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 March 31, 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 253,465,939
--------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of
common stock on April 30, 1994.
<PAGE>
<PAGE> 2
=====================================================================
FORM 10-Q INDEX
Part I Page
------ ----
Item 1 Financial Statements - Chemical Banking Corporation
and Subsidiaries:
Consolidated Balance Sheet at March 31, 1994 and
December 31, 1993. 3
Consolidated Statement of Income for the three
months ended March 31, 1994 and March 31, 1993. 4
Consolidated Statement of Cash Flows for the
three months ended March 31, 1994 and March 31, 1993. 5
Consolidated Statement of Changes in
Stockholders' Equity for the three months
ended March 31, 1994 and March 31, 1993. 6
Notes to Financial Statements. 6-12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-44
Part II
-------
Item 1 Legal Proceedings 45
Item 6 Exhibits and Reports on Form 8-K. 45
====================================================================
<PAGE>
<PAGE> 3
<TABLE><CAPTION>
Part I
Item 1.
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions)
March 31, December 31,
1994 1993
--------- ------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 8,286 $ 6,852
Deposits with Banks 3,886 6,030
Federal Funds Sold and Securities
Purchased Under Resale Agreements 11,722 10,556
Trading Assets:
Debt and Equity Instruments 13,357 11,679
Risk Management Instruments 17,136 ---
Securities:
Held-to-Maturity (Market Value: $9,444 and $10,288) 9,526 10,108
Available-for Sale 17,860 15,840
Loans (Net of Unearned Income: $450 and $477) 74,661 75,381
Allowance for Losses (2,991) (3,020)
Premises and Equipment 2,004 1,910
Due from Customers on Acceptances 1,109 1,077
Accrued Interest Receivable 986 1,106
Assets Acquired as Loan Satisfactions 834 934
Other Assets 7,661 11,435
--------- ---------
TOTAL ASSETS $166,037 $ 149,888
========= =========
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 21,473 $ 23,443
Time and Savings 49,939 51,940
Foreign 23,709 22,894
--------- ---------
Total Deposits 95,121 98,277
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 16,016 12,857
Other Borrowed Funds 13,348 11,908
Acceptances Outstanding 1,112 1,099
Accounts Payable and Accrued Liabilities 2,158 2,607
Other Liabilities 18,874 3,784
Long-Term Debt 8,447 8,192
--------- ---------
TOTAL LIABILITIES 155,076 138,724
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note 8)
STOCKHOLDERS' EQUITY
Preferred Stock 1,654 1,654
Common Stock (Issued 253,796,022 and 253,397,864 Shares) 254 253
Capital Surplus 6,565 6,553
Retained Earnings 2,692 2,501
Net Unrealized Gain (Loss) on Securities Available-for-Sale,
Net of Taxes (192) 215
Treasury Stock, at Cost (12) (12)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 10,961 11,164
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $166,037 $ 149,888
========= =========
The Notes to Consolidated Financial Statements are an integral part of these Statements.
</TABLE>
<PAGE>
<PAGE> 4
Part I
Item 1. (continued)
<TABLE>
<CAPTION> CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31,
(in millions, except per share data)
1994 1993
--------- ---------
<S> <C> <C>
INTEREST INCOME
Loans $ 1,307 $ 1,465
Securities 416 428
Trading Assets 173 94
Federal Funds Sold and Securities
Purchased Under Resale Agreements 100 76
Deposits With Banks 94 61
--------- ---------
Total Interest Income 2,090 2,124
--------- ---------
INTEREST EXPENSE
Deposits 520 593
Short-Term and Other Borrowings 292 252
Long-Term Debt 135 130
--------- ---------
Total Interest Expense 947 975
--------- ---------
Net Interest Income 1,143 1,149
Provision for Losses 205 312
--------- ---------
Net Interest Income After Provision For Losses 938 837
--------- ---------
Noninterest Revenue
Trust and Investment Management Fees 110 98
Corporate Finance and Syndication Fees 82 71
Service Charges on Deposit Accounts 69 67
Fees for Other Banking Services 290 251
Trading Account and Foreign Exchange Revenues 185 252
Securities Gains 46 70
Other Revenue 149 116
--------- ---------
Total Noninterest Revenue 931 925
--------- ---------
Noninterest Expense
Salaries 518 501
Employee Benefits 119 102
Occupancy Expense 146 145
Equipment Expense 84 75
Foreclosed Property Expense 35 71
Restructuring Charge 48 43
Other Expense 374 339
--------- ---------
Total Noninterest Expense 1,324 1,276
--------- ---------
Income Before Income Tax Expense and Effect of
Accounting Changes 545 486
Income Tax Expense 226 147
--------- ---------
Income Before Effect of Accounting Changes 319 339
Net Effect of Changes in Accounting Principles --- 35
--------- ---------
Net Income $ 319 $ 374
========= =========
Net Income Applicable To Common Stock $ 287 $ 335
========= =========
Per Common Share:
Income Before Effect of Accounting Changes $ 1.13 $ 1.21
Net Effect of Changes in Accounting Principles --- .14
--------- ---------
Net Income $ 1.13 $ 1.35
========= =========
Average Common Shares Outstanding 253.2 248.5
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
<PAGE>
<PAGE> 5
Part I
Item 1. (continued)
<TABLE>
<CAPTION> CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(in millions)
1994 1993
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 319 $ 374
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Losses 205 312
Restructuring Charge 48 43
Depreciation and Amortization 89 79
Net Changes In:
Trading Related Assets (1,066) (4,121)
Accrued Interest Receivable 120 73
Accrued Interest Payable 26 86
Other, Net 592 392
-------- --------
Net Cash Provided (Used) by Operating Activities 333 (2,762)
-------- --------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 2,142 (2,275)
Federal Funds Sold and Securities Purchased Under Resale Agreements (1,166) (1,830)
Loans Due to Sales and Securitizations 2,942 3,113
Other Loans (2,669) (432)
Other, Net 607 403
Proceeds from the Maturity of Held-to-Maturity Securities 1,033 1,254
Purchases of Held-to-Maturity Securities (396) (3,170)
Proceeds from the Maturity of Available-for-Sale Securities 5,507 217
Proceeds from the Sale of Available-for-Sale Securities 1,008 1,655
Purchases of Available-for-Sale Securities (8,209) (703)
Cash Used in Acquisitions --- (333)
-------- --------
Net Cash Provided (Used) by Investing Activities 799 (2,101)
-------- --------
FINANCING ACTIVITIES
Net Change In:
Noninterest Bearing Domestic Demand Deposits (1,967) (3,201)
Domestic Time and Savings Deposits (1,984) (1,796)
Foreign Deposits 815 522
Federal Funds Purchased, Securities Sold Under Repurchase Agreements
and Other Borrowed Funds 4,529 6,986
Other Liabilities (1,222) (84)
Other, Net 13 (146)
Proceeds from the Issuance of Long-Term Debt 1,000 1,245
Redemption and Maturity of Long-Term Debt (749) (316)
Proceeds from the Issuance of Common Stock 13 167
Issuance of Preferred Stock --- 194
Cash Dividends Paid (128) (112)
-------- --------
Net Cash Provided by Financing Activities 320 3,459
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks (18) (2)
-------- --------
Net Increase (Decrease) in Cash and Due from Banks 1,434 (1,406)
-------- --------
Cash and Due from Banks at January 1, 6,852 8,846
-------- --------
Cash and Due from Banks at March 31, $ 8,286 $ 7,440
======== ========
Cash Interest Paid $ 921 $ 889
Taxes Paid $ 226 $ 16
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
<PAGE>
<PAGE> 6
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Three Months Ended March 31,
(in millions)
1994 1993
-------- --------
BALANCE AT JANUARY 1, $11,164 $ 9,851
-------- --------
Net Income 319 374
Dividends Declared:
Preferred Stock (32) (39)
Common Stock (96) (83)
Issuance of Preferred Stock --- 200
Issuance of Common Stock 13 167
Accumulated Translation Adjustment --- 1
Net Change in Fair Value of Available-for-Sale
Securities, Net of Taxes (407) ---
-------- --------
Net Change in Stockholders' Equity (203) 620
-------- --------
BALANCE AT MARCH 31, $10,961 $10,471
======== ========
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.
On January 1, 1994, the Corporation adopted 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 in assets and in liabilities of $14.5
billion at March 31, 1994, with unrealized gains reported as Trading
Assets-Risk Management Instruments and the unrealized losses
reported in Other Liabilities. Prior to adoption, 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 also been reclassified. Prior to the accounting
change, cash flows from these transactions were included as operating
activities. See Note 3 of this Form 10-Q for further discussion.
<PAGE>
<PAGE> 7
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:
March 31, Dec. 31,
(in millions) 1994 1993
-------- --------
U.S. Government and Federal Agencies $ 4,630 $ 2,792
Obligations of State and Political Subdivisions 211 604
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,636 1,794
Debt Securities Issued by Foreign Governments 3,106 4,025
Foreign Financial Institutions 2,443 1,496
Other <a> 1,331 968
-------- --------
Total Trading Assets - Debt and
Equity Instruments $13,357 $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; 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 $192 million on the Corporation's stockholders' equity
at March 31, 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. See Note 4
for further discussion.
<PAGE>
<PAGE> 8
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity
securities were as follows for the dates indicated:
March 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value<a>
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 3,632 $ 10 $ 35 $ 3,607
Collateralized Mortgage Obligations 4,869 14 78 4,805
Other, primarily U.S. Treasuries 103 --- --- 103
Obligations of State and Political
Subdivisions 19 --- --- 19
Collateralized Mortgage Obligations <b> 143 4 1 146
Other 760 5 1 764
-------- -------- -------- --------
Total Held-to-Maturity Securities <C> $ 9,526 $ 33 $ 115 $ 9,444
======== ======== ======== ========
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
======== ======== ======== ========
<FN>
<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 Four for loans accounted for pursuant to FAS 115.
</TABLE>
<PAGE>
<PAGE> 9
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale
securities for the dates indicated were as follows:
March 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value<a>
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 9,008 $ 326 $ 236 $ 9,098
Collateralized Mortgage Obligations 762 4 9 757
Other, primarily U.S. Treasuries 3,727 22 141 3,608
Debt Securities Issued by Foreign Governments 2,628 17 50 2,595
Corporate Debt Securities 333 16 2 347
Collateralized Mortgage Obligations <b> 502 1 2 501
Other 953 11 10 954
-------- -------- -------- --------
Total Available-for-Sale Securities
Carried at Fair Value <C> $17,913 $ 397 $ 450 $17,860
======== ======== ======== ========
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
======== ======== ======== ========
<FN>
<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 Four for loans accounted for pursuant to FAS 115.
</TABLE>
NOTE 4 - LOANS
--------------
As discussed in Note Three, 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 and Venezuela) to financial
institutions, including the Corporation, as part of a debt
renegotiation are subject to the provisions of SFAS 115. Such loans
are classified as loans to foreign governments or as LDC loans. At
March 31, 1994, $3,214 million of loans, primarily renegotiated
loans, were measured under SFAS 115, including $1,965 million that
are classified as held-to-maturity and that are carried at amortized
cost. Pre-tax gross unrealized gains and gross unrealized losses
<PAGE>
<PAGE> 10
Part I
Item 1. (continued)
related to these held-to-maturity loans totaled $7 million and $672
million, respectively, at March 31, 1994. Loans that were
designated as available-for-sale at March 31, 1994 are carried at
fair value in the amount of $1,249 million. Pre-tax gross
unrealized gains and gross unrealized losses on these loans totaled
$17 million and $298 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 1994
first quarter were $318 million. The fair value of loans designated
as available-for-sale was calculated after consideration of the
allowance for losses that would be available to cover credit losses.
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.
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 March 31, 1994, the reserve balance has been
substantially utilized and no significant 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 March
31, 1994, the merger reserve balance was approximately $79 million.
