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, 1995
--------------
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 240,881,338
-------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of
common stock on April 30, 1995.
<PAGE>
<PAGE> 2
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FORM 10-Q INDEX
Part I Page
------ ----
Item 1 Financial Statements - Chemical Banking Corporation
and Subsidiaries:
Consolidated Balance Sheet at March 31, 1995 and
December 31, 1994. 3
Consolidated Statement of Income for the three months
ended March 31, 1995 and March 31, 1994. 4
Consolidated Statement of Cash Flows for the three
months ended March 31, 1995 and March 31, 1994. 5
Consolidated Statement of Changes in Stockholders'
Equity for the three months ended March 31, 1995 and
March 31, 1994. 6
Notes to Financial Statements. 6-16
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 17-49
Part II
-------
Item 1 Legal Proceedings 50
Item 6 Exhibits and Reports on Form 8-K. 50
===================================================================
<PAGE>
<PAGE> 3
Part I
Item 1.
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions)
March 31, December 31,
1995 1994
------ ------
ASSETS
Cash and Due from Banks $ 7,819 $ 8,832
Deposits with Banks 2,718 5,649
Federal Funds Sold and Securities
Purchased Under Resale Agreements 15,044 12,797
Trading Assets:
Debt and Equity Instruments 10,900 11,093
Risk Management Instruments 29,977 17,709
Securities:
Held-to-Maturity (Market Value: $8,230
and $8,106) 8,442 8,566
Available-for-Sale 19,407 18,431
Loans (Net of Unearned Income: $615
and $460) 80,369 78,767
Allowance for Credit Losses (2,455) (2,480)
Premises and Equipment 2,140 2,134
Due from Customers on Acceptances 1,083 1,088
Accrued Interest Receivable 1,224 1,190
Assets Acquired as Loan Satisfactions 61 210
Assets Held for Accelerated Disposition 402 526
Other Assets 8,150 6,911
-------- --------
TOTAL ASSETS $185,281 $171,423
======== ========
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 19,515 $ 21,399
Time and Savings 45,945 46,799
Foreign 29,961 28,308
-------- --------
Total Deposits 95,421 96,506
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 23,362 23,098
Other Borrowed Funds 11,981 11,843
Acceptances Outstanding 1,086 1,104
Accounts Payable and Accrued Liabilities 2,323 2,361
Other Liabilities 32,608 17,808
Long-Term Debt 7,709 7,991
-------- --------
TOTAL LIABILITIES 174,490 160,711
-------- --------
COMMITMENTS AND CONTINGENCIES (See Note 8)
STOCKHOLDERS' EQUITY
Preferred Stock 1,450 1,450
Common Stock (Issued 254,931,474
and 254,009,187 Shares) 255 254
Capital Surplus 6,578 6,544
Retained Earnings 3,523 3,263
Net Unrealized Loss on Securities
Available-for-Sale, Net of Taxes (472) (438)
Treasury Stock, at Cost (543) (361)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 10,791 10,712
-------- --------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $185,281 $171,423
======== ========
The Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
<PAGE> 4
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31,
(in millions, except per share data)
1995 1994
------ ------
Interest Income
Loans $ 1,661 $ 1,307
Securities 505 416
Trading Assets 199 173
Federal Funds Sold and Securities
Purchased Under Resale Agreements 219 100
Deposits with Banks 82 94
-------- --------
Total Interest Income 2,666 2,090
-------- --------
Interest Expense
Deposits 851 520
Short-Term and Other Borrowings 519 292
Long-Term Debt 140 135
-------- --------
Total Interest Expense 1,510 947
-------- --------
Net Interest Income 1,156 1,143
Provision for Losses 120 205
-------- --------
Net Interest Income After
Provision For Losses 1,036 938
-------- --------
Noninterest Revenue
Trust and Investment Management Fees 91 110
Corporate Finance and Syndication Fees 119 82
Service Charges on Deposit Accounts 74 69
Fees for Other Banking Services 294 290
Trading Revenue 56 185
Securities Gains (Losses) (18) 46
Other Revenue 254 149
-------- --------
Total Noninterest Revenue 870 931
-------- --------
Noninterest Expense
Salaries 546 518
Employee Benefits 107 119
Occupancy Expense 135 146
Equipment Expense 101 84
Foreclosed Property Expense (7) 35
Restructuring Charge --- 48
Other Expense 364 374
-------- --------
Total Noninterest Expense 1,246 1,324
-------- --------
Income Before Income Tax Expense and
Effect of Accounting Change 660 545
Income Tax Expense 264 226
-------- --------
Income Before Effect of Accounting Change 396 319
Effect of Change in Accounting Principle (11) ---
-------- --------
Net Income $ 385 $ 319
======== ========
Net Income Applicable To Common Stock $ 355 $ 287
======== ========
Per Common Share:
Income Before Effect of
Accounting Change $ 1.51 $ 1.13
Effect of Change in Accounting Principle (0.05) ---
-------- --------
Net Income $ 1.46 $ 1.13
======== ========
Average Common Shares Outstanding 243.2 253.2
The Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
<PAGE> 5
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(in millions)
1995 1994
------ ------
Operating Activities
--------------------
Net Income $ 385 $ 319
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Losses 120 205
Restructuring Charge --- 48
Depreciation and Amortization 98 89
Net Change In:
Trading-Related Assets 3,083 (1,066)
Accrued Interest Receivable (34) 120
Accrued Interest Payable (3) 26
Other, Net (22) 592
------- -------
Net Cash Provided by Operating Activities 3,627 333
------- -------
Investing Activities
--------------------
Net Change In:
Deposits with Banks 2,931 2,142
Federal Funds Sold and Securities
Purchased Under Resale Agreements (2,247) (1,166)
Loans Due to Sales and Securitizations 1,280 2,942
Other Loans, Net (3,405) (2,669)
Other, Net (1,645) 607
Proceeds from the Maturity of
Held-to-Maturity Securities 280 1,033
Purchases of Held-to-Maturity Securities (150) (396)
Proceeds from the Maturity of
Available-for-Sale Securities 769 5,507
Proceeds from the Sale of
Available-for-Sale Securities 9,309 1,008
Purchases of Available-for-Sale Securities (10,711) (8,209)
------- -------
Net Cash Provided (Used)
by Investing Activities (3,589) 799
------- -------
Financing Activities
--------------------
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (1,884) (1,967)
Domestic Time and Savings Deposits (854) (1,984)
Foreign Deposits 1,653 815
Federal Funds Purchased, Securities
Sold Under Repurchase Agreements
and Other Borrowed Funds 694 4,529
Other Liabilities (57) (1,222)
Other, Net (14) 13
Proceeds from the Issuance of Long-Term Debt 291 1,000
Redemption and Maturity of Long-Term Debt (578) (749)
Proceeds from the Issuance of Stock 34 13
Treasury Stock, Net (182) ---
Cash Dividends Paid (137) (128)
------ ------
Net Cash Provided (Used) by
Financing Activities (1,034) 320
------ ------
Effect of Exchange Rate Changes on
Cash and Due from Banks (17) (18)
Net Increase (Decrease) in Cash
and Due from Banks (1,013) 1,434
Cash and Due from Banks at January 1, 8,832 6,852
------ ------
Cash and Due from Banks at March 31, $7,819 $8,286
====== ======
Cash Interest Paid $2,669 $ 921
Taxes Paid $ 76 $ 226
The Notes to Financial Statements are an integral part of these
Statements.
<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)
1995 1994
-------- --------
BALANCE AT JANUARY 1, $10,712 $11,164
-------- --------
Net Income 385 319
Dividends Declared:
Preferred Stock (30) (32)
Common Stock (105) (96)
Issuance of Common Stock 34 13
Restricted Stock Granted,
Net of Amortization 1 ---
Net Changes in Treasury Stock (182) ---
Net Change in Fair Value of
Available-for-Sale Securities, Net of Taxes (34) (407)
Accumulated Translation Adjustment 10 ---
-------- --------
Net Change in Stockholders' Equity 79 (203)
-------- --------
BALANCE AT MARCH 31, $10,791 $10,961
======== ========
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, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114"), and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" ("SFAS
118"), an amendment to SFAS 114. The adoption of SFAS 114 and SFAS
118 did not have an effect on the Corporation's earnings,
liquidity, or capital resources. See Note 4 - Loans on page 10 of
this Form 10-Q for further discussion of the Corporation's impaired
loans as of and for the three months ended March 31, 1995.
NOTE 2 - TRADING ACTIVITIES
---------------------------
The Corporation uses its trading assets, such as debt and equity
instruments and risk management instruments, to meet the financing
needs of its customers and to generate revenues through its trading
activities.
<PAGE>
<PAGE> 7
Part I
Item 1. (continued)
DEBT AND EQUITY INSTRUMENTS
Trading assets-debt and equity instruments, which are carried at
fair value, are presented in the following table for the dates
indicated:
March 31, December 31,
(in millions) 1995 1994
--------- ------------
U.S. Government and Federal Agencies $ 3,269 $ 2,548
Obligations of State and
Political Subdivisions 228 327
Certificates of Deposit, Bankers'
Acceptances, and Commercial Paper 1,193 1,644
Debt Securities Issued by
Foreign Governments 2,761 1,983
Foreign Financial Institutions 2,136 3,119
Other, primarily includes corporate
debt and eurodollar bonds 1,313 1,472
------- -------
Total Trading Assets - Debt
and Equity Instruments (a) $10,900 $11,093
======= =======
[FN]
(a) Includes emerging markets instruments of $161 million at March
31, 1995 and $544 million at December 31, 1994.
RISK MANAGEMENT INSTRUMENTS
Trading assets-risk management instruments, which totaled $30.0
billion at March 31, 1995, represent unrealized gains on interest
rate contracts of $8.3 billion, foreign exchange contracts of $21.4
billion, and stock index options and commodity contracts of $0.3
billion. At December 31, 1994, trading assets-risk management
instruments totaled $17.7 billion and represented unrealized gains
on interest rate contracts of $7.9 billion, foreign exchange
contracts of $9.5 billion, and stock index options and commodity
contracts of $0.3 billion.
Trading liabilities-risk management instruments, which totaled
$31.1 billion at March 31, 1995, represent unrealized losses on
interest rate contracts of $9.3 billion, foreign exchange contracts
of $21.5 billion, and stock index options and commodity contracts
of $0.3 billion. At December 31, 1994 trading liabilities-risk
management instruments totaled $16.0 billion and represented
unrealized losses on interest rate contracts of $7.0 billion,
foreign exchange contracts of $8.9 billion, and stock index options
and commodity contracts of $0.1 billion.
The increase in the Corporation's risk management instruments at
March 31, 1995, when compared with December 31, 1994, was primarily
due to an increase in foreign exchange related unrealized gains and
losses as a result of the recent decline in the value of the U.S.
dollar against foreign currencies, in particular the Deutsche mark
and Japanese yen.
A description of the classes of derivative and foreign exchange
instruments used in the Corporation's trading activities as well as
the related accounting policies and the credit risk and
market risk factors involved in such activities are disclosed in
Note One on page B48 and in Note Nineteen on pages B64-B66 of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994. For a discussion of the Corporation's risk
management instrument activity and related trading revenue for the
1995 first quarter, see Management's Discussion and Analysis on
page 23 and pages 37-40 of this Form 10-Q.
NOTE 3 - SECURITIES
-------------------
Securities that may be sold in response to or in anticipation of
changes in interest rates and resulting prepayment risk, or other
factors, are classified as available-for-sale and carried at fair
value. The unrealized gains and losses on these securities, along
with any unrealized gains and losses on related hedges, are
reported net of applicable taxes in a separate component of
stockholders' equity. Securities that the Corporation has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and are carried at amortized cost.
<PAGE>
<PAGE> 8
Part I
Item 1. (continued)
The fair valuation of the securities classified as available-for-
sale (including loans classified as available-for-sale) resulted in
a net after-tax unfavorable impact of $472 million on
the Corporation's stockholders' equity at March 31, 1995, compared
with a net after-tax unfavorable impact of $438
million at December 31, 1994. The net change from the 1994 year-
end was the result of the declining value of Brady Bonds
partially offset by the effect of lower interest rate levels at
March 31, 1995 compared with December 31, 1994. See Note 4 for
further discussion.
Net losses from available-for-sale securities sold in the first
quarter of 1995 amounted to $18 million (gross gains of $38 million
and gross losses of $56 million). Net gains on such sales for the
same period in 1994 amounted to $46 million (gross gains of $73
million and gross losses of $27 million). There were no sales of
held-to-maturity securities in either first quarter period.
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity
securities were as follows for the dates indicated:
<TABLE>
<CAPTION>
March 31, 1995 (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 $ 3,556 $ 2 $ 91 $ 3,467
Collateralized Mortgage Obligations 3,761 --- 120 3,641
Other, primarily U.S. Treasuries 179 --- --- 179
Obligations of State
and Political Subdivisions 189 --- --- 189
Collateralized Mortgage Obligations (b) 137 2 3 136
Other, primarily
Asset-Backed Securities 620 2 4 618
-------- -------- -------- --------
Total Held-to-Maturity
Securities (c) $ 8,442 $ 6 $ 218 $ 8,230
======== ======== ======== ========
December 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- -----
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 3,615 $ --- $ 209 $ 3,406
Collateralized Mortgage Obligations 3,871 --- 237 3,634
Other, primarily U.S. Treasuries 130 --- 2 128
Obligations of State and
Political Subdivisions 118 1 --- 119
Collateralized Mortgage
Obligations (b) 140 1 4 137
Other, primarily Asset Backed
Securities 692 2 12 682
-------- -------- -------- --------
Total Held-to-Maturity
Securities (c) $ 8,566 $ 4 $ 464 $ 8,106
======== ======== ======== ========
<FN>
(a) The Corporation's portfolio of securities generally consists
of investment grade securities. The fair value of actively-
traded securities is determined by the secondary market, while
the fair value for non-actively-traded securities is based on
independent broker quotations.
(b) Collateralized mortgage obligations of private issuers
generally have underlying collateral consisting of obligations
of U.S. Government and Federal agencies and corporations.
(c) See Note 4 for loans accounted for pursuant to Statement of
Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115").
</TABLE>
<PAGE>
<PAGE> 9
Part I
Item 1. (continued)
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale
securities for the dates indicated were as follows:
<TABLE>
<CAPTION>
March 31, 1995 (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 $ 8,407 $ 370 $ 320 $ 8,457
Collateralized Mortgage Obligations 186 --- 7 179
Other, primarily U.S. Treasuries 6,003 33 223 5,813
Debt Securities Issued by
Foreign Governments 3,703 7 216 3,494
Corporate Debt Securities 368 8 10 366
Collateralized Mortgage
Obligations (b) 237 --- 1 236
Other (c) 876 1 15 862
--------- --------- --------- ---------
Total Available-for-Sale Securities
Carried at Fair Value (d) $19,780 $ 419 $ 792 $19,407
========= ========= ========= =========
December 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- -----
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-backed Securities $ 8,151 $ 554 $ 593 $ 8,112
Collateralized Mortgage Obligations 354 1 28 327
Other, primarily U.S. Treasuries 6,414 8 359 6,063
Debt Securities Issued by
Foreign Governments 2,736 16 134 2,618
Corporate Debt Securities 358 6 5 359
Collateralized Mortgage
Obligations (b) 262 1 3 260
Other (c) 702 1 11 692
-------- -------- -------- --------
Total Available-for-Sale Securities
Carried at Fair Value (d) $18,977 $ 587 $ 1,133 $18,431
======== ======== ======== ========
<FN>
(a) The Corporation's portfolio of securities generally consists
of investment grade securities. The fair value of actively-
traded securities is determined by the secondary market, while
the fair value for non-actively-traded securities is based on
independent broker quotations.
