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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 1994 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, N.Y. 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on
------------------- which Registered
------------------------
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Common Stock.................................................................. New York Stock Exchange, Inc.
10.96% Cumulative Preferred Stock (Stated Value--$25)......................... New York Stock Exchange, Inc.
8 3/8% Cumulative Preferred Stock (Stated Value--$25).......................... New York Stock Exchange, Inc.
7.92% Cumulative Preferred Stock (Stated Value--$100) evidenced by
Depositary Shares Representing One Quarter Share of Preferred Stock......... New York Stock Exchange, Inc.
7.58% Cumulative Preferred Stock (Stated Value--$100) evidenced by
Depositary Shares Representing One Quarter Share of Preferred Stock......... New York Stock Exchange, Inc.
7 1/2% Cumulative Preferred Stock (Stated Value--$100) evidenced by
Depositary Shares Representing One Quarter Share of Preferred Stock......... New York Stock Exchange, Inc.
Adjustable Rate Cumulative Preferred Stock, Series L (Stated Value--$100)..... New York Stock Exchange, Inc.
Rights to Purchase Units of Junior Participating Preferred Stock.............. New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: None
Number of Shares of Common Stock outstanding on February 28, 1995: 243,117,380
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. \X\
The aggregate market value of Chemical Banking Corporation Common Stock
held by non-affiliates of Chemical Banking Corporation on February 28, 1995 was
$9,686,000,000.
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Document incorporated by reference Part of Form 10-K into
in this Form 10-K which incorporated
---------------------------------- ----------------------
<S> <C>
Proxy statement for the annual meeting of stockholders to be held May 16, 1995 Part III
(other than information included in the proxy statement pursuant to
Rule 402 (i), (k) and (l) of Regulation S-K)
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FORM 10-K INDEX
Part I Page
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Item 1
Business.......................................................... A1
Overview................................................... A1
Organizational Review...................................... A1
Competition................................................ A2
Government Monetary Policies and Economic Controls......... A2
Supervision and Regulation................................. A2
Foreign Operations......................................... A6
Statistical Information.................................... A7
Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential.......... A7
Securities Portfolio....................................... A14
Loan Portfolio............................................. A15
Allowance for Credit Losses................................ A17
Deposits................................................... A18
Item 2 Properties........................................................ A19
Item 3 Legal Proceedings................................................. A19
Item 4 Submission of Matters to a Vote of Security Holders............... A19
Executive Officers of the Registrant.............................. A20
Part II
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Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters........................................ A21
Item 6 Selected Financial Data........................................... A21
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ A21
Item 8 Financial Statements and Supplementary Data....................... A21
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... A21
Part III
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Item 10 Directors and Executive Officers of the Corporation............... A22
Item 11 Executive Compensation............................................ A22
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................. A22
Item 13 Certain Relationships and Related Transactions.................... A22
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... A23
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PART I
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ITEM 1: BUSINESS
OVERVIEW
Chemical Banking Corporation (the "Corporation") is a bank holding company
organized under the laws of the State of Delaware in 1968 and registered under
the Bank Holding Company Act of 1956, as amended (the "BHCA").
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, a New York banking
corporation ("Chemical Bank"), and Texas Commerce Bank National Association, a
subsidiary of Texas Commerce Equity Holdings, Inc. ("Texas Commerce"), a
Delaware holding company subsidiary of the Corporation headquartered in Texas.
On December 31, 1991, Manufacturers Hanover Corporation ("MHC") merged with and
into the Corporation (the "Merger"). In addition, on June 19, 1992,
Manufacturers Hanover Trust Company, a New York banking corporation, was merged
with and into Chemical Bank. At December 31, 1994, the Corporation was the third
largest bank holding company in the United States in terms of total assets and
Chemical Bank was the third largest bank in the United States in terms of total
assets.
The bank and non-bank subsidiaries of the Corporation operate nationally as
well as through overseas branches and an international network of
representative offices, subsidiaries and affiliated banks.
The financial services provided by the Corporation's domestic subsidiaries
include personal and commercial checking accounts, savings and time deposit
accounts, personal and business loans, consumer financing, leasing, real estate
financing, investment banking, mortgage banking, money transfer, cash
management, safe deposit facilities, personal trust and estate administration,
corporate and institutional trust and securities processing services, full
investment services, discount brokerage, United States Government and Federal
agency securities dealership, corporate debt and equity securities dealership
and underwriting, and United States corporate tax depository facilities.
Internationally, services also include correspondent banking arrangements,
merchant banking, underwriting and trading of eurosecurities, and interest rate
and foreign exchange activities.
The Corporation's bank subsidiaries also provide products to ensure that a
customer will have a specific currency-exchange or interest rate at some future
date. These products include interest-rate and currency swaps, interest rate
options, future rate agreements, forward interest-rate contracts, foreign
exchange contracts and financial futures.
The Corporation retains a 40% interest in the CIT Group Holdings, Inc.
("CIT"). CIT, directly or through its subsidiaries, engages in diversified
financial services activities, primarily in the United States. These activities
include asset-based finance and leasing, sales finance and factoring. For
additional information pertaining to CIT, see the sections entitled "Actions to
Improve Earnings Per Share" and "Noninterest Revenue" in Section B at pages 16
and 20, respectively.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
ORGANIZATIONAL REVIEW
The Corporation's activities are internally organized, for management reporting
purposes, into various business sectors. Developments that have occurred during
1994 with respect to these business sectors are discussed below.
THE GLOBAL BANK
The Global Bank provides banking, financial advisory, trading and investment
services to corporations and public-sector clients worldwide through a network
of offices in 35 countries, including major operations in all key international
financial centers. For a discussion of the Global Bank's business activities,
see the section entitled "Lines-of-Business Results" in Section B at page 23.
THE REGIONAL BANK
The Regional Bank is a leading provider of services to middle market commercial
enterprises, small businesses, and consumers in the tri-state metropolitan
region of New York, New Jersey and Connecticut. For a discussion of the Regional
Bank's business activities, see the section entitled "Lines-of-Business Results"
in Section B at page 24. On July 1, 1994, the Corporation acquired Margaretten
Financial Corporation, whose primary business is the origination, purchase, sale
and servicing of residential mortgage loans. As a result of this acquisition,
the Corporation now ranks fourth nationwide in mortgage origination and fifth
nationwide in mortgage servicing. For a further discussion of this acquisition,
see Note 2, "Acquisitions", in Section B at page 51. In 1995, the Corporation
expects to receive regulatory approval to commence operations of its joint
venture with Mellon Bank Corporation, to be called Chemical Mellon Shareholders
Services, which will focus on providing stock transfer and related shareholder
services to publicly-held companies. The Corporation also announced on March 8,
1995 that it had entered into a definitive agreement to sell Chemical New Jersey
Holdings, Inc. and its subsidiaries, including Chemical Bank New Jersey National
Association. The sale does not include 40 branches and commercial banking
offices in northeastern New Jersey, or the Montclair, Morristown, Ridgewood and
Summit offices of Princeton Bank and Trust Company, all of which will be
repositioned as a strategic component of the Corporation's regional banking
operations in metropolitan New York. For additional information pertaining to
the joint venture with Mellon Bank Corporation and the sale of Chemical New
Jersey Holdings, Inc., see the section entitled "Other Events" in Section B at
page 40.
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TEXAS COMMERCE
Texas Commerce is a major financial institution in Texas with over 115 locations
statewide and serves as the primary Texas bank for more than half of all
companies located in Texas with annual revenues of $250 million or more. For a
discussion of Texas Commerce's business activities, see the section entitled
"Lines-of-Business Results" in Section B at page 24.
REAL ESTATE AND CORPORATE
For a discussion on the Corporation's real estate and corporate business
sectors, see the section entitled "Lines-of-Business Results" in Section B at
page 24.
ACQUISITIONS, DIVESTITURES AND STRATEGIC POSITIONING
During 1994, the Corporation undertook a business-by-business evaluation of its
principal franchises and, on December 1, 1994, the Corporation announced a
two-year program designed to produce greater earnings per share (see the section
entitled "Actions to Improve Earnings Per Share" in Section B at page 16). As
part of these actions, the Corporation announced that it would continue to
divest businesses that are not producing adequate returns or are no longer
central to its more focused strategy . An example of the latter is the sale of
Chemical New Jersey Holdings, Inc. discussed above. At the same time, the
Corporation announced that it planned to allocate $180 million in new investment
spending for products and franchises with attractive opportunities for revenue
growth, such as credit cards, mortgage banking, private banking and its
high-yield securities business. The plans announced on December 1, 1994 are
intended to improve the operating margins and return levels of the Corporation
and to increase shareholder value so that the Corporation will have maximum
options available to it as the banking industry continues to consolidate in the
future.
COMPETITION
The Corporation and its subsidiaries and affiliates operate in a highly
competitive environment. The Corporation's bank subsidiaries compete with other
domestic and foreign banks, thrift institutions, credit unions, and money market
and other mutual funds for deposits and other sources of funds. In addition, the
Corporation and its bank and non-bank subsidiaries face increased competition
with respect to the diverse financial services and products they offer.
Competitors also include finance companies, brokerage firms, investment banking
companies, merchant banks, insurance companies, leasing companies, and a variety
of other financial services and advisory companies. Many of these competitors
are not subject to the same regulatory restrictions as are domestic bank holding
companies and banks, such as the Corporation and its bank subsidiaries.
The Corporation expects that competitive conditions will continue to
intensify as a result of technological advances. Technological advances have,
for example, made it possible for non-depository institutions to offer customers
automatic transfer systems and other automated payment systems services that
have been traditional banking products.
Competition is also expected to increase as a result of recently enacted
legislation permitting interstate banking. Legislation recently introduced in
Congress, which would permit new types of affiliations between banks and
financial service companies, including securities firms, could, if enacted,
also have increased competitive effects. (See "Supervision and Regulation"
below).
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and business of the Corporation are affected by general economic
conditions, both domestic and international. In addition, fiscal or other
policies that are adopted by various regulatory authorities of the United
States, by foreign governments, and by international agencies can have important
consequences on the financial performance of the Corporation. The Corporation is
particularly affected by the policies of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), which regulates the national
supply of bank credit. Among the instruments of monetary policy available to the
Federal Reserve Board are engaging in open-market operations in United States
Government securities; changing the discount rates of borrowings of depository
institutions; imposing or changing reserve requirements against depository
institutions deposits and certain assets of foreign branches; and imposing or
changing reserve requirements against certain borrowings by banks and their
affiliates (including parent corporations such as the Corporation). These
methods are used in varying combinations to influence the overall growth of bank
loans, investments, and deposits, and the interest rates charged on loans or
paid for deposits.
The Corporation has economic, credit, legal, and other specialists who
monitor economic conditions, and domestic and foreign government policies and
actions. However, since it is difficult to predict changes in macroeconomic
conditions and in governmental policies and actions relating thereto, it is
difficult to foresee the effects of any such changes on the business and
earnings of the Corporation and its subsidiaries.
SUPERVISION AND REGULATION
The Corporation is subject to regulation as a registered bank holding company
under the BHCA. As such, the Corporation is required to file with the Federal
Reserve Board an annual report and other information required quarterly pursuant
to the BHCA. The Corporation is also subject to the examination powers of the
Federal Reserve Board.
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Under the BHCA, the Corporation may not engage in any business other than
managing and controlling banks or furnishing certain specified services to
subsidiaries, and may not acquire voting control of non-banking corporations,
except those corporations engaged in businesses or furnishing services which the
Federal Reserve Board deems to be so closely related to banking as "to be a
proper incident thereto". Further, the Corporation is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any corporation that is engaged in activities that
are not closely related to banking, and may not acquire direct or indirect
ownership or control of more than 5% of the voting shares of any domestic bank
without the prior approval of the Federal Reserve Board.
Federal law imposes limitations on the payment of dividends by the
subsidiaries of the Corporation that are state member banks of the Federal
Reserve System (a "state member bank") or national banks. Non-bank subsidiaries
of the Corporation are not subject to such limitations. The amount of dividends
that may be paid by a state member bank, such as Chemical Bank, or by a national
bank, such as Texas Commerce Bank National Association, is limited to the lesser
of the amounts calculated under a "recent earnings" test and an "undivided
profits" test. Under the recent earnings test, a dividend may not be paid if the
total of all dividends declared by a bank in any calendar year is in excess of
the current year's net income combined with the retained net income of the two
preceding years unless the bank obtains the approval of its appropriate Federal
banking regulator (which, in the case of a member bank, is the Federal Reserve
Board and, in the case of a national bank, is the Office of the Comptroller of
the Currency (the "Comptroller of the Currency")). Under the undivided profits
test, a dividend may not be paid in excess of a bank's "undivided profits". The
New York State Banking Department imposes a similar recent earnings test on the
payment of dividends by New York State-chartered banks, such as Chemical Bank.
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1995, without the approval of their relevant banking
regulators, pay dividends estimated at approximately $700 million to their
respective bank holding companies, plus an additional amount equal to their net
income from January 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 Comptroller of the Currency and the Federal Deposit Insurance
Corporation ("FDIC") have authority under the Financial Institutions Supervisory
Act to prohibit or to limit the payment of dividends by the banking
organizations they supervise, including the Corporation and its subsidiaries
that are banks or bank holding companies, if, in the banking regulator's
opinion, payment of a dividend would constitute an unsafe or unsound practice in
light of the financial condition of the banking organization.
For a further discussion of the dividend restrictions imposed on the
Corporation's subsidiaries that are state member or national banks, see Note 15,
"Restrictions on Cash and Intercompany Funds Transfers", in Section B on page
61.
The Corporation is also subject to the risk-based capital and leverage
guidelines of the Federal Reserve Board, which require that the Corporation's
capital-to-assets ratios meet certain minimum standards. For a discussion of the
Federal Reserve Board's guidelines and the Corporation's ratios, see the
sections entitled "Risk-Based Capital Ratios" and "Leverage Ratios" in Section
B, page 38.
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 and revises certain provisions of the Federal Deposit Insurance Act as
well as certain other Federal banking statutes. In general, FDICIA provides for
expanded regulation of depository institutions and their affiliates, including
parent holding companies, by such institutions' Federal banking regulators, and
requires the Federal banking regulator to take "prompt corrective action" with
respect to a depository institution if such institution does not meet certain
capital adequacy standards.
Prompt Corrective Action: Pursuant to FDICIA, the Federal Reserve Board,
the FDIC and the Comptroller of the Currency adopted regulations setting forth a
five-tier scheme for measuring the capital adequacy of the depository
institutions they supervise. Under the regulations (commonly referred to as the
"prompt corrective action" rules), an institution would be placed in one of the
following capital categories: (i) well capitalized (an institution that has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a Tier 1 leverage ratio of at least 5%); (ii)
adequately capitalized (an institution that has a total risk-based capital ratio
of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1
leverage ratio of at least 4%); (iii) undercapitalized (an institution that has
a total risk-based capital ratio of under 8% or a Tier 1 risk-based capital
ratio under 4% or a Tier 1 leverage ratio under 4%); (iv) significantly
undercapitalized (an institution that has a total risk-based capital ratio of
under 6% or a Tier 1 risk-based capital ratio under 3% or a Tier 1 leverage
ratio under 3%); and (v) critically undercapitalized (an institution that has a
ratio of tangible equity to total assets of 2% or less).
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Supervisory actions by the appropriate Federal banking regulator will
depend upon an institution's classification within the five categories. All
institutions are generally prohibited from declaring any dividends, making any
other capital distribution, or paying a management fee to any controlling
person, if such payment would cause the institution to become undercapitalized.
Additional supervisory actions are mandated for an institution falling into one
of the three "undercapitalized" categories, with the severity of supervisory
action increasing at greater levels of capital deficiency. For example,
critically undercapitalized institutions are, among other things, restricted
from making any principal or interest payments on subordinated debt without
prior approval of their Federal banking regulator. The regulations apply only to
banks and not to bank holding companies, such as the Corporation; however, the
Federal Reserve Board is authorized to take appropriate action at the holding
company level based on the undercapitalized status of such holding company's
subsidiary banking institution. In certain instances relating to an
undercapitalized banking institution, the bank holding company would be required
to guarantee the performance of the undercapitalized subsidiary and may be
liable for civil money damages for failure to fulfill its commitments on such
guarantee.
At December 31, 1994, Chemical Bank and Texas Commerce Bank National
Association were each "well capitalized".
Brokered Deposits: The FDIC issued a rule, effective June 16, 1992,
regarding the ability of depository institutions to accept brokered deposits.
Under the rule, the term "brokered deposits" is defined to include deposits that
are solicited by a bank's affiliates on its behalf. A significant portion of
Chemical Bank's wholesale deposits are solicited on its behalf by a
broker-dealer affiliate of Chemical Bank and are considered brokered deposits.
Under the rule, (i) an "undercapitalized" institution is prohibited from
accepting, renewing or rolling over brokered deposits, (ii) an "adequately
capitalized" institution must obtain a waiver from the FDIC before accepting,
renewing or rolling over brokered deposits and is not permitted to pay interest
on brokered deposits accepted in such institution's normal market area at rates
that "significantly exceed" rates paid on deposits of similar maturity in such
area, and (iii) a "well capitalized" institution may accept, renew or roll over
brokered deposits without restriction. The definitions of "well capitalized",
"adequately capitalized", and "undercapitalized" are the same as those utilized
in the "prompt corrective action" rules described above.
FDIC Insurance Assessments: The FDIC has adopted, for assessment periods
commencing January 1, 1994, a risk-based insurance assessment system. Under the
assessment system, each depository institution is assigned to one of nine risk
classifications based upon certain capital and supervisory measures and,
depending upon its classification, is assessed premiums ranging from 23 basis
points to 31 basis points. On February 16, 1995, the FDIC proposed a new
assessment rate schedule, with assessment premiums ranging from 4 basis points
to 31 basis points. The new rate schedule is expected to take effect on
September 30, 1995. The proposed new rate schedule could be subject to future
adjustments by the FDIC. The Corporation expects that its 1995 FDIC expense will
be substantially reduced if this proposed rate schedule is adopted.
Other FDICIA Rules: Other rules that have been adopted pursuant to FDICIA
include: (i) real estate lending standards for banks, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
rules relating to consumer lending, including regulations governing advertising
and disclosures required for consumer deposit accounts; (iii) rules requiring
depository institutions to develop and implement internal procedures to evaluate
and control credit and settlement exposure to their correspondent banks; (iv)
rules implementing the FDICIA provision prohibiting, with certain exceptions,
FDIC-insured state banks from making equity investments of the types and
amount, or from engaging as principal in activities, not permissible for
national banks; (v) rules mandating enhanced financial reporting and audit
requirements; and (vi) notice provisions in the case of branch closings.
Rules proposed, but not yet adopted, include those addressing (i) various
"safety and soundness" issues, including operations and managerial standards,
standards for asset quality, earnings and stock valuations, and compensation
standards for the officers, directors, employees and principal stockholders of
the depository institution, and (ii) the degree to which the risk-based capital
rules should be revised to take into account interest-rate risk.
The Corporation expects the rules and regulations adopted and proposed to
be adopted pursuant to FDICIA will result in increased compliance costs for the
Corporation and its bank subsidiaries, but does not expect such rules and
regulations to have a material impact on the operations of the Corporation or
its bank subsidiaries.
POWERS OF THE FDIC UPON INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") imposes liability on an FDIC-insured depository institution (such as
the Corporation's bank subsidiaries) for costs incurred by the FDIC in
connection with the insolvency of other FDIC-insured institutions under common
control with such institution (commonly referred to as "cross-guarantees" of
insured depository institutions). An FDIC cross-guarantee claim against a
depository institution is superior in right of payment to claims of the holding
company and its affiliates against such depository institution.
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In the event an insured depository institution becomes insolvent, or upon
the occurrence of certain other events specified in the Federal Deposit
Insurance Act, whenever the FDIC is appointed the conservator or receiver of
such insured depository institution, the FDIC has the power: (i) to transfer any
of such bank's assets and liabilities to a new obligor (including, but not
limited to, another financial institution acquiring all or a portion of the
bank's business, assets or liabilities), without the approval of such bank's
creditors; (ii) to enforce the terms of such bank's contracts pursuant to their
terms, or (iii) to repudiate or disaffirm any contract or lease to which such
depository institution is a party, the performance of which is determined by the
FDIC to be burdensome and the disaffirmance or repudiation of which is
determined by the FDIC to promote the orderly administration of such depository
institution's assets. Such provisions of the Federal Deposit Insurance Act would
be applicable to obligations and liabilities of those of the Corporation's
subsidiaries that are insured depository institutions, such as Chemical Bank and
Texas Commerce Bank National Association, including without limitation,
obligations under senior or subordinated debt issued by such banks to investors
(hereinafter referred to as "public noteholders") in the public markets.
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is not permitted to take any action
that would have the effect of increasing the losses to a deposit insurance fund
by protecting depositors for more than the insured portion of their deposits or
by protecting creditors of the insured depository institution (including public
noteholders), other than depositors. In addition, the FDIC is authorized to
settle all uninsured and unsecured claims in the insolvency of an insured
institution by making a final settlement payment after the declaration of
insolvency based upon a percentage determined by the FDIC reflecting an average
of the FDIC's receivership recovery experience, regardless of the assets of the
insolvent institution actually available for distribution to creditors. Such a
payment would constitute full payment and disposition of the FDIC's obligations
to claimants.
The Omnibus Budget Reconciliation Act of 1993 included a "depositor
preference" provision, which provided that the claims of a receiver of an
insured depository institution for administrative expenses and the claims of
holders of deposit liabilities (including the FDIC, as subrogee of such holders)
have priority over the claims of other unsecured creditors of such
institution, including public noteholders, in the event of the liquidation or
other resolution of such institution.
As a result of the provisions described above, whether or not the FDIC ever
sought to repudiate any obligations held by public noteholders of any subsidiary
of the Corporation that is an insured depository institution, such as Chemical
Bank or Texas Commerce Bank National Association, the public noteholders would
be treated differently from, and could receive, if anything, substantially less
than, holders of deposit obligations of such depository institution.
OTHER SUPERVISION AND REGULATION
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to each bank subsidiary and to commit resources to
support such bank subsidiary in circumstances where it might not do so absent
such policy. Any loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of the subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a Federal bank
regulatory agency to maintain the capital of a subsidiary bank at a certain
level will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
The bank subsidiaries of the Corporation are subject to certain
restrictions imposed by Federal law on extensions of credit to, and certain
other transactions with, the Corporation and certain other affiliates and on
investments in stock or securities thereof. Such restrictions prevent the
Corporation and other affiliates from borrowing from a bank subsidiary unless
the loans are secured in specified amounts. Without the prior approval of the
Federal Reserve Board, secured loans, other transactions and investments by any
bank subsidiary are generally limited in amount as to the Corporation and as to
each of the other affiliates to 10% of the bank's capital and surplus and as to
the Corporation and all such other affiliates to an aggregate of 20% of the
bank's capital and surplus. Federal law also requires that transactions between
a bank subsidiary and the Corporation or certain non-bank affiliates, including
extensions of credit, sales of securities or assets and the provision of
services, be conducted on terms at least as favorable to the bank subsidiary as
those that apply or that would apply to comparable transactions with
unaffiliated parties.
The Corporation's bank and non-bank subsidiaries are subject to direct
supervision and regulation by various other Federal and state authorities.
Chemical Bank, as a New York State-chartered bank and member bank of the Federal
Reserve System, is subject to supervision and regulation of the New York State
Banking Department as well as by the Federal Reserve Board and the FDIC. The
Corporation's national bank subsidiaries, such as Texas Commerce Bank National
Association, Chemical Bank New Jersey, N.A. and Chemical Bank, N.A., are subject
to substantially similar supervision and regulation by the Comptroller of the
Currency. Supervision and regulation by each of the fore-
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going regulatory agencies generally include comprehensive annual reviews of all
major aspects of the relevant bank's business and condition, as well as the
imposition of periodic reporting requirements and limitations on investments and
other powers. The activities of the Corporation's broker-dealers are subject to
the regulations of the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., and, in the case of Chemical Securities
Inc. (the Corporation's "Section 20" subsidiary ("CSI")), are subject to the
supervision and regulation of the Federal Reserve Board (which has imposed
conditions governing CSI's activities, including limitations on the gross
revenues that may be derived from certain of CSI's activities). Additionally,
various securities activities conducted by the bank subsidiaries of the
Corporation, such as dealing in municipal securities, acting as transfer agent,
the making available of mutual funds and providing other types of investment
management services, are subject to the regulations of the Securities and
Exchange Commission, the Municipal Securities Rulemaking Board and, with respect
to certain activities of its mutual funds, the Federal Reserve Board. The types
of activities in which the foreign branches of Chemical Bank and the
international subsidiaries of the Corporation may engage are subject to various
restrictions imposed by the Federal Reserve Board. Such foreign branches and
international subsidiaries are also subject to the laws and banking authorities
of the countries in which they operate.
Federal and state legislation affecting the banking industry has played,
and will continue to play, a significant role in shaping the nature of the
financial services industry. For example, during 1994 legislation was enacted
that will permit, commencing September 29, 1995, interstate banking (under
certain conditions relating to concentration of deposits) and commencing June 1,
1997 (subject to enactment by any state of "opt-out" legislation), interstate
branching (by consolidation across state lines of banks under the common control
of a bank holding company). Furthermore, legislation has recently been
introduced in Congress that would, if enacted, substantially reform the
regulatory structure under which U.S. bank holding companies and other financial
services institutions operate. The Clinton Administration has also announced its
own proposal to allow affiliation between banks and other financial services
companies. The Corporation believes that the outcome of the current legislative
proposals would have important implications for it and for other financial
services companies. Also, there are cases pending before Federal and state
courts that seek to expand or restrict interpretations of existing laws and
their accompanying regulations affecting the activities of bank holding
companies and their subsidiaries. Given the current status of these legislative
and judicial efforts, it is not possible for the Corporation to predict, at the
present time, the extent to which the Corporation and its subsidiaries may be
affected by any of these initiatives.
FOREIGN OPERATIONS
For geographic distributions of total assets, total revenue, total expense,
income before income tax expense and net income, see Note 24, "International
Operations", of the Notes to Consolidated Financial Statements in Section B,
page 70. For a discussion of foreign loans, see Note 5, "Loans", of the Notes to
Consolidated Financial Statements in Section B, page 54 and see the sections
entitled "Foreign Portfolio" and "Cross-Border Outstandings" in Section B,
pages 29 and 30.
A6
<PAGE> 9
-------------------------------------------------------------------------------
STATISTICAL INFORMATION
In addition to the statistical information that is presented in the following
pages in this Section A of the Form 10-K, the following statistical information
is included in Section B of the Form 10-K:
<TABLE>
<CAPTION>
DESCRIPTION OF STATISTICAL INFORMATION SECTION B LOCATION
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Securities Portfolio Pages 52 and 53 (Note 4)
2. Loan Portfolio
Lending and Related Activities Pages 25 through 33 (includes an analysis of the Corporation's Loan
Portfolio; Nonperforming Assets; Net Charge-Offs; the Domestic Commercial
Real Estate, Commercial and Industrial, Financial Institutions, and
Consumer Portfolios; the Foreign Portfolio; Cross-Border Outstandings;
Credit Risk Management; and Allowance for Credit Losses); and pages 54
through 56 (Notes 5, 6 and 7)
Nonaccrual Policy Page 49 (Note 1)
Impact of Nonperforming Loans on Page 56 (Note 7)
Interest Income
Cross-Border Outstandings Exceeding Page 30 (Cross-Border Outstandings)
1% of Total Assets
3. Summary of Loan Loss Experience Pages 27 through 33 (Net Charge-Offs; the Domestic Commercial Real Estate,
Commercial and Industrial, Financial Institutions, and Consumer Portfolios;
the Foreign Portfolio; Cross-Border Outstandings; and Allowance for Credit
Losses); page 49 (Note 1); and page 55 (Note 6)
4. Return on Equity and Assets Page 15 (Financial Review)
5. Short-Term Borrowings Page 56 (Note 8)
</TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
For a three-year summary of the consolidated average balances, interest rates
and interest differentials on a taxable-equivalent basis for the years 1994
through 1992, see pages A8 and A9. Income computed on a taxable-equivalent basis
is income as reported in the Consolidated Statement of Income adjusted to make
income and earning yields on assets exempt from income taxes (primarily Federal
taxes) comparable to other taxable income. The incremental tax rate used for
calculating the taxable equivalent adjustment was approximately 43% in each of
the years 1994 through 1992. The majority of the Corporation's securities are
taxable.
Within the consolidated average balance sheet, interest and rate schedules
for 1994, 1993 and 1992, the principal amounts of nonaccrual and renegotiated
loans have been included in the average loan balances used to determine the
average interest rate earned on loans. Interest accrued but not collected at the
date a loan is placed on nonaccrual status is reversed against interest income.
Subsequent cash receipts are applied either to the outstanding principal balance
or recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest. Interest income is accrued on
renegotiated loans at the renegotiated rates. Certain renegotiated loan
agreements call for additional interest to be paid on a deferred or a contingent
basis. Such interest is taken into income only as collected.
A summary of interest rates and interest differentials segregated between
domestic and foreign operations for the years 1994, 1993 and 1992 is presented
on pages A10 and A11 herein. Regarding the basis of segregation between the
domestic and foreign components, see Note 24 of the Notes to Consolidated
Financial Statements in Section B, page 70. A portion of the Corporation's
international operations are being funded by domestic sources (intra-company
funding). Generally, the source of such domestic funds is the Parent Company
which, in order to optimize the Corporation's overall liquidity, deposits its
excess short-term funds with Chemical Bank's Nassau Branch to hold until such
funds are needed. Intra-company funding is very short-term in nature and the
Corporation believes such funds are not subject to cross-border risk.
Domestic net interest income was $3,842 million in 1994, an increase of
$124 million from the prior year. The increase in 1994 was attributable to a
higher level of interest-earning assets and the significant reduction in
nonperforming loans, partially offset by a shift in the composition of the
Corporation's interest-earning assets (for further discussion, see the section
entitled "Net Interest Income" in Section B, page 17).
Net interest income from foreign operations was $856 million for 1994,
compared with $939 million in 1993. The decline reflected lower interest
collections from Argentina, primarily as a result of a $29 million one-time cash
payment in 1993 related to interest arrearages. Excluding the impact of such
payments, the decrease in the level of net interest income reflects a lower net
yield as a result of the aforementioned shift in the composition of the
Corporation's interest-earning assets.
The tables on pages A12 and A13 herein present an analysis of the effect on
net interest income of volume and rate changes for the periods 1994 over 1993
and 1993 over 1992. In this analysis, the change due to the volume/rate variance
has been allocated to volume.
A7
<PAGE> 10
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
<TABLE>
<CAPTION>
Year Ended December 31, 1994
(Taxable-Equivalent Interest and Rates; in millions) Balance Interest Rate
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Deposits With Banks $ 5,257 $ 371 7.07%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 12,000 550 4.58
Trading Assets-Debt and Equity Instruments 11,347 722 6.37
Securities:
Held-to-Maturity 9,204 620 6.73
Available-for-Sale 17,003 1,104 6.49(b)
Securities(a) -- -- --
------------------------------------------------------------------------------------------------------
Total Securities 26,207 1,724 6.58
------------------------------------------------------------------------------------------------------
Domestic Loans 57,377 4,522 7.88
Foreign Loans 17,857 1,223 6.85
------------------------------------------------------------------------------------------------------
Total Loans 75,234 5,745(c) 7.64
------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 130,045 9,112 7.01%
------------------------------------------------------------------------------------------------------
Allowance for Credit Losses (2,872)
Cash and Due from Banks 8,491
Risk Management Instruments 17,779
All Other Assets 13,236
------------------------------------------------------------------------------------------------------
Total Assets $166,679
------------------------------------------------------------------------------------------------------
LIABILITIES
Domestic Retail Deposits $ 43,861 1,164 2.66%
Domestic Negotiable Certificates of Deposit
and Other Deposits 5,128 186 3.64
Deposits in Foreign Offices 24,051 1,028 4.27
------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 73,040 2,378 3.26
------------------------------------------------------------------------------------------------------
Short-Term and Other Borrowings:
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 19,154 844 4.41
Commercial Paper 2,760 118 4.29
Other Borrowings 8,775 538 6.12
------------------------------------------------------------------------------------------------------
Total Short-Term and Other Borrowings 30,689 1,500 4.89
Long-Term Debt 8,419 536 6.37
------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 112,148 4,414 3.94
------------------------------------------------------------------------------------------------------
Demand Deposits 21,723
Risk Management Instruments 16,143
All Other Liabilities 5,703
------------------------------------------------------------------------------------------------------
Total Liabilities 155,717
------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 1,579
Common Stockholders' Equity 9,383
------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 10,962(d)
------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $166,679
------------------------------------------------------------------------------------------------------
Interest Rate Spread 3.07%
------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 4,698 3.61%
------------------------------------------------------------------------------------------------------
</TABLE>
(a) On December 31, 1993, the Corporation adopted SFAS 115. Previously reported
amounts have not been restated to conform with the 1994 presentation. (b) For
the year ended December 31, 1994, the annualized rate for securities
available-for-sale based on amortized cost was 6.42%. (c) Fees and commissions
on loans included in loan interest amounted to $141 million in 1994, $176
million in 1993 and $159 million in 1992. (d) The ratio of average stockholders'
equity to average assets was 6.6% for 1994, 7.3% for 1993 and 6.7% for 1992.
A8
<PAGE> 11
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992
(Taxable-Equivalent Interest and Rates; in millions) Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits With Banks $ 4,202 $ 268 6.39% $ 2,605 $ 274 10.52%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 10,300 339 3.29 8,592 349 4.07
Trading Assets-Debt and Equity Instruments 8,039 449 5.59 6,205 419 6.76
Securities:
Held-to-Maturity -- -- -- -- -- --
Available-for-Sale -- -- -- -- -- --
Securities(a) 23,654 1,731 7.32 21,674 1,758 8.11
--------------------------------------------------------------------------------------------------------------------------
Total Securities 23,654 1,731 7.32 21,674 1,758 8.11
--------------------------------------------------------------------------------------------------------------------------
Domestic Loans 57,701 4,197 7.28 58,963 4,580 7.77
Foreign Loans 21,038 1,440 6.85 23,210 1,799 7.75
--------------------------------------------------------------------------------------------------------------------------
Total Loans 78,739 5,637(c) 7.16 82,173 6,379(c) 7.76
--------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 124,934 8,424 6.74% 121,249 9,179 7.57%
--------------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses (3,084) (3,327)
Cash and Due from Banks 8,537 8,051
Risk Management Instruments -- --
All Other Assets 14,494 13,356
--------------------------------------------------------------------------------------------------------------------------
Total Assets $144,881 $139,329
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Domestic Retail Deposits $ 46,598 1,237 2.65% $ 44,538 1,438 3.23%
Domestic Negotiable Certificates of Deposit
and Other Deposits 6,242 191 3.05 7,506 296 3.94
Deposits in Foreign Offices 21,066 813 3.86 21,717 1,134 5.22
--------------------------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 73,906 2,241 3.03 73,761 2,868 3.89
--------------------------------------------------------------------------------------------------------------------------
Short-Term and Other Borrowings:
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 15,461 472 3.05 15,658 623 3.98
Commercial Paper 2,438 83 3.42 2,190 87 3.92
Other Borrowings 6,663 437 6.56 6,376 518 8.17
--------------------------------------------------------------------------------------------------------------------------
Total Short-Term and Other Borrowings 24,562 992 4.04 24,224 1,228 5.07
Long-Term Debt 8,053 534 6.64 6,220 454 7.31
--------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 106,521 3,767 3.54 104,205 4,550 4.37
--------------------------------------------------------------------------------------------------------------------------
Demand Deposits 21,750 18,989
Risk Management Instruments -- --
All Other Liabilities 6,027 6,811
--------------------------------------------------------------------------------------------------------------------------
Total Liabilities 134,298 130,005
--------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 1,887 1,751
Common Stockholders' Equity 8,696 7,573
--------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 10,583(d) 9,324(d)
--------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $144,881 $139,329
--------------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 3.20% 3.20%
--------------------------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $4,657 3.73% $4,629 3.82%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On December 31, 1993, the Corporation adopted SFAS 115. Previously reported
amounts have not been restated to conform with the 1994 presentation. (b) For
the year ended December 31, 1994, the annualized rate for securities
available-for-sale based on amortized cost was 6.42%. (c) Fees and commissions
on loans included in loan interest amounted to $141 million in 1994, $176
million in 1993 and $159 million in 1992. (d) The ratio of average stockholders'
equity to average assets was 6.6% for 1994, 7.3% for 1993 and 6.7% for 1992.