NOTE 7 - INCOME TAXES
---------------------
The Corporation adopted SFAS 109, "Accounting for Income Taxes", as of
January 1, 1993 and, after taking into account the additional tax
benefits associated with the adoption of SFAS 106 (see Note Five),
the Corporation recognized a favorable cumulative effect on income
tax expense of $450 million (or $1.81 per common share).
A valuation reserve was established as of January 1, 1993, in
accordance with the requirements of SFAS 109, for tax benefits
available to the Corporation but for which realization was in doubt.
The Corporation's valuation reserve for Federal taxes of $452
million upon adoption of SFAS 109, as restated for the Omnibus
Budget Reconciliation Act of 1993 ("OBRA"), was reevaluated and
reduced by $331 million during 1993 due to the strength of the
Corporation's earnings. 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.
<PAGE>
<PAGE> 11
Part I
Item 1. (continued)
The remaining Federal valuation reserve of $121 million at March 31,
1994 relates 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
March 31, 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 - 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 exposure is summarized in the following table 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. 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.
March 31, December 31,
(in billions) 1994 1993
--------- ------------
Credit Exposure:
Interest Rate Contracts $9.9 $ 8.6
Foreign Exchange Contracts 7.1 8.1
Stock Index Option and
Commodity Contracts 0.3 0.2
------ ------
Total Credit Exposure 17.3 16.9
Less: Amounts Recorded as Assets
on Consolidated Balance Sheet 17.3<a> 3.3
------ ------
Credit exposure not on balance sheet $--- $13.6
====== ======
[FN]
<a> Increase due to adoption of FASI 39 on January 1, 1994.
<PAGE>
<PAGE> 12
Part I
Item 1. (continued)
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.
<TABLE>
<CAPTION>
OFF-BALANCE SHEET INSTRUMENTS-DERIVATIVES AND
FOREIGN EXCHANGE INSTRUMENTS Notional Amounts
(in millions) Trading ALM(a) Total
-------- ------ -----
<S> <C> <C> <C>
Financial Instruments, the Credit Risk of Which is
Represented by Other Than Notional or Contract Amounts:
At March 31, 1994:
Total Interest Rate Contracts $1,828,563 $ 112,561 $1,941,124
Total Foreign Exchange Contracts 819,372 14,324 833,696
Total Stock Index Options and Commodity
Derivative Contracts 6,306 --- 6,306
---------- ---------- ----------
Total Off-Balance Sheet Instruments
(Notional Amount) $2,654,241 $ 126,885 $2,781,126
========== ========== ==========
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.
</TABLE>
Credit-related Financial Instruments: The following table
summarizes the Corporation's maximum credit risk which is
represented by contract amounts relating to these financial
instruments at March 31, 1994 and December 31, 1993. The table
should be read in conjunction with the description 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.
<TABLE>
<CAPTION>
OFF-BALANCE SHEET INSTRUMENTS-CREDIT-RELATED
FINANCIAL INSTRUMENTS
March 31, December 31,
(in millions) 1994 1993
--------- -------------
<S> <C> <C>
Commitments to Extend Credit $ 47,534<a> $ 47,540<a>
Standby Letters of Credit (Net of Risk
Participations of $1,430 and $1,285) 13,302 11,224
Other Letters of Credit 2,525 2,325
Customers' Securities Lent 17,655 14,530
<FN>
<a> Excludes credit card commitments of $18.6 billion and $18.0
billion at March 31, 1994 and December 31, 1993, respectively.
</TABLE>
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.
<PAGE>
<PAGE> 13
Part I
Item 2.
<TABLE>
<CAPTION>
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
------- ---------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REPORTED:
Income Before Effect of Accounting Changes $ 319 $ 347 $ 502 $ 381 $ 339
Net Effect of Changes in Accounting Principles --- --- --- --- 35
------- ------- ------- ------- -------
Net Income $ 319 $ 347 $ 502 $ 381 $ 374
======= ======= ======= ======= =======
Per Common Share:
Income Before Effect of Accounting Changes $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.21
Net Effect of Changes in Accounting Principles --- --- --- --- .14
------- ------- -------- ------- -------
Net Income $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.35
======= ======= ======= ======= =======
PRO FORMA: <a>
Income Before Effect of Accounting Changes $ 319 $ 347 $ 288 $ 327 $ 276
Net Effect of Changes in Accounting Principles --- --- --- --- 35
------- ------- ------- ------- -------
Net Income $ 319 $ 347 $ 288 $ 327 $ 311
======= ======= ======= ======= =======
Per Common Share:
Income Before Effect of Accounting Changes $ 1.13 $ 1.23 $ .99 $ 1.14 $ .95
Net Effect of Changes in Accounting Principles --- --- --- --- .14
------- ------- ------- ------- -------
Net Income $ 1.13 $ 1.23 $ .99 $ 1.14 $ 1.09
======= ======= ======= ======= =======
Book Value $ 36.74 $ 37.60 $ 35.96 $ 34.47 $ 33.50
Market Value $ 36.38 $ 40.13 $ 45.00 $ 40.88 $ 40.38
Common Dividends Declared $ .38 $ .38<b> $ .33 $ .33 $ .33
COMMON SHARES OUTSTANDING:
Average 253.2 252.5 252.1 251.7 248.5
Period End 253.3 252.9 252.3 251.8 251.5
PERFORMANCE RATIOS:
Return on Average Assets <C> .79% <e> .94% 1.39% 1.04% 1.06%
Return on Average Common Equity <C> 12.24% 13.38% 20.90% 15.97% 16.47%
Return on Average Stockholders' Equity <C> 11.59% 12.48% 18.68% 14.49% 15.00%
Overhead Ratio <d> 61.5% 60.6% 57.9% 59.2% 59.5%
CAPITAL RATIOS:
Common Stockholders' Equity to Assets 5.6% <e> 6.3% 6.1% 6.0% 5.7%
Total Stockholders' Equity to Assets 6.6% <e> 7.4% 7.3% 7.2% 7.1%
Tier 1 Leverage 6.2% <e><f> 6.8% <f> 6.9% 6.6% 6.7%
Risk-Based Capital Ratios:
Tier I (4.0% required) 8.3% <f> 8.1% <f> 7.9% 7.6% 7.5%
Total (8.0% required) 12.5% <f> 12.2% <f> 12.1% 12.0% 11.8%
<FN>
(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 FASI 39, which
increased total assets by approximately $14.5 billion at March
31, 1994 and total average assets by approximately $13.1 billion
for the 1994 first quarter.
(f) In accordance with current regulatory guidelines, these ratios
exclude the impact on stockholders' equity resulting from the
adoption of SFAS No. 115.
</TABLE>
<PAGE>
Part I
Item 2 (continued)
<PAGE>14
-----------------------------------------------------------------
OVERVIEW
-----------------------------------------------------------------
Chemical Banking Corporation (the "Corporation") recorded net income
of $319 million, or $1.13 per common share, in the first quarter of
1994. These results were 16% higher than earnings on a comparable
basis (excluding accounting changes and tax benefits) of $276
million, or $.95 per common share, in the first quarter of 1993.
Reported net income in the first quarter of 1993 was $374 million,
or $1.35 per share, when the Corporation benefitted from $98 million
in one-time gains, including a net favorable impact of $35 million
from the adoption of new accounting standards, as further discussed
below, and an income tax benefit of $63 million. The Corporation
recognized its remaining available Federal 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 Corporation's 1994 first quarter results reflected continued
good performance in its core businesses, a sharp decline in credit
costs, as well as major progress in achieving key financial
objectives--growth in fee-based income, a lower credit risk profile,
productivity initiatives and a double A credit rating. In the
beginning of April 1994, Moody's Investors Service raised its rating
on long-term deposits and other senior obligations of Chemical Bank
to Aa3 from A1. It also raised the ratings on Chemical Banking
Corporation's commercial paper, senior debt, subordinated debt and
preferred stock and on Chemical Bank's subordinated debt. The
Corporation's 1994 first quarter results also reflected a decline in
trading revenues due to weak emerging markets trading and higher
noninterest expenses due to the Corporation's continued investment
in certain key businesses.
Net income for the first quarter of 1994 included a restructuring
charge of $48 million ($28 million after-tax) related to the
previously reported closing of 50 New York branches and a staff
reduction of 650. On an annualized basis, the Corporation expects
to save $44 million pre-tax through this rationalization of its
branch system, part of an ongoing, Corporate wide program to improve
productivity.
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"). Also included in the Corporation's 1993 results was the
impact of two significant accounting changes. On January 1, 1993,
the Corporation adopted Financial Accounting Standards Board
Statement No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"), which resulted in a
charge of $415 million and Statement 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 nonperforming assets at March 31, 1994 were $3.20
billion, down $322 million or 9% from $3.53 billion at December 31,
1993. Moreover, after peaking in the 1992 third quarter,
nonperforming assets have declined by $3.38 billion, or 51%, 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 126% as of March 31, 1994, compared with
117% at the 1993 year-end and 67% at March 31, 1993.
At March 31, 1994, the Corporation's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were
8.3% and 12.5% respectively, well in excess of the minimum ratios
specified by the Board of Governors of the Federal Reserve System
("Federal Reserve Board").
<PAGE>
Part I
Item 2 (continued)
<PAGE> 14
-----------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------------------------------------------------
Net Interest Income
=================================================================
First Quarter
-------------------
(in millions) 1994 1993
------ ------
Total Interest Income $2,090 $2,124
Total Interest Expense 947 975
------- -------
Net Interest Income 1,143 1,149
Taxable Equivalent Adjustment <a> 5 5
------- -------
Net Interest Income - Taxable
Equivalent Basis $1,148 $1,154
======= =======
-----------------------------------------------------------------
[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 1994 first quarter was $1,143 million
compared with $1,149 million in the comparable 1993 period. The net
yield on interest-earning assets was 3.59% in the 1994 first
quarter, compared with 3.82% in the year ago first quarter. The
Corporation recorded interest collections of $18 million from
Argentine and Brazilian loans in the 1994 first quarter, down from
$30 million in the same period a year ago. Excluding the impact of
these receipts, net interest income rose slightly from last year due
to a $7.2 billion increase in interest-earning assets and the
favorable impact from the reduction in nonperforming loans, largely
offset by a lower net yield on interest-earning assets.
The Corporation's average interest-earning assets for the 1994 first
quarter were $129.8 billion, compared with $122.6 billion in the
year-ago period. The composition of average earning assets
continued to shift 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 (excluding the impact of interest from Brazil and
Argentina), the shift to lower-spread liquid assets has exerted
downward pressure on the net yield on interest-earning assets.
<PAGE>
Part I
Item 2 (continued)
<PAGE>16
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST RATE SPREAD AND NET YIELD ON AVERAGE INTEREST-EARNING ASSETS
First Quarter
----------------------------------
1994 1993
----------------------- -----------------------
(Taxable equivalent rates; Average Average
in millions) Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Loans <a> $ 74,481 7.14% $ 81,423 7.32%
Securities 26,406 6.40 23,307 7.47
Liquid Interest-Earning Assets 28,917 5.15 17,870 5.23
-------- --------
Total Interest-Earning Assets $129,804 6.54% $122,600 7.04%
======== ========
Interest-Bearing Liabilities $111,099 3.46% $105,636 3.74%
Interest-Rate Spread 3.08 3.30
Interest-Free Funds 18,705 --- 16,964 ---
-------- --------
Total Source of Funds $129,804 2.95% $122,600 3.22%
======== ========
Net Yield on Interest-Earning Assets 3.59% 3.82%
<FN>
<a> Nonperforming loans are included in the average loan balances.
</TABLE>
The Corporation's average total loans in the 1994 first quarter
declined by $6.9 billion from the comparable 1993 period. As a
percentage of total interest-earning assets, the loan portfolio for
the 1994 first quarter decreased to 57% from 66% in the same period
a year ago. The decline in the loan portfolio reflects a continuing
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.