(b) Collateralized mortgage obligations of private issuers
generally have underlying collateral consisting of obligations
of U.S. Government and Federal agencies and corporations.
(c) Comprised of all other debt, asset-backed and equity
securities.
(d) See Note 4 for loans accounted for pursuant to SFAS 115.
</TABLE>
<PAGE>
<PAGE> 10
Part I
Item 1. (continued)
NOTE 4 - LOANS
--------------
Certain loans that meet the accounting definition of a security are
classified as loans and are measured pursuant to SFAS 115. Bonds
that have been issued by foreign governments (such as Mexico,
Venezuela and Brazil) to financial institutions, including the
Corporation, as part of a debt renegotiation (i.e., "Brady Bonds")
are subject to the provisions of SFAS 115. The amortized cost and
estimated fair value of loans measured pursuant to SFAS 115 for the
dates indicated were as follows:
<TABLE>
<CAPTION>
March 31, 1995 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Held-to-Maturity $ 1,998 $ 6 $ 989 $ 1,015
Available-for-Sale 1,635 71 523 1,183
-------- --------- -------- --------
Total $ 3,633 $ 77 $ 1,512 $ 2,198
======== ======== ======== ========
December 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Held-to-Maturity $ 1,998 $ 10 $ 848 $ 1,160
Available-for-Sale 1,635 150 369 1,416
-------- -------- -------- --------
Total $ 3,633 $ 160 $ 1,217 $ 2,576
======== ======== ======== ========
</TABLE>
There were no sales of available-for-sale loans in the first
quarter of 1995. Cash proceeds from the sales of such loans in the
first quarter of 1994 were $318 million.
As discussed in Note 1 - Basis of Presentation, the Corporation
adopted SFAS 114 and SFAS 118 on January 1, 1995 which 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 SFAS 114, a loan is
considered impaired when, based on current information, it is
probable that the borrower will be unable to pay contractual
interest or principal payments as scheduled in the loan agreement.
SFAS 114 applies to all loans except smaller-balance homogeneous
consumer loans, loans carried at fair value or the lower of cost
or fair value, debt securities and leases.
The Corporation's impaired loans are those non-consumer loans
currently reported as nonperforming. The Corporation recognizes
interest income on those loans to the extent received in cash.
However, where there is doubt regarding the ultimate collectibility
of the loan principal, cash receipts, whether designated as
principal or interest, are applied to reduce the carrying value of
the loan. For a further description of the Corporation's
accounting policies for recognition of interest income on
nonperforming loans, see Note One of the Notes to the Consolidated
Financial Statements on pages B48-B51 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994.
<PAGE>
<PAGE> 11
Part I
Item 1. (continued)
The following table sets forth impaired loan disclosures as of and
for the three months ended March 31, 1995.
March 31,
(in millions) 1995
---------
Impaired Loans with an Allowance $ 665
Impaired Loans without an Allowance (a) 277
------
Total Impaired Loans $ 942
======
Allowance for Impaired Loans under
SFAS 114 (b) $ 217
======
Average Balance of Impaired Loans
during the Period $ 945
======
Interest Income Recognized on Impaired
Loans during the Period $ 4
======
[FN]
(a) Impaired loans for which the discounted cash flows, collateral
value or market price equals or exceeds the carrying value of
the loan. Such loans do not require an allowance under SFAS
114.
(b) The Allowance for Impaired Loans under SFAS 114 is a part of
the Corporation's overall Allowance for Credit Losses.
NOTE 5 - COMMON STOCK REPURCHASE
--------------------------------
During the 1995 first quarter, the Corporation repurchased 3.9
million shares of its common stock on the open market under a
previously announced plan to repurchase up to 6 million shares in
1995. This follows a stock buyback program of 10 million shares
completed in 1994.
NOTE 6 - POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
-----------------------------------------------------------
For a discussion of the Corporation's postretirement medical and
life insurance benefits provided to domestic employees, reference
is made to page B60 of the Corporation's Annual Report filed on
Form 10-K for the year ended December 31, 1994.
On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106"), for
postretirement medical benefits related to the Corporation's
foreign employees. SFAS 106 requires recognition, during the years
of the employees' active service, of the employer's expected cost
and obligation of providing postretirement benefits other than
pensions to employees and eligible dependents. The Corporation has
not prefunded these benefits. Consistent with the January 1, 1993
adoption of SFAS 106 for its domestic employees, the Corporation
elected to expense the entire unrecognized accumulated obligation
related to its foreign employees via a one-time pre-tax charge of
$17 million ($11 million after-tax or $0.05 per common share) on
January 1, 1995.
During the first quarter of 1995, the Corporation accrued $1
million of periodic expense related to its foreign employees, which
is primarily comprised of interest on the accumulated obligation,
and also included service cost-benefits earned during the quarter.
Prior to January 1, 1995, the Corporation recognized the costs of
providing postretirement medical benefits related to its foreign
employees on a cash basis.
<PAGE>
<PAGE> 12
Part I
Item 1. (continued)
NOTE 7 - RESTRUCTURING CHARGES
------------------------------
In December 1994, the Corporation announced a two-year program to
improve earnings per share and return on equity and, as a result,
recorded a pre-tax restructuring charge of $260 million. The
charge (which is primarily comprised of cash charges) is related to
severance and other termination-related costs of $138 million
associated with the elimination of 3,700 positions and costs of
$122 million for the disposition of certain facilities, premises
and equipment, and the termination of leases. The staff reductions
are tied to specific expense reduction initiatives such as
commercial lending re-engineering, branch network rationalization
and the process improvement program at Texas Commerce and will
occur within the Global Bank, Regional Bank, Texas Commerce and
Corporate sectors. At March 31, 1995 the reserve balance
associated with this charge was approximately $227 million of which
$112 million related to severance and other termination-related
costs and $115 million related to the disposition of certain
facilities, premises and equipment and termination of leases.
During 1994, the Corporation also included in noninterest expense a
restructuring charge of $48 million related to the closing of 50
New York branches and a staff reduction of 650. This restructuring
charge primarily comprises real estate costs and severance costs
associated with the closing of the 50 New York branches. Also
included in the restructuring charge are severance costs involved
in optimizing the branch staff at existing branches. This
rationalization of the branch system is part of an ongoing
Corporate-wide program to improve productivity. At March 31, 1995,
the reserve balance associated with this restructuring charge was
approximately $23 million (of which $22 million related to the
pending disposition of certain facilities).
At March 31, 1995, remaining reserve balances (associated with the
pending disposition of facilities) related to 1993 restructuring
charges were immaterial.
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 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
--------------------------------------------------------------
The Corporation utilizes various derivative and foreign exchange
financial instruments for trading purposes and for purposes other
than trading, such as asset/liability management. These financial
instruments represent contracts with counterparties where payments
are made to or from the counterparty based upon specific interest
rates, currency levels, other market rates or on terms
predetermined by the contract. Such derivative and foreign
exchange transactions involve, to varying degrees, credit risk and
market risk. A discussion of the credit and market risks involved
with derivative and foreign exchange financial instruments is
provided on pages B31-B34 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR TRADING
PURPOSES: The financial instruments used for the Corporation's
trading activities are disclosed in Note 2 of this Form 10-Q.
The amount of credit risk regarding the Corporation's trading
activities is disclosed on the balance sheet in accordance with
Financial Accounting Standards Board Interpretation No. 39 ("FASI
39"). These amounts are disclosed in Note 2 of this Form 10-Q.
The effects of market risk (gains or losses) on the Corporation's
trading activities have been reflected in trading revenue, as the
trading instruments are marked-to-market on a daily basis.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR PURPOSES OTHER
THAN TRADING: The Corporation's principal objective in using off-
balance sheet instruments for purposes other than trading is for
its asset/liability management. The majority of the Corporation's
derivatives used for such activities are transacted through its
trading units. A discussion of the Corporation's objectives and
strategies for employing derivative and foreign exchange
instruments for asset/liability management activities is included
on page B34 of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1994.
<PAGE>
<PAGE> 13
Part I
Item 1. (continued)
At March 31, 1995, gross deferred gains and gross deferred losses
relating to closed financial futures contracts used in
asset/liability management activities were $24 million and $63
million, respectively. Deferred gains and losses on closed
financial futures contracts are generally amortized over periods
ranging up to twelve months. The amortization periods are
dependent upon when the contract is closed and the period of time
over which the asset or liability is being hedged.
The Corporation does not generally terminate its interest rate swaps;
however, during the 1995 first quarter, certain swaps were terminated.
As of March 31, 1995, gross deferred gains and gross deferred losses
related to terminated interest rate swap contracts were $2 million and
$35 million, respectively.
The Corporation generally does not use derivative financial
instruments to hedge anticipated transactions. Accordingly, at
March 31, 1995, deferred gains and losses associated with such
transactions were immaterial.
<PAGE>
<PAGE> 14
Part I
Item 1. (continued)
The following table summarizes the aggregate notional amounts of
interest rate and foreign exchange contracts as well as the credit
exposure related to these instruments (after taking into account
the effects of master netting agreements) for the dates indicated
below. The table should be read in conjunction with the preceding
narrative as well as the descriptions of these products and their
risks included on pages B65-B66 of the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1994.
<TABLE>
<CAPTION>
Notional Amounts Credit Exposure
------------------------- -----------------------
March 31, December 31, March 31, December 31,
(in billions) 1995 1994 1995 1994
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Futures and Forward Rate Agreements
Trading $1,025.9 $ 938.1 $ 1.2 $ 0.8
Asset and Liability Management 52.9 32.8 --- ---
Interest Rate Swaps
Trading 1,345.6 1,107.9 7.0 6.9
Asset and Liability Management 55.5 50.7 0.2 0.2
Purchased Options
Trading 112.5 60.5 0.1 0.2
Asset and Liability Management 13.1 13.7 --- ---
Written Options
Trading 108.4 69.5 --- ---
Asset and Liability Management 7.7 3.3 --- ---
-------- -------- -------- --------
Total Interest Rate Contracts $2,721.6 $2,276.5 $ 8.5 $ 8.1
======== ======== ======== ========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 924.6 $ 794.0 $ 18.0 $ 7.3
Asset and Liability Management 11.9 12.3 --- ---
Other Foreign Exchange Contracts (a)
Trading 122.0 94.5 3.4 2.2
Asset and Liability Management 0.2 0.3 --- ---
-------- -------- -------- --------
Total Foreign Exchange Contracts $1,058.7 $ 901.1 $ 21.4 $ 9.5
======== ======== ======== ========
STOCK INDEX OPTIONS AND COMMODITY CONTRACTS
Trading $ 6.4 $ 4.5 $ 0.3 $ 0.3
======== ======== ======= =======
Total Credit Exposure Recorded on the Balance Sheet $ 30.2 $ 17.9
======= =======
<FN>
(a) Includes purchased options, written options and cross-currency
interest rate swaps of $46.5 billion, $48.8 billion and $26.9
billion, respectively at March 31, 1995, compared with $34.2
billion, $38.4 billion and $22.2 billion, respectively, at
December 31, 1994.
</TABLE>
In addition to the financial instruments presented in the preceding
notional table, the Corporation also enters into transactions
involving "when-issued securities" primarily as part of its trading
activities. When-issued securities are commitments to purchase or
sell securities authorized for issuance, but not yet actually
issued. Accordingly, they are not recorded on the balance sheet
until issued. At March 31, 1995 and December 31, 1994, commitments
to purchase when-issued securities were $5,440 million and $6,289
million, respectively, and commitments to sell when-issued
securities were $5,484 million and $6,658 million, respectively.
<PAGE>
<PAGE> 15
Part I
Item 1. (continued)
Derivatives and foreign exchange products are generally either
negotiated over-the-counter ("OTC") contracts or standardized
contracts executed on a recognized exchange (such as the Chicago
Board of Options Exchange). Standardized exchange-traded
derivatives primarily include futures and options. Negotiated
over-the-counter derivatives are generally entered into between two
counterparties that negotiate specific agreement terms, including
the underlying instrument, amount, exercise price and maturity.
All of the Corporation's interest rate swaps and forward rate
agreements are OTC-traded and all of the Corporation's financial
futures contracts are exchange-traded. As of March 31, 1995,
approximately 33% of the Corporation's options activity was
exchange-traded, with the balance being OTC-traded. As of December
31, 1994, approximately 19% of the Corporation's options activity
was exchange-traded, with the balance being OTC-traded. The
percentage of options activity that is exchange-traded versus OTC-
traded will vary depending upon conditions in the market place.
NOTE 10 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
-----------------------------------------------------------------
The following table summarizes the Corporation's credit risk which
is represented by contract amounts relating to lending-related
financial instruments at March 31, 1995 and December 31, 1994. The
table should be read in conjunction with the description of these
products and their risks included on pages B66-B67 of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
------------------------------------------------------------------
March 31, December 31,
(in millions) 1995 1994
--------- ------------
Commitments to Extend Credit $ 52,431(a) $ 49,266(a)
Standby Letters of Credit (Net of Risk
Participations of $5,014 and $5,218) 12,222 12,451
Other Letters of Credit 3,099 2,860
Customers' Securities Lent 18,565 18,979
------------------------------------------------------------------
(a) Excludes credit card commitments of $19.6 billion and $19.0
billion at March 31, 1995 and December 31, 1994, respectively.
------------------------------------------------------------------
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------------
For a discussion of the Corporation's fair value methodologies, see
pages B67-B69 of the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994. At March 31, 1995, the carrying
value and estimated fair value of financial assets required to be
valued for purposes of SFAS 107 were $180.0 billion and $181.0
billion, respectively, compared with $166.0 billion and $166.8
billion, respectively, at December 31, 1994. At March 31, 1995,
the carrying value and estimated fair value of financial
liabilities required to be valued for purposes of SFAS 107 were
$173.9 billion and $174.4 billion, respectively, compared with
$160.2 billion and $160.8 billion at December 31, 1994.
<PAGE>
<PAGE> 16
Part I
Item 1. (continued)
The following table presents the carrying value and estimated fair
value at March 31, 1995 of financial assets and liabilities valued
under SFAS 107 and certain derivatives contracts (which are primarily
interest rate swaps) used for asset/liability management ("ALM")
activities related to such financial assets and liabilities.
<TABLE>
<CAPTION>
Financial Assets/ Derivative Contracts Used
Financial Liabilities for ALM Activities
-------------------- --------------------------------------------------
Estimated Gross Gross Estimated
Carrying Fair Carrying Unrecognized Unrecognized Fair
(in millions) Value(a) Value(a) Value(b) Gains Losses Value
-------- ------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Assets for Which Fair Value
Approximates Book Value $ 31,496 $ 31,496 $ --- $ --- $ --- $ ---
Trading Assets:
Debt and Equity Instruments 10,900 10,900 --- --- --- ---
Risk Management Instruments 29,977 29,977 --- --- --- ---
Securities Held-to-Maturity 8,442 8,230 --- --- --- ---
Securities Available-for-Sale 19,407 19,407 287 --- --- 287
Loans, Net 77,914 78,628 29 123 (237) (85)
Derivatives in Lieu of
Cash Market Instruments 15 87 15 213 (141) 87
Other Assets 1,876 2,242 --- --- --- ---
-------- --------
Total Financial Assets $180,027 $180,967
======== ========
FINANCIAL LIABILITIES:
Liabilities for Which Fair Value
Approximates Book Value $119,354 $119,354 1 3 (6) (2)
Domestic Time Deposits 15,771 16,179 71 21 (395) (303)
Long-Term Debt 7,709 7,785 5 14 (124) (105)
Trading Liabilities - Risk
Management Instruments 31,050 31,050 --- --- --- ---
------- --------
Total Financial Liabilities $173,884 $174,368
======== ========
<FN>
(a) The carrying value and estimated fair value of financial
assets/liabilities include the carrying value and estimated
fair value of derivative contracts used in asset/liability
management activities.
