corporation announced its intention to
repurchase up to 10 million shares of its common stock on the open
market from time to time during the twelve months following such
announcement. As of June 30, 1994, the Corporation had repurchased
approximately 3.2 million shares of its common stock under this
program.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
-----------------------------------------------------------
Derivatives and Foreign Exchange Products: In the normal course of
its business, the Corporation utilizes various financial instruments
to meet the financing needs of its customers, to generate revenues
through its trading activities, and to manage its exposure to
fluctuations in interest and currency rates. Derivatives and
foreign exchange transactions involve, to varying degrees, credit
risk and market risk. Credit risk is the possibility that a loss
may occur because a party to a transaction fails to perform
according to the terms of the contract. Market risk is the
possibility that a change in interest or currency rates will cause
the value of a financial instrument to decrease or become more
costly to settle.
Credit exposures for various products of the Corporation are
summarized in the following table for the dates indicated. The
table should be read in conjunction with the descriptions of such
products and their risks included on pages B71-B74 of the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1993. The amount of mark-to-market exposure presented in the
table below takes into account the impact of master netting
agreements in effect at the respective dates.
-12-
13
Part I
Item 1. (continued)
====================================================================
JUNE 30, December 31,
(in billions) 1994 1993
--------------------------------------------------------------------
Credit Exposure:
Interest Rate Contracts $ 10.1 $ 8.6
Foreign Exchange Contracts 10.4 8.1
Stock Index Option and
Commodity Contracts 0.3 0.2
------- -------
Total Credit Exposure 20.8 16.9
Less: Amounts Recorded as Assets
on Consolidated Balance Sheet 20.8(a) 3.3
------- -------
Credit exposure not on balance sheet $ --- $ 13.6
======= =======
--------------------------------------------------------------------
[FN]
(a) Increase due to adoption of FASI 39 on January 1, 1994.
====================================================================
The increases in the credit exposure related to interest rate
contracts and foreign exchange contracts at June 30, 1994 compared
with December 31, 1993 was primarily due to increased notional
outstandings at June 30, 1994 coupled with the decline in the value
of the U.S. dollar against foreign currencies.
The following table summarizes the aggregate notional amounts of
interest rate contracts and foreign exchange contracts for the dates
indicated. The table should be read in conjunction with the
descriptions of these products and their risks included on pages
B71-B74 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993.
=================================================================================
OFF-BALANCE SHEET INSTRUMENTS-DERIVATIVES AND
FOREIGN EXCHANGE INSTRUMENTS NOTIONAL AMOUNTS
(IN MILLIONS) TRADING ALM(a) TOTAL
---------------------------------------------------------------------------------
Financial Instruments, the Credit Risk of Which is
Represented by Other Than Notional or Contract Amounts:
At June 30, 1994:
Total Interest Rate Contracts $1,999,508 $ 123,784 $2,123,292
Total Foreign Exchange Contracts 942,283 12,249 954,532
Total Stock Index Options and Commodity
Derivative Contracts 5,727 --- 5,727
--------- --------- ---------
Total Off-Balance Sheet Instruments
(Notional Amount) $2,947,518 $ 136,033 $3,083,551
========= ========= =========
--------------------------------------------------------------------------------
At December 31, 1993:
Total Interest Rate Contracts $1,644,396 $ 96,970 $1,741,366
Total Foreign Exchange Contracts 720,793 11,361 732,154
Total Stock Index Options and Commodity
Derivative Contracts 5,751 --- 5,751
--------- --------- ---------
Total Off-Balance Sheet Instruments
(Notional Amount) $2,370,940 $ 108,331 $2,479,271
========= ========= =========
---------------------------------------------------------------------------------
(a) ALM denotes Asset/Liability Management.
=================================================================================
-13-
14
Part I
Item 1. (continued)
Credit-Related Financial Instruments: The following table
summarizes the Corporation's credit risk at June 30, 1994 and at
December 31, 1993, represented by contract amounts relating to the
credit-related financial instruments listed in the table. The table
should be read in conjunction with the description of these credit-
related products and their risks included on pages B71-B74 of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993. These credit-related products are not
derivatives or foreign exchange related products.
======================================================================
OFF-BALANCE SHEET INSTRUMENTS-CREDIT-RELATED
FINANCIAL INSTRUMENTS
JUNE 30, December 31,
(in millions) 1994 1993
----------------------------------------------------------------------
Commitments to Extend Credit $ 43,519(a) $ 47,540(a)
Standby Letters of Credit (Net of Risk
Participations of $5,162 and $1,285) 12,281 11,224
Other Letters of Credit 2,879 2,325
Customers' Securities Lent 17,290 14,530
----------------------------------------------------------------------
[FN]
(a) Excludes credit card commitments of $18.6 billion and $18.0
billion at June 30, 1994 and December 31, 1993, respectively.
======================================================================
For a description of the Corporation's derivatives products and
related revenues, see the Derivatives and Related Products section
in Part I, Item 2 of this Form 10-Q.
-14-
15
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
=============================================================================================================================
QUARTERLY FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
1994 1993
--------------------- -------------------------------------------
SECOND First Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- -------
REPORTED:
Income Before Effect of Accounting Changes $ 357 $ 319 $ 347 $ 502 $ 381 $ 339
Net Effect of Changes in Accounting Principles --- --- --- --- --- 35
------- ------- ------- ------- ------- -------
Net Income $ 357 $ 319 $ 347 $ 502 $ 381 $ 374
======= ======= ======= ======= ======= =======
Per Common Share:
Income Before Effect of Accounting Changes $ 1.28 $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.21
Net Effect of Changes in Accounting Principles --- --- --- --- --- .14
------- ------- ------- ------- ------- -------
Net Income $ 1.28 $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.35
======= ======= ======= ======= ======= =======
---------------------------------------------------------------------------------------------------------------------------
PRO FORMA: (a)
Income Before Effect of Accounting Changes $ 357 $ 319 $ 347 $ 288 $ 327 $ 276
Net Effect of Changes in Accounting Principles --- --- --- --- --- 35
------- ------- ------- ------- ------- -------
Net Income $ 357 $ 319 $ 347 $ 288 $ 327 $ 311
======= ======= ======= ======= ======= =======
Per Common Share:
Income Before Effect of Accounting Changes $ 1.28 $ 1.13 $ 1.23 $ .99 $ 1.14 $ .95
Net Effect of Changes in Accounting Principles --- --- --- --- --- .14
------- ------- ------- ------- ------- -------
Net Income $ 1.28 $ 1.13 $ 1.23 $ .99 $ 1.14 $ 1.09
======= ======= ======= ======= ======= =======
---------------------------------------------------------------------------------------------------------------------------
Book Value $ 37.17 $36.74 $ 37.60 $ 35.96 $ 34.47 $ 33.50
Market Value $ 38.50 $36.38 $ 40.13 $ 45.00 $ 40.88 $ 40.38
Common Dividends Declared $ .38 $ .38 $ .38(b) $ .33 $ .33 $ .33
COMMON SHARES OUTSTANDING:
Average 253.1 253.2 252.5 252.1 251.7 248.5
Period End 250.9 253.3 252.9 252.3 251.8 251.5
PERFORMANCE RATIOS:
Return on Average Assets (c) .87%(e) .79%(e) .94% 1.39% 1.04% 1.06%
Return on Average Common Equity (c) 13.90% 12.24% 13.38% 20.90% 15.97% 16.47%
Return on Average Stockholders' Equity (c) 12.96% 11.59% 12.48% 18.68% 14.49% 15.00%
Overhead Ratio (d) 62.4% 61.5% 60.6% 57.9% 59.2% 59.5%
CAPITAL RATIOS:
Common Stockholders' Equity to Assets 5.5%(e) 5.6%(e) 6.3% 6.1% 6.0% 5.7%
Total Stockholders' Equity to Assets 6.6%(e) 6.6%(e) 7.4% 7.3% 7.2% 7.1%
Tier 1 Leverage 6.4%(e)(f) 6.2%(e)(f) 6.8%(f) 6.9% 6.6% 6.7%
Risk-Based Capital Ratios:
Tier I (4.0% required) 8.7%(f) 8.3%(f) 8.1%(f) 7.9% 7.6% 7.5%
Total (8.0% required) 12.8%(f) 12.5%(f) 12.2%(f) 12.1% 12.0% 11.8%
---------------------------------------------------------------------------------------------------------------------------
(a) The Corporation recognized its remaining available Federal
income tax benefits in the third quarter of 1993 and, as a
result, the Corporation's earnings beginning in the fourth
quarter of 1993 are reported on a fully-taxed basis. The pro-
forma section assumes that the Corporation's 1993 first, second
and third quarter results are reported on a fully-taxed basis.
(b) In the fourth quarter of 1993, the Corporation increased its
quarterly common stock dividend to $0.38 per share.
(c) Quarterly performance ratios are based on annualized reported
net income amounts.
(d) Excludes nonrecurring charges.
(e) On January 1, 1994, the Corporation adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 39 ("FASI 39"),
which increased total assets and total liabilities by
approximately $19.0 billion and by $14.5 billion at June 30,
1994 and March 31, 1994, respectively, and total average assets
and total average liabilities by approximately $14.1 billion for
the 1994 second quarter and $13.1 billion for the first quarter
of 1994. Excluding the impact of FASI 39, the return on average
assets for the second and first quarters of 1994 were .96% and
.86%, respectively.
(f) In accordance with current regulatory guidelines, these ratios
exclude the impact on stockholders' equity resulting from the
adoption of SFAS No. 115.
==========================================================================================================================
-15-
16
Part I
Item 2 (continued)
--------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------
Chemical Banking Corporation (the "Corporation") reported net income
of $357 million, or $1.28 per common share, for the 1994 second
quarter, an increase of 9% from earnings on a comparable basis
(excluding tax benefits) of $327 million, or $1.14 per share, for
the second quarter of 1993. Reported net income in the 1993 second
quarter was $381 million, or $1.35 per share, a period in which the
Corporation recognized income tax benefits of $54 million. The
Corporation recognized its remaining available Federal tax benefits
in the third quarter of 1993 and, as a result, the Corporation's
earnings commencing with the fourth quarter of 1993 are reported on
a fully-taxed basis.
For the first six months of 1994, the Corporation's net income was
$676 million, an increase of 12 percent from $603 million on a
comparable basis for the first half of 1993. Reported net income
for the first six months of 1993 was $755 million, a period in which
the Corporation benefited from $152 million in accounting changes
and tax benefits.
The 1993 year-to-date results included the impact of two significant
accounting changes. On January 1, 1993, the Corporation adopted
Statement of Financial Accounting Standards No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106"), which resulted in a charge of $415 million and Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which resulted in an income tax benefit of $450
million. The net favorable impact of the adoption of these new
accounting standards was $35 million.
The Corporation's core businesses performed well in a challenging
environment during the 1994 second quarter. Earnings benefited from
further improvement in the Corporation's risk profile, including a
substantial reduction in nonperforming assets, a sharp decline in
the provision for losses and a decrease in other credit costs. The
Corporation remains committed to improving its operating margins and
return levels. To achieve this end, revenue initiatives and
productivity programs are currently under way throughout the
Corporation and are expected to contribute to ongoing improvements.
Completion of a Brazilian refinancing package during the second
quarter of 1994 brought to a close the broad LDC-rescheduling
programs begun in the mid-1980s. Accordingly, the Corporation has
combined its remaining LDC allowance for losses with its general
allowance for losses and will no longer report a separate LDC
allowance.
The Corporation's nonperforming assets at June 30, 1994 were $2.49
billion, a decrease of $710 million, or 22%, from $3.20 billion at
March 31, 1994 and a decrease of $1.04 billion, or 29%, from $3.53
billion at December 31, 1993. Moreover, after peaking in the 1992
third quarter, nonperforming assets have declined by $4.09 billion,
or 62%, since September 30, 1992. As a result of the continued
decline in nonperforming assets, the ratio of the allowance for
losses to nonperforming loans reached 152% at June 30, 1994,
compared with 117% at the 1993 year-end and 79% at June 30, 1993.
At June 30, 1994, the Corporation's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were
8.7% and 12.8%, respectively, well in excess of the minimum ratios
specified by the Board of Governors of the Federal Reserve System
("Federal Reserve Board").
On July 1, 1994, the Corporation completed its tender offer for the
outstanding common stock and the depositary shares representing the
preferred stock of Margaretten Financial Corporation
("Margaretten"). With this acquisition, the Corporation will, based
on year-end 1993 data, rank fourth nationwide in mortgage
originations and fifth in mortgage servicing. This acquisition is
not reflected in the 1994 second quarter results.
-16-
17
Part I
Item 2 (continued)
--------------------------------------------------------------------
RESULTS OF OPERATIONS
--------------------------------------------------------------------
NET INTEREST INCOME
====================================================================
Second Quarter Six Months
------------------- -----------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Total Interest Income $ 2,219 $2,132 $4,309 $4,256
------- ------- ------- --------
Total Interest Expense 1,034 957 1,981 1,932
------- ------- ------- -------
NET INTEREST INCOME 1,185 1,175 2,328 2,324
Taxable Equivalent Adjustment (a) 4 6 9 11
------- ------- ------- -------
NET INTEREST INCOME - TAXABLE
EQUIVALENT BASIS $ 1,189 $1,181 $2,337 $2,335
======= ======= ======= =======
[FN]
(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.
====================================================================
Net interest income for the second quarter of 1994 was $1,185
million, compared with $1,175 million for the comparable 1993
period. For the first six months of 1994, net interest income was
$2,328 million, versus $2,324 million for the same period of 1993.
The slight increases from last year were due to an increase in
interest-earning assets (including growth in consumer loans), and
the favorable impact of the decrease in nonperforming loans, largely
offset by a lower net yield on interest-earning assets.
AVERAGE BALANCES, INTEREST RATE SPREAD AND NET YIELD ON AVERAGE
INTEREST-EARNING ASSETS
---------------------------------------------------------------------
Second Quarter
-----------------------------------
1994 1993
---------------- -------------
AVERAGE Average
(Taxable equivalent rates; BALANCE RATE Balance Rate
in millions) ------- ---- ------- ----
Loans (a) $ 74,144 7.44% $ 79,900 7.19%
Securities 26,594 6.54 24,029 7.39
Liquid Interest-Earning Assets 28,380 5.82 21,675 4.74
-------- --------
Total Interest-Earning Assets $129,118 6.89% $125,604 6.81%
======== ========
Interest-Bearing Liabilities $111,063 3.73% $108,242 3.53%
Interest-Rate Spread 3.16 3.28
Interest-Free Funds 18,055 --- 17,362 ---
-------- --------
Total Source of Funds $129,118 3.20% $125,604 3.05%
======== ========
Net Yield on Interest-Earning Assets 3.69% 3.76%
===== =====
[FN]
(a) Nonperforming loans are included in the average loan balances.
-17-
18
Part I
Item 2 (continued)
Six Months
--------------------------------
1994 1993
-------------- --------------
AVERAGE Average
(Taxable equivalent rates; BALANCE RATE Balance Rate
in millions) ------- ---- ------- ----
Loans (a) $ 74,312 7.29% $ 80,654 7.26%
Securities 26,500 6.47 23,670 7.43
Liquid Interest-Earning Assets 28,647 5.48 19,789 4.96
-------- --------
Total Interest-Earning Assets $129,459 6.72% $124,113 6.92%
======== ========
Interest-Bearing Liabilities $111,081 3.59% $106,944 3.64%
Interest-Rate Spread 3.13 3.28
Interest-Free Funds 18,378 --- 17,169 ---
-------- --------
Total Source of Funds $129,459 3.08% $124,113 3.13%
======== ========
Net Yield on Interest-Earning Assets 3.64% 3.79%
===== =====
[FN]
(a) Nonperforming loans are included in the average loan balances.