A9
<PAGE> 12
<TABLE>
<CAPTION>
INTEREST RATES AND INTEREST DIFFERENTIAL ANALYSIS OF
NET INTEREST INCOME - DOMESTIC AND FOREIGN
-----------------------------------------------------------------------------
1994
----------------------------
(in millions; interest and average Average Average
rates on a taxable-equivalent basis) balance Interest rate
-----------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC
INTEREST-EARNING ASSETS:
Deposits With Banks $ 85 $ 6 7.22%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 10,947 477 4.36
Securities and Trading Assets 28,039 1,789 6.38
Loans 57,377 4,522 7.88
---------------------------------------------------------------------------
Total Interest-Earning Assets $96,448 6,794 7.04
---------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits:
Domestic Retail Time Deposits $43,861 1,164 2.66
Domestic Negotiable Certificates of
Deposit and Other Time Deposits 5,128 186 3.64
---------------------------------------------------------------------------
Total Deposits 48,989 1,350 2.76
---------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 18,041 710 3.94
Other Borrowed Funds 9,983 550 5.50
---------------------------------------------------------------------------
Total Short-Term Borrowings 28,024 1,260 4.49
---------------------------------------------------------------------------
Long-Term Debt 8,190 480 5.86
Intra-Company Funding-Net (4,348) (138) --
---------------------------------------------------------------------------
Total Interest-Bearing Liabilities 80,855 2,952 3.65
Noninterest-Bearing Liabilities 15,593 -- --
---------------------------------------------------------------------------
Total Investable Funds $96,448 2,952 3.06
---------------------------------------------------------------------------
Domestic Net Interest Income and Net Yield $ 3,842 3.98%
---------------------------------------------------------------------------
FOREIGN
INTEREST-EARNING ASSETS:
Deposits With Banks $ 5,172 $ 365 7.07%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 1,053 73 6.91
Securities and Trading Assets 9,515 657 6.90
Loans 17,857 1,223 6.85
---------------------------------------------------------------------------
Total Interest-Earning Assets $33,597 2,318 6.90
---------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits $24,051 1,028 4.27
---------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 1,113 134 12.04
Other Borrowed Funds 1,552 106 6.85
---------------------------------------------------------------------------
Total Short-Term Borrowings 2,665 240 9.02
---------------------------------------------------------------------------
Long-Term Debt 229 56 24.48
Intra-Company Funding-Net 4,348 138 3.14
---------------------------------------------------------------------------
Total Interest-Bearing Liabilities 31,293 1,462 4.67
Noninterest-Bearing Liabilities 2,304 -- --
---------------------------------------------------------------------------
Total Investable Funds $33,597 1,462 4.35
---------------------------------------------------------------------------
Foreign Net Interest Income and Net Yield $ 856 2.55%
---------------------------------------------------------------------------
Percentage of Total Assets and Liabilities
Attributable to Foreign Operations:
Assets 31.7%
Liabilities 31.1%
---------------------------------------------------------------------------
</TABLE>
A10
<PAGE> 13
<TABLE>
-----------------------------------------------------------------------------------------------------------------------
1993 1992
---------------------------- -----------------------------
(in millions; interest and average Average Average Average Average
rates on a taxable-equivalent basis) balance Interest rate balance Interest rate
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
INTEREST-EARNING ASSETS:
Deposits With Banks $ 232 $ 10 4.65% $ 22 $ 1 6.11%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 9,946 314 3.16 8,368 308 3.69
Securities and Trading Assets 25,977 1,741 6.70 24,308 1,806 7.43
Loans 57,701 4,197 7.28 58,963 4,580 7.77
----------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $93,856 6,262 6.67 $91,661 6,695 7.30
----------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits:
Domestic Retail Time Deposits $46,598 1,237 2.65 $44,538 1,438 3.23
Domestic Negotiable Certificates of
Deposit and Other Time Deposits 6,242 191 3.05 7,506 296 3.94
----------------------------------------------------------------------------------------------------------------------
Total Deposits 52,840 1,428 2.70 52,044 1,734 3.33
----------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 14,413 397 2.76 15,011 552 3.70
Other Borrowed Funds 7,881 412 5.24 7,387 390 5.31
----------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 22,294 809 3.63 22,398 942 4.21
----------------------------------------------------------------------------------------------------------------------
Long-Term Debt 7,763 494 6.37 5,829 393 6.75
Intra-Company Funding-Net (4,835) (187) -- (3,326) (49) --
----------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 78,062 2,544 3.26 76,945 3,020 3.93
Noninterest-Bearing Liabilities 15,794 -- -- 14,716 -- --
----------------------------------------------------------------------------------------------------------------------
Total Investable Funds $93,856 2,544 2.71 $91,661 3,020 3.29
----------------------------------------------------------------------------------------------------------------------
Domestic Net Interest Income and Net Yield $3,718 3.96% $3,675 4.01%
----------------------------------------------------------------------------------------------------------------------
FOREIGN
INTEREST-EARNING ASSETS:
Deposits With Banks $ 3,970 $ 258 6.49% $ 2,583 $ 273 10.56%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 354 25 6.93 224 41 18.45
Securities and Trading Assets 5,716 439 7.67 3,571 371 10.38
Loans 21,038 1,440 6.85 23,210 1,799 7.75
----------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $31,078 2,162 6.95 $29,588 2,484 8.39
----------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits $21,066 813 3.86 $21,717 1,134 5.22
----------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 1,048 75 7.15 647 71 11.05
Other Borrowed Funds 1,220 108 8.82 1,179 215 18.20
----------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 2,268 183 8.05 1,826 286 15.67
----------------------------------------------------------------------------------------------------------------------
Long-Term Debt 290 40 13.77 391 61 15.54
Intra-Company Funding-Net 4,835 187 3.86 3,326 49 1.49
----------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 28,459 1,223 4.29 27,260 1,530 5.61
Noninterest-Bearing Liabilities 2,619 -- -- 2,328 -- --
----------------------------------------------------------------------------------------------------------------------
Total Investable Funds $31,078 1,223 3.93 $29,588 1,530 5.17
----------------------------------------------------------------------------------------------------------------------
Foreign Net Interest Income and Net Yield $ 939 3.02% $ 954 3.22%
----------------------------------------------------------------------------------------------------------------------
Percentage of Total Assets and Liabilities
Attributable to Foreign Operations:
Assets 24.5% 22.5%
Liabilities 25.2% 22.8%
----------------------------------------------------------------------------------------------------------------------
</TABLE>
A11
<PAGE> 14
CHANGE IN NET INTEREST INCOME
VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Consolidated
------------------------------------------------
1994 OVER 1993 Increase (decrease) due to change in:
------------------------------------- Net
(in millions; interest and average rates on a taxable-equivalent basis) Volume Rate Change
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Deposits With Banks $ 74 $ 29 $ 103
Federal Funds Sold and Securities Purchased Under Resale Agreements 92 119 211
Securities and Trading Assets 393 (127) 266
Loans (238) 346 108
-----------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 321 367 688
-----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits (78) 5 (73)
Domestic Negotiable Certificates of Deposit and Other Time Deposits (42) 37 (5)
Deposits in Foreign Offices 129 86 215
-----------------------------------------------------------------------------------------------------------------------------
Total Deposits 9 128 137
-----------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 151 221 372
Other Borrowed Funds 140 (4) 136
-----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 291 217 508
-----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 11 (9) 2
Intra-Company Funding -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 311 336 647
-----------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 10 $ 31 $ 41
-----------------------------------------------------------------------------------------------------------------------------
1993 OVER 1992
INTEREST-EARNING ASSETS
Deposits With Banks $ 99 $(105) $ (6)
Federal Funds Sold and Securities Purchased Under Resale Agreements 60 (70) (10)
Securities and Trading Assets 277 (274) 3
Loans (244) (498) (742)
-----------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 192 (947) (755)
-----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits 57 (258) (201)
Domestic Negotiable Certificates of Deposit and Other Time Deposits (38) (67) (105)
Deposits in Foreign Offices (26) (295) (321)
-----------------------------------------------------------------------------------------------------------------------------
Total Deposits (7) (620) (627)
-----------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 15 (166) (151)
Other Borrowed Funds 31 (116) (85)
-----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 46 (282) (236)
-----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 109 (29) 80
Intra-Company Funding -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 148 (931) (783)
-----------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 44 $ (16) $ 28
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A12
<PAGE> 15
<TABLE>
<CAPTION>
Domestic
----------------------------------------------
1994 OVER 1993 Increase (decrease) due to change in:
------------------------------------- Net
(in millions; interest and average rates on a taxable-equivalent basis) Volume Rate Change
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Deposits With Banks $ (10) $ 6 $ (4)
Federal Funds Sold and Securities Purchased Under Resale Agreements 44 119 163
Securities and Trading Assets 131 (83) 48
Loans (21) 346 325
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 144 388 532
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits (78) 5 (73)
Domestic Negotiable Certificates of Deposit and Other Time Deposits (42) 37 (5)
Deposits in Foreign Offices -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Deposits (120) 42 (78)
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 143 170 313
Other Borrowed Funds 118 20 138
-----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 261 190 451
-----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 26 (40) (14)
Intra-Company Funding 14 35 49
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 181 227 408
-----------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ (37) $ 161 $ 124
-----------------------------------------------------------------------------------------------------------------------------------
1993 OVER 1992
INTEREST-EARNING ASSETS
Deposits With Banks $ 9 $ -- $ 9
Federal Funds Sold and Securities Purchased Under Resale Agreements 50 (44) 6
Securities and Trading Assets 112 (177) (65)
Loans (94) (289) (383)
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 77 (510) (433)
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits 57 (258) (201)
Domestic Negotiable Certificates of Deposit and Other Time Deposits (38) (67) (105)
Deposits in Foreign Offices -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 19 (325) (306)
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements (14) (141) (155)
Other Borrowed Funds 27 (5) 22
-----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 13 (146) (133)
-----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 123 (22) 101
Intra-Company Funding (59) (79) (138)
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 96 (572) (476)
-----------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ (19) $ 62 $ 43
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Foreign
----------------------------------------------
1994 OVER 1993 Increase (decrease) due to change in:
------------------------------------- Net
(in millions; interest and average rates on a taxable-equivalent basis) Volume Rate Change
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Deposits With Banks $ 84 $ 23 $ 107
Federal Funds Sold and Securities Purchased Under Resale Agreements 48 -- 48
Securities and Trading Assets 262 (44) 218
Loans (217) -- (217)
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 177 (21) 156
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits -- -- --
Domestic Negotiable Certificates of Deposit and Other Time Deposits -- -- --
Deposits in Foreign Offices 129 86 215
-----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 129 86 215
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 8 51 59
Other Borrowed Funds 22 (24) (2)
-----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 30 27 57
-----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (15) 31 16
Intra-Company Funding (14) (35) (49)
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 130 109 239
-----------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 47 $(130) $ (83)
-----------------------------------------------------------------------------------------------------------------------------------
1993 OVER 1992
INTEREST-EARNING ASSETS
Deposits With Banks $ 90 $(105) $ (15)
Federal Funds Sold and Securities Purchased Under Resale Agreements 10 (26) (16)
Securities and Trading Assets 165 (97) 68
Loans (150) (209) (359)
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 115 (437) (322)
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits -- -- --
Domestic Negotiable Certificates of Deposit and Other Time Deposits -- -- --
Deposits in Foreign Offices (26) (295) (321)
-----------------------------------------------------------------------------------------------------------------------------------
Total Deposits (26) (295) (321)
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 29 (25) 4
Other Borrowed Funds 4 (111) (107)
-----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 33 (136) (103)
-----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (14) (7) (21)
Intra-Company Funding 59 79 138
-----------------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 52 (359) (307)
-----------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 63 $ (78) $ (15)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A13
<PAGE> 16
SECURITIES PORTFOLIO
On December 31, 1993, the Corporation adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 addresses the accounting for investments in
equity securities that have readily determinable fair values and investments in
all debt securities. Prior to the adoption of SFAS 115, available-for-sale
securities were carried at the lower of aggregate amortized cost or market
value. For a further discussion of the Corporation's securities portfolios, see
Note 4,"Securities", in Section B, pages 52 and 53.
Of the securities held in the Corporation's securities portfolios, the U.S.
Government is the only issuer whose securities exceeded 10% of the Corporation's
total stockholders' equity at December 31, 1994. The year-end balances of the
Corporation's held-to-maturity and available-for-sale securities portfolios for
1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993 1992
---------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
<S> <C> <C> <C>
U.S. Treasury and Federal agencies $7,616 $ 9,142 $12,108
Obligations of State and Political Subdivisions 118 13 4
Other(a) 832 953 2,924
---------------------------------------------------------------------------------------------------------
Total $8,566 $10,108 $15,036
---------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury and Federal Agencies $14,502 $11,897 $6,568
Other(a) 3,929 3,943 1,822
---------------------------------------------------------------------------------------------------------
Total $18,431 $15,840 $8,390
---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes investments in debt securities issued by foreign governments,
corporate debt securities, collateralized mortgage obligations of private
issuers, and other debt and equity securities.
The following table presents, by maturity range and type of
security, the amortized cost at December 31, 1994, and the
average yield of the held-to-maturity securities portfolio.
<TABLE>
<CAPTION>
MATURITIES AND AVERAGE YIELDS OF THE PORTFOLIO
Amortized Cost Average
(in millions, except yields) December 31, 1994 Yield(a)
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and Federal Agencies:
Due in One Year or Less $ 81 5.06%
Due After One Year through Five Years 502 6.30
Due After Five Years through Ten Years 1,333 6.63
Due After Ten Years(b) 5,700 6.96
-------------------------------------------------------------------------------------------------------
Total $ 7,616 6.84%
-------------------------------------------------------------------------------------------------------
Obligations of State and Political
Subdivisions:
Due in One Year or Less $ 113 6.22%
Due After One Year through Five Years 1 6.66
Due After Five Years through Ten Years 4 6.64
Due After Ten Years -- --
-------------------------------------------------------------------------------------------------------
Total $ 118 6.24%
-------------------------------------------------------------------------------------------------------
Other:
Due in One Year or Less $ -- --%
Due After One Year through Five Years 570 6.16
Due After Five Years through Ten Years 113 7.21
Due After Ten Years(b) 149 7.02
-------------------------------------------------------------------------------------------------------
Total $ 832 6.46%
-------------------------------------------------------------------------------------------------------
</TABLE>
(a) Yields are derived by dividing interest income, adjusted for amortization of
premiums and accretion of discounts, by total amortized cost. Taxable-equivalent
yields are used, where applicable.
(b) Substantially all of the Corporation's mortgage-backed securities are due in
ten years or more based on contractual maturity. The weighted-average maturity
of mortgage-backed securities, which reflects anticipated future prepayments
based on a consensus of dealers in the market, is approximately 5 years.
A14
<PAGE> 17
The following table presents, by maturity range and type of
security, the fair value and amortized cost at December 31, 1994
and the average yield of the available-for-sale securities portfolio.
MATURITIES AND AVERAGE YIELDS OF THE PORTFOLIO
<TABLE>
<CAPTION>
Fair Value Amortized Cost
December 31, December 31, Average
(in millions, except yields) 1994 1994 Yield(a)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and Federal Agencies:
Due in One Year or Less $ 1,799 $ 1,807 6.48%
Due After One Year through Five Years 2,738 2,863 6.00
Due After Five Years through Ten Years 2,040 1,682 6.03
Due After Ten Years(b) 7,925 8,567 7.37
-------------------------------------------------------------------------------------------------
Total $14,502 $14,919 6.85%
-------------------------------------------------------------------------------------------------
Other:
Due in One Year or Less $ 859 $ 854 7.65%
Due After One Year through Five Years 1,707 1,750 9.09
Due After Five Years through Ten Years 625 689 8.23
Due After Ten Years(b) 738 765 6.29
-------------------------------------------------------------------------------------------------
Total $ 3,929 $ 4,058 8.11%
-------------------------------------------------------------------------------------------------
</TABLE>
(a) Yields are derived by dividing interest income, adjusted for amortization of
premiums and accretion of discounts, by total amortized cost. Taxable-equivalent
yields are used, where applicable.
(b) Substantially all of the Corporation's mortgage-backed securities are due in
ten years or more based on contractual maturity. The weighted-average maturity
of mortgage-backed securities, which reflects anticipated future prepayments
based on a consensus of dealers in the market, is approximately 5 years.
LOAN PORTFOLIO
The table below sets forth the amount of loans outstanding
by type for the dates indicated:
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Commercial and Financial $24,972 $23,848 $29,277 $32,904 $33,790
Consumer 30,120 25,798 23,599 20,436 18,700
Commercial Real Estate 5,650 7,338 8,103 8,737 9,407
-------------------------------------------------------------------------------------------------
Total Domestic Loans 60,742 56,984 60,979 62,077 61,897
-------------------------------------------------------------------------------------------------
Foreign Loans:
Commercial, Industrial and Consumer 8,290 7,353 8,115 8,742 11,847
Foreign Governments and Official
Institutions 6,567 7,558 8,266 8,740 9,651
Financial Institutions 3,628 3,963 5,145 5,278 3,057
-------------------------------------------------------------------------------------------------
Total Foreign Loans 18,485 18,874 21,526 22,760 24,555
-------------------------------------------------------------------------------------------------
Total Loans 79,227 75,858 82,505 84,837 86,452
Unearned Income (460) (477) (495) (600) (767)
-------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $78,767 $75,381 $82,010 $84,237 $85,685
-------------------------------------------------------------------------------------------------
</TABLE>
For a discussion of the Corporation's loan outstandings, see the
sections entitled "Net Interest Income" in Section B on pages
17-18, "Loan Portfolio" in Section B on pages 25-30, and "Net
Interest Income" in Section B on page 41.
A15
<PAGE> 18
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table shows the maturity distribution based upon
the stated terms of the loan agreements, and sensitivity to changes
in interest rates of the loan portfolio, excluding consumer loans,
at December 31, 1994:
<TABLE>
<CAPTION>
Within 1-5 After 5
December 31, 1994 (in millions) 1 Year(b) Years Years Total
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic:
Commercial and Financial $12,893 $ 8,498 $3,581 $24,972
Commercial Real Estate 1,961 3,075 614 5,650
Foreign(a) 8,849 3,875 5,591 18,315
-------------------------------------------------------------------------------------------------------
Total $23,703 $15,448 $9,786 $48,937
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Loans at Fixed Interest Rates $ 1,781 $ 813
Loans at Variable Interest Rates 13,667 8,973
-------------------------------------------------------------------------------------------------------
Total $15,448 $9,786
-------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans previously classified as LDC loans.
(b) Includes demand loans, overdrafts and loans having no stated schedule of
repayments and no stated maturity.
<TABLE>
<CAPTION>
RISK ELEMENTS
The following table shows the principal amounts of
nonaccrual and renegotiated loans at the dates indicated:
December 31, (in millions) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing Loans:
Domestic $581 $1,661 $2,974 $3,099 $2,984
Foreign(a) 307 889 1,837 1,515 2,804
-------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 888 2,550 4,811 4,614 5,788
-------------------------------------------------------------------------------------------------------
Renegotiated Loans:
Domestic 37 37 -- 7 21
Foreign(a) 4 4 5 7 16
-------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 41 41 5 14 37
-------------------------------------------------------------------------------------------------------
Total $929 $2,591 $4,816 $4,628 $5,825
-------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans previously classified as LDC loans. Previously reported loan
amounts have been reclassified to conform with the 1994 presentation.
See Note 7, "Nonperforming Assets", on pages 55 and 56 of Section B for
interest income calculated on the carrying value of nonaccrual and renegotiated
loans that would have been recorded had these loans been current in accordance
with their original terms (interest at original rates), and the amount of
interest income on these loans that was included in income for the periods
indicated.
The following table presents loans past due 90 days or more for which
interest is being accrued at the dates indicated:
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic(a) $330 $323 $393 $393 $342
Foreign -- -- -- 30 25
-------------------------------------------------------------------------------------------------------
Total $330 $323 $393 $423 $367
-------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes consumer loans, exclusive of residential mortgage loans, as to
which interest or principal is past due 90 days or more which are generally
not classified as nonperforming but, rather, are charged off on a formula
basis upon reaching certain specified stages of delinquency.
A16
<PAGE> 19
ALLOWANCE FOR CREDIT LOSSES
The table below sets forth the Allowance for Credit Losses for the dates
indicated:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $3,020 $ 3,025 $3,275 $4,229 $5,313
Provision for Losses 550 1,259(c) 1,365 1,345 1,161
CHARGE-OFFS
Domestic:
Commercial and Financial (206) (496) (511) (528) (325)
Consumer (458) (467)(c) (449) (456) (248)
Commercial Real Estate (201) (259) (302) (265) (287)
Foreign(a) (401)(b) (402) (494) (1,228)(f) (1,572)(g)
--------------------------------------------------------------------------------------------------------
Total Charge-Offs (1,266) (1,624) (1,756) (2,477) (2,432)
--------------------------------------------------------------------------------------------------------
RECOVERIES
Domestic:
Commercial and Financial 126 74 61 70 67
Consumer 63 48 49 46 51
Commercial Real Estate 36 15 12 12 10
Foreign 94 206(d) 25 44 47
--------------------------------------------------------------------------------------------------------
Total Recoveries 319 343 147 172 175
--------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS (947) (1,281) (1,609) (2,305) (2,257)
Charge for Assets Transferred to
Held-for-Accelerated Disposition (148) -- -- -- --
Other 5 17(e) (6) 6 12
--------------------------------------------------------------------------------------------------------
Balance at End of Year $2,480 $3,020 $3,025 $3,275 $4,229
--------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes losses on LDC sales and swaps. Previously reported amounts have
been reclassified to conform with the 1994 presentation.
(b) Includes $291 million related to management's final evaluation of the LDC
portfolio. For a further discussion, see the section entitled "Net
Charge-Offs" in Section B on page 27.
(c) Includes $55 million related to the decision to accelerate the disposition
of certain nonperforming residential mortgage loans.
(d) Includes $175 million of recoveries on the disposition of LDC debt.
(e) Includes $19 million increase in allowance related to the acquisition
by Texas Commerce of certain assets of First City Bancorporation of
Texas, Inc.
(f) Includes a $902 million charge to adjust Brazilian medium- and long-term
outstandings to an estimated net recoverable value.
(g) Includes a $349 million charge related to the Mexican debt restructuring
agreement. This amount represents the difference between the carrying value
of the debt exchanged and the face value of the bonds received.
ALLOWANCE FOR CREDIT LOSSES-FOREIGN
The following table shows the changes in the portion of the allowance for credit
losses allocated to loans related to foreign operations, including activity
related to countries engaged in debt rescheduling:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $665 $887 $1,337 $2,464 $4,028
Provision for Losses 8 174 225 52 20
Charge-offs(a) (401) (402) (494) (1,228) (1,572)
Recoveries 94 206 25 44 47
Transfer from (to) Domestic Allowance -- (200) (200) -- (65)
Other 3 -- (6) 5 6
---------------------------------------------------------------------------------------------------------
Balance at End of Year $369 $665 $887 $1,337 $2,464
---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes losses on LDC sales and swaps. Previously reported amounts have
been reclassified to conform with the 1994 presentation.
The consolidated year-end allowance for credit losses is available to absorb
potential credit losses from the entire loan portfolio, as well as from other
balance sheet and off-balance sheet credit-related transactions.
A17
<PAGE> 20
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
LOAN LOSS ANALYSIS
Year Ended December 31, (in millions) 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES
Loans-Average $75,234 $78,739 $82,173 $84,520 $84,727
Loans-Year End 78,767 75,381 82,010 84,237 85,685
Net Charge-Offs(a) 1,095(b) 1,281 1,609 2,305 2,257
Allowance for Credit Losses 2,480 3,020 3,025 3,275 4,229
Nonperforming Loans 929 2,591 4,816 4,628 5,825
RATIOS
Net Charge-Offs to:
Loans-Average 1.46% 1.63% 1.96% 2.73% 2.66%
Allowance for Credit Losses 44.15 42.42 53.19 70.38 53.37
Allowance for Credit Losses to:
Loans-Year End 3.15 4.01 3.69 3.89 4.94
Nonperforming Loans 266.95 116.56 62.81 70.76 72.60
-----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes losses on LDC sales and swaps. Previously reported amounts have
been reclassified to conform with the 1994 presentation.
(b) Includes a $148 million charge for assets transferred to held for
accelerated disposition.
DEPOSITS
The following data provide a summary of the Corporation's average deposits and
average interest rates for the years 1994-1992:
<TABLE>
<CAPTION>
Average Balances Average Interest Rates
(in millions, except interest rates) 1994 1993 1992 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Noninterest-Bearing Demand $21,723 $21,750 $18,989 --% --% --%
Interest-Bearing Demand 6,556 6,456 5,547 1.36 1.60 2.17
Savings 26,812 27,553 26,641 2.43 2.22 2.67
Time 15,621 18,831 19,856 3.89 3.79 4.54
------------------------------------------------------------------------------------------------------------------
Total Domestic Deposits 70,712 74,590 71,033 1.91 1.91 2.44
------------------------------------------------------------------------------------------------------------------
Foreign:
Noninterest-Bearing Demand 165 157 345 -- -- --
Interest-Bearing Demand 8,893 7,969 6,111 4.28 4.87 5.72
Savings 23 43 82 2.98 2.48 1.72
Time 14,970 12,897 15,179 4.32 3.28 5.16
------------------------------------------------------------------------------------------------------------------
Total Foreign Deposits(a) 24,051 21,066 21,717 4.27 3.86 5.22
------------------------------------------------------------------------------------------------------------------
Total Deposits $94,763 $95,656 $92,750 2.51% 2.34% 3.09%
------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Substantially all of the foreign deposits are in denominations of $100,000
or more.
The following table presents deposits by maturity range and type for the
dates indicated:
<TABLE>
<CAPTION>
Domestic Time Other Domestic Deposits in
Certificates of Deposit Time Deposits Foreign Offices
Deposits (in millions) ($100,000 or More) ($100,000 or More) ($100,000 or More)
----------------------------------------------------------------------------------------------------------------
By remaining maturity at December 31, 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------
Three Months or Less $3,402 $3,370 $2,088 $3,752 $25,682 $21,145
Over Three Months but within Six Months 469 503 7 40 1,204 1,208
Over Six Months but within Twelve Months 460 311 6 20 1,227 368
Over Twelve Months 849 1,047 68 104 195 173
----------------------------------------------------------------------------------------------------------------
Total $5,180 $5,231 $2,169 $3,916 $28,308 $22,894
----------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1994, time and savings deposits in domestic offices totaled
$46,799 million, of which $5,180 million were time certificates of deposit in
denominations of $100,000 or more, $2,169 million were other time deposits in
denominations of $100,000 or more, and $31,386 million were money market deposit
accounts and other savings accounts. Deposits of $100,000 or more in foreign
offices totaled $28,308 million, substantially all of which were
interest-bearing.
At December 31, 1993, time and savings deposits in domestic offices totaled
$51,940 million, of which $5,231 million were time certificates of deposit in
denominations of $100,000 or more, $3,916 million were other time deposits in
denominations of $100,000 or more, and $34,290 million were money market deposit
accounts and other savings accounts. Deposits of $100,000 or more in foreign
offices totaled $22,894 million, substantially all of which were
interest-bearing.
A18
<PAGE> 21
--------------------------------------------------------------------------------
ITEM 2: PROPERTIES
The headquarters of the Corporation is located in New York City at 270 Park
Avenue, which is a 50-story bank and office building owned by the Corporation.
This location contains approximately 1.3 million square feet of commercial
office and retail space. The Corporation also owns and occupies a 22-story bank
and office building at 4 New York Plaza with 900,000 square feet of commercial
office and retail space. The Corporation also occupies, under leasehold
agreements, office space at 55 Water Street, 95 Wall Street and various other
locations in New York City.
The Corporation, as lessee, also occupies offices in the United Kingdom. The
most significant office space leased in the United Kingdom is 168,000 square
feet at 125 London Wall, which lease expires in December 2017.
In addition, the Corporation and its subsidiaries own and occupy
administrative and operational facilities in Hicksville, New York; Moorestown,
New Jersey; Houston, Texas; McAllen, Texas; Austin, Texas; Arlington, Texas and
El Paso, Texas.
The Corporation and its subsidiaries occupy branch offices and other
locations throughout the United States and in foreign countries under various
types of ownership and leasehold agreements which, when considered in the
aggregate, are not material to its operations.
--------------------------------------------------------------------------------
ITEM 3: LEGAL PROCEEDINGS
The Securities and Exchange Commission has commenced an investigation relating
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 (for a further description, see the section entitled "Noninterest
Revenue" in Section B at page 20). 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
A19
<PAGE> 22
--------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Positions and offices held
Name Age with the Corporation and with Chemical Bank
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Walter V. Shipley 59 Effective January 1, 1994, Chairman and Chief Executive Officer of the
Corporation and Chemical Bank. From the Merger until December 31,
1993, President of the Corporation and Chemical Bank. Prior to the Merger,
Mr. Shipley had served as Chairman and Chief Executive Officer of
Chemical Banking Corporation and Chemical Bank since 1983. Director of
the Corporation and Chemical Bank since 1982.
Edward D. Miller 54 Effective January 1, 1994, President of the Corporation and Chemical Bank.
From the Merger until December 31, 1993, Vice Chairman of the
Corporation and Chemical Bank. A Director of the Corporation and
Chemical Bank since the Merger. Prior to the Merger, Mr. Miller had served
as a Vice Chairman and a Director of MHC since December 1988.
William B. Harrison Jr. 51 Vice Chairman of the Corporation and Chemical Bank. A Director of the
Corporation since the Merger and of Chemical Bank since August 1990.
Prior to the Merger, Mr. Harrison had been an Executive Officer of the
Corporation since 1988.
Peter J. Tobin 51 Executive Vice President and Chief Financial Officer of the Corporation and
Chemical Bank. Prior to the Merger, Mr. Tobin had served in the same
capacity for MHC since December 1985.
William C. Langley 56 Executive Vice President and Chief Credit and Risk Policy Officer of the
Corporation and Chemical Bank. Prior to the Merger, Mr. Langley had
served as Executive Vice President of MHC since 1983.
</TABLE>
Unless otherwise noted, all of the Corporation's above-named executive officers
have continuously held senior-level positions with the Corporation and Chemical
Bank during the five fiscal years ended December 31, 1994. There are no family
relationships among the foregoing executive officers.
A20
<PAGE> 23
PART II
-------------------------------------------------------------------------------
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of the Corporation's Common Stock are listed on the New
York Stock Exchange and the International Stock Exchange of the United Kingdom
and the Republic of Ireland. For the quarterly high and low prices of the
Common Stock on the New York Stock Exchange and the quarterly dividends
declared data for the Corporation's common stock for the last two years, see
the section entitled "Quarterly Financial Information" in Section B, page 73.
At February 28, 1995, there were approximately 52,900 holders of record of
the Corporation's Common Stock.
-------------------------------------------------------------------------------
ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see "Financial Review" in Section B,
page 15.
-------------------------------------------------------------------------------
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations, entitled "Management's Discussion and Analysis", appears in Section
B, pages 16 through 42.
-------------------------------------------------------------------------------
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements appear, together with the Notes thereto
and the report of Price Waterhouse LLP dated January 17, 1995 thereon, in
Section B, pages 43 through 72.
Supplementary financial data for each full quarter within the two years
ended December 31, 1994 are included in Section B, page 73 in the table
entitled "Quarterly Financial Information". Also included in Section B,
pages 74 and 75, are the "Average Consolidated Balance Sheet, Interest and
Rates" and the "Consolidated Balance Sheet" for Chemical Bank and Subsidiaries.
-------------------------------------------------------------------------------
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
A21
<PAGE> 24
PART III
--------------------------------------------------------------------------------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
See Item 13 below.
--------------------------------------------------------------------------------
ITEM 11: EXECUTIVE COMPENSATION
See Item 13 below.
--------------------------------------------------------------------------------
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13 below.
--------------------------------------------------------------------------------
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G (3) to Form 10-K, the information to be provided by
Items 10, 11, 12 and 13 of Form 10-K (other than information pursuant to Rule
402 (i), (k) and (l) of Regulation S-K) are incorporated by reference to the
Corporation's definitive proxy statement for the annual meeting of stockholders,
to be held May 16, 1995, which proxy statement will be filed with Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the close of
the Corporation's 1994 fiscal year.
A22
<PAGE> 25
PART IV
--------------------------------------------------------------------------------
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS
1. Financial Statements
The consolidated financial statements, the Notes thereto and the report
thereon listed in Item 8 are set forth in Section B, commencing on page 43
thereof.
2. Financial Statement Schedules
None.
3. EXHIBITS
3.1 (a) Restated Certificate of Incorporation of Chemical Banking
Corporation (incorporated by reference to Exhibit 3.1 of the Annual
Report on Form 10-K dated December 31, 1993 of Chemical Banking
Corporation).
3.1 (b) Certificate of Designations of Adjustable Rate Cumulative Preferred
Stock, Series L (incorporated by reference to Exhibit 2 to the
Registration Statement on Form 8-A dated June 6, 1994 of Chemical
Banking Corporation).
3.2 By-laws of Chemical Banking Corporation, as amended (incorporated
by reference to Exhibit 3.2 of the Annual Report on Form 10-K dated
December 31, 1993 of Chemical Banking Corporation).
4.1 (a) Form of Rights Agreement, dated as of April 13, 1989 between
Chemical Banking Corporation and Harris Trust Company of New York,
as amended (incorporated by reference to Exhibit 4 to the Current
Report on Form 8-K of Chemical Banking Corporation dated April 13,
1989).
4.1 (b) Letter of Appointment dated December 23, 1991 of Chemical Banking
Corporation appointing Chemical Bank, as successor Rights Agent
under the Rights Agreement (incorporated by reference to Exhibit
4.13(b) of the Annual Report on Form 10-K dated December 31, 1991
of Chemical Banking Corporation).
4.2 Form of Indenture dated as of December 1, 1989 between Chemical
Banking Corporation and The Chase Manhattan Bank (National
Association), which Indenture includes the form of Debt
Securities (incorporated by reference to Exhibit 4.9 to the
Registration Statement on Form S-3 (File No. 33-32409) of Chemical
Banking Corporation).
4.3 Form of Indenture dated as of April 1, 1987, as amended and
restated as of December 15, 1992, between Chemical Banking
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, which Indenture includes the form of Subordinated Debt
Securities (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K dated December 22, 1992 of Chemical Banking
Corporation).
4.4 (a) Form of Indenture dated as of June 1, 1982 between Manufacturers
Hanover Corporation and Morgan Guaranty Trust Company of New York,
as succeeded to by First Trust of New York (National Association),
as Trustee, which Indenture includes the form of Debt Securities
(incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-3 (File No. 2-82433) of Manufacturers Hanover
Corporation).
4.4 (b) Form of First Supplemental Indenture dated as of January 15, 1986
to the Indenture dated as of June 1, 1982 between Manufacturers
Hanover Corporation and Morgan Guaranty Trust Company of New York,
as succeeded to by First Trust of New York (National Association),
as Trustee, relating to the Senior Debt Securities (incorporated by
reference to Exhibit 1 to the Current Report on Form 8-K dated as
of January 29, 1986 of Manufacturers Hanover Corporation).
4.4 (c) Form of Second Supplemental Indenture dated as of March 13, 1991 to
the Indenture dated as of June 1, 1982 between Manufacturers
Hanover Corporation and Morgan Guaranty Trust Company of New York,
as succeeded to by First Trust of New York (National Association),
as Trustee, relating to the Senior Debt Securities (incorporated by
reference to Exhibit 4 to the Current Report on Form 8-K dated
March 19, 1991 of Manufacturers Hanover Corporation).
A23
<PAGE> 26
4.4 (d) Form of Third Supplemental Indenture dated as of December 31, 1991
among Chemical Banking Corporation, Manufacturers Hanover
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, to the Indenture dated as of June 1, 1982 (incorporated by
reference to Exhibit 4.14(d) of the Annual Report on Form 10-K
dated December 31, 1991 of Chemical Banking Corporation).
4.5 (a) Form of Indenture dated as of June 1, 1985 between Manufacturers
Hanover Corporation and IBJ Schroder Bank and Trust Company, as
Trustee, relating to 8 1/2% Subordinated Capital Notes Due February
15, 1999 (incorporated by reference to Exhibit 4 (b) to the Current
Report on Form 8-K dated February 27, 1987 of Manufacturers Hanover
Corporation).