(b) The carrying value of derivatives used for asset/liability
management is recorded as receivables and payables and is
primarily included in Other Assets on the balance sheet,
except derivatives used in connection with available-for-sale
securities which are carried at fair value and are included in
Securities: Available-for-Sale on the balance sheet.
</TABLE>
Certain financial instruments and all nonfinancial instruments are
excluded from the scope of SFAS 107. Therefore, in addition to the
derivative contracts in the above table, the Corporation also uses
derivative contracts (primarily interest rate floors) to hedge its
purchased mortgage servicing rights which are not required to be
fair valued under SFAS 107. At March 31, 1995, the notional amount
of such derivatives was $2.4 billion, the carrying value was $4.8
million, and the gross unrecognized gains and losses of such derivatives
were $0.2 million and $1.8 million, respectively, resulting in an
estimated fair value of $3.2 million.
The above table does not include futures contracts which the Corporation
uses in its ALM activities to modify the interest rate characteristics
of balance sheet instruments such as securities, loans and deposits.
Gross deferred gains and losses from daily margin settlements on open
futures contracts were $1 million and $56 million, respectively, at
March 31, 1995. The deferred gains and losses from open futures
contracts are amortized to income after the contracts close. See
page 13 of this Form 10-Q for a discussion of closed futures contracts
related to ALM activities.
<PAGE>
<PAGE> 17
Part I
Item 2.
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHEMICAL BANKING CORPORATION
QUARTERLY FINANCIAL HIGHLIGHTS
(in millions, except per share and ratio data)
1995 1994
-------- -------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Income Before Effect of Accounting Change $ 396 $ 179 $ 439 $ 357 $ 319
Net Effect of Change in Accounting Principle (11)(a) --- --- --- ---
------- ------- ------- ------- -------
Net Income $ 385 $ 179 $ 439 $ 357 $ 319
======= ======= ======= ======= =======
Net Income Applicable to Common Stock $ 355 $ 149 $ 396 $ 324 $ 287
======= ======= ======= ======= =======
Per Common Share:
Income Before Effect of Accounting Change $ 1.51 $ .63 $ 1.60 $ 1.28 $ 1.13
Net Effect of Change in Accounting Principle (0.05)(a) --- --- --- ---
------- ------- ------- ------- -------
Net Income $ 1.46 $ .63 $ 1.60 $ 1.28 $ 1.13
======= ======= ======= ======= =======
Book Value $ 38.79 $ 37.88 $ 38.29 $ 37.17 $36.74
Market Value $ 37.75 $ 35.88 $ 35.00 $ 38.50 $36.38
Common Dividends Declared $ .44 $ .44 $ .44(b) $ .38 $ .38
COMMON SHARES OUTSTANDING:
Average 243.2 244.5 246.6 253.1 253.2
Period End 240.8 244.5 244.4 250.9 253.3
PERFORMANCE RATIOS:
Return on Average Assets (c) .89% .42% 1.03% .87% .79%
Return on Average Common Equity (c) 15.50% 6.29% 16.92% 13.90% 12.24%
Return on Average Stockholders' Equity (c) 14.54% 6.54% 16.14% 12.96% 11.59%
Efficiency Ratio (d) 64.6% 67.2% 62.9% 62.3% 61.2%
CAPITAL RATIOS:
Common Stockholders' Equity to Assets 5.0% 6.2% 5.5% 5.5% 5.6%
Total Stockholders' Equity to Assets 5.8% 5.4% 6.4% 6.6% 6.6%
Tier 1 Leverage (e) 5.8% 5.9% 5.9% 6.4% 6.2%
Risk-Based Capital Ratios:
Tier I (4.0% required) (e) 8.1% 8.2% 8.2% 8.7% 8.3%
Total (8.0% required) (e) 12.1% 12.3% 12.3% 12.8% 12.5%
<FN>
(a) On January 1, 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 106, "Employer's Accounting
for Postretirement Benefits Other Than Pensions" ("SFAS 106")
for the accounting for other postretirement benefits relating
to the Corporation's foreign employees.
(b) In the third quarter of 1994, the Corporation increased its
quarterly common stock dividend to $0.44 per share.
(c) Quarterly performance ratios are based on annualized reported
net income amounts.
(d) Excludes restructuring charges, foreclosed property expense,
emerging markets past-due interest bond sales and gain on the
sale of the Corporation's investment in Far East Bank and
Trust Company.
(e) In accordance with current regulatory guidelines, these ratios
exclude the impact on stockholders' equity resulting from the
adoption of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115").
</TABLE>
<PAGE>
<PAGE> 18
-------------------------------------------------------------------
OVERVIEW
-------------------------------------------------------------------
Chemical Banking Corporation reported net income for the first
quarter of $385 million, an increase of 21% from net income of $319
million in the comparable period of 1994. On a per share basis,
earnings for the 1995 first quarter increased 29% to $1.46 per
common share, compared with $1.13 in the first quarter of 1994.
The Corporation's 1995 first quarter results reflected a solid
performance in several core businesses and good progress on the
expense and capital initiatives that were announced by the
Corporation in the 1994 fourth quarter. Operating expenses
declined significantly from the 1994 fourth quarter and were
essentially flat when compared with the same period a year ago.
Additionally, the Corporation announced the proposed sale of
Chemical New Jersey Holdings Inc., divested an overseas equity
investment and launched the second phase of a common stock buyback
program. For a further discussion of the expense and capital
initiatives announced by the Corporation in the 1994 fourth
quarter, see the Actions to Improve Earnings Per Share section on
pages B16-B17 of the Corporation's Annual Report on Form 10-K for
the year ended December 31 1994.
During the 1995 first quarter, the Corporation announced a
definitive agreement to sell its wholly-owned subsidiary, Chemical
New Jersey Holdings, Inc., to PNC Bank Corp. ("PNC") for
approximately $504 million. The sale, which is expected to close
by year-end, does not include the Corporation's franchise in
northeastern New Jersey, where the Corporation is retaining 40
branches and commercial banking operations. Also during the 1995
first quarter, the Corporation sold its interest in Far East Bank
and Trust Company in the Philippines, resulting in an $85 million
gain ($51 million after-tax). This transaction was part of the
previously-announced program of selling minority interests in
overseas entities that are not considered strategic. As of March
31, 1995, the Corporation had repurchased 3.9 million shares of its
common stock as part of a plan to repurchase up to 6 million shares
by the 1995 year-end.
The Corporation's nonperforming assets at March 31, 1995 were
$1,130 million, a decline of $9 million from $1,139 million at
December 31, 1994 and a decline of $2,073 million from $3,203
million at March 31, 1994. Nonperforming assets have declined
by $5,457 million, or 83%, from their peak level of $6,587 million
in September 1992.
At March 31, 1995, the Corporation's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were
8.13% and 12.13%, respectively, well in excess of the minimum
ratios specified by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). At March 31, 1995, the
Corporation was "well capitalized" as defined by the Federal
Reserve Board. These ratios were slightly below the reported 8.20%
and 12.35%, respectively, at December 31, 1994 reflecting a $2.9
billion increase in risk-weighted assets primarily due to an
increase in risk management instruments at March 31, 1995.
In the first quarter of 1995, the Corporation adopted SFAS 106 for
its foreign employees and, as a result, recorded a $17 million
charge ($11 million after-tax or $0.05 per common share). The
treatment of the 1995 adoption of SFAS 106 as an accounting change
is consistent with the Corporation's adoption of SFAS 106 for
domestic employees in 1993.
<PAGE>
<PAGE> 19
------------------------------------------------------------------
RESULTS OF OPERATIONS
------------------------------------------------------------------
NET INTEREST INCOME
First Quarter
---------------------
(in millions) 1995 1994
------- -------
Total Interest Income $2,666 $2,090
Total Interest Expense 1,510 947
------- -------
Net Interest Income 1,156 1,143
Taxable Equivalent Adjustment (a) 8 5
------- -------
Net Interest Income - Taxable
Equivalent Basis $1,164 $1,148
======= =======
[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.
The Corporation's net interest income for the first quarter was
$1,156 million in 1995, compared with $1,143 million in the first
quarter of last year. The year-over-year increase is attributable
to a higher level of average interest-earning assets. Average
interest-earning assets were $135.8 billion in the 1995 first
quarter, an increase of $6.0 billion from the prior year's
comparable quarter, principally reflecting a 16% increase in
average consumer loans outstanding.
In the 1995 first quarter, the composition of average interest-
earning asset mix was relatively unchanged from both the 1994
fourth quarter and the prior year's comparable quarter. The
following table reflects the composition of interest-earning assets
as a percentage of total earning assets and the net yield on
interest-earning assets for the periods indicated.
AVERAGE EARNING ASSET MIX
First Quarter
-----------------------------------------
1995 1994
-------------------- -------------------
% of Total % of Total
Interest- Interest-
(Taxable equivalent Average Earning Average Earning
rates; in millions) Balance Assets Balance Assets
------ -------- ------ -------
Consumer Loans $ 30,269 22% $ 25,989 20%
Commercial Loans 47,685 35 48,492 37
Securities 27,736 21 26,406 21
Liquid Interest-Earning
Assets 30,087 22 28,917 22
-------- ---- -------- ----
Total Interest-Earning
Assets $135,777 100% $129,804 100%
======== ==== ======== ====
Interest-Rate Spread 2.80% 3.08%
==== ====
Net Yield on Interest-
Earning Assets 3.48% 3.59%
==== ====
<PAGE>
<PAGE> 20
The Corporation's average total loans were $78.0 billion in the
1995 first quarter, an increase of $3.5 billion from the comparable
1994 period. The increase reflected the continued growth in
consumer loans (principally from residential mortgage and credit
card activities), partially offset by a reduction in the commercial
real estate portfolio and a slight decline in commercial loans.
Although average commercial loan outstandings were lower in the
first quarter of 1995 than the comparable 1994 period, commercial
loans at March 31, 1995 represented the third consecutive quarterly
increase since the June 30, 1994 level. This increase reflected an
upward trend in commercial lending activity experienced during the
latter half of 1994 and into the first quarter of 1995. For the
remainder of 1995, the Corporation expects continued growth in its
loan portfolio, with its consumer loans continuing to grow faster
than its commercial loans. For a further discussion of the
Corporation's loans, see the loan portfolio section on page 30 of
this Form 10-Q.
The $6.0 billion growth in interest-earning assets was funded by a
$6.8 billion increase in interest-bearing liabilities. For the
1995 first quarter, average interest-bearing liabilities were
$117.9 billion, compared with $111.1 billion for the same period in
1994, principally due to a higher level of Federal funds purchased
and securities sold under repurchase agreements. The Corporation
utilizes repurchase agreements as a source of short-term funding
for trading-related positions as well as a source of financing for
the securities portfolio.
The negative impact on net interest income from nonperforming loans
(excluding nonperforming loans held for accelerated disposition) in
the first quarter of 1995 was $20 million, compared with $19
million in the first quarter of 1994. Although the level of
nonperforming loans declined significantly from the March 31, 1994
level, interest that was recognized in income decreased
significantly in the first quarter of 1995, compared with the first
quarter of 1994, as a result of lower cash collections. This
caused the negative impact on net interest income from
nonperforming loans to be relatively flat for the 1995 first
quarter versus the 1994 first quarter.
The favorable impact on net interest income from the Corporation's
asset/liability derivative activities, whereby certain of the
Corporation's assets and liabilities are hedged with derivative
instruments in order to alter the yield on such assets and
liabilities, was approximately $16 million for the first quarter
of 1995, compared with $60 million for the first quarter of 1994.
The interest rate spread, which is the difference between the
average rate on interest-earning assets and the average rate on
interest-bearing liabilities, was 2.80% for the first quarter of
1995, compared with 3.08% for the same period a year ago. 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 3.48% in
the 1995 first quarter, compared with 3.59% in the same period a
year ago. The decreases in the interest rate spread and net yield
reflected narrower loan spreads and the impact of higher interest
rates, partially offset by wider deposit spreads and an increased
contribution from noninterest-bearing funds. The contribution from
interest-free funds to the net yield was 68 basis points in the
1995 period, an increase from a 51 basis point contribution in the
comparable 1994 period. The improvement from the prior year is due
to the higher interest rate environment during 1995, despite a
decrease of $800 million in interest-free funds.
Despite its outlook for loan growth in 1995, management anticipates
that net interest income for 1995 will approximate or be somewhat
lower than the 1994 full year level.
For additional information on average balances and net interest
income, see Average Consolidated Balance Sheet, Interest and Rates
on page 48.
PROVISION FOR LOSSES
The provision for losses for the first quarter of 1995 was $120 million,
down significantly from $205 million in the first quarter of 1994, but
was up from the 1994 fourth quarter level of $85 million. The increase
in the provision from the prior quarter was primarily due to an unusually
high level of loan recoveries in the fourth quarter of 1994. The
gross recoveries in the 1995 first quarter were $30 million, down
from $82 million in the 1994 fourth quarter and down from $53
million in the prior year period.
<PAGE>
<PAGE> 21
As a result of management's evaluation of the continuing
improvement in the Corporation's credit profile, the quarterly
provision for losses during the remainder of 1995 is expected to be
generally consistent with the 1995 first quarter level.
NONINTEREST REVENUE
Noninterest revenue for the 1995 first quarter was $870 million,
compared with the $931 million recorded in the same period last
year. The decrease in 1995 was largely due to lower trading
revenue, lower securities results and the absence of gains on
emerging markets-related bond sales. Partially offsetting these
declines are higher corporate finance and syndication fees and
gains on the sale of certain assets included in other revenue
(primarily, the Far East Bank and Trust Company). The following
table reflects the composition of total noninterest revenue for the
periods indicated:
First Quarter
-----------------
(in millions) 1995 1994
------- -------
Trust and Investment Management Fees $ 91 $ 110
Corporate Finance and Syndication Fees 119 82
Service Charges on Deposit Accounts 74 69
Fees for Other Banking Services 294 290
Trading Revenue 56 185
Securities Gains (Losses) (18) 46
Other Revenue 254 149
------- -------
Total Noninterest Revenue $ 870 $ 931
======= =======
Trust and investment management fees decreased $19 million during
the first quarter of 1995 compared with the previous year's first
quarter. The following table reflects the components of trust and
investment management fees for the periods indicated.
First Quarter
----------------------
(in millions) 1995 1994
------- --------
Trust and Investment Management Fees:
Personal Trust and Investment
Management Fees $ 50 $ 53
Corporate and Institutional
Trust Fees 31 46
Other, primarily Foreign Asset
Management 10 11
------- -------
Total Trust and Investment Management Fees $ 91 $ 110
======= =======
The decline of $15 million in corporate and institutional trust
fees was due to the absence of $10 million in fees in 1995 related
to the joint venture with Mellon Bank Corporation. As a result of
the definitive agreement between the Corporation and Mellon Bank
Corporation relating to the shareholder services joint venture,
effective January 1, 1995 revenues and expenses of the affected
business units were reflected on an equity basis within other
revenue. Also contributing to the reduction within this category
was the sale of certain units of Ameritrust Texas Corporation
("Ameritrust"), the effect of attrition of certain Ameritrust and
First City Bancorp of Texas ("First City") customers experienced
during 1994, and continued pricing pressures affecting the
corporate and institutional trust business.