The Corporation's average interest-earning assets for the 1994
second quarter were $129.1 billion, an increase of $3.5 billion from
the comparable period last year. For the first six months, average
interest-earning assets were $129.5 billion in 1994, an increase of
$5.3 billion, or 4.3%, from 1993. The composition of average
interest-earning assets shifted in response to growth in liquid
assets to support trading businesses and securities, more than
offsetting declines in loans. While net interest income was only
slightly higher than the 1993 level, the shift to lower-spread
liquid assets has exerted downward pressure on the net yield on
interest-earning assets.
The Corporation's average total loans in the 1994 second quarter and
first six months declined by $5.8 billion and $6.4 billion,
respectively, from the comparable 1993 periods. As a percentage of
total interest-earning assets, the loan portfolio for the second
quarter of 1994 decreased to 57% from 65% in the same period a year
ago. The decline in the loan portfolio reflects a continued
reduction in commercial loans (albeit at a much lower rate than
prior quarters), largely offset by an increase in the consumer
portfolio. For a further discussion of the Corporation's loans, see
the Credit Portfolio section in this Form 10-Q.
The Corporation's liquid interest-earning assets and securities
averaged $55.0 billion in the 1994 second quarter, compared with
$45.7 billion for the same period in 1993. For the first six
months, liquid interest-earning assets and securities averaged $55.1
billion in 1994, compared with $43.4 billion for 1993. As a
percentage of total interest-earning assets, combined liquid assets
and securities for the second quarter were 43% in 1994 versus 35% in
the 1993 comparable period, reflecting the growth in liquid assets
to support the Corporation's trading businesses and securities.
The $3.5 billion growth in interest-earning assets for the 1994
second quarter was funded by higher interest-bearing liabilities of
$2.8 billion and a $.7 billion increase in interest-free funds. For
the first half of 1994, the higher level of interest-earning assets
was funded by a $4.1 billion increase in interest-bearing
liabilities and a $1.2 billion increase in interest-free funds.
The negative impact on net interest income from nonperforming loans
in the second quarter of 1994 was $38 million, down from $49 million
in the same quarter in 1993. For the first six months, the negative
impact was $57 million in 1994, compared with a negative impact of
$98 million in 1993. The improvement in both 1994 periods is
principally due to the significant reduction in the level of the
Corporation's nonperforming loans.
-18-
19
Part I
Item 2 (continued)
The net yield on interest-earning assets, which is the average rate
for interest-earning assets less the average rate paid for all
sources of funds, including the impact of interest-free funds, was
3.69% in the second quarter of 1994, compared with 3.76% in same
period in 1993. The net yield on interest-earning assets for the
first six months of 1994 was 3.64%, compared with 3.79% for the same
period in 1993. The decline in the net yield was affected by the
aforementioned shift in the Corporation's balance sheet asset mix,
partially offset by the smaller negative impact from nonperforming
loans. The contribution from interest-free funds to the net yield
was 53 basis points in the 1994 second quarter, up from 48 basis
points in the 1993 second quarter. The increase resulted from the
higher average interest-earning asset rate in 1994, as well as the
increased level of interest-free funds that financed interest-
earning assets.
Management anticipates that the net yield on interest-earning assets
for the remainder of 1994 will approximate the net yield for the
first six months of 1994 but that the net yield on interest-earning
assets for the full year 1994 will be lower than the net yield on
interest-earning assets for the full year 1993. Management
nevertheless expects that net interest income for the full year 1994
will approximate the 1993 level as an anticipated higher level of
interest-earning assets is expected to offset the anticipated
decline in the net yield.
For additional information on average balances and net interest
income, see Average Consolidated Balance Sheet, Interest and Rates
on pages 50-51.
PROVISION FOR LOSSES
The Corporation's provision for losses was $160 million for the 1994
second quarter, compared with $205 million in the 1994 first
quarter, and $363 million in the 1993 second quarter. For the first
six months, the provision for losses was $365 million in 1994 versus
$675 million in 1993. Included in the 1993 second quarter provision
was $55 million related to the decision to accelerate the
disposition of certain nonperforming residential mortgage loans.
As a result of management's evaluation of the continuing improvement
in the Corporation's credit profile, the provision for losses in the
1994 second quarter and first half was lower than the Corporation's
net charge-offs in each of those periods. The Corporation expects
the provision for losses for each of the subsequent quarters in 1994
to decline further from the level of the provision for the 1994
second quarter. A discussion of the Corporation's credit portfolio,
net charge-offs and allowance for losses appears in the Credit
Portfolio section in this Form 10-Q.
NONINTEREST REVENUE
Second Quarter Six Months
--------------- -------------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Trust and Investment Management Fees $ 108 $ 102 $ 218 $ 200
Corporate Finance and
Syndication Fees 93 84 175 155
Service Charges on Deposit Accounts 75 77 144 144
Fees for Other Banking Services 279 272 569 523
Trading Account and Foreign
Exchange Revenues 203 298 388 550
Securities Gains 13 5 59 75
Other Revenue 96 204 245 320
------ ------ ------ ------
Total Noninterest Revenue $ 867 $1,042 $1,798 $1,967
====== ====== ====== ======
The decrease in noninterest revenue for the 1994 second quarter and
first six months when compared to corresponding 1993 periods
reflected lower trading account and foreign exchange revenues, as
well as lower revenues from equity-related investments and lower
gains from the sales of emerging markets debt securities. The
aforementioned decreases were partially offset by increased
corporate finance fees, credit card services fees, and trust and
investment management fees.
-19-
20
Part I
Item 2 (continued)
Trust and investment management fees are primarily comprised of
corporate, institutional and personal trust activities. Services
provided include custody, security services, and private banking to
customers on a global basis. The following table presents the
components of trust and investment management fees for the periods
indicated.
Second Quarter Six Months
------------------ -------------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Trust and Investment Management Fees:
Personal Trust Fees $ 54 $ 46 $ 107 $ 97
Corporate and Institutional
Trust Fees 45 46 91 85
Other, primarily Foreign
Asset Management 9 10 20 18
------- ------- ------- -------
Total $ 108 $ 102 $ 218 $ 200
======= ======= ======= =======
For the second quarter and first six months of 1994, personal trust
fees rose 17% and 10%, respectively, from the comparable 1993
periods. The increases were primarily due to higher volume and new
customer relationships developed as a result of the acquisition of
Ameritrust Texas Corporation ("Ameritrust"). Partially offsetting
these increases was a slight decline in corporate and institutional
trust fees in the 1994 second quarter as a result of pricing
pressures affecting this business.
Corporate finance and syndication fees were $93 million in the 1994
second quarter and $175 million in the first six months of 1994,
increases of 11% and 13%, respectively, from the comparable periods
last year. The increases from last year reflect higher global loan
originations and distributions by the Corporation as well as new
revenue from underwriting public corporate debt offerings. During
the first half of 1994, the Corporation acted as agent or co-agent
for approximately $129 billion of syndicated credit facilities, a
reflection of the Corporation's large client base and strong
emphasis on distribution.
The following table sets forth the components of fees for other
banking services for the periods indicated.
Second Quarter Six Months
------------- -----------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Fees for Other Banking Services:
Credit Card Services Revenue $ 75 $ 55 $ 150 $ 108
Fees in Lieu of Compensating
Balances 49 52 107 104
Commission on Letters of Credit
and Acceptances 39 40 76 80
Loan Commitment Fees 23 25 45 46
Mortgage Servicing Fees 18 17 34 32
Other Fees 75 83 157 153
------ ------ ------ ------
Total $ 279 $ 272 $ 569 $ 523
====== ====== ====== ======
The higher level of credit card services revenue for both 1994
periods included fees from the new Shell MasterCard, reflecting
increased volume of retail credit cards from a growing cardholder
base.
Combined trading account and foreign exchange revenues in the 1994
second quarter were $203 million, versus a record $298 million in
the same period in 1993, and as compared with $185 million in the
first quarter of 1994. For the first six months, combined trading
account and foreign exchange revenues were $388 million in 1994,
compared with $550 million in 1993. The decline in trading results
for both the second quarter and first half of 1994 from the prior
year reflected difficult conditions in certain trading markets,
including emerging market debt and European government bonds, and in
many foreign exchange markets.
-20-
21
Part I
Item 2 (continued)
The following table sets forth the components of trading account and
foreign exchange revenues for the second quarter and first six
months of 1994 and 1993.
====================================================================
Second Quarter Six Months
------------------ ------------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Trading Account and Foreign
Exchange Revenue:
Interest Rate Contracts (a) $ 135 $ 97 $ 223 $ 226
Foreign Exchange Revenue (b) 55 96 100 164
Debt Instruments and Other (c) 13 105 65 160
------ ------ ------ ------
Total $ 203 $ 298 $ 388 $ 550
====== ====== ====== ======
[FN]
(a) Includes interest rate swaps, currency swaps, foreign exchange
forward contracts, interest rate futures, and forward rate
agreements and related hedges.
(b) Includes foreign exchange spot and option contracts.
(c) Includes U.S. government and foreign government agency and
corporate debt securities, emerging markets debt instruments,
debt-related derivatives, equity securities, equity derivatives,
and commodity derivatives.
====================================================================
The trading environment was difficult during the first six months of
1994. While rates in the U.S. bond markets have been increasing
during 1994, along with the economic cycle, the foreign exchange
markets and European bond markets have not generally followed
underlying economic trends. As such, positions taken in these
foreign markets have not been as profitable as in prior periods.
Interest rate contract revenues increased in the second quarter of
1994 compared with the same 1993 period primarily reflecting
earnings on certain derivative instruments resulting from higher
demand for these hedging products. Foreign exchange revenues
decreased during the first six months of 1994 primarily due to
unexpected movements in the U.S. dollar. The decrease in debt
instrument revenue was primarily due to difficult conditions in the
emerging debt markets, as well as in the European government bond
markets.
Trading revenues are affected by many factors including volatility
of currencies and interest rates, the volume of transactions
executed by the Corporation's customers, the Corporation's success
in proprietary positioning, its credit ratings, and steps taken by
central banks and governments to affect financial markets. The
Corporation believes that its trading business is a significant core
business and that its recently improved credit standing will benefit
the Corporation's trading revenues by enabling the Corporation to
utilize a wider array of products with additional counterparties.
However, the Corporation expects that its trading revenues will
fluctuate as factors, such as market volatility, governmental
actions, or success in proprietary positioning, may vary from period
to period and may not be as favorable in future periods as they were
during 1993.
Securities gains were $13 million in the 1994 second quarter, an
increase of $8 million from the same period in 1993. For the first
six months, securities gains were $59 million in 1994, versus $75
million in 1993.
Other revenue in the 1994 second quarter was $96 million, compared
with $204 million in the 1993 second quarter. For the first six
months, other revenue was $245 million in 1994, compared with $320
million in 1993. The following table presents the composition of
other noninterest revenue for the second quarters and first six
months of 1994 and 1993.
-21-
22
Part I
Item 2 (continued)
====================================================================
Second Quarter Six Months
------------- ----------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Other Revenue:
Revenue from Equity-Related
Investments $ 66 $ 115 $ 149 $ 143
Net Gains on LDC-Related
Interest Bond Sales --- 44 45 100
All Other Revenue 30 45 51 77
------ ------ ------ ------
Total $ 96 $ 204 $ 245 $ 320
====== ====== ====== ======
====================================================================
Revenue from equity-related investments, which includes income from
venture capital activities and emerging markets investments, was $66
million in the 1994 second quarter, compared with $115 million in
the same 1993 period. For the first half of 1994, revenue from
equity-related investments was $149 million, a slight increase from
the comparable 1993 period. At June 30, 1994, the Corporation had
equity-related investments with a carrying value of $1.9 billion.
The Corporation believes that equity-related investments will
continue to make substantial contributions to the Corporation's
earnings, although the timing of the recognition of gains from such
activities is unpredictable and it is expected that revenues from
such activities will vary significantly from period to period. For
further discussion of the Corporation's venture capital activities,
see page B30 of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993.
In the 1994 second quarter, the Corporation had no LDC-related past-
due interest bond sales versus gains from the sales of such bonds of
$44 million in the 1993 second quarter. The 1994 first half results
included the recognition of $45 million in net gains from LDC-
related past-due interest bonds, compared with $100 million in the
same period a year ago.
All other revenue includes the Corporation's share of CIT's net
income which, after purchase accounting adjustments, was $19 million
in the 1994 second quarter and $36 million in the first six months,
increases from $17 million and $32 million, respectively, for the
comparable 1993 periods. Also included in all other revenue for the
second quarter of 1994 was a net loss of $6 million incurred in
connection with the Corporation's residential mortgage sales
activities, compared with a net loss of $25 million in the 1994
first quarter and a net gain of $5 million in the 1993 second
quarter. The results for the second quarter and first quarter of
1994 included $19 million and $11 million, respectively, of revenue
from the sale of mortgage servicing rights. For the first six
months of 1994, the Corporation's residential mortgage sales
activities incurred a $31 million loss (net of $30 million of gains
from the sale of servicing rights), compared with a $12 million gain
the first six months of 1993 (no servicing rights were sold in the
first half of 1993).
NONINTEREST EXPENSE
====================================================================
Second Quarter Six Months
-------------- ----------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Salaries $ 542 $ 529 $1,060 $ 1,030
Employee Benefits 102 105 221 207
Occupancy Expense 140 145 286 290
Equipment Expense 91 88 175 163
Foreclosed Property Expense 2 85 37 156
Restructuring Charge --- --- 48 43
Other Expense 404 360 778 699
------ ------ ------ ------
Total Noninterest Expense $1,281 $ 1,312 $2,605 $ 2,588
====== ====== ====== ======
====================================================================
-22-
23
Part I
Item 2 (continued)
Noninterest expense in the 1994 second quarter was $1,281 million,
compared with $1,312 million in the second quarter of 1993.
Expenses for the second quarter of 1994 reflected additional costs
of $47 million associated with the acquisition of Ameritrust and
operating costs connected with the Shell MasterCard (including
marketing expenses that increased $21 million largely reflecting the
advertising campaign for the co-branded program).
For the first six months, noninterest expense was $2,605 million in
1994 versus $2,588 million in 1993. Included in the results for the
first six months of 1994 was a $48 million restructuring charge,
recorded in the first quarter, related to the closing of 50 New York
state branches. The results for the first six months of 1993
included a restructuring charge of $43 million associated with the
Federally-assisted acquisition in February 1993 of certain assets
and liabilities of four former banks (the "First City Banks") of
First City Bancorporation of Texas, Inc. by Texas Commerce
Bancshares. Excluding the restructuring charges in both years,
noninterest expense for the first half of 1994 increased by $12
million or less than 1% from the comparable 1993 period.
Noninterest expense for the first six months of 1994, when compared
with the comparable 1993 period, reflected higher expenses
associated with investments in certain key businesses partially
offset by lower foreclosed property expense. The investments
included the 1993 acquisitions by Texas Commerce (which contributed
approximately $37 million in additional operating expenses) and
higher operating costs of $66 million related to the co-branded
Shell MasterCard program in the first six months of 1994.
The ratio of noninterest operating expense (excluding nonrecurring
charges) to total operating revenue was 62.4% in the 1994 second
quarter, compared with 59.2% in the same 1993 period. This ratio
for the first six months of 1994 was 62.0% compared with 58.8% for
the first six months of 1993. The Corporation anticipates its
revenue growth in certain key businesses and its various
productivity initiatives will improve the ratio of noninterest
operating expenses to total operating revenue.
The increases in salaries for the 1994 second quarter and first six
months were primarily due to additional staff costs resulting from
the 1993 acquisitions by Texas Commerce, the implementation of the
Shell MasterCard program, and the increase in the Corporation's
securities underwriting business, partially offset by lower
incentive compensation costs due to the lower trading results.