4.5 (b) Form of First Supplemental Indenture dated as of December 31, 1991
among Chemical Banking Corporation, Manufacturers Hanover
Corporation and IBJ Schroder Bank and Trust Company to the
Indenture dated June 1, 1985 (incorporated by reference to Exhibit
4.18(b) to the Annual Report on Form 10-K dated December 31, 1991
of Chemical Banking Corporation).
4.6 (a) Form of Indenture dated as of May 15, 1993 between Margaretten
Financial Corporation and The Bank of New York, as Trustee,
relating to the 6 3/4% Notes due June 15, 2000 (incorporated by
reference to Exhibit 4(a) to Registration Statement on Form S-3
(No. 33-60262) of Margaretten Financial Corporation).
4.6 (b) Form of Supplemental Indenture dated as of July 22, 1994 to the
Indenture dated as of May 15, 1993 among Margaretten Financial
Corporation, Chemical Banking Corporation and The Bank of New York,
as Trustee, and Guarantee dated as of July 22, 1994 by Chemical
Banking Corporation (incorporated by reference to Exhibit 4.34 to
the Current Report on Form 8-K dated September 28, 1994 of Chemical
Banking Corporation).
10.1 Stock Purchase Agreement, dated as of September 18, 1989, between
the Dai-Ichi Kangyo Bank, Limited as Purchaser and Manufacturers
Hanover Corporation as Seller (incorporated by reference to the
Current Report on Form 8-K dated September 25, 1989 of
Manufacturers Hanover Corporation).
10.2 Stockholder's Agreement, dated as of December 29, 1989, among The
CIT Group Holdings, Inc., The Dai-Ichi Kangyo Bank, Limited and
Manufacturers Hanover Corporation (incorporated by reference to
the Current Report on Form 8-K dated January 16, 1990 of
Manufacturers Hanover Corporation).
10.3 CIT Stock Purchase Agreement, dated as of September 18, 1989
between The Dai-Ichi Kangyo Bank, Limited as Purchaser and
Manufacturers Hanover Corporation as Seller (incorporated by
reference to the Current Report on Form 8-K dated September 25,
1989 of Manufacturers Hanover Corporation).
10.4 Key Executive Performance Plan of Chemical Banking Corporation.
10.5 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993.
10.6 Deferred Compensation Plan for Non-Employee Directors of Chemical
Banking Corporation and Chemical Bank, as amended and restated
effective December 15, 1992 (incorporated by reference to Exhibit
10.6 to the Annual Report on Form 10-K for the year ended
December 31, 1992 of Chemical Banking Corporation).
10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as
amended and restated as of May 19, 1992 (incorporated by reference
to Exhibit 10.7 to the Annual Report on Form 10-K for the year
ended December 31, 1992 of Chemical Banking Corporation).
A24
<PAGE> 27
10.8 Forms of employment agreements as entered into by Chemical Banking
Corporation and certain of its executive officers (incorporated by
reference to Exhibit 10.9 to the Annual Report on Form 10-K for the
year ended December 31, 1992 of Chemical Banking Corporation).
10.9 Post-Retirement Compensation Plan for Non-Employee Directors, as
amended and restated as of December 15, 1992 (incorporated by
reference to Exhibit 10.10 to the Annual Report on Form 10-K
for the year ended December 31, 1992 of Chemical Banking
Corporation).
10.10 Executive Cash Plan for Retirement of Chemical Banking Corporation
and Certain Affiliates, as amended and restated effective January
1, 1991 (incorporated by reference to Exhibit 10.11 to the Annual
Report on Form 10-K for the year ended December 31, 1992
of Chemical Banking Corporation).
10.11 Permanent Life Insurance Options Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K for the year ended
December 31, 1992 of Chemical Banking Corporation).
11.1 Computation of Net Income per Common Share.
12.0 Computation of ratio of earnings to fixed charges.
12.1 Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements.
21.1 List of Subsidiaries of Chemical Banking Corporation.
22.1 Annual Report on Form 11-K of the Chemical Savings Plan of Chemical
Bank and Certain Affiliates (to be filed by amendment pursuant to
Rule 15d-21 under the Securities Exchange Act of 1934).
22.2 Annual Report on Form 11-K of the Margaretten Financial Corporation
Savings Plan (to be filed by amendment pursuant to Rule 15d-21
under the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
The Corporation hereby agrees to furnish to the Commission, upon request, copies
of instruments defining the rights of holders for the following outstanding
nonregistered long-term debt of the Corporation and its subsidiaries: Floating
Rate Subordinated Note Due 1998 of the Corporation; Subordinated Floating Rate
Notes Due 2003 of the Corporation; Floating Rate Note Due 2002 of the
Corporation; Zero-Coupon Note Due 2002 of the Corporation; Serial Zero Coupon
Guaranteed Notes Due 1984-2003 of the Corporation; 7 1/4% Subordinated Notes Due
2002 of Chemical Bank; 7% Subordinated Notes Due 2005 of Chemical Bank; Floating
Rate Subordinated Notes Due May 5, 2003 of Chemical Bank; Floating Rate
Subordinated Notes Due June 15, 2000 of Chemical Bank; Floating Rate
Subordinated Notes Due July 29, 2003 of Chemical Bank; 6.58% Subordinated Notes
Due 2005 of Chemical Bank; 6.70% Subordinated Notes Due 2008 of Chemical Bank;
6.125% Subordinated Notes Due 2008 of Chemical Bank; Adjustable Rate Notes Due
April 1, 2011 of Texas Commerce Bancshares, Inc.; Floating Rate Subordinated
Notes Due 1997 of Manufacturers Hanover Corporation; Floating Rate Subordinated
Capital Notes Due April 1997 of Manufacturers Hanover Trust Company; and LIBOR
Note, Series C, Due March 1998 of Manufacturers Hanover Corporation. These
instruments have not been filed as exhibits hereto by reason that the total
amount of each issue of such securities does not exceed 10% of the total assets
of the Corporation and its subsidiaries on a consolidated basis.
(b) REPORTS ON FORM 8-K
- A Current Report on Form 8-K dated October 20, 1994 was filed setting forth
the Corporation's financial results for the 1994 third quarter.
- A Current Report on Form 8-K dated December 1, 1994 was filed announcing a
two-year program designed to increase the Corporation's earnings per share.
A25
<PAGE> 28
SECTION B
---------
Pages 1 - 13 not used
A26
<PAGE> 29
Financial Report Page Number in
B Section
Financial Review 15
Management's Discussion and Analysis:
Overview 16
Actions to Improve Earnings Per Share 16
Results of Operations 17
Business Organization 22
Loan Portfolio 25
Derivative and Foreign Exchange Financial Instruments 31
Risk Management 31
Capital and Liquidity 37
Other Events 40
Accounting Developments 40
Comparison Between 1993 and 1992 41
Management's Report on Responsibility for Financial Reporting 43
Report of Independent Accountants 43
Consolidated Financial Statements 44
Notes to Consolidated Financial Statements 48
Supplemental Schedules:
Quarterly Financial Information 73
Average Consolidated Balance Sheet, Interest and Rates 74
Chemical Bank Consolidated Balance Sheet 75
14
<PAGE> 30
Chemical Banking Corporation
and Subsidiaries
Financial Review(a)
<TABLE>
<CAPTION>
(in millions, except per share, ratio and unit data)
As of or for the year ended December 31, 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net Interest Income $ 4,674 $ 4,636 $ 4,598 $ 4,080 $ 3,539
Provision for Losses 550 1,259 1,365 1,345 1,161
Noninterest Revenue 3,597 4,024 3,026 2,862 2,792
Noninterest Expense 5,509 5,293 4,930 5,307 4,641
Income Before Income Tax Expense
and Effect of Accounting Changes 2,212 2,108 1,329 290 529
Income Tax Expense 918 539 243 136 89
Net Effect of Changes in Accounting Principles -- 35 -- -- --
Net Income $ 1,294 $ 1,604 $ 1,086 $ 154 $ 440
----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income Before Effect of Accounting Changes $ 4.64 $ 5.63 $ 3.90 $ .11 $ 1.84
Net Effect of Changes in Accounting Principles -- .14 -- -- --
Net Income 4.64 5.77 3.90 .11 1.84
Book Value at December 31, 37.88 37.60 32.43 31.02 32.80
Market Value at December 31, 35.88 40.13 38.63 21.25 10.75
Cash Dividends Declared 1.64 1.37 1.20 1.05 2.29
Cash Dividends Declared Per Class B -- -- --(b) .29 .64
----------------------------------------------------------------------------------------------------------------------------
PRO FORMA(c)
Net Income $ 1,446 $ 1,305 $ 784 $ 540 $ 402
Net Income Per Common Share 5.25 4.58 2.64 2.24 1.63
Return on Average Common Stockholders' Equity 13.94% 13.22% 8.37% 6.74% 4.74%
----------------------------------------------------------------------------------------------------------------------------
TOTAL AT YEAR-END
Loans $ 78,767 $ 75,381 $ 82,010 $ 84,237 $ 85,685
Securities 26,997 25,948 23,426 19,763 19,242
Total Assets 171,423(d) 149,888 139,655 138,930 136,249
Deposits 96,506 98,277 94,173 92,950 89,147
Long-Term Debt 7,991 8,192 6,798 5,738 5,764
Total Stockholders' Equity 10,712 11,164 9,851 7,281 7,238
----------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on Average:
Total Assets .78%(d) 1.11% .78% .11% .30%
Common Stockholders' Equity 12.32 16.66 12.36 .33 5.38
Total Stockholders' Equity 11.80 15.16 11.65 2.02 5.94
Common Dividend Payout 35 24 32 1,280 146
Efficiency Ratio(e) 63 58 61 65 70
----------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Tier 1 Leverage 5.95%(d) 6.77% 6.60% 4.74% 4.48%
Tier 1 Risk-Based Capital Ratio 8.20 8.12 7.33 5.13 5.16
Total Risk-Based Capital Ratio 12.35 12.22 11.55 9.13 9.40
----------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Average Common Shares and Common Stock
Equivalents Outstanding 249.3 251.2 240.4 181.4 174.7
Number of Employees 42,130 41,567 39,687 43,169 45,636
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On December 31, 1991, Manufacturers Hanover Corporation ("MHC") merged with
and into Chemical Banking Corporation (the "merger"). The merger was accounted
for as a pooling of interests and, accordingly, all amounts include the
consolidated results of MHC. (b) In March 1992, the Class B Common Stock was
converted into the Corporation's Common Stock. (c) The Corporation recognized
its remaining Federal income tax benefits in 1993. The pro forma section
presents the earnings prior to 1994 on a fully-taxed basis and excludes the
impact of the $260 million restructuring charge in 1994, the $115 million
merger-related charge and $35 million benefit of accounting changes in 1993, the
$625 million restructuring charge in 1991 and the $152 million restructuring
charge in 1990. (d) On January 1, 1994, the Corporation adopted Financial
Accounting Standards Board ("FASB") Interpretation No. 39 ("FASI 39"), which
increased total assets and total liabilities by approximately $16.0 billion, at
December 31, 1994, and total average assets and total average liabilities by
$16.1 billion for the year 1994. Excluding the impact of FASI 39, the return on
average assets for 1994 was 0.86%. (e) Excludes restructuring charges,
foreclosed property expense and emerging markets past-due interest bond sales.
15
<PAGE> 31
Management's Discussion and Analysis
OVERVIEW
Chemical Banking Corporation's (the "Corporation") net income for 1994,
including a fourth-quarter restructuring charge of $260 million ($152 million
after-tax), was $1,294 million, or $4.64 per share. Reported 1993 net income was
$1,604 million, or $5.77 per share, which included the recognition of remaining
income tax benefits of $331 million, a $115 million merger-related charge ($67
million after-tax), and a net positive impact of $35 million related to
accounting changes.
Net income, before the fourth-quarter restructuring charge, was $1,446
million, or $5.25 per common share. These 1994 results reflected an 11% increase
from comparable pro forma earnings of $1,305 million, or $4.58 per common share,
in 1993.
Despite a difficult operating environment, 1994 was a year of progress for
the Corporation. The year reflected solid performances in several core
businesses, a significant reduction in credit costs, and strategic initiatives
undertaken by the Corporation which management believes will result in
continuous improvements in its financial results going forward. For a discussion
of these initiatives, see Actions to Improve Earnings Per Share which follows.
During 1994, significant capital actions were completed reflecting
management's continued positive outlook for the Corporation. In September, the
Corporation increased the quarterly cash dividend on its outstanding common
stock to $0.44 per share, a 16% increase from the quarterly dividend of $0.38.
On an annual basis, the dividend rate increased to $1.76 per share from $1.52
per share. Since March 1993, the Corporation has increased the common dividend
by 47%. In addition, during 1994, the Corporation completed the repurchase of 10
million shares of its common stock in the open market under a stock repurchase
plan originally announced in May 1994 and announced plans to repurchase an
additional 6 million shares in 1995 (see Actions to Improve Earnings Per Share).
On July 1, 1994, the Corporation completed a tender offer for the outstanding
common stock and the depositary shares representing the preferred stock of
Margaretten Financial Corporation ("Margaretten"), an organization whose primary
business is the origination and servicing of mortgages nationwide. Margaretten's
results of operations have been included in the Corporation's consolidated
financial statements from the date of the acquisition.
The Corporation's nonperforming assets at December 31, 1994 were $1.14
billion, a decline of 68% from $3.53 billion at year-end 1993. The reduction in
nonperforming assets is largely attributable to the continued improvement in the
Corporation's credit profile as well as the planned sale of approximately $735
million of real estate assets (approximately $580 million nonperforming)
designated as Assets Held for Accelerated Disposition. Nonperforming assets were
0.7% of total assets at the end of 1994, compared with 2.4% at December 31,
1993. At December 31, 1994, the allowance for credit losses was 267% of
nonperforming loans, compared with 117% at the same date a year ago.
At December 31, 1994, the Corporation's ratios of Tier 1 Capital to
risk-weighted assets and Total Capital to risk-weighted assets were 8.20% and
12.35%, respectively, well in excess of the minimum ratios specified by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). At
December 31, 1994, the Corporation was "well capitalized" as defined by the
Federal Reserve Board. These ratios were 8.12% and 12.22%, respectively, at
December 31, 1993.
[GRAPH 1-See Appendix I]
[GRAPH 2-See Appendix I]
--------------------------------------------------------------------------------
ACTIONS TO IMPROVE EARNINGS PER SHARE
On December 1, 1994, the Corporation announced a two-year program (the "Actions
to Improve Earnings Per Share") designed to produce earnings per share growth of
more than 15% in 1995 and in 1996, as well as an efficiency ratio of 57% and a
return on common stockholders' equity of 16% by 1996.
To achieve these performance goals, the Corporation plans to reduce its
existing cost base by $440 million ($230 million in 1995) as a result of a
number of actions, including the elimination of 3,700 positions and
expense-reduction initiatives. At the same time, the Corporation intends to
focus $180 million of new investment spending in a number of its high-growth
businesses while maintaining its commitment to a disciplined and strategic use
of its capital. Management believes the net result of these and other
initiatives should be flat expenses in 1995 and 1996, as well as the achievement
of annual revenue growth of 4% to 6%.
To cover the costs associated with severance and the disposition of certain
facilities, the Corporation recorded a pre-tax re-
16
<PAGE> 32
structuring charge of $260 million in the 1994 fourth quarter. For further
discussion of this restructuring charge, see the Noninterest Expense section of
Management's Discussion and Analysis on page 20 and Note Sixteen of the
Consolidated Financial Statements.
The Corporation also announced its intention to sell approximately 60% of
Chemical Bank New Jersey, N.A. and to integrate the remaining branches in the
northeast quadrant of New Jersey into the Regional Bank's consumer and middle
market franchise serving metropolitan New York. For a discussion of the
agreement to sell Chemical Bank New Jersey, N.A., see the Other Events Section
on page 40. The Corporation also announced that it is exploring options to sell
or substantially reduce its 40% investment in The CIT Group Holdings, Inc.
("CIT").
In addition, the Corporation announced plans to repurchase up to 6 million
shares of its common stock during 1995. This follows the aforementioned buyback
program of 10 million shares completed during 1994. The Corporation will
consider expanding the new stock buyback program upon completion of the
contemplated divestitures.
In December 1994, the Corporation also 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.
Management believes the Corporation's plans, as described above, will enhance
shareholder value in 1995 and 1996. The Corporation intends to monitor and
measure its success in terms of demonstrable improvements in its core net
income, earnings per share and return on common stockholders' equity.
Because the Corporation's markets are highly competitive and because certain
factors affecting the Corporation's revenues (such as interest rates and the
volatility of the trading environment) are not within the Corporation's control,
there can be no assurance the Corporation's plans will achieve its financial
performance goals as described above.
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET INTEREST INCOME
Year Ended December 31, (in millions) 1994 1993
----------------------------------------------------------------
<S> <C> <C>
Total Interest Income $9,088 $8,403
Total Interest Expense 4,414 3,767
----------------------------------------------------------------
Net Interest Income 4,674 4,636
Taxable-Equivalent Adjustment(a) 24 21
----------------------------------------------------------------
Net Interest Income-Taxable Equivalent Basis $4,698 $4,657
----------------------------------------------------------------
</TABLE>
(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 was $4,674 million in 1994, compared
with $4,636 million in 1993. The rise in 1994 was attributable to an increase in
average interest-earning assets, which more than offset the effect of rising
interest rates.
Average interest-earning assets were $130.0 billion in 1994, an increase of
4% from 1993, reflecting a higher level of liquid assets and securities. The
composition of average interest-earning assets shifted during the latter part of
1993 and early part of 1994 to support the Corporation's trading businesses. 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:
<TABLE>
<CAPTION>
AVERAGE EARNING ASSET MIX
Year Ended December 31, (in billions) 1994 1993
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Loans $ 75.2 58% $ 78.7 63%
Securities 26.2 20 23.7 19
Liquid Assets 28.6 22 22.5 18
--------------------------------------------------------------------------------------
Total $130.0 100% $124.9 100%
--------------------------------------------------------------------------------------
Interest Rate Spread 3.07% 3.20%
--------------------------------------------------------------------------------------
Net Yield on Interest-Earning Assets 3.61% 3.73%
-------------------------------------------------------------------------------------
</TABLE>
The Corporation's average total loans in 1994 were $75.2 billion, compared
with $78.7 billion in 1993. The decline reflected lower commercial loan
outstandings of $5.3 billion (due to paydowns from businesses refinancing their
borrowings in the debt and equity markets and the Corporation's ongoing loan
syndication and distribution activities) and a reduction of $1.4 billion in
commercial real estate loans, partially offset by a $3.2 billion increase in
higher-yielding consumer loans (principally from residential mortgage and credit
card activities). Although average commercial loan outstandings were lower in
1994 than in 1993, commercial loan outstandings at year-end 1994 had increased
from the June 30, 1994 level due to an upward trend in commercial lending
activity experienced during the latter half of 1994. In 1995, the Corporation
expects continued growth in its loan portfolio, with its consumer loans
continuing to grow faster than its commercial loans.
The growth in interest-earning assets was funded by a $5.6 billion increase
in interest-bearing liabilities. For 1994, average interest-bearing liabilities
were $112.1 billion, compared with $106.5 billion for 1993, 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 in 1994
was $65 million, a decrease from $111 million in 1993. The improvement is
principally due to the significant reduction in the level of the Corporation's
nonperforming loans.
17
<PAGE> 33
Management's Discussion and Analysis
The favorable impact on net interest income from the Corporation's risk
management activities, where certain assets and liabilities were hedged with
derivatives which alter the yield on these assets and liabilities, was
approximately $190 million in 1994 and $280 million in 1993.
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 3.07% for 1994, compared with 3.20% for 1993. 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 3.61% in 1994, compared with 3.73% in 1993. The
interest rate spread and net yield were negatively affected by the
aforementioned shift in the Corporation's balance sheet asset mix to
lower-yielding liquid assets, partially offset by the smaller negative impact
from nonperforming loans and a lag in repricing of certain liabilities. The
contribution from interest-free funds to the net yield in 1994 was 54 basis
points, a slight increase from 53 basis points in 1993.
Despite its outlook for loan growth in 1995, management anticipates that net
interest income will be somewhat lower than in 1994. Contributing factors
include continuing pricing pressures in the loan and deposit markets and the
expectation of higher interest rate levels in 1995. For a more complete
discussion of the Corporation's sensitivity to interest rates, see the
Asset/Liability Management section on page 34.
For additional information on average balances and net interest income, see
Average Consolidated Balance Sheet, Interest and Rates on page 74.
PROVISION FOR LOSSES
The provision for losses in 1994 was $550 million, compared with $1,259 million
in 1993, a decline of 56%.
As a result of management's evaluation of the continuing improvement in the
Corporation's credit profile, the provision for losses in 1994 was lower than
the Corporation's net charge-offs. The Corporation anticipates that this trend
will continue into 1995.
Management expects that the quarterly provision for losses in 1995 will rise
from the 1994 fourth-quarter's level of $85 million. The increase is due to a
lower level of expected loan recoveries (versus fourth-quarter 1994) as well as
the impact of anticipated higher consumer net charge-offs, a consequence of the
continuing growth in consumer loans.
NONINTEREST REVENUE
Noninterest revenue totaled $3,597 million in 1994, compared with $4,024 million
in 1993. The decrease from the prior year reflected lower trading revenue, a
decline in securities gains, and a decline in gains on the sales of emerging
markets-related past-due interest bonds (included in other revenue). The
aforementioned decreases were partially offset by increased revenues from
corporate finance fees, credit card services fees (included in fees for other
banking services), trust and investment management fees, as well as increased
revenues from equity-related investments (included in other revenue). The
following table reflects the composition of total noninterest revenue for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
-------------------------------------------------------------
<S> <C> <C>
Trust and Investment Management Fees $ 421 $ 406
Corporate Finance and Syndication Fees 405 338
Service Charges on Deposit Accounts 300 288
Fees for Other Banking Services 1,148 1,067
Trading Revenue 645 1,073
Securities Gains 66 142
Other Revenue 612 710
-------------------------------------------------------------
Total Noninterest Revenue $3,597 $4,024
-------------------------------------------------------------
</TABLE>
Trust and investment management fees are primarily comprised of corporate,
institutional and private banking (personal trust) activities provided to
corporations and individuals on a global basis. The Corporation's corporate and
institutional trust area provides customers with a full range of services such
as trustee and securities processing, as well as investment advisory and
administrative functions for customers' pension and other employee benefit
plans. The Corporation's private banking area provides a full range of services
for high-net worth individuals. The Corporation's family of proprietary mutual
funds, The Hanover Funds, are managed within the private banking area.
The following table reflects the components of trust and investment
management fees for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
-----------------------------------------------------------------------
<S> <C> <C>
Trust and Investment Management Fees:
Personal Trust and Investment Management Fees $ 206 $ 196
Corporate and Institutional Trust Fees 176 168
Other, primarily Foreign Asset Management 39 42
-----------------------------------------------------------------------
Total Trust and Investment Management Fees $ 421 $ 406
-----------------------------------------------------------------------
</TABLE>
Personal trust fees increased 5% in 1994, principally reflecting new customer
relationships developed as a result of the acquisition in September 1993 of
Ameritrust Texas Corporation ("Ameritrust"), by Texas Commerce Equity Holdings
Inc. ("Texas Commerce") the holding company for Texas Commerce Bank National
Association. Partially offsetting this increase was a decline in fees related to
assets under management as a result of lower bond and equity market values
experienced during 1994. Corporate and institutional trust fees increased 5%
from the 1993 level also largely due to the inclusion of Ameritrust results for
the full year in 1994 versus only three months in 1993. However, fees from
corporate and institutional trust services for the last half of 1994 were under
pricing pressures that continue to affect this business.
18
<PAGE> 34
Management anticipates that trust and investment management fees in 1995 will
be consistent with the 1994 level. The anticipated growth in trust and asset
management activities from the Corporation's planned investment in the private
banking business is expected to be offset somewhat by the effects of the sale of
certain Ameritrust units in 1994, attrition of some Ameritrust and First City
customers experienced during 1994, and the anticipated absence of fees
associated with the Mellon Bank Corporation joint venture. For further
discussion of the Mellon Bank Corporation joint venture, see the Other Events
section on page 40.
Corporate finance and syndication fees include revenue from managing and
syndicating loan arrangements; providing financial advisory services in
connection with leveraged buyouts, recapitalizations and mergers and
acquisitions; and arranging private placements and underwriting public debt
securities. Corporate finance and syndication fees in 1994 reached a record
level of $405 million, a 20% increase from the prior year, principally resulting
from the continued strong growth in loan syndication and other investment
banking activities. During 1994, the Corporation acted as agent or co-agent for
approximately $319 billion of syndicated credit facilities, compared with $185
billion in 1993, reflecting the Corporation's large client base and strong
emphasis on distribution. Management expects corporate finance and syndication
fees to continue to grow in 1995.
Service charges on deposit accounts totaled $300 million in 1994, an increase
of 4% over last year. The increase from 1993 was primarily due to pricing
initiatives during the first half of 1994 related to retail accounts, partially
offset by a slightly smaller deposit base.
Fees for other banking services for 1994 were $1,148 million, an increase of
$81 million from a year ago. The improvement in fees for 1994 reflected higher
credit card services revenue and mortgage servicing fees. The following table
reflects the components of fees for other banking services for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Credit Card Services Revenue $ 315 $ 238
Fees in Lieu of Compensating Balances 203 209
Commissions on Letters of Credit and Acceptances 151 155
Loan Commitment Fees 86 90
Mortgage Servicing Fees 79 63
Other 314 312
----------------------------------------------------------------------
Total Fees for Other Banking Services $1,148 $1,067
----------------------------------------------------------------------
</TABLE>
Credit card services revenue increased $77 million from the 1993 level. The
higher level of credit card services revenue in 1994 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, which was
launched in the fourth quarter of 1993. During 1994, 1.2 million new accounts
were added as a result of the Shell MasterCard program. Outstandings in the
credit card lending portfolio grew $2.1 billion to $9.3 billion at December 31,
1994, almost all of which related to the Shell MasterCard, with the remaining
increase resulting from the Corporation's more traditional Visa and MasterCard
products.
Mortgage servicing fees increased $16 million in 1994, reflecting a higher
level of mortgage servicing volume from the Margaretten acquisition as well as
additions to the portfolio from mortgage originations. The Corporation
originated $12.7 billion of mortgage loans in 1994 versus $14.7 billion in 1993.
The following table sets forth the components of trading revenue for 1994 and
1993.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
------------------------------------------------------------------
<S> <C> <C>
Trading Revenue:
Interest Rate Contracts(a) $391 $ 453
Foreign Exchange Revenues(b) 152(d) 302
Debt Instruments and Other(c) 102 318
------------------------------------------------------------------
Total Trading Revenue $645 $1,073
------------------------------------------------------------------
</TABLE>
(a) Includes interest rate swaps, currency swaps, foreign exchange forward
contracts, interest rate futures, and forward rate agreements and related
hedges.
(b) Includes foreign exchange spot and option contracts.
(c) Includes U.S. government and foreign government agency and corporate debt
securities, emerging markets debt instruments, debt-related derivatives, equity
securities, equity derivatives, and commodity derivatives.
(d) Reflects $70 million reduction as a result of losses sustained from
unauthorized foreign exchange transactions involving the Mexican peso.
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 was difficult during 1994, when compared with 1993.
The interest rate environment in the U.S. and European markets was volatile
during 1994, contributing to the decrease in interest rate contract revenue.
Foreign exchange revenues decreased by $150 million during 1994 primarily due to
unexpected movements in the U.S. dollar and from a $70 million loss resulting
from unauthorized foreign exchange transactions involving the Mexican peso. The
decrease in debt instrument revenue of $216 million was primarily due to
difficult conditions in the emerging debt markets, as well as in the European
government bond markets. While the Corporation expects the difficult conditions
in the emerging debt markets to continue
19
<PAGE> 35
Management's Discussion and Analysis
into the first quarter of 1995, management anticipates that 1995 trading
revenues will be higher than the 1994 level but lower than the 1993 level.
[GRAPH 3-See Appendix I]
The $70 million dollar loss ($40 million after-tax) from unauthorized foreign
exchange transactions was an isolated incident that resulted from the actions of
a single trader who took unauthorized positions in the Mexican peso. The loss
was sustained when the peso declined significantly in the 1994 fourth quarter.
The loss affected only the 1994 fourth-quarter financial results and prior
periods were not affected.
Securities gains were $66 million in 1994, compared with $142 million in
1993. The decrease in securities gains in 1994 when compared to 1993 is due to
the higher interest rate environment exerting downward pressure on market
prices. For further discussion of the Corporation's securities, see Note Four of
the Consolidated Financial Statements.
The Corporation's other noninterest revenue was $612 million in 1994,
compared with $710 million in 1993. The following table presents the composition
of other revenue for 1994 and 1993.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
-------------------------------------------------------------
<S> <C> <C>
Other Revenue:
Revenue from Equity-Related Investments $362 $278
Net Gains on Emerging Markets-Related
Interest Bond Sales 127 306
All Other Revenue 123 126
-------------------------------------------------------------
Total Other Revenue $612 $710
-------------------------------------------------------------
</TABLE>
Revenue from equity-related investments, which includes income from venture
capital activities and emerging markets investments, was $362 million in 1994,
an increase of 30% from 1993. Included in the 1994 results was the recognition
of a $78 million gain related to an emerging market equity investment. At
December 31, 1994, the Corporation had equity-related investments with a
carrying value of $1.9 billion. The Corporation believes that equity-related
investments will continue to make substantial contributions to the Corporation's
earnings, although the timing of the recognition of gains from such activities
is unpredictable and it is expected that revenues from such activities will vary
significantly from period to period.
In 1994, the Corporation recognized $127 million in net gains from the sale
of emerging markets-related past-due interest bonds, compared with $306 million
in 1993. As of December 31, 1994, the Corporation had approximately $92 million
face value of emerging markets-related past-due interest bonds that were unsold.
All other revenue includes the Corporation's share of net income from its 40%
interest in CIT which, after purchase accounting adjustments, was $73 million in
1994, an increase from $65 million in 1993. Also included in all other revenue
for 1994 was a net loss of $15 million incurred in connection with the
Corporation's residential mortgage sales activities, compared with a net gain of
$6 million in 1993.
NONINTEREST EXPENSE
Noninterest expense in 1994 was $5,509 million, compared with $5,293 million in
1993. Included in the results for 1994 was a $260 million restructuring charge
taken in connection with the aforementioned Actions to Improve Earnings Per
Share, and a $48 million restructuring charge related to the closing of 50 New
York State branches. The 1993 results included a $115 million charge related to
the final assessment of costs associated with the merger with Manufacturers
Hanover Corporation ("MHC") and a $43 million charge associated with the
acquisition of certain assets of the First City Banks by Texas Commerce.
Excluding all restructuring charges in both years, noninterest expense for 1994
was $5,201 million, an increase of 1.3% from 1993. Noninterest expense for 1994,
when compared with the prior year, reflected higher expenses associated with
investments in certain key businesses such as the Shell MasterCard program, the
trading and securities businesses, Margaretten and Ameritrust.
The following table presents the components of noninterest expense for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
--------------------------------------------------------------
<S> <C> <C>
Salaries $2,205 $2,070
Employee Benefits 439 396
Occupancy Expense 573 587
Equipment Expense 382 337
Foreclosed Property Expense 41 287
Restructuring Charge 308 158
Other Expense 1,561 1,458
--------------------------------------------------------------
Total Noninterest Expense $5,509 $5,293
--------------------------------------------------------------
</TABLE>
The increase in salaries in 1994 was primarily due to the Margaretten
acquisition, the implementation of the Shell MasterCard program, additional
staff costs resulting from the 1993 acquisition of Ameritrust by Texas Commerce,
and the increase in the Corporation's securities underwriting business.
Additionally, there were also higher incentives in 1994 due to improved core
operating earnings and competitive pressures for
20
<PAGE> 36
specialized skills for selected businesses. Total staff at December 31, 1994
amounted to 42,130 (which includes 1,423 staff from the Margaretten acquisition)
compared with 41,567 at December 31, 1993. Excluding the impact of Margaretten,
staff increases in areas with revenue growth initiatives were more than offset
by reductions from continued integration and productivity efforts.
In 1994, employee benefits increased $43 million from the prior year
reflecting the 1993 acquisitions by Texas Commerce and the 1994 acquisition of
Margaretten, as well as a change in actuarial assumptions used for
postemployment benefits expense. Total 1994 postretirement benefits expense was
higher than the 1993 level as a result of a decrease from 8.75% to 7.50% in the
discount rate utilized in determining the benefit obligations.
Occupancy expense was $573 million in 1994, a decrease of $14 million from
1993. The decline from 1993 principally resulted from the termination of a
facilities lease in London at the beginning of 1994, the impact of branch
divestitures, and the continuing consolidation of the New York branch system.
Partially offsetting these factors were additional occupancy expense related to
the Margaretten acquisition, as well as costs associated with the consolidation
and relocation of certain data centers.
Equipment expense in 1994 was $382 million, compared with $337 million in
1993. In 1994, the Corporation continued to invest strategically in new
technology for its trading and consumer banking businesses to maintain a
leadership position in transaction and information processing. As a result,
higher costs were incurred for system enhancements to support the Corporation's
trading activities, the consolidation of its data centers, and for upgrades to
its ATM technology. Additionally, the higher equipment expense reflects the
Margaretten and the Texas Commerce acquisitions. Management expects that
equipment expense in 1995 will be somewhat higher than 1994. During 1995, the
Corporation plans to invest in technology and systems to support its
high-growth, high-margin businesses as part of its Actions to Improve Earnings
Per Share.
Foreclosed property expense was $41 million in 1994, compared with $287
million in 1993, reflecting significant progress in managing the Corporation's
real estate portfolio. The 1994 expense benefited by approximately $42 million
of gains from the sale of foreclosed property. Also included in the 1994 results
was a $12 million charge in conjunction with the transfer of certain real estate
assets to the held for accelerated disposition category. Included in the 1993
amount was $20 million related to the decision to accelerate the disposition of
certain foreclosed residential properties arising from loans originally extended
several years ago under a reduced-documentation mortgage program that was
discontinued in 1990.
For 1994, other expense was $1,561 million, an increase of 7% from the 1993
level. The increase reflects higher professional services and telecommunication
costs, as well as the full-year impact in 1994 of expenses associated with the
First City Banks and Ameritrust acquisitions, and the inclusion of Margaretten
since its acquisition on July 1, 1994.
The following table presents the components of other expense for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
-------------------------------------------------------------
<S> <C> <C>
Other Expense:
Professional Services $ 225 $ 193
Marketing Expense 186 187
FDIC Assessments 160 175
Telecommunications 134 115
Amortization of Intangibles 115 106
All Other 741 682
-------------------------------------------------------------
Total Other Expense $1,561 $1,458
-------------------------------------------------------------
</TABLE>
Professional service expense during 1994 increased by $32 million from the
prior year reflecting increased use of contract computer consultants associated
with the Corporation's ongoing technology enhancements efforts.
Telecommunications expense in 1994 increased by $19 million from 1993,
reflecting increased costs for market data services related to trading
activities, as well as installations and technology upgrades throughout the
Corporation (including at First City Banks, Ameritrust and Margaretten). Also
included in other expense for 1994 was approximately $46 million related to the
amortization of goodwill and other intangible assets associated with the
aforementioned acquisitions. As a result of these acquisitions, total
amortization of goodwill and intangibles amounted to $115 million in 1994, an
increase of 8% from 1993. FDIC assessments declined $15 million during 1994
largely reflecting a decrease in the domestic deposit base. The Corporation
expects that its 1995 FDIC expense will be substantially reduced if the FDIC's
current proposal to reduce the rate schedule for risk-based deposit insurance
premiums applicable to insured banks is adopted.
As part of the Actions to Improve Earnings Per Share, the Corporation
recorded a $260 million restructuring charge in the fourth quarter of 1994. This
charge 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
termination of leases. The staff reductions are tied to the 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. The resulting savings from these actions, when combined with the other
expense initiatives, such as aggressive sourcing, are expected to reduce the
overall existing cost base by $440 million
21
<PAGE> 37
Management's Discussion and Analysis
($230 million in 1995). At December 31, 1994, $247 million of the restructuring
reserve remained. For a further discussion of the Corporation's restructuring
charges included in noninterest expense in 1994 and 1993, see Note Sixteen of
the Consolidated Financial Statements.
During 1994, the Corporation's efficiency ratio (excluding restructuring
charges, foreclosed property expense and emerging markets past-due interest bond
sales) was 63.4%, compared with 58.0% in 1993. 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. To achieve these goals, the
Corporation initiated the Actions to Improve Earnings Per Share in December
1994.