<PAGE>
<PAGE> 22
Corporate finance and syndication fees were $119 million in the
1995 first quarter, an increase of 45% from the previous year's
first quarter. The increase from last year reflects continued
strong growth in loan syndications and high-yield public debt
underwritings. During the 1995 first quarter, the Corporation
acted as agent or co-agent for approximately $63 billion of
syndicated credit facilities, a reflection of the Corporation's
large client base and strong emphasis on distribution. Management
expects the strong activity level in the marketplace to continue
throughout the remainder of 1995.
Fees for other banking services for the first quarter of 1995 were
$294 million, a slight increase from the comparable 1994 period,
reflecting higher credit card and mortgage servicing revenue,
offset partially by lower fees in lieu of compensating balances.
The following table sets forth the components of fees for other
banking services for the first quarters of 1995 and 1994.
First Quarter
------------------------
(in millions) 1995 1994
------- -------
Fees for Other Banking Services:
Credit Card Services Revenue $ 80 $ 75
Fees in Lieu of Compensating Balances 47 58
Commissions on Letters of Credit
and Acceptances 41 37
Loan Commitment Fees 24 22
Mortgage Servicing Fees 23 16
Other 79 82
------- -------
Total Fees for Other Banking Services $ 294 $ 290
======= =======
The higher level of credit card services revenue in the first
quarter of 1995 reflected an increased volume of retail credit
cards from a growing cardholder base, primarily as a result of the
Corporation's co-branded Shell MasterCard program. Outstandings in
the credit card lending portfolio were $9.5 billion at March 31,
1995, compared with $7.3 billion at the same date a year ago,
almost all of which related to the Shell MasterCard.
Mortgage servicing fees increased $7 million in the first quarter
of 1995, reflecting a higher level of mortgage servicing volume
from the acquisition of Margaretten Financial Corporation
("Margaretten") on July 1, 1994, as well as additions to the
portfolio from mortgage originations.
Fees in lieu of compensating balances decreased by $11 million in
the 1995 first quarter to $47 million. Customers often pay for
cash management or other banking services by maintaining
noninterest-bearing deposits. As interest rates increase, the
required compensating balance for a given level of service will
decrease. As a result, during the 1995 first quarter, when
interest rates were higher than in the 1994 first quarter, a
greater volume of customers maintained a compensating balance in
lieu of paying a fee.
<PAGE>
<PAGE> 23
The following table sets forth the components of trading
revenue for the first quarters of 1995 and 1994.
First Quarter
------------------------
(in millions) 1995 1994
------- -------
Trading Revenue:
Interest Rate Contracts (a) $ 19 $ 88
Foreign Exchange Revenue (b) 75 45
Debt Instruments and Other (c) (38) 52
------- -------
Total Trading Revenue $ 56 $ 185
======= =======
[FN]
(a) Includes interest rate swaps, currency swaps, forward
contracts, interest rate futures, and forward rate agreements
and related hedges.
(b) Includes foreign exchange spot and option contracts.
(c) Includes U.S. government and foreign government agency and
corporate debt securities, emerging markets debt instruments,
debt-related derivatives, equity securities, equity
derivatives, and commodity derivatives.
Trading revenues are affected by many factors including volatility
of currencies and interest rates, the volume of transactions
executed by the Corporation on behalf of its customers, the
Corporation's success in proprietary positioning, the improvements
in its credit ratings, and the steps taken by central banks and
governments which affect financial markets. The Corporation
believes that its trading business is a significant core business
and that its 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, vary from period to
period.
The trading environment continued to be difficult during the first
quarter of 1995 when compared with the same period in 1994,
primarily due to conditions in the emerging markets and European markets.
The decrease in revenue from interest rate contracts for the 1995
first quarter was primarily due to unexpected increases in
certain European interest rates, while foreign exchange revenues
benefited from volatility in the currency markets. The decrease in
debt instrument revenue was primarily due to major declines in the
prices of emerging markets debt instruments during the 1995 first
quarter.
The Corporation recorded net losses on the sales of its securities
of $18 million in the 1995 first quarter, compared with net gains
of $46 million in the same period in 1994. The 1995 loss reflected
a $13 million permanent impairment on Barings Bank PLC securities
held by the Corporation and an $11 million loss on available-for-
sale securities sales at Chemical Bank New Jersey as part of the
repositioning of the remaining bank in anticipation of the sale of
the central and southern branches. For further discussion of the
Corporation's securities, see Note 3 - Securities of the Notes to
Financial Statements of this Form 10-Q.
The following table presents the composition of other noninterest
revenue for the periods indicated.
First Quarter
---------------------
(in millions) 1995 1994
------- -------
Other Revenue:
Revenue from Equity-Related Investments $ 107 $ 83
Net Gains on Emerging Markets-Related
Interest Bond Sales -- 45
All Other Revenue 147(a) 21
------- -------
Total Other Revenue $ 254 $ 149
======= =======
[FN]
(a) Includes $85 million gain on the sale of the Corporation's
investment in Far East Bank and Trust Company.
<PAGE>
<PAGE> 24
Revenue from equity-related investments, which includes income from
venture capital activities and emerging markets investments, was
$107 million in the 1995 first quarter, compared with $83 million
in the comparable 1994 period. Average revenue from equity-related
investments was approximately $94 million per quarter, based on
revenues during the last five quarters. At March 31,
1995, the Corporation had equity-related investments with a
carrying value of $1.9 billion. The Corporation believes that
equity-related investments will continue to make substantial
contributions to the Corporation's earnings, although the timing of
the recognition of gains from such activities is unpredictable and
it is expected that revenues from such activities will vary
significantly from period to period.
In the first quarter of 1995, the Corporation had no emerging
markets-related past-due interest bond sales, compared with $45
million of gains from the sale of such bonds in the 1994 first
quarter. As of March 31, 1995, the Corporation had approximately
$101 million face value of emerging markets-related past-due
interest bonds that were unsold but that were available-for-sale.
In the 1995 first quarter, all other revenue included a $85 million
gain related to the sale of the Corporation's 12% interest in Far
East Bank and Trust Company in the Philippines. This transaction
was part of a previously-announced program of selling minority
interests in overseas entities that are not considered strategic.
All other revenue increased during the 1995 first quarter when
compared with the previous year's comparable period, due to higher
equity income from the Corporation's investment in CIT as well as
from certain Brazilian affiliates. The Corporation's share of net
income from its 40% interest in CIT, after purchase accounting
adjustments, was $19 million in the 1995 first quarter, an
increase from $17 million in the 1994 first quarter. Also
included in all other revenue for the 1995 first
quarter was a net gain of $2 million in connection with the
Corporation's residential mortgage sales activities, compared with
a net loss of $25 million in the 1994 first quarter.
NONINTEREST EXPENSE
Noninterest expense in the 1995 first quarter was $1,246 million,
compared with $1,333 million in the fourth quarter of 1994 and
$1,276 million in the first quarter of 1994. The comparable
amounts in the fourth and first quarters of 1994 exclude
restructuring charges of $260 million and $48 million, respectively.
The following table presents the components of noninterest expense
for the periods indicated.
First Quarter
---------------------
(in millions) 1995 1994
------- -------
Salaries $ 546 $ 518
Employee Benefits 107 119
Occupancy Expense 135 146
Equipment Expense 101 84
Foreclosed Property Expense (7) 35
Restructuring Charge --- 48
Other Expense 364 374
------- -------
Total Noninterest Expense $ 1,246 $ 1,324
======= =======
Excluding the restructuring charges in the 1994 first and fourth
quarter periods, noninterest expense for the 1995 first quarter
decreased $30 million from the previous year's first quarter, and
$87 million from the preceding quarter. These declines reflect the
initial benefits of certain expense reduction initiatives
undertaken by the Corporation at the end of 1994. Additionally, as
a result of the previously-mentioned joint venture agreement with
Mellon Bank Corporation, $16 million of 1995 first quarter expense
associated with the stock transfer and related shareholder
servicing operations is being recorded on an equity basis within
noninterest revenue. The decrease in noninterest expense from the
first quarter of 1994 was partially offset by the inclusion of $29
million of noninterest expenses in the first quarter of 1995,
relating to Margaretten, which was acquired in July 1994.
<PAGE>
<PAGE> 25
The increase in salaries for the 1995 first quarter was primarily
due to additional staff costs resulting from the 1994 Margaretten
acquisition, and the continued growth in the Corporation's
securities underwriting business. When compared with salaries in
the 1994 fourth quarter of $571 million, the decrease in the 1995
first quarter reflected a decline in incentives as a result of
lower trading results, the impact of personnel reductions and lower
salaries due to the aforementioned joint venture with Mellon Bank
Corporation. Total staff at March 31, 1995 amounted to 41,547
compared with 42,130 at December 31, 1994 and 41,112 at March 31,
1994. At March 31, 1995, there were approximately 900 positions
eliminated, out of the 3,700 positions targeted for elimination, as
part of the Corporation's actions to improve earnings per share.
Employee benefits in the 1995 first quarter decreased $12 million
from the prior year period reflecting lower retirement plan
expenses as well as a reduction in expenses resulting from the
adoption of the aforementioned expense reduction programs,
partially offset by higher OPEB expense resulting from the adoption
of SFAS 106 for the Corporation's foreign employees.
Occupancy expense in the 1995 first quarter decreased by $11
million from the prior year period, primarily due to the impact of
branch divestitures and the continuing consolidation of the New
York branch system, along with other expense reduction initiatives.
Equipment expense in the 1995 first quarter was $101 million,
compared with $84 million in the comparable 1994 period. The
increase in 1995 was primarily the result of continued technology
enhancements to support the Corporation's investment in certain key
businesses (in particular its trading and consumer banking
businesses). Additionally, the higher equipment expense level in
the 1995 first quarter reflects the Margaretten acquisition.
Foreclosed property expense in the 1995 first quarter was a credit
of $7 million, compared with an expense of $35 million in the same
1994 period, reflecting significant progress in managing the
Corporation's real estate portfolio. Included in the 1995 first
quarter amount were payments received related to certain foreclosed
properties previously written down.
The following table presents the components of other expense for
the periods indicated.
First Quarter
----------------------
(in millions) 1995 1994
------- -------
Other Expense:
Professional Services $ 54 $ 46
Marketing Expense 43 40
FDIC Assessments 37 42
Telecommunications 32 30
Amortization of Intangibles 28 29
All Other 170 187
------- -------
Total $ 364 $ 374
======= =======
Other expense for the 1995 first quarter decreased $10 million, or
3%, when compared with the same period in 1994. Federal Deposit
Insurance Corporation ("FDIC") assessments decreased 12% from the
1994 first quarter level reflecting a lower deposit base during the
1995 period. All other expense, which includes various smaller
expense categories such as stationery and other supplies, postage,
shipping, travel and insurance, decreased by 9% in the 1995 first
quarter, primarily as a result of the Corporation's aggressive
sourcing and other expense reduction initiatives. Partially
offsetting the quarter-over-quarter decrease in other expense
were higher professional service fees, reflecting continued use
of contract computer consultants associated with the Corporation's
ongoing technology enhancement efforts to improve productivity.
Other expense in the 1995 first quarter also included operating
costs of approximately $14 million relating to Margaretten.
<PAGE>
<PAGE> 26
The Corporation announced on December 1, 1994 that, as a result of
the expense reduction initiatives undertaken at that time, it was
targeting noninterest expense in each of 1995 and 1996 to be flat
with full year 1994. At the current time, the Corporation believes
that 1995 and 1996 noninterest expense will be approximately equal
to or less than 1994 noninterest expense.
The Corporation's efficiency ratio (excluding restructuring
charges, foreclosed property expense, emerging markets-related
past-due interest bond sales and gain from the sale of Far East
Bank and Trust Company) was 64.6% in the 1995 first quarter,
compared with 61.2% in the same 1994 period. The Corporation
remains committed to improving its operating margins and return
levels and to achieving an efficiency ratio of 60% in 1995 and 57%
in 1996 as a result of the programs initiated in December 1994.
INCOME TAXES
The Corporation recorded income tax expense of $264 million in the
1995 first quarter, compared with $226 million in the comparable
1994 period. The Corporation's effective tax rate was 40.0% and
41.5% in the first quarter of 1995 and 1994, respectively.
------------------------------------------------------------------
BUSINESS ORGANIZATION
------------------------------------------------------------------
The Corporation conducts domestic and international financial
services businesses through various bank and non-bank subsidiaries.
The principal bank subsidiaries of the Corporation are Chemical
Bank and Texas Commerce Bank National Association.
LINES-OF-BUSINESS RESULTS
Profitability of the Corporation is tracked with an internal
management information system that produces lines-of-business
performance for all sectors. 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.
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 losses,
utilizing a risk-based methodology. Noninterest expenses of the
Corporation are fully allocated to the business units except for
special corporate one-time charges. Management has developed a
risk-adjusted capital methodology that quantifies different types
of risk -- credit, operating and market -- within various
businesses and assigns capital accordingly. Credit risk is
computed using a risk grading system that is consistently applied
throughout the Corporation. During 1994, the Corporation revised
its equity allocation approach. These changes resulted in a
restatement of the previously published 1994 first quarter capital
allocation to each of the four business sectors. A long-term
expected tax rate is assigned in evaluating the Corporation's
businesses.
Commencing with the 1995 first quarter, Texas Commerce Equity
Holdings Inc. ("Texas Commerce") is being reported on a management
accounting basis instead of a legal entity basis. The 1994 results
for Texas Commerce have been restated to conform to the current
presentation.
<PAGE>
<PAGE> 27
<TABLE>
<CAPTION>
Global Bank Regional Bank Texas Commerce
For the three months ended March 31,
(in millions, except ratios) 1995 1994 1995 1994 1995 1994
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 257 $ 232 $ 727 $ 731 $ 173 $ 161
Noninterest Revenue 446 499 310 307 102 106
Noninterest Expense 299 292 707 742(b) 199 199
--------- -------- --------- --------- -------- ---------
Operating Margin 404 439 330 296 76 68
Credit Provision 36 42 114 111 15 15
Foreclosed Property Expense --- 3 2 1 (21) ---
--------- -------- --------- --------- -------- ---------
Income Before Taxes 368 394 214 184 82 53
Income Taxes 128 162 98 78 30 19
--------- -------- --------- --------- -------- ---------
Net Income Before Accounting
Change 240 232 116 106 52 34
Accounting Change --- --- --- --- --- ---
--------- -------- --------- --------- -------- ---------
Net Income $ 240 $ 232 $ 116 $ 106 $ 52 $ 34
========= ======== ========= ========= ======== =========
Average Assets $ 111,255 $100,703 $ 45,652 $ 41,872 $ 19,070 $ 20,693
Return on Common Equity 22.8% 21.7% 14.8% 15.0% 14.6% 8.1%
Return on Assets 0.87% 0.93% 1.03% 1.03% 1.11% 0.67%
Efficiency Ratio (c) 48.4% 42.6% 68.2% 66.9% 72.4% 74.5%
===============================================================================================================================
Real Estate Total(a)
For the three months ended March 31, 1995 1994 1995 1994
(in millions, except ratios) ------- ------- ------- -------
Net Interest Income $ 37 $ 42 $ 1,156 $ 1,143
Noninterest Revenue 3 5 870 931
Noninterest Expense 24 23 1,253 1,289(b)
--------- --------- -------- ---------
Operating Margin 16 24 773 785
Credit Provision 13 67 120 205
Foreclosed Property Expense 6 31 (7) 35
--------- --------- -------- ---------
Income (Loss) Before Taxes (3) (74) 660 545
Income Taxes (Benefits) (1) (33) 264 226
--------- --------- -------- ---------
Net Income (Loss) Before
Accounting Change (2) (41) 396 319
Accounting Change --- --- (11) ---
--------- --------- -------- ---------
Net Income (Loss) $ (2) $ (41) $ 385 $ 319
========= ========= ======== =========
Average Assets $ 4,043 $ 5,917 $175,467 $ 164,152
Return on Common Equity NM NM 15.5% 12.2%
Return on Assets NM NM 0.89% 0.79%
Efficiency Ratio (c) NM NM 64.6% 61.2%
<FN>
(a) Total column includes Corporate sector. See description of
Corporate sector on page 30.