Total staff at June 30, 1994 amounted to 40,988 compared with 41,303
at June 30, 1993, as staff increases in areas with revenue growth
initiatives were more than offset by reductions from continued
integration and productivity efforts.
In the first six months of 1994, employee benefits increased $14
million from the prior year period reflecting the 1993 Texas
Commerce acquisitions, as well as a change in actuarial assumptions
used for pension expense and Other Postretirement Benefits ("OPEB")
expense. Total 1994 pension expense is expected to be higher than
the 1993 level, as a result of a decrease in the discount rate
utilized in determining the benefit obligation to 7.5%. Higher
costs related to various medical plans also contributed to the
increase in employee benefits.
Equipment expense in the 1994 second quarter was $91 million
compared with $88 million in the same 1993 period. For the first
six months, equipment expense was $175 million in 1994, versus $163
million in 1993. The increase in 1994 was primarily the result of
continued technology enhancements to support the Corporation's
investment in certain key businesses.
Foreclosed property expense was $2 million in 1994 second quarter,
compared with $85 million in the 1993 second quarter. The current
quarter expense benefited by approximately $15 million of gains from
the sale of foreclosed property. Additionally, included in the 1993
second quarter amount was $20 million related to the decision to
accelerate the disposition of certain foreclosed residential
properties arising from loans originally extended several years ago
under a reduced documentation mortgage program that was discontinued
in 1990. For the first six months, foreclosed property expense was
$37 million in 1994 versus $156 million in 1993, reflecting
significant progress in managing the Corporation's real estate
portfolio. Management expects that foreclosed property expense in
each of the 1994 third and fourth quarters will be higher than the
amount of foreclosed property expense in the 1994 second quarter;
nevertheless, management continues to expect that foreclosed
property expense for the full year 1994 will be significantly lower
than the full year 1993 level.
-23-
24
Part I
Item 2 (continued)
Other expense is comprised of items such as professional services,
insurance, marketing, communications expense and Federal Deposit
Insurance Corporation ("FDIC") assessments. Other expense for the
1994 second quarter was $404 million, compared with $360 million in
the same period in 1993. Other expense for the 1994 second quarter
reflected additional costs of $30 million in connection with the
Shell MasterCard (including $21 million of marketing expenses).
Also contributing to the quarter-over-quarter increase in other
expense was higher professional fees, up 8% to $59 million,
reflecting increased use of contract computer consultants associated
with the Corporation's ongoing technology enhancement efforts.
For the first six months, other expense was $778 million in 1994,
compared with $699 million for the prior year. The increase
principally reflects higher marketing expenses, professional services
and telecommunication costs, as well as expenses associated with the
First City Banks and Ameritrust acquisitions. Included in other
expense for the first six months of 1994 was approximately $20
million related to the amortization of goodwill and other intangible
assets and other ongoing expenses associated with the First City
Banks and Ameritrust acquisitions. As a result of these
acquisitions, total amortization of goodwill and intangibles
amounted to $56 million in the first half of 1994, an increase of
10% from the same period in 1993. Marketing expenses for the first
six months of 1994 was $97 million, an increase of $29 million from
comparable period in 1993, reflecting the marketing campaign for the
co-branded Shell MasterCard project, as well as increased
promotional advertising related to the Corporation's retail banking
business.
The Corporation expects that total noninterest operating expense in
1994 will be somewhat higher than that in 1993, reflecting costs
associated with the continued investment by the Corporation to grow
key business activities.
INCOME TAXES
The Corporation's effective tax rate was 41.5% in the second quarter
and the first six months of 1994, compared with 29.7% and 30.0% in
the respective 1993 periods. Tax expense included income tax
benefits of $54 million in the 1993 second quarter and $117 million
in the first six months of 1993. Because the Corporation recognized
its remaining available Federal tax benefits in the third quarter of
1993, the Corporation's earnings beginning in the fourth quarter of
1993 were reported on a fully-taxed basis.
--------------------------------------------------------------------
LINES OF BUSINESS RESULTS
--------------------------------------------------------------------
Profitability of the Corporation is tracked with an internal
management information system that produces lines-of-business
performance within the Global Bank, Regional Bank, Real Estate and
Corporate sectors. A set of management accounting policies has been
developed and implemented to ensure that the reported results of the
groups reflect the economics of their businesses. Lines-of-business
results are subject to restatement as appropriate whenever there are
refinements in management reporting policies or changes to the
management organization. Certain amounts reported in prior periods
have been restated to conform with the current 1994 presentation.
Lines-of-business results are subject to further restatements as may
be necessary to reflect future changes in internal management
reporting.
-24-
25
Part I
Item 2 (continued)
GLOBAL BANK REGIONAL BANK TEXAS COMMERCE
----------- ------------- --------------
For the three months ended
June 30, 1994 1993 1994 1993 1994 1993
(in millions, except ratios) ------ ------ ------ ------ ------ ------
Total Revenue $ 691 $ 944 $ 1,088 $ 1,030 $ 277 $ 279
Credit Provision 43 80 108 116 (10) 5
Noninterest Expense 318 319 724 708 192 206
Income (Loss) Before Taxes 330 545 256 206 95 68
Income Taxes (Benefits) 121 218 109 87 35 24
------ ------ ------ ------ ------ ------
Net Income (Loss) 209 327 147 119 60 44
====== ====== ====== ====== ====== ======
Average Assets $102,634 $ 82,585 $ 42,270 $ 40,160 $ 20,190 $21,628
Return on Common Equity 19.4% 26.8% 21.3% 15.5% 13.6% 10.3%
Return on Assets 0.82% 1.59% 1.39% 1.19% 1.18% 0.82%
Overhead Ratio (Excluding
Restructuring Charge) 46.0% 33.8% 66.5% 68.7% 69.4% 73.9%
==========================================================================================
REAL ESTATE TOTAL(a)
----------- -----
For the three months ended June 30, 1994 1993 1994 1993
------ ------ ------ ------
(in millions, except ratios)
Total Revenue $ 39 $ 48 $ 2,052 $ 2,217
Credit Provision 70 94 160 363
Noninterest Expense 35 54 1,281 1,312
Income (Loss) Before Taxes (66) (100) 611 542
Income Taxes (Benefits) (29) (44) 254 215
------ ------ ------ ------
Net Income (Loss) Before Special
Item/Accounting Changes (37) (56) 357 327
Special Item (Federal Tax Benefits) --- --- --- 54
------ ------ ------ -------
Net Income (Loss) (37) (56) 357 381
====== ====== ====== ======
Average Assets $ 5,344 $ 7,220 $164,066 $146,350
Return on Common Equity NM NM 13.9% 16.0%
Return on Assets NM NM 0.87% 1.04%
Overhead Ratio (Excluding
Restructuring Charge) NM NM 62.4% 59.2%
(a) Total column includes Corporate sector. See description of
Corporate sector on page 29.
NM - Not meaningful.
==========================================================================================
-25-
26
Part I
Item 2 (continued)
GLOBAL BANK REGIONAL BANK TEXAS COMMERCE
----------- ------------- --------------
For the six months
ended June 30, 1994 1993 1994 1993 1994 1993
(in millions, except ratios) ------ ------ ------ ------ ------ ------
Total Revenue $ 1,426 $ 1,777 $ 2,127 $ 2,060 $ 545 $ 542
Credit Provision 85 168 218 245 (20) 11
Noninterest Expense 613 609 1,467 1,397 389 403
Income (Loss) Before Taxes 728 1,000 442 418 176 128
Income Taxes (Benefits) 279 394 189 173 65 39
------ ------ ------ ------ ------ ------
Net Income (Loss) 449 606 253 245 111 89
====== ====== ====== ====== ====== ======
Average Assets $101,596 $ 80,637 $ 42,173 $ 40,728 $ 20,455 $20,637
Return on Common Equity 20.8% 24.6% 18.2% 16.1% 12.7% 11.1%
Return on Assets 0.89% 1.51% 1.21% 1.21% 1.09% 0.87%
Overhead Ratio (Excluding
Restructuring Charge) 43.0% 34.3% 66.7% 67.8% 71.4% 74.5%
==========================================================================================
REAL ESTATE TOTAL(a)
----------- -----
For the six months ended June 30, 1994 1993 1994 1993
(in millions, except ratios) ------ ------ ------ ------
Total Revenue $ 85 $ 95 $ 4,126 $ 4,291
Credit Provision 139 169 365 675
Noninterest Expense 89 109 2,605 2,588
Income (Loss) Before Taxes (143) (183) 1,156 1,028
Income Taxes (Benefits) (63) (81) 480 425
------ ------ ------ ------
Net Income (Loss) Before Special
Item/Accounting Changes (80) (102) 676 603
Special Item (Federal Tax Benefits) --- --- --- 117
Accounting Changes (SFAS 106 and 109) --- --- --- 35
------ ------ ------ ------
Net Income (Loss) (80) (102) 676 755
====== ====== ====== ======
Average Assets $ 5,635 $ 7,242 $164,109 $144,489
Return on Common Equity NM NM 13.1% 16.2%
Return on Assets NM NM 0.83% 1.05%
Overhead Ratio (Excluding
Restructuring Charge) NM NM 62.0% 58.8%
(a) Total column includes Corporate sector. See description of
Corporate sector on page 29.
NM - Not meaningful.
==========================================================================================
Guidelines exist for assigning expenses that are not directly
incurred by businesses, such as overhead and taxes, as well as for
allocating shareholders' equity and the provision for losses,
utilizing a risk-based methodology. Noninterest expenses of the
Corporation are fully allocated to the business units except for
special corporate one-time charges. Management has developed a
risk-adjusted capital methodology that quantifies different types of
risk -- credit, operating and market -- within various businesses
and assigns capital accordingly. Credit risk is computed using a
risk grading system that is consistently applied throughout the
Corporation. During the second quarter of 1994, the Corporation
revised its equity allocation approach to fully
-26-
27
Part I
Item 2 (continued)
allocate all equity from its Corporate sector back to the business units.
These changes resulted in the restatement of the business units' capital
for the 1994 first quarter and for all of 1993. A long-term expected income
tax rate is assigned in evaluating the Corporation's businesses.
Texas Commerce's results are tracked and reported on a legal entity
basis, including the return on equity calculation.
GLOBAL BANK
The Global Bank is organized into four principal management
entities: Banking & Corporate Finance (worldwide wholesale client
management and venture capital activities); Structured Finance (loan
syndications, high yield securities and mergers & acquisitions);
Asia, Europe & Capital Markets (securities, foreign exchange and
derivatives trading, the Corporation's treasury functions and
administration of the international branch system in Asia and
Europe); and Developing Markets (cross-border investment banking,
local merchant banking and trade finance). The Global Bank seeks to
optimize its risk profile by emphasizing underwriting, distribution,
and risk management skills.
The Global Bank's net income in the second quarter of 1994 was $209
million, a decrease of $118 million from the second quarter of 1993.
The sector's return on equity in the second quarter of 1994 was
19.4% compared with 26.8% in the 1993 second quarter. The decline
in the 1994 second quarter results was primarily due to decreases in
noninterest revenue of $187 million and in net interest income of
$66 million, partially offset by a decrease in credit provision of
$37 million. The Global Bank's net income of $449 million and
return on equity of 20.8% for the first six months of 1994 decreased
from last year's six month results of $606 million and 24.6%,
respectively. The decline in the 1994 six month results was
attributable to decreases in noninterest revenue of $215 million and
in net interest income of $136 million, partially offset by a
decrease in the credit provision of $83 million.
The decrease in noninterest revenue was primarily due to the decline
in trading revenues to $195 million for the second quarter of 1994,
compared with a record of $290 million in the 1993 second quarter.
For the first six months, trading revenues were $375 million in
1994, a decrease from $534 million in 1993. The unfavorable trading
results reflect increasing interest rates as a result of actions
take by the Federal Reserve Board in the first six months of 1994,
and the volatile conditions in certain trading markets, including
emerging market debt and European government bonds, and in many
foreign exchange markets. Revenues from equity-related investments
for the second quarter of 1994 were lower than the comparable period
in 1993 as a result of lower gains from venture capital activities.
In the 1994 second quarter, the Corporation had no LDC-related past-
due interest bond sales versus gains from the sales of such bonds of
$44 million in the 1993 second quarter. The 1994 first half results
included the recognition of $45 million in net gains from LDC-
related past-due interest bonds, compared with $100 million in the
same period a year ago. The decrease in net interest income was due
to the rising interest rate environment, combined with a change in
the mix of earning assets from loans to lower interest-earning
liquid assets.
For the first six months of 1994, noninterest expense rose $4
million, compared with the same period in 1993, due primarily to the
Corporation's continued investment in its securities business. The
substantial increase in average assets is due primarily to the
adoption of FASI 39.
REGIONAL BANK
The Regional Bank includes Retail Banking (New York Markets --
consumer banking and commercial and professional banking; Retail
Card Services; and National Consumer Business), Regional
Relationship Banking (Middle Market -- regional commercial banking;
Private Banking; and Chemical New Jersey Holdings, Inc.) and
Geoserve (cash management, funds transfer, trade, corporate trust
and securities services worldwide). The Corporation's Technology
and Operations group is also managed within this organizational
structure. The Corporation maintains a leading market share
position in serving the financial needs of Middle Market commercial
enterprises in the New York metropolitan area.
-27-
28
Part I
Item 2 (continued)
The Regional Bank's net income of $147 million and return on equity
of 21.3% for the second quarter of 1994 increased from last year's
second quarter results of $119 million and 15.5%, respectively. The
increase in earnings is attributable to improvements in net interest
income of $38 million and noninterest revenue of $20 million coupled
with a lower credit provision of $8 million, partially offset by
higher noninterest expense of $16 million. For the first six months
of 1994, the Regional Bank's net income of $253 million and return
on equity of 18.2% improved from $245 million and 16.1%,
respectively, for the first six months of 1993. The results for the
first six months of 1994 included a restructuring charge of $48
million ($28 million after-tax) related to the closing of 50 New
York branches and a staff reduction of 650. Excluding this
restructuring charge, the Regional Bank's net income would have been
$281 million and its return on equity would have been 20.4% for the
first six months of 1994. The increase in earnings (excluding the
restructuring charge) can be attributable to increases in net
interest income of $38 million and noninterest revenue of $29
million coupled with a lower credit provision of $27 million, offset
partially by increased noninterest expense of $22 million.
The improvement in net interest income was primarily due to a higher
level of interest-earning assets, coupled with higher demand
deposits and improved spreads in New York Markets. The increase of
$20 million in noninterest revenue reflected the higher fees from
revolving credit products in Retail Card Services primarily due to
the launch of the co-branded Shell MasterCard in the fourth quarter
of 1993. In addition, New York Markets recorded higher deposit
servicing fees. Partially offsetting these positive factors was the
impact of losses on residential mortgage warehouse activities in the
National Consumer Business and lower corporate finance fees in Middle Market.
The lower credit provision resulted from improvements in credit quality
for Middle Market, Chemical New Jersey Holdings, Inc. and the Retail
Card Services portfolio.
The increase in noninterest expense is primarily due to the
aforementioned launch of the Shell MasterCard, which resulted in
higher operating expenses of $34 million in the second quarter of
1994 and of $66 million in the first six months. This increase was
partially offset by expense management initiatives throughout the
Regional Bank coupled with lower foreclosed property expense,
primarily in Chemical New Jersey Holdings, Inc.
TEXAS COMMERCE BANCSHARES
Texas Commerce is a leader in providing financial products and
services to businesses and individuals throughout Texas. Texas
Commerce is the primary bank for more large corporations and middle
market companies than any other bank in Texas. As of June 30, 1994,
Texas Commerce had $21 billion in total assets with 115 locations
statewide.