The Corporation's liquid interest-earning assets and securities
averaged $55.3 billion for the 1994 first quarter, compared with
$41.2 billion from the same period in 1993. As a percentage of
total interest-earning assets, combined liquid assets and securities
were 43% for the 1994 first quarter versus 34% in the 1993
comparable periods reflecting the remixing of the composition of the
average interest-earning assets which support the Corporation's
trading businesses.
The $7.2 billion growth in interest-earning assets was funded by a
$5.5 billion increase in interest-bearing liabilities and a $1.7
billion increase in interest-free funds. For the 1994 first
quarter, average interest-bearing liabilities were $111.1 billion,
compared with $105.6 billion for the same period in 1993.
The negative impact on net interest income from nonperforming loans
in the first quarter of 1994 was $19 million, down from $49 million
in the first quarter of 1993. The improvement in the 1994 period is
principally due to the significant reduction in the level of the
Corporation's nonperforming loans.
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
3.59% in the first quarter of 1994, compared with 3.82% in same
period in 1993. The decline in the net yield was impacted 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 51 basis points in 1994, a slight decline from a 52 basis point
contribution in 1993. The decline resulted from the lower average
interest-earning asset rate in 1994, despite an increase of $1.7
billion in interest-free funds that financed interest-earning
assets.
<PAGE>
Part I
Item 2 (continued)
<PAGE>17
Management anticipates that the net yield on interest-earning assets
will be lower in 1994 than 1993. Net interest income in 1994 is
expected to approximate the 1993 level as an anticipated higher
level of interest-earning assets is expected to offset the
anticipated decline in net yield.
For additional information on average balances and net interest
income, see Average Consolidated Balance Sheet, Interest and Rates
on page 43.
PROVISION FOR LOSSES
The Corporation's provision for losses was $205 million for the 1994
first quarter, compared with $286 million in the 1993 fourth
quarter, and $312 million in the 1993 first quarter. As a result of
management's evaluation of the continuing improvement in the
Corporation's credit profile, the provision for losses in the 1994
first quarter was lower than the non-LDC net charge-offs. The
Corporation expects the provision for losses to continue at a lower
level throughout 1994. A discussion of the Corporation's credit
portfolio, net charge-offs and allowance for losses appears in the
Credit Portfolio section.
NONINTEREST REVENUE
Noninterest revenue for the 1994 first quarter was $931 million,
compared with the $925 million recorded in the same period last
year. The increase in 1994 was from increased corporate finance
fees, revolving credit fees, and trust and investment management
fees, partially offset by lower trading results. The Corporation
expects continued growth during 1994 in its various fee-based
businesses.
First Quarter
------------------
(in millions) 1994 1993
---- ----
Trust and Investment Management Fees $110 $ 98
Corporate Finance and Syndication Fees 82 71
Service Charges on Deposit Accounts 69 67
Fees for Other Banking Services 290 251
Trading Account and Foreign Exchange Revenues 185 252
Securities Gains 46 70
Other Revenue 149 116
------ ------
Total Noninterest Revenue $931 $925
====== ======
Trust and investment management fees are primarily comprised of
corporate and personal trust activities. Services provided include
trade, custody, security services, and private banking to customers
on a global basis. The increase in trust and investment management
fees for 1994 was principally due to increased volume in personal
trust and asset management businesses. New customer relationships
developed as a result of the acquisition of Ameritrust Texas
Corporation ("Ameritrust") also contributed to the increase in
personal trust fees.
Corporate finance and syndication fees were $82 million in the 1994
first quarter, up 15% from a year ago. The increase from last year
reflects higher global loan originations and distributions by the
Corporation as well as growth in corporate advisory activities.
During the 1994 first quarter, the Corporation acted as agent or co-
agent for approximately $51 billion of syndicated credit facilities,
a reflection of the Corporation's large client base and strong
emphasis on distribution. Fees from underwriting debt offerings
also contributed to the increase.
Fees for other banking services for the first quarter of 1994 were
$290 million, an increase of $39 million from the comparable 1993
period. The following table sets forth the components of fees for
other banking services for the first quarters of 1994 and 1993.
<PAGE>
Part I
Item 2 (continued)
<PAGE>18
First Quarter
------------------
(in millions) 1994 1993
---- ----
Credit Card Services Revenue $ 75 $ 53
Fees in Lieu of Compensating Balances 58 51
Commission on Letters of Credit
and Acceptances 33 36
Loan Commitment Fees 22 20
Mortgage Servicing Fees 16 16
Other Fees 86 75
------ ------
Total Fees for Other Banking Services $ 290 $251
====== ======
The higher level of credit card services revenue included $14
million of 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 first quarter were $185 million, compared with $252
million in the prior year quarter. Results from foreign exchange,
risk management products, and securities trading were mixed, while
emerging markets were weak.
The following table sets forth the components of trading account and
foreign exchange revenues for the first quarters of 1994 and 1993.
The decrease in revenue from interest rate contracts and from
foreign exchange contracts were primarily due to the recent
unanticipated volatility in the interest rate and currency markets.
Interest rates were affected both overseas and domestically in
response to the recently increased interest rates by the Federal
Reserve Board. The slight decrease in debt instruments revenue was
due to weak emerging markets trading as a result of a decline in the
market value of Brady bonds.
First Quarter
------------------
(in millions) 1994 1993
---- ----
Trading Account and Foreign
Exchange Revenue:
Interest Rate Contracts <a> $ 88 $129
Foreign Exchange Revenue <b> 45 68
Debt Instruments and Other [C] 52 55
------ ------
Total Trading Account and Foreign
Exchange Revenue $ 185 $252
====== ======
[FN]
<a> Includes interest rate swaps, currency swaps, foreign exchange
forward contracts, interest rate futures, and forward rate
agreements.
<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.
As evidenced in the 1994 first quarter, 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 standings, 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.
<PAGE>
Part I
Item 2 (continued)
<PAGE>19
Securities gains were $46 million in the 1994 first quarter, down
$24 million from the same period in 1993. For further discussion of
the Corporation's securities, see the Securities section.
Other revenue in the 1994 first quarter was $149 million, compared
with $116 million in the 1993 first quarter. The Corporation's
other revenue is primarily comprised of income from venture capital
activities, equity income from affiliates (including the
Corporation's 40% interest in The CIT Group Holdings, Inc. ("CIT")),
and gains on the sale of corporate assets.
Income from venture capital activities, net of valuation losses, was
$84 million in the 1994 first quarter, an increase of $56 million
from the comparable 1993 period. At March 31, 1994, the Corporation
had equity and equity-related investments with a carrying value of
$1.4 billion. The Corporation believes that venture capital
activities 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.
The 1994 first quarter results included the recognition of $45
million in net gains from LDC-related past-due interest bonds
compared with $56 million from the sale of such bonds in the same
period a year ago. Also included in other revenue for the
1994 first quarter was a $25 million loss incurred in
connection with the Corporation's residential mortgage warehouse
activities, compared with a $10 million gain in the first quarter of
1993. The loss was due to an increase in interest rates, more
competitive pricing and a greater volume of mortgage closings during the
1994 first quarter. The Corporation's share of CIT's net income,
after purchase accounting adjustments, was $16 million in the 1994
first quarter, up from $14 million for the comparable 1993 period.
NONINTEREST EXPENSE
Noninterest expense in the first quarter, including the
aforementioned $48 million restructuring charge, was $1,324 million,
compared with $1,276 million in the first quarter of 1993. The 1993
first quarter results included a one-time restructuring charge of
$43 million related to the Federally-assisted acquisition in
February 1993 of major components of First City Bancorporation of
Texas, Inc. by Texas Commerce Bancshares.
First Quarter
---------------------
(in millions) 1994 1993
---- ----
Salaries $ 518 $ 501
Employee Benefits 119 102
Occupancy Expense 146 145
Equipment Expense 84 75
Foreclosed Property Expense 35 71
Restructuring Charge 48 43
Other Expense 374 339
------ ------
Total Noninterest Expense $1,324 $1,276
====== ======
Excluding the restructuring charges in both years, noninterest
expense for the 1994 first quarter increased 3.5% when compared with
the respective 1993 period, reflecting higher expenses associated
with investments in certain key businesses. These investments
included the 1993 acquisitions by Texas Commerce, which contributed
approximately $26 million in additional operating expenses, and
higher operating costs of $32 million related to the co-branded
Shell MasterCard program.
<PAGE>
Part I
Item 2 (continued)
<PAGE>20
The ratio of noninterest operating expense (excluding nonrecurring
charges) to total operating revenue was 61.5% in the 1994 first
quarter, compared with 59.5% in the 1993 comparable period.
The increase in salaries for the 1994 first quarter was 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
March 31, 1994 amounted to 41,112 compared with 41,567 at December
31, 1993. The decrease in staff count from December 31, 1993 was
effected by the previously mentioned closings of 50 New York
branches.
Employee benefits in the 1994 first quarter increased $17 million
from the prior year period primarily due to a change in actuarial
assumptions used for pension expense and Other Postretirement
Benefits ("OPEB") expense. Total 1994 pension expense is expected
to be approximately $30 million 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 first quarter was $84 million compared
with $75 million in the comparable 1993 period. 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 $35 million in 1994 first quarter, a
decrease of 51% from the same 1993 period, reflecting significant
progress in managing the Corporation's real estate portfolio.
Management expects that foreclosed property expense in 1994 will be
significantly lower than the full year 1993 level.
Other expense comprises items such as professional fees, insurance,
marketing and communications expense. Other expense in the 1994
first quarter was $374 million compared with $339 million in the
1993 first quarter. The increase principally reflects higher
marketing expense and telecommunications costs, as well as expenses
associated with the First City Banks and Ameritrust acquisitions.
Included in other expense for the 1994 first quarter was
approximately $19 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 increased to $29 million in the 1994 first quarter from
$22 million in the same period in 1993.
Marketing expenses for the 1994 first quarter were $41 million,
compared with $32 million in the 1993 first quarter, reflecting the
advertising 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 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. The Corporation anticipates its revenue
growth from its investments in certain key businesses and various
productivity initiatives will improve the ratio of noninterest
operating expenses to total operating revenue.
INCOME TAXES
The Corporation's effective tax rate was 41.5% and 30.3% in the
first quarter of 1994 and 1993, respectively. Tax expense for the
first quarter of 1993 included an income tax benefit of
approximately $63 million. 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.
<PAGE>
Part I
Item 2 (continued)
<PAGE>21
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
--------------------------------------------------------------------------------------------------------------
Global Bank Regional Bank Texas Commerce
For the three months ended March 31, 1994 1993 1994 1993 1994 1993
(in millions, except ratios) ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Revenue $ 719 $ 806 $ 1,030 $ 1,021 $ 268 $ 263
Credit Provision 56 88 110 129 (10) 6
Noninterest Expense 297 290 742 689 197 198
Income (Loss)Before Taxes 366 428 178 203 81 59
Income Taxes (Benefits) 143 164 76 82 30 14
-------- -------- -------- -------- -------- --------
Net Income (Loss) 223 264 102 121 51 45
======== ======== ======== ======== ======== ========
Average Assets $100,991 $ 78,606 $42,388 $41,415 $ 20,693 $ 19,659
Return on Common Equity 28.9% 30.0% 17.1% 19.2% 11.8% 12.2%
Return on Assets 0.90% 1.36% 0.98% 1.18% 1.00% 0.92%
Overhead Ratio (Excluding
Restructuring Charge) 41.3% 36.0% 67.4% 67.6% 73.5% 75.1%
Real Estate Total<a>
For the three months ended March 31, 1994 1993 1994 1993
(in millions, except ratios) ---- ---- ---- ----
Total Revenue $ 41 $ 41 $ 2,074 $ 2,074
Credit Provision 69 75 205 312
Noninterest Expense 54 55 1,324 1,276
Income (Loss) Before Taxes (82) (89) 545 486
Income Taxes (Benefits) (36) (39) 226 210
------- ------- ------- -------
Net Income (Loss) Before Special
Items/Accounting Changes (46) (50) 319 276
Special Item (Federal Tax Benefits) -- -- -- 63
Accounting Changes (SFAS 106 and 109) -- -- -- 35
------- ------- ------- -------
Net Income (Loss) (46) (50) 319 374
======= ======= ======= =======
Average Assets $ 5,924 $ 7,265 $164,152 $142,613
Return on Common Equity NM NM 12.2% 16.5%
Return on Assets NM NM 0.79% 1.06%
Overhead Ratio (Excluding
Restructuring Charge) NM NM 61.5% 59.5%
<FN>
<a> Total column includes Corporate sector. See description of
Corporate sector on page 24.