(b) Includes restructuring charge of $48 million.
(c) Efficiency ratio excludes restructuring charges, foreclosed
property expense, emerging markets past-due interest bond
sales and the gain from the sale of the Corporation's
investment in Far East Bank and Trust Company.
NM - Not meaningful.
</TABLE>
<PAGE>
<PAGE> 28
GLOBAL BANK
The Global Bank is organized into four principal management
entities: Asia, Europe & Global Markets (securities, foreign
exchange and derivatives trading, the Corporation's treasury
functions, and the administration of the international branch
system in Asia and Europe); Banking & Corporate Finance (worldwide
wholesale client management and venture capital activities); Global
Investment Banking (acquisition finance, syndicated finance, high-
yield finance, mergers and acquisitions, restructuring and
refinance and lease finance); and Emerging Markets (cross-border
investment banking, local merchant banking and trade finance). The
Global Bank seeks to optimize its risk profile by emphasizing
originations, underwriting, distribution, and risk management
products.
The Global Bank's net income in the first quarter of 1995 was $240
million, an increase of $8 million from the first quarter of 1994.
The increase in the 1995 first quarter results was primarily due to
a gain on the sale of the Corporation's interest in Far East Bank
and Trust Company and an 11% increase in net interest income,
partially offset by lower trading revenue and higher noninterest
expense. For the first quarter of 1995, trading revenue decreased
to $44 million compared with $180 million in the 1994 first
quarter, reflecting major declines in the prices of emerging market
debt instruments and to unexpected increases in certain European
interest rates. Noninterest expenses rose $7 million, or 2%, when
compared with the same 1994 period, due primarily to the Global
Bank's continued investment in its securities and trading
businesses.
The results for Asia, Europe & Global Markets in the first quarter
of 1995 decreased 33% from last year's first quarter, primarily due
to lower noninterest revenue and higher noninterest expense. These
factors were partially offset by an increase in net interest
income. Noninterest revenue declined 39% which is attributable to
the unfavorable trading conditions and lower securities gains in
the 1995 first quarter compared with the same period in 1994. The
increase in noninterest expense is due to the previously mentioned
investment in securities and trading businesses. Net interest
income in the first quarter of 1995 rose 14% compared with the 1994
first quarter primarily due to wider spreads on short term
investments.
Banking & Corporate Finance's results in the first quarter of 1995
improved 54% from last year's comparable period reflecting
increases in noninterest revenue. The increase in noninterest
revenue was primarily due to growth in fee income and to gains on
the sale of equity investments. Additionally, the credit provision
decreased 25%, reflecting improved credit quality.
Global Investment Banking's 1995 first quarter performance was up
significantly from the same period in 1994. Performance was
characterized by a record level of corporate finance and
syndication fees driven by a combination of sizable refinancings,
acquisition loans, high yield public debt underwritings, and
private placements.
The earnings for Emerging Markets increased 29% in the 1995 first
quarter when compared with the 1994 first quarter, primarily due to
the aforementioned gain on the sale of the Corporation's interest in
Far East Bank and Trust Company. This positive impact was offset by
lower trading results and the absence of gains on emerging markets-
related bond sales in the 1995 first quarter, compared with gains
of $45 million recorded on such sales in the first quarter of 1994.
REGIONAL BANK
The Regional Bank includes New York Markets (consumer banking and
commercial and professional banking); Retail Card Services;
National Consumer Business; Middle Market (regional commercial
banking); Private Banking; Chemical New Jersey Holdings, Inc. and
Geoserve (cash management, funds transfer, trade, corporate trust
and securities services worldwide). The Corporation maintains a
leading market share position in serving the financial needs of
middle market commercial enterprises and small businesses in the
New York metropolitan area. Private Banking serves a high net-
worth clientele with banking, advisory and investment services.
<PAGE>
<PAGE> 29
In March 1995, the Corporation announced a definitive agreement to
sell its wholly-owned subsidiary, Chemical New Jersey Holdings, Inc.,
to PNC for approximately $504 million. The sale, which is
expected to close by year-end, does not include the Corporation's
franchise in northeastern New Jersey, where the Corporation is
retaining 40 branches and commercial banking operations.
The Regional Bank's net income of $116 million in the first quarter
of 1995 increased from last year's first quarter results of $106
million. The 1994 first quarter results included a $48 million
restructuring charge ($28 million after-tax) related to the closing
of 50 New York branches and a staff reduction of 650. Excluding
the restructuring charge, the Regional Bank's 1995 first quarter
earnings decreased by $18 million when compared with last year's
first quarter due to higher noninterest expense (reflecting the
acquisition of Margaretten in July 1994) and an increase in the
credit provision.
For the first quarter of 1995, New York Markets had a 23% increase
in revenue over the comparable 1994 quarter. The increase was
primarily attributable to an increase in net interest income due to
favorable deposit spreads and to higher deposit servicing fees
relating to pricing initiatives undertaken in the first half of
1994. Despite a 13% growth in loan volume in the 1995 first
quarter, the National Consumer Business results decreased $18 million
from last year's first quarter. The decrease was due to a decline
in net interest income from unfavorable loan spreads and higher
noninterest expense (reflecting the Margaretten acquisition).
Retail Card Services results for the 1995 first quarter decreased
9% when compared with the 1994 first quarter due to higher noninterest
expense and an increase in the credit provision, despite strong
revenue growth generated from the Shell MasterCard.
Middle Market's 1995 first quarter earnings increased 16% from last
year's first quarter due to a decrease in the credit provision
reflecting a substantial decline in nonperforming assets, partially
offset by a 9% decrease in fee revenues due to lower deposit
servicing fees and lower fees in lieu of compensating balances.
The results for Private Banking in the first quarter of 1995 were
significantly lower than the 1994 first quarter due to the adverse
affect of a $13 million loss on the permanent impairment of Barings
Bank PLC securities. Securities losses of $11 million contributed
to a decline in earnings for Chemical New Jersey Holdings, Inc. for
the 1995 first quarter compared with last year's first quarter.
Geoserve's results for the 1995 first quarter decreased 16% from the
1994 first quarter primarily due to lower net interest income
reflecting a decline in investable balances partially offset by
gains on the sales of certain assets. Additionally, revenues and
expenses related to those business units within Geoserve affected
by the joint venture formed between the Corporation and Mellon Bank
Corporation have been accounted for on an equity basis since
January 1, 1995.
TEXAS COMMERCE
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,
1995, Texas Commerce had $19 billion in total assets.
Texas Commerce's net income in the first quarter of 1995 was $52
million, an increase of 53% from last year's first quarter results
of $34 million. The increase in the 1995 first quarter period,
when compared with the 1994 first quarter period, was primarily due
to lower foreclosed property expense and higher net interest income
partially offset by lower noninterest revenue. The substantial
decrease in foreclosed property expense is attributable to the
improvement in the Texas real estate market and payments
received related to certain foreclosed properties that were previously
written down. Net interest income rose $12 million in the 1995
first quarter, when compared with the 1994 first quarter, due to a
7% growth in loan volume coupled with more favorable interest rate
spreads. The decreases in noninterest revenue and investment
banking income are due to declines in trust income and deposit
servicing fees, partially offset by improved trading results.
<PAGE>
<PAGE> 30
REAL ESTATE
Real Estate includes the management of the Corporation's commercial
real estate portfolio, primarily at Chemical Bank. Real Estate had
a net loss of $2 million for the first quarter of 1995 compared
with a net loss of $41 million in the first quarter of 1994. The
improved results were due primarily to a 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, 1995 were $161
million, down $1,029 million from $1,190 million in the first
quarter of 1994. The improvement in nonperforming asset levels for
the first quarter of 1995 is the result of increased liquidity in
the real estate markets coupled with successful workout activities,
as well as the aforementioned strategic actions taken during 1994.
CORPORATE
Corporate includes the management results attributed to the parent
company; the Corporation's investment in CIT; and some effects
remaining at the corporate level after the implementation of
management accounting policies including credit provision and tax
expense. Corporate had a net loss of $21 million for the first
quarter of 1995, compared with a net loss of $12 million in last
year's first quarter. The 1995 first quarter loss includes an $11
million after-tax charge due to the adoption of SFAS 106 for
foreign employees and a $6 million write-down associated with
certain nonperforming residential mortgages transferred to held-
for-sale.
------------------------------------------------------------------
LOAN PORTFOLIO
------------------------------------------------------------------
The following loan review discussion focuses primarily on
developments since December 31, 1994 and should be read in
conjunction with the Loan Portfolio section on pages B25 through
B30 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
The Corporation's loans outstanding totaled $80.4 billion at March
31, 1995, an increase of $1.6 billion from year-end 1994 and $5.7
billion higher than at March 31, 1994. The growth in loans
outstanding reflects increases in both the consumer and commercial
and industrial loan portfolios. For the remainder of 1995, the
Corporation expects continued growth in its loan portfolio.
<PAGE>
<PAGE> 31
The Corporation's loan balances were as follows for the dates
indicated:
March 31,December 31, March 31,
(in millions) 1995 1994 1994
--------------------- ---------
LOANS
Domestic Consumer:
Residential Mortgage (a) $14,053 $13,560 $12,438
Credit Card 9,454 9,261 7,269
Other Consumer (b) 7,364 7,265 6,455
-------- -------- --------
Total Consumer Loans 30,871 30,086 26,162
-------- -------- --------
Domestic Commercial:
Commercial and Industrial 21,342 20,805 19,145
Commercial Real Estate (c) 5,663 5,650 6,950
Financial Institutions 3,909 3,918 4,829
-------- -------- --------
Total Commercial Loans 30,914 30,373 30,924
-------- -------- --------
Total Domestic Loans 61,785 60,459 57,086
Foreign, primarily Commercial (d) 18,584 18,308 17,575
-------- -------- --------
Total Loans $80,369 $78,767 $74,661
======== ======== ========
[FN]
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of
consumer finance) and student loans.
(c) Represents loans secured primarily by real property, other
than loans secured by mortgages on 1-4 family residential
properties.
(d) Includes loans previously classified as LDC loans. Previously
reported loan amounts have been reclassified to conform with
the current presentation.
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 page B49 of the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1994.
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 pages B55-B56 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994. At March 31, 1995,
nonperforming shared loss assets were $52 million. Such assets are
not included in the amount of nonperforming assets below.
<PAGE>
<PAGE> 32
The following table sets forth the nonperforming assets and
contractually past due loans of the Corporation at March 31, 1995,
December 31, 1994 and March 31, 1994.
March 31, December 31, March 31,
(in millions) 1995 1994 1994
--------- ----------- ---------
NONPERFORMING ASSETS:
Domestic Consumer:
Residential Mortgage $ 114 $ 92 $ 155
Other Consumer 13 12 26
------- ------- -------
Total Consumer Loans 127 104 181
------- ------- -------
Domestic Commercial:
Commercial and Industrial 354 354 737
Commercial Real Estate 213 156 672
Financial Institutions 24 4 19
------- ------- -------
Total Commercial Loans 591 514 1,428
------- ------- -------
Total Domestic 718 618 1,609
Foreign, primarily Commercial (a) 351 311 760
------- ------- -------
Total Nonperforming Loans (b) 1,069 929 2,369
Assets Acquired as Loan
Satisfactions (b) 61 210 834
------- ------- -------
Total Nonperforming Assets $ 1,130 $ 1,139 $ 3,203
======== ======= =======
------------------------------------------------------------------
Contractually Past-Due Loans (c):
Consumer $ 313 $ 294 $ 271
Commercial and Other Loans 56 36 118
------- ------- -------
Total Contractually
Past-Due Loans $ 369 $ 330 $ 389
======= ======= =======
[FN]
(a) Includes nonperforming loans previously classified as LDC
nonperforming loans. Previously reported amounts have been
restated to conform with the current presentation.
(b) Includes $942 million of loans considered impaired under
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), as discussed on pages 6, 10 and 11. In
addition, on January 1, 1995, $122 million of assets for which
the Corporation did not have possession were reclassified from
Assets Acquired as Loan Satisfactions to Nonperforming Loans
pursuant to the adoption of SFAS 114.
(c) Accruing loans past-due 90 days or more as to principal and
interest, which are not characterized as nonperforming loans.
Consumer loans are generally not classified as nonperforming
loans but rather charged-off on a formula basis.
The Corporation's total nonperforming assets at March 31, 1995 were
$1,130 million, a decrease of $9 million from the 1994 year-end
level and a decrease of $2,073 million, or 65%, from last year's
comparable quarter-end. These reductions reflect the improvement
in the Corporation's credit profile as a result of a lower level of
loans being placed on nonperforming status, repayments, charge-
offs, the Corporation's continuing loan workout and collection
activities, as well as the impact of several strategic actions
undertaken during 1994. A discussion of such actions is provided
on page B26 of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1994.
Management expects the level of the Corporation's nonperforming
assets during 1995 to be at or moderately below the 1994 year-end
level.
<PAGE>
<PAGE> 33
The following table presents the reconciliation of nonperforming
assets for the first quarters of 1995 and 1994.
RECONCILIATION OF NONPERFORMING ASSETS First Quarter
-------------------
(in millions) 1995 1994
------- -------
Balance at beginning of period $ 1,139 $ 3,525
Additions:
Loans placed on nonperforming status 153 292
Deductions:
Payments 103 345
Sales 24 42
Charge-offs of Nonperforming Loans (a) 21 156
Write-downs of Real Estate Owned (12)(b) 31
Return to accrual status 26 40
------- -------
Balance at end of period $ 1,130 $ 3,203
======= =======
[FN]
(a) Excludes those consumer charge-offs that are recorded on a
formula basis.
(b) Included in the 1995 first quarter amount was a reevaluation
of the foreclosed property allowance as a result of payments
received on certain foreclosed properties which were
previously written down.
ASSETS HELD FOR ACCELERATED DISPOSITION
In December 1994, the Corporation segregated approximately $735
million of real estate loans and real estate owned (approximately
$580 million nonperforming assets) and designated such assets as
Assets Held for Accelerated Disposition. In conjunction with the
transfer of these real estate loans to the held for accelerated
disposition classification, the Corporation reevaluated its
carrying values for these assets to facilitate their rapid
disposition and recorded a charge of $148 million to the allowance
for credit losses. As a result of this action, these assets were
excluded from the March 31, 1995 and December 31, 1994
nonperforming assets category.
The following table represents the Corporation's assets held for
accelerated disposition at the dates indicated:
<PAGE>
March 31, December 31, March 31,
(in millions) 1995 1994 1994
-------- ------------ ---------
ASSETS HELD FOR
ACCELERATED DISPOSITION:
Loans (a) $ 296 $ 336 $ --
Real Estate Owned 106 190 --
------- ------- -------
Total Assets Held for Accelerated
Disposition $ 402 $ 526 $ --
======= ======= =======
(a) Includes $18 million and $87 million of loans that were
performing at March 31, 1995 and December 31, 1994,
respectively.