Texas Commerce's net income in the second quarter of 1994 was $60
million, an increase of 35% from last year's second quarter results
of $44 million. The increase in the 1994 second quarter period
compared with the 1993 second quarter period was primarily due to
decreases in the credit provision of $15 million and noninterest
expense of $14 million and higher noninterest revenue of $5 million,
partially offset by a $7 million decline in net interest income.
For the first six months, Texas Commerce's net income increased to
$111 million in 1994, compared with $89 million in 1993. This
improvement resulted from the lower credit provision of $31 million,
higher noninterest revenue of $18 million and lower noninterest
expense of $14 million, partially offset by a $15 million decline in
net interest income. The $89 million net income for the first half
of 1993 excludes the restructuring charge ($43 million pre-tax; $30
million after-tax) related to the acquisition of the First City
Banks and a positive $14 million after-tax net effect from the
implementation of SFAS 106 and SFAS 109.
Based on continuing improvements in asset quality and Texas
Commerce's already adequate allowance for losses, Texas Commerce
recorded a negative credit provision (i.e. credit to the provision
for losses) in the first half of 1994. The increase in noninterest
revenue is due to strong revenue growth from fee-based services
which was up 4% from the second quarter of 1993 and up 8% from the
first half of 1993. Trust income rose 34% from the second quarter
of 1993 (up 40% from the first half of 1993), reflecting both
increased demand for Texas Commerce's services as well as the
effects of the acquisitions of First City Banks and Ameritrust last
year. The decrease in net interest income is attributable to lower
loan volumes and less favorable interest rate spreads.
-28-
29
Part I
Item 2 (continued)
The decline in noninterest expense is attributable to lower
foreclosed property expense (down $45 million compared to the first
half of 1993), due to improved credit quality. This favorable
result offset the additional operating expenses associated with the
1993 acquisitions.
Nonperforming assets declined to $177 million at June 30, 1994, down
$14 million from the 1994 first quarter. The decrease represented
the 24th consecutive quarterly decline from a peak of $1,303 million
in mid-1988.
REAL ESTATE
Real Estate includes the management of the Corporation's commercial
real estate portfolio, exclusive of those in Chemical New Jersey
Holdings, Inc. (included in Regional Bank section) and in Texas
Commerce. Real Estate had a net loss of $37 million for the second
quarter of 1994 compared with a net loss of $56 million in the
second quarter of 1993. For the first six months, Real Estate's net
loss was $80 million in 1994, compared with $102 million in 1993.
The improvement in net income was primarily due to a decrease in
credit provision and lower foreclosed property expense reflecting
the significant progress made in managing the Corporation's real
estate portfolio. Total nonperforming assets at June 30, 1994 were
$1,074 million, a decline of 10% from $1,190 million in the first
quarter of 1994 and a decline of 18% from the 1993 year-end.
CORPORATE
Corporate had a net loss of $22 million for the 1994 second quarter
and a net loss of $57 million for the first six months of 1994,
compared with a net loss of $53 million and $83 million,
respectively, for the same period in 1993. Corporate includes the
management results attributed to the parent company; the
Corporation's investment in CIT; and some effects remaining at the
corporate level after the implementation of management accounting
policies, including residual credit provision and tax expense.
Included in the $83 million net loss for the first six months of
1993 were the following one-time items: the recognition of $117
million in Federal tax benefits, an after-tax loss of $53 million
($75 million pre-tax) due to the writedown associated with the
planned disposition of residential mortgages, a net $35 million gain
from the adoption of SFAS 106 and SFAS 109 and a $30 million after-
tax restructuring charge ($43 million pre-tax) related to the
acquisition of the First City Banks.
--------------------------------------------------------------------
BALANCE SHEET ANALYSIS
--------------------------------------------------------------------
The Corporation's total assets were $168.9 billion at June 30, 1994,
an increase of $19.0 billion from the 1993 year-end. The higher
level of total assets was principally due to the adoption of FASI 39
on January 1, 1994. As a result of the adoption of this accounting
standard, total assets and liabilities each increased by
approximately $19.0 billion at June 30, 1994, with unrealized gains
reported as Trading Assets-Risk Management Instruments and
unrealized losses reported in Other Liabilities. Prior to the
adoption of FASI 39, unrealized gains and losses were reported net
in Other Assets.
-29-
30
Part I
Item 2 (continued)
SECURITIES
As of December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). As a
result of the adoption of SFAS 115, debt and equity securities that
were previously measured either at amortized cost or at the lower of
aggregate amortized cost or market are currently measured at fair
value. See Note 3 of the Notes to Consolidated Financial Statements
for a further discussion of SFAS 115.
The prepayment trends of mortgage-backed securities and
collateralized mortgage obligations ("CMOs") is actively monitored
through the Corporation's portfolio management function. The
Corporation typically invests in CMOs that the Corporation believes
have stable cash flows and relatively short duration, thereby
limiting the impact of interest rate fluctuations on the portfolio.
Management regularly does simulation testing of the impact that
interest and market rate changes would have on its CMO portfolio.
Mortgage-backed securities and CMOs which management believes have
high prepayment risk are included in the available-for-sale
portfolio.
CREDIT PORTFOLIO
The following loan review discussion focuses primarily on
developments since December 31, 1993 and should be read in
conjunction with the Credit Portfolio section on pages B34 - B42 of
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993.
The Corporation's loans outstanding totaled $74.7 billion at June
30, 1994, a decline of $696 million from year-end 1993 and $4.5
billion lower than June 30, 1993. The decline in the loan portfolio
reflects a continued reduction in commercial loans (albeit at a much
lower rate than prior quarters), largely offset by an increase in
the consumer portfolio. The commercial loan outstandings have
declined due to management's strategic decision to reduce the credit
risk profile of the Corporation as well as ongoing loan paydowns
from businesses that are refinancing their borrowings in the debt
and equity markets. The loan portfolio at June 30, 1994 was
relatively unchanged from the March 31, 1994 level, in contrast to a
decline experienced in the Corporation's total loan portfolio for
each of the eight consecutive quarters ended March 31, 1994.
Management believes that there was a modest increase in loan demand
during the second quarter of 1994 and, as a result, expects a modest
increase in loan outstandings for the remaining quarters of 1994.
The Corporation is a leading participant in loan originations and
sales. This activity is comprised of the origination and sale of
loans and lending commitments to investors, generally without
recourse. These sales include syndication, assignment and
participation, and include both short- and medium-term transactions.
This loan distribution capability allows the Corporation to compete
aggressively and profitably in wholesale lending markets by enabling
it to originate and subsequently reduce larger individual credit
exposures and thereby to price more flexibly than if all loans were
held as permanent investments. The Corporation also benefits from
increased liquidity. During the 1994 second quarter and six months,
the Corporation acted as agent or co-agent for approximately $78
billion and $129 billion, respectively, in syndicated credit
facilities.
-30-
31
Part I
Item 2 (continued)
The Corporation's loan balances were as follows for the dates
indicated:
====================================================================
JUNE 30, December 31, June 30,
(in millions) 1994 1993 1993
-------- ------------ --------
LOANS
Domestic Commercial:
Commercial Real Estate (a) $ 6,706 $ 7,338 $ 8,225
Commercial and Industrial 19,601 18,874 23,484
Financial Institutions 3,384 4,816 3,367
------- ------- -------
Total Commercial Loans 29,691 31,028 35,076
------- ------- -------
Domestic Consumer: (b)
Residential Mortgage 12,361 12,244 11,674
Credit Card 7,774 7,176 6,279
Other Consumer 6,538 6,266 6,021
------- ------- -------
Total Consumer Loans 26,673 25,686 23,974
------- ------- -------
Total Domestic Loans 56,364 56,714 59,050
Foreign, primarily commercial (c) 18,321 18,667 20,150
------- ------- -------
Total Loans $ 74,685 $ 75,381 $79,200
======= ======= =======
[FN]
(a) Represents loans secured primarily by real property, other than
loans secured by mortgages on 1-4 family residential properties.
(b) Consists of 1-4 family residential mortgages, credit cards,
installment loans (direct and indirect types of consumer
finance) and student loans.
(c) Includes loans previously classified as LDC loans. Previously
reported loan amounts have been reclassified to conform with the
June 30, 1994 presentation.
====================================================================
NONPERFORMING ASSETS
For a description of the Corporation's accounting policies for its
nonperforming loans, renegotiated loans and assets acquired as loan
satisfactions, see Note One of the Notes to the Consolidated
Financial Statements on pages B57-B58 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993.
For a description of the Corporation's shared loss assets acquired
from First City which are subject to loss sharing provisions of the
Purchase and Assumption Agreements between the FDIC and Texas
Commerce, see Note Seven of the Notes to the Consolidated Financial
Statements on page B64 of the Corporation's Annual Report on Form
10-K for the year ended December 31, 1993. At June 30, 1994,
nonperforming shared loss assets were $87 million. Such assets are
not included in the amount of nonperforming assets below.
-31-
32
Part I
Item 2 (continued)
The following table sets forth the nonperforming assets and
contractually past-due loans of the Corporation at June 30, 1994,
December 31, 1993 and June 30, 1993.
====================================================================
JUNE 30, December 31, June 30,
(in millions) 1994 1993 1993
-------- ------------ --------
NONPERFORMING LOANS:
Domestic Commercial:
Commercial Real Estate $ 645 $ 682 $ 977
Commercial and Industrial 570 867 1,440
Financial Institutions 14 24 44
-------- -------- --------
Total Commercial Loans 1,229 1,573 2,461
-------- -------- --------
Domestic Consumer:
Residential Mortgage 144 101 85
Other Consumer 21 24 26
-------- -------- --------
Total Consumer Loans 165 125 111
-------- -------- --------
Total Domestic 1,394 1,698 2,572
Foreign, primarily commercial (a) 364 893 1,192
-------- -------- --------
Total Nonperforming Loans $ 1,758 $ 2,591 $ 3,764
Assets Acquired as Loan
Satisfactions 735 934 1,099
-------- -------- --------
Total Nonperforming Assets $ 2,493 $ 3,525 $ 4,863
======== ======== ========
Contractually Past-Due Loans (b):
Consumer $ 267 $ 299 $ 290
Commercial and Other Loans 61 24 105
-------- -------- --------
Total Contractually
Past-Due Loans $ 328 $ 323 $ 395
======== ======== ========
[FN]
(a) Includes nonperforming loans previously classified as LDC
nonperforming loans. Previously reported amounts have been
restated to conform with the June 30, 1994 presentation.
(b) Accruing loans past-due 90 days or more as to principal and
interest, which are not characterized as nonperforming loans.
====================================================================
The Corporation's total nonperforming assets at June 30, 1994 were
$2,493 million, a decrease of $1,032 million from the 1993 year-end
level and a decrease of $2,370 million from last year's comparable
quarter. This improvement in the Corporation's credit profile is a
result of a significantly lower level of loans being placed on
nonperforming status as well as the result of repayments, charge-
offs, and the Corporation's continuing loan workout and collection
activities. Included in foreign nonperforming loans at June 30,
1994 were nonperforming LDC loans of $145 million, a decrease from
$524 million at March 31, 1994, principally the result of the
completion of the Brazilian refinancing program. For a further
discussion of the Brazilian debt exchange, see the Brazil section in
this Form 10-Q. Management expects a further significant reduction
in the level of its nonperforming assets during the remainder of
1994, although at a lower rate than the reduction in nonperforming
assets during the first half of 1994.
-32-
33
Part I
Item 2 (continued)
The following table presents the reconciliation of nonperforming
assets for the second quarter and first six months of 1994 and 1993.
RECONCILIATION OF NONPERFORMING ASSETS Second Quarter Six Months
------------------- -------------------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Balance at beginning of period $ 3,203 $5,706 $ 3,525 $ 6,092
Additions:
Loans placed on nonperforming status 220 417 512 999
Deductions:
Payments 299 307 644 684
Sales 91 127 133 209
Charge-offs (a) 212 315 368 562
Write-downs 16 76 47 133
Return to accrual status 312 348 352 553
Transfer to held-for-sale
(other assets) --- 87 --- 87
------- ------- ------- -------
Balance at end of period $ 2,493 $4,863 $ 2,493 $ 4,863
======= ======= ======= =======
(a) Excludes those consumer charge-offs that are recorded on a
formula basis.
================================================================================
ALLOWANCE FOR LOSSES
The accompanying table reflects the activity in the allowance for
losses for the second quarter and six months ended June 30, 1994 and
1993.
Second Quarter Six Months
--------------------- -------------------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
NON-LDC ALLOWANCE:
Balance at Beginning of Period $ 2,400 $2,220 $ 2,423 $ 2,206
Provision for Losses 160 363 365 675
Charge-Offs (236) (400) (519) (755)
Recoveries 51 37 104 80
------- ------- ------- -------
Net Charge-Offs (185) (363) (415) (675)
Transfer from LDC Allowance 300 200 300 200
Other 1 1 3 15(a)
------- ------- ------- -------
Balance at End of Period 2,676 2,421 2,676 2,421
------- ------- ------- -------
LDC ALLOWANCE:
Balance at Beginning of Period 591 768 597 819
Provision for Losses --- --- --- ---
Charge-Offs (295) (15) (296) (19)
Recoveries 4 80 57 90
------- ------- ------- -------
Net (Charge-Offs) Recoveries (291) 65 (239) 71
Losses on Sales and Swaps --- (63) (58) (120)
Transfer to Non-LDC Allowance (300) (200) (300) (200)
------- ------- ------- -------
Balance at End of Period 0 570 0 570
------- ------- ------- -------
Total Allowance for Losses $ 2,676 $2,991 $ 2,676 $ 2,991
======= ======= ======= =======
(a) Primarily related to the First City Banks acquisition.
================================================================================
-33-
34
Part I
Item 2 (continued)
Completion of the Brazilian refinancing package during the 1994
second quarter brought to a close the broad rescheduling programs
begun in the mid-1980s. In connection with completion of the
Brazilian refinancing program, the Corporation performed a final
valuation of its LDC portfolio, adjusting its medium- and long-term
outstandings to the various LDC countries constituting the portfolio
to amounts that management believes to be the estimated net
recoverable values of each of such loans at June 30, 1994. The
final valuation resulted in a $291 million charge in the 1994 second
quarter. The remaining LDC allowance of $300 million (after taking
the aforementioned charge-off) was transferred to the general
allowance for losses.
The following table presents the Corporation's allowance coverage
ratios at June 30, 1994, December 31, 1993 and June 30, 1993.
ALLOWANCE COVERAGE RATIOS
====================================================================
JUNE 30, December 31, June 30,
For the Period Ended: 1994 1993 1993
-------- ------------ --------
Allowance for Losses to:
Loans at Period-End 3.58% 4.01% 3.78%
Average Loans 3.60 3.84 3.71
Nonperforming Loans 152.22 116.56 79.46
====================================================================
The Corporation deems its allowance for losses at June 30, 1994 to
be adequate. Although the Corporation considers that it has
sufficient reserves to absorb losses that may currently exist in the
portfolio, but are not yet identifiable, the precise loss content
from the loan portfolio, as well as from other balance sheet and
off-balance sheet credit-related instruments, is subject to
continuing review based on quality indicators, concentrations,
changes in business conditions, and other external factors such as
competition and legal and regulatory requirements.
NET CHARGE-OFFS
====================================================================
Second Quarter Six Months
---------------- -------------
(in millions) 1994 1993 1994 1993
------ ------ ------ ------
Net Charge-Offs:
Domestic Commercial:
Commercial Real Estate $ 49 $ 70 $123 $127
Commercial and Industrial 37 125 88 199
Financial Institutions (1) --- (1) 14
------ ------ ------ ------
Total Commercial Net
Charge-Offs 85 195 210 340
------ ------ ------ ------
Domestic Consumer:
Residential Mortgage 9 60 12 63
Credit Card 81 83 163 169
Other Consumer 4 6 9 14
------ ------ ------ ------
Total Consumer Loans 94 149 184 246
------ ------ ------ ------
Total Domestic Loans 179 344 394 586
Foreign (a) 297 17 318 138
------ ------ ------ ------
Total Net Charge-Offs $476 $361 $712 $724
====== ====== ====== ======
[FN]
(a) Included in Foreign are LDC net charge-offs and losses on sales
and swaps in the amounts of $291 million and $297 million for
the 1994 second quarter and six month periods, respectively, and
a net recovery of $2 million and net charge-offs and losses of
$49 million for 1993 second quarter and six month periods,
respectively.