NM - Not meaningful.
</TABLE>
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. Thus, certain amounts reported in the
prior periods have been restated to conform with the presentation of
the current quarter's results. Thus, 1993 amounts reported in prior
periods have been restated to conform with 1994 presentation.
<PAGE>
Part I
Item 2 (continued)
<PAGE> 22
Lines-of-business results are subject to further restatements as may
be necessary to reflect future changes in internal management
reporting.
Guidelines exist for assigning expenses that are not directly
incurred by businesses (such as overhead and taxes), as well as for
allocating shareholders' equity and the provision for credit losses
utilizing a risk-based methodology. Noninterest expenses of the
Corporation are fully allocated to the business units except for
special corporate one-time charges. Management has developed a
risk-adjusted capital methodology that quantifies different types of
risk -- credit, operating and market -- within various businesses
and assigns capital accordingly. Credit risk is computed using a
risk grading system that is consistently applied throughout the
Corporation. A long-term expected tax rate is assigned in
evaluating the Corporation's businesses. Texas Commerce's results
are tracked and reported on a legal entity basis, including the
return on equity calculation.
GLOBAL BANK
The Global Bank is organized into four principal management
entities: Banking & Corporate Finance (worldwide client management
and venture capital); Structured Finance (loan syndications, high
yield securities and mergers & acquisitions); Asia, Europe & Capital
Markets (the Corporation's trading and treasury functions, plus
administration of the international branch system in Asia and Europe);
and Developing Markets (businesses include 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 first quarter of 1994 was $223
million, a decrease of $41 million, or 15.5%, when compared with the
prior-year's comparable period. The sector's return on equity in
the first quarter of 1994 was 28.9% compared with 30.0% in the 1993
first quarter. The decline in the 1994 first quarter results was
due primarily to decreases in net interest income of $61 million and
noninterest revenue of $26 million, partially offset by a decrease
in credit provision of $32 million.
The decrease in net interest income was due to a rising interest
rate environment, combined with a change in the mix of earning
assets from loans to liquid assets and a reduction in interest
collections on Brazilian loans. The noninterest revenue decrease
was primarily due to a 26% decline in trading revenues to $180
million in the first quarter of 1994, down from $245 million
recorded for last year's first quarter. Trading revenues were down
due to the Federal Reserve Board increasing interest rates. Also,
foreign exchange and emerging markets trading results were weak.
These factors were offset partially by the substantial increase in
venture capital revenue of $84 million, up from $28 million from the
prior year, and by the strong performance from corporate finance and
syndication fees.
Noninterest expense rose $7 million, or 2.4%, due primarily to the
continued investment in the 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 (comprised of New York
Markets, Retail Card Services and National Consumer Business),
Regional Relationship Banking (comprised of Middle Market, Private
Banking and Chemical New Jersey) and Geoserve. The Corporation's
Technology and Operations group is also managed within this
organizational structure. The Retail Bank provides a broad array of
products and services including consumer lending, residential
financing, deposit services and credit card financing. The
Corporation maintains a leading market share position in serving the
financial needs of Middle Market commercial enterprises in the New
York metropolitan area. Private Banking serves a high net worth
clientele with banking and investment services. The Geoserve unit
offers cash management, funds transfer, corporate trust and
securities processing to the global market.
<PAGE>
Part I
Item 2 (continued)
<PAGE> 23
The Regional Bank's net income of $102 million and return on equity
of 17.1% for the first quarter of 1994 decreased from last year's
first quarter results of $121 million and 19.2%, respectively. The
results for the first quarter of 1994 included a restructuring
charge of $48 million ($28 million after-tax) related to the closing
of 50 New York branches and a staff reduction of 650. Excluding
this one-time charge, the Regional Bank's net income in the 1994
first quarter would have been $130 million and its return on equity
22.3%. The increase in earnings (excluding the restructuring
charge) can be attributable to a lower credit provision of $19
million and higher noninterest revenue of $9 million, offset
partially by increased noninterest expense of $5 million.
Improvements in credit quality resulted in lower credit provision
for Middle Market, Chemical New Jersey and the Retail Card
portfolio. The increase in noninterest revenue is due primarily to
higher fees from revolving credit products in Retail Card Services
reflecting the launch of the co-branded Shell MasterCard in the
fourth quarter of 1993. In addition, New York Markets and Geoserve
recorded a higher level of fees. Partially offsetting these
positive factors was the impact of losses on residential mortgage
warehouse activities in the National Consumer Business, a decrease
in corporate finance fees in Middle Market, and lower securities
gains at Chemical New Jersey.
The increase in noninterest expense is primarily due to the
aforementioned launch of the Shell MasterCard resulting in higher
operating expenses of $32 million. This increase was partially
offset by expense management initiatives throughout the Regional
Bank, primarily in New York Markets. The Regional Bank's effective
tax rate increased to 42.5% for the first quarter of 1994 compared
with 40.4% from last year due to the utilization of tax benefits in
Chemical New Jersey in the first quarter of 1993.
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 March 31,
1994, Texas Commerce had $21 billion in total assets with 115
locations statewide.
Texas Commerce's net income in the first quarter of 1994 was $51
million, an increase of 13% from last year's first quarter results
of $45 million. The increase in the 1994 first quarter period
compared with the 1993 first quarter period was due primarily to a
decrease in the credit provision of $16 million and higher
noninterest revenue of $13 million, partially offset by an $8 million
decline in net interest income. The $45 million net income for the
first three months of 1993 excludes the restructuring charge ($43
million pre-tax; $30 million after-tax) related to the acquisition
of the First City Banks and a positive $14 million after-tax net
effect from the implementation of SFAS 106 and SFAS 109.
Based on continuing improvements in asset quality and Texas
Commerce's already adequate allowance for losses, Texas Commerce
recorded a negative credit provision (i.e. credit to the provision
for losses) in the first quarter of 1994. The increase in
noninterest revenue is due to strong revenue growth from fee-based
services which were up 14% from the first quarter of 1993. Trust
income increased 46% and deposit service charges rose 12% from the
first quarter 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. Lower loan volume
contributed to the decline in net interest income.
Noninterest expenses remained flat compared with last year as the
additional $26 million in operating expenses associated with the
1993 acquisitions was entirely offset by a decline in foreclosed
property expense.
Nonperforming assets declined to $191 million at March 31, 1994,
down $28 million from the 1993 year-end. The decrease represented
the 23rd consecutive quarterly decline from a peak of $1,303 million
in mid-1988.
<PAGE>
Part I
Item 2 (continued)
<PAGE>24
REAL ESTATE
Real Estate includes the management of the Corporation's commercial
real estate portfolio, exclusive of Texas Commerce and Chemical Bank
New Jersey, N.A. Real Estate had a net loss of $46 million for the
first quarter of 1994 compared with a net loss of $50 million in the
first quarter of 1993. The $4 million improvement was due primarily
to a $6 million decrease in credit provision and lower foreclosed
property expense reflecting the significant progress in managing the
Corporation's real estate portfolio. Total nonperforming assets at
March 31, 1994 were $1,190 million, down 9% from $1,304 million at
the 1993 year-end.
CORPORATE
Corporate had a net loss of $11 million for the first quarter of
1994, compared with a net loss of $6 million in the comparable 1993
period. Included in the $6 million net loss in 1993 were the
following one-time items: the recognition of $63 million in Federal
tax benefits, a net $35 million gain from the adoptions 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.
Corporate also 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, such as the impact of residual
equity, residual loan loss reserves and provision, and tax
residuals.
-----------------------------------------------------------------
BALANCE SHEET ANALYSIS
-----------------------------------------------------------------
The Corporation's total assets were $166.0 billion at March 31,
1994, an increase of $16.1 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 this adoption, total
assets and liabilities increased by approximately $14.5 billion at
March 31, 1994, with unrealized gains reported as Trading Assets-
Risk Management Instruments and unrealized losses reported in Other
Liabilities. Prior to adoption, unrealized gains and losses were
reported net in Other Assets.
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 Three of the Notes to Consolidated Financial
Statements for further discussion of SFAS 115.
The prepayment of mortgage-backed securities and collateralized
mortgage obligations ("CMO") is actively monitored through the
Corporation's portfolio management function. The Corporation
typically invests in CMO's 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 regarding the impact that interest
and market rate changes would have on its CMO portfolio. Mortgage-
backed securities and CMO's 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 through
B42 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993.
<PAGE>
Part I
Item 2 (continued)
<PAGE>25
The Corporation's loans outstanding totaled $74.7 billion at March
31, 1994, a decline of $0.7 billion from year-end 1993 and $6.6
billion lower than March 31, 1993. The slight decline in the loan
portfolio reflects a continuing 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 Corporation is a leading participant in loan originations and
sales. This activity is comprised of the sale of loans and lending
commitments to investors, generally without recourse. These sales
include syndication, assignment and participation, and include both
short- and medium-term transactions. This loan distribution
capability allows the Corporation to compete aggressively and
profitably in wholesale lending markets by enabling it to reduce
larger individual credit exposures and thereby to price more
flexibly than if all loans were held as permanent investments. The
Corporation also benefits from increased liquidity. During the 1994
first quarter, the Corporation acted as agent or co-agent for
approximately $51 billion in syndicated credit facilities.
The Corporation's loan balances were as follows for the dates
indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(in millions) 1994 1993 1993
--------- ------------ ---------
<S> <C> <C> <C>
Non-LDC Loans:
Commercial Real Estate <a> $ 7,542 $ 7,939 $ 9,277
Commercial and Industrial 25,909 24,963 32,524
Financial Institutions 7,285 8,364 6,718
Foreign Governments and Official
Institutions 4,972 5,314 5,156
------- ------- -------
Total Commercial Loans 45,708 46,580 53,675
Consumer <b> 26,288 25,803 23,876
------- ------- -------
Total Non-LDC Loans 71,996 72,383 77,551
LDC Loans 2,665 2,998 3,676
------- ------- -------
Total Loans $74,661 $75,381 $81,227
======= ======= =======
<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.
</TABLE>
NONPERFORMING ASSETS
For a description of the Corporation's accounting policy 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 March 31, 1994,
nonperforming shared loss assets were $91 million. Such assets are
not included in the amount of nonperforming assets below.
<PAGE>
Part I
Item 2 (continued)
<PAGE> 26
The following table sets forth the nonperforming assets and
contractually past due loans of the Corporation at March 31, 1994,
December 31, 1993 and March 31, 1993.
<TABLE>
<CAPTION>
March 31,December 31, March 31,
(in millions) 1994 1993 1993
--------------------- ---------
<S> <C> <C> <C>
Nonperforming Loans:
Non-LDC:
Commercial Real Estate $ 684 $ 707 $1,145
Commercial and Industrial 922 1,068 1,750
Financial Institutions 58 69 95
Foreign Governments and
Official Institutions --- --- ---
------- ------- -------
Total Commercial Loans 1,664 1,844 2,990
Consumer <a> 181 125 228
------- ------- -------
Total Non-LDC 1,845 1,969 3,218
LDC:
Brazil 307 403 594
Argentina 6 7 316
Other LDC Countries 211 212 320
------- ------- -------
Total LDC 524 622 1,230
Total Nonperforming Loans 2,369 2,591 4,448
Assets Acquired as Loan Satisfactions 834 934 1,258
------- ------- -------
Total Nonperforming Assets $3,203 $3,525 $5,706
======= ======= =======
Contractually Past Due Loans <b>:
Consumer $ 271 $ 299 $ 294
Commercial and Other Loans 118 24 133
------- ------- -------
Total Contractually Past Due Loans $ 389 $ 323 $ 427
======= ======= =======
<FN>
<a> Primarily includes 1-4 family residential mortgage loans.