INCOME TAXES
The Corporation recorded income tax expense of $918 million in 1994, compared
with $539 million in 1993. The Corporation adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") as of
January 1, 1993, and, after taking into account the additional tax benefits
associated with the adoption of Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
("SFAS 106"), the Corporation recognized a favorable cumulative effect on
income tax expense of $450 million (or $1.81 per common share). This favorable
impact was recorded within the caption Net Effect of Changes in Accounting
Principles on the Consolidated Statement of Income.
The Corporation recognized its remaining available Federal income tax
benefits in accordance with SFAS 109 in the third quarter of 1993. As a result,
the Corporation's earnings beginning in the fourth quarter of 1993 were reported
on a fully-taxed basis. Included in the 1993 income tax expense was $331 million
of Federal income tax benefits.
The Corporation's effective tax rate was 41.5% in 1994, compared with 25.6%
in 1993. Excluding the $331 million of benefits recognized under SFAS 109 for
1993, the Corporation's effective tax rate for 1993 would have been 41.3%.
Management has undertaken certain actions which it believes will result in an
effective tax rate of approximately 40% for the Corporation in 1995.
--------------------------------------------------------------------------------
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 the Global Bank, Regional Bank, Real Estate and Corporate
sectors. A set of management accounting policies has been developed and
implemented to ensure that the reported results of the groups reflect the
economics of their businesses. Lines-of-business results are subject to
restatement as appropriate whenever there are refinements in management
reporting policies or changes to the management organization. Certain amounts
reported in prior periods have been restated to conform with the current 1994
presentation. Lines-of-business results are subject to further restatements as
may be necessary to reflect future changes in internal management reporting.
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 capital allocated to each of the four business sectors for 1993. Texas
Commerce's results are tracked and reported on a legal entity basis, including
the return-on-equity calculation.
22
<PAGE> 38
Chemical Banking Corporation
and Subsidiaries
<TABLE>
<CAPTION>
Global Bank Regional Bank Texas Commerce Real Estate Total(a)
----------- ------------- ------------- ----------- --------
Year Ended December 31, 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993
(in millions, except ratios)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 992 $1,193 $3,013 $2,916 $ 690 $ 692 $ 141 $ 169 $ 4,674 $ 4,636
Noninterest Revenue 1,795 2,367 1,372 1,241 400 392 19 23 3,597 4,024
Noninterest Expense(b) 1,254 1,209 2,980 2,814 793 755 97 95 5,468 5,006
------------------------------------------------------------------------------------------------------------------------------------
Operating Margin 1,533 2,351 1,405 1,343 297 329 63 97 2,803 3,654
Credit Provision 163 302 407 473 (40) -- 196 329 550 1,259
Foreclosed Property Expense (1) 52 (2) 37 (24) 60 53 95 41 287
------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes 1,371 1,997 1,000 833 361 269 (186) (327) 2,212 2,108
Income Taxes (Benefits)(c) 525 793 423 349 132 79 (82) (144) 918 539
------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before
Accounting Changes 846 1,204 577 484 229 190 (104) (183) 1,294 1,569
Accounting Changes (SFAS 106 & 109) -- -- -- -- -- -- -- -- -- 35
------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 846 $ 1,204 $ 577 $ 484 $ 229 $ 190 $ (104) $ (183) $ 1,294 $ 1,604
------------------------------------------------------------------------------------------------------------------------------------
Average Assets $103,476 $81,994 $43,474 $40,715 $19,878 $21,126 $5,174 $6,960 $166,679 $144,881
Return on Common Equity 19.7% 24.9% 19.9% 16.0% 13.3% 11.1% NM NM 12.3% 16.7%
Return on Assets 0.82% 1.47% 1.33% 1.19% 1.15% 0.90% NM NM 0.78% 1.11%
Efficiency Ratio(d) 47.1% 37.1% 66.9% 67.7% 72.8% 70.0% NM NM 63.4% 58.0%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total column includes Corporate sector. See description of Corporate sector
on page 24.
(b) Total column includes restructuring charges of $308 million in 1994 and $158
million in 1993.
(c) Total column includes $331 million of Federal income tax benefits in 1993.
(d) Efficiency ratio excludes restructuring charges, foreclosed property expense
and emerging markets past-due interest bond sales.
NM - Not meaningful.
GLOBAL BANK
The Global Bank is organized into four principal management entities: Banking &
Corporate Finance (worldwide wholesale client management and venture capital
activities); Structured Finance (acquisition finance, loan syndications,
high-yield securities and mergers and acquisitions); 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); 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 1994 was $846 million, a decrease of $358
million from 1993. Its return on equity in 1994 was 19.7%, compared with 24.9%
in 1993. The declines in the 1994 results were primarily due to decreases in
trading revenues and net interest income. During 1994, trading revenues declined
to $616 million (which included the aforementioned $70 million loss related to
the Mexican peso), compared with $1,048 million in 1993. Noninterest expenses
rose $45 million, or 4%, when compared with 1993, due primarily to the Global
Bank's continued investment in its securities and trading businesses. The
substantial increase in average assets is primarily due to the adoption of FASI
39.
The results for Asia, Europe & Global Markets in 1994 were significantly
lower than 1993, reflecting a 21% decline in revenue and higher noninterest
expense. The decline in revenue was primarily due to lower trading revenues of
$280 million reflecting interest rate increases and the volatile conditions in
certain trading markets, including European government bonds and in many foreign
exchange markets. Additionally, securities gains were lower in 1994 compared
with 1993. Also contributing to the revenue decline was lower net interest
income due to the rising interest rate environment. The increase in noninterest
expense was attributable to the previously mentioned investment in securities
and trading businesses. This increase was partially offset by a reduction in
foreclosed property expense in the United Kingdom.
The results for Banking & Corporate Finance improved from 1993 primarily due
to a substantial decrease of $129 million in credit provision, attributable to
improved credit quality and lower loan volume, and $75 million higher revenue
from equity-related investments.
Structured Finance's 1994 performance was characterized by a record level of
syndicated loan fees reflecting higher global loan origination and distribution
volume. The earnings for Emerging Markets decreased in 1994 compared with 1993
primarily due to lower net gains on sales of emerging markets past-due interest
bonds (which were $127 million in 1994 versus $301 million in 1993), coupled
with a reduction in trading revenues of $138 million.
23
<PAGE> 39
Management's Discussion and Analysis
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. The Regional Bank's results for 1994 include the acquisition of
Margaretten in July 1994.
The Regional Bank's net income of $577 million and return on equity of 19.9%
for 1994 increased from the prior year's results of $484 million and 16.0%,
respectively. The 1994 results included a restructuring charge of $48 million
($28 million after-tax) related to the closing of 50 New York branches and a
staff reduction of 650.
For 1994, New York Markets produced strong revenue growth primarily due to a
16% growth in net interest income, reflecting improved demand deposit volumes,
wider deposit spreads, and higher deposit servicing fees as a result of pricing
initiatives undertaken during the first half of 1994. Despite solid loan volume
growth of 8%, the National Consumer Business results decreased from 1993
primarily due to an 18% decline in net interest income, relating to unfavorable
spreads, coupled with higher noninterest expense reflecting the Margaretten
acquisition and increased consumer finance activities. Retail Card Services'
results improved from the 1993 levels due to higher fees of $80 million
(primarily from the co-branded Shell MasterCard) and increased net interest
income, reflecting strong portfolio growth of 24%. These favorable results were
partially offset by higher noninterest expense, primarily related to the Shell
MasterCard (which accounted for an increase in operating expenses of $76 million
in 1994).
Middle Market produced higher earnings resulting from reduced credit costs of
$39 million and higher net interest income, partially offset by lower corporate
finance fees. Private Banking's earnings improved from 1993 due to a 14%
increase in net interest income, due primarily from increased loan and deposit
volume and solid fee growth. For 1994, Chemical New Jersey Holdings, Inc. had a
$34 million decline in credit provision and a $20 million decline in foreclosed
property expense, which resulted in higher earnings compared with the previous
year. Geoserve increased its earnings in 1994 over the prior year, primarily due
to higher net interest income of $24 million related to favorable deposit
spreads.
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 December 31, 1994, Texas Commerce had $20 billion in total assets
with 115 locations statewide.
Texas Commerce's net income in 1994 was $229 million, an increase of 21% from
the prior-year's results of $190 million. The increase in 1994, when compared
with 1993, was due to decreases in foreclosed property expense and in the credit
provision coupled with higher noninterest revenue. These favorable results were
partially offset by higher noninterest expense and a decrease in net interest
income.
The substantial decline in foreclosed property expense and in credit
provision was based on the continued improvement in asset quality. Nonperforming
assets declined to $161 million at December 31, 1994, a decrease of $58 million
from the prior year end. The increase in noninterest revenue is due to strong
growth in trust income, which rose 20% from 1993, resulting from the acquisition
of Ameritrust and the First City Banks. The higher noninterest expense is
related to the additional operating expenses associated with the 1993
acquisition of Ameritrust. The decline in net interest income is attributable to
less favorable interest rate spreads.
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 $104 million
for 1994 compared with a net loss of $183 million in 1993. The improved results
were primarily due to a decrease in credit provision and lower foreclosed
property expense reflecting the significant progress made in managing the
Corporation's real estate portfolio. Total nonperforming assets at December 31,
1994 were $158 million, a decline of 88% from $1,304 million at the 1993 year
end.
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 $254 million for
1994, which includes a $152 million after-tax restructuring charge associated
with the Actions to Improve Earnings Per Share, coupled with residual tax
expense and occupancy charges which were not assigned to any business unit. In
1993, the net loss of $91 million included the following one-time
24
<PAGE> 40
items: the recognition of $331 million in Federal tax benefits; an after-tax
noninterest expense charge of $67 million taken as a result of a reassessment
of costs associated with the merger with MHC; an after-tax loss of $53 million
due to the writedown associated with the planned disposition of residential
mortgages; a $35 million net gain from the adoption of SFAS 106 and SFAS 109;
and a $30 million after-tax restructuring charge related to the Texas Commerce
acquisition of the First City Banks.
------------------------------------------------------------------------------
LOAN PORTFOLIO
The Corporation's loans outstanding totaled $78.8 billion at December 31, 1994,
an increase of $3.4 billion from the 1993 year end. The loan portfolio reflects
the third consecutive quarter-end increase in loans outstanding since March 31,
1994, in comparison to quarterly declines experienced in the two years prior to
that date. The growth in loans outstanding reflects an increase in the consumer
and commercial and industrial loan portfolios, partially offset by the continued
reduction in the Corporation's commercial real estate loans. In 1995, the
Corporation expects continued growth in its loan portfolio, with its consumer
loans continuing to grow faster than its commercial loans, as the Corporation
continues to expand its residential mortgage and credit card activities.
The Corporation's loan balances at December 31, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
------------------------------------------------------------------
<S> <C> <C>
Domestic Commercial:
Commercial Real Estate(a) $ 5,650 $ 7,338
Commercial and Industrial 20,805 18,874
Financial Institutions 3,918 4,816
------------------------------------------------------------------
Total Domestic Commercial Loans 30,373 31,028
------------------------------------------------------------------
Total Domestic Consumer Loans 30,086 25,686
------------------------------------------------------------------
Total Domestic Loans 60,459 56,714
Foreign, primarily Commercial(b) 18,308 18,667
------------------------------------------------------------------
Total Loans $78,767 $75,381
------------------------------------------------------------------
</TABLE>
(a) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
(b) Includes loans previously classified as LDC loans. Previously reported loan
amounts have been reclassified to conform with the 1994 presentation.
The Corporation is a leading participant in loan originations and
syndications. This activity is comprised of the origination and sale of loans
and lending commitments to investors, generally without recourse. These sales
include syndication, assignment and participation, and include both short- and
medium-term transactions. The Corporation's loan distribution capability allows
it to compete aggressively and profitably in the wholesale lending markets by
enabling it to originate, and subsequently reduce, larger individual credit
exposures and thereby to price more flexibly than if all loans were held as
permanent investments. The Corporation also benefits from increased liquidity.
During 1994, the Corporation acted as agent or co-agent for approximately
$319 billion in syndicated credit facilities, compared with $185 billion in
1993.
NONPERFORMING ASSETS
The following table represents the Corporation's nonperforming assets, and the
assets held for accelerated disposition, at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
---------------------------------------------------------------------
<S> <C> <C>
Nonperforming Assets:
Domestic Commercial:
Commercial Real Estate $ 156 $ 682
Commercial and Industrial 354 867
Financial Institutions 4 24
---------------------------------------------------------------------
Total Domestic Commercial Loans 514 1,573
---------------------------------------------------------------------
Domestic Consumer:
Residential Mortgage 92 101
Other Consumer 12 24
---------------------------------------------------------------------
Total Domestic Consumer Loans 104 125
---------------------------------------------------------------------
Total Domestic Loans 618 1,698
Foreign, primarily Commercial(a) 311 893
---------------------------------------------------------------------
Total Nonperforming Loans $ 929 $2,591
---------------------------------------------------------------------
Assets Acquired as Loan Satisfactions 210 934
---------------------------------------------------------------------
Total Nonperforming Assets $1,139 $3,525
---------------------------------------------------------------------
ASSETS HELD FOR ACCELERATED DISPOSITION:
Loans(b) $ 336 $ --
Real Estate Owned 190 --
---------------------------------------------------------------------
Total Assets Held for Accelerated Disposition $ 526 $ --
---------------------------------------------------------------------
</TABLE>
(a) Includes nonperforming loans previously classified as LDC nonperforming
loans. Previously reported amounts have been reclassified to conform with the
1994 presentation.
(b) Includes $87 million of loans that are performing.
The Corporation's total nonperforming assets at December 31, 1994 were $1,139
million, a decrease of $2,386 million, or 68%, from the 1993 year-end level. At
December 31, 1994, total nonperforming assets had decreased by 83% from their
peak level of $6,587 million at September 30, 1992. This improvement in the
Corporation's credit profile is a result of significantly 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 as discussed below.
25
<PAGE> 41
[GRAPH 4-See Appendix I]
[GRAPH 5-See Appendix I]
In October 1994, the Corporation sold a $341 million (face value) portfolio
of commercial real estate mortgage loans and real estate assets. The purchase
price for the portfolio, which contained approximately 86% nonperforming loans
and foreclosed properties, was approximately 60% of face value and in excess of
the Corporation's carrying value for those assets. 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 December 31, 1994 nonperforming assets category.
Foreign nonperforming loans at December 31, 1994 were $311 million, a
decrease from $893 million at December 31, 1993, primarily as a result of the
completion of the Brazilian refinancing program. For a further discussion of the
Brazilian debt exchange, see the discussion on Brazil included in the Foreign
Portfolio section on page 29.
Management expects the level of its nonperforming assets at December 31, 1995
to be at or moderately below the level of nonperforming assets at December 31,
1994.
The following table presents the reconciliation of nonperforming assets for
1994 and 1993.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Year $3,525 $6,092
Additions:
Loans Placed on Nonperforming Status 909 1,526
Deductions:
Payments 1,111 1,587
Sales 558 411
Charge-offs of Nonperforming Loans(a) 623 1,009
Write-downs of Real Estate Owned 73 249
Return to Accrual Status 491 750
Transfer to Assets Held for Accelerated Disposition 439 87
------------------------------------------------------------------------------
Balance at End of Year $1,139 $3,525
------------------------------------------------------------------------------
</TABLE>
(a) Excludes those consumer charge-offs that are recorded on a formula basis.
As of December 31, 1994, the Corporation had consumer loans (which primarily
consisted of credit card and installment loans) and commercial loans aggregating
$330 million that were not characterized as nonperforming loans, although such
loans were past due 90 days or more as to principal or interest. The following
table presents the amounts of such loans at December 31, 1994 and December 31,
1993.
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
-------------------------------------------------------------
<S> <C> <C>
Contractually Past-Due Loans:
Consumer $294 $299
Commercial and Other Loans 36 24
-------------------------------------------------------------
Total Contractually Past-Due Loans(a) $330 $323
-------------------------------------------------------------
</TABLE>
(a) Substantially all domestic.
Consumer loans, exclusive of residential mortgage loans, for which interest
or principal is past due 90 days or more are generally not classified as
nonperforming but, rather, are charged off on a formula basis upon reaching
certain specified stages of delinquency. A commercial loan on which interest or
principal is past due 90 days or more is not classified as nonperforming if the
loan is considered well-secured (i.e., the collateral value is considered
sufficient to cover the principal and accrued interest on the loan) and is in
the process of collection.
26
<PAGE> 42
NET CHARGE-OFFS
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
-------------------------------------------------------------------
<S> <C> <C>
Domestic Commercial:
Commercial Real Estate $ 165 $ 244
Commercial and Industrial 81 395
Financial Institutions (1) 27
-------------------------------------------------------------------
Total Domestic Commercial Net Charge-Offs 245 666
-------------------------------------------------------------------
Domestic Consumer:
Residential Mortgage 47 67(a)
Credit Card 329 322
Other Consumer(b) 19 30
-------------------------------------------------------------------
Total Domestic Consumer Net Charge-Offs 395 419
-------------------------------------------------------------------
Total Domestic Net Charge-Offs 640 1,085
-------------------------------------------------------------------
Foreign(c) 307 196
-------------------------------------------------------------------
Total Net Charge-Offs 947 1,281
-------------------------------------------------------------------
Charge for Assets Transferred to Held for
Accelerated Disposition 148 --
-------------------------------------------------------------------
Total Net Charge-Offs and Charge for Assets
Held for Accelerated Disposition $1,095 $1,281
-------------------------------------------------------------------
</TABLE>
(a) Includes $55 million related to the decision to accelerate the disposition
of certain nonperforming residential mortgages.
(b) There are essentially no credit losses in the student loan portfolio due to
the existence of Federal and State government agency guarantees.
(c) Included in Foreign are LDC net charge-offs and losses on sales and swaps in
the amounts of $297 million for 1994 and $22 million for 1993.
For a discussion of net charge-offs, see the various credit portfolio
sections that follow. In 1994, net charge-offs of $1,095 million included a $148
million charge related to the above-mentioned decision to designate assets as
held for accelerated disposition. Also included in the 1994 net charge-offs was
a $291 million charge incurred in the second quarter of 1994 in connection with
management's final valuation of the LDC portfolio, at which time the
Corporation's medium- and long-term outstandings to the various LDC countries
were adjusted to estimated net recoverable values of such loans. The remaining
LDC allowance was transferred to the general allowance for credit losses. For a
further discussion, see the Allowance for Credit Losses section on pages 32-33.
Management expects total net charge-offs in 1995 to be similar to the 1994
level, exclusive of the impact of the two aforementioned special charge-offs
taken in 1994.
DOMESTIC COMMERCIAL REAL ESTATE PORTFOLIO
The domestic commercial real estate portfolio represents loans secured primarily
by real property, other than loans secured by one-to-four family residential
properties (which are included in the consumer loan portfolio). The domestic
commercial real estate loan portfolio totaled $5.7 billion at December 31, 1994,
a decline from $7.3 billion at December 31, 1993. The decrease from the 1993
year-end is attributable to repayments, the bulk asset sale in October 1994,
transfers to real estate owned, charge-offs, and the designation of certain real
estate assets for accelerated disposition in December 1994.
The following table sets forth the major components of the domestic
commercial real estate loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Commercial Mortgages $4,680 $5,917
Construction Loans 970 1,421
----------------------------------------------------------------------
Total Domestic Commercial Real Estate Loans $5,650 $7,338
----------------------------------------------------------------------
</TABLE>
Commercial mortgages provide financing for the acquisition or refinancing of
commercial properties, and typically have terms ranging from three to seven
years. Construction loans are generally originated to finance the construction
of real estate projects. When a loan financing the completed construction has
cash flows sufficient to support a commercial mortgage, the loan is transferred
from construction status to commercial mortgage status.
The following table shows the Corporation's domestic commercial real estate
loans by geographic location. The largest concentration of domestic commercial
real estate loans is in the New York/New Jersey and Texas markets, representing
52% and 28%, respectively, of the domestic commercial real estate portfolio. No
other state represents more than 3% of the domestic commercial real estate loan
portfolio.
DOMESTIC COMMERCIAL REAL ESTATE BY GEOGRAPHIC REGION(a)
<TABLE>
<CAPTION>
1994 1993
---------------------------------------------- --------------------------------------------
New York/ Other Total New York/ Other Total
December 31, (in millions) New Jersey Texas Domestic Domestic New Jersey Texas Domestic Domestic
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC COMMERCIAL REAL ESTATE:
Loans $2,959 $1,579 $1,112 $5,650 $3,789 $1,810 $1,739 $7,338
Nonperforming Loans 111 37 8 156 418 61 203 682
Real Estate Owned 20 61 12 93 491 137 170 798
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Nonperforming loans are included in loan balances. Real estate owned denotes
foreclosed commercial real estate, which is included in assets acquired as loan
satisfactions.
27
<PAGE> 43
Management's Discussion and Analysis
Nonperforming domestic commercial real estate assets were $249 million at
December 31, 1994, compared with $1,480 million at December 31, 1993. The
improvement in nonperforming domestic commercial real estate asset levels in
1994 is the result of the October 1994 bulk real estate assets sale, and the
designation of certain real estate assets for accelerated disposition, as well
as successful workout activities as a result of increased liquidity in the
commercial real estate markets.
Domestic commercial real estate net charge-offs in 1994 totaled $165 million,
compared with $244 million in the prior year. Writedowns of domestic commercial
real estate owned totaled $68 million for 1994, compared with $199 million in
1993. Approximately $437 million of commercial real estate owned were sold
during 1994 (which includes the October 1994 bulk asset sale). Generally, these
assets were sold at or above carrying value. Domestic commercial real estate net
charge-offs, writedowns and nonperforming assets for 1995 are expected to be
below 1994 levels.
DOMESTIC COMMERCIAL AND INDUSTRIAL PORTFOLIO
The domestic commercial and industrial portfolio totaled $20.8 billion at
December 31, 1994, compared with $18.9 billion at December 31, 1993. The
portfolio is diversified geographically and by industry. The largest industry
concentration, oil and gas, approximates $1.8 billion or 2.3% of total loans.
All of the other remaining industries are each less than 2% of total loans.
Included in commercial and industrial are loans related to highly leveraged
transactions ("HLT"). The Corporation originates and syndicates loans, which
include acquisitions, leveraged buyouts and recapitalizations. HLT loans at
December 31, 1994 totaled approximately $1.3 billion, compared with $1.8 billion
at December 31, 1993. The Corporation was also committed at December 31, 1994 to
lend an additional amount of approximately $.8 billion. The substantial
reduction in the HLT loan portfolio from the 1993 year end can be largely
attributed to repayments and reclassifications to non-HLT status. At December
31, 1994, the Corporation had $82 million in nonperforming HLT loans, compared
with $242 million at year-end 1993. Net recoveries related to HLTs during 1994
totaled approximately $19 million, versus net charge-offs of $52 million for
1993.
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 $3,918
million at December 31, 1994 or 5% of total loans outstanding at December 31,
1994, compared with $4,816 million or 6% at December 31, 1993. Loans to
domestic financial institutions are predominantly secured loans to
broker-dealers, which comprise over half the domestic financial institutions
total. The portfolio maintained its strong credit quality during 1994 as the
Corporation had net recoveries of $1 million in 1994 compared with net
charge-offs of only $27 million in 1993.
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 $30.1 billion at December 31, 1994, representing 38% of total
loans, an increase from $25.7 billion, or 34% of total loans, at December 31,
1993.
The following table represents the composition of the Corporation's domestic
consumer loan portfolio at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
-----------------------------------------------------------------
<S> <C> <C>
Residential Mortgages(a) $13,560 $12,244
Credit Cards 9,261 7,176
Other Consumer Loans(b) 7,265 6,266
-----------------------------------------------------------------
Total Domestic Consumer Loans $30,086 $25,686
-----------------------------------------------------------------
</TABLE>
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance) and student loans.
Residential mortgage loans at the end of 1994 were $13.6 billion, an increase
of $1.3 billion from the 1993 year-end, due in part, to the Margaretten
acquisition in July 1994.
Credit card receivables at December 31, 1994 increased $2.1 billion from
December 31, 1993, due almost entirely to the co-branded Shell MasterCard
program, which was introduced in the fourth quarter of 1993. Management is
exploring other opportunities in the credit card area, including the feasibility
of other co-branded card programs.
Total nonperforming domestic consumer loans at December 31, 1994 were $104
million and were comprised of $92 million of loans secured by residential real
estate and $12 million of other consumer loans. Total nonperforming domestic
consumer loans at December 31, 1993 were $125 million and were comprised of $101
million of loans secured by residential real estate and $24 million of other
consumer loans.
Net charge-offs in the domestic consumer loan portfolio totaled $395 million
in 1994, compared with $419 million in 1993. The 1994 net charge-offs included
$329 million in credit card receivables, $47 million in residential mortgages,
and $19 million in other consumer loans. The 1993 net charge-offs consisted of
$322 million in credit card receivables, $67 million in residential mortgages
(including $55 million related to the decision to accelerate the disposition of
certain residential mortgages), and $30 million in other consumer loans. There
were essentially no credit losses in the student loan portfolio due to the
existence of Federal and State government agency guarantees.
28
<PAGE> 44
Domestic consumer loan balances are expected to increase in 1995,
particularly in the credit card and residential mortgage portfolios. Due to this
anticipated growth, management expects consumer loan net charge-offs in 1995 to
be somewhat higher than in 1994. However, management expects that the percentage
of total consumer net charge-offs to total consumer loan outstandings should
continue to decline as a result of the general continued improvement in the
Corporation's credit profile.
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. In
accordance with current accounting standards, the value of such servicing rights
related to originating mortgage loans is not recorded as an asset in the
financial statements. The Corporation originated $12.7 billion of mortgages in
1994, compared with $14.7 billion in 1993. In 1994, the Corporation sold to
investors approximately 73% of the residential mortgage loans it had originated,
compared with 88% in 1993.
In addition to originating mortgage servicing rights, the Corporation also
purchases such rights. The Corporation's servicing portfolio amounted to $55.6
billion at December 31, 1994, compared with $36.4 billion at December 31, 1993.
Purchased mortgage servicing rights (included in other assets) amounted to $469
million at December 31, 1994, compared with $249 million at December 31, 1993.
The increases in the servicing portfolio and in purchased mortgage servicing
rights at December 31, 1994 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 within the past three
years when interest rates have been relatively low). The Corporation utilizes an
amortization method based on adjusted cash flows to amortize purchased mortgage
servicing rights. The Corporation continually evaluates prepayment exposure of
the portfolio, adjusting the balance and remaining life of the servicing rights
as a result of prepayments. During 1994, the Corporation had no writedowns with
respect to its purchased mortgage servicing rights, compared with $14 million of
writedowns in 1993.
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 December
31, 1994, the Corporation's total foreign loans were $18.3 billion, compared
with $18.7 billion at December 31, 1993.
Included in foreign loans were foreign commercial and industrial loans of
$7.6 billion at the end of 1994, an increase of $1.0 billion from the 1993
year-end. Total foreign commercial real estate loans at December 31, 1994 were
$.5 billion, compared with $.6 billion at December 31, 1993. A significant
portion of the foreign real estate portfolio is located in the United Kingdom
and Hong Kong.
Mexico: The Mexican government's devaluation of the peso on December 20, 1994
precipitated a significant decline in the value of the peso against the dollar.
The resulting liquidity crisis led to the destabilization of local financial
markets and rippling effects throughout global markets.
On January 31, 1995, a $52.8 billion international rescue package (the
"Package") to assist Mexico was announced. The Package, in its current form,
includes $20 billion of financing provided principally by the United States
Treasury. The Package also includes financing from the International Monetary
Fund, European central banks through the Bank for International Settlements,
commercial banks, a consortium of Latin American countries and Canada.
At December 31, 1994, the Corporation's total exposure to Mexico was $879
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 $1,827 million, which are
collateralized by zero-coupon United States Treasury obligations.
Brazil: In 1994, the completion of the Brazilian Financing Package essentially
brought to an end the broad LDC-rescheduling programs begun in the mid-1980's.
The exchange of bank creditors' eligible medium- and long-term debt for bonds
issued by the Federal Republic of Brazil occurred on April 15, 1994. The
Corporation's total Brazilian outstandings affected by the exchange had a
carrying value of $297 million. The Corporation's "Old" debt (multi-year Deposit
Facility Agreement and other pre-1988 restructured debt) with a face value of
$635 million was exchanged for $296 million of Capitalization bonds and $223
million of Discount bonds. The Corporation's "New" debt (credit extensions
originating from the 1988 restructuring) with a face value of $214 million was
exchanged for $89 million of Debt Conversion bonds, $85 million of New Money
bonds, and $40 million of local currency denominated bonds. The exchange did not
result in any additional charge-offs by the Corporation. The Corporation also
received Eligible Interest bonds ("EI") of approximately $187 million for the
majority of its remaining unpaid interest. An additional $9 million of EIs was
29
<PAGE> 45
Management's Discussion and Analysis
received on January 31, 1995. To date, the Corporation has sold approximately
$125 million face value of EI bonds and had approximately $71 million face value
of EI bonds remaining unsold. Future sales of the Corporation's remaining EI
bonds will depend upon market conditions.
The aforementioned bonds received by the Corporation through the exchange are
measured pursuant to the provisions of SFAS 115. The Corporation is classifying
all the bonds it received in the exchange as available-for-sale and, therefore,
such bonds are carried at fair value. As a result of the exchange, the
Corporation removed approximately $270 million of Brazilian loans from
nonperforming status.
CROSS-BORDER OUTSTANDINGS
The extension of credits denominated in a currency other than that of the
country in which a borrower is located, such as dollar-denominated loans made
overseas, are called "cross-border" credits. In addition to the credit risk
associated with any borrower, these particular credits are also subject to
"country risk" - economic and political risk factors specific to the country of
the borrower which may make the borrower unable or unwilling to pay principal
and interest according to contractual terms. Other risks associated with these
credits include the possibility of insufficient foreign exchange and
restrictions on its availability. To minimize country risk, the Corporation
monitors its foreign credits in each country with specific consideration given
to maturity, currency, industry and geographic concentration of the credits. In
addition, the Corporation establishes limits governing lending to the various
categories of the foreign portfolio.
The following table lists all countries in which the Corporation's
cross-border outstandings exceeded 1% of consolidated assets as of any of the
dates specified. The Corporation does not have significant local currency
outstandings to the individual countries listed in the following table that are
not hedged or are not funded by local currency borrowings.
<TABLE>
<CAPTION>
CROSS-BORDER OUTSTANDINGS(a) Total
At December 31, (in millions) Cross-Border
Country Public Banks Other Outstandings(b)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Japan 1994 $ 238 $3,200 $ 368 $3,806(c)
1993 27 3,955 257 4,239(c)
1992 1 264 148 413(c)
-------------------------------------------------------------------------------------------------------------------------------
United Kingdom 1994 95 605 914 1,614
1993 106 1,035 1,086 2,227
1992 87 358 1,271 1,716
-------------------------------------------------------------------------------------------------------------------------------
Germany 1994 1,480 246 453 2,179(d)
1993 2,021 314 356 2,691(d)
1992 62 171 145 378
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Outstandings (including loans and accrued interest, interest-bearing
deposits with banks, securities, acceptances and other monetary assets, except
equity investments) represent those of both the public and private sectors and
are presented on a risk basis, i.e., net of written guarantees and tangible
liquid collateral when held outside the foreign country. At December 31, 1994,
1993 and 1992, outstandings to Brazil amounted to $1,327 million, $1,328
million, and $1,224 million, respectively, which were in excess of .75% of total
assets in each respective year. At December 31, 1993, outstandings to Italy
amounted to $1,281 million, which were in excess of .75% of 1993 total assets.
At December 31, 1992, outstandings to Korea amounted to $1,074 million, which
were in excess of .75% of 1992 total assets.
(b) Outstandings exclude equity received in debt-for-equity conversions, which
is recorded initially at fair market value and generally accounted for under the
cost method. Commitments (outstanding letters of credit, standby letters of
credit, guarantees and unused legal commitments) are excluded. At December 31,
1994, off-balance sheet commitments, after adjusting for transfers of risk,
amounted to $1,385 million for Japan, $1,059 million for the United Kingdom, and
$487 million for Germany.
(c) The average outstandings to Japan during 1994, 1993 and 1992 (based on
quarter-end amounts) were approximately $3.2 billion, $3.6 billion and $1.2
billion, respectively.
(d) The average outstandings to Germany during 1994 and 1993 (based on
quarter-end amounts) were approximately $2.2 billion and $1.2 billion,
respectively.
The majority of outstandings to Japan and Germany are short-term in nature,
generally representing interbank placements (in the case of Japan) and trading
assets (in the case of Germany). Due to the short-term nature of interbank
placements and trading assets, the Corporation's balances with Japan and
Germany tend to fluctuate greatly and the amount of outstandings at year-end
tends to be a function of timing, rather than representing a consistent trend.
30
<PAGE> 46
--------------------------------------------------------------------------------
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).
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.
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 immaterial at December 31, 1994.
TRADING ACTIVITIES
The Corporation has four fundamental trading activities which generate revenue.
The Corporation seeks generally stable businesses of market-making, sales and
arbitrage, while placing less emphasis on the potentially less-stable business
of positioning.
Market-making: The Corporation trades with the intention of making a profit
based on the spread between bid and ask prices. Market-making, compared with
other trading activities, is considered to be a relatively stable business by
the Corporation because revenue is related principally to market volumes, rather
than to anticipating correctly material changes in the prices of various
financial instruments. The Corporation considers market-making to be a key
trading activity in its non-exchange traded businesses, particularly in its
derivative, foreign exchange, and government markets businesses.
Sales: The Corporation provides products for its clients at competitive prices.
The Corporation believes this to be a relatively stable business because revenue
is related principally to the volume of products sold to the Corporation's
worldwide client base.
Arbitrage: The Corporation enters into a risk position and offsets that risk in
different but closely related markets or instruments. Because of the nature of
trading markets, where there are numerous instruments that relate to one
another, the Corporation believes it can effectively utilize this strategy. The
Corporation considers arbitrage to be a key fundamental of its trading business.
Positioning: The Corporation takes certain positions in the market with the
intention of generating revenue. This strategy has the lowest stability of all
four trading activities and the Corporation's emphasis in this area is less than
in the other trading activities.
The Corporation manages the market risk associated with these trading
activities on an aggregate basis at the business unit level. For a discussion
regarding the Corporation's market risk management process, see the Market Risk
Management - Trading Activities section of Risk Management on page 33.
For a discussion of the derivative and foreign exchange financial instruments
with respect to the Corporation's asset/liability management, see the
Asset/Liability Management section of Risk Management on page 34.
------------------------------------------------------------------------------
RISK MANAGEMENT
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's credit risk management is an integrated process operating
concurrently at the transaction and portfolio levels. For credit origination,
business units formulate strategies, target markets, and determine acceptable
levels of risk. Credit officers work with client managers and, when appropriate,
the syndications group during the underwriting process.
Lending-Related Products: The consumer and commercial segments of the portfolio
have different risk characteristics and different techniques are utilized to
measure and manage their respective credit risks. The consumer loan risk
management process utilizes sophisticated credit scoring and other analytical
methods to differentiate risk characteristics. Risk management procedures
include monitoring both loan origination credit standards and
31
<PAGE> 47
Management's Discussion and Analysis
loan performance quality indicators. The consumer portfolio review process also
includes evaluating product-line performance, geographic diversity and consumer
economic trends. Within the commercial segment, each credit facility is risk
graded. Facilities are subject to hold targets based on risk, and are often
syndicated in order to lower potential concentration risks. Credits not
syndicated remain on the balance sheet and are carefully monitored and analyzed.
The loan review process includes industry specialists and country risk managers
who provide independent expert insight into the portfolio. Industries and
countries are also graded in a process which is incorporated into credit-risk
decisions through the facility-risk grading system and by direct consultation
with originating officers. In addition, real estate problem assets are managed
in special units staffed for restructuring, workout and collection. The
Corporation reassesses the market value of real estate owned for possible
impairment on a continual basis.
Derivative and Foreign Exchange Products: The Corporation seeks to control the
credit risk arising from derivative and foreign exchange transactions through
its credit approval process and the use of risk control limits and monitoring
procedures. The Corporation uses the same credit procedures when entering into
derivative and foreign exchange transactions as it does for traditional lending
products. The credit approval process involves, first, evaluating each
counterparty's creditworthiness, then, where appropriate, assessing the
applicability of off-balance sheet instruments to the risks the counterparty is
attempting to manage, and determining if there are specific transaction
characteristics which alter the risk profile. Credit limits are calculated and
monitored on the basis of potential exposure which takes into consideration
current market value and estimates of potential future movements in market
values. If collateral is deemed necessary to reduce credit risk, the amount and
nature of the collateral obtained is based on management's credit evaluation of
the customer. Collateral held varies but may include cash, investment
securities, accounts receivable, inventory, property, plant and equipment, and
real estate.