<PAGE>
<PAGE> 34
NET CHARGE-OFFS
First Quarter
-----------------------
(in millions) 1995 1994
------- -------
Net Charge-Offs:
Domestic Consumer:
Residential Mortgage $ 11 $ 3
Credit Card 91 82
Other Consumer 9 5
------- -------
Total Consumer Net Charge-Offs 111 90
------- -------
Domestic Commercial:
Commercial and Industrial 38 50
Commercial Real Estate 1 75
Financial Institutions --- ---
------- -------
Total Commercial Net Charge-Offs 39 125
------- -------
Total Domestic Net Charge-Offs 150 215
Foreign (a) (5) 21
------- -------
Total Net Charge-Offs $ 145 $ 236
======= =======
[FN]
(a) Includes charge-offs previously classified as LDC charge-offs
and losses on sales and swaps. Previously reported net
charge-off amounts have been reclassified to conform with the
current presentation.
For a discussion of net charge-offs, see the various credit
portfolio sections that follow. Management expects total net
charge-offs in 1995 to be similar to the full year 1994 amount,
exclusive of the special charges taken in 1994. For a discussion
of special charges the Corporation incurred in 1994, see page B27
of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994.
DOMESTIC CONSUMER PORTFOLIO
The domestic consumer loan portfolio consists of one-to-four family
residential mortgages, credit cards and other consumer loans. The
domestic consumer loan portfolio totaled $30.9 billion at March 31,
1995, representing 38% of total loans, an increase from
$30.1 billion, or 38% of total loans, at December 31, 1994 and an
increase from $26.2 billion, or 35% of total loans, at March
31, 1994.
Residential mortgage loans at March 31, 1995 increased $1.6 billion
from the comparable 1994 period-end, in part due to the Margaretten
acquisition in July 1994. Credit card receivables at March 31,
1995 increased $2.2 billion from a year ago, primarily due to the
co-branded Shell MasterCard program. Management expects continued
growth in the level of Shell credit card outstandings for 1995.
Management is exploring other opportunities in the credit card
area, including other co-branded card programs.
Total nonperforming domestic consumer loans were $127 million at
March 31, 1995, $104 million at December 31, 1994 and $181 million
at March 31, 1994. The increase in nonperforming domestic consumer
loans since December 31, 1994 is primarily due to the increase in
the volume of consumer loans.
Domestic consumer loan balances are expected to continue to
increase in 1995, particularly in the credit card and residential
mortgage portfolios. As a result of this anticipated growth,
management expects consumer loan net charge-offs in 1995 to be
somewhat higher than in 1994.
<PAGE>
<PAGE> 35
The following table presents the composition of the Corporation's
delinquent domestic consumer loans that are contractually past due
90 days or more at the dates indicated and are still accruing.
Such consumer loans are generally not classified as nonperforming
but, rather, are charged-off on a formula basis.
<TABLE>
<CAPTION> % of
90 Days and Over Loans Outstanding
-------------------------------- -----------------------------------
March 31, December 31, March 31, March 31, December 31, March 31,
(in millions) 1995 1994 1994 1995 1994 1994
--------- ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Credit Cards $ 197 $ 176 $ 163 2.08% 1.90% 2.24%
Other Consumer Loans (a) 116(b) 118(b) 108(b) 1.58% 1.62% 1.67%
------- ------- -------
Total $ 313 $ 294 $ 271 1.01% .95% 1.04%
======= ======= =======
<FN>
(a) Consists of installment loans (direct and indirect types of
consumer finance) and student loans.
(b) Includes student loans at March 31, 1995, December 31, 1994
and March 31, 1994 of approximately $103 million, $105 million
and $96 million, respectively, which are substantially
guaranteed by Federal and State government agencies.
</TABLE>
MORTGAGE BANKING ACTIVITIES
The Corporation both originates and services residential mortgage
loans as part of its mortgage banking activities. After
origination, the Corporation typically sells loans to investors,
primarily in the secondary market, while retaining the rights to
service such loans. The Corporation originated $1.8 billion of
residential mortgages in the first quarter of 1995 versus $4.1
billion in the same 1994 period. During the first quarter of 1995,
the Corporation sold to investors approximately 68% of the
residential mortgage loans it had originated, compared with 84% in
same 1994 period.
In addition to originating mortgage servicing rights, the
Corporation also purchases and sells mortgage servicing rights.
The Corporation may purchase bulk rights to service a loan
portfolio or the Corporation may purchase loans directly and then
sell such loans while retaining the servicing rights. The
Corporation's residential mortgage servicing portfolio amounted to
$53.4 billion at March 31, 1995, compared with $55.6 billion at
December 31, 1994 and $38.6 billion at March 31, 1994. Purchased
mortgage servicing rights (included in other assets) amounted to
$460 million at March 31, 1995 compared with $469 million at
December 31, 1994 and $265 million at March 31, 1994. The
increases in the servicing portfolio and in purchased mortgage
servicing rights at March 31, 1995 when compared with the same date
a year-ago were primarily due to the Margaretten acquisition. The
mortgage loans to which the Corporation's servicing rights relate
are, to a substantial degree, of recent vintage (i.e., originated
in the period 1992 through the first half of 1994 when interest
rates have been relatively low). The Corporation utilizes an
amortization method based on adjusted cash flows to amortize
purchased mortgage servicing rights. The Corporation continually
evaluates prepayment exposure of the portfolio, adjusting the
balance and remaining life of the servicing rights as a result of
prepayments.
DOMESTIC COMMERCIAL AND INDUSTRIAL PORTFOLIO
The domestic commercial and industrial portfolio totaled $21.3
billion at March 31, 1995, an increase from $20.8 billion at
December 31, 1994 and $19.1 billion at March 31, 1994. The
portfolio is diversified geographically and by industry. The
largest industry concentrations are oil and gas and retailing which
approximate $2.2 billion (or 2.7% of total loans) and $1.8 billion
(or 2.2% of total loans), respectively. All of the other remaining
industries are each less than 2% of total loans.
<PAGE>
<PAGE> 36
Included in the domestic commercial and industrial portfolio are
loans related to highly leveraged transactions ("HLTs"). The
Corporation originates and syndicates loans in HLTs, which include
acquisitions, leveraged buyouts and recapitalizations. HLT loans
at March 31, 1995 totaled approximately $1.3 billion, unchanged
from the 1994 year-end and down from $1.6 billion at March 31,
1994. The reduction in the HLT loan portfolio from March 31, 1994
can be largely attributed to repayments and reclassifications to
non-HLT status. At March 31, 1995, the Corporation had $72 million
in nonperforming HLT loans, compared with $82 million at the end of
1994 and $237 million at March 31, 1994. There were no net charge-offs
of HLTs during the first quarter of 1995, compared with net charge-offs
of $3 million in the comparable 1994 period.
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
1995 first quarter, the Corporation acted as agent or co-agent for
approximately $63 billion in syndicated credit facilities, compared
with $51 billion in the same period last year.
DOMESTIC COMMERCIAL REAL ESTATE
The domestic commercial real estate portfolio represents loans
secured primarily by real property, other than loans secured by
one-to-four family residential properties (which are included in
the consumer loan portfolio). The domestic commercial real estate
loan portfolio totaled $5.7 billion at March 31, 1995, relatively
unchanged from December 31, 1994 and a decrease from $7.0 billion
at March 31, 1994. The decrease from March 31, 1994 is attributable
to repayments, transfers to real estate owned, charge-offs, a bulk
asset sale in October 1994, and the designation of certain real
estate assets for accelerated disposition in December 1994.
The slight increase from December 31, 1994 reflects the
reclassification of in-substance foreclosed assets during the first
quarter from assets acquired as loan satisfactions to nonperforming
loans, as a result of the adoption of SFAS 114.
The table below sets forth the major components of the domestic
commercial real estate loan portfolio at the dates indicated.
March 31, December 31, March 31,
(in millions) 1995 1994 1994
--------- ----------- ---------
Commercial Mortgages $ 4,693 $ 4,680 $ 5,742
Construction 970 970 1,208
------- ------- -------
Total Domestic Commercial
Real Estate Loans $ 5,663 $ 5,650 $ 6,950
======= ======= =======
Commercial mortgages provide financing for the acquisition or
refinancing of commercial properties, and typically have terms
ranging from two-to-five years. Construction loans are generally
originated to finance the construction of real estate projects.
When the real estate project has cash flows sufficient to support a
commercial mortgage, the loan is transferred from construction
status to commercial mortgage status.
The largest concentration of domestic commercial real estate loans
is in the New York/New Jersey and Texas markets, representing 51%
and 29%, respectively, of the domestic commercial real estate
portfolio. No other state represented more than 3% of the domestic
commercial real estate loan portfolio.
Nonperforming domestic commercial real estate assets were $234
million at March 31, 1995, a 33% decrease from December 31, 1994
and a decrease of $1.1 billion, or 83%, from March 31, 1994. The
improvement in nonperforming domestic commercial real estate asset
levels for the first quarter of 1995 is the result of increased
liquidity in the commercial real estate markets coupled with
successful workout activities, as well as the aforementioned
strategic actions taken during 1994.
<PAGE>
<PAGE> 37
As a result of strategic actions taken by the Corporation in
December 1994 to accelerate the disposition of certain real estate
assets, domestic commercial real estate net charge-offs in the
first quarter of 1995 totaled $1 million, compared with $75 million
in the same period a year ago. Writedowns of commercial real
estate owned totaled $12 million for the first quarter of 1995,
compared with $28 million in first quarter of 1994. Approximately
$24 million of commercial real estate owned was sold during the
1995 first quarter. Generally, these assets were sold at or above
carrying value. The first quarter of 1995 was the ninth
consecutive quarter in which nonperforming domestic commercial real
estate assets declined.
Domestic commercial real estate net charge-offs and writedowns for
the full year 1995 are expected to be below the full year 1994
levels.
DOMESTIC FINANCIAL INSTITUTIONS PORTFOLIO
The domestic financial institutions portfolio includes commercial
banks and companies whose businesses primarily involve lending,
financing, investing, underwriting, or insurance. Loans to
domestic financial institutions were $3.9 billion at March 31, 1995
or 5% of total loans outstanding. Loans to domestic financial
institutions are predominantly to broker-dealers, which comprise
over half the domestic financial institutions total.
FOREIGN PORTFOLIO
The foreign portfolio includes foreign commercial and industrial
loans, loans to foreign financial institutions, foreign commercial
real estate, loans to foreign governments and official
institutions, and foreign consumer loans. At March 31, 1995, the
Corporation's total foreign loans were $18.6 billion, compared with
$18.3 billion at December 31, 1994 and $17.6 billion at March 31,
1994.
Included in foreign loans were foreign commercial and industrial
loans of $7.9 billion at the end of the 1995 first quarter, an
increase of $.3 billion from the 1994 year-end and an increase of
$.4 billion from March 31, 1994. Total foreign commercial real
estate loans at March 31, 1995 were $.5 billion, unchanged from
December 31, 1994 but slightly reduced from $.6 million at March
31, 1994. A significant portion of the foreign real estate
portfolio is located in the United Kingdom and Hong Kong.
MEXICO
For a discussion of significant developments with respect to
Mexican debt, see page B29 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994.
At March 31, 1995, the Corporation's total exposure to Mexico was
$935 million, which is largely trade and short-term credits. This
excludes bonds received as part of debt renegotiations (i.e., Brady
Bonds) with a face value of $2,199 million and current carrying
value of $1,709 million, which are collateralized by zero-coupon
United States Treasury obligations.
------------------------------------------------------------------
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
------------------------------------------------------------------
In the normal course of its business, the Corporation utilizes
various derivative and foreign exchange financial instruments to
meet the financing needs of its customers, to generate revenues
through its trading activities, and to manage its exposure to
fluctuations in interest and currency rates.
Derivative and foreign exchange instruments represent contracts
with counterparties where payments are made to or from the
counterparty based upon specific interest rates, currency levels,
other market rates, or on terms predetermined by the contract.
These instruments can provide a cost-effective alternative to
assuming and mitigating risk associated with traditional on-balance
sheet instruments. Derivative and foreign exchange transactions
involve, to varying degrees, credit risk (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).
<PAGE>
<PAGE> 38
The effective management of credit and market risk is vital to the
success of the Corporation's trading activities and asset/liability
management. Because of the changing market environment, the
monitoring and managing of these risks is a continual process. For
a further discussion, see the Risk Management section below.
The Corporation does not deal, to any material extent, in
derivatives which dealers of derivatives (such as other banks and
financial institutions) consider to be "complex" (i.e., exotic
and/or leveraged). As a result, the notional amount of such
derivatives were less than 0.5% of the Corporation's total notional
amount of derivative contracts at March 31, 1995.
A discussion of the derivative and foreign exchange financial
instruments utilized in connection with the Corporation's trading
activities and asset/liability management activities is provided on
pages B31 and B34 of the Corporation's Annual Report filed on Form
10-K for the year ended December 31, 1994.
------------------------------------------------------------------
RISK MANAGEMENT
------------------------------------------------------------------
The following discussion of risk management focuses primarily on
developments since December 31, 1994 and, accordingly, should be
read in conjunction with the Risk Management section on pages B31-
B37 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
CREDIT RISK MANAGEMENT
Credit risk for both lending-related products and derivative and
foreign exchange products represents the possibility that a loss
may occur if a borrower or counterparty fails to honor fully the
terms of a contract. Under the direction of the Chief Credit
Officer, risk policies are formulated, approved and communicated
throughout the Corporation. The Credit Risk Management Committee,
chaired by the Chief Credit Officer, is responsible for maintaining
a sound credit process, addressing risk issues, and reviewing the
portfolio.
The Corporation routinely enters into derivative and foreign
exchange product transactions with regulated financial
institutions, which the Corporation believes have relatively low
credit risk. At March 31, 1995, approximately 94% of the mark-to-
market exposure of such activities were with commercial bank and
financial institution counterparties, most of which are dealers in
these products. Non-financial institutions only accounted for
approximately 6% of the Corporation's derivative and foreign
exchange mark-to-market exposure.
Many of the Corporation's contracts are short-term, which mitigates
credit risk as transactions settle quickly. The following table
provides the remaining maturities of derivative and foreign
exchange contracts outstanding at March 31, 1995 and December 31,
1994. Percentages are based upon remaining contract life of
mark-to-market exposure amounts. For the notional amounts and
credit exposure outstandings of the Corporation's interest rate
contracts and foreign exchange contracts, see page 14 of this
Form 10-Q.
<TABLE>
<CAPTION>
At March 31, 1995 At December 31, 1994
------------------------------------ -----------------------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
Contracts Contracts Total Contracts Contracts Total
--------- --------- ----- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Less than 3 months 9% 58% 40% 11% 57% 32%
3 to 6 months 8 21 16 8 24 15
6 to 12 months 11 18 15 12 12 12
1 to 3 years 36 2 15 35 6 22
Over 3 years 36 1 14 34 1 19
---- ---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ====
</TABLE>
<PAGE>
<PAGE> 39
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb potential
credit losses from the entire loan portfolio, as well as from off-
balance sheet credit-related transactions. The Corporation deems
its allowance for credit losses at March 31, 1995 to be adequate.
Although the Corporation considers that it has sufficient reserves
to absorb losses that may currently exist in the portfolio, but are
not yet identifiable, the precise loss content from the loan
portfolio and off-balance sheet credit-related instruments, is
subject to continuing review based on quality indicators, industry
and geographic concentrations, changes in business conditions, and
other external factors such as competition and legal and regulatory
requirements. The Corporation will continue to reassess the
adequacy of the allowance for credit losses.
The Corporation's actual credit losses arising from derivative and
foreign exchange transactions were immaterial during the 1995 and
1994 first quarters. Additionally, at March 31, 1995 and 1994,
nonperforming derivatives contracts were immaterial.