====================================================================
-34-
35
Part I
Item 2 (continued)
For a discussion of net charge-offs, see the various credit
portfolio sections in this Form 10-Q. Management expects total net
charge-offs in 1994 to decrease significantly from the full year
1993 amount.
DOMESTIC COMMERCIAL REAL ESTATE
The domestic commercial real estate portfolio represents loans
secured primarily by real property, other than loans secured by
one-to-four family residential properties, which are included in the
consumer loan portfolio. The domestic commercial real estate loan
portfolio totaled $6.7 billion at June 30, 1994, a decline from $7.3
billion at December 31, 1993 and a decline from $8.2 billion at June
30, 1993. The decreases from the 1993 year-end and year ago periods
are attributable to repayments, transfers to real estate owned and
charge-offs.
The table below sets forth the major components of the domestic
commercial real estate loan portfolio at the dates indicated.
====================================================================
JUNE 30, December 31, June 30,
(in millions) 1994 1993 1993
-------- ------------ --------
Commercial Mortgages $5,584 $ 5,917 $ 6,506
Construction 1,122 1,421 1,719
------ ------ ------
Total Domestic Commercial
Real Estate Loans $6,706 $ 7,338 $ 8,225
====== ====== ======
====================================================================
Commercial mortgages provide financing for the acquisition or
refinancing of commercial properties, and typically have terms
ranging from three-to-seven years. Construction loans are generally
originated to finance the construction of real estate projects.
When the real estate project has cash flows sufficient to support a
commercial mortgage, the loan is transferred from construction
status to commercial mortgage status.
-35-
36
Part I
Item 2 (continued)
The following table shows the Corporation's domestic commercial real
estate loans, nonperforming loans and foreclosed commercial real
estate, by property type and geographic location.
DOMESTIC COMMERCIAL REAL ESTATE BY PROPERTY TYPE AND GEOGRAPHIC
REGION (a)
JUNE 30, 1994
-----------------------------
Dec. 31,
Other 1993
(in millions) NY/NJ Texas Domestic TOTAL Total
----- ----- -------- ----- -------
OFFICE:
Loans $ 799 $ 367 $ 302 $1,468 $1,589
Nonperforming Loans 52 2 72 126 180
Real Estate Owned 41 37 22 100 140
RETAIL:
Loans 609 244 357 1,210 1,370
Nonperforming Loans 31 11 2 44 52
Real Estate Owned 17 3 43 63 65
RESIDENTIAL: (b)
Loans 451 168 175 794 1,161
Nonperforming Loans 94 12 16 122 130
Real Estate Owned 77 1 3 81 123
HOTEL:
Loans 167 79 318 564 574
Nonperforming Loans 21 --- 77 98 72
Real Estate Owned 113 --- 15 128 211
LAND:
Loans 275 146 23 444 387
Nonperforming Loans 106 5 7 118 90
Real Estate Owned 39 56 52 147 212
OTHER:
Loans 1,039 644 543 2,226 2,257
Nonperforming Loans 46 19 72 137 158
Real Estate Owned 46 9 28 83 47
TOTAL:
Loans $3,340 $1,648 $1,718 $6,706 $7,338
Nonperforming Loans 350 49 246 645 682
Real Estate Owned 333 106 163 602 798
[FN]
(a) Nonperforming loans are included in loan balances. Real Estate
Owned denotes foreclosed commercial real estate, which is
included in assets acquired as loan satisfactions.
(b) Represents residential property construction, land development
and multi-family permanent mortgages, excluding 1-4 family
residential mortgages.
====================================================================
The largest concentration of domestic commercial real estate loans
is in the New York/New Jersey and Texas markets, representing 50%
and 25%, respectively, of the domestic commercial real estate
portfolio. No other state represented more than 3% of the domestic
commercial real estate loan portfolio.
-36-
37
Part I
Item 2 (continued)
Nonperforming domestic commercial real estate assets were $1,247
million at June 30, 1994, a 16% decrease from December 31, 1993 and
a decrease of $609 million, or 33%, from June 30, 1993. The
improvement in nonperforming domestic commercial real estate asset
levels for the first half of 1994 is the result of increased
liquidity in the commercial real estate markets as well as
successful workout activities.
The second quarter of 1994 was the sixth consecutive quarter in
which reductions to nonperforming domestic commercial real estate
assets in the form of payments, return to accrual status and sales
of real estate owned were greater than the additions to
nonperforming assets. Domestic commercial real estate net charge-
offs in the second quarter of 1994 totaled $49 million, compared
with $70 million in the same period a year ago. For the first six
months, such charge-offs were $123 million in 1994, compared with
$127 million in 1993. Writedowns of commercial real estate owned
totaled $43 million for the first six months of 1994, compared with
$99 million in first half of 1993. Approximately $79 million and
$120 million in commercial real estate owned were sold during the
1994 second quarter and first six months, respectively. Generally,
these assets were sold at or above carrying value. Domestic
commercial real estate net charge-offs, writedowns and nonperforming
assets for 1994 are expected to be below 1993 levels.
DOMESTIC COMMERCIAL AND INDUSTRIAL PORTFOLIO
The domestic commercial and industrial portfolio totaled $19.6
billion at June 30, 1994, compared with $18.9 billion at December
31, 1993 and $23.5 billion at June 30, 1993. The portfolio is
diversified geographically and by industry. The largest industry
concentrations are real estate related and oil and gas, both of
which approximate $1.5 billion or 2.1% of total loans. All of the
other remaining industries are each less than 2% of total loans.
Included in the domestic commercial and industrial portfolio are
loans related to highly leveraged transactions ("HLT"). The
Corporation originates and syndicates loans in HLTs, which include
acquisitions, leveraged buyouts and recapitalizations. HLT loans at
June 30, 1994 totaled approximately $1.6 billion, compared with $1.9
billion at December 31, 1993 and $2.1 billion at June 30, 1993. The
Corporation also was committed at June 30, 1994 to lend an
additional amount of approximately $464 million to its HLTs. The
substantial reduction in the HLT loan portfolio from June 30, 1993
can be largely attributed to repayments, reclassifications to non-
HLT status and, to a lesser extent, charge-offs. At June 30, 1994,
the Corporation had $182 million in nonperforming HLT loans compared
with $269 million at the end of 1993 and $412 million at the end of
the same period last year. Net charge-offs related to HLTs for the
six months ended June 30, 1994 totaled $2 million, versus $55
million for the comparable 1993 period.
DOMESTIC FINANCIAL INSTITUTIONS PORTFOLIO
The domestic financial institutions portfolio includes commercial
banks and companies whose businesses primarily involve lending,
financing, investing, underwriting or insuring. Loans to domestic
financial institutions were $3,384 million at June 30, 1994 or 5% of
total loans outstanding at June 30, 1994. Loans to domestic
financial institutions are predominantly to broker-dealers, which
comprise over half the domestic financial institution total.
DOMESTIC CONSUMER PORTFOLIO
The consumer loan portfolio consists of one-to-four family
residential mortgages, credit cards and other consumer loans. The
domestic consumer loan portfolio totaled $26.7 billion at June 30,
1994, representing 36% of total loans, an increase from
$25.7 billion or 34% of total loans at December 31, 1993 and an
increase from $24.0 billion or 30% of total loans at June 30, 1993.
-37-
38
Part I
Item 2 (continued)
The following table presents the composition of the Corporation's
domestic consumer loans at the dates indicated.
====================================================================
JUNE 30, December 31, June 30,
(in millions) 1994 1993 1993
-------- ------------ --------
Residential Mortgages $ 12,361 $ 12,244 $ 11,674
Credit Cards 7,774 7,176 6,279
Other Consumer Loans (a) 6,538 6,266 6,021
------- ------- -------
Total $ 26,673 $ 25,686 $ 23,974
======= ======= =======
[FN]
(a) Includes installment and student loans.
====================================================================
Credit card receivables at June 30, 1994 increased $1.5 billion from
the same period a year ago, of which approximately $1.2 billion is
related to the co-branded Shell MasterCard program, which was
introduced in the fourth quarter of 1993. Management expects
continued growth in the level of Shell credit card outstandings for
the remainder of 1994. Management is exploring other opportunities
in the credit card area, including the feasibility of other co-
branded card programs.
Total nonperforming domestic consumer loans at June 30, 1994 were
$165 million and were comprised of $144 million of loans secured by
residential real estate and $21 million of other consumer loans.
Total nonperforming domestic consumer loans at December 31, 1993
were $125 million and were comprised of $101 million of loans
secured by residential real estate and $24 million of other consumer
loans. At June 30, 1993, total nonperforming domestic consumer
loans were $111 million and were comprised of $85 million of loans
secured by residential real estate and $26 million of other consumer
loans. The rise in nonperforming domestic consumer residential
loans since June 30, 1993, primarily reflects increases in the
nonperforming status of certain loans originally extended several
years ago under a reduced documentation mortgage program.
Net charge-offs in the domestic consumer loan portfolio totaled $94
million in the 1994 second quarter compared with $149 million in the
1993 second quarter. The 1994 second quarter net charge-offs
consisted of $81 million in credit card receivables, $9 million in
residential mortgages and $4 million in other consumer loans. The
1993 second quarter net charge-offs consisted of $60 million in
residential mortgages (including $55 million related to the decision
to accelerate the disposition of certain nonperforming residential
mortgages), $83 million in credit card receivables and $6 million in
other consumer loans. There were essentially no credit losses in
the student loan portfolio due to the existence of Federal and State
government agency guarantees. For the first six months of 1994,
domestic consumer net charge-offs were $184 million compared with
$246 million for the first six months of 1993.
Domestic consumer loan balances are expected to increase in 1994,
particularly in the credit card and residential mortgage portfolios.
The higher residential mortgage activity is the result of the
Margaretten acquisition in July 1994. In 1994, the Corporation's
strategy will continue to emphasize risk management and consumer
loan portfolio credit quality. Management expects consumer loan net
charge-offs in the second half of 1994 will be somewhat higher than
the first half due to the growth of the consumer portfolio,
including the higher level of credit card receivables outstanding as
a result of the Shell MasterCard program.
MORTGAGE BANKING ACTIVITIES
The Corporation both originates and services residential mortgage
loans as part of its mortgage banking activities. After
origination, the Corporation may sell loans to investors, primarily
in the secondary market, while retaining the rights to service such
loans. In accordance with current accounting standards, the value
of such servicing rights related to originating mortgage loans is
not recorded as an asset in the financial statements. The
Corporation originated $2.9 billion of mortgages in the second
quarter of 1994 versus $3.7 billion in the same 1993 period. For
the six months ended June 30, 1994 the Corporation originated $7.0
billion of mortgages
-38-
39
Part I
Item 2 (continued)
compared with $6.6 billion in 1993. For the first six months of 1994, the
Corporation sold to investors approximately 75% of the residential mortgage
loans it had originated. The 1994 second quarter results do not include the
acquisition of Margaretten.
In addition to originating mortgage servicing rights, the
Corporation also purchases mortgage servicing rights. The
Corporation may purchase bulk rights to service a loan portfolio or
the Corporation may purchase loans directly and then sell such loans
while retaining the servicing rights. The Corporation's servicing
portfolio amounted to $40.3 billion at June 30, 1994 compared with
$36.4 billion at December 31, 1993 and $35.0 billion at June 30,
1993. Purchased mortgage servicing rights (included in other
assets) amounted to $293 million at June 30, 1994 compared with $249
million at December 31, 1993 and $224 million at June 30, 1993. The
mortgage loans to which the Corporation's servicing rights relate
are, to a substantial degree, of recent vintage (i.e., originated
within the past two years when interest rates have been relatively
low). The Corporation utilizes an amortization method based on
adjusted cash flows to amortize purchased mortgage servicing rights.
The Corporation continually evaluates prepayment exposure of the
portfolio, adjusting the balance and remaining life of the servicing
rights as a result of prepayments.
FOREIGN PORTFOLIO
The foreign portfolio includes foreign commercial and industrial
loans, loans to foreign financial institutions, foreign commercial
real estate, loans to foreign governments and official institutions
and foreign consumer loans. At June 30, 1994, the Corporation's
total foreign loans were $18.3 billion, compared with $18.7 billion
at December 31, 1993 and $20.2 billion at June 30, 1993. Included
in foreign loans were foreign commercial and industrial loans of
$7.1 billion at the end of the 1994 second quarter, an increase of
$.6 billion from the 1993 year-end and $41 million from June 30,
1993.
Total foreign commercial real estate loans at June 30, 1994 were $.5
billion, slightly reduced from $.6 billion at each of December 31,
1993 and June 30, 1993. A significant portion of the foreign real
estate portfolio is located in the United Kingdom and Hong Kong.
The Corporation's medium- and long-term outstandings to countries
engaged in debt rescheduling ("LDC") at June 30, 1994 were $1,546
million, a reduction of $702 million, or 31%, from December 31,
1993. The reduction from the 1993 year-end is primarily
attributable to the aforementioned $291 million charge-off related
to the final evaluation of the Corporation's LDC portfolio, as well
as from loan sales. Total LDC outstandings were $3,503 million at
June 30, 1994, a decline of $587 million from December 31, 1993.
The reduction was principally due to the aforementioned reductions
in medium- and long-term outstandings.
BRAZIL
For a discussion of significant developments with respect to the
restructuring of Brazilian debt, see pages B41 and B42 of the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1993. The following significant events have occurred to date in
1994: The exchange of bank creditors' eligible medium- and long-
term debt for bonds issued by the Federal Republic of Brazil
occurred on April 15, 1994. The Corporation's total Brazilian
outstandings affected by the exchange had a book value of $297
million. The Corporation's "Old" debt (multi-year Deposit Facility
Agreement and other pre-1988 restructured debt) with a face value of
$635 million (which includes loan amounts previously charged-off)
was exchanged for $299 million of Capitalization bonds and $218
million of Discount bonds. The Corporation's "New" debt (credit
extensions originating from the 1988 restructuring) with a face
value of $165 million (which includes loan amounts previously
charged off) was exchanged for $90 million of Debt Conversion bonds
and $75 million of New Money bonds. The Corporation also received
Eligible Interest bonds (EIs) of approximately $160 million for the
majority of its remaining unpaid interest. In addition, a portion
of Principal bonds ($50 million) and EIs (approximately $8 million)
is currently being held in escrow to be released on September 22,
1994. The exchange did not result in any additional charge-offs by
the Corporation.
The aforementioned bonds received by the Corporation through the
exchange are measured subject to the provisions of SFAS 115. The
Corporation is classifying all the bonds it received in the exchange
as available-for-sale, and therefore such bonds will be valued at
fair value. As a result of the consummation of the exchange,
-39-
40
Part I
Item 2 (continued)
the Corporation removed approximately $270 million of Brazilian loans
from nonperforming status. Depending upon market conditions during
the latter half of 1994, the Corporation expects to sell a portion
of the EI bonds it received in the exchange.
--------------------------------------------------------------------
CAPITAL
--------------------------------------------------------------------
The following capital discussion focuses primarily on developments
since December 31, 1993. Accordingly, it should be read in
conjunction with the Capital section on pages B42 - B44 of the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1993.
Total stockholders' equity was $11.2 billion at both June 30, 1994
and December 31, 1993, compared with $10.5 billion at June 30, 1993.