The Corporation believes the true measure of credit risk exposure is the
replacement cost of the derivative or foreign exchange product (i.e., the cost
to replace the contract at current market rates should the counterparty default
prior to the settlement date). This is also referred to as repayment risk or the
mark-to-market exposure amount. The notional principal of derivative and foreign
exchange instruments is the amount on which interest and other payments in a
transaction are based. For derivative transactions, the notional principal
typically does not change hands; it is simply a quantity that is used to
calculate payments. While notional principal is the most commonly used volume
measure in the derivative and foreign exchange markets, it is not a measure of
credit or market risk. The notional principal of the Corporation's derivative
and foreign exchange products greatly exceeds the possible credit and market
loss that could arise from such transactions. As a result, the Corporation does
not consider the notional principal to be indicative of its credit or market
risk exposure.
Mark-to-market exposure is a measure, at a point in time, of the value of a
derivative or foreign exchange contract in the open market. When the
mark-to-market is positive, it indicates the counterparty owes the Corporation
and, therefore, creates a repayment risk for the Corporation. When the
mark-to-market is negative, the Corporation owes the counterparty. In this
situation, the Corporation does not have repayment risk.
When the Corporation has more than one transaction outstanding with a
counterparty, and there exists a master netting agreement with the counterparty,
the "net" mark-to-market exposure represents the netting of the positive and
negative exposures with the same counterparty. If there is a net negative
number, the Corporation's exposure to the counterparty is considered zero. Net
mark-to-market is, in the Corporation's view, the best measure of credit risk
when there is a legally enforceable master netting agreement between the
Corporation and the counterparty.
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 December 31, 1994, approximately
95% 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 5% of the
Corporation's derivative and foreign exchange mark-to-market exposure.
Many of the Corporation's contracts are short-term, which mitigates the
credit risk as transactions settle quickly. The following table provides the
remaining maturities of derivative and foreign exchange contracts outstanding at
December 31, 1994. Percentages are based upon remaining contract life of
mark-to-market exposure amounts.
<TABLE>
<CAPTION>
Interest Rate Foreign Exchange
At December 31, 1994 Contracts Contracts
-------------------------------------------------------------------------------
<S> <C> <C>
Less than 3 months 11% 57%
3 to 6 months 8 24
6 to 12 months 12 12
1 to 3 years 35 6
Over 3 years 34 1
-------------------------------------------------------------------------------
Total 100% 100%
-------------------------------------------------------------------------------
</TABLE>
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
other balance sheet and off-balance sheet credit-related transactions. The
Corporation deems its allowance for credit losses at December 31, 1994 to be
adequate. Although the Corporation considers that it has sufficient reserves to
absorb losses that may currently exist in the portfolio,
32
<PAGE> 48
but are not yet identifiable, the precise loss content from the loan portfolio,
as well as from other balance sheet and off-balance sheet credit-related
instruments, is subject to continuing review based on quality indicators,
industry and geographic concentrations, changes in business conditions, and
other external factors such as competition, legal and regulatory requirements.
The Corporation will continue to reassess the adequacy of the allowance for
credit losses.
During 1994, 1993 and 1992, the Corporation's actual credit losses arising
from derivative and foreign exchange transactions were immaterial. Additionally,
at December 31, 1994 and 1993, nonperforming derivatives contracts were
immaterial.
The following table reflects the activity in the allowance for credit losses
for the years ended December 31, 1994 and 1993.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
---------------------------------------------------------------------------
NON-LDC ALLOWANCE:
<S> <C> <C>
Balance at Beginning of Year $2,423 $ 2,206
Provision for Losses 550 1,259 (a)
Net Charge-Offs (650) (1,259)(a)
Charge for Assets Transferred to Held for
Accelerated Disposition (148) --
Transfer from LDC Allowance 300 200
Allowance Related to Purchased Assets
of the First City Banks -- 19
Other 5 (2)
---------------------------------------------------------------------------
Balance at End of Year 2,480 2,423
---------------------------------------------------------------------------
LDC ALLOWANCE:
Balance at Beginning of Year 597 819
Provision for Losses -- --
Net (Charge-Offs) Recoveries (239) 130
Losses on Sales and Swaps (58) (152)
Transfer to Non-LDC Allowance (300) (200)
---------------------------------------------------------------------------
Balance at End of Year -- 597
---------------------------------------------------------------------------
Total Allowance for Credit Losses $2,480 $ 3,020
---------------------------------------------------------------------------
</TABLE>
(a) Includes $55 million related to the decision to accelerate the disposition
of certain nonperforming residential mortgages.
Completion of the Brazilian refinancing package during 1994 brought to a
close the broad rescheduling programs begun in the mid-1980s. In connection with
the completion of the Brazilian refinancing program, the Corporation performed a
final valuation of its LDC portfolio and adjusted its medium- and long-term
outstandings to the various LDC countries in that portfolio to amounts that
management believed to be the estimated net recoverable values of each of such
loans. The final valuation resulted in a $291 million charge in the 1994 second
quarter. The remaining LDC allowance of $300 million was transferred to the
general allowance for credit losses.
MARKET RISK MANAGEMENT - TRADING ACTIVITIES
Risk limits originate with the Chairman of the Market Risk Committee who
determines instrument authorities and exposure levels of individual business
units. Criteria for risk limit determination include, among other factors,
relevant market analysis, market liquidity, prior track record, business
strategy, and management experience and depth. Procedures and policies specify
authorized instruments and exposure levels. Critical risk limits that are
designated as primary are centrally tracked and reported on a daily basis, while
less-critical risk limits are independently monitored and centrally reported on
a periodic basis. Individual business units often set additional internal
limits.
The Market Risk Management Group (the "Group") performs independent analysis
of instrument authority, limit requests, and limit utilization. In addition, the
Group tracks market risk-related revenue and compares it to the actual market
risk incurred to produce such revenue and assesses risk levels and related
topics. Other focuses include measurement and calculation of value-at-risk,
criteria for official volatility and correlation statistics, and formulas for
determination of market-related credit exposure. Additionally, the Group reviews
the market risk related to new products (as one element of the Corporation's new
product process) and provides independent review of the mathematical and
simulation models utilized by business units. The Group combines efforts with
other functional units to assess cross-discipline risks in business units having
significant market risk.
The Corporation's business strategy seeks to manage the market risks
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.
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 unrealized market gains
or losses on the Corporation's asset/liability management portfolio, see Note
Twenty Two of the Consolidated Financial Statements.
Measuring Market Risk: The Corporation's overall risk management process
utilizes a limit system incorporating three types of risk control:
value-at-risk, non-statistical limits, and stop loss advisories. Value-at-risk
is defined 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 nearly 1,500 volatilities and 400,000 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
33
<PAGE> 49
Management's Discussion and Analysis
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 in
1994. Based on actual 1994 trading results, which capture the historical
correlation among business units, the Corporation's daily average value-at-risk
was reduced to approximately $12 million with 97.5% confidence.
Value-at-risk is an important concept, but it is not the sole control measure
used in the risk management process. Non-statistical limits include net open
positions, basis point values, position concentrations, and position ages.
These non-statistical measures are accorded the same importance as
value-at-risk. Stop loss advisories also are used to advise senior management
when losses of a certain threshold are sustained from a business activity. The
use of non-statistical measures and stop loss advisories to complement
value-at-risk limits reduces the likelihood that potential trading losses will
reach the daily average value-at-risk amount.
[GRAPH 6-See Appendix I]
The above chart contains a histogram of the Corporation's daily market
risk-related revenue for 1994. Market risk-related revenue is defined as the
daily change in value in marked-to-market trading portfolios plus any
trading-related net interest income or other revenue. Net interest income
related to funding and investment activity is excluded. The histogram covers
the corporation's major trading units (including Texas Commerce) which
constitute approximately 98% of its trading activity. The histogram does not
include the $70 million loss from unauthorized foreign exchange transactions
related to the Mexican peso, as management considers this loss to be indicative
of operating risk rather than market risk. As shown by the histogram, the
Corporation posted positive daily market risk-related revenue far more often
than negative results approximately 77% of all days). The large number of
results centered around the $0 million to $5 million range is representative of
the Corporation's emphasis on market-making and sales activities. The low
number of outlier results 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 process operates under the authority and direction of the Asset and
Liability Policy Committee, comprised of the Office of the Chairman and senior
business and finance executives. The Committee seeks to maximize earnings -
particularly revenues associated with net interest income - while ensuring that
the risks to those earnings from adverse movements in interest rates are kept
within specified limits deemed acceptable by the Corporation.
The Corporation's net interest income is affected by changes in the level of
market interest rates based upon 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.
The Corporation, as part of its asset/liability management process, employs a
variety of off-balance sheet instruments in managing its exposure to
fluctuations in market interest rates and foreign exchange rates. These
instruments include interest rate swaps, futures, forward rate agreements,
options and foreign currency contracts (see Note One of the Consolidated
Financial Statements for a discussion of the Corporation's accounting policy
relative to off-balance sheet instruments used for asset/liability management
and Note Nineteen of the Consolidated Financial Statements for the aggregate
notional principal of off-balance sheet instruments). Foreign currency
instruments are used to hedge the exposure to changes in currency values. For
example, the legal capital invested in the Corporation's foreign branches and
subsidiaries is usually recorded in their respective local currencies, while the
related funding by the Corporation is in U.S. dollars. The resulting market risk
is generally hedged using foreign exchange forward contracts.
34
<PAGE> 50
Risk Management and Control: A key element of the Corporation's asset/liability
process is that it allows the assumption of interest sensitivity at a
decentralized level by authorized units with close contacts to the markets.
These units are subject to individual authorities and limits administered
centrally which limit the size of exposures by currency and the instruments that
can be used to manage the sensitivities.
The Asset and Liability Policy Committee has ultimate responsibility for the
Corporation's consolidated interest rate exposure. In addition to the individual
limits placed on the decentralized risk management units, the Committee has
established "global" limits for consolidated exposures along several dimensions
of risk, including net gap exposure and earnings at risk.
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.
Derivatives used in interest rate sensitivity management are also included in
the maturity ladders. The aggregate notional amounts of derivatives are netted
when the repricing of the "receive-side" and "pay-side" of two swaps occur
within the same gap interval. Such net amount represents the repricing mismatch
of the Corporation's derivatives during the particular gap interval. It is the
amount of the net repricing mismatch, rather than the aggregate notional
principal of the derivatives repricing during the period, that is included in
the gap analysis, because it is the amount of the mismatch that reflects the
impact of the Corporation's derivatives in altering the repricing profile of the
Corporation.
INTEREST SENSITIVITY TABLE
<TABLE>
<CAPTION>
Over
At December 31, 1994 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years 5 Years Total
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Deposits With Banks $ 5,458 $ 182 $ 9 $ -- $ -- $ 5,649
Federal Funds Sold and Securities Purchased
Under Resale Agreements 12,660 137 -- -- -- 12,797
Trading Account Assets 28,802 -- -- -- -- 28,802
Securities 3,489 775 1,386 12,207 9,140 26,997
Loans, Net 49,835 7,906 3,461 9,843 5,242 76,287
Noninterest Earning Assets 12,378 367 649 4,451 3,046 20,891
--------------------------------------------------------------------------------------------------------------------------------
Total Assets $112,622 $ 9,367 $ 5,505 $26,501 $17,428 $171,423
--------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits $ 64,356 $ 4,031 $ 4,803 $16,348 $ 6,968 $ 96,506
Short-Term and Other Borrowings 34,734 35 37 76 59 34,941
Long-Term Debt 3,784 462 -- 977 2,768 7,991
Other Liabilities 21,106 9 15 68 75 21,273
Stockholders' Equity 171 437 475 4,763 4,866 10,712
--------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $124,151 $ 4,974 $ 5,330 $22,232 $14,736 $171,423
--------------------------------------------------------------------------------------------------------------------------------
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)% -- --
--------------------------------------------------------------------------------------------------------------------------------
At December 31, 1993
--------------------------------------------------------------------------------------------------------------------------------
Interest-Rate-Sensitivity Gap $(12,523) $ 2,311 $ 2,300 $10,795 $(2,883) --
--------------------------------------------------------------------------------------------------------------------------------
Cumulative Interest-Rate Sensitivity Gap (12,523) (10,212) (7,912) 2,883 -- --
--------------------------------------------------------------------------------------------------------------------------------
% of Total Assets (8)% (7)% (5)% 2% -- --
--------------------------------------------------------------------------------------------------------------------------------
At December 31, 1992
--------------------------------------------------------------------------------------------------------------------------------
Interest-Rate-Sensitivity Gap $(11,501) $ 1,730 $2,516 $ 8,963 $(1,708) --
--------------------------------------------------------------------------------------------------------------------------------
Cumulative Interest-Rate Sensitivity Gap (11,501) (9,771) (7,255) 1,708 -- --
--------------------------------------------------------------------------------------------------------------------------------
% of Total Assets (8)% (7)% (5)% 1% -- --
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
35
<PAGE> 51
Management's Discussion and Analysis
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.
At December 31, 1994, the Corporation had $9,118 million more liabilities
than assets repricing within one year, amounting to 5.3% of total assets. This
compares with $7,912 million, or 5.3% of total assets, at December 31, 1993. The
consolidated gaps include exposure to U.S. dollar interest rates as well as
exposure to non-U.S. dollar rates in currency markets in which the Corporation
does business. Since U.S. interest rates and non-U.S. interest rates do not move
in tandem, the overall cumulative gaps will tend to overstate the exposures of
the Corporation to U.S. interest rates.
Gap analysis is the simplest representation of the Corporation's interest
rate sensitivity. It cannot reveal the impact of factors such as administered
rates (e.g., the prime lending rate), pricing strategies on its consumer and
business deposits, changes in balance sheet mix, or various options embedded in
the balance sheet. Accordingly, the Asset and Liability Policy Committee
conducts comprehensive simulations of net interest income under a variety of
market interest rate scenarios. These simulations provide the Committee with an
estimate of earnings at risk for given changes in interest rates.
The simulations are based on a static balance sheet, reflecting the
Corporation's then-current business mix and interest rate exposures. The
simulations take explicit account of pricing strategies and deposit responses
and the behavior of embedded options. Net interest income is then projected
assuming stable interest rates and under a variety of other scenarios. The
difference between these projections of net interest income after taxes, as a
percentage of projected net income after taxes, represent earnings at risk to
changes in interest rates.
At December 31, 1994, based on these simulations, earnings at risk to a
gradual 150 basis point rise in market interest rates over the course of 1995
was estimated to be less than three percent of projected 1995 after-tax net
income. The gradual 150 basis point rise in interest rates is a hypothetical
rate scenario, used to calibrate risk, and does not necessarily represent
management's current view of future market interest rate movements.
Simulation analysis fails to capture interest rate exposures beyond the
simulation period. To capture these exposures, the Asset and Liability Policy
Committee has constructed models to estimate the sensitivity in value of the
Corporation's financial assets and liabilities which result from hypothetical,
instantaneous shifts in the level of market interest rates. This sensitivity is
calculated by comparing the net present value of net interest income-related
cash flows under current market conditions to the net present values under
different rate environments. In addition to gap exposures and earnings at risk,
the Asset and Liability Policy Committee continuously monitors the longer-run
sensitivity.
All the measurements of risk described above are based upon the Corporation's
business mix and interest rate exposures at a particular point in time. The
exposures change continuously as a result of the Corporation's ongoing business
and its risk management initiatives. During 1994, the Corporation's net
cumulative gap exposure at the one-year point ranged between 3.2% and 7.2% of
total assets. Earnings at risk to a gradual, one-year 150 basis point increase
in interest rates varied between 2% and 4% of projected after-tax net income.
While management believes these measures provide a meaningful representation
of the Corporation's interest rate sensitivity, they do not necessarily take
into account all business developments which have an effect on net income, such
as changes in credit quality or the size and composition of the balance sheet.
Interest rate swaps: Interest rate swaps are one of the various financial
instruments used in the Corporation's 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 summarizes the expected maturities and weighted-average interest
rates to be received and paid on domestic and international interest rate swaps
utilized in the Corporation's asset/liability management at December 31, 1994.
The table was prepared under the assumption that variable interest rates remain
constant at December 31, 1994 levels and, accordingly, the actual interest rates
to be received or paid will be different to the extent that such variable rates
fluctuate from December 31, 1994 levels. Variable rates presented are generally
based on the short-term interest rates for the relevant currencies (e.g., London
Interbank Offered Rate (LIBOR)). Basis swaps are interest rate swaps based on
two floating rate indices (e.g., LIBOR and prime). Forward starting swaps are
interest rate swap contracts that become effective at a future time.
36
<PAGE> 52
INTEREST RATE SWAP MATURITY TABLE
<TABLE>
<CAPTION>
By expected maturities After
At December 31, 1994 (in millions) 1995 1996 1997 1998 1999 1999 Total
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RECEIVE FIXED SWAPS
Notional amount $11,193 $ 5,297 $4,551 $1,316 $ 638 $2,057 $25,052
Weighted-average:
Receive rate 6.10% 6.38% 6.53% 5.88% 5.93% 6.89% 6.29%
Pay rate 5.36 5.13 5.73 5.96 6.10 5.80 5.47
PAY FIXED SWAPS
Notional amount $ 7,462 $ 5,891 $2,102 $ 599 $ 978 $1,366 $18,398
Weighted-average:
Receive rate 5.60% 5.25% 5.29% 5.84% 5.79% 5.84% 5.49%
Pay rate 5.72 6.13 6.66 5.80 7.10 7.04 6.13
BASIS SWAPS
Notional amount $ 4,055 $ 1,109 $ 415 $ 342 $ 405 $ 145 $ 6,471
Weighted-average:
Receive rate 6.13% 6.28% 6.06% 6.34% 6.54% 5.83% 6.18%
Pay rate 6.10 6.02 5.95 6.24 6.57 5.95 6.11
FORWARD STARTING
Notional amount $ 46 $ 492 $ 68 $ -- $ -- $ 155 $ 761
Weighted-average:
Receive rate 6.84% 5.76% 6.19% --% --% 4.64% 5.63%
Pay rate 7.11 6.23 7.83 -- -- 5.78 6.33
-------------------------------------------------------------------------------------------------------------------------------
Total notional amount(a) $22,756 $12,789 $7,136 $2,257 $2,021 $3,723 $50,682
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At December 31, 1994, approximately $30.8 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, $15.7
billion is expected to mature in 1995, $8.2 billion in 1996 and $4.2 billion in
1997 with the remaining $2.7 billion in 1998 and thereafter. The unrecognized
net gain related to these positions was approximately $80 million. See Note One
to the Consolidated Financial Statements for a discussion of the Corporation's
accounting policy relative to off-balance sheet instruments used for
asset/liability management.
--------------------------------------------------------------------------------
CAPITAL AND LIQUIDITY
The Corporation's capital base at December 31, 1994 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 as discussed below
under Risk-Based Capital Ratios) increased by $222 million during 1994.
STOCKHOLDERS' EQUITY
The Corporation's total stockholders' equity at the 1994 year-end was $10.7
billion, compared with $11.2 billion at December 31, 1993. The decline reflected
a $653 million reduction in the fair value of available-for-sale securities
accounted for under SFAS 115. The market valuation related to these securities
does not include the favorable impact of related funding sources. Also impacting
stockholders' equity during 1994 was the redemption of $404 million of
Adjustable Rate Cumulative Preferred Stock, Series C ("Series C Preferred
Stock"); the net increase in treasury stock of $349 million from the repurchase
of approximately 10 million shares of the Corporation's common stock; and common
and preferred dividends totaling $532 million. These declines were partially
offset by $1,294 million of net income generated during 1994 as well as an
increase of $200 million from the issuance of Adjustable Rate Cumulative
Preferred Stock, Series L ("Series L Preferred Stock").
The Corporation's ratio of common stockholders' equity to total assets was
5.40% at December 31, 1994, a decrease from 6.34% at year-end 1993. The ratio of
total stockholders' equity to total assets at December 31, 1994 was 6.25%, a
decrease from 7.45% from the same date a year ago. The declines in the ratios
from the prior year-end are primarily due to the higher level of assets (as a
result of the adoption of FASI 39, which increased total assets by $16.0 billion
at December 31, 1994), and the unfavorable impact of SFAS 115 on stockholders'
equity. Excluding the impact of FASI 39, the ratio of total common stockholders'
equity to total assets was 5.96% and total stockholders' equity to total assets
was 6.89% at December 31, 1994.
LONG-TERM DEBT
During 1994, additions to the Corporation's long-term debt totaled $1,822
million (including $872 million of medium-term notes, $350 million of
subordinated debt that qualifies as Tier 2 Capital, $450 million of other
long-term debt and the inclusion of $150 million from the acquisition of
Margaretten). These additions were offset by maturities of $1,842 million of
long-term debt (including $637 million of medium-term notes, $515 million of
senior notes, and $690 million of other long-term
37
<PAGE> 53
Management's Discussion and Analysis
debt) and the redemption of $200 million of long-term debt. See the Liquidity
Management section on page 39 for further discussion of the Corporation's
long-term debt redemption.
COMMON STOCK DIVIDENDS
In the third quarter of 1994, the Board of Directors of the Corporation
increased the quarterly dividend on the Corporation's common stock from $0.38
per share to $0.44 per share. On an annualized basis, this represents an
increase in the dividend rate to $1.76 from $1.52 per share. Since March 1993,
the Corporation has increased the common dividend by 47%. 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
Under the Federal Reserve Board's risk-based capital guidelines, banking
organizations are required to maintain certain ratios of "Qualifying Capital" to
"risk-weighted assets". "Qualifying Capital" is classified into two tiers,
referred to as Tier 1 Capital and Tier 2 Capital. Tier 1 Capital consists of
common equity, qualifying perpetual preferred equity, and minority interests in
the equity accounts of unconsolidated subsidiaries, less goodwill and other
non-qualifying intangible assets. Tier 2 Capital consists of perpetual preferred
equity not qualifying for Tier 1, qualifying allowance for credit losses,
mandatory convertible debt and subordinated debt, and other qualifying
securities. The amount of Tier 2 Capital may not exceed the amount of Tier 1
Capital. In calculating "risk-weighted assets", certain risk percentages, as
specified by the Federal Reserve Board, are applied to particular categories of
both on- and off-balance sheet assets.
Under the guidelines, the Corporation's Tier 1 Capital ratio and Total
Capital ratio to risk-weighted assets at December 31, 1994 were 8.20% and
12.35%, respectively, well in excess of the minimum ratios of 4% and 8%,
respectively, specified by the Federal Reserve Board. Also, as of that date,
Chemical Bank's ratios of Tier 1 Capital and Total Capital to risk-weighted
assets, were 7.60% and 11.91%, respectively. At December 31, 1994, Chemical Bank
and Texas Commerce Bank National Association were each "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 (as defined in the following
section) of at least 5%.
The Federal Reserve Board has announced that banking corporations should
exclude from Tier 1 Capital the net amount of any unrealized gains or losses
from securities available-for-sale. Accordingly, Tier 1 Capital, as well as the
leverage ratio discussed below, do not reflect any adjustment in stockholders'
equity due to the adoption of SFAS 115. The adoption of FASI 39 did not affect
the Corporation's risk-based capital ratios.
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 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.
The Corporation's Tier 1 leverage ratio was 5.95% at December 31, 1994,
compared with 6.77% at December 31, 1993. At December 31, 1994, Chemical Bank's
Tier 1 leverage ratio was 5.72%, compared with 6.97% at December 31, 1993. The
declines in the leverage ratios for both the Corporation and Chemical Bank
reflect the adoption of FASI 39 on January 1, 1994. Excluding the impact of FASI
39, the Corporation's Tier 1 leverage ratio would have been 6.65% at December
31, 1994 and Chemical Bank's Tier 1 leverage ratio would have been 6.62%.
The table which follows sets forth the Corporation's Tier 1 and Total
Capital, risk-weighted assets, Tier 1 and Total Capital ratios, and Tier 1
leverage ratios for the dates indicated.
CAPITAL RATIOS
<TABLE>
<CAPTION>
December 31, (in millions, except ratios) 1994 1993
------------------------------------------------------------------
<S> <C> <C>
TIER 1 CAPITAL:
Common Stockholders' Equity $ 9,700 $ 9,295
Nonredeemable Preferred Stock 1,450 1,654
Minority Interest 63 66
Less: Goodwill 1,068 941
Non-Qualifying Intangible Assets 142 211
------------------------------------------------------------------
Tier 1 Capital 10,003 9,863
------------------------------------------------------------------
TIER 2 CAPITAL:
Long-Term Debt Qualifying as Tier 2 3,519 3,437
Qualifying Allowance for Credit Losses 1,536 1,536
------------------------------------------------------------------
Tier 2 Capital 5,055 4,973
------------------------------------------------------------------
Total Qualifying Capital $ 15,058 $ 14,836
------------------------------------------------------------------
Risk-Weighted Assets(a) $121,939 $121,446
Tier 1 Capital Ratio(b) 8.20% 8.12%
Total Capital Ratio(b) 12.35% 12.22%
Tier 1 Leverage Ratio(b) 5.95% 6.77%
------------------------------------------------------------------
</TABLE>
(a) Includes off-balance sheet risk-weighted assets in the amount of $37,157
million and $36,777 million, respectively, at December 31, 1994 and December 31,
1993.
(b) Excluding the Corporation's securities subsidiary, Chemical Securities Inc.,
the December 31, 1994 Tier 1 Leverage, Tier 1 Capital and Total Capital ratios
were 6.26%, 8.02% and 11.97%, respectively, compared with 7.16%, 7.93% and
11.86%, respectively, at December 31, 1993.
38
<PAGE> 54
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Corporation's financial commitments and
to capitalize on opportunities for the Corporation's business expansion.
Liquidity management addresses the Corporation's ability to meet deposit
withdrawals either on demand or at contractual maturity, to repay borrowings as
they mature, and to make new loans and investments as opportunities arise.
Liquidity is managed on a daily basis at both the parent company and the
subsidiary levels, enabling senior management to monitor effectively changes in
liquidity and to react accordingly to fluctuations in market conditions.
Contingency plans exist and could be implemented on a timely basis to minimize
the risk associated with dramatic changes in market conditions.
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 1994 were $58 billion, a decrease
from $61 billion for 1993. These deposits fund a portion of the Corporation's
asset base, thereby reducing the Corporation's reliance on other, more volatile,
sources of funds. The Corporation's average core deposits as a percentage of
average loans was 77% for each of 1994 and 1993.
The Corporation holds marketable securities and other short-term investments
which can be readily converted to cash. In addition, loan syndication networks
are maintained in order to facilitate the timely liquidation of certain assets
if and when deemed desirable.
The Corporation is an active participant in the capital markets. In addition
to issuing commercial paper and medium-term notes, the Corporation raises funds
through the issuance of long-term debt, common stock and preferred stock. During
1994, the Corporation issued $200 million of preferred stock, $350 million of
subordinated debt, and $1,322 million of senior debt (including $872 million
through its medium-term note program) in various public offerings.
In April 1994, Moody's Investors Service raised its rating on the long-term
deposits and other senior obligations of Chemical Bank to Aa3 from A1. It also
raised the ratings on the Corporation's commercial paper, senior debt,
subordinated debt and preferred stock and on Chemical Bank's subordinated debt.
These rating increases enhanced and should continue to enhance the Corporation's
access to global capital and money markets, a primary source of liquidity for an
international money-center institution. The ability to access this
geographically diverse assortment of distribution channels and to issue a wide
variety of capital and money market instruments at various maturities provides
the Corporation with a full array of alternatives for managing its liquidity
position.
During 1994, the Corporation redeemed $200 million of its long-term debt, as
well as all 33.6 million outstanding shares of its Series C Preferred Stock. The
redemption price was $12.36 per share (which included a premium of $.36 per
share) plus accrued but unpaid dividends to the date of redemption. A portion of
the redemption was funded by the net proceeds received from the issuance of the
Series L Preferred Stock. The effect on earnings per share as a result of the
premium related to the redemption was a one-time reduction of $0.05 per common
share for 1994. These redemptions were part of the Corporation's plan to improve
its capital position by achieving lower financing costs, reducing interest-rate
risk and lengthening maturities of its outstanding debt. The Corporation will
continue to evaluate the opportunity for future redemptions of its outstanding
debt and preferred stock in light of current market conditions.
In September 1994, the Corporation completed the repurchase of 10 million
shares of its common stock under a program announced in May 1994. In December
1994, as part of the Actions to Improve Earnings Per Share, the Corporation
announced a similar program under which it intends to repurchase approximately 6
million additional shares of its common stock during 1995. Management will
consider expanding this new program upon the completion of the contemplated
divestitures of Chemical Bank New Jersey, N.A. and CIT discussed in the Actions
to Improve Earnings Per Share section.
The following comments apply to the Consolidated Statement of Cash Flows,
which appears on page 47.
Cash and due from banks increased $2.0 billion during 1994, as net cash
provided by financing and operating activities exceeded the net cash used by
investing activities. The $6.8 billion net cash provided by financing activities
was due to increases in Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds ($9.4 billion), and net proceeds
from the issuance of long-term debt ($1.7 billion), partially offset by
repayments and maturities of long-term debt ($2.0 billion) and a decrease in
total deposits ($1.8 billion). The $2.4 billion net cash provided by operating
activities was principally due to cash inflows from earnings partially offset by
a net increase in trading-related assets ($1.0 billion). The $7.1 billion net
cash used by investing activities was largely the result of cash outflows from
the purchases of securities ($26.9 billion), as well as increases in net loans
($4.0 billion) and Federal funds sold and securities purchased under resale
agreements ($2.2 billion), partially offset by cash inflows from the proceeds
from the sales of available-for-sale securities and maturities of securities
($18.6 billion and $6.3 billion, respectively).
39
<PAGE> 55
Management's Discussion and Analysis
The Corporation's anticipated cash requirements (on a parent company-only basis)
for 1995 include approximately $2.0 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 aforementioned
program to repurchase 6 million shares of its common stock and for other parent
company operations. The Corporation considers the sources of liquidity available
to the parent company to be more than sufficient to meet its obligations. The
sources of liquidity available to the Corporation (on a parent company-only
basis) include its liquid assets (including deposits with its bank subsidiaries
and short-term advances to and repurchase agreements with its securities
subsidiaries) as well as dividends and the repayment of intercompany advances
from its bank and non-bank subsidiaries. In addition, as of December 31, 1994,
the Corporation had available to it $750 million in committed credit facilities
from a syndicate of domestic and international banks. The facilities included a
$375 million 36-month facility and a $375 million 364-day facility.
--------------------------------------------------------------------------------
OTHER EVENTS
JOINT VENTURE WITH MELLON BANK CORPORATION
The Corporation and Mellon Bank Corporation have agreed to form a joint venture
that will focus on providing stock transfer and related shareholder services to
publicly-held companies. The joint venture will be called Chemical Mellon
Shareholder Services, and will be 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 will include 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 will be accounted for as an equity investment.
The commencement of the joint venture's operations is subject to receipt of
regulatory approval, which is currently expected in mid-1995.
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 Bank Corp. ("PNC") for $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 BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the Financial Accounting Standards Board, ("FASB") issued Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114"). In October 1994, the FASB issued Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"), as an
amendment to SFAS 114. SFAS 114 requires that the carrying value of impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. SFAS 118 amends SFAS 114 to allow creditors to use
existing methods for recognizing interest income on impaired loans.
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 is
applicable to all loans that are identified for evaluation, uncollateralized as
well as collateralized, with certain exceptions.
SFAS 114, as amended by SFAS 118, applies to financial statements for fiscal
years beginning after December 15, 1994. The Corporation believes that its
impaired loans are generally those currently reported as nonperforming and
expects to continue to use existing methods discussed in Note One of the Notes
to Consolidated Financial Statements for recognizing interest income on these
loans. Management believes that the adoption of SFAS 114 and SFAS 118 will not
affect the Corporation's earnings, liquidity or capital resources.
40
<PAGE> 56
-------------------------------------------------------------------------------
COMPARISON BETWEEN 1993 AND 1992
OPERATING HIGHLIGHTS
The Corporation's net income was $1,604 million for 1993, an increase of 48%
from $1,086 million reported for 1992. Net income per common share for 1993 was
$5.77, compared with $3.90 in 1992.
The higher net income in 1993 reflected strong revenue growth in the
Corporation's core businesses. Total noninterest revenue in 1993 increased 33%
from 1992 reflecting strong performances from capital markets, corporate
finance, personal trust and national consumer activities, as well as higher
profits from equity-related investments. Also contributing to the strong
earnings was a lower provision for losses reflecting improvement during 1993 in
the Corporation's credit quality.
On January 1, 1993, the Corporation adopted SFAS 106, which resulted in a
charge of $415 million, and SFAS 109, which resulted in an income tax benefit of
$450 million. The net favorable impact of the adoption of these two new
accounting standards was $35 million. Income before the effect of these
accounting changes was $1,569 million ($5.63 per common share), an increase of
44% from 1992.
NET INTEREST INCOME
The Corporation's net interest income was $4,636 million in 1993, an increase
from $4,598 million in 1992. The improvement in net interest income for 1993 was
due to the favorable impact from the decrease in nonperforming loans, higher
average interest earning assets and lower funding costs (primarily as a result
of the upgrades to the Corporation's credit ratings). These improvements were
partially offset by a decrease in the Corporation's loan portfolio, as a result
of sluggish commercial loan demand in 1993, loan paydowns from businesses
refinancing their borrowings in the debt and equity markets, as well as
management's strategic decision to reduce the credit-risk profile of the
Corporation. As a consequence, there was a remixing of the composition of the
Corporation's average interest-earning assets to liquid assets, which support
the Corporation's trading businesses. Additionally, net interest income for 1993
was unfavorably impacted by the expiration of positions taken prior to and in
the early part of 1992 to take advantage of declining U.S. interest rates.
PROVISION FOR LOSSES AND NET CHARGE-OFFS
The provision for losses in 1993 was $1,259 million, a decrease of 8% from
$1,365 million in 1992. In both years, the provision equaled the amount of the
respective year's non-LDC net charge-offs. The 1993 amount included a $55
million provision related to the decision to accelerate the disposition of
certain nonperforming residential mortgage loans.
LDC net charge-offs and losses on sales and swaps totaled $22 million in
1993, compared with $244 million from the prior year.
NONINTEREST REVENUE
Noninterest revenue totaled $4,024 million in 1993, an increase of 33% from
1992. The growth in noninterest revenue was primarily the result of record
combined trading revenue, increases in various fee-based revenue, higher revenue
from equity-related investments and higher other revenue, principally gains from
the sale of emerging markets-related past-due interest bonds.
Trust and investment management fees in 1993 were $406 million, an increase
of $45 million from 1992, reflecting growth in the Corporation's personal trust
and asset management businesses. Included in these amounts are personal trust
fees, which increased by $31 million in 1993, due to a rise in the market value
of investments under management and to new customer relationships developed as a
result of two acquisitions by Texas Commerce in 1993.
Corporate finance and syndication fees in 1993 reached $338 million, an
increase of 28% from the prior year, principally resulting from strong growth in
global loan originations and distribution activities. New fees from expanded
underwriting powers in 1993 related to debt offerings also contributed to the
increase.
Service charges on deposit accounts totaled $288 million in 1993, an increase
of 9% over 1992, reflecting a higher level of fees related to retail accounts,
as well as a larger deposit base (principally resulting from the acquisition of
the First City Banks).
Fees for other banking services for 1993 were $1,067 million, an increase of
$27 million from the previous year, which is indicative of the continued growth
in the Corporation's core revenue businesses such as credit card fees, mortgage
servicing fees, and loan commitment fees.
Trading revenue in 1993 was $1,073 million, an increase of 26% from the prior
year. The Corporation, taking advantage of its higher credit ratings and its
increasing global presence, broadened its global trading activities and
increased the range of products it offers and the currency markets in which it
operates. The resulting growth in transaction volume, coupled with a broader
range of instruments, market volatility and wider spreads (especially in the
European markets) contributed to the increased revenues.
Securities gains in 1993 were $142 million, compared with $53 million in
1992. During 1993, the Corporation sold high-coupon mortgage-backed securities
("MBS"), under favorable market conditions, and replaced them with lower-coupon
MBS in order to reduce the Corporation's exposure to prepayment and price risk.
The Corporation's other noninterest revenue for 1993 was $710 million,
compared with $190 million in 1992. Revenue from equity-related investments,
which includes income from venture capital activities and emerging markets
investments, was $278 million in 1993, an increase of $181 million from 1992.