The accompanying table reflects the activity in the allowance for
credit losses for the first quarters ended March 31, 1995 and 1994.
First Quarter
-----------------------
(in millions) 1995 1994
------- -------
Total Allowance at Beginning of Period $ 2,480 $ 3,020
Provision for Losses 120 205
Charge-Offs (175) (342)(a)
Recoveries 30 106 (a)
------- -------
Net Charge-Offs (145) (236)
Other --- 2
------- -------
Total Allowance at End of Period $ 2,455 $ 2,991
======= =======
[FN]
(a) Includes LDC charge-offs and losses on sales and swaps of $59
million and recoveries of $53 million.
The following table presents the Corporation's allowance coverage
ratios at March 31, 1995, December 31, 1994 and March 31, 1994.
ALLOWANCE COVERAGE RATIOS
March 31, December 31, March 31,
For the Period Ended: 1995 1994 1994
--------- ------------ ---------
Allowance for Credit Losses to:
Loans at Period-End 3.05% 3.15% 4.01%
Average Loans 3.15 3.30 4.02
Nonperforming Loans 229.65(a) 266.95 126.26
[FN]
(a) The decrease from December 31, 1994 is primarily due to the
aforementioned reclassification of in-substance foreclosed
assets from assets acquired as loan satisfactions to
nonperforming loans as a result of the adoption of SFAS 114.
<PAGE>
<PAGE> 40
MARKET RISK MANAGEMENT - TRADING ACTIVITIES
The Corporation's business strategy seeks to manage the market risk
associated with its trading activities through geographic, product
and functional diversification. The Corporation's trading
activities are geographically diverse. Trading activities are
undertaken in more than 20 countries, with a majority of the
Corporation's transactions in the United States, Japan, Singapore,
United Kingdom and Western Europe. The Corporation trades in a
wide range of products which include not only foreign exchange and
derivatives but also securities, including emerging markets debt
instruments. For a further discussion of the Corporation's market
risk management, see pages B33-B34 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994.
The effects of market gains or losses on the Corporation's trading
activities have been reflected in trading revenue, as the trading
instruments are marked-to-market on a daily basis. For the impact
of any unrecognized market gains or losses on the Corporation's
asset/liability management portfolio, see Note 11 - Fair Value of
Financial Instruments of this Form 10-Q.
Measuring Market Risk: One of the risk controls the Corporation
utilizes in its overall risk management process is value-at-risk.
The Corporation defines value-at-risk as the potential overnight
dollar loss from adverse market movements that would cover 97.5% of
likely market movements, which are determined by using two years of
historical price and rate data. The value-at-risk calculations
employ over 2,300 volatilities and 715,000 correlations (updated
semi-annually) of various market instruments. The Corporation
monitors value-at-risk figures for major business units on a daily
basis to ensure the potential for market loss is properly
reflected. The methodology generally used to offset positions
within a business unit is deemed by the Corporation to be
conservative. Only partial credit for correlation between
instruments within each business unit is incorporated since
correlations can exhibit instability during volatile market
environments. Aggregating across business units with no
correlation offset resulted in an aggregated daily average value-
at-risk figure of $29 million for the twelve months ended March 31,
1995. Based on actual trading results for the twelve months ended
March 31, 1995, which capture the historical correlation among
business units, the Corporation's daily value-at-risk was reduced
to approximately $9 million with 97.5% confidence.
For the twelve months ended March 31, 1995, the Corporation posted
positive daily market risk-related revenue for 193 out of 269
business trading days for international and domestic units. For
176 of the 269 days, the Corporation's daily market risk-related
revenue or losses centered around the $0 million to $5 million
range, which is representative of the Corporation's emphasis on
market-making and sales activities. The low number of outlier
results (25 days having risk-related revenue or losses which exceed
$10 million) exemplifies the Corporation's diversified approach to
market risk management as a business strategy.
OPERATING RISK MANAGEMENT
The Corporation, like all financial institutions, is subject to the
risk of fraud and to the risk of unauthorized activities by
employees. The Corporation maintains a comprehensive system of
internal controls designed to manage such risks.
ASSET/LIABILITY MANAGEMENT
The objective of the asset/liability management process is to
manage and control the sensitivity of the Corporation's income to
changes in market interest rates. 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 the Corporation's investments and the maturities of its
wholesale funding activities, and with the use of off-balance sheet
derivative instruments. For a further discussion of the
Corporation's asset/liability management process and the variety of
techniques used to measure its interest rate sensitivity, see pages
B34-B36 of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1994.
<PAGE>
<PAGE> 41
Measuring Interest Rate Sensitivity: Management uses a variety of
techniques to measure its interest rate sensitivity. One such tool
is aggregate net gap analysis, an example of which is presented below.
Assets and liabilities are placed in 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.
A net gap for each time period is calculated by subtracting the
liabilities repricing in that interval from the assets repricing.
A negative gap - more liabilities repricing than assets - will
benefit net interest income in a declining interest rate
environment and will detract from net interest income in a rising
interest rate environment. Conversely, a positive gap - more
assets repricing than liabilities - will benefit net interest
income if rates are rising and will detract from net interest
income in a falling rate environment.
<TABLE>
<CAPTION>
(in millions) 1-3 4-6 7-12 1-5 Over
At March 31, 1995 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $ (14,473) $ 2,358 $ 2,238 $ 4,444 $ 5,433 $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity (a) 7,545 1,520 (1,065) (8,192) 192 ---
Interest-Rate-Sensitivity Gap (6,928) 3,878 1,173 (3,748) 5,625 ---
Cumulative Interest-Rate
Sensitivity Gap (6,928) (3,050) (1,877) (5,625) --- ---
% of Total Assets (4)% (2)% (1)% (3)% --- ---
---------------------------------------------------------------------------------------------------------------------------
1-3 4-6 7-12 1-5 Over
At December 31, 1994 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
Balance Sheet $ (11,529) $ 4,393 $ 175 $ 4,269 $ 2,692 $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity (a) 1,622 (4,366) 587 1,581 576 ---
Interest-Rate-Sensitivity Gap (9,907) 27 762 5,850 3,268 ---
Cumulative Interest-Rate
Sensitivity Gap (9,907) (9,880) (9,118) (3,268) --- ---
% of Total Assets (6)% (6)% (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, 1995, the Corporation had $1,877 million more
liabilities than assets repricing within one year, amounting to
1.0% of total assets. This compares with $9,118 million, or 5.3%,
of total assets at December 31, 1994.
At March 31, 1995, based on the Corporation's simulation models,
which are comprehensive simulations of net interest income under a
variety of market interest rate scenarios, net interest income
sensitivity to a gradual 150 basis point rise in market rates over
the next twelve months was estimated at less than 2% of projected
after-tax net income. At December 31, 1994, the Corporation's
interest rate sensitivity to a similar increase in market rates was
estimated to be 3%.
<PAGE>
<PAGE> 42
Interest Rate Swaps: Interest rate swaps are one of the various
financial instruments used in the Corporation's asset/liability
management activities. Although the Corporation believes the
results of its asset/liability management activities should be
evaluated on an integrated basis, taking into consideration all on-
and related off-balance sheet instruments and not a specific
financial instrument, the interest rate swap maturity table, which
follows, provides an indication of the Corporation's interest rate
swap activity.
The table below summarizes expected maturities and weighted-average
interest rates to be received and paid on domestic and
international interest rate swaps utilized in the Corporation's
asset/liability management at March 31, 1995. The table was
prepared under the assumption that variable interest rates remain
constant at March 31, 1995 levels and, accordingly, the actual
interest rates to be received or paid will be different to the
extent that such variable rates fluctuate from March 31, 1995
levels. Variable rates presented are generally based on the short-
term interest rates for relevant currencies (e.g., London Interbank
Offered Rate (LIBOR)). Basis swaps are interest rate swaps based
on two floating rate indices (e.g., LIBOR and prime). Forward
starting swaps are interest rate swap contracts that become
effective at a future time.
<TABLE>
<CAPTION>
By expected maturities After
(in millions) 1995 1996 1997 1998 1999 1999 Total
---- ---- ----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed swaps
Notional amount $ 8,416 $ 6,917 $ 4,836 $1,770 $ 743 $3,163 $ 25,845
Weighted-average:
Receive rate 6.00% 6.59% 6.76% 5.67% 7.48% 7.16% 6.46%
Pay rate 5.62 5.33 6.03 5.02 6.28 6.18 5.66
Pay fixed swaps
Notional amount $ 5,831 $ 7,271 $ 4,451 $ 842 $ 865 $2,416 $ 21,676
Weighted-average:
Receive rate 6.12% 5.63% 5.28% 6.03% 6.55% 6.24% 5.81%
Pay rate 5.84 6.23 6.16 7.73 7.75 7.76 6.40
Basis Swaps
Notional amount $ 180 $ 1,079 $ 350 $ 342 $ 1,030 $ 187 $ 3,168
Weighted-average:
Receive rate 6.27% 6.32% 6.10% 6.33% 6.38% 6.49% 6.32%
Pay rate 6.23 6.18 6.54 6.37 6.46 6.52 6.35
Forward Starting
Notional amount $ 51 $ 1,126 $ 3,003 $ 403 $ 0 $ 234 $ 4,817
Weighted-average:
Receive rate 7.32% 6.02% 5.99% 4.75% 0.00% 5.83% 5.90%
Pay rate 7.59 6.98 6.82 5.29 0.00 5.77 6.69
------- ------- ------- ------- ------- ------- -------
Total notional
amount (a) $ 14,478 $ 16,393 $ 12,640 $3,357 $ 2,638 $6,000 $ 55,506
======= ======= ======= ======= ======= ======= =======
<FN>
(a) At March 31, 1995, approximately $28 billion of notional
amounts are interest rate swaps that as part of the
Corporation's asset/liability management, are used in place of
cash market instruments. Of this amount $13 billion is
expected to mature in 1995, $8 billion in 1996 and $4 billion
in 1997 with the remaining $3 billion in 1998 and thereafter.
The unrecognized net gain related to these positions was
approximately $72 million.
</TABLE>
<PAGE>
<PAGE> 43
------------------------------------------------------------------
CAPITAL AND LIQUIDITY
------------------------------------------------------------------
The following capital and liquidity discussion focuses primarily on
developments since December 31, 1994. Accordingly, it should be
read in conjunction with the Capital and Liquidity section on pages
B37-B40 of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1994.
The Corporation's capital base at March 31, 1995 remained strong,
with capital ratios well in excess of regulatory guidelines. The
Corporation's Tier 1 and Total Capital ratios continued to exceed
8% and 12%, respectively. Total capitalization (the sum of Tier 1
Capital and Tier 2 Capital) increased by $82 million during the
first quarter of 1995.
STOCKHOLDER'S EQUITY
Total stockholders' equity at March 31, 1995 was $10.8 billion,
compared with $10.7 billion at December 31, 1994. The $79 million
increase from the 1994 year-end reflected net income generated
during the 1995 first quarter of $385 million and $34 million
generated from the issuance of common stock. These amounts were
partially offset by a net increase in treasury stock of $182
million, largely from the repurchase of approximately 3.9 million
shares of the Corporation's common stock under a previously-
announced buyback program; common and preferred stock dividends
totaling $135 million; and a $34 million reduction in the fair
value of available-for-sale securities accounted for under SFAS
115. The market valuation of the available-for-sale securities
does not include the favorable impact of related funding sources.
LONG-TERM DEBT
In the first quarter of 1995, additions to the Corporation's long-
term debt were $291 million (including $191 million of senior
medium-term notes and $100 million of other senior notes). These
additions were offset by maturities of $578 million of long-term
debt (including $263 million of senior medium-term notes and $315
million of other senior notes). See the Liquidity Management
section for further discussion of the Corporation's long-term debt.
COMMON STOCK DIVIDENDS
In the first quarter of 1995, the Board of Directors of the
Corporation declared a $.44 per share quarterly dividend to be paid
on its common stock in April 1995. 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, 1995, the Corporation's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were
8.1% and 12.1%, 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. At
March 31, 1995, Chemical Bank's ratios of Tier 1 Capital and Total
Capital to risk-weighted assets, were 7.5% and 11.6%, respectively.
At such date, all of the Corporation's banking institutions were
"well capitalized," as defined by the Federal Reserve Board. To be
"well capitalized," a banking organization must have a Tier 1
Capital ratio of at least 6%, Total Capital ratio of at least 10%,
and Tier 1 leverage ratio of at least 5%.
LEVERAGE RATIOS
The Tier 1 leverage ratio is defined as Tier 1 Capital (as defined
under the risk-based capital guidelines) divided by average total
assets (net of allowance for credit losses, goodwill and certain
intangible assets). The minimum leverage ratio is 3% for banking
organizations that have well-diversified risk (including no undue
interest rate risk); excellent asset quality; high liquidity; good
earnings; and, in general, are considered strong banking
organizations. Other banking organizations are expected to have
ratios of at least 4%-5% depending upon their particular condition
and growth plans. Higher capital ratios could be required if
warranted by the particular 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.
<PAGE>
<PAGE> 44
The Corporation's Tier 1 leverage ratio was 5.78% at March 31,
1995, compared with 5.95% at December 31, 1994. At March 31, 1995,
Chemical Bank's Tier 1 leverage ratio was 5.51%, compared with
5.72% at December 31, 1994.
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 Capital 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) 1995 1994
---------- -----------
TIER 1 CAPITAL
Common Stockholders' Equity $ 9,813 $ 9,700
Nonredeemable Preferred Stock 1,450 1,450
Minority Interest 67 63
Less: Goodwill 1,053 1,068
Non-Qualifying Intangible Assets 134 142
---------- ---------
Tier 1 Capital $ 10,143 $ 10,003
---------- ---------
TIER 2 CAPITAL
Long-Term Debt Qualifying as Tier 2 $ 3,426 $ 3,519
Qualifying Allowance for Credit Losses 1,571 1,536
---------- ---------
Tier 2 Capital $ 4,997 $ 5,055
---------- ---------
TOTAL QUALIFYING CAPITAL $ 15,140 $ 15,058
========== =========
Risk-Weighted Assets (a) $ 124,798 $ 121,939
Tier 1 Capital Ratio (b) 8.13% 8.20%
Total Capital Ratio (b) 12.13% 12.35%
Tier 1 Leverage Ratio (b) 5.78% 5.95%
[FN]
(a) Includes off-balance sheet risk-weighted assets in the amount
of $40,900 million, and $37,157 million, respectively, at
March 31, 1995 and December 31, 1994.
(b) Excluding the Corporation's securities subsidiary, Chemical
Securities Inc., the March 31, 1995 Tier 1 Leverage, Tier 1
Capital and Total Capital ratios were 6.00%, 7.84% and 11.55%,
respectively, compared with 6.26%, 8.02% and 11.97%,
respectively, at December 31, 1994.
LIQUIDITY MANAGEMENT
The primary source of liquidity for the bank subsidiaries of the
Corporation derives from their ability to generate core deposits
(which includes all deposits except noninterest-bearing time
deposits, foreign deposits and certificates of deposit of $100,000
or more). The Corporation considers funds from such sources to
comprise its subsidiary banks' "core" deposit base because of the
historical stability of such sources of funds. The average core
deposits at the Corporation's bank subsidiaries for the 1995 first
quarter were $55.2 billion, a decrease from $60.4 billion for the
comparable quarter in 1994. These deposits fund a portion of the
Corporation's asset base, thereby reducing the Corporation's
reliance on other, more volatile, sources of funds. Average core
deposits as a percentage of average loans was 71% for the first
quarter 1995, compared with 81% for the same quarter a year ago.