The amount of stockholders' equity at June 30, 1994 reflected an
increase of $676 million in net income generated during the six
month period as well as an increase of $200 million from the
issuance of Adjustable Rate Cumulative Preferred Stock,
Series L ("Series L Preferred Stock"). These increases were
offset by a $506 million reduction in the fair value of available-
for-sale securities accounted for under SFAS 115; the net increase
in treasury stock of $102 million principally from the
aforementioned repurchase of approximately 3.2 million shares of the
Corporation's common stock, and common and preferred dividends
totaling $257 million.
Total capitalization (total stockholders' equity under risk-based
capital guidelines and senior subordinated debt that qualifies as
Tier 2 Capital) increased by $542 million during the first six months
of 1994.
LONG-TERM DEBT
In the first half of 1994, additions to the Corporation's long-term
debt were $1,215 million (including $565 million of medium-term
notes, $200 million of subordinated debt that qualifies as Tier 2
Capital and $450 of other long-term debt). These additions were
offset by maturities of $895 million of long-term debt (including
$255 million of medium-term notes, $315 million of senior notes and
$325 million of other long-term debt) and the redemption of $185
million of long-term debt. See Liquidity Management section for
further discussion of the Corporation's long-term debt redemptions.
COMMON STOCK DIVIDENDS
In the second quarter of 1994, the Board of Directors of the
Corporation declared a $.38 per share quarterly dividend to be paid
on its common stock in July 1994. Future dividend policies will be
determined by the Board of Directors in light of the earnings and
financial condition of the Corporation and its subsidiaries and
other factors, including applicable governmental regulations and
policies.
RISK-BASED CAPITAL RATIOS
At June 30, 1994, the Corporation's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were
8.7% and 12.8%, respectively, well in excess of the minimum ratios
specified by the Federal Reserve Board. These ratios, as well as
the leverage ratio discussed below, do not reflect any adjustment in
stockholders' equity due to the adoption of SFAS No. 115. The
Federal Reserve Board has proposed to permit banking corporations to
include in Tier 1 Capital the net amount of any unrealized gains or
losses from securities available-for-sale. At June 30, 1994,
Chemical Bank's ratios of Tier 1 Capital and Total Capital to risk-
weighted assets, were 7.8% and 12.2%, respectively. At such date,
each of Chemical Bank and Texas Commerce Bank National Association,
were "well capitalized," as defined by the Federal Reserve Board.
To be "well capitalized," a banking organization must have a Tier 1
Capital ratio of at least 6%, Total Capital ratio of at least 10%,
and Tier 1 leverage ratio of at least 5%.
LEVERAGE RATIOS
The Tier 1 leverage ratio, is defined as Tier 1 Capital (as defined
under the risk-based capital guidelines) divided by average total
assets (net of allowance for losses, goodwill and certain intangible
assets). The minimum leverage ratio is 3% for banking organizations
that have well-diversified risk (including no undue interest risk);
excellent asset quality; high liquidity; good earnings; and, in
general, is considered a strong banking organization
-40-
41
Part I
Item 2 (continued)
(rated composite 1 under the BOPEC rating system for bank holding
companies). Other banking organizations are expected to have ratios
of at least 4%-5%, depending upon their particular condition and
growth plans. Higher capital ratios could be required if warranted
by the particular circumstances or risk profile of a given banking
organization. The Federal Reserve Board has not advised the
Corporation of any specific minimum Tier 1 leverage ratio applicable
to it. The Corporation's Tier I leverage ratio was 6.41% at June
30, 1994, compared with 6.77% at December 31, 1993. At June 30,
1994, Chemical Bank's Tier 1 leverage ratio was 5.98%, compared with
6.97% at December 31, 1993. The declines in the leverage ratios for
both the Corporation and Chemical Bank reflect the adoption of FASI
39 on January 1, 1994. Assuming that FASI 39 had not been adopted,
the Corporation's Tier 1 leverage ratio would have been 7.11% at
June 30, 1994 and Chemical Bank's Tier 1 leverage ratio would have
been 6.83%.
The table which follows sets forth the Corporation's Tier 1 Capital,
Tier 2 Capital and risk-weighted assets, and the Corporation's
risk-based Tier 1 and Total Capital Ratios and Tier 1 leverage
ratios for the dates indicated.
CAPITAL AND RATIOS UNDER FEDERAL RESERVE BANK FINAL GUIDELINES
====================================================================
JUNE 30, December 31,
(in millions, except ratios) 1994 1993
-------- ------------
TIER 1 CAPITAL
Common Stockholders' Equity $ 9,617 $ 9,295
Nonredeemable Preferred Stock 1,854 1,654
Minority Interest 63 66
Less: Goodwill 924 941
Non-Qualifying Intangible Assets 164 211
------- -------
Tier 1 Capital $ 10,446 $ 9,863
------- -------
TIER 2 CAPITAL
Long-Term Debt Qualifying as Tier 2 $ 3,413 $ 3,437
Qualifying Allowance for Losses 1,519 1,536
------- -------
Tier 2 Capital $ 4,932 $ 4,973
------- -------
TOTAL QUALIFYING CAPITAL $ 15,378 $ 14,836
======= =======
Risk-Weighted Assets (a) $ 120,336 $121,446
Tier 1 Capital Ratio 8.68% 8.12%
Total Capital Ratio 12.78% 12.22%
Tier 1 Leverage Ratio 6.41% 6.77%
[FN]
(a) Includes off-balance sheet risk-weighted assets in the amount of
$39,773 million, and $36,777 million, respectively, at June 30,
1994 and December 31, 1993.
Excluding the Corporation's securities subsidiary, Chemical
Securities Inc., the June 30, 1994 ratios of Tier 1 Leverage,
Tier 1 Capital to risk-weighted assets and Total Capital to
risk-weighted assets were 6.8%, 8.5% and 12.4%, respectively,
compared with 7.2%, 7.9% and 11.9%, respectively, at December 31,
1993.
====================================================================
--------------------------------------------------------------------
LIQUIDITY MANAGEMENT
--------------------------------------------------------------------
The following liquidity management discussion focuses primarily on
developments since December 31, 1993. Accordingly, it should be
read in conjunction with the Liquidity Management section on pages
B44 and B45 of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993.
-41-
42
Part I
Item 2 (continued)
The primary source of liquidity for the bank subsidiaries of the
Corporation derives from their ability to generate core deposits,
which includes all deposits except zero-rate deposits, foreign
deposits and certificates of deposit of $100,000 or more. The
Corporation considers funds from such sources to comprise its
subsidiary banks' "core" deposit base because of the historical
stability of such sources of funds. The average core deposits at
the Corporation's bank subsidiaries for the first half of 1994 were
$59 billion, a decrease from $60 billion for the comparable quarter
in 1993. These deposits fund a portion of the Corporation's asset
base, thereby reducing the Corporation's reliance on other, more
volatile, sources of funds. For the first half of 1994, the
Corporation's percentage of average core deposits to average
interest-earning assets was 46%, compared with 48% in the first half
of 1993. Average core deposits as a percentage of average loans was
79% for the first six months of 1994, compared with 74% for the same
period a year ago.
In April 1994, Moody's Investors Service raised its rating on the
long-term deposits and other senior obligations of Chemical Bank to
Aa3 from A1. It also raised the ratings on the Corporation's
commercial paper, senior debt, subordinated debt and preferred stock
and on Chemical Bank's subordinated debt.
The Corporation is an active participant in the capital markets. In
addition to issuing commercial paper and medium-term notes, the
Corporation raises funds through the issuance of long-term debt,
common stock and preferred stock. During the first six months of
1994, the Corporation issued $200 million of preferred stock, $200
million of subordinated debt, $565 million of senior debt through
its medium-term note program and $450 million other long-term debt.
During the first six months of 1994, the Corporation redeemed $185
million of its long-term debt and announced its intention to redeem
all outstanding shares of its Adjustable Rate Cumulative Preferred
Stock, Series C ("Series C Preferred Stock"), stated value $12.00
per share. Such redemptions were undertaken by the Corporation in
light of its ability (as a result of market conditions in general
and the recent upgrades in the Corporation's debt ratings in
particular) to access the credit markets on terms more favorable
than that of the redeemed debt and preferred stock. These
redemptions were part of the Corporation's plan to improve its
capital position by achieving lower financing costs, reducing
interest-rate risk and lengthening maturities. The Corporation will
continue to evaluate the opportunity for future redemptions of debt
and of its outstanding preferred stock in light of current market
conditions.
On May 27, 1994, the Corporation announced its intention to
repurchase up to 10 million shares of its common stock on the open
market from time to time during the twelve months following such
announcement. As of June 30, 1994, the Corporation had repurchased
approximately 3.2 million shares of its common stock under this
program.
On July 15, 1994, the Corporation redeemed all outstanding shares of
its Series C Preferred Stock. The redemption price was $12.36 per
share (which included a premium of $.36 per share) plus accrued but
unpaid dividends to the date of redemption. Approximately 33.7
million shares of the stock were redeemed. A portion of the
redemption was funded by net proceeds received from the issuance of
the Adjustable Rate Cumulative Preferred Stock, Series L. The
proforma effect on earnings per share as a result of the premium
related to the redemption will be a one-time reduction of
approximately $0.05 per common share for the 1994 third quarter.
The following comments apply to the Consolidated Statement of Cash
Flows.
Cash and due from banks increased $2.6 billion during the first six
months of 1994, as net cash provided by operating and financing
activities exceeded net cash used by investing activities. The $2.7
billion net cash provided by financing activities was due to
increases in Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds ($8.5 billion),
partially offset by decreases in net deposits ($6.3 billion). The
$1.2 billion of net cash provided by operating activities was
principally due to earnings adjusted for noncash charges and
credits. The $1.3 billion net cash used in investing activities was
largely the result of cash outflows from purchases of securities
($15.5 billion) and from Federal funds sold and securities purchased
under resale agreements ($2.2 billion), partially offset by cash
inflows from the sales and maturities of securities ($11.3 billion
and $3.9 billion, respectively), as well as decreases in deposits
with banks ($1.6 billion).
-42-
43
Part I
Item 2 (continued)
Cash and due from banks decreased $1.2 billion during the first six
months of 1993, as net cash used in operating and investing
activities exceeded the net cash provided by financing activities.
The $2.1 billion total net cash used by operating activities was
primarily impacted by the net increase in trading related assets
($4.5 billion). The $626 million of net cash used in investing
activities was largely the result of cash outflows from purchases of
securities ($6.0 billion), as well as increases in deposits with
banks ($1.9 billion), and Federal funds sold and securities
purchased under resale agreements ($1.5 billion), partially offset
by cash inflows from the sales and securitizations of loans ($6.3
billion), and maturities and sales of securities ($3.1 billion and
$2.0 billion, respectively). The $1.5 billion net cash provided by
financing activities was due to the increase in Federal funds
purchased, securities sold under repurchase agreements and other borrowed
funds ($3.3 billion), and the net proceeds from the issuance of long-term
debt ($2.6 billion), partially offset by decreases in noninterest bearing
domestic demand deposits ($1.4 billion), domestic time and savings
deposits ($1.8 billion).
The Corporation's anticipated cash requirements (on a parent company
only basis) for the remainder of 1994 include approximately $1,765
million for maturing medium- and long-term debt, redemption of
Series C Preferred Stock, anticipated dividend payments on the
Corporation's common stock and preferred stock and for other parent
company operations. The Corporation considers the sources of
liquidity available to the parent company to be more than sufficient
to meet its obligations. The sources of liquidity available to the
Corporation (on a parent company only basis) include its liquid
assets (including deposits with its bank subsidiaries and short-term
advances to and repurchase agreements with its securities
subsidiaries) as well as dividends or the repayment of intercompany
advances from its bank and non-bank subsidiaries. In addition, as
of June 30, 1994, the Corporation had available to it $750 million
in committed credit facilities from a syndicate of domestic and
international banks. The facilities included a $375 million 36-
month facility and a $375 million 364-day facility.
--------------------------------------------------------------------
OFF-BALANCE SHEET ANALYSIS
--------------------------------------------------------------------
The following off-balance sheet analysis discussion focuses
primarily on developments since December 31, 1993. Accordingly, it
should be read in conjunction with the Off-Balance Sheet Analysis
section on pages B45 - B48 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1993. For a discussion of
the Corporation's accounting policies related to off-balance sheet
instruments, see Note One on page B58 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993.
The Corporation utilizes various off-balance sheet financial
instruments in two ways: trading and asset/liability management.
Certain of these instruments, commonly referred to as "derivatives",
represent contracts with counterparties where payments are made to
or from the counterparty based upon specific interest rates,
currency levels, other market rates or on terms predetermined by the
contract. Derivatives, along with foreign exchange contracts, can
provide a cost-effective alternative to assuming and mitigating risk
associated with traditional on-balance sheet instruments. Such
derivative and foreign exchange transactions involve, to varying
degrees, market risk (i.e., the possibility that a change in
interest or currency rates will cause the value of a financial
instrument to decrease or become more costly to settle) and credit
risk (i.e., the possibility that a loss may occur because a party to
a transaction fails to perform according to the terms of a
contract).
Derivatives and foreign exchange products are generally either
negotiated over-the-counter ("OTC") contracts or standardized
contracts executed on a recognized exchange (such as the Chicago
Board of Options Exchange). Standardized exchange-traded
derivatives primarily include futures and options. Negotiated over-
the-counter derivatives are generally entered into between two
counterparties that negotiate specific agreement terms, including
the underlying instrument, amount, exercise price and maturity.
All the Corporation's interest rate swaps and forwards are OTC-
traded and all of the Corporation's financial futures contracts are
exchange-traded. As of June 30, 1994, approximately 29% of the
Corporation's options activity was exchange-traded, with the balance
being OTC-traded. As of December 31, 1993, approximately 53% of the
Corporation's options activity was exchange-traded, with the balance
being OTC-traded. The percentage of options activity which is
exchange-traded versus OTC-traded will change from quarter to
quarter depending upon conditions in the market place.
-43-
44
Part I
Item 2 (continued)
Market Risk: The Corporation's business strategy is to manage the
market risks associated with its trading activities through
geographic and product diversification. Because of the changing
market environment, the monitoring and managing of these risks is a
continuous process.
The Corporation's trading activities are geographically diverse.
Trading activities are undertaken in more than 20 countries,
although a majority of the Corporation's transactions are executed
in the United States, Japan, Singapore and Western Europe, areas
which the Corporation believes have the most developed laws
regarding derivatives and foreign exchange businesses. The
Corporation trades in a wide range of products which include not
only foreign exchange and derivatives but also securities, including
LDC debt.
The effects of any market losses on the Corporation's trading
activities have been reflected in trading revenue, as the trading
instruments are marked-to-market on a daily basis.
Credit Risk: The effective management of credit risk is a vital
ingredient of the Corporation's off-balance sheet activities. The
Corporation routinely enters into derivative and foreign exchange
product transactions with regulated financial institutions that it
believes have relatively low credit risk. At June 30, 1994,
approximately 95% of transaction counterparties were commercial
banks and financial institutions. Non-financial institutions
accounted for only 5% of the Corporation's derivatives
counterparties. The great majority of the Corporation's derivatives
transactions are with counterparties that are banks and financial
institutions which are dealers of derivatives.
The majority of derivatives and foreign exchange transactions are
outstanding for less than one year. At June 30, 1994, 34% of
outstanding transactions were scheduled to expire within three
months, 20% within three to six months, 17% within six months to one
year, 16% within one to three years and 13% greater than three
years. The short-term nature of these transactions mitigates credit
risk as transactions settle quickly.
The Corporation's actual credit losses arising from derivatives and
foreign exchange transactions in past years have been immaterial.
During 1994 there were no credit losses. Additionally, at June 30,
1994, nonperforming derivatives contracts were immaterial.