Included in other noninterest revenue in 1993 was $306 million
41
<PAGE> 57
Management's Discussion and Analysis
of net gains from the sale of emerging markets-related past-due interest bonds.
There were no such sales in 1992. All other noninterest revenue was $126 million
in 1993 compared with $93 million in 1992. Included in the 1993 amount was
equity income from CIT of $65 million, an increase from $57 million in 1992.
NONINTEREST EXPENSE
Noninterest expense in 1993 was $5,293 million, compared with $4,930 million in
1992. Included in noninterest expense for 1993 were expenses related to two
acquisitions by Texas Commerce and higher expenses associated with investments
in certain key businesses, such as expansion of the Corporation's securities
business and the introduction of the co-branded MasterCard program with Shell
Oil Company.
During 1993, the Corporation incurred a $115 million charge related to the final
assessment of costs associated with the merger with MHC and a $43 million charge
in connection with the First City Banks acquisition. The results for 1992
included a one-time charge of $41 million related to costs incurred in combining
the Corporation's employee benefit plans and a $30 million charge for London
occupancy-related expenses associated with the Corporation's Canary Wharf lease
arrangements.
Salaries and employee benefits expenses in 1993 were $2,466 million, compared
with $2,349 million in 1992. The increase was primarily the result of
significantly higher incentive compensation costs due to increased revenues
(primarily from the Corporation's capital markets and corporate finance
activities), higher expenses related to services provided by temporary
employment agencies to assist with merger integration efforts, and the
additional staff costs from the 1993 acquisitions by Texas Commerce.
Additionally, as a result of the adoption of SFAS 106, expenses for 1993 related
to other postretirement benefits were approximately $20 million higher than in
1992.
Occupancy expense in 1993 was $587 million, an increase of $21 million from
1992. The increase in 1993 principally resulted from $13 million in
occupancy-related expenses associated with the facilities acquired in connection
with the First City Banks and Ameritrust transactions.
Equipment expense in 1993 was $337 million, an increase of $21 million from
the prior year, primarily the result of technology enhancements to support the
Corporation's investments in certain businesses.
Foreclosed property expense was $287 million in 1993, compared with $283
million in 1992. Included in the 1993 results was a $20 million writedown
related to the accelerated disposition of nonperforming residential mortgage
assets.
Other expense in 1993 was $1,458 million, compared with $1,416 million in
1992. Excluding the aforementioned one-time charges in 1992, the increase in
other expense in 1993 principally reflected higher marketing costs, increased
operating expenses associated with the First City Banks and Ameritrust
acquisitions, and higher FDIC costs due to a higher deposit base resulting from
such acquisitions.
INCOME TAXES
The Corporation recorded income tax expense of $539 million in 1993, compared
with $243 million in 1992. Included in the 1993 and 1992 income tax expense were
approximately $331 million and $278 million, respectively, of Federal income tax
benefits.
The Corporation recognized its remaining available Federal income tax
benefits in accordance with SFAS 109 in the third quarter of 1993. As a result,
earnings, beginning in the fourth quarter of 1993, have been reported on a
fully-taxed basis.
NONPERFORMING ASSETS
The Corporation's total nonperforming assets at December 31, 1993 were $3,525
million, a decline of 42% from $6,092 million at December 31, 1992. The decline
resulted from increased repayments, lower levels of loans being placed on
nonperforming status, the impact of increased charge-offs and write-downs
and the removal of restructured Argentine debt from nonaccrual status.
ALLOWANCE FOR CREDIT LOSSES
The total allowance for credit losses at December 31, 1993 was $3,020 million,
or 4.01% of total loans and 116.56% of nonperforming loans at year-end, compared
with $3,025 million, or 3.69% of total loans and 62.81% of nonperforming loans
at the 1992 year-end.
CASH FLOWS
The following comments apply to the Consolidated Statement of Cash Flows, which
appears on page 47.
Cash and due from banks decreased $2.0 billion during 1993, as net cash used
by operating and investing activities exceeded the net cash provided by
financing activities. The $7.9 billion net cash used by operating activities
resulted from cash outflows from increased trading-related assets. The $.2
billion net cash used by investing activities was largely the result of cash
outflows from purchases of available-for-sale and held-to-maturity securities
partially offset by loan sales and securitizations. The $6.0 billion net cash
provided by financing activities was the result of increases in Federal funds
purchased, securities sold under repurchase agreements and other borrowed
funds, foreign deposits and net proceeds from the issuance of long-term debt,
partially offset by repayments and maturities of long-term debt.
42
<PAGE> 58
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
TO OUR STOCKHOLDERS
The management of Chemical Banking Corporation and its subsidiaries has the
responsibility for preparing the accompanying consolidated financial statements
and for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles. The consolidated
financial statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
Management maintains a comprehensive system of internal control to assure the
proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. The Corporation maintains a
strong internal auditing program that independently assesses the effectiveness
of the internal controls and recommends possible improvements thereto.
Management believes that as of December 31, 1994, the Corporation maintains an
effective system of internal control.
The Audit Committee of the Board of Directors reviews the systems of internal
control and financial reporting. The Committee meets and consults regularly with
management, the internal auditors and the independent accountants to review the
scope and results of their work.
The accounting firm of Price Waterhouse LLP has performed an independent
audit of the Corporation's financial statements. Management has made available
to Price Waterhouse LLP all of the Corporation's financial records and related
data, as well as the minutes of stockholders' and directors' meetings.
Furthermore, management believes that all representations made to Price
Waterhouse LLP during its audit were valid and appropriate. The firm's report
appears below.
/s/ Walter V. Shipley
----------------------------------------------------
Walter V. Shipley
Chairman of the Board and Chief Executive Officer
/s/ Peter J. Tobin
----------------------------------------------------
Peter J. Tobin
Executive Vice President and Chief Financial Officer
/s/ Joseph L. Sclafani
----------------------------------------------------
Joseph L. Sclafani
Senior Vice President and Controller
January 17, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
Price Waterhouse LLP 1177 AVENUE OF THE AMERICAS, NEW YORK, NY 10036
To the Board of Directors and Stockholders of Chemical Banking Corporation: In
our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Chemical Banking Corporation and its subsidiaries at December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Notes Three, Four, Thirteen and Seventeen to the consolidated
financial statements, in 1994 the Corporation changed its method of accounting
for the offsetting of amounts related to certain contracts and in 1993 the
Corporation changed its method of accounting for income taxes, postretirement
benefits other than pensions, and certain investments in debt and marketable
equity securities.
/s/ Price Waterhouse LLP
January 17, 1995
43
<PAGE> 59
Chemical Banking Corporation
and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, (in millions, except share data) 1994 1993
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 8,832 $ 6,852
Deposits with Banks 5,649 6,030
Federal Funds Sold and Securities Purchased Under Resale Agreements 12,797 10,556
Trading Assets:
Debt and Equity Instruments 11,093 11,679
Risk Management Instruments 17,709 --
Securities:
Held-to-Maturity (Market Value: $8,106 and $10,288) 8,566 10,108
Available-for-Sale 18,431 15,840
Loans (Net of Unearned Income: $460 and $477) 78,767 75,381
Allowance for Credit Losses (2,480) (3,020)
Premises and Equipment 2,134 1,910
Due from Customers on Acceptances 1,088 1,077
Accrued Interest Receivable 1,190 1,106
Assets Acquired as Loan Satisfactions 210 934
Assets Held for Accelerated Disposition 526 --
Other Assets 6,911 11,435
-------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 171,423 $149,888
-------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 21,399 $ 23,443
Time and Savings 46,799 51,940
Foreign 28,308 22,894
-------------------------------------------------------------------------------------------------------------------------------
Total Deposits 96,506 98,277
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 23,098 12,857
Other Borrowed Funds 11,843 11,908
Acceptances Outstanding 1,104 1,099
Accounts Payable and Accrued Liabilities 2,361 2,607
Other Liabilities 17,808 3,784
Long-Term Debt 7,991 8,192
-------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 160,711 138,724
-------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (See Note Twenty Three)
STOCKHOLDERS' EQUITY
Preferred Stock 1,450 1,654
Common Stock (Authorized 400,000,000 Shares,
Issued 254,009,187 Shares in 1994 and 253,397,864 Shares in 1993) 254 253
Capital Surplus 6,544 6,553
Retained Earnings 3,263 2,501
Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Taxes (438) 215
Treasury Stock, at Cost (9,497,533 Shares in 1994 and 515,782 Shares in 1993) (361) (12)
-------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 10,712 11,164
-------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 171,423 $149,888
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
44
<PAGE> 60
Chemical Banking Corporation
and Subsidiaries
Consolidated Statement of Income
<TABLE>
Year Ended December 31, (in millions, except per share data) 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $5,730 $5,620 $6,353
Securities 1,715 1,727 1,753
Trading Assets 722 449 419
Federal Funds Sold and Securities Purchased Under Resale Agreements 550 339 349
Deposits With Banks 371 268 274
------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 9,088 8,403 9,148
------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,378 2,241 2,868
Short-Term and Other Borrowings 1,500 992 1,228
Long-Term Debt 536 534 454
------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 4,414 3,767 4,550
------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 4,674 4,636 4,598
Provision for Losses 550 1,259 1,365
------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Losses 4,124 3,377 3,233
------------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Trust and Investment Management Fees 421 406 361
Corporate Finance and Syndication Fees 405 338 265
Service Charges on Deposit Accounts 300 288 264
Fees for Other Banking Services 1,148 1,067 1,040
Trading Revenue 645 1,073 853
Securities Gains 66 142 53
Other Revenue 612 710 190
------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Revenue 3,597 4,024 3,026
------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,205 2,070 1,977
Employee Benefits 439 396 372
Occupancy Expense 573 587 566
Equipment Expense 382 337 316
Foreclosed Property Expense 41 287 283
Restructuring Charge 308 158 --
Other Expense 1,561 1,458 1,416
------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,509 5,293 4,930
------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Effect of Accounting Changes 2,212 2,108 1,329
Income Tax Expense 918 539 243
------------------------------------------------------------------------------------------------------------------------------
Income Before Effect of Accounting Changes 1,294 1,569 1,086
Net Effect of Changes in Accounting Principles -- 35 --
------------------------------------------------------------------------------------------------------------------------------
Net Income $1,294 $1,604 $1,086
------------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $1,156 $1,449 $ 936
------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Income Before Effect of Accounting Changes $ 4.64 $ 5.63 $ 3.90
Net Effect of Changes in Accounting Principles -- .14 --
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 4.64 $ 5.77 $ 3.90
------------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 249.3 251.2 240.4
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
45
<PAGE> 61
Chemical Banking Corporation
and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at Beginning of Year $ 1,654 $ 1,848 $ 1,598
Issuance of Stock 200 400 550
Redemption of Stock (404) (594) (300)
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 1,450 1,654 1,848
-------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at Beginning of Year 253 247 183
Issuance of Stock 1 6 64
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 254 253 247
-------------------------------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at Beginning of Year -- -- 34
Conversion of Class B Common Stock -- -- (34)
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year -- -- --
-------------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at Beginning of Year 6,553 6,376 4,734
Issuance of Stock 12 194 1,642
Premium on Redemption of Preferred Stock (12) (17) --
Restricted Stock Granted, Net of Amortization (9) -- --
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 6,544 6,553 6,376
-------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 2,501 1,392 752
Net Income 1,294 1,604 1,086
Cash Dividends Declared:
Preferred Stock (126) (155) (153)
Common Stock (406) (345) (295)
Accumulated Translation Adjustment(a) -- 5 2
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 3,263 2,501 1,392
-------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES
Balance at Beginning of Year 215 -- --
Impact of Accounting Change -- 215 --
Net Change in Fair Value of Securities Available-for-Sale, Net of Taxes (653) -- --
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year (438) 215 --
-------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK IN TREASURY, AT COST
Balance at Beginning of Year -- -- (8)
Redemption of Stock -- -- 8
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year -- -- --
-------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY, AT COST
Balance at Beginning of Year (12) (12) (12)
Purchase of Treasury Stock (387) -- --
Reissuance of Treasury Stock 38 -- --
-------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year (361) (12) (12)
-------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $10,712 $11,164 $9,851
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Balance was ($10) million, ($10) million and ($15) million at December 31,
1994, 1993, and 1992, respectively.
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
46
<PAGE> 62
Chemical Banking Corporation
and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,294 $ 1,604 $ 1,086
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Losses 550 1,259 1,365
Restructuring Charge 308 158 --
Depreciation and Amortization 377 333 319
Net Change In:
Trading-Related Assets (980) (10,513) 2,149
Accrued Interest Receivable (56) (20) 101
Accrued Interest Payable 91 22 (76)
Other, Net 766 (721) (175)
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 2,350 (7,878) 4,769
-------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 407 (4,169) 1,241
Federal Funds Sold and Securities Purchased Under Resale Agreements (2,241) (2,424) (951)
Loans Due to Sales and Securitizations 9,136 12,403 7,857
Other Loans, Net (13,123) (5,657) (7,559)
Other, Net 1,105 2,082 440
Proceeds from the Maturity of Held-to-Maturity Securities 2,816 4,968 6,344
Proceeds from the Sale of Held-to-Maturity Securities -- 152 3,736
Purchases of Held-to-Maturity Securities (1,194) (6,444) (14,386)
Proceeds from the Maturity of Available-for-Sale Securities 3,498 1,608 304
Proceeds from the Sale of Available-for-Sale Securities 18,556 5,352 684
Purchases of Available-for-Sale Securities (25,697) (7,568) --
Cash Used in Acquisitions (373) (481) --
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (7,110) (178) (2,290)
-------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (2,041) (115) 4,696
Domestic Time and Savings Deposits (5,124) (1,716) (1,076)
Foreign Deposits 5,414 2,887 (3,051)
Federal Funds Purchased, Securities Sold Under Repurchase
Agreements and Other Borrowed Funds 9,361 3,347 (4,449)
Other Liabilities 622 1,326 131
Other, Net (18) (344) 115
Proceeds from the Issuance of Long-Term Debt 1,672 3,451 1,654
Repayments of Long-Term Debt (2,042) (2,299) (549)
Proceeds from the Issuance of Stock 254 591 2,117
Redemption of Preferred Stock (416) (610) (292)
Treasury Stock Purchased (387) -- --
Cash Dividends Paid (521) (480) (438)
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 6,774 6,038 (1,142)
-------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks (34) 24 (20)
Net Increase (Decrease) in Cash and Due from Banks 1,980 (1,994) 1,317
Cash and Due from Banks at the Beginning of the Year 6,852 8,846 7,529
-------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at the End of the Year $ 8,832 $ 6,852 $ 8,846
-------------------------------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 4,323 $ 3,745 $ 4,626
-------------------------------------------------------------------------------------------------------------------------------
Taxes Paid $ 1,011 $ 390 $ 166
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
47
<PAGE> 63
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chemical Banking Corporation (the "Corporation") is a bank holding company
organized under the laws of the State of Delaware in 1968 and registered under
the Bank Holding Company Act of 1956, as amended.
The 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, a New York State bank
("Chemical Bank"), and Texas Commerce Bank National Association, a subsidiary of
Texas Commerce Equity Holdings, Inc., a bank holding company organized under the
laws of the State of Delaware ("Texas Commerce"). The accounting and financial
reporting policies of the Corporation and its subsidiaries conform to generally
accepted accounting principles and prevailing industry practices. The following
is a description of significant accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after eliminating intercompany balances and
transactions. Equity investments in less than majority-owned companies (20%-50%
ownership interest) are generally accounted for in accordance with the equity
method of accounting and are reported in other assets. The Corporation's
pro-rata share of earnings (losses) of equity investments is included in other
noninterest revenue.
Securities and other property held in a fiduciary or agency capacity are not
included in the Consolidated Balance Sheet since these are not assets or
liabilities of the Corporation.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
STATEMENT OF CASH FLOWS
For purposes of preparing the Consolidated Statement of Cash Flows, the
Corporation defines cash and cash equivalents as those amounts included in the
balance sheet caption cash and due from banks. Cash flows from loans and
deposits are reported on a net basis.
TRADING ACTIVITIES
Debt and Equity Instruments and Securities Sold, Not Yet Purchased: Debt and
equity instruments include securities, refinancing country loans, and money
market and credit instruments held for trading purposes. Obligations to deliver
securities sold but not yet purchased are reported as other borrowed funds.
These instruments are carried at fair value with gains and losses, including
market value adjustments, reported on the income statement as trading revenue.
Interest on debt and equity instruments and securities sold but not yet
purchased are reported as interest revenue and expense, respectively.
Risk Management Instruments: The Corporation primarily deals in interest rate,
foreign exchange, and commodity contracts to generate trading revenues. Such
contracts include futures, forwards, swaps, and options and are carried at
market value with realized and unrealized gains and losses reported on the
income statement as trading revenue. A portion of the market valuation relating
to certain contracts is deferred and accreted to income over the life of the
contracts to match ongoing servicing costs and credit risks, as appropriate.
On January 1, 1994, the Corporation adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts" ("FASI 39"), which changed the reporting of unrealized gains and
losses on interest rate, foreign exchange, and commodity contracts on the
balance sheet. FASI 39 requires that gross unrealized gains be reported as
assets and gross unrealized losses be reported as liabilities; however, FASI 39
permits netting of such unrealized gains and losses with the same counterparty
when master netting agreements that are enforceable through bankruptcy have been
executed. With the adoption of FASI 39, unrealized gains are reported as Trading
Assets-Risk Management Instruments and unrealized losses are reported as Trading
Liabilities-Risk Management Instruments, which is included in other liabilities.
Prior to the adoption of FASI 39, unrealized gains and losses were reported net
in other assets.
HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES
Effective December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). 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.
Interest income on securities, including amortization of premiums and
accretion of discounts, is recognized using the interest method. The specific
identification method is used to determine realized gains and losses on sales of
securities, which are reported in securities gains. Individual securities are
reduced through writedowns against securities gains to reflect
other-than-temporary impairments in value.
48
<PAGE> 64
The Corporation anticipates prepayments of principal in the calculation of
the effective yield for collateralized mortgage obligations and mortgage-backed
securities. The prepayment of mortgage-backed securities and collateralized
mortgage obligations ("CMO") is actively monitored through the Corporation's
portfolio management function. The Corporation typically invests in CMOs with
stable cash flows and relatively short duration, thereby limiting the impact of
interest rate fluctuations on the portfolio. Management regularly does
simulation testing regarding the impact that interest and market rate changes
would have on its CMO portfolio. Mortgage-backed securities and CMOs which
management believes have high prepayment risk are included in the
available-for-sale portfolio.
In accordance with SFAS 115, cash flows from purchases, maturities and sales
of available-for-sale securities have been classified as cash flows from
investing activities and prior periods have been similarly reclassified.
LOANS
Loans are generally reported at the principal amount outstanding, net of
unearned income and net deferred loan fees (deferred nonrefundable yield-related
loan fees, net of related direct origination costs). Mortgage loans held for
sale are carried at the lower of aggregate cost or market value. Certain loans
meeting the accounting definition of a security are reported as loans but are
valued consistent with SFAS 115.
Interest income is recognized using the interest method or on a basis
approximating a level rate of return over the term of the loan. Net deferred
loan fees are amortized into interest income over the term of the loan.
Nonaccrual loans are those on which the accrual of interest has ceased.
Loans, other than certain consumer loans discussed below, are placed on
nonaccrual status immediately if, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan
agreement, or when principal or interest is past due 90 days or more and
collateral, if any, is insufficient to cover principal and interest. Interest
accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Interest
income is recognized on nonaccrual loans only to the extent received in cash.
However, where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Renegotiated loans are those for which concessions, such as the reduction of
interest rates or deferral of interest or principal payments, have been granted
due to a deterioration in the borrower's financial condition. Interest on
renegotiated loans is accrued at the renegotiated rates. Certain renegotiated
loan agreements call for additional interest to be paid on a deferred or
contingent basis. Such interest is taken into income only as collected.
Consumer loans (exclusive of residential mortgage products which are
accounted for in accordance with the nonaccrual loan policy discussed above) are
generally charged to the allowance for credit losses upon reaching specified
stages of delinquency. Accrued interest is reversed against interest income when
such consumer loans are charged off.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on periodic reviews and analysis of the
portfolio, which comprises primarily loans and other financial instruments,
including commitments to extend credit, guarantees, letters of credit, and
derivatives and foreign exchange contracts. The analysis includes consideration
of such factors as the risk rating of individual credits, the size and diversity
of the portfolio (particularly in terms of industry and geography), economic and
political conditions, prior loss experience and results of periodic credit
reviews of the portfolio. The allowance for credit losses is increased by
charges against income and reduced by charge-offs, net of recoveries, and losses
on sales and swaps of loans to countries engaged in debt rescheduling. Other
charges to the allowance include amounts related to loans transferred to assets
held for accelerated disposition.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Capital leases are included in
premises and equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization of premises are included in occupancy expense
while depreciation of equipment is included in equipment expense. Depreciation
and amortization are computed using the straight-line method over the estimated
useful life of the owned asset and, for leasehold improvements, over the
estimated useful life of the related asset or the lease term, whichever is
shorter.
ASSETS ACQUIRED AS LOAN SATISFACTIONS
Assets acquired in full or partial satisfaction of loans are reported at the
lower of cost or fair value less estimated costs to sell. These assets are
primarily real estate. Writedowns of such assets subsequent to six months from
the date of acquisition are included in foreclosed property expense. Operating
expenses, net of related revenue, and gains and losses on sales of such assets
are reported net in foreclosed property expense.
49
<PAGE> 65
Notes to Consolidated Financial Statements
ASSETS HELD FOR ACCELERATED DISPOSITION
During the fourth quarter of 1994, the Corporation transferred certain real
estate loans and real estate assets acquired as loan satisfactions to assets
held for accelerated disposition. At the date of transfer, these assets were
recorded at fair value less estimated costs to sell.
Interest income relating to real estate loans will be recognized either as
interest income or applied to reduce the carrying value of loans depending on
management's judgment of collectibility.
OTHER ASSETS
Equity-Related Investments: Equity and equity-related investments are reported
in other assets. Nonmarketable holdings are carried at cost, net of valuation
losses. Marketable holdings are marked-to-market at a discount to the public
value. Income from venture capital activities is reported in other noninterest
revenue.
Intangibles: Goodwill and other acquisition intangibles are reported in other
assets and are amortized over the estimated periods to be benefited, the
majority of which are being amortized over periods generally ranging from 10 to
25 years. An impairment review is performed periodically on these assets.
Goodwill, which is included in other assets, amounted to $1.1 billion at
December 31, 1994 compared with $.9 billion at December 31, 1993.
OFF-BALANCE SHEET INSTRUMENTS USED IN
ASSET/LIABILITY MANAGEMENT ACTIVITIES
As part of its asset/liability management activities, the Corporation may enter
into interest rate futures, forwards, swaps and options contracts. Futures
contracts are designated as hedges when they reduce risk and there is high
correlation between the futures contract and the item being hedged, both at
inception and throughout the hedge period. Interest rate forwards, swaps and
options contracts are linked to specific assets or groups of similar assets,
specific liabilities or groups of similar liabilities. Additionally, the
Corporation uses interest rate swaps in place of cash market instruments.
Asset/liability management instruments are accounted for on an accrual basis.
Realized gains and losses on futures and forward contracts are deferred and
amortized over the period for which the related assets or liabilities exposure
is managed and are included as adjustments to interest income or interest
expense. Settlements on interest rate swaps and options contracts are recognized
as adjustments to interest income or interest expense over the lives of the
agreements.
Interest rate contracts used in connection with the securities portfolio that
is designated as available-for-sale are carried at fair value with gains and
losses, net of applicable taxes, reported in a separate component of
stockholders' equity, consistent with the reporting of unrealized gains and
losses on such securities.
Effective January 1, 1995, as part of its asset/liability management process,
the Corporation discontinued the use of interest rate swaps in place of cash
market instruments. Accordingly, interest rate contracts entered into subsequent
to January 1, 1995 that do not meet the hedge or linkage criteria described
above will be designated as trading activities-risk management instruments.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars using prevailing rates of exchange. Gains and losses on foreign currency
translation from operations for which the functional currency is other than the
U.S. dollar, together with related hedges and tax effects, are reported in
stockholders' equity. For foreign operations for which the U.S. dollar is the
functional currency, gains and losses resulting from converting foreign currency
assets and liabilities to the U.S. dollar, including the related hedges, are
included in trading revenue.
FEE-BASED REVENUE
Trust and investment management fees primarily include fees received in
connection with personal, corporate, and employee benefit trust and investment
management activities.
Corporate finance and syndication fees primarily include fees received for
managing and syndicating loan arrangements; providing investment banking and
financial advisory services in connection with leveraged buyouts,
recapitalizations, and mergers and acquisitions; underwriting debt securities;
and arranging private placements.
Fees for other banking services primarily include fees received in connection
with credit card services, mortgage servicing, loan commitments, standby letters
of credit, compensating balances, and other fees.
Trust and investment management fees and fees for other banking services are
generally recognized over the period the related service is provided. Corporate
finance and syndication fees are recognized when all services to which they
relate have been provided. In addition, recognition of syndication fees are
subject to certain yield tests being satisfied.
INCOME TAXES
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, the deferred tax liability (asset) is determined based on enacted tax
rates which will be in effect when the underlying items of income and expense
are expected to be reported to the taxing authorities. Annual deferred tax
expense (benefit) is equal to the change in
50
<PAGE> 66
the deferred tax liability (asset) account from the beginning to the end of the
year. A current tax liability or asset is recognized for the estimated taxes
payable or refundable for the current year.
During 1992, the Corporation followed Statement of Financial Accounting
Standards No. 96, "Accounting for Income Taxes" ("SFAS 96"). See Note Seventeen
for further discussion.
NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income, after deducting
preferred stock dividends (including any premiums paid on preferred stock
redemptions), by the weighted-average number of common shares and common stock
equivalents outstanding during the period.
Until March 1992, when the Class B Common Stock was converted into the
Corporation's common stock, the Corporation had included such stock as a common
stock equivalent for purposes of the above computation. Other common stock
equivalents, such as stock options, are not included in the calculation since
their dilutive effect is immaterial.
--------------------------------------------------------------------------------
NOTE TWO
ACQUISITIONS
In July 1994, the Corporation, through Chemical Bank National Association, a
wholly-owned bank subsidiary of the Corporation, acquired the outstanding common
shares and depositary receipts representing preferred shares of Margaretten
Financial Corporation ("Margaretten") through a cash tender offer. Margaretten
is the parent company of Margaretten & Company, Inc. whose primary business is
the origination, purchase, sale and servicing of residential mortgage loans. The
cost of the acquired company was approximately $373 million. Subsequently,
during the 1994 third quarter, the Corporation sold to Bank of America, FSB, a
BankAmerica Corporation subsidiary, Margaretten's mortgage servicing operations
located in Richmond, Virginia. This transaction included the assumption of the
lease and fixed assets of the Richmond facility as well as the servicing rights
to a portion of the GNMA portfolio and private investor portfolio that were
serviced at that facility.
In February 1993, the Corporation, through its Texas Commerce subsidiary,
acquired $3.8 billion in assets and assumed $3.4 billion in deposit liabilities
of four banks (the "First City Banks") of the former First City Bancorporation
of Texas, Inc. from the Federal Deposit Insurance Corporation (the "FDIC") in a
federally-assisted transaction. The First City Banks were primarily engaged in
providing commercial banking services in Texas. The premium paid to the FDIC was
approximately $333 million.
In September 1993, the Corporation, through Texas Commerce Bank, N.A.,
acquired Ameritrust Texas Corporation ("Ameritrust"), a corporation engaged in
the delivery of personal, corporate and institutional trust and investment
services. The purchase price included a premium of approximately $130 million.
These acquisitions were recorded using the purchase method of accounting.
Under this method of accounting, the purchase price is allocated to the
respective assets acquired and liabilities assumed based on their estimated fair
values. Goodwill related to the Margaretten acquisition is being amortized over
a 15-year period using the straight-line method and purchased mortgage servicing
rights are being amortized based on adjusted cash flows. Intangibles related to
the Ameritrust acquisition are being amortized over a 10-year period. Deposit
premiums and other intangibles related to the acquisition of the First City
Banks are being amortized over the estimated periods of benefit. Goodwill
related to the two 1993 acquisitions is being amortized over 25 years.
--------------------------------------------------------------------------------
NOTE THREE
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. The Corporation generates such
trading revenue through market-making, sales, arbitrage and, to a lesser degree,
positioning. A description of the classes of derivative and foreign exchange
instruments used in the Corporation's trading activities as well as the credit
risk and market risk factors involved in such activities are disclosed in Note
Nineteen.
DEBT AND EQUITY INSTRUMENTS
Trading assets-debt and equity instruments at December 31, 1994 and 1993, which
are carried at fair value, are presented in the following table.
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
------------------------------------------------------------------------
<S> <C> <C>
U.S. Government and Federal Agencies $ 2,548 $ 2,792
Obligations of State and Political Subdivisions 327 604
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,644 1,794
Debt Securities Issued by Foreign Governments 1,983 4,025
Foreign Financial Institutions 3,119 1,496
Other(a) 1,472 968
------------------------------------------------------------------------
Total Trading Assets-Debt and Equity Instruments(b) $11,093 $11,679
------------------------------------------------------------------------
</TABLE>
(a) Primarily includes corporate debt and eurodollar bonds.
(b) Includes emerging markets instruments of $544 million in 1994 and $426
million in 1993.
51
<PAGE> 67
Notes to Consolidated Financial Statements
RISK MANAGEMENT INSTRUMENTS
On January 1, 1994, the Corporation adopted FASI 39, which changed the reporting
on the balance sheet of unrealized gains and losses on interest rate, foreign
exchange, and commodity contracts. See Note One for a further discussion with
respect to FASI 39.
Trading assets-risk management instruments totaled $17.7 billion at December
31, 1994, and represents 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 $16.0 billion
at December 31, 1994, represents 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.
TRADING REVENUE
The following table sets forth the components of trading revenue.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
--------------------------------------------------------------------
<S> <C> <C> <C>
Trading Revenue:
Interest Rate Contracts(a) $391 $ 453 $333
Foreign Exchange Revenues(b) 152(d) 302 363
Debt Instruments and Other(c) 102 318 157
--------------------------------------------------------------------
Total Trading Revenue $645 $1,073 $853
--------------------------------------------------------------------
</TABLE>
(a) Includes interest rate swaps, currency swaps, foreign exchange forward
contracts, interest rate futures, and forward rate agreements and related
hedges.
(b) Includes foreign exchange spot and option contracts.
(c) Includes U.S. government and foreign government agency and corporate debt
securities, emerging markets debt instruments, debt-related derivatives, equity
securities, equity derivatives, and commodity derivatives.
(d) Includes $70 million of losses sustained from unauthorized foreign exchange
transactions involving the Mexican peso.
-----------------------------------------------------------------------------
NOTE FOUR
SECURITIES
On December 31, 1993, the Corporation adopted SFAS 115, which addresses the
accounting for investments in equity securities that have readily determinable
fair values and for investments in all debt securities. See Note One for a
further discussion with respect to SFAS 115.
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>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1994 (in millions) Cost Gains Losses Value(a)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 $8,566 $ 4 $464 $8,106
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1993 (in millions) Cost Gains Losses Value(a)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $ 3,666 $132 $-- $ 3,798
Collateralized Mortgage Obligations 5,375 45 11 5,409
Other, primarily U.S. Treasuries 101 -- -- 101
Obligations of State and Political Subdivisions 13 1 -- 14
Debt Securities Issued by Foreign Governments 1 -- -- 1
Collateralized Mortgage Obligations(b) 153 5 1 157
Other, primarily Asset-Backed Securities 799 9 -- 808
---------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities $10,108 $192 $12 $10,288
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
52
<PAGE> 68
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale securities at
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1994 (in millions) Cost Gains Losses Value(a)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1993 (in millions) Cost Gains Losses Value(a)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $ 8,298 $349 $14 $ 8,633
Collateralized Mortgage Obligations 837 4 2 839
Other, primarily U.S. Treasuries 2,400 42 17 2,425
Debt Securities Issued by Foreign Governments 2,174 49 9 2,214
Corporate Debt Securities 326 11 3 334
Collateralized Mortgage Obligations(b) 618 3 1 620
Other (c) 791 -- 16 775
---------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities Carried at Fair Value (d) $15,444 $458 $62 $15,840
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 Five for loans accounted for pursuant to SFAS 115.
There were no sales of held-to-maturity securities in 1994. Cash proceeds
from the sales of held-to-maturity securities during 1993 and 1992 were $152
million and $3,736 million, respectively. Cash proceeds from the sale of
available-for-sale securities during 1994, 1993 and 1992 were $18,556 million,
$5,352 million and $684 million, respectively. Net gains from available-for-sale
securities sold in 1994 and 1993 amounted to $66 million (gross gains of $141
million and gross losses of $75 million) and $139 million (gross gains of $178
million and gross losses of $39 million), respectively. Gross gains from
held-to-maturity securities sold amounted to $3 million in 1993 (there were no
losses from sales of such securities in 1993). Net gains from securities sold in
1992 were $53 million (gross gains of $140 million and gross losses of $87
million).
The amortized cost, estimated fair value and average yield of securities at
December 31, 1994 by contractual maturity are presented in the table which
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Available-for-Sale Securities Held-to-Maturity Securities
Maturity Schedule of Securities Amortized Fair Average Amortized Fair Average
December 31, 1994 (in millions) Cost Value Yield(a) Cost Value Yield(a)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in One Year or Less $ 2,661 $ 2,658 6.85% $ 194 $ 194 5.74%
Due After One Year Through Five Years 4,613 4,445 7.17 1,073 1,045 6.22
Due After Five Years Through Ten Years 2,371 2,665 6.67 1,450 1,386 6.68
Due After Ten Years(b) 9,332 8,663 7.28 5,849 5,481 6.96
----------------------------------------------------------------------------------------------------------------------------------
Total Securities $18,977 $18,431 7.12% $8,566 $8,106 6.80%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The average yield is based on amortized cost balances at the end of the
year. Yields are derived by dividing interest income, adjusted for amortization
of premiums and accretion of discounts, by total amortized cost.
(b) Securities with no stated maturity are included with securities with a
remaining maturity of ten years or more. Substantially all of the Corporation's
mortgage-backed securities are due in ten years or more based on contractual
maturity. The weighted-average maturity of mortgage-backed securities, which
reflects anticipated future prepayments based on a consensus of dealers in the
market, is approximately 5 years.
53
<PAGE> 69
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
NOTE FIVE
LOANS
The composition of the loan portfolio at each of the dates
indicated was as follows:
<TABLE>
<CAPTION>
1994 1993
---------------------------------- ---------------------------------
December 31, (in millions) Domestic Foreign Total Domestic Foreign Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL:
Commercial Real Estate $ 5,650 $ 482 $ 6,132 $ 7,338 $ 601 $ 7,939
Commercial and Industrial 21,014 7,638 28,652 19,000 6,635 25,635
Financial Institutions 3,958 3,628 7,586 4,848 3,963 8,811
Foreign Governments and Official Institutions -- 6,567 6,567 -- 7,558 7,558
------------------------------------------------------------------------------------------------------------------------------
Total Commercial 30,622 18,315 48,937 31,186 18,757 49,943
------------------------------------------------------------------------------------------------------------------------------
CONSUMER:
Residential Mortgage 13,567 154 13,721 12,255 102 12,357
Credit Card 9,261 -- 9,261 7,176 -- 7,176
Other Consumer 7,292 16 7,308 6,367 15 6,382
------------------------------------------------------------------------------------------------------------------------------
Total Consumer 30,120 170 30,290 25,798 117 25,915
------------------------------------------------------------------------------------------------------------------------------
Total Loans 60,742 18,485 79,227 56,984 18,874 75,858
Unearned Income (283) (177) (460) (270) (207) (477)
------------------------------------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $60,459 $18,308 $78,767 $56,714 $18,667 $75,381
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain loans that meet the accounting definition of a security are
classified as loans and are measured pursuant to SFAS 115. Bonds that have been
issued by foreign governments (such as Mexico, Venezuela and Brazil) to
financial institutions, including the Corporation, as part of a debt
renegotiation (i.e., "Brady Bonds") are subject to the provisions of SFAS 115.
At December 31, 1994 and 1993, $3,414 million and $3,783 million, respectively,
of loans, primarily renegotiated loans, were measured under SFAS 115, including
$1,998 million and $1,962 million, respectively, that are classified as
held-to-maturity and that are carried at amortized cost. Pre-tax gross
unrealized gains and gross unrealized losses related to these held-to-maturity
loans totaled $10 million and $848 million, respectively, at December 31, 1994.