<b> Accruing loans past due 90 days or more as to principal and
interest, which are not characterized as nonperforming loans.
</TABLE>
The Corporation's total nonperforming assets at March 31, 1994 were
$3,203 million, down $322 million from the 1993 year-end level and a
decrease of $2.5 billion from last year's comparable quarter. The
decreases from both 1993 period-ends reflect declines in non-LDC
nonperforming assets and LDC nonperforming loans. This improvement
in the Corporation's credit profile is a result of a lower level of
loans being placed on nonperforming status as well as repayments,
charge-offs, and the result of continuing loan workout and
collection activities. Management expects further significant
reductions in the level of its non-LDC nonperforming assets during
1994. LDC nonperforming loans also are expected to decrease in the
second quarter of 1994 due to the Brazilian debt exchange which took
place on April 15, 1994. For further discussion of the Brazilian
debt exchange, see the Brazil section in this Form 10-Q.
<PAGE>
Part I
Item 2 (continued)
<PAGE> 27
The following table presents the reconciliation of non-LDC
nonperforming assets for the first quarters of 1994 and 1993.
Reconciliation of Non-LDC Nonperforming Assets First Quarter
------------------
(in millions) 1994 1993
---- ----
Balance at beginning of period $2,903 $4,744
Additions:
Loans placed on nonperforming status 292 576
Deductions:
Payments 247 258
Sales 42 82
Charge-offs <a> 156 242
Write-downs 31 57
Return to accrual status 40 205
------- -------
Balance at end of period $2,679 $4,476
======= =======
[FN]
<a> Excludes those consumer charge-offs that are recorded on a
formula basis.
LDC nonperforming loans at March 31, 1994 were $524 million, a
decrease of $98 million from December 31, 1993 and $706 million
lower than a year ago. The decrease from March 31, 1993 principally
reflects the removal of restructured Argentine debt from nonaccrual
status which resulted in a reduction of $281 million in LDC
nonperforming outstandings, as well as charge-offs, and sales and
swaps.
ALLOWANCE FOR LOSSES
For a discussion of the Corporation's allowance for losses, see the
allowance for losses section on page B36 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993. The
accompanying table reflects the activity in the allowance for losses
for the first quarters ended March 31, 1994 and 1993.
First Quarter
-------------------
(in millions) 1994 1993
---- ----
NON-LDC ALLOWANCE:
Balance at Beginning of Period $2,423 $2,206
Provision for Losses 205 312
Charge-Offs (283) (355)
Recoveries 53 43
------- -------
Net Charge-Offs (230) (312)
Other 2 14<a>
------- -------
Balance at End of Period 2,400 2,220
------- -------
LDC ALLOWANCE:
Balance at Beginning of Period 597 819
Provision for Losses --- ---
Charge-Offs (1) (4)
Recoveries 53 10
------- -------
Net Recoveries 52 6
Losses on Sales and Swaps (58) (57)
------- -------
Balance at End of Period 591 768
------- -------
Total Allowance for Losses $2,991 $2,988
======= =======
[FN]
<a> Primarily related to the First City Banks acquisition.
<PAGE>
Part I
Item 2 (continued)
<PAGE>28
The Corporation's allowance for losses has been allocated between
the non-LDC and LDC portfolio segments. The Corporation's non-LDC
allowance at March 31, 1994 was $2.4 billion, or 3.33% of non-LDC
loans outstanding, compared with $2.4 billion or 3.35% of non-LDC
loans outstanding at December 31, 1993 and $2.2 billion or 2.86% of
non-LDC loans outstanding at March 31, 1993. The LDC allowance
totaled $591 million at March 31, 1994, compared with $597 million
at December 31, 1993 and $768 million at March 31, 1993.
The changes in the non-LDC and LDC allowances from a year ago
resulted from the reallocation of $200 million from the LDC
allowance to the non-LDC allowance in the second quarter of 1993.
The reallocation reflected the Corporation's ongoing analysis and
evaluation of its LDC loan portfolio, including the finalization of
the Argentine financing program in 1993 and progress in debt
negotiations with Brazil. In addition, during 1993, the Corporation
allocated $102 million of the LDC allowance for Brazilian
outstandings as a result of the Corporation's evaluation of its
refinancing country portfolio and in consideration of
recommendations of the Interagency Country Exposure Review Committee
("ICERC").
As a result of developments relating to the recently completed
restructuring of Brazilian debt, the Corporation will continue to
evaluate its options with respect to the allowance currently
allocated to the LDC portfolio, including the possible elimination
of a separately designated LDC allowance.
The following table presents the Corporation's allowance coverage
ratios at March 31, 1994, December 31, 1993 and March 31, 1993.
ALLOWANCE COVERAGE RATIOS
March 31, December 31, March 31,
For the Period Ended: 1994 1993 1993
--------- ------------ ---------
Allowance for Losses to:
Loans at Period-End 4.01% 4.01% 3.68%
Average Loans 4.02 3.84 3.67
Nonperforming Loans 126.26 116.56 67.18
Non-LDC Allowance for Losses to:
Total Non-LDC Loans 3.33 3.35 2.86
Non-LDC Nonperforming Loans 130.08 123.06 68.99
LDC Allowance for Losses to:
Medium- and Long-Term Outstandings 32.34 26.55 23.80
Total Outstandings 14.92 14.59 18.50
LDC Nonperforming Loans 112.92 95.98 62.49
LDC Allowance Adjusted for Prior
Charge-Offs with Claims Retained to
Medium- and Long-Term Outstandings
and Claims Retained 58.97 54.14 55.60
Total Net Charge-Offs (annualized) to
Loans at Period-End .97 1.50 1.53
Average Loans .97 1.43 1.52
Non-LDC Net Charge-Offs (annualized) to
Non-LDC Loans at Period-End 1.30 1.74 1.63
<PAGE>
Part I
Item 2 (continued)
<PAGE>29
The Corporation deems its allowance for losses at March 31, 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
First Quarter
-------------------
(in millions) 1994 1993
---- ----
Non-LDC Net Charge-Offs:
Commercial Real Estate $ 75 $ 67
Commercial and Industrial 63 126
Financial Institutions 2 22
Foreign Government and Official Institutions --- ---
------ ------
Total Commercial Net Charge-Offs 140 215
Consumer 90 97
------ ------
Total Non-LDC Net Charge-Offs 230 312
LDC Net Recoveries (52) (6)
------ ------
Total Net Charge-Offs 178 306
Losses on Sales and Swaps 58 57
------ ------
Total Net Charge-Offs and Losses
on Sales and Swaps $236 $363
====== ======
For a discussion of net charge-offs, see the various credit
portfolio sections. Management expects total non-LDC net
charge-offs in 1994 to decrease significantly from the full year
1993 amount.
COMMERCIAL REAL ESTATE
The 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 commercial real estate loan portfolio totaled
$7.5 billion at March 31, 1994, down from $7.9 billion at December
31, 1993 and $9.3 billion at March 31, 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 commercial
real estate loan portfolio at the dates indicated.
March 31, December 31, March 31,
(in millions) 1994 1993 1993
---------- ---------- ---------
Commercial Mortgages $6,301 $6,478 $7,409
Construction 1,241 1,461 1,868
------ ------ ------
Total Commercial Real
Estate Loans $7,542 $7,939 $9,277
====== ====== ======
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 a loan financing the completed construction has cash flows
sufficient to support a commercial mortgage, the loan is transferred
from construction status to commercial mortgage status.
<PAGE>
Part I
Item 2 (continued)
<PAGE>30
The following table shows the Corporation's commercial real estate
loans, nonperforming loans and foreclosed commercial real estate, by
property type and geographic location.
<TABLE>
<CAPTION>
Commercial Real Estate by Property Type and Geographic Region <a>
-----------------------------------------------------------------
March 31, 1994
-------------------------------------------------------------------
Dec. 31,
Other Total 1993
(in millions) NY/NJ Texas Domestic Domestic Foreign Total Total
------ ----- -------- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Office:
Loans $ 804 $ 413 $ 312 $1,529 $ 166 $1,695 $ 1,768
Nonperforming Loans 48 2 99 149 18 167 198
Real Estate Owned 44 39 38 121 65 186 208
Retail:
Loans 628 268 483 1,379 91 1,470 1,459
Nonperforming Loans 29 11 0 40 0 40 52
Real Estate Owned 8 3 41 52 0 52 65
Residential: <b>
Loans 650 163 157 970 79 1,049 1,215
Nonperforming Loans 100 10 8 118 0 118 130
Real Estate Owned 99 1 0 100 0 100 123
Hotel:
Loans 195 79 267 541 45 586 619
Nonperforming Loans 21 0 112 133 0 133 72
Real Estate Owned 198 0 8 206 0 206 211
Land:
Loans 176 154 23 353 29 382 404
Nonperforming Loans 70 6 7 83 0 83 90
Real Estate Owned 84 60 45 189 0 189 212
Other:
Loans 1,163 677 339 2,179 181 2,360 2,474
Nonperforming Loans 98 25 13 136 7 143 165
Real Estate Owned 26 10 0 36 0 36 47
Total:
Loans $3,616 $1,754 $1,581 $6,951 $ 591 $7,542 $ 7,939
Nonperforming Loans 366 54 239 659 25 684 707
Real Estate Owned 459 113 132 704 65 769 866
<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.
</TABLE>
The largest concentration of commercial real estate loans is in the
New York/New Jersey and Texas markets, representing 48% and 23%,
respectively, of the commercial real estate portfolio. No other
state represented more than 3% of the commercial real estate loan
portfolio. At March 31, 1994, the portfolio included $591 million
of international real estate loans, which are primarily located in
the United Kingdom and Hong Kong.
<PAGE>
Part I
Item 2 (continued)
<PAGE>31
Nonperforming commercial real estate assets were $1,453 million at
March 31, 1994, a 8% decrease from December 31, 1993 and down $744
million or 34% from March 31, 1993. The improvement in
nonperforming commercial real estate asset levels for the 1994 first
quarter is the result of increased liquidity in the commercial real
estate markets and successful focused workout activities. The decreases
from both periods reflect nonaccrual loans returning to accrual
status, charge-offs and the continuing sale of foreclosed property.
The amount of commercial real estate loans that became nonperforming
during the 1994 first quarter declined significantly when compared
with the 1993 period. The first quarter of 1994 was the fifth
consecutive quarter in which reductions to nonperforming assets in
the form of payments, return to accrual status and sales of real
estate owned were greater than the additions to nonperforming
assets. Commercial real estate net charge-offs in the first quarter
of 1994 totaled $75 million, compared with $67 million in the same
period a year ago. Writedowns of commercial real estate owned
totaled $28 million for the first three months of 1994, compared
with $54 million in first quarter 1993. Approximately $41 million
in commercial real estate owned was sold during the 1994 first
quarter. Generally, these assets were sold at or above carrying
value. Commercial real estate net charge-offs, writedowns and
nonperforming assets for 1994 are expected to be below 1993 levels.
COMMERCIAL AND INDUSTRIAL PORTFOLIO
The commercial and industrial portfolio totaled $25.9 billion at
March 31, 1994, compared with $25.0 billion at December 31, 1993 and
$32.5 billion at March 31, 1993. The portfolio is diversified
geographically and by industry. At March 31, 1994, approximately
75% of the commercial and industrial loans were domestic. The
largest industry concentration is oil and gas at approximately 2.9%
of total loans. Real estate related of approximately $1.6 billion
is the second largest concentration representing 2.1% of total
loans.