The Corporation does not deal, to any material extent, in
derivatives (such as other banks and financial institutions) which
dealers of derivatives consider to be "complex" (i.e., exotic and/or
leveraged). As a result, the notional amount of such derivatives
were immaterial at June 30, 1994.
INTEREST RATE SENSITIVITY
The Corporation's net interest income is affected by changes in the
level of market interest rates based upon mismatches between the
repricing of its assets and liabilities. Interest rate sensitivity
arises in the ordinary course of the Corporation's banking business
as the repricing characteristics of its loans do not necessarily
match those of its deposits and other borrowings. This sensitivity
can be altered by adjusting investments and the maturities of
wholesale funding and with the use of off-balance sheet derivatives
instruments. The Corporation, as part of its asset/liability
management program, does utilize derivatives, primarily interest
rate swaps. These swaps are utilized to adjust the interest rate
risk of specific assets, long-term debt and groups of similar assets
and similar deposits.
Management uses a variety of techniques to measure its interest rate
sensitivity. One such tool is aggregate net gap analysis, an
example of which is presented below. Assets and liabilities are
placed in maturity ladders based on their contractual maturities or
repricing dates. Assets and liabilities for which no specific
contractual maturity or repricing dates exist are placed in ladders
based on management's judgments concerning their most likely
repricing behaviors.
-44-
45
Part I
Item 2 (continued)
----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1-3 4-6 7-12 1-5 OVER
AT JUNE 30, 1994 MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
------ ------ ------ ----- ------- -----
Balance Sheet $ (8,529) $ 4,233 $ 1,723 $ 2,929 $ (356) $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity (a) (1,460) (3,930) (1,897) 7,101 186 ---
Interest-Rate-Sensitivity Gap (9,989) 303 (174) 10,030 (170) ---
Cumulative Interest-Rate
Sensitivity Gap (9,989) (9,686) (9,860) 170 --- ---
% of Total Assets (6)% (6)% (6)% --- --- ---
----------------------------------------------------------------------------------------------------
1-3 4-6 7-12 1-5 OVER
AT DECEMBER 31, 1993 MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
------ ------ ------ ----- ------- -----
Balance Sheet $ (7,529) $ 4,442 $ 3,237 $ 3,416 $ (3,566) $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity (a) (4,994) (2,131) (937) 7,379 683 ---
Interest-Rate-Sensitivity Gap (12,523) 2,311 2,300 10,795 (2,883) ---
Cumulative Interest-Rate
Sensitivity Gap (12,523) (10,212) (7,912) 2,883 --- ---
% of Total Assets (8)% (7)% (5)% 2% --- ---
----------------------------------------------------------------------------------------------------
(a) Represents repricing effect of off-balance sheet positions,
which include interest rate swaps and options, financial
futures, and similar agreements that are used as part of the
Corporation's overall asset and liability management activities.
====================================================================
At June 30, 1994, the Corporation had $9,860 million more
liabilities than assets repricing within one year, amounting to 5.8%
of total assets. This compares with $7,912 million of more
liabilities than assets repricing, or 5.3% of total assets, at
December 31, 1993.
At June 30, 1994, based on the Corporation's simulation models,
which are comprehensive simulations of net interest income under a
variety of market interest rate scenarios, net interest income
sensitivity to a gradual 150 basis point rise in market rates over
the next twelve months was estimated at less than 2% of projected
1994 after-tax net income.
For the 1994 second quarter and first six months, the impact on net
interest income attributable to the Corporation's end-user
derivative activities was approximately $59 million and $119
million, respectively.
The estimated fair value of open derivative contracts (which are
primarily interest rate swaps) used for asset/liability management
activities at June 30, 1994 reflected a net unrealized loss of $268
million, compared with a net unrealized gain of $425 million at
December 31, 1993. The decrease is primarily due to the recent
increases in interest rates. The above unrealized loss does not include the
favorable impact of the assets/liabilities being hedged by these derivative
contracts.
At June 30, 1994, gross deferred gains were $53 million and gross
deferred losses were $38 million relating to closed financial
futures contracts used in end-user derivative activities. Deferred
gains and losses on closed financial futures contracts are amortized
over periods ranging from six to nine months depending on when the
contract is closed and the period of time over which the liability
was being hedged. The Corporation does not generally terminate its
interest rate swaps. As of June 30, 1994, the Corporation did not
have any deferred gains or losses related to terminated interest
rate swap contracts.
-45-
46
Part I
Item 2 (continued)
INTEREST RATE SWAPS
Interest rate swaps are one of the various financial instruments
used in the Corporation's asset/liability management activities.
Although the Corporation believes the results of its asset/liability
management activities should be evaluated on an integrated basis,
taking into consideration all on- and related off-balance sheet
instruments and not a specific financial instrument, the interest
rate tables below do provide an indication of the Corporation's
interest rate swap activity.
The table that follows summarizes the expected maturities and
weighted-average interest rates to be received and paid on domestic
and international interest rate swaps utilized in the
Corporation's asset/liability management at June 30, 1994. The
table was prepared under the assumption that variable interest
rates remain constant at June 30, 1994 levels and, accordingly, the
actual interest rates to be received or paid will be different to
the extent that such variable rates fluctuate from June 30, 1994
levels. Variable rates presented are generally based on the short-term
interest rates for the relevant currencies (e.g., London Interbank Offered
Rate (LIBOR)). Basis swaps are interest rate swaps based on two floating
rate indices.
By expected maturities AFTER
(IN MILLIONS) 1994 1995 1996 1997 1998 1998 TOTAL
------ ------ ------ ------ ------ ------ -----
Receive fixed swaps
Notional amount $3,929 $ 7,129 $4,802 $4,119 $ 981 $1,610 $22,570
Weighted-average:
Receive rate 6.24 5.85 6.49 6.59 6.86 6.83 6.30
Pay rate 4.75 4.38 4.00 4.87 5.11 4.70 4.51
Pay fixed swaps
Notional amount $2,490 $ 3,679 $3,265 $1,082 $ 386 $1,522 $12,424
Weighted-average:
Receive rate 3.99 4.66 4.37 4.64 4.49 4.40 4.41
Pay rate 4.62 5.07 5.78 6.26 7.51 7.38 5.63
Basis Swaps
Notional amount $ 765 $ 2,575 $ 570 $ 230 $ 335 $ 445 $ 4,920
Weighted-average:
Receive rate 4.66 4.52 4.70 5.04 4.55 5.70 4.70
Pay rate 4.70 4.47 4.70 4.79 4.85 4.92 4.61
Forward Starting
Notional amount $ 147 $ 102 $ 102 $ 379 $ 3 $ 31 $ 764
Weighted-average:
Receive rate 6.10 5.13 3.06 4.34 6.74 4.83 4.64
Pay rate 5.69 5.79 5.13 4.82 5.68 8.63 5.31
----------------------------------------------------------------------------------------------------
Total notional amount $7,331 $13,485 $8,739 $5,810 $1,705 $3,608 $40,678
====================================================================================================
-46-
47
Part I
Item 2 (continued)
--------------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
--------------------------------------------------------------------
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114"). SFAS 114 requires that the carrying value of
impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral if the loan is collateral
dependent. Under the new standard, a loan is considered impaired
when, based on current information, it is probable that the borrower
will be unable to pay contractual interest or principal payments as
scheduled in the loan agreement. SFAS 114 is applicable to all
loans that are identified for evaluation, uncollateralized as well
as collateralized, with certain exceptions.
SFAS 114 applies to financial statements for fiscal years beginning
after December 15, 1994. Management believes that the adoption of
SFAS 114 will not have a material effect on the Corporation's
earnings, liquidity or capital resources.
--------------------------------------------------------------------
SUPERVISION AND REGULATION
--------------------------------------------------------------------
The following supervision and regulation discussion focuses
primarily on developments since December 31, 1993 and should be read
in conjunction with the Supervision and Regulation section on pages
A3-A8 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993.
-47-
48
Part I
Item 2 (continued)
DIVIDENDS
Federal law imposes limitations on the payment of dividends by the
subsidiaries of the Corporation that are state member banks of the
Federal Reserve System (a "state member bank") or are national
banks. Two different calculations are performed to measure the
amounts of dividends that may be paid: a "recent earnings" test and
an "undivided profits" test. New York State banks like Chemical
Bank are also subject to substantially similar restrictions of the
New York State Banking Department. Non-bank subsidiaries of the
Corporation are not subject to such limitations.
At June 30, 1994, in accordance with the dividend restrictions
applicable to them, the Corporation's bank subsidiaries could,
without the approval of their relevant banking regulators, pay
dividends of approximately $1.9 billion to their respective bank
holding companies, plus an additional amount equal to their net
profits from July 1, 1994 through the date in 1994 of any such
dividend payment.
In addition to the dividend restrictions described above, the
Federal Reserve Board, the Comptroller of the Currency and the FDIC
have authority under the Financial Institutions Supervisory Act to
prohibit or to limit the payment of dividends by the banking
organizations they supervise, including the Corporation and its
subsidiaries that are banks or bank holding companies, if, in the
banking regulator's opinion, payment of a dividend would constitute
an unsafe or unsound practice in light of the financial condition of
the banking organization.
FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. Among other things,
FDICIA requires the FDIC to establish a risk-based assessment system
for FDIC deposit insurance. FDICIA also contains provisions
limiting certain activities and business methods of depository
institutions. Finally, FDICIA provides for expanded regulation of
depository institutions and their affiliates, including parent
holding companies, by such institutions' appropriate Federal banking
regulator. Chemical Bank and Texas Commerce Bank, National
Association were each "well capitalized" as that term is defined
under the various regulations promulgated under FDICIA and,
therefore, the Corporation does not expect such regulations to have
a material adverse impact on their business operations.
--------------------------------------------------------------------
SUBSEQUENT EVENTS
--------------------------------------------------------------------
On May 12, 1994, the Corporation, through Chemical Bank National
Association, a wholly-owned bank subsidiary of the Corporation,
signed a definitive agreement to acquire all the outstanding
preferred and common shares of Margaretten Financial Corporation.
Margaretten is the parent company of one of the nation's leading
mortgage banking firms, Margaretten & Company, Inc., whose primary
business is the origination, purchase, sale and servicing of
residential mortgage loans.
Under the terms of the agreement, a cash tender offer was made for
all outstanding shares of Margaretten common stock at $25 per share,
and all outstanding depositary shares representing 8-1/4% Cumulative
Preferred Stock, Series A, at $25 per depositary share, plus accrued
and unpaid dividends. The tender offer was conditioned on, among
other things, a minimum of 80% of the outstanding Margaretten common
shares being validly tendered and not withdrawn.
As of midnight on June 30, 1994, when the offer expired,
approximately 99% and 95% of outstanding Margaretten common shares
and depositary shares, respectively, had been tendered and not
withdrawn. The remaining shares of common stock and depositary
shares were converted to cash through a merger effective on July 22,
1994.
-48-
49
Part I
Item 2 (continued)
On July 20, 1994, the Corporation announced a definitive agreement
through which Bank of America, FSB, a BankAmerica Corporation
subsidiary, will acquire Margaretten's mortgage servicing operations
located in Richmond, Virginia. The sale to Bank of America, FSB,
will include the assumption of the lease and fixed assets of the
Richmond facility as well as servicing rights to a portion of the
portfolio of GNMA and other loans that are serviced at that
facility. The agreement is expected to close in the 1994 third
quarter, and is subject to satisfaction of certain conditions and
the obtaining of any necessary regulatory approvals.
The Corporation intends to integrate the remaining Margaretten
facilities into its existing operations and run its mortgage banking
activities on a consolidated basis.
On August 2, 1994, the Corporation and Mellon Bank announced that
they had signed a letter of intent to form a joint venture that will
focus exclusively on providing stock transfer and related
shareholder services to publicly-held companies. The joint venture,
which will be called Chemical Mellon Shareholder Services, will be a
50/50 partnership, with Mellon Bank and the Corporation sharing
equally in the joint venture's initial capitalization, including
investments in new technology.
The joint venture's product line will include traditional stock
transfer services, proxy tabulation and the administration of
dividend reinvestment plans, as well as proxy solicitation programs,
corporate reorganization processing, the development and
administration of employee stock option plans, and a comprehensive
stock watch monitoring service.
The joint venture is expected to become operational by January 1995.
The Corporation currently offers shareholder services through its
Regional Bank's Geoserve division.
-49-
50
Part I
Item 2 (continued)
CHEMICAL BANKING CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1994 JUNE 30, 1993
------------------------------------ ------------------------------------
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (ANNUALIZED) BALANCE INTEREST (ANNUALIZED)
------- --------- ----------- ------- --------- -----------
ASSETS
Deposits with Banks $ 4,606 $ 100 8.66% $ 4,548 $ 73 6.40%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 11,732 121 4.13% 9,536 80 3.40%
Trading Assets 12,042 191 6.32% 7,591 103 5.43%
Securities:
Held-to-Maturity 9,309 164 8.44% --- --- ---%
Available-for-Sale 17,285 270 6.25% --- --- ---%
Securities (a) --- --- ---% 24,029 444 7.39%
Loans 74,144 1,377 7.44% 79,900 1,438 7.19%
-------- ------- -------- -------
Total Interest-Earning Assets 129,118 2,223 6.89% 125,604 2,138 6.81%
Allowance for Losses (3,027) (3,095)
Cash and Due from Banks 8,618 8,548
Risk Management Instruments 15,984 ---
Other Assets 13,373 15,293
-------- --------
Total Assets $164,066 $ 146,350
======== ========
LIABILITIES
Domestic Retail Time Deposits $ 44,308 $ 273 2.48% $ 46,775 $ 325 2.79%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,202 44 3.45% 6,464 50 3.07%
Deposits in Foreign Offices 22,680 226 3.94% 20,533 194 3.74%
-------- ------- -------- -------
Total Interest-Bearing
Deposits 72,190 543 3.01% 73,772 569 3.08%
-------- ------- -------- -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 18,546 189 4.08% 16,747 123 2.94%
Commercial Paper 2,566 25 3.81% 2,591 23 3.55%
Other 9,391 145 6.20% 7,070 107 6.03%
-------- ------- -------- -------
Total Short-Term and
Other Borrowings 30,503 359 4.71% 26,408 253 3.83%
Long-Term Debt 8,370 132 6.34% 8,062 135 6.75%
-------- ------- -------- -------
Total Interest-Bearing
Liabilities 111,063 1,034 3.73% 108,242 957 3.53%
-------- ------- -------- -------
Demand Deposits 21,788 21,521
Risk Management Instruments 14,148 ---
Other Liabilities 6,015 6,043
-------- --------
Total Liabilities 153,014 135,806
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 1,704 1,979
Common Stockholders' Equity 9,348 8,565
-------- --------
Total Stockholders' Equity 11,052 10,544
-------- --------
Total Liabilities and
Stockholders' Equity $164,066 $ 146,350
======== ========
SPREAD ON INTEREST-BEARING
LIABILITIES 3.16% 3.28%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $1,189 3.69% $1,181 3.76%
======= ==== ======= ====
(a) On December 31, 1993 the Corporation adopted SFAS 115.
Previously reported amounts have not been restated to conform
with 1994 presentation.