Pre-tax gross unrealized gains and gross unrealized losses related to these
held-to-maturity loans at December 31, 1993 totaled $13 million and $362
million, respectively. Loans measured pursuant to SFAS 115 that were designated
as available-for-sale at December 31, 1994 and 1993 are carried at fair value,
and amounted to $1,416 million and $1,821 million, respectively. Net unrealized
gains or losses on these loans are reported net of taxes in a separate component
of stockholders' equity. Pre-tax gross unrealized gains and gross unrealized
losses on these loans totaled $150 million and $369 million, respectively, at
December 31, 1994, and $86 million and $122 million, respectively, at December
31, 1993. Cash proceeds from the sale of such available-for-sale loans during
1994 were $411 million. Substantially all foreign loans that meet the accounting
definition of a security mature in over 10 years.
RENEGOTIATED LOANS
In 1994, in accordance with the Brazilian debt refinancing package, the
Corporation exchanged $849 million of Brazilian medium- and long-term loans for
$296 million of 20-year capitalization bonds, $223 million of 30-year discount
bonds (collateralized by zero-coupon U.S. Treasury obligations), $89 million of
debt-conversion bonds, $85 million of new-money bonds and $40 million of local
currency-denominated bonds. The capitalization bonds carry an initial interest
rate of 4% which will gradually increase to 8% in year seven and thereafter. The
discount bonds, new-money bonds, debt-conversion bonds and local
currency-denominated bonds carry a floating rate of interest of LIBOR plus
13/16%.
In accordance with the previously completed Mexican debt restructuring
agreement in 1990, the Corporation exchanged its eligible Mexican medium- and
long-term loans for 30-year principal-reduction bonds and 30-year interest rate
reduction bonds. Principal on the bonds is collateralized by zero-coupon U.S.
Treasury obligations. Principal-reduction bonds carry a floating rate of
interest of LIBOR plus 13/16%. Interest-rate reduction bonds carry a fixed rate
of 6.25%. At December 31, 1994, the Corporation held principal-reduction bonds
of $480 million (all of which were designated as available-for-sale) and
interest rate-reduction bonds of $1,347 million (of which $214 million is
designated as available-for-sale). The market value of the interest-rate
reduction bonds designated as held-to-maturity at December 31, 1994 was $611
million.
In accordance with the previously completed Republic of Venezuela Financing
Plan, the Corporation exchanged its eligible Venezuelan medium- and long-term
loans for an equal amount of 30-year interest rate-reduction bonds which have
been collat-
54
<PAGE> 70
eralized by zero-coupon U.S. Treasury obligations and carry a fixed interest
rate of 6.75%. Also, under this plan, the Corporation purchased new money bonds
and converted certain existing Venezuelan outstandings into debt conversion
bonds. The debt conversion bonds had an original 17-year maturity and bear
interest at a rate of LIBOR plus 7/8%. The new money bonds had an original
15-year maturity and bear interest rates ranging from LIBOR plus 7/8% to LIBOR
plus 1%. At December 31, 1994, the Corporation held interest-rate reduction
bonds of $287 million (of which $4 million is designated as available-for-sale),
debt conversion bonds of $130 million (all of which were designated as
available-for-sale) and $163 million of new money bonds (all of which were
designated as held-to-maturity). The market value of the interest-rate reduction
bonds and the new-money bonds designated as held-to-maturity at December 31,
1994 were $129 million and $74 million, respectively.
Aside from renegotiated loans to Brazil, Mexico, and Venezuela, the
Corporation's remaining renegotiated loans at December 31, 1994 and 1993 were
not significant.
--------------------------------------------------------------------------------
NOTE SIX
ALLOWANCE FOR CREDIT LOSSES
The table below summarizes the changes in the allowance for credit losses during
1994, 1993 and 1992.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Allowance at January 1 $3,020 $3,025 $3,275
Provision for Losses 550 1,259(a) 1,365
Gross Charge-Offs (1,266) (1,624)(a) (1,756)
Recoveries 319 343 147
------------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (947) (1,281) (1,609)
Charge for Assets Transferred to Held for Accelerated Disposition (148) -- --
Allowance Related to Purchased Assets of the First City Banks -- 19 --
Other 5 (2) (6)
------------------------------------------------------------------------------------------------------------------------------
Total Allowance at December 31 $2,480 $3,020 $3,025
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $55 million related to the decision to accelerate the disposition
of certain nonperforming residential mortgages.
Completion of the Brazilian refinancing package during 1994 essentially
brought to a close the broad rescheduling programs begun in the mid-1980s.
Accordingly, during the second quarter of 1994, the Corporation combined its
then remaining LDC allowance with its general allowance for credit losses.
--------------------------------------------------------------------------------
NOTE SEVEN
NONPERFORMING ASSETS
The Corporation's nonperforming assets and assets held for accelerated
disposition were as follows:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
-------------------------------------------------------------
<S> <C> <C>
Total Domestic Nonperforming Loans $ 618 $1,698
Total Foreign Nonperforming Loans 311 893
-------------------------------------------------------------
Total Nonperforming Loans 929 2,591
Assets Acquired as Loan Satisfactions
(primarily Real Estate) 210 934
-------------------------------------------------------------
Total Nonperforming Assets $1,139 $3,525
-------------------------------------------------------------
</TABLE>
ASSETS HELD FOR ACCELERATED DISPOSITION
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
--------------------------------------------------------------
<S> <C> <C>
Loans $336(a) $--
Real Estate Owned 190 --
--------------------------------------------------------------
Total Assets Held for Accelerated Disposition $526 $--
--------------------------------------------------------------
</TABLE>
(a) Includes $87 million of loans that are performing.
Certain assets ("shared loss assets") acquired from certain First City Banks
(in February, 1993) are subject to the loss-sharing provisions of the Purchase
and Assumption Agreements between the FDIC and Texas Commerce relating to the
First City Banks based in Houston and Dallas/Fort Worth. These agreements
provide that, for a period of five years following the acquisition, the FDIC
will absorb 80% of future losses arising from such shared-loss assets up to $61
million from the Houston bank and $21 million from the Dallas/Ft. Worth bank and
95% of losses in
55
<PAGE> 71
excess of such respective amounts. Shared-loss assets are certain specified
commercial and real estate loans acquired by Texas Commerce at those two banks.
At December 31, 1994, nonperforming shared-loss assets from the two banks
aggregated $54 million. Such assets are not included in the amount of
nonperforming assets in the preceding table.
The following table presents the amount of interest income recorded by the
Corporation on its nonaccrual and renegotiated loans and the amount of interest
income on the carrying value of such loans that would have been recorded if
these loans had been current in accordance with their original terms (interest
at original rates).
IMPACT OF NONPERFORMING LOANS ON INTEREST INCOME
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C>
Domestic:
Gross Amount of Interest That Would Have
Been Recorded at the Original Rate $80 $180 $254
Interest That Was Recognized in Income (28) (38) (28)
---------------------------------------------------------------------
Negative Impact-Domestic 52 142 226
---------------------------------------------------------------------
Foreign:
Gross Amount of Interest That Would Have
Been Recorded at the Original Rate 22 54 161
Interest That Was Recognized in Income (9) (85) (94)
---------------------------------------------------------------------
Negative (Positive) Impact-Foreign 13 (31) 67
---------------------------------------------------------------------
Total Negative Impact on Interest Income $65 $111 $293
---------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
NOTE EIGHT
SHORT-TERM AND OTHER BORROWED FUNDS
<TABLE>
<CAPTION>
(in millions) 1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities
sold under repurchase agreements:
Balance at year end $23,098 $12,857 $15,051
Average daily balance during the year 19,154 15,461 15,658
Maximum month-end balance 23,241 16,071 17,594
Weighted-average rate at December 31 5.46% 2.85% 3.23%
Weighted-average rate during the year 4.41% 3.05% 3.98%
--------------------------------------------------------------------------------
Other Borrowed Funds-Commercial paper:
Balance at year end $ 4,075 $ 2,423 $ 2,377
Average daily balance during the year 2,760 2,438 2,190
Maximum month-end balance 4,075 2,764 2,377
Weighted-average rate at December 31 5.18% 2.81% 3.51%
Weighted-average rate during the year 4.29% 3.42% 3.92%
--------------------------------------------------------------------------------
Other Borrowed Funds-Other borrowings:
Balance at year end $ 7,768 $ 9,485 $ 5,643
Average daily balance during the year 8,775 6,663 6,376
Maximum month-end balance 11,735 11,501 12,188
Weighted-average rate at December 31 6.35% 8.31% 8.10%
Weighted-average rate during the year 6.12% 6.56% 8.17%
--------------------------------------------------------------------------------
</TABLE>
Federal funds purchased and securities sold under repurchase agreements are
generally issued on an overnight or demand basis. Commercial paper is generally
issued in amounts not less than $100,000 and with maturities of 270 days or
less. Other borrowings consist of demand notes, securities sold not yet
purchased, and various other borrowings in domestic and foreign offices that
generally have maturities of less than one year.
At December 31, 1994, the Corporation had unused lines of credit available
for general corporate purposes, including the payment of commercial paper
borrowings, amounting to $750 million.
--------------------------------------------------------------------------------
NOTE NINE
FEES FOR OTHER BANKING SERVICES AND OTHER REVENUE
Details of fees for other banking services were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C>
Credit Card Services Revenue $ 315 $ 238 $ 210
Fees in Lieu of Compensating Balances 203 209 212
Commissions on Letters of Credit
and Acceptances 151 155 162
Loan Commitment Fees 86 90 81
Mortgage Servicing Fees 79 63 57
Other 314 312 318
---------------------------------------------------------------
Total Fees for Other Banking Services $1,148 $1,067 $1,040
---------------------------------------------------------------
</TABLE>
Other Revenue: Details of other revenue were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Other Revenue:
Revenue from Equity-Related Investments $362 $278 $ 97
Net Gains on Emerging Markets-Related
Interest Bond Sales 127 306 --
All Other Revenue 123 126 93
-------------------------------------------------------------------
Total Other Revenue $612 $710 $190
-------------------------------------------------------------------
</TABLE>
56
<PAGE> 72
--------------------------------------------------------------------------------
NOTE TEN
LONG-TERM DEBT
<TABLE>
<CAPTION> 1994 1993
-------------------------------------------------- -----
Under Due Due
By remaining maturity at December 31, (in millions) 1 year 1-5 years 6-15 years Total Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chemical Banking Corporation:
Parent Company:
Senior Debt:
Fixed Rate $ 66 $ 568 $ 13 $ 647 $ 888
Variable Rate 828 1,581 154 2,563 2,581
Subordinated Debt:
Fixed Rate -- 550 1,345 1,895 1,546
Variable Rate -- 142 100 242 413
------------------------------------------------------------------------------------------------------------------------------
Subtotal 894 2,841 1,612 5,347 5,428
------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Senior Debt:
Fixed Rate 94 47 250 391 242
Variable Rate 250 460 -- 710 889
Subordinated Debt:
Fixed Rate -- -- 947 947 947
Variable Rate -- 196 400 596 686
------------------------------------------------------------------------------------------------------------------------------
Subtotal 344 703 1,597 2,644 2,764
------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $1,238 $3,544 $3,209 $7,991 $8,192
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying table is a summary of long-term debt (net of unamortized
original issue debt discount, where applicable) displayed by remaining maturity
at December 31, 1994. The distribution by remaining maturity is based on
contractual maturity or the earliest date on which the debt is redeemable at the
option of the holder.
Fixed-rate debt outstanding at December 31, 1994 matures at various dates
through 2009 at interest rates ranging from 4.68% to 11.83%. The consolidated
weighted-average interest rates on fixed-rate debt at December 31, 1994 and 1993
were 7.82% and 8.03%, respectively. Variable-rate debt outstanding, with
interest rates ranging from 3.13% to 6.88% at December 31, 1994, matures at
various dates through 2004. The consolidated weighted-average interest rates on
variable-rate debt at December 31, 1994 and 1993 were 5.64% and 3.94%,
respectively.
Included in long-term debt are equity commitment notes and equity contract
notes totalling $693 million and $923 million at December 31, 1994 and 1993,
respectively.
Equity commitment notes require that the Corporation issue, prior to their
maturity, shares of common stock or perpetual preferred stock or other
securities of the Corporation (collectively, "Capital Securities") approved by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") equal to 100% of the original aggregate principal amount of the notes.
Equity contract notes require the Corporation to exchange the notes at
maturity for Capital Securities with a market value equal to the principal
amount of the notes or, at the Corporation's option, to pay the principal of the
notes from amounts representing designated proceeds from the sale of Capital
Securities.
At December 31, 1994, the Corporation had designated proceeds from the sale
of Capital Securities in an amount sufficient to satisfy fully the dedication
requirements of its equity commitment and equity contract notes.
The Corporation has guaranteed several long-term debt issues of its
subsidiaries. Such guaranteed debt totaled $435 million and $300 million at
December 31, 1994 and 1993, respectively.
At December 31, 1994, long-term debt aggregating $350 million was redeemable
at the option of the Corporation, in whole or in part, prior to maturity, based
on the terms specified in the respective notes.
The Corporation's aggregate amounts of maturities and sinking fund
requirements for the five years subsequent to December 31, 1994 are $1,238
million in 1995, $1,458 million in 1996, $731 million in 1997, $657 million in
1998, and $698 million in 1999.
57
<PAGE> 73
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
NOTE ELEVEN
PREFERRED STOCK
At December 31, 1994, the Corporation was authorized to issue 200 million shares
of preferred stock, in one or more series, with a par value of $1 per share.
During 1994, the Corporation issued 2 million shares of Adjustable Rate
Cumulative Preferred Stock, Series L (Series L Preferred), with a stated value
of $100 per share. Dividends are cumulative and are payable quarterly commencing
June 30, 1994. The quarterly dividend rate will be equal to 84% of the highest
of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Thirty
Year Constant Maturity Rate (as each of such terms are defined in the
Certificate of Designations relating to the Series L Preferred Stock), but not
less than 4.50% per annum or more than 10.50% per annum.
Also during 1994, the Corporation redeemed all 33.6 million outstanding
shares of its Adjustable Rate Cumulative Preferred Stock, Series C. The
redemption price was $12.36 per share (which included a premium of $.36 per
share) plus accrued but unpaid dividends to the date of redemption. A portion of
the redemption was funded by net proceeds received from the issuance of the
Series L Preferred. The effect on earnings per share as a result of the premium
related to the redemption was a one-time reduction of $0.05 per common share for
1994.
At December 31, 1994, four million shares of preferred stock designated as
Junior Participating Preferred Stock were reserved for issuance under the
Corporation's Shareholders' Rights Plan (see Note Eighteen).
During 1993, the Corporation redeemed all 3.87 million outstanding shares of
its Adjustable Rate Cumulative Preferred Stock, Series E, at a redemption price
of $51.50 per share plus accrued but unpaid dividends; all four million
outstanding shares of its Adjustable Rate Cumulative Preferred Stock, Series F,
at a redemption price of $50.00 per share plus accrued but unpaid dividends; and
all two million outstanding shares of its 10 3/4% Cumulative Preferred Stock, at
a redemption price of $105.375 per share plus accrued but unpaid dividends. Two
issues of preferred stock totaling $400 million were issued during 1993.
The following is a summary of the Corporation's preferred stocks outstanding
at December 31, 1994:
<TABLE>
<CAPTION>
Shares
December 31, 1994 Outstanding Terms
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.96% Cumulative 4,000,000 Shares may be redeemed (at the option of the Corporation) from June 30, 2000 at $25.00
(Stated Value $25.00) per share.
10% Convertible 3,999,900 Shares may be redeemed (at the option of the Corporation) from May 1, 1995 at
(Stated Value $50.00) $53.00 per share, and at decreasing prices thereafter declining to $50.00 per share on
May 1, 2001 and thereafter. The shares are convertible at any time at the option of the
holder into shares of common stock at a conversion price equal to $26.20, subject to
adjustment as set forth in the terms of the preferred stock.
8-3/8% Cumulative 14,000,000 Shares may be redeemed (at the option of the Corporation) from June 1, 1997 at $25.00
(Stated Value $25.00) per share.
7.92% Cumulative 2,000,000 Shares may be redeemed (at the option of the Corporation) from October 1, 1997
(Stated Value $100.00) at $100.00 per share. Such shares are represented by 8,000,000 depositary shares, each
representing .25 of a share.
7.58% Cumulative 2,000,000 Shares may be redeemed (at the option of the Corporation) from April 1, 1998 at $100.00
(Stated Value $100.00) per share. Such shares are represented by 8,000,000 depositary shares, each representing
.25 of a share.
7.50% Cumulative 2,000,000 Shares may be redeemed (at the option of the Corporation) from June 1, 1998 at $100.00
(Stated Value $100.00) per share. Such shares are represented by 8,000,000 depositary shares, each representing
.25 of a share.
Adjustable Rate Cumulative, 2,000,000 Shares may be redeemed (at the option of the Corporation) from June 30, 1999 at
Series L $100.00 per share. The dividend rate was 6.43% at December 31, 1994.
(Stated Value $100.00)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All the preferred stocks outstanding have preference over the Corporation's
common stock with respect to the payment of dividends and the distribution of
assets in the event of a liquidation or dissolution of the Corporation.
--------------------------------------------------------------------------------
NOTE TWELVE
COMMON STOCK
At December 31, 1994, the Corporation was authorized to issue 400 million shares
of common stock, $1 par value per share. At December 31, 1994, 1993, and 1992,
the number of shares of common stock issued and outstanding were as follows:
<TABLE>
<CAPTION>
December 31, 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C>
Issued 254,009,187 253,397,864 247,323,972
Held in Treasury (9,497,533) (515,782) (515,782)
----------------------------------------------------------------------
Outstanding 244,511,654 252,882,082 246,808,190
----------------------------------------------------------------------
</TABLE>
In September 1994, the Corporation completed the repurchase of 10 million
shares of its common stock. In December 1994, as part of a two-year program to
improve earnings per share and return on equity (the Actions to Improve Earnings
Per
58
<PAGE> 74
Share), the Corporation announced that it intends to repurchase up to 6
million additional shares of its common stock over the twelve-month period
following that announcement.
As of December 31, 1994, approximately 16,965,476 shares of common stock were
reserved for issuance under various employee incentive and stock purchase plans
and under the Corporation's Dividend Reinvestment Plan. In addition, as of such
date, the Corporation had reserved 7,699,809 shares of common stock for issuance
upon the conversion of its 10% Convertible Preferred Stock.
Under the Corporation's Dividend Reinvestment Plan, stockholders may reinvest
all or part of their quarterly dividends in shares of common stock.
Common stock issued, or distributed from treasury, during 1994, 1993 and 1992
was as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Employee Benefit and
and Compensation Plans 1,210,011 1,733,973 1,891,851
Dividend Reinvestment
and Stock Purchase Plans 456,767 539,919 1,108,523
Public Offerings -- 3,800,000 57,500,000
Mandatory Stock
Purchase Contracts -- -- 2,842,299
Class B Common
Stock Conversion -- -- 1,014,064
-----------------------------------------------------------------------
Total Shares Issued, or Distributed
from Treasury(a) 1,666,778 6,073,892 64,356,737
-----------------------------------------------------------------------
</TABLE>
(a) During 1994, 1,055,455 of these shares were distributed from treasury. No
shares were distributed from treasury in 1993 and 1992.
--------------------------------------------------------------------------------
NOTE THIRTEEN
POSTRETIREMENT BENEFITS
Pension Plans: The Corporation has a noncontributory pension plan that covers
substantially all domestic employees and provides for defined benefits pursuant
to a cash balance feature and a final-average-pay feature (the "noncontributory
pension plan"). Contributions will be made to the noncontributory pension plan
within the range of levels permitted under applicable law. This plan was amended
January 1, 1993. Prior to that date, employees of the Corporation and the former
Manufacturers Hanover Corporation ("MHC") had separate noncontributory pension
plans that provided a defined benefit to substantially all domestic employees
who satisfied minimum age and length-of-service requirements.
During 1992, a new defined contribution plan was adopted for United Kingdom
employees, which replaced a defined benefit plan. The Corporation has other
defined benefit plans in foreign jurisdictions covering the employees of certain
foreign operations. Contributions are made to foreign plans in accordance with
local plan and legal requirements.
The accompanying tables present the aggregate funded status and the net asset
amounts included in other assets and the components of expense included in
employee benefits expense for those defined benefit plans in effect at the
respective dates that had assets in excess of benefit obligations.
FUNDED STATUS OF PENSION PLANS
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligation:
Accumulated Benefit Obligation
Vested Benefits $ (817) $ (753)
Nonvested Benefits (44) (73)
Additional Benefits Based on Future Salary Levels (135) (185)
------------------------------------------------------------------------
Projected Benefit Obligation for Service
Rendered to Date (996) (1,011)
Plan Assets at Fair Value, primarily Listed Stocks,
U.S. Bonds and Commingled Funds 1,296 1,373
------------------------------------------------------------------------
Plan Assets in Excess of Projected Benefit Obligation 300 362
Unrecognized Net Loss 161 146
Unrecognized Net Asset (60) (72)
Unrecognized Prior Service (Benefit) Cost (31) (27)
------------------------------------------------------------------------
Prepaid Pension Cost $ 370 $ 409
------------------------------------------------------------------------
Annualized Actuarial Assumptions:
Discount Rate 8.75% 7.50%
Assumed Rate of Long-Term Return on Plan Assets 8.50 9.50
Rate of Increase in Future Compensation 5.00 5.00
------------------------------------------------------------------------
</TABLE>
In 1994, pension expense increased from the prior years primarily as a result
of the change in assumptions for 1994. Expense in 1995 is expected to be
relatively unchanged.
Due to changes in the benefits design in connection with the aforementioned
January 1, 1993 amendment to the plan, pension expense was higher in 1993 than
in 1992. The unrecognized net loss at December 31, 1993 resulted primarily from
changes in certain of the actuarial assumptions.
59
<PAGE> 75
Notes to Consolidated Financial Statements
COMPONENTS OF NET PENSION EXPENSE
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C>
Cost of Benefits Earned $ 96 $ 87 $ 60
Interest Cost on Projected Benefit Obligation 72 69 70
Actual (Gain) Loss on Plan Assets 15 (157) (151)
Net Amortization and Deferral (145) 24 24
----------------------------------------------------------------------
Net Periodic Pension Expense $ 38 $ 23 $ 3(a)
----------------------------------------------------------------------
Annualized Actuarial Assumptions:
Discount Rate 7.50% 8.75% 8.75%
Assumed Rate of Long-Term Return on
Plan Assets 8.50 9.50 9.50
Rate of Increase in Future Compensation 5.00 6.00 6.00
----------------------------------------------------------------------
</TABLE>
(a) Excludes the following nonrecurring items: a one-time charge of $37 million
for special window termination benefits, and a net curtailment and settlement
loss of $4 million - both incurred in combining and restructuring the
Corporation's employee benefit plans; and $9 million of dividend income.
The Corporation has elected not to prefund fully several defined benefit
plans based on plan and legal requirements. At December 31, 1994 and 1993, the
Corporation's accrued liability included in accrued expenses related to those
plans totaled $46 million and $43 million, respectively. The employee benefits
expense related to these plans was $11 million in 1994 and $8 million in each of
1993 and 1992.
The Corporation has several defined contribution plans. The most significant
is the Savings Incentive Plan ("SIP") offered to domestic employees. Subject to
certain limits, the SIP allows employees to make tax-deferred investments and
earn matching contributions from the Corporation. In addition, the Corporation
maintains the aforementioned defined contribution retirement plan for United
Kingdom employees. Employee benefits expense related to defined contribution
plans totaled $51 million in 1994 and $42 million in 1993.
Postretirement Medical and Life Insurance Benefits: The Corporation provides
postretirement medical and life insurance benefits to substantially all
domestic employees hired prior to April 15, 1992 who meet certain age and
length-of-service requirements at retirement. The amount of benefits provided
varies with length of service and date of hire. The Corporation has not
prefunded these benefits.
Effective January 1, 1993, the Corporation adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") for
benefits provided to domestic employees. SFAS 106 requires recognition, during
the years of the employees' active service, of the employer's expected cost and
obligation of providing postretirement benefits other than pensions to employees
and eligible dependents. The Corporation elected to expense the entire
unrecognized accumulated obligation as of the date of adoption of SFAS 106 via
a one-time pre-tax charge of $415 million.
The accompanying tables present the components of the liability included in
accrued expenses, and the periodic expense included in employee benefits expense
related to providing postretirement medical and life insurance benefits. The
discount rates and rates of increase in future compensation used to determine
the actuarial values for this plan generally are consistent with those used for
the noncontributory pension plan. For 1994, the assumed medical benefits cost
trend rate used to measure the expected cost of benefits covered by the plan was
12% for 1995, declining by 1% per year to a floor of 6%. The effect of a 1%
increase in the assumed medical benefits cost trend rate would be to increase
the December 31, 1994 accumulated obligation and related periodic expense each
by approximately 8%.
COMPONENTS OF POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, (in millions) 1994 1993
-------------------------------------------------------------------
Accumulated Benefit Obligation:
Retirees $391 $419
Active Employees 57 62
-------------------------------------------------------------------
Accumulated Benefit Obligation 448 481
Unrecognized Net Loss (24) (68)
-------------------------------------------------------------------
Accrued Postretirement Medical and
Life Insurance Benefits $424 $413
-------------------------------------------------------------------
</TABLE>
The decrease in the unrecognized net loss at December 31, 1994 resulted
primarily from the change in the discount rate at December 31, 1994.
COMPONENTS OF NET POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Cost of Benefits Earned $ 4 $ 3
Interest Cost on Accumulated Benefit Obligation 36 35
Amortization of Net Loss 2 --
---------------------------------------------------------------------
Net Postretirement Medical and Life Insurance Expense $42 $38
---------------------------------------------------------------------
</TABLE>
In 1992, the Corporation recognized cash-basis postretirement medical and
life insurance costs of $22 million.
60
<PAGE> 76
--------------------------------------------------------------------------------
NOTE FOURTEEN
EMPLOYEE STOCK INCENTIVE PLANS
The Corporation has a long-term stock incentive plan (the "plan") which provides
for stock-based awards, including stock options, restricted stock and restricted
stock units.
Stock options are issued at prices at least equal to the market value of the
Corporation's common stock on the grant date. Under generally accepted
accounting principles, no expense is required to be recognized in conjunction
with such options granted or exercised; amounts received upon the exercise of
options are recorded as common stock and capital surplus. Options generally
expire ten years after the grant date. Options cannot be exercised until one
year after the grant date and generally become exercisable over various periods
as determined at the time of grant. At December 31, 1994, stock options covering
7,546,369 shares of the Corporation's common stock were exercisable under the
plan.
Restricted shares of common stock and restricted stock units are issued under
the plan at no cost to the recipient. Most restricted shares and restricted
stock units awarded during 1994 will vest when the Corporation's common stock
price reaches and sustains targeted prices for a minimum period of time. In the
event that the first target is not attained before January 1, 1999, one half of
these awards would vest on that date and the remaining one half would be
forfeited.
Compensation expense relating to most restricted shares and restricted stock
units (e.g., for awards where the number of shares to be issued at the end of
the restricted period is determined on the grant date) is equal to the market
value of the Corporation's common stock on the grant date; for other awards,
compensation expense generally is equal to the market value on the date the
restrictions lapse (e.g., for awards that are forfeitable in the event that
targets are not attained). Compensation expense is recognized over the
restricted period. During 1994 and 1993, an aggregate 901,300 and 48,500
restricted shares and restricted stock units, respectively, were issued under
the plan.
At December 31, 1994 and 1993, 197,924 and 223,365 shares, respectively, of
the Corporation's common stock were reserved for issuance and available for
future awards under the plan.
In addition to the awards granted under the plan, the Corporation granted
20,025,250 non-qualified stock options to purchase shares of its common stock to
all full-time (500 options each) and part-time (250 options each) employees
(excluding senior officers). These options were granted at the $40.50 market
price of the Corporation's common stock on June 15, 1994 and are exercisable in
three installments if the Corporation's common stock price closes at, or above,
certain targeted prices for a pre-specified period. If a minimum target price is
not reached and maintained for the specified period on or before June 14, 2000,
grant recipients may then exercise all of their options beginning on June 15,
2000. Any options not exercised by June 14, 2004 would be forfeited as of that
date.
The following table presents a summary of the aggregate option transactions
during 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
Number of Number of
Year ended December 31, Options Option Price Options Option Price
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Outstanding, January 1 11,440,548 $10.88 - $43.13 8,825,955 $10.88--$42.21
Granted 23,360,587 21.80 - 40.50 4,063,150 38.06-- 43.13
Exercised 457,620 10.88 - 39.06 1,250,019 10.88-- 42.21
Cancelled 1,492,439 10.88 - 43.13 198,538 10.88-- 43.13
------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 32,851,076 $10.88 - $43.13 11,440,548 $10.88--$43.13
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
NOTE FIFTEEN
RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS
Federal Reserve Board regulations require depository institutions to maintain
cash reserves with a Federal Reserve Bank. The average amount of reserve
balances deposited by the Corporation with various Federal Reserve Banks was
approximately $1 billion during both 1994 and 1993.
Restrictions imposed by Federal law prohibit the Corporation and certain other
affiliates from borrowing from banking subsidiaries unless the loans are secured
in specified amounts. Such secured loans to the Corporation or to each of
certain other affiliates generally are limited to 10% of the banking
subsidiary's capital and surplus; the aggregate amount of all such loans is
limited to 20% of the banking subsidiary's capital and surplus. The Corporation
was well within these limits throughout the year.
The principal sources of the Corporation's income (on a parent company-only
basis) are dividends and interest from Chemical Bank and the other banking and
non-banking subsidiaries of the Corporation. Federal law imposes limitations on
the payment of dividends by the subsidiaries of the Corporation that are state
member banks of the Federal Reserve System (a "state member bank") or are
national banks. Under such limitations, dividend payments by such banks are
limited to the lesser of (i) the amount of "undivided profits" (as defined) and
(ii) absent regulatory approval, an amount not in excess of "net income" (as
defined) for the current year plus "retained net income" (as defined) for the
61
<PAGE> 77
Notes to Consolidated Financial Statements
preceding two years. Non-bank subsidiaries of the Corporation are not subject to
such limitations.
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1995, without the approval of their relevant banking
regulators, pay dividends of approximately $700 million to their respective bank
holding companies, plus an additional amount equal to their net income from
January 1, 1995 through the date in 1995 of any such dividend payment.
In addition to dividend restrictions, 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.
--------------------------------------------------------------------------------
NOTE SIXTEEN
RESTRUCTURING CHARGES AND OTHER EXPENSE
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 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 December 31, 1994, the
reserve balance associated with this charge was approximately $247 million.
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 December 31, 1994, the reserve balance
associated with this restructuring charge was approximately $24 million (of
which $23 million related to the pending disposition of certain facilities).
In 1993, the Corporation completed an assessment of costs associated with the
merger of the Corporation and MHC on December 31, 1991, and, as a result,
included in noninterest expense a charge of $115 million. The charge was related
principally to changes in the Corporation's facilities plans since the merger
announcement and revised estimates of occupancy-related costs associated with
headquarters and branch consolidations. At December 31, 1994, the merger reserve
balance was approximately $27 million (all of which related to the pending
disposition of facilities).
The Corporation's Texas Commerce subsidiary incurred a restructuring charge
of $43 million in 1993 in connection with the acquisition of assets and
assumption of liabilities of the First City Banks from the FDIC. The
restructuring charge was utilized for expenses associated with cost-saving
actions arising from the acquisition. These actions included the consolidation
of operations and the elimination of redundant expenses. At December 31, 1994,
the reserve balance associated with this restructuring charge had been
substantially utilized and no significant additional costs are expected in the
future.
Other Expense: Details of other expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C>
Other Expense:
Professional Services $ 225 $ 193 $ 196
Marketing Expense 186 187 111
FDIC Assessments 160 175 159
Telecommunications 134 115 104
Amortization of Intangibles 115 106 80
All Other 741 682 766
-------------------------------------------------------------
Total Other Expense $1,561 $1,458 $1,416
-------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
NOTE SEVENTEEN
INCOME TAXES
The Corporation adopted SFAS 109 as of January 1, 1993, and, after taking into
account the additional tax benefits associated with the adoption of SFAS 106
(see Note Thirteen), the Corporation recognized a favorable cumulative effect on
income tax expense of $450 million (or $1.81 per common share). Prior-years'
financial statements have not been restated to apply the provisions of SFAS 109.
Prior to 1993, the Corporation followed SFAS 96. The primary difference between
SFAS 109 and SFAS 96 is that SFAS 96 precluded the recognition of deferred tax
assets the realization of which was dependent on taxable earnings of future
years. SFAS
62
<PAGE> 78
109 requires recognition of such deferred tax assets except where, in
management's judgement, the realization of such tax benefits appears unlikely.
The cumulative effect adjustment upon adoption of SFAS 109 was less than the
unrecognized benefits available at December 31, 1992, because of the timing of
anticipated future income, tax law limitations on the utilization of
tax-attribute carryovers, and the recognition of losses at the two predecessor
institutions in recent years.
A valuation reserve was established as of January 1, 1993, in accordance with
the requirements of SFAS 109, for tax benefits available to the Corporation but
for which realization was in doubt. The Corporation's valuation reserve for
Federal taxes had a balance of $115 million at December 31, 1994, relating to
tax benefits which are subject to tax law limitations on realization.
Additionally, a valuation reserve approximating $148 million at December 31,
1994, was established as of January 1, 1993, against all New York State and City
deferred tax assets. The Corporation has recorded deferred New York State and
City tax liabilities of approximately $75 million, net of deferred tax assets
and related valuation reserve, as of December 31, 1994. Foreign deferred taxes
are not material.
The Corporation recognized its remaining available Federal income tax
benefits in the third quarter of 1993. As a result, the Corporation's earnings
beginning in the fourth quarter of 1993 were reported on a fully-taxed basis.
Deferred income tax expense (benefit) results from differences between
amounts of assets and liabilities as measured for income tax return and
financial reporting purposes. The significant components of Federal deferred tax
assets and liabilities as of December 31, 1994 and 1993 are reflected in the
following table.
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
--------------------------------------------------------------------------
<S> <C> <C>
Federal Deferred Tax Assets:
Reserves for Credit Losses $ 510 $ 784
Reserves Other Than Credit Losses 487 396
Fair Value Adjustments 230 --
Interest and Fee Accrual Differences 225 225
Tax Credits and Foreign Losses Not Currently Utilizable 188 166
Postretirement Benefits 144 145
Other 179 147
--------------------------------------------------------------------------
Gross Federal Deferred Tax Assets $1,963 $1,863
--------------------------------------------------------------------------
Federal Deferred Tax Liabilities:
Leasing Transactions $ 563 $ 634
Pension Benefits 134 137
Depreciation and Amortization 148 131
Fair Value Adjustments -- 110
Other 185 161
--------------------------------------------------------------------------
Gross Federal Deferred Tax Liabilities $1,030 $1,173
--------------------------------------------------------------------------
Deferred Federal Tax Asset Valuation Reserve $ 115 $ 121
--------------------------------------------------------------------------
Net Federal Deferred Tax Asset After Valuation Reserve $ 818 $ 569
--------------------------------------------------------------------------
</TABLE>
The components of income tax expense included in the Consolidated Statement
of Income were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C>
Current Income Tax Expense (Benefit):
Federal $489 $ 360 $ 75
Foreign 122 201 70
State and Local 197 203 36
-------------------------------------------------------------
Total Current 808 764 181
-------------------------------------------------------------
Deferred Income Tax Expense (Benefit):
Federal 68 (229) --
Foreign 28 (17) (6)
State and Local 14 21 68
-------------------------------------------------------------
Total Deferred 110 (225) 62
-------------------------------------------------------------
Total Income Tax Expense $918 $ 539 $243
-------------------------------------------------------------
</TABLE>
Not reflected in the preceding table are the tax effects of foreign currency
translation adjustments related to the hedging of foreign net investments.
Additionally, the tax effects of SFAS 115 on unrealized gains and losses, with
respect to available-for-sale securities, are recorded directly in stockholders'
equity and in 1994 and 1993 amounted to an increase of $472 million and a
decrease of $145 million, respectively, in stockholders' equity.
The tax expense applicable to securities gains and losses for the years 1994,
1993 and 1992 was $27 million, $62 million, and $17 million, respectively.