Included in commercial and industrial 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 March 31, 1994 totaled
approximately $1.7 billion, compared with $1.9 billion at December
31, 1993 and $2.4 billion at March 31, 1993. The Corporation also
was committed at March 31, 1994 to lend an additional amount of
approximately $.8 billion to its HLTs. The substantial reduction in
the HLT loan portfolio from March 31, 1993 can be largely attributed
to repayments, reclassifications to non-HLT status and, to a
lesser extent, charge-offs. At March 31, 1994, the Corporation had
$260 million in nonperforming HLT loans compared with $269 million
at the end of 1993 and $466 million at the end of the same period
last year. Net charge-offs related to HLTs during the first quarter
of 1994 totaled $3 million, versus $27 million for the first quarter
1993.
FINANCIAL INSTITUTIONS, AND FOREIGN GOVERNMENTS AND OFFICIAL
INSTITUTIONS PORTFOLIOS
Financial institutions include commercial banks and companies whose
businesses primarily involve lending, financing, investing,
underwriting or insuring. Loans to financial institutions were
$7,285 million at March 31, 1994 or 10% of total loans
outstanding at March 31, 1994. Loans to financial institutions are
predominantly to commercial banks and broker-dealers, which together
comprise over half the financial institution total.
At March 31, 1994, 7% of the Corporation's total non-LDC loans
were to foreign governments, government agencies, government-owned
commercial enterprises, and official institutions.
CONSUMER PORTFOLIO
The consumer loan portfolio consists of one-to-four family
residential mortgages, credit cards, installment loans and student
loans. The consumer loan portfolio totaled $26.3 billion at March
31, 1994, representing 35% of total loans, up from $25.8 billion or
34% of total loans at December 31, 1993 and $23.9 billion or 29% of
total loans at March 31, 1993.
<PAGE>
Part I
Item 2 (continued)
<PAGE>32
The following table presents the composition of the Corporation's
consumer loans at the dates indicated.
March 31, December 31, March 31,
(in millions) 1994 1993 1993
--------- ------------ ---------
Residential Mortgages $12,549 $12,346 $ 11,683
Credit Cards 7,269 7,176 6,178
Installment Loans 4,300 4,178 3,986
Student Loans 2,170 2,103 2,029
-------- -------- --------
Total $26,288 $25,803 $ 23,876
======== ======== ========
Credit card receivables at March 31, 1994 increased $1.1 billion
from the same period a year ago, of which approximately $770 million
is related to the co-branded Shell MasterCard program, which was
introduced in the fourth quarter of 1993.
Total nonperforming consumer loans at March 31, 1994 were $181
million and were comprised of $155 million of loans secured by
residential real estate and $26 million of installment loans. Total
nonperforming 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 installment loans. At March 31,
1993, total nonperforming consumer loans were $228 million and were
comprised of $200 million of loans secured by residential real
estate and $28 million of installment loans. The decline in
nonperforming consumer residential loans and real estate owned from
March 31, 1993 was principally due to the Corporation's decision, in
the second quarter of 1993, to accelerate the disposition of $162
million of nonperforming residential mortgage assets arising from
loans originally extended several years ago under a reduced
documentation mortgage program that was discontinued in 1990.
Net charge-offs in the consumer loan portfolio totaled $90 million
in the 1994 first quarter compared with $97 million in the 1993
first quarter. The 1994 first quarter net charge-offs consisted of
$82 million in credit card receivables, $5 million in installment
loans and $3 million in residential mortgages. The 1993 first
quarter net charge-offs consisted of $86 million in credit card
receivables, $8 million in installment loans and $3 million in
residential mortgages. There were essentially no credit losses in
the student loan portfolio due to the existence of Federal and State
government agency guarantees.
Consumer loan balances are expected to increase in 1994,
particularly in the credit card portfolio. In 1994, the
Corporation's strategy will continue to emphasize risk management
and consumer loan portfolio credit quality. Management expects
consumer loan charge-offs in 1994 will approximate the 1993 level
due to the anticipated 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 $4.1 billion of mortgages in
the first quarter of 1994 versus $2.9 billion in the same 1993
period.
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 $38.6 billion at March 31, 1994 compared with
$36.4 billion at December 31, 1993 and $33.3 billion at March 31, 1993.
Purchased mortgage servicing rights (included in other assets) amounted
to $265 million at March 31, 1994 compared with $249 million at
December 31, 1993 and $209 million at March 31, 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
<PAGE>
Part I
Item 2 (continued)
<PAGE> 33
past two years when interest rates have been relatively low). The
Corporation utilizes accelerated amortization and continually
evaluates prepayment exposure of the portfolio, thereby adjusting
the balance and remaining life of the servicing rights as a result
of prepayments.
OUTSTANDINGS TO COUNTRIES ENGAGED IN DEBT RESCHEDULING
The following table sets forth the Corporation's outstandings to
countries engaged in debt rescheduling ("LDC") at the dates
indicated.
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------------------------------- -----------------------------------
Medium- and Trade and Medium- and Trade and
Long-Term Short-Term Total Long-Term Short-Term Total
(in millions) <a> <a>
----------- ---------- ----- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Brazil $ 402 $1,047 $ 1,449 $ 499 $ 829 $1,328
Venezuela <b> 401 260 661 651 160 811
Argentina 165 546 771 203 544 747
Others <C> 861 280 1,141 895 309 1,204
------- ------- ------- ------- ------- -------
Total $1,829 $2,133 $ 3,962 $ 2,248 $ 1,842 $4,090
======= ======= ======= ======= ======= =======
<FN>
<a> Trade and short-term outstandings include accrued interest,
interest-bearing deposits with banks and trade-related credits.
<b> Amounts outstanding to Venezuela exclude interest rate reduction
bonds with a book value of $287 million at March 31, 1994 and
$365 million at December 31, 1993. The principal amount of
these bonds is secured by zero-coupon U.S. Treasury securities.
As of March 31, 1994, the market values of these bonds and the
underlying collateral were $145 million and $42 million,
respectively.
<C> Amounts outstanding to Uruguay exclude interest rate reduction
bonds with a book value of $129 million at March 31, 1994 and
also at December 31, 1993. The principal amount of these bonds
is secured by zero-coupon U.S. Treasury securities. At March
31, 1994, the market values of these bonds and the underlying
collateral were $90 million and $18 million, respectively.
</TABLE>
The Corporation's medium- and long-term outstandings to countries
engaged in debt rescheduling at March 31, 1994 were $1,829 million,
a reduction of $419 million, or 19%, from December 31, 1993. The
reduction from the 1993 year-end is primarily attributable to loan
sales.
Total LDC outstandings were $3,962 million at March 31, 1994, a
decline of $128 million from December 31, 1993. The reduction was
principally due to the aforementioned reductions in medium- and
long-term outstandings partially offset by higher trade and short-
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 have 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
$633 million (which includes loan amounts previously charged off)
was exchanged for $296 million of Capitalization bonds
and $219 million of Discount bonds. The Corporation's "New" debt
(credit extensions originating from the 1988 restructuring) with a
face value of $166 million (which includes loan amounts previously
charged off) was exchanged for $91 million of Debt
Conversion bonds and $75 million of New Money bonds. The
Corporation also received Eligible Interest bonds (EI's) of
approximately $160 million for the majority of its remaining unpaid
interest. A portion of principal bonds ($50 million) and interest
bonds (approximately $15 million) is currently being held in escrow
to be released at a later date. The exchange did not result in any
additional charge-offs by the Corporation.
<PAGE>
Part I
Item 2 (continued)
<PAGE>34
The aforementioned bonds received through the exchange are measured
subject to the provisions of SFAS 115. The Corporation is
classifying these bonds as available-for-sale, and therefore they
will be valued at fair value. As a result of the above classification,
the Corporation plans to remove approximately $280 million of
Brazilian loans from nonperforming status. Also, Brazilian
outstandings will be reduced by approximately $120 million, due to
the collateralization of the discount bonds principal. The
remaining bonds received were uncollateralized. The reductions to
nonperforming loans and total Brazilian outstandings are expected to
occur in the second quarter of 1994.
-----------------------------------------------------------------
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 through B44 of the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1993.
Total stockholders' equity at March 31, 1994 was $11.0 billion,
compared with $11.2 billion at December 31, 1993. The $200 million
decline from year-end was principally due to a $407 million
reduction in the fair value of available-for-sale securities
accounted for under SFAS 115, which was partially offset by $191
million in retained earnings generated over the first three months
of 1994.
Total capitalization (total stockholders' equity under risk-based
capital guidelines and subordinated and senior debt that qualifies
as Tier 2 Capital) increased by $306 million during the 1994 first
quarter.
LONG-TERM DEBT
In the first quarter of 1994, additions to the Corporation's long-term
debt were $1.0 billion (including $200 million of subordinated debt that
qualifies as Tier 2 Capital). These additions were offset by
maturities of $609 million of long-term debt (including $169 million
of medium-term notes, $100 million of senior notes, $340 million
of other long-term debt) and the redemption of $140 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 first 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 April 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 March 31, 1994, the Corporation's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were
8.3% and 12.5%, 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 March 31, 1994,
Chemical Bank's ratios of Tier 1 Capital and Total Capital to risk-
weighted assets, were 7.6% and 12.0%, 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 divided by
average total assets (net of allowance for losses, goodwill and non-
qualified intangible assets). The minimum leverage ratio is 3% for
banking organizations that do not anticipate significant growth and
that have well-diversified risk (including no undue interest rate
risk), excellent asset quality, high liquidity and good earnings.
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 6.19% at March
31, 1994, compared with 6.77% at December 31, 1993. At March 31,
1994, Chemical Bank's Tier 1 leverage ratio was 6.11%, 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.
<PAGE>
Part I
Item 2 (continued)
<PAGE>35
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
March 31, December 31,
(in millions, except ratios) 1994 1993
--------- ------------
Tier 1 Capital
Common Stockholders' Equity $ 9,499 $ 9,295
Nonredeemable Preferred Stock 1,654 1,654
Minority Interest 65 66
Less: Goodwill 935 941
Non-Qualifying Intangible Assets 189 211
-------- --------
Tier 1 Capital $ 10,094 $ 9,863
-------- --------
Tier 2 Capital
Long-Term Debt Qualifying as Tier 2 $ 3,539 $ 3,437
Qualifying Allowance for Credit Losses 1,541 1,536
-------- --------
Tier 2 Capital $ 5,080 $ 4,973
-------- --------
Total Qualifying Capital $ 15,174 $ 14,836
======== ========
Risk-Weighted Assets <a> $121,874 $ 121,446
Tier 1 Capital Ratio 8.28% 8.12%
Total Capital Ratio 12.45% 12.22%
Tier 1 Leverage Ratio 6.19% 6.77%
[FN]
Excluding the Corporation's securities subsidiary, Chemical
Securities Inc., the March 31, 1994 ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were
8.0% and 12.0%, respectively, compared with 7.9% and 11.9%,
respectively, at December 31, 1993.
(a) Includes off-balance sheet risk-weighted assets in the amount of
$39,061 million, and $36,777 million, respectively, at March 31,
1994 and December 31, 1993.
<PAGE>
Part I
Item 2 (continued)
<PAGE> 36
-----------------------------------------------------------------
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.
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 1994 first quarter were
$60.4 billion, an increase from $60.0 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 1994 first quarter, the
Corporation's percentage of average core deposits to average
interest-earning assets was 47%, compared with 49% in the first
quarter 1993. Average core deposits as a percentage of average
loans was 81% for the first quarter 1994, compared with 74% for the
same quarter a year ago.
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 1994 first quarter,
the Corporation issued $200 million of subordinated debt, $350
million of senior debt through its medium-term note program, and
$450 million other long-term debt.
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.
During the 1994 first quarter, the Corporation redeemed $140 million
of its long-term debt. 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. 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.
The following comments apply to the Consolidated Statement of Cash
Flows.