<PAGE>
<PAGE> 45
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 1995 first quarter,
the Corporation issued $291 million of senior debt, including $191
million through its medium-term note program.
In February 1995, Duff & Phelps Credit Rating Corporation ("Duff &
Phelps") upgraded its ratings of the Corporation's senior debt (to
A+ from A), subordinated debt (to A from A-) and preferred stock
(to A- from BBB+), as well as Chemical Bank's long-term senior
obligations, subordinated debt and short-term obligations. Duff &
Phelps also raised its ratings on Texas Commerce Equity Holdings'
long-term debt and Texas Commerce Bank National Association's long-
term senior and short-term obligations.
The following comments apply to the Consolidated Statement of Cash
Flows.
Cash and due from banks decreased $1.0 billion during the first
three months of 1995, as net cash used in investing and financing
activities exceeded the net cash provided by operating activities.
The $3.6 billion net cash used by investing activities was
primarily impacted by cash outflows from purchases of
securities ($10.9 billion) and from Federal funds sold and
securities purchased under resale agreements ($2.2 billion),
partially offset by cash inflows from the sales and maturities of
securities ($9.3 billion and $1.0 billion, respectively). The $1.0
billion net cash used by financing activities was primarily due to
a decrease in net deposits ($1.1 billion). The $3.6 billion net
cash provided by operating activities was principally due to a
reduction in trading-related assets.
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).
The Corporation's anticipated cash requirements (on a parent
company-only basis) for the remainder of 1995 include approximately
$1.1 billion for maturing medium- and long-term debt, interest
payments on its outstanding debt, anticipated dividend payments on
the Corporation's common stock and preferred stock, the completion
of the aforementioned 6 million stock buyback program, 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, 1995, the Corporation
had available to it $750 million in committed credit facilities
from a syndicate of domestic and international banks. The
facilities included a $375 million 36-month facility and a $375
million 364-day facility.
<PAGE>
<PAGE> 46
------------------------------------------------------------------
SUPERVISION AND REGULATION
------------------------------------------------------------------
The following supervision and regulation discussion focuses
primarily on developments since December 31, 1994. Accordingly, it
should be read in conjunction with the Supervision and Regulation
section on pages A2-A6 of the Corporation's Annual Report on Form
10-K for the year ended December 31, 1994.
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 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 a similar "recent earnings" test imposed by the
New York State Banking Department. Non-bank subsidiaries of the
Corporation are not subject to such limitations.
At March 31, 1995, in accordance with the dividend restrictions
applicable to them, the Corporation's bank subsidiaries could,
during 1995, without the approval of their relevant banking
regulators, pay dividends of approximately $800 million to their
respective bank holding companies, plus an additional amount equal
to their net income from April 1, 1995 through the date in 1995 of
any such dividend payment.
In addition to the dividend restrictions described above, the
Federal Reserve Board, the Office of 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
The Federal Deposit Insurance Corporation Improvement Act of 1991
("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. Each of the Corporation's banking institutions
were "well capitalized" as that term is defined under the various
regulations promulgated under FDICIA and, therefore, the
Corporation does not expect such regulations to have a material
adverse impact on their business operations.
------------------------------------------------------------------
OTHER EVENTS
------------------------------------------------------------------
JOINT VENTURE WITH MELLON BANK CORPORATION
The Corporation and Mellon Bank Corporation have formed a joint
venture that will focus on providing stock transfer and related
shareholder services to publicly-held companies. The joint venture
is called Chemical Mellon Shareholder Services, and is a 50/50
partnership, with Mellon Bank Corporation and the Corporation
sharing equally in the joint venture's initial capitalization,
including investments in new technology.
The joint venture product line includes traditional stock transfer
services, proxy tabulation and the administration of dividend
reinvestment plans, as well as proxy solicitation programs,
corporate reorganization securities processing, the development and
administration of employee stock option plans, and a comprehensive
stock watch monitoring service. This joint venture was accounted
for as an equity investment in the first quarter of 1995.
The joint venture commenced operations on May 1, 1995.
<PAGE>
<PAGE> 47
AGREEMENT TO SELL CHEMICAL BANK NEW JERSEY NATIONAL ASSOCIATION
In March 1995, the Corporation entered into an agreement to sell
Chemical New Jersey Holdings, Inc. and its subsidiaries, including
Chemical Bank New Jersey National Association, to PNC for
approximately $504 million. As part of the purchase price, PNC has
the option to issue up to $300 million of perpetual preferred stock
to the Corporation. The sale does not include the Corporation's
franchise in northeastern New Jersey or the Montclair, Morristown,
Ridgewood and Summit offices of Princeton Bank and Trust Company.
The Corporation intends to reposition these remaining branches and
offices as a strategic component of regional banking in
metropolitan New York.
The sale, which is expected to close by the end of the year,
subject to regulatory approvals, includes 84 branches in 15
counties in central and southern New Jersey and approximately $2.9
billion in deposits and $2.3 billion in loans.
------------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
------------------------------------------------------------------
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122
amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities," to require that mortgage banking enterprises recognize
as separate assets the rights to service mortgage loans for others,
irrespective of whether those servicing rights are acquired through
the purchase or the origination of mortgage loans, when a
definitive plan to sell or securitize the mortgage loans and retain
the servicing rights exists. Under SFAS No. 65, only purchased
mortgage servicing rights were permitted to be recognized as
separate assets. SFAS 122 also requires that capitalized mortgage
servicing rights be assessed for impairment based on the fair value
of those rights.
SFAS 122 is effective prospectively for fiscal years beginning
after December 15, 1995 for transactions in which mortgage loans
are sold or securitized with servicing rights retained and for
impairment evaluations of all capitalized mortgage servicing rights
whenever acquired. Earlier adoption is encouraged. Management is
currently evaluating the financial impact of adopting this new
accounting standard.
<PAGE>
<PAGE> 48
<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, 1995 March 31, 1994
---------------------------------- ----------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 4,737 $ 82 7.06% $ 5,153 $ 94 7.37%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 14,440 219 6.14% 11,887 100 3.42%
Trading Assets-Debt and
Equity Instruments 10,910 199 7.41% 11,877 173 5.92%
Securities:
Held-to-Maturity 8,528 149 7.07% 10,178 175 6.97%
Available-for-Sale 19,208 360 7.60%(b) 16,228 242 6.04%(b)
Loans 77,954 1,665 8.66% 74,481 1,311 7.14%
-------- ------- -------- -------
Total Interest-
Earning Assets 135,777 $ 2,674 7.99% 129,804 $ 2,095 6.54%
Allowance for Credit Losses (2,487) (3,086)
Cash and Due from Banks 7,539 8,833
Risk Management Instruments 21,611 15,393
Other Assets 13,027 13,208
-------- --------
Total Assets $175,467 $164,152
======== ========
LIABILITIES
Domestic Retail Deposits $ 41,338 $ 368 3.61% $ 46,047 $ 248 2.18%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,912 82 5.63% 5,450 46 3.43%
Deposits in Foreign Offices 28,096 401 5.77% 22,971 226 3.99%
-------- ------- -------- -------
Total Time & Savings Deposits 75,346 851 4.58% 74,468 520 2.83%
-------- ------- -------- -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 23,194 333 5.83% 16,060 137 3.47%
Commercial Paper 3,323 47 5.74% 2,408 21 3.55%
Other Borrowings 8,219 139 6.82% 9,665 134 5.61%
-------- ------- -------- -------
Total Short-Term and
Other Borrowings 34,736 519 6.06% 28,133 292 4.21%
Long-Term Debt 7,855 140 7.24% 8,498 135 6.43%
-------- ------- -------- -------
Total Interest-
Bearing Liabilities 117,937 1,510 5.19% 111,099 947 3.46%
-------- ------- -------- -------
Demand Deposits 20,450 22,625
Risk Management Instruments 20,688 13,068
Other Liabilities 5,653 6,194
-------- --------
Total Liabilities 164,728 152,986
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 1,450 1,654
Common Stockholders' Equity 9,289 9,512
-------- --------
Total Stockholders' Equity 10,739 11,166
-------- --------
Total Liabilities and
Stockholders' Equity $175,467 $164,152
======== ========
INTEREST RATE SPREAD 2.80% 3.08%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 1,164(a) 3.48% $ 1,148(a) 3.59%
======= ===== ======= =====
<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.
(b) For the three months ended March 31, 1995 and March 31, 1994,
the annualized rate for securities available-for-sale based on
historical cost was 7.51% and 6.07%, respectively.
</TABLE>
<PAGE>
<PAGE> 49
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1995 1994
------ --------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 1,661 $ 1,575 $ 1,473 $ 1,375 $ 1,307
Securities 505 445 422 432 416
Trading Assets 199 177 181 191 173
Federal Funds Sold and Securities
Purchased Under Resale Agreements 219 178 151 121 100
Deposits with Banks 82 91 86 100 94
------- ------- ------- ------- -------
Total Interest Income 2,666 2,466 2,313 2,219 2,090
------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits 851 718 597 543 520
Short-Term and Other Borrowings 519 444 405 359 292
Long-Term Debt 140 135 134 132 135
------- ------- ------- ------- -------
Total Interest Expense 1,510 1,297 1,136 1,034 947
------- ------- ------- ------- -------
NET INTEREST INCOME 1,156 1,169 1,177 1,185 1,143
Provision for Losses 120 85 100 160 205
------- ------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 1,036 1,084 1,077 1,025 938
------- ------- ------- ------- -------
NONINTEREST REVENUE
Trust and Investment Management Fees 91 99 104 108 110
Corporate Finance and Syndication Fees 119 133 97 93 82
Service Charges on Deposit Accounts 74 78 78 75 69
Fees for Other Banking Services 294 294 285 279 290
Trading Revenue 56 45 212 203 185
Securities Gains (Losses) (18) 1 6 13 46
Other Revenue 254 165 202 96 149
------- ------- ------- ------- -------
Total Noninterest Revenue 870 815 984 867 931
------- ------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 546 571 574 542 518
Employee Benefits 107 110 108 102 119
Occupancy Expense 135 142 145 140 146
Equipment Expense 101 107 100 91 84
Foreclosed Property Expense (7) 2 2 2 35
Restructuring Charge --- 260 --- --- 48
Other Expense 364 401 382 404 374
------- ------- ------- ------- -------
Total Noninterest Expense 1,246 1,593 1,311 1,281 1,324
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT OF
ACCOUNTING CHANGE 660 306 750 611 545
Income Tax Expense 264 127 311 254 226
------- ------- ------- ------- -------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE 396 179 439 357 319
Effect of Change in Accounting Principle (11) --- --- --- ---
------- ------- ------- ------- -------
NET INCOME $ 385 $ 179 $ 439 $ 357 $ 319
======= ======= ======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 355 $ 149 $ 396 $ 324 $ 287
======= ======= ======= ======= =======
PER COMMON SHARE:
Income Before Effect of Accounting Change $ 1.51 $ 0.63 $ 1.60 $ 1.28 $ 1.13
Effect of Change in Accounting Principle (0.05) --- --- --- ---
------- ------- ------- ------- -------
Net Income $ 1.46 $ 0.63 $ 1.60 $ 1.28 $ 1.13
======= ======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING 243.2 244.5 246.6 253.1 253.2
</TABLE>
<PAGE>
<PAGE> 50
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is made to page A19 of the Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1994 relating to the investigation
commenced by the Securities and Exchange
Commission pertaining to the $70 million loss
incurred by the Corporation in the fourth quarter
of 1994 resulting from unauthorized foreign
exchange transactions involving the Mexican peso.
The Corporation is cooperating with this investigation.
The Corporation cannot determine at this time the outcome
of the investigation but believes it will not have a
material adverse effect on the consolidated financial
condition of 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.
27 - Financial Data Schedule
(B) Reports on Form 8-K:
The Corporation filed three reports on Form 8-K
during the quarter ended March 31, 1995, as
follows:
Form 8-K Dated January 3, 1995: Announcement of
$70 million Loss Sustained from Unauthorized
Foreign Exchange Transactions Involving the
Mexican Peso.
Form 8-K Dated January 19, 1995: January 17, 1994
Press Release - Results of Operations for Fourth
Quarter 1994.
Form 8-K Dated March 14, 1995: March 8, 1995
Press Release - Announcing a Definitive Agreement
to sell Branches in Central and Southern New
Jersey to PNC Bank Corp. while retaining 40
offices in six counties in Northeastern New
Jersey.
<PAGE>
<PAGE> 51
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 15, 1995 By /s/ Joseph L. Sclafani
------------ -----------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
<PAGE>
<PAGE> 52 INDEX TO EXHIBITS
------------------
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
----------- -------- ---------------------
11 Computation of net income 53
per common share
12 (a) Computation of ratio of 54
earnings to fixed charges
12 (b) Computation of ratio of 55
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 56
<PAGE>
<PAGE> 53
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 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
Period Ended Average common applicable to Net income
March 31 shares outstanding common shares(A) per share
----------------------------------- --------------- ---------
Three months
1995 243.2 $355 $1.46(B)
1994 253.2 $287 $1.13
[FN]
(A) After dividends on the preferred stock of $30 million
and $32 million for the three months ended
March 31, 1995 and 1994, respectively.
(B) In the first quarter of 1995, the Corporation adopted
SFAS 106 for its foreign employees which resulted in a
charge of $11 million after tax or $.05 per common
share. Net income before the effect of the accounting
change was $1.51 per common share.
<PAGE>
<PAGE> 54
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, 1995
-----------------
-
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes and Effect of
Accounting Change $ 660
-------
Fixed charges:
Interest expense 659
One third of rents, net of income from subleases (a) 23
-------
Total fixed charges 682
-------
Less: Equity in undistributed income of affiliates (56)
-------
Earnings before taxes, fixed charges and effect of
accounting change, excluding capitalized interest $ 1,286
=======
Fixed charges, as above $ 682
=======
Ratio of earnings to fixed charges 1.89
=======
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges, as above $ 682
Add: Interest on deposits 851
-------
Total fixed charges and interest on deposits $ 1,533
=======
Earnings before taxes, fixed charges
and effect of accounting change, excluding
capitalized interest, as above $ 1,286
Add: Interest on deposits 851
-------
Total earnings before taxes, fixed charges,
effect of accounting change and
interest on deposits $ 2,137
=======
Ratio of earnings to fixed charges 1.39
=======
(a) The proportion deemed representative of the interest factor.
<PAGE>
<PAGE> 55
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, 1995
------------------
EXCLUDING INTEREST ON DEPOSITS
------------------------------
Income before Income Taxes and Effect
of Accounting Change $ 660
-------
Fixed charges:
Interest expense 659
One third of rents, net of
income from subleases (a) 23
-------
Total fixed charges 682
-------
Less: Equity in undistributed income of affiliates (56)
-------
Earnings before taxes, fixed charges and
effect of accounting change, excluding
capitalized interest $ 1,286
=======
Fixed charges, as above $ 682
Preferred stock dividends 30
-------
Fixed charges including preferred stock dividends $ 712
=======
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.81
INCLUDING INTEREST ON DEPOSITS
------------------------------
Fixed charges including preferred stock dividends $ 712
Add: Interest on deposits 851
-------
Total fixed charges including preferred stock
dividends and interest on deposits $ 1,563
=======
Earnings before taxes, fixed charges and
effect of accounting change, excluding
capitalized interest, as above $ 1,286
Add: Interest on deposits 851
-------
Total earnings before taxes, fixed charges,
effect of accounting change and interest
on deposits $ 2,137
=======
Ratio of earnings to fixed charges and preferred
stock dividend requirement 1.37
=======
[FN]
(a) The proportion deemed representative of the interest factor.
<PAGE>
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<NAME> CHEMICAL BANKING CORPORATION
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