-50-
51
Part I
Item 2 (continued)
CHEMICAL BANKING CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1994 JUNE 30, 1993
------------------------------------ ------------------------------------
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (ANNUALIZED) BALANCE INTEREST (ANNUALIZED)
-------- ---------- ----------- ------- ---------- -----------
ASSETS
Deposits with Banks $ 4,878 $ 194 7.98% $ 4,040 $ 134 6.68%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 11,809 221 3.77% 9,126 156 3.45%
Trading Assets 11,960 364 6.12% 6,623 197 5.99%
Securities:
Held-to-Maturity 9,735 339 8.64% --- --- ---%
Available-for-Sale 16,765 512 6.15% --- --- ---%
Securities (a) --- --- ---% 23,670 873 7.43%
Loans 74,312 2,688 7.29% 80,654 2,907 7.26%
-------- ------- -------- -------
Total Interest-Earning Assets 129,459 $4,318 6.72% 124,113 $4,267 6.92%
Allowance for Losses (3,057) (3,104)
Cash and Due from Banks 8,725 8,462
Risk Management Instruments 15,690 ---
Other Assets 13,292 15,018
-------- --------
Total Assets $164,109 $ 144,489
======== ========
LIABILITIES
Domestic Retail Time Deposits $ 45,173 $ 521 2.32% $ 46,243 $ 633 2.76%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,325 90 3.44% 6,507 99 3.06%
Deposits in Foreign Offices 22,825 452 3.97% 21,020 430 4.10%
-------- ------- -------- -------
Total Interest-Bearing
Deposits 73,323 1,063 2.92% 73,770 1,162 3.17%
-------- ------- -------- -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 17,310 326 3.80% 16,470 261 3.20%
Commercial Paper 2,488 46 3.69% 2,489 45 3.60%
Other 9,526 279 5.90% 6,447 199 6.22%
-------- ------- -------- -------
Total Short-Term and
Other Borrowings 29,324 651 4.47% 25,406 505 4.01%
Long-Term Debt 8,434 267 6.39% 7,768 265 6.89%
-------- ------- -------- -------
Total Interest-Bearing
Liabilities 111,081 1,981 3.59% 106,944 1,932 3.64%
-------- ------- -------- -------
Demand Deposits 22,204 21,267
Risk Management Instruments 13,611 ---
Other Liabilities 6,110 5,954
-------- --------
Total Liabilities 153,006 134,165
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 1,679 1,922
Common Stockholders' Equity 9,424 8,402
-------- --------
Total Stockholders' Equity 11,103 10,324
-------- --------
Total Liabilities and
Stockholders' Equity $164,109 $ 144,489
======== ========
SPREAD ON INTEREST-BEARING
LIABILITIES 3.13% 3.28%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $2,337 3.64% $2,335 3.79%
======= ==== ======= ====
(a) On December 31, 1993 the Corporation adopted SFAS 115.
Previously reported amounts have not been restated to conform
with 1994 presentation.
-51-
52
Part I
Item 2 (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
1994 1993
--------------------- ----------------------------------------------------
SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- -------
INTEREST INCOME
Loans $ 1,375 $ 1,307 $ 1,350 $ 1,372 $ 1,433 $ 1,465
Securities 432 416 428 428 443 428
Trading Assets 191 173 135 117 103 94
Federal Funds Sold and Securities
Purchased Under Resale Agreements 121 100 94 89 80 76
Deposits With Banks 100 94 67 67 73 61
------- ------- ------- ------- ------- -------
Total Interest Income 2,219 2,090 2,074 2,073 2,132 2,124
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits 543 520 542 537 569 593
Short-Term and Other Borrowings 359 292 249 238 253 252
Long-Term Debt 132 135 134 135 135 130
------- ------- ------- ------- ------- -------
Total Interest Expense 1,034 947 925 910 957 975
------- ------- ------- ------- ------- -------
NET INTEREST INCOME 1,185 1,143 1,149 1,163 1,175 1,149
Provision for Losses 160 205 286 298 363 312
------- ------- ------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES 1,025 938 863 865 812 837
------- ------- ------- ------- ------- -------
NONINTEREST REVENUE
Trust and Investment Management Fees 108 110 109 97 102 98
Corporate Finance and Syndication Fees 93 82 88 95 84 71
Service Charges on Deposit Accounts 75 69 71 73 77 67
Fees for Other Banking Services 279 290 278 266 272 251
Trading Account and Foreign
Exchange Revenues 203 185 255 268 298 252
Securities Gains 13 46 16 51 5 70
Other Revenue 96 149 236 154 204 116
------- ------- ------- ------- ------- -------
Total Noninterest Revenue 867 931 1,053 1,004 1,042 925
------- ------- ------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 542 518 522 518 529 501
Employee Benefits 102 119 95 94 105 102
Occupancy Expense 140 146 149 148 145 145
Equipment Expense 91 84 93 81 88 75
Foreclosed Property Expense 2 35 61 70 85 71
Restructuring Charge --- 48 --- 115 --- 43
Other Expense 404 374 415 344 360 339
------- ------- ------- ------- ------- -------
Total Noninterest Expense 1,281 1,324 1,335 1,370 1,312 1,276
------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE AND
EFFECT OF ACCOUNTING CHANGES 611 545 581 499 542 486
Income Tax Expense 254 226 234 (3) 161 147
------- ------- ------- ------- ------- -------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGES 357 319 347 502 381 339
Net Effect of Changes in
Accounting Principles --- --- --- --- --- 35
------- ------- ------- ------- ------- -------
Net Income $ 357 $ 319 $ 347 $ 502 $ 381 $ 374
======= ======= ======= ======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 324 $ 287 $ 309 $ 464 $ 341 $ 335
======= ======= ======= ======= ======= =======
PER COMMON SHARE:
Income Before Effect of
Accounting Changes $ 1.28 $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.21
Net Effect of Changes in
Accounting Principles --- --- --- --- --- .14
------- ------- ------- ------- ------- -------
Net Income $ 1.28 $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.35
======= ======= ======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING 253.1 253.2 252.5 252.1 251.7 248.5
-52-
53
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is made to page A24 of the Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1993 and to the Corporation's Form 10-Q
for the quarter ended March 31, 1994 with respect to
the proceedings involving Best Products Co., Inc.,
in the United States Bankruptcy Court for the
Southern District of New York. Terms used herein
have the same meanings as defined in the discussion
of this litigation set forth in the Annual Report.
On May 25, 1994, the Bankruptcy Court issued its
decision overruling the objections of the Resolution
Trust Corporation ("RTC") and certain other
creditors of Best to the confirmation of Best's plan
of reorganization and the compromise and settlement
of Best's claims against Chemical Bank and the Bank
Group. By order dated May 31, 1994 (the
"Confirmation Order"), the Bankruptcy Court
confirmed Best's plan of reorganization and approved
the compromise and settlement of Best's claims
against Chemical Bank and the Bank Group. On June
14, 1994, Best's plan of reorganization became
effective. In accordance with the plan, Best's
claims against Chemical Bank and the Bank Group have
been dismissed with prejudice and releases of claims
relating to the leveraged buyout of Best and other
matters have been exchanged among Best, Chemical
Bank and the Bank Group and certain other parties.
The RTC has appealed from the Confirmation Order to the
United States District Court for the Southern District of
New York. Management believes that the RTC appeal will be
resolved without having any material adverse impact on
the financial condition of Chemical Bank or the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The following is a summary of matters submitted to vote at
the Annual Meeting of Stockholders of the Corporation. The
Annual Meeting of the Stockholders was held on May 17, 1994.
A total of 214,521,878 shares, or 84.7% of the 253,272,583
shares entitled to vote at the Annual Meeting, were
represented at the meeting.
(a) Election of Directors
---------------------
The following twenty (20) directors were elected to hold
office until the 1995 Annual Meeting or until their
successors are elected and have qualified, subject to
approval of the amendment to the Certificate of
Incorporation relating to the elimination of the classified
Board of Directors.
Votes Votes
Received Withheld
-------- --------
Frank A. Bennack, Jr. 212,998,011 1,523,867
Michel C. Bergerac 213,086,504 1,435,374
Randolph W. Bromery 212,976,811 1,545,067
Charles W. Duncan, Jr. 213,017,642 1,504,236
Melvin R. Goodes 213,086,898 1,434,980
George V. Grune 213,072,689 1,449,189
William B. Harrison, Jr. 213,110,238 1,411,640
Harold S. Hook 213,128,637 1,393,241
Helene L. Kaplan 213,017,143 1,504,735
J. Bruce Llewellyn 213,041,203 1,480,675
John P. Mascotte 213,049,950 1,471,928
John F. McGillicuddy 212,913,414 1,608,464
Edward D. Miller 213,095,238 1,426,640
Walter V. Shipley 213,041,326 1,480,552
Andrew C. Sigler 213,051,035 1,470,843
Michael I. Sovern 213,069,504 1,452,374
John R. Stafford 213,081,482 1,440,396
W. Bruce Thomas 213,045,477 1,476,401
Marina v.N. Whitman 213,042,289 1,479,589
Richard D. Wood 212,991,221 1,530,657
-53-
54
(b)(1) RATIFYING INDEPENDENT ACCOUNTANTS
---------------------------------
* A proposal to ratify Price Waterhouse as independent
accountants was approved by 99.5% of the votes cast. It
received a "for" vote of 212,886,136 and an "against" vote of
984,054. The number of votes abstaining was 775,072. There
were no broker non-votes.
(2) APPROVAL OF KEY EXECUTIVE PERFORMANCE PLAN
------------------------------------------
* A proposal to approve the Key Executive Performance Plan was
approved by 90.0% of the votes cast. It received a "for"
vote of 191,817,307 and an "against" vote of 21,268,935. The
number of votes abstaining was 1,559,020. There were no
broker non-votes.
(3) STOCKHOLDERS PROPOSAL RE: DISCLOSURE OF POLITICAL
CONTRIBUTIONS
-------------------------------------------------
* A proposal by Evelyn Y. Davis that management supply detailed
disclosure of political contributions was rejected by 92.2%
of the votes cast. The vote "for" was 14,216,206 and the
vote "against" was 168,384,266. The number of votes
abstaining was 4,746,194 and there were 27,298,596 broker
non-votes.
(4) STOCKHOLDERS PROPOSAL RE: ADOPTION OF CUMULATIVE VOTING FOR
DIRECTORS
-----------------------------------------------------------
* A proposal by the late Lewis D. Gilbert and by John J.
Gilbert that cumulative voting be adopted in the election of
directors was rejected by 66.8% of the votes cast. The vote
"for" was 61,391,985 and the vote "against" was 123,417,276.
The number of votes abstaining was 2,531,382 and there were
27,304,619 broker non-votes.
(5) STOCKHOLDERS PROPOSAL RE: UTILIZATION OF FINANCIAL
INTERMEDIARIES IN EMERGING ECONOMIES
--------------------------------------------------
* A proposal by the Sisters of Charity of Saint Elizabeth, The
United Church Board for World Ministries, and the Maryknoll
Fathers and Brothers regarding the utilization of financial
intermediaries in emerging economies was rejected by 95.1% of
the votes cast. The vote "for" was 8,909,919 and the vote
"against" was 173,090,166. The number of votes abstaining
was 5,335,588 and there were 27,309,589 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
11 - Computation of net income per common share
12(a) - Computation of ratio of earnings to fixed charges
12(b) - Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements.
(B) Reports on Form 8-K:
The Corporation filed three reports on Form 8-K during
the quarter ended June 30, 1994, as follows:
Form 8-K Dated April 20, 1994: April 19, 1994 Press
Release - Results of Operations for First Quarter 1994.
Form 8-K Dated June 1, 1994: (A) May 27, 1994 Press
Release - Intention to (i) repurchase up to 10 million
common shares (ii) redeem all outstanding shares of
Adjustable Rate Cumulative Preferred Stock, Series C,
on July 15, 1994 (iii) issue $200 million of Adjustable
Rate Cumulative Preferred Stock, Series L. (B) June 1,
1994 Press Release - Chemical and Margaretten Receive
Antitrust Clearance.
Form 8-K Dated June 20, 1994: June 16, 1994 Press
Release - The extension of the tender offer for the
common stock and preferred stock of Margaretten
Financial Corporation.
-54-
55
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CHEMICAL BANKING CORPORATION
----------------------------
(Registrant)
Date August 15, 1994 By /s/ Joseph L. Sclafani
--------------- ----------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
-55-
56
INDEX TO EXHIBITS
-----------------
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
----------- -------- ---------------------
11 Computation of net income 57
per common share
12 (a) Computation of ratio of 58
earnings to fixed charges
12 (b) Computation of ratio of 59
earnings to fixed charges
and preferred stock dividend
requirements
-56-
1
EXHIBIT 11
CHEMICAL BANKING CORPORATION and Subsidiaries
COMPUTATION OF NET INCOME PER COMMON SHARE
-----------------------------------------
Net income per common share is computed by dividing net income
after deducting dividends on preferred stock, by the weighted
average number of common shares and common share equivalents
outstanding during the period. Other common share equivalents such
as stock options are not required to be included in the calculation
since the applicable dilution tests are not met.
Net income per common share:
---------------------------
(In millions, except per share data)
Net income
Three Months Average common applicable to Net income
Ended June 30 shares outstanding common shares(A) per share
------------- ------------------ ---------------- ----------
Three months 1994 253.1 $324 $1.28
1993 251.7 $341 $1.35
Six months 1994 253.1 $611 $2.41
1993 250.1 $676 $2.70(B)
[FN]
(A) After dividends on the preferred stock of $33 million and
$40 million for the three months ended June 30, 1994 and
1993, respectively, and of $65 million and $79 million for
the six months ended June 30, 1994 and 1993, respectively.
(B) On January 1, 1993, the Corporation adopted SFAS 106 which
resulted in a charge of $415 million or $1.67 per common
share relating to postretirement benefits and also adopted
SFAS 109 which resulted in an income tax benefit of $450
million or $1.81 per common share. Net income before the
effect of accounting changes was $2.56 per common share.
The changes in accounting principles increased net income
per common share by $0.14.
-57-
1
EXHIBIT 12(a)
CHEMICAL BANKING CORPORATION and Subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(IN MILLIONS, EXCEPT RATIOS)
Six Months Ended
June 30, 1994
----------------
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes and
Effect of Accounting Changes $ 1,156
-------
Fixed charges:
Interest expense 918
One third of rents, net of income from subleases (a) 52
-------
Total fixed charges 970
-------
Less: Equity in undistributed income of affiliates (52)
-------
Earnings before taxes and fixed charges, excluding
capitalized interest $ 2,074
=======
Fixed charges, as above $ 970
=======
Ratio of earnings to fixed charges 2.14
=======
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges, as above $ 970
Add: Interest on deposits 1,063
-------
Total fixed charges and interest on deposits $ 2,033
=======
Earnings before taxes and fixed charges, excluding
capitalized interest, as above $ 2,074
Add: Interest on deposits 1,063
-------
Total earnings before taxes, fixed charges and
interest on deposits $ 3,137
=======
Ratio of earnings to fixed charges 1.54
=======
[FN]
(a) The proportion deemed representative of the interest factor.
-58-
1
EXHIBIT 12(b)
CHEMICAL BANKING CORPORATION and Subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
-------------------------------------------------
(IN MILLIONS, EXCEPT RATIOS)
Six Months Ended
June 30, 1994
----------------
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes and
Effect of Accounting Changes $ 1,156
-------
Fixed charges:
Interest expense 918
One third of rents, net of income from subleases (a) 52
-------
Total fixed charges 970
-------
Less: Equity in undistributed income of affiliates (52)
-------
Earnings before taxes and fixed charges, excluding
capitalized interest $ 2,074
=======
Fixed charges, as above $ 970
Preferred stock dividends 65
-------
Fixed charges including preferred stock dividends $ 1,035
=======
Ratio of earnings to fixed charges and
preferred stock dividend requirements 2.00
=======
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges including preferred stock dividends $ 1,035
Add: Interest on deposits 1,063
-------
Total fixed charges including preferred stock
dividends and interest on deposits $ 2,098
=======
Earnings before taxes and fixed charges, excluding
capitalized interest, as above $ 2,074
Add: Interest on deposits 1,063
-------
Total earnings before taxes, fixed charges and
interest on deposits $ 3,137
=======
Ratio of earnings to fixed charges
and preferred stock dividend requirement 1.50
=======
[FN]
(a) The proportion deemed representative of the interest factor.
-59-