Cash and due from banks increased $1.4 billion during the first
three months of 1994, from net cash provided by investing,
operating and financing activities. The $799 million of net cash
provided by investing activities was largely the result of cash inflows
from the maturities and sales of securities ($6.5 billion and $1.0 billion,
respectively), as well as decreases in deposits with banks ($2.1
billion), and net loans ($273 million), partially offset by cash
outflows from purchases of securities ($8.6 billion) and from
Federal funds sold and securities purchased under resale agreements
($1.2 billion). The $333 million net cash provided by operating
activities was principally due to earnings adjusted for noncash charges and
credits. The $320 million net cash provided by financing activities was
due to increases in Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds ($4.5 billion),
and proceeds from the additions of long-term debt ($1.0 billion),
partially offset by decreases in net deposits ($3.1 billion) and other
liabilities ($1.2 billion), and redemptions and maturities of long-term
debt ($749 million).
<PAGE>
Part I
Item 2 (continued)
<PAGE>37
Cash and due from banks decreased $1.4 billion during the first
three months of 1993, as net cash used in operating and investing
activities exceeded the net cash provided by financing activities.
The $2.8 billion total net cash used by operating activities was
primarily impacted by the net increase in trading related assets
($4.1 billion). The $2.1 billion of net cash used in investing
activities was largely the result of cash outflows from purchases of
securities ($3.9 billion), as well as increases in deposits with
banks ($2.3 billion), and Federal funds sold and securities
purchased under resale agreements ($1.8 billion), partially offset
by cash inflows from the sales and securitizations of loans ($3.1
billion), and maturities and sales of securities ($1.5 billion and
$1.7 billion, respectively). The $3.5 billion net cash provided by
financing activities was due to the increase in Federal funds
purchased and securities sold under repurchase agreements ($7.0
billion), and the net proceeds from the issuance of long-term debt
($1.2 billion), partially offset by decreases in noninterest bearing
domestic demand deposits ($3.2 billion) and 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
$1.2 billion for maturing medium- and long-term debt, 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 March 31, 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 $241 million 36-month facility and a $509 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 through 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, 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) and 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).
The Corporation's actual credit losses arising from derivatives and
foreign exchange transactions in past years have been immaterial.
During the 1994 first quarter there were no credit losses. The
effects of 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.
At March 31, 1994, the net deferred amount relating to closed
derivative contracts used in asset/liability management activities
was immaterial. The estimated fair value of open derivative
contracts (which are primarily interest rate swaps) used for
asset/liability management activities at March 31, 1994 reflected a
net unrealized gain of $64 million, compared with a net unrealized
gain of $425 million at December 31, 1993. The decrease is
primarily due to the recent unanticipated volatility in the interest
rate and currency markets.
<PAGE>
Part I
Item 2 (continued)
<PAGE>38
The effective management of credit and market risk is a vital
ingredient of the Corporation's off-balance sheet activities. The
Corporation also manages the risks associated with its trading
activities through geographic and product diversification. Because
of the changing market environment, which results in increasingly
complex financial instruments, and because of the Corporation's
business strategy to maintain geographic and product
diversification, the monitoring and managing of these risks is a
continual process.
The Corporation routinely enters into derivative and foreign
exchange product transactions with regulated financial institutions
that it believes have relatively low credit risk. At March 31,
1994, over 80% of transaction counterparties were commercial banks.
The remaining balance was comprised mainly of other financial
institutions and major corporations. At March 31, 1994,
nonperforming derivatives contracts were immaterial.
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 and Western Europe, areas which the
Corporation believes have the most developed laws regarding
derivatives and foreign exchange businesses. Trading products
include not only foreign exchange and derivatives but also
securities, including LDC debt.
The majority of derivatives and foreign exchange transactions are
outstanding for less than one year. At March 31, 1994, 29% of
outstanding transactions were scheduled to expire within three
months, 14% within three to six months, 17% within six months to one
year, 23% within one to three years and 17% greater than three
years. The short-term nature of these transactions, along with
product diversification, mitigates credit risk, as transactions
settle quickly.
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.
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.
<PAGE>
Part I
Item 2 (continued)
<PAGE>39
<TABLE>
<CAPTION>
(in millions) 1-3 4-6 7-12 1-5 Over
At March 31, 1994 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $(5,628) $ 3,062 $ 1,618 $ 2,090 $(1,142) $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity <a> (8,074) (645) (1,009) 9,112 616 ---
Interest-Rate-Sensitivity Gap (13,702) 2,417 609 11,202 (526) ---
Cumulative Interest-Rate
Sensitivity Gap (13,702) (11,285) (10,676) 526 --- ---
% of Total Assets (8)% (7)% (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% --- ---
<FN>
<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.
</TABLE>
At March 31, 1994, the Corporation had $10,676 million more
liabilities than assets repricing within one year, amounting to 6.4%
of total assets. This compares with $7,912 million, or 5.3%, of
total assets at December 31, 1993.
At March 31, 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 100 basis point rise in market rates over
the remainder of 1994 was estimated at less than 1.5% of projected
1994 after-tax net income.
For the 1994 first quarter, the percentage impact on net interest
income attributable to the Corporation's asset/liability management
activities was less than six percent.
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 off-balance sheet instruments
and not a specific financial instrument, the interest rate table
below does provide an indication of the Corporation's interest rate
swap activity.
<PAGE>
Part I
Item 2 (continued)
<PAGE>40
The table below summarizes expected maturities and weighted-average
interest rates to be received and paid on U.S. dollar interest rate
swaps utilized in the Corporation's asset/liability management at
March 31, 1994. The table was prepared under the assumption that
variable interest rates remain constant at March 31, 1994 levels as
these variable interest rates to be received or paid will change to the
extent that rates fluctuate. Variable rates presented are generally
based on the London Interbank Offered Rate (LIBOR).
<TABLE>
<CAPTION>
By expected maturities
After
Dollars in millions 1994 1995 1996 1997 1998 1998 Total
---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. dollar
Receive fixed swaps
Notional amount $1,837 $1,265 $2,664 $1,886 $ 665 $1,337 $ 9,654
Weighted-average:
Receive rate 7.31% 7.08% 7.28% 5.50% 6.25% 6.78% 6.77%
Pay rate 3.74 3.74 3.92 3.90 3.74 3.69 3.81
Pay fixed swaps
Notional amount $1,436 $ 351 $ 695 $ 208 $ 224 $ 779 $ 3,693
Weighted-average:
Receive rate 3.64% 3.59% 3.61% 3.57% 3.71% 3.56% 3.61%
Pay rate 5.15 6.60 6.65 6.76 8.47 7.32 6.32
Basis Swaps
Notional amount $ 855 $2,375 $ 585 $ 155 $ 335 $ 100 $ 4,405
Weighted-average:
Receive rate 3.88% 3.80% 3.92% 3.82% 3.89% 4.05% 3.84%
Pay rate 3.98 3.62 3.72 3.64 4.12 3.72 3.74
Forward Starting
Notional amount $ 1 $ 116 $ 90 $ 352 $ 1 $ 36 $ 596
Weighted-average:
Receive rate 3.69% 3.69% 3.90% 3.69% 3.69% 3.83% 3.73%
Pay rate 6.03 4.72 5.56 4.06 6.03 8.06 4.66
------- ------- ------- ------- ------- ------- -------
Total notional amount $4,129 $4,107 $4,034 $2,601 $1,225 $2,252 $18,348
======= ======= ======= ======= ======= ======= =======
</TABLE>
In addition to the swaps listed above, the Corporation also uses
non-U.S. dollar interest rate swaps within various foreign currencies.
The notional amount did not exceed $5.0 billion for any of the
individual non-U.S. dollar currencies.
<PAGE>
Part I
Item 2 (continued)
<PAGE>41
-----------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
-----------------------------------------------------------------
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board, ("FASB")issued
Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS 114).
SFAS114 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 is currently evaluating the
financial impact of adopting this new accounting standard.
-----------------------------------------------------------------
SUPERVISION AND REGULATION
-----------------------------------------------------------------
The following supervision and regulation discussion focuses
primarily on developments since December 31, 1993. Accordingly, it
should be read in conjunction with the Supervision and Regulation
section on pages A3-A8 of the Corporation's Annual Report on Form
10-K for the year ended December 31, 1993.
DIVIDENDS
Federal law imposes limitations on the payment of dividends by the
subsidiaries of the Corporation that are state member banks of the
Federal Reserve System (a "state member bank") or are national
banks. Two different calculations are performed to measure the
amounts of dividends that may be paid: a "recent earnings" test and
an "undivided profits" test. New York State banks like Chemical
Bank are also subject to substantially similar of restrictions the
New York State Banking Department. Non-bank subsidiaries of the
Corporation are not subject to such limitations.
At March 31, 1994, in accordance with the dividend restrictions
applicable to it, the Corporation's bank subsidiaries could, without
the approval of their relevant banking regulators, pay dividends of
approximately $2.0 billion to their respective bank holding
companies, plus an additional amount equal to their net profits from
April 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 do not
expect such regulations to have a material adverse impact on their
business operations.
<PAGE>
Part I
Item 2 (continued)
<PAGE>42
-----------------------------------------------------------------
ACQUISITIONS
-----------------------------------------------------------------
On May 12, 1994, the Corporation, through Chemical Bank, National
Association, a wholly-owned bank subsidiary of Chemical Banking
Corporation, signed a definitive agreement to acquire all the
outstanding common shares of Margaretten Financial Corporation
("Margaretten") for approximately $330 million. 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 will be 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 will be
conditioned on, among other things, a minimum of 80% of the
outstanding Margaretten common shares being validly tendered and not
withdrawn.
Following completion of the tender offer and receipt of any
necessary shareholders' approval, remaining shares of common stock
and depositary shares representing preferred stock not purchased in
the tender offer will be acquired in a merger at the same prices.
The transaction is subject to certain regulatory approvals and is
expected to close in mid-1994. A copy of the press release
announcing the transaction is attached as an exhibit hereto.
<PAGE>
Part I
Item 2 (continued)
<PAGE>43
<TABLE>
<CAPTION>
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
March 31, 1994 March 31, 1993
----------------------------------- ------------------------------------
Average Rate Average Rate
Balance Interest(Annualized) Balance Interest (Annualized)
------- --------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 5,153 $ 94 7.37% $ 3,521 $ 61 7.04%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 11,887 100 3.42% 8,711 76 3.52%
Trading Assets 11,877 173 5.92% 5,638 94 6.75%
Securities 26,406 417 6.40% 23,307 429 7.47%
Loans 74,481 1,311 7.14% 81,423 1,469 7.32%
-------- ------- -------- -------
Total Interest-
Earning Assets $129,804 $2,095 6.54% $ 122,600 $2,129 7.04%
Allowance for Losses (3,086) (3,115)
Cash and Due from Banks 8,833 8,376
Risk Management Instruments 15,393 ---
Other Assets 13,208 14,752
-------- ---------
Total Assets $164,152 $ 142,613
======== =========
LIABILITIES
Domestic Retail Time Deposits $ 46,047 $ 248 2.18% $ 45,705 $ 308 2.73%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,450 46 3.43% 6,550 49 3.05%
Deposits in Foreign Offices 22,971 226 3.99% 21,519 236 4.45%
-------- ------ --------- ------
Total Interest-Bearing Deposits 74,468 520 2.83% 73,774 593 3.26%
-------- ------ --------- ------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 16,060 137 3.47% 16,189 138 3.46%
Commercial Paper 2,408 21 3.55% 2,385 22 3.66%
Other 9,665 134 5.61% 5,818 92 6.45%
-------- ------ --------- -------
Total Short-Term and
Other Borrowings 28,133 292 4.21% 24,392 252 4.19%
Long-Term Debt 8,498 135 6.43% 7,470 130 7.04%
-------- ------ --------- -------
Total Interest-
Bearing Liabilities 111,099 947 3.46% 105,636 975 3.74%
-------- ------ --------- -------
Demand Deposits 22,625 21,011
Risk Management Instruments 13,068 ---
Other Liabilities 6,194 5,853
-------- ---------
Total Liabilities 152,986 132,500
-------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,654 1,865
Common Stockholders' Equity 9,512 8,248
-------- ---------
Total Stockholders' Equity 11,166 10,113
-------- ---------
Total Liabilities and
Stockholders' Equity $164,152 $ 142,613
======== =========
SPREAD ON INTEREST-BEARING
LIABILITIES 3.08% 3.30%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $1,148 3.59% $1,154 3.82%
====== ====== ====== =====
</TABLE>
<PAGE>
Part I
Item 2 (continued)
<PAGE> 44
<TABLE>
<CAPTION> CHEMICAL BANKING CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1994 1993
-------- -----------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
-------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income
Loans $ 1,307 $ 1,350 $1,372 $1,433 $ 1,465
Securities 416 428 428 443 428
Trading Assets 173 135 117 103 94
Federal Funds Sold and Securities
Purchased Under Resale Agreements 100 94 89 80 76
Deposits With Banks 94 67 67 73 61
------- ------- ------- ------- -------
Total Interest Income 2,090 2,074 2,073 2,132 2,124
------- ------- ------- ------- -------
Interest Expense
Deposits 520 542 537 569 593
Short-Term and Other Borrowings 292 249 238 253 252
Long-Term Debt 135 134 135 135 130
------- ------- ------- ------- -------
Total Interest Expense 947 925 910 957 975
------- ------- ------- ------- -------
Net Interest Income 1,143 1,149 1,163 1,175 1,149
Provision for Losses 205 286 298 363 312
------- ------- ------- ------- -------
Net Interest Income After
Provision For Losses 938 863 865 812 837
------- ------- ------- ------- -------
Noninterest Revenue
Trust and Investment Management Fees 110 109 97 102 98
Corporate Finance and Syndication Fees 82 88 95 84 71
Service Charges on Deposit Accounts 69 71 73 77 67
Fees for Other Banking Services 290 278 266 272 251
Trading Account and Foreign Exchange Revenues 185 255 268 298 252
Securities Gains 46 16 51 5 70
Other Revenue 149 236 154 204 116
------- ------- ------- ------- -------
Total Noninterest Revenue 931 1,053 1,004 1,042 925
------- ------- ------- ------- -------
Noninterest Expense
Salaries 518 522 518 529 501
Employee Benefits 119 95 94 105 102
Occupancy Expense 146 149 148 145 145
Equipment Expense 84 93 81 88 75
Foreclosed Property Expense 35 61 70 85 71
Restructuring Charge 48 --- 115 --- 43
Other Expense 374 415 344 360 339
------- ------- ------- ------- -------
Total Noninterest Expense 1,324 1,335 1,370 1,312 1,276
------- ------- ------- ------- -------
Income Before Income Tax Expense and
Effect of Accounting Changes 545 581 499 542 486
Income Tax Expense 226 234 (3) 161 147
------- ------- ------- ------- -------
Income Before Effect of Accounting Changes 319 347 502 381 339
Net Effect of Changes in Accounting Principles --- --- --- --- 35
------- ------- ------- ------- -------
Net Income $ 319 $ 347 $ 502 $ 381 $ 374
======= ======= ======= ======= =======
Net Income Applicable To Common Stock $ 287 $ 309 $ 464 $ 341 $ 335
======= ======= ======= ======= =======
Per Common Share:
Income Before Effect of Accounting Changes $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.21
Net Effect of Changes in Accounting Principles --- --- --- --- .14
------- ------- ------- ------- -------
Net Income $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.35
======= ======= ======= ======= =======
Average Common Shares Outstanding 253.2 252.5 252.1 251.7 248.5
</TABLE>
<PAGE>
<PAGE>45
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 relating to the proceedings
commenced by Best Products Co., Inc., against
Chemical Bank 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.
The Bankruptcy Court has approved the disclosure
statement for the plan of reorganization and a
creditor vote on the plan has taken place. A
hearing on both the confirmation of Best's plan of
reorganization and the compromise and settlement of
Best's claims against Chemical Bank and the Bank
Group has been conducted, but no decision has been
rendered. Although there can be no assurance that
the Bankruptcy Court will approve the compromise
and settlement or confirm the proposed plan of
reorganization, management believes that the above-
described proceedings will be resolved without
having any material adverse impact on the financial
condition of Chemical Bank or the Corporation.
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.
99 - Press Release: Transaction with Margaretten
Financial Corporation.
(B) Reports on Form 8-K:
The Corporation filed one report on Form 8-K during the
quarter ended March 31, 1994, as follows:
Form 8-K Dated January 21, 1994: January 18,
1994 Press Release - Results of Operations for
Fourth Quarter 1993.
<PAGE>
<PAGE>46
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 May 16, 1994 By /s/Joseph L. Sclafani
------------ ---------------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
<PAGE>
<PAGE>47
INDEX TO EXHIBITS
-------------------
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
----------- -------- ---------------------
11 Computation of net income 48
per common share
12(a) Computation of ratio of 49
earnings to fixed charges
12(b) Computation of ratio of 50
earnings to fixed charges
and preferred stock dividend
requirements
99 Press Release: Transaction with 51
Margaretten Financial Corporation.
<PAGE>
<PAGE>48
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 March 31 shares outstanding common shares<a> per share
-------------- ------------------- ---------------- --------
Three months 1994 253.2 $ 287 $ 1.13
1993 248.5 $ 335 $ 1.35<b>
[FN]
<a> After dividends on the preferred stock of $32 million and
$39 million for the three months ended March 31, 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 $1.21 per common share.
The changes in accounting principles increased net income
per common share by $0.14.
<PAGE>
<PAGE> 49
EXHIBIT 12(a)
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
---------------------------------------------------
(in millions, except ratios)
Three Months Ended
March 31, 1994
------------------
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes and
Effect of Accounting Changes $ 545
-------
Fixed charges:
Interest expense 427
One third of rents, net of income from subleases <a> 27
-------
Total fixed charges 454
-------
Less: Equity in undistributed income of affiliates (26)
-------
Earnings before taxes and fixed charges, excluding
capitalized interest $ 973
=======
Fixed charges, as above $ 454
=======
Ratio of earnings to fixed charges 2.14
=======
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges, as above $ 454
Add: Interest on deposits 520
-------
Total fixed charges and interest on deposits $ 974
=======
Earnings before taxes and fixed charges, excluding
capitalized interest, as above $ 973
Add: Interest on deposits 520
-------
Total earnings before taxes, fixed charges and
interest on deposits $ 1,493
=======
Ratio of earnings to fixed charges 1.53
=======
[FN]
<a> The proportion deemed representative of the interest factor.
<PAGE>
<PAGE> 50
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)
Three Months Ended
March 31, 1994
------------------
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes and
Effect of Accounting Changes $ 545
-------
Fixed charges:
Interest expense 427
One third of rents, net of income from subleases <a> 27
-------
Total fixed charges 454
-------
Less: Equity in undistributed income of affiliates (26)
-------
Earnings before taxes and fixed charges, excluding
capitalized interest $ 973
=======
Fixed charges, as above $ 454
Preferred stock dividends 32
-------
Fixed charges including preferred stock dividends $ 486
=======
Ratio of earnings to fixed charges and
preferred stock dividend requirements 2.00
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges including preferred stock dividends $ 486
Add: Interest on deposits 520
-------
Total fixed charges including preferred stock
dividends and interest on deposits $ 1,006
=======
Earnings before taxes and fixed charges, excluding
capitalized interest, as above $ 973
Add: Interest on deposits 520
-------
Total earnings before taxes, fixed charges and
interest on deposits $ 1,493
=======
Ratio of earnings to fixed charges
and preferred stock dividend requirement 1.48
=======
[FN]
<a> The proportion deemed representative of the interest factor.
<PAGE>
<PAGE> 51
Contacts: Chemical Bank Margaretten Financial
Judy Walsh Bruce Schnelwar
(212) 270-2914 Executive Vice President & CFO
(908) 324- 4183
Ken Herz
(212) 270-4621 Morgen-Walke Associates
Michelle Katz
(212) 850-5629
For Immediate Release
Thursday, May 12, 1994
New York, May 12 -- Chemical Bank, National Association, a wholly-
owned bank subsidiary of Chemical Banking Corporation, and Margaretten
Financial Corporation today announced that they have signed a
definitive agreement for Chemical to acquire all the outstanding common
shares of Margaretten for approximately $330 million.
Under the terms of the agreement, which has been approved by the
boards of directors of both companies, a subsidiary of Chemical will
begin a cash tender offer no later than May 18, 1994 for all
outstanding shares of 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 will be conditioned on, among other
things, a minimum of 80% of the outstanding Margaretten common shares
being validly tendered and not withdrawn.
Following completion of the tender offer and receipt of any
necessary shareholders' approval, remaining shares of common stock and
depositary shares representing preferred stock not purchased in the
tender offer will be acquired in a merger at the same prices. The
transaction is subject to certain regulatory approvals.
Upon completion of the transaction, which is expected at mid-year,
Chemical will rank fourth nationwide in mortgage originations with a
volume of approximately $26.3 billion, based on 1993 figures, and will
rank fifth in mortgage servicing. Based on March 31, 1994 figures,
the combined servicing volume will be $54.5 billion.
"Chemical views mortgage banking as a critical element of its
nationwide retail financial services strategy," said Michael Hegarty,
Chemical's senior executive vice president in charge of retail banking.
"Our goal is to make Chemical the leading choice for a full range of
financial services among consumers nationwide.
((more))
((page two))
<PAGE>
<PAGE> 52
"Chemical and Margaretten are two outstanding institutions with
complementary strengths. This transaction will expand our retail
mortgage network serving realtors and builders, increase our
penetration in existing markets and enhance our ability to serve the
communities in which we do business.
"In the rapidly consolidating mortgage business, firms with the
critical mass to achieve economies of scale are best prepared to take
advantage of growth opportunities," Hegarty continued. "The
efficiencies created by this transaction will enable us to accelerate
our plans to build a more comprehensive nationwide presence.
"By leveraging technology and capital strength, we can continue to
offer attractive pricing and outstanding credit quality and service
quality, while Margaretten clients will gain access to an expanded
product line, including jumbo mortgages and ARMs and low - to moderate-
income-oriented products. At the same time, we will be able to take
advantage of the excellent fee revenues that stem from the servicing
end of the business."
Chemical and Margaretten are both currently leaders in the
mortgage business nationwide. The transaction will create a new
organization in which origination volume will be in balance with
servicing potential. In 1993, Chemical had originations of $14.7
billion and servicing volume of $36.4 billion. It has 19 retail
offices and 24 wholesale offices in 20 states. Margaretten & Co., Inc.
had originations of $11.6 billion and servicing volume of $15.6
billion. It has 78 retail offices and 11 wholesale offices in 25
states nationwide. At March 31, 1994, Chemical's servicing volume was
$38.6 billion and Margaretten's servicing volume was $15.9 billion.
Felix M. Beck, chairman and chief executive officer of Margaretten
Financial Corporation, commented, "We believe this transaction provides
our shareholders with the enhanced value we have been seeking since our
initial public offering in January 1992. Our company when joined with
Chemical will be able to provide a broad array of financial products to
better serve our customers."
Lehman Brothers Inc. has advised Chemical in this transaction.
Goldman, Sachs & Co. has advised Margaretten in this transaction.
Lehman Brothers Inc. and Chemical Securities Inc., an affiliate of
Chemical, will serve as dealer managers for the tender offer.
Chemical Banking Corporation is a worldwide banking organization
with $164.2 billion in assets and nearly $11 billion in equity. It is
the fourth largest bank holding company in the United States, with
major franchises in key regional, national and global markets.
Margaretten Financial Corporation, located in Perth Amboy, New
Jersey, is the parent company of one of the nation's leading mortgage
banking firms, Margaretten & Company, Inc. Its primary business is the
origination, purchase, sale and servicing of residential mortgage
loans. Its retail division has 78 branches and satellite offices in 21
states and its wholesale division operates primarily in California, the
Pacific Northwest, Arizona, Georgia and Ohio.
# # #
<PAGE>