A reconciliation of the income tax expense computed at the applicable
statutory U.S. income tax rate to the actual income tax expense for the past
three years is shown in the following table.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
--------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. Federal Tax Expense $774 $738 $452
Increase (Decrease) in Tax Expense Resulting From:
(Recognized) Unrecognized Tax Benefits -- (331) (278)
Tax-Exempt Interest and Dividends (34) (34) (37)
State and Local Income Taxes, Net of
Federal Income Tax Benefit 137 145 69
Nondeductible Expense 22 24 21
Other--Net 19 (3) 16
--------------------------------------------------------------------------
Total Income Tax Expense $918 $539 $243
--------------------------------------------------------------------------
</TABLE>
The following table presents the domestic and foreign components of income
before income taxes for the past three years.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C>
Domestic $1,665 $1,783 $ 997
Foreign(a) 547 325 332
--------------------------------------------------------------
Income Before Income Taxes $2,212 $2,108 $1,329
--------------------------------------------------------------
</TABLE>
(a) For purposes of this disclosure, foreign income is defined as income
generated from operations located outside the United States.
63
<PAGE> 79
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
NOTE EIGHTEEN
SHAREHOLDERS' RIGHTS PLAN
The Corporation has in place a Shareholders' Rights Plan. The Shareholders'
Rights Plan contains provisions intended to protect stockholders in the event of
unsolicited offers or attempts to acquire the Corporation, including offers that
do not treat all stockholders equally, acquisitions in the open market of shares
constituting control without offering fair value to all stockholders, and other
coercive or unfair takeover tactics that could impair the Board of Directors'
ability to represent stockholders' interests fully. The Shareholders' Rights
Plan provides that attached to each share of common stock is one right (a
"Right") to purchase a unit consisting of one one-hundredth of a share of Junior
Participating Preferred Stock for an exercise price of $150 per unit, subject to
adjustment.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person that attempts to acquire the Corporation
without the approval of the Board of Directors unless the offer is conditioned
on a substantial number of Rights being acquired. The Rights, however, should
not affect offers for all outstanding shares of common stock at a fair price and
otherwise in the best interests of the Corporation and its stockholders as
determined by the Board of Directors. The Board of Directors may, at its option,
redeem all, but not fewer than all, of the then outstanding Rights at any time
until the 10th business day following a public announcement that a person or a
group had acquired beneficial ownership of 20% or more of the Corporation's
outstanding common stock or total voting power.
----------------------------------------------------------------------------
NOTE NINETEEN
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. For a discussion of
the credit and market risks involved with derivative and foreign exchange
financial instruments, reference is made to the first three paragraphs of the
Derivative and Foreign Exchange Financial Instruments section of the
Management's Discussion and Analysis ("MD&A") on page 31, the Credit Risk
Management section of the MD&A on pages 31-32, and the first four paragraphs of
the Market Risk Management section of the MD&A on page 33.
Derivative and Foreign Exchange Instruments Used for Trading Purposes: The
financial instruments used for the Corporation's trading activities are
disclosed in Note Three.
The credit risk associated with the Corporation's trading activities is
disclosed on the balance sheet as a result of the Corporation's adoption of FASI
39. The effects of any market risk (gains or losses) on the Corporation's
trading activities have been reflected in trading revenue, as the trading
instruments are marked-to-market on a daily basis. See Note One for a discussion
of FASI 39 and Note Three for the categories of these trading instruments.
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. For a further discussion of the Corporation's objectives and
strategies for employing derivative and foreign exchange instruments for
asset/liability management activities, reference is made to the first three
paragraphs of the Asset/Liability Management discussion in the MD&A on page 34.
The majority of the Corporation's derivatives used for asset/liability
management are transacted through its trading units.
For the disclosure of the fair value associated with the Corporation's
asset/liability management activities, see Note Twenty Two, Fair Value of
Financial Instruments.
At December 31, 1994, gross deferred gains and gross deferred losses relating
to closed financial futures contracts used in asset/liability management
activities were $23 million and $9 million, respectively. Deferred gains and
losses on closed financial futures contracts are generally amortized over
periods ranging from six to nine months depending upon when the contract is
closed and the period of time over which the liability is being hedged. The
Corporation does not generally terminate its interest rate swaps. As of December
31, 1994, the Corporation did not have any deferred gains or losses related to
terminated interest rate swap contracts.
The Corporation generally does not use derivative financial instruments to
hedge anticipated transactions. Accordingly, at December 31, 1994, deferred
gains and losses associated with such transactions were insignificant.
64
<PAGE> 80
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 immediately following.
<TABLE>
<CAPTION>
Notional Amounts Credit Exposure
December 31, (in billions) 1994 1993 1994 1993
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Futures and Forward Rate Agreements
Trading $ 938.1 $ 780.4 $ 0.8
Asset and Liability Management 32.8 14.0 --
Interest Rate Swaps
Trading 1,107.9 630.5 6.9
Asset and Liability Management 50.7 37.4 0.2
Purchased Options
Trading 60.5 87.5 0.2
Asset and Liability Management 13.7 26.3 --
Written Options
Trading 69.5 146.0 --
Asset and Liability Management 3.3 19.3 --
-------------------------------------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $2,276.5 $1,741.4 $ 8.1 $ 8.6
-------------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 794.0 $ 657.0 $ 7.3
Asset and Liability Management 12.3 11.0 --
Other Foreign Exchange Contracts(a)
Trading 94.5 63.8 2.2
Asset and Liability Management 0.3 0.4 --
-------------------------------------------------------------------------------------------------------------------------------
Total Foreign Exchange Contracts $ 901.1 $ 732.2 $ 9.5 $ 8.1
-------------------------------------------------------------------------------------------------------------------------------
STOCK INDEX OPTIONS AND COMMODITY CONTRACTS
Trading $ 4.5 $ 5.7 $ 0.3
-------------------------------------------------------------------------------------------------------------------------------
Total Stock Index Options and Commodity Contracts $ 4.5 $ 5.7 $ 0.3 $ 0.2
-------------------------------------------------------------------------------------------------------------------------------
Total Credit Exposure $17.9 $16.9
-------------------------------------------------------------------------------------------------------------------------------
Less: Amounts Recorded as Assets on the Balance Sheet $17.9 $ 3.3
-------------------------------------------------------------------------------------------------------------------------------
Credit Exposure Not Recorded on the Balance Sheet $ -- $13.6
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes purchased options, written options and cross-currency interest rate
swaps of $34.2 billion, $38.4 billion and $22.2 billion, respectively, at
December 31, 1994, compared with $21.9 billion, $23.7 billion and $18.6 billion,
respectively, at December 31, 1993.
Classes of Derivative and Foreign Exchange Instruments: The following classes of
derivative and foreign exchange instruments refer to instruments that are used
by the Corporation for purposes of both trading and asset/liability management.
Interest rate futures and forwards are contracts for the delayed delivery of
securities or money market instruments in which the seller agrees to deliver on
a specified future date, a specified instrument, at a specified price or yield.
The credit risk inherent in futures and forwards is the risk that the exchange
party may default. Futures contracts settle in cash daily and, therefore, there
is minimal credit risk to the Corporation. The credit risk inherent in forwards
arises from the potential inability of counterparties to meet the terms of their
contracts. Both futures and forwards are also subject to the risk of movements
in interest rates or the value of the underlying securities or instruments.
Forward rate agreements are contracts to exchange payments on a certain
future date, based on a market change in interest rates from trade date to
contract maturity date. The maturity of these agreements is typically less than
two years.
Interest rate swaps are contracts in which a series of interest rate flows in
a single currency are exchanged over a prescribed period. The notional amount on
which the interest payments are based is not exchanged. Most interest rate swaps
involve the exchange of fixed and floating interest payments. Cross-currency
interest rate swaps are contracts that involve the exchange of both interest and
principal amounts in two different currencies. The risks inherent in interest
rate and cross-currency swap contracts are the potential inability of a
counterparty to meet the terms of its contract and the risk associated with
changes in the market values of the underlying interest rates.
65
<PAGE> 81
Notes to Consolidated Financial Statements
Interest rate options, which include caps and floors, are contracts which
transfer, modify, or reduce interest rate risk in exchange for the payment of a
premium when the contract is initiated. As a writer of interest rate caps,
floors, and other options, the Corporation receives a premium in exchange for
bearing the risk of unfavorable changes in interest rates. Conversely, as a
purchaser of an option, the Corporation pays a premium for the right, but not
the obligation, to buy or sell a financial instrument or currency at
predetermined terms in the future. Foreign currency options are similar to
interest rate option contracts, except that they are based on currencies instead
of interest rates.
Foreign exchange contracts are contracts for the future receipt or delivery
of foreign currency at previously agreed-upon terms. The risks inherent in these
contracts are the potential inability of a counterparty to meet the terms of its
contract and the risk associated with changes in the market values of the
underlying currencies.
Stock index option contracts are contracts to pay or receive cash flows from
counterparties based upon the increase or decrease in the underlying index.
Commodity contracts include swaps, caps and floors and are similar to interest
rate contracts, except that they are based on commodity indices instead of
interest rates.
To reduce its exposure to market risk related to the above-mentioned classes
of derivative and foreign exchange instruments, the Corporation may enter into
offsetting positions.
To reduce credit risk, management may deem it necessary to obtain collateral.
The amount and nature of the collateral obtained is based on management's credit
evaluation of the customer. Collateral held varies but may include cash,
investment securities, accounts receivable, inventory, property, plant and
equipment, and real estate.
Derivatives and foreign exchange products are generally either negotiated
over-the-counter ("OTC") contracts or standardized contracts executed on a
recognized exchange (such as the Chicago Board of Options Exchange).
Standardized exchange-traded derivatives primarily include futures and options.
Negotiated over-the-counter derivatives are generally entered into between two
counterparties that negotiate specific agreement terms, including the underlying
instrument, amount, exercise price and maturity.
All the Corporation's interest rate swaps and forwards are OTC-traded and all
of the Corporation's financial futures contracts are exchange-traded. As of
December 31, 1994, approximately 19% of the Corporation's options activity was
exchange-traded, with the balance being OTC-traded. As of December 31, 1993,
approximately 53% of the Corporation's options activity was exchange-traded,
with the balance being OTC-traded. The percentage of options activity that is
exchange-traded versus OTC-traded will vary depending upon conditions in the
market place.
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 December 31, 1994 and 1993, commitments to purchase when-issued
securities were $6,289 million and $2,194 million, respectively, and commitments
to sell when-issued securities were $6,658 million and $1,790 million,
respectively.
-------------------------------------------------------------------------------
NOTE TWENTY
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
In addition to using derivative and foreign exchange financial instruments, the
Corporation also utilizes lending-related financial instruments in order to meet
the financing needs of its customers. The Corporation issues commitments to
extend credit, standby and other letters of credit and guarantees, and also
provides securities-lending services. For these instruments, the contractual
amount of the financial instrument represents the maximum potential credit risk
if the counterparty does not perform according to the terms of the contract. A
large majority of these commitments expire without being drawn upon. As a
result, total contractual amounts is not representative of the Corporation's
actual future credit exposure or liquidity requirements for such commitments.
The following table summarizes the Corporation's maximum credit risk, which
is represented by contract amounts relating to these financial instruments at
December 31, 1994 and 1993.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
---------------------------------------------------------------------
<S> <C> <C>
Commitments to Extend Credit $49,266(a) $47,540(a)
Standby Letters of Credit and Guarantees (Net of
Risk Participations of $5,218 and $1,285) 12,451 11,224
Other Letters of Credit 2,860 2,325
Customers' Securities Lent 18,979 14,530
---------------------------------------------------------------------
</TABLE>
(a) Excludes credit card commitments of $19 billion and $18 billion at December
31, 1994 and 1993, respectively.
66
<PAGE> 82
Unfunded commitments to extend credit are agreements to lend to a customer
who has complied with predetermined contractual conditions. Commitments
generally have fixed expiration dates.
Standby letters of credit and guarantees are conditional commitments issued
by the Corporation generally to guarantee the performance of a customer to a
third party in borrowing arrangements, such as commercial paper, bond financing,
construction and similar transactions. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan facilities to customers and may be reduced by participations to third
parties. The Corporation holds collateral to support those standby letters of
credit and guarantees written for which collateral is deemed
necessary. At December 31, 1994, all of the Corporation's standby letters of
credit and guarantees written expire in less than five years.
Customers' securities lent are customers' securities held by the Corporation
which are lent to third parties. The Corporation obtains collateral, with a
market value exceeding 100% of the contract amount, for all such customers'
securities lent, which is used to indemnify customers against possible losses
resulting from third-party defaults.
-----------------------------------------------------------------------------
NOTE TWENTY-ONE
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
Concentrations of credit risk indicate the relative sensitivity of the
Corporation's performance to both positive and negative developments affecting a
particular industry. Based on the nature of the banking business, management
does not believe that any of these concentrations are unusual.
The accompanying table presents the Corporation's significant concentrations
of credit risk for all financial instruments, including both on-balance sheet as
well as off-balance sheet instruments (which include derivative and foreign
exchange financial instruments as well as lending-related financial
instruments). The Corporation has procedures to monitor counterparty credit risk
and to obtain collateral when deemed necessary. Accordingly, management believes
that the total credit exposure shown below is not representative of the
potential risk of loss inherent in the portfolio.
<TABLE>
<CAPTION>
1994 1993
Distributions Distributions
Total Credit % of On-Balance Off-Balance Total Credit % of On-Balance Off-Balance
December 31, (in billions) Exposure Total Sheet Sheet Exposure Total Sheet Sheet
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer $ 52 20% $ 31 $21 $45 18% $ 26 $ 19
Real Estate 10 4 8 2 12 5 10 2
Financial Institutions 57 21 43 14 61 24 26 35
U.S. Government and Agencies 25 9 25 -- 24 9 24 --
Foreign Governments and
Official Institutions 15 6 13 2 15 6 13 2
Brokers and Dealers 36 14 13 23 30 12 11 19
All Other 70 26 33 37 67 26 32 35
------------------------------------------------------------------------------------------------------------------------------
Total $265 100% $166 $99 $254 100% $142 $112
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Geographic concentrations are a factor most directly affecting the credit
risk of the real estate and emerging markets segments of the Corporation's loan
portfolio. The Corporation's real estate portfolio is primarily concentrated in
the New York Metropolitan area and in Texas. Its emerging markets portfolio is
largely concentrated in Latin America, principally Mexico, Venezuela and Brazil.
--------------------------------------------------------------------------------
NOTE TWENTY-TWO
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires the Corporation disclose
fair value information about financial instruments for which it is practicable
to estimate the value, whether or not such financial instruments are recognized
on the balance sheet. Fair value is the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation, and is best evidenced by a quoted market price,
if one exists.
Quoted market prices are not available for a significant portion of the
Corporation's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may not
be indicative of the net realizable or liquidation value. In addition, the
calculation of estimated fair value is based on market conditions at a specific
point in time and may not be reflective of current or future fair values.
67
<PAGE> 83
Notes to Consolidated Financial Statements
Certain financial instruments and all nonfinancial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 provide only a partial estimate of the fair value of the Corporation;
for example, the values associated with the various ongoing businesses which the
Corporation operates are excluded. The Corporation has estimated the values
related to the long-term relationships with its customers through its deposit
base and its credit card accounts, commonly referred to as core deposit
intangibles and credit card relationships, respectively, as well as the value of
its portfolio of mortgage servicing rights and its owned and leased premises. In
the aggregate, these items add significant value to the Corporation but their
fair value is not disclosed in this Note.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Corporation's financial instruments required to
be valued pursuant to SFAS 107.
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Book Value: The fair value of certain
financial assets carried at cost, including cash and due from banks, deposits
with banks, federal funds sold and securities purchased under resale agreements,
due from customers on acceptances, short-term receivables and accrued interest
receivable is considered to approximate their respective book values due to
their short-term nature and negligible credit losses. In addition, as discussed
in Note One, the Corporation valued loans held for accelerated disposition at
fair value less estimated costs to sell.
Trading Assets: The Corporation carries trading assets, which includes debt and
equity instruments as well as derivative and foreign exchange instruments, at
fair value. The fair value of debt and equity instruments is based on current
market value. The fair value of trading assets-risk management instruments is
based on the net present value of expected cash flows utilizing prevailing
market rates. For the fair value of trading assets, see Note Three.
Securities: Securities held-to-maturity are carried at amortized cost.
Securities available-for-sale and interest rate contracts used in connection
with the available-for-sale portfolio are carried at fair value. The valuation
methodologies for securities are discussed in Note Four.
Loans: The fair value of the Corporation's non-LDC commercial loan portfolio was
estimated by assessing the two main risk components of the portfolio: credit and
interest. The estimated cash flows were adjusted to reflect the inherent credit
risk and then discounted, using rates appropriate for each maturity that
incorporate the effects of interest rate changes. Generally, emerging market
loans were valued based on secondary market prices.
For consumer installment loans and residential mortgages, for which market
rates for comparable loans are readily available, the fair value was estimated
by discounting cash flows, adjusted for prepayments. The discount rates used for
consumer installment loans were current rates offered by commercial banks and
thrifts; for residential mortgages, secondary market yields for comparable
mortgage-backed securities, adjusted for risk, were used. The fair value of
credit card receivables was estimated by discounting expected net cash flows.
The discount rate used incorporated the effects of interest rate changes only,
since the estimated cash flows were adjusted for credit risk.
The estimated fair value of net loans decreased from 104% of carrying value
at December 31, 1993 to 101% of carrying value at December 31, 1994 primarily
due to the rising interest rate environment in 1994 along with a decrease in the
market value of Brady Bonds.
Other: In other assets are equity investments, including venture capital
investments, and securities acquired as loan satisfactions. The fair value of
these investments was determined on an individual basis. The valuation
methodologies included market values of publicly-traded securities, independent
appraisals, and cash flow analyses.
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Book Value: SFAS 107 requires that
the fair value disclosed for deposit liabilities with no stated maturity (i.e.,
demand, savings and certain money market deposits) be equal to the carrying
value. SFAS 107 does not allow for the recognition of the inherent funding value
of these instruments.
The fair value of foreign deposits, federal funds purchased and securities
sold under repurchase agreements, other borrowed funds, acceptances outstanding,
short-term payables and accounts payable and accrued liabilities are considered
to approximate their respective book values due to their short-term nature.
Trading Liabilities-Risk Management Instruments: In accordance with FASI 39, the
Corporation records the gross unrealized losses on derivatives and foreign
exchange instruments as trading liabilities-risk management instruments which is
included in other liabilities. Such instruments are valued at the net present
value of expected cash flows based upon prevailing market rates. For the fair
value of trading liabilities, see Note Three.
Domestic Time Deposits: The fair value of time deposits was estimated by
discounting cash flows based on contractual maturities at the average interest
rates offered by commercial banks and thrifts.
68
<PAGE> 84
Long-Term Debt: The valuation of long-term debt takes into account several
factors, including current market interest rates and the Corporation's credit
rating. Quotes were gathered from various investment banking firms for
indicative yields for the Corporation's securities over a range of maturities.
UNUSED COMMITMENTS AND LETTERS OF CREDIT
The Corporation has reviewed the unfunded portion of commitments to extend
credit as well as standby and other letters of credit, and has determined that
the fair value of such financial instruments is not material.
The following table presents the financial assets and liabilities required to
be valued for SFAS 107.
<TABLE>
<CAPTION>
1994 1993
Carrying Estimated Fair Carrying Estimated Fair
December 31, (in millions) Value(a) Value(a) Value Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Assets for Which Fair Value Approximates Book Value $ 31,883 $ 31,883 $ 32,065 $ 32,065
Trading Assets:
Debt and Equity Instruments 11,093 11,093(b) 11,679 11,679(b)
Risk Management Instruments 17,709 17,709(c) -- (c) --(c)
Securities:
Held-to-Maturity 8,566 8,106 10,108 10,288
Available-for-Sale 18,431 18,431 15,840 15,840
Loans, Net 76,287 77,169 72,361 74,918
Derivatives in Lieu of Cash Market Instruments 97 175 -- (d) --(d)
Other Assets(e) 1,971 2,260 1,670 2,171
-----------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $166,037 $166,826 $143,723 $146,961
-----------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates Book Value $120,579 $120,579 $113,202 $113,202
Trading Liabilities-Risk Management Instruments 15,979 15,979(c) -- (c) --(c)
Domestic Time Deposits 15,675 16,369 16,703 17,050
Long-Term Debt 7,991 7,918 8,192 8,489
-----------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $160,224 $160,845 $138,097 $138,741
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The carrying value and estimated fair value for 1994 include the carrying
value and fair value of derivatives used for asset/liability management
activities. See the following table for the specific assets and liabilities to
which the derivatives relate.
(b) The average fair value of debt and equity instruments held for trading
purposes was $11,347 million during 1994 and $8,039 million during 1993. For a
further breakout of the fair value of Trading Assets-Debt and Equity
Instruments, see Note Three.
(c) The average fair value of Trading Assets-Risk Management Instruments and
Trading Liabilities-Risk Management Instruments in 1994 was $17,779 million and
$16,143 million, respectively. For 1993, the carrying value and the fair value
amounts for Trading Assets-Risk Management Instruments and Trading
Liabilities-Risk Management Instruments were reported net in Other Assets. For a
further breakout of the fair value of Trading Assets and Liabilities-Risk
Management Instruments, see Note Three.
(d) In 1993, the carrying value of derivatives used for asset/liability
management was included in Other Assets and in Assets and Liabilities for Which
Fair Value Approximates Book Value. The estimated fair value for 1993 excluded
the estimated fair value of derivatives used for asset/liability management,
except for those derivatives linked to available-for-sale securities, mortgages
held for sale and long-term debt. The carrying value and estimated fair value of
the derivatives included in Other Assets and in Assets and Liabilities for Which
Fair Value Approximates Book Value at December 31, 1993 was $300 million and
$725 million, respectively
(e) The carrying value and estimated fair value of equity-related investments at
December 31, 1994 were $1,899 million and $2,172 million, respectively. At
December 31, 1993, the carrying value and estimated fair value of equity-related
investments were $1,655 million and $2,140 million, respectively.
DERIVATIVES USED FOR ASSET/LIABILITY MANAGEMENT
The following table presents the carrying value and estimated fair values at
December 31, 1994 of derivatives contracts (which are primarily interest rate
swaps) used for asset/liability management activities that are included in the
above table.
<TABLE>
<CAPTION>
Carrying Gross Gross Estimated Fair
December 31, 1994 (in millions) Value(a) Unrecognized Gains Unrecognized Losses Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities - Available-for-Sale $ 542 $ -- $ -- $ 542
Loans 123 145 (175) 93
Derivatives in Lieu of Cash Market Instruments 97 194 (116) 175
Liabilities for Which Fair Value Approximates Book Value 4 -- (18) (14)
Domestic Time Deposits 20 5 (716) (691)
Long-Term Debt 26 1 (104) (77)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The carrying value of derivatives used for asset/liability management is
recorded as receivables and payables and are 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.
69
<PAGE> 85
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
NOTE TWENTY-THREE
COMMITMENTS AND CONTINGENCIES
At December 31, 1994, the Corporation and its subsidiaries were obligated under
a number of noncancelable operating leases for premises and equipment used
primarily for banking purposes. Certain leases contain rent escalation clauses
for real estate taxes and other operating expenses and renewal option clauses
calling for increased rents. No lease agreement imposes any restrictions on the
Corporation affecting its ability to pay dividends, engage in debt or equity
financing transactions, or to enter into further lease agreements. Future
minimum rental payments required under operating leases with initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1994 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions)
-------------------------------------------------------------
<S> <C>
1995 $ 241
1996 212
1997 196
1998 180
1999 168
After 812
-------------------------------------------------------------
Total Minimum Payments Required $1,809
-------------------------------------------------------------
Less: Sublease Rentals Under Noncancelable Subleases $ (162)
-------------------------------------------------------------
Net Minimum Payment Required $1,647
-------------------------------------------------------------
</TABLE>
Total rental expense in 1994, 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C>
Gross Rentals $363 $384 $372
Sublease Rentals (56) (60) (55)
-------------------------------------------------------------
Total $307 $324 $317
-------------------------------------------------------------
</TABLE>
At December 31, 1994 and 1993, assets amounting to $28 billion and $18
billion, respectively, were pledged to secure public deposits and for other
purposes. The significant components of the $28 billion of assets pledged at
December 31, 1994 to secure public deposits and for other purposes were as
follows: $9 billion were securities, $9 billion were loans, and the remaining
$10 billion were primarily trading account assets. These amounts compare with
$4 billion of securities, $8 billion of loans, and $6 billion of trading
account assets pledged at December 31, 1993.
The Corporation and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all such actions and proceedings
pending against or involving the Corporation and its subsidiaries, management
does not expect the aggregate liability or loss, if any, resulting therefrom to
have a material adverse effect on the consolidated financial condition of the
Corporation.
--------------------------------------------------------------------------------
NOTE TWENTY-FOUR
INTERNATIONAL OPERATIONS
The accompanying table presents total assets and income statement information
for 1994, 1993 and 1992 relating to international and domestic operations of the
Corporation by major geographic areas, based on the domicile of the customer.
The Corporation defines international activities as business transactions that
involve customers residing outside of the United States. However, a definitive
separation of the Corporation's domestic and foreign businesses cannot be
performed because many of the Corporation's domestic operations service
international business.
As these operations are highly integrated, estimates and subjective
assumptions have been made to apportion revenue and expenses between domestic
and international operations. Estimates of the following are allocated on a
management accounting basis: stockholders' equity, interest costs charged to
users of funds, and overhead, administrative and other expenses incurred by one
area on behalf of another. The provision for losses is allocated based on actual
net charge-offs and changes in outstandings.
The Corporation considers the balance in the allowance for credit losses to
be available for both domestic and foreign losses; however a portion of the
allowance is allocated to international operations based on a methodology
consistent with the allocation of the provision for losses.
70
<PAGE> 86
Chemical Banking Corporation
and Subsidiaries
<TABLE>
<CAPTION>
Income (Loss) Net
Total Total Total Before Income
As of or for the Year Ended December 31, (in millions) Assets Revenue Expense Income Taxes (Loss)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Europe $30,247 $ 1,638 $1,290 $ 348 $ 209
Latin America and the Caribbean 8,424 831 603 228 141
Asia and Pacific 10,911 567 400 167 101
Middle East and Africa 1,231 79 74 5 3
Other(a) 804 40 46 (6) (3)
-----------------------------------------------------------------------------------------------------------------------------
Total International 51,617 3,155 2,413 742 451
Total Domestic 119,806 9,530 8,060 1,470 843
-----------------------------------------------------------------------------------------------------------------------------
Total Corporation $171,423 $12,685 $10,473 $2,212 $1,294
-----------------------------------------------------------------------------------------------------------------------------
1993
Europe $18,598 $ 1,806 $1,438 $ 368 $ 221
Latin America and the Caribbean 8,203 990 536 454 272
Asia and Pacific 6,765 471 336 135 72
Middle East and Africa 1,015 78 49 29 17
Other(a) 774 49 60 (11) (6)
-----------------------------------------------------------------------------------------------------------------------------
Total International 35,355 3,394 2,419 975 576
Total Domestic 114,533 9,033 7,900 1,133 1,028
-----------------------------------------------------------------------------------------------------------------------------
Total Corporation $149,888 $12,427 $10,319 $2,108 $1,604
-----------------------------------------------------------------------------------------------------------------------------
1992
Europe $12,718 $ 1,603 $1,437 $ 166 $ 100
Latin America and the Caribbean 8,716 1,046 886 160 113
Asia and Pacific 4,771 383 331 52 32
Middle East and Africa 1,312 90 73 17 10
Other(a) 2,305 164 173 (9) (6)
-----------------------------------------------------------------------------------------------------------------------------
Total International 29,822 3,286 2,900 386 249
Total Domestic 109,833 8,888 7,945 943 837
-----------------------------------------------------------------------------------------------------------------------------
Total Corporation $139,655 $12,174 $10,845 $1,329 $1,086
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) No geographic region included in other international amounts to more than
10% of the total for the Corporation.
--------------------------------------------------------------------------------
NOTE TWENTY-FIVE
PARENT COMPANY
Condensed financial information of Chemical Banking Corporation, the Parent
Company, is presented on the next page.
For purposes of preparing the Statement of Cash Flows, cash and cash
equivalents are those amounts included in the balance sheet caption cash with
banks.
71
<PAGE> 87
Notes to Consolidated Financial Statements
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, (in millions) 1994 1993
--------------------------------------------------------------------
<S> <C> <C>
Assets
Cash with Banks $ 76 $ 69
Deposits with Banking Subsidiaries 3,581 1,205
Securities Purchased Under Resale
Agreements-Chemical Securities Inc. 430 586
Short-Term Advances to Subsidiaries:
Banking 23 12
Nonbanking 1,567 2,027
Long-Term Advances to Subsidiaries:
Banking 2,187 2,287
Nonbanking 115 5
Investment (at Equity) in Subsidiaries:
Banking 10,718 11,174
Nonbanking 1,137 1,021
Other Assets 673 648
--------------------------------------------------------------------
Total Assets $20,507 $19,034
--------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other Borrowed Funds, primarily Commercial Paper $ 3,968 $ 2,040
Other Liabilities 340 263
Long-Term Debt(a) 5,487 5,567
--------------------------------------------------------------------
Total Liabilities 9,795 7,870
Stockholders' Equity 10,712 11,164
--------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $20,507 $19,034
--------------------------------------------------------------------
</TABLE>
(a) At December 31, 1994, aggregate annual maturities and sinking fund
requirements for all issues for the years 1995 through 1999 were $894 million,
$986 million, $524 million, $646 million, and $685 million, respectively.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiaries:
Banking $1,291 $ 588 $ 204
Nonbanking 102 23 18
Interest from Subsidiaries 353 326 296
All Other Income 2 -- 5
--------------------------------------------------------------
Total Income 1,748 937 523
--------------------------------------------------------------
Expense
Interest on:
Other Borrowed Funds, primarily
Commercial Paper 104 75 71
Long-Term Debt 357 361 339
All Other Expense 39 96 102
--------------------------------------------------------------
Total Expense 500 532 512
--------------------------------------------------------------
Income Before Income Tax
Expense (Benefit) and Equity
in Undistributed Net Income
of Subsidiaries 1,248 405 11
Income Tax Expense (Benefit) (42) (76) (79)
Equity in Undistributed Net
Income of Subsidiaries 4 1,123 996
--------------------------------------------------------------
Net Income $1,294 $1,604 $1,086
--------------------------------------------------------------
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 1,294 $1,604 $ 1,086
Less--Net Income of Subsidiaries 1,397 1,734 1,218
-------------------------------------------------------------------------------------------------------------------------------
Parent Company Net Loss (103) (130) (132)
Add--Dividends from Subsidiaries 1,393 611 222
Other--Net 131 (131) (69)
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,421 350 21
-------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Net (Increase) Decrease in Deposits with Banking Subsidiaries (2,376) (155) (704)
Net (Increase) Decrease in Short-Term Advances to Subsidiaries 449 242 336
Net (Increase) Decrease in Long-Term Advances to Subsidiaries (10) 650 (1,077)
Net (Increase) Decrease in Investment (at Equity) in Subsidiaries (300) (430) (1,045)
Net (Increase) Decrease in Securities Under Resale Agreement-Chemical Securities Inc. 156 (586) --
Other--Net (101) -- 7
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (2,182) (279) (2,483)
-------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net Increase (Decrease) in Other Borrowed Funds 1,928 6 368
Proceeds from the Issuance of Long-Term Debt 1,217 2,408 1,306
Repayments of Long-Term Debt (1,307) (2,014) (517)
Proceeds from the Issuance of Stock 254 591 2,117
Purchase of Treasury Stock (387) -- --
Redemption of Preferred Stock (416) (610) (292)
Cash Dividends Paid (521) (480) (438)
-------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 768 (99) 2,544
-------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 7 (28) 82
Cash with Banks at the Beginning of the Year 69 97 15
-------------------------------------------------------------------------------------------------------------------------------
Cash with Banks at the End of the Year $ 76 $ 69 $ 97
-------------------------------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 449 $ 421 $ 409
Taxes Paid (Refunded) $ (123) $ 89 $ 58
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE> 88
Chemical Banking Corporation
and Subsidiaries
Quarterly Financial Information 1994-1993
<TABLE>
<CAPTION>
(in millions, except per share and stock price data) 1994 1993
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Net Interest Income $ 1,169 $ 1,177 $1,185 $1,143 $1,149 $1,163 $1,175 $1,149
Provision for Losses 85 100 160 205 286 298 363 312
Noninterest Revenue 815 984 867 931 1,053 1,004 1,042 925
Noninterest Expense 1,593 1,311 1,281 1,324 1,335 1,370 1,312 1,276
-------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense
and Effect of Accounting Changes 306 750 611 545 581 499 542 486
Income Tax Expense (Benefit) 127 311 254 226 234 (3) 161 147
-------------------------------------------------------------------------------------------------------------------------------
Income Before Effect of
Accounting Changes 179 439 357 319 347 502 381 339
Net Effect of Changes in
Accounting Principles -- -- -- -- -- -- -- 35
-------------------------------------------------------------------------------------------------------------------------------
Net Income $ 179 $ 439 $ 357 $ 319 $ 347 $ 502 $ 381 $ 374
-------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Income Before Effect of
Accounting Changes $ .63 $ 1.60 $ 1.28 $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.21
Net Effect of Changes in
Accounting Principles -- -- -- -- -- -- -- .14
Net Income $ .63 $ 1.60 $ 1.28 $ 1.13 $ 1.23 $ 1.84 $ 1.35 $ 1.35
-------------------------------------------------------------------------------------------------------------------------------
Pro Forma:(a)
Income Before Effect of
Accounting Changes $ 331 $ 439 $ 357 $ 319 $ 347 $ 355 $ 327 $ 276
Net Effect of Changes in
Accounting Principles -- -- -- -- -- -- -- 35
-------------------------------------------------------------------------------------------------------------------------------
Pro Forma Net Income $ 331 $ 439 $ 357 $ 319 $ 347 $ 355 $ 327 $ 311
-------------------------------------------------------------------------------------------------------------------------------
Pro Forma Per Common Share:
Income Before Effect of
Accounting Changes $ 1.24 $ 1.60 $ 1.28 $ 1.13 $ 1.23 $ 1.26 $ 1.14 $ .95
Net Effect of Changes in
Accounting Principles -- -- -- -- -- -- -- .14
Net Income $ 1.24 $ 1.60 $ 1.28 $ 1.13 $ 1.23 $ 1.26 $ 1.14 $ 1.09
-------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Share $ .44 $ .44 $ .38 $ .38 $ .38 $ .33 $ .33 $ .33
Average Common Shares Outstanding 244.5 246.6 253.1 253.2 252.5 252.1 251.7 248.5
-------------------------------------------------------------------------------------------------------------------------------
Stock Price Per Common Share:(b)
High $38.63 $ 40.00 $40.88 $42.13 $46.38 $45.38 $44.13 $44.13
Low 33.63 34.88 33.88 34.50 36.00 38.75 35.00 37.00
Close 35.88 35.00 38.50 36.38 40.13 45.00 40.88 40.38
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recognized its remaining available Federal income tax
benefits in the third quarter of 1993. The pro forma section presents the
earnings prior to the 1993 fourth quarter on a fully-taxed basis and excludes
the impact of the $260 million restructuring charge in the fourth quarter of
1994 and the $115 million merger-related charge in the third quarter of 1993.
(b) The Corporation's common stock is listed and traded on the New York Stock
Exchange and the International Stock Exchange of the United Kingdom and Republic
of Ireland. The high, low and closing prices of the Corporation's common stock
are from the New York Stock Exchange Composite Transaction Tape.
73
<PAGE> 89
Chemical Banking Corporation
and Subsidiaries
Average Consolidated Balance Sheet, Interest and Rates
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993
(Taxable-Equivalent Interest and Rates; in millions) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits With Banks $ 5,257 $ 371 7.07% $ 4,202 $ 268 6.39%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 12,000 550 4.58 10,300 339 3.29
Trading Assets-Debt and Equity Instruments 11,347 722 6.37 8,039 449 5.59
Securities:
Held-to-Maturity 9,204 620 6.73 -- -- --
Available-for-Sale 17,003 1,104 6.49(b) -- -- --
Securities(a) -- -- -- 23,654 1,731 7.32
------------------------------------------------------------------------------------------------------------------------------------
Total Securities 26,207 1,724 6.58 23,654 1,731 7.32
------------------------------------------------------------------------------------------------------------------------------------
Domestic Loans 57,377 4,522 7.88 57,701 4,197 7.28
Foreign Loans 17,857 1,223 6.85 21,038 1,440 6.85
------------------------------------------------------------------------------------------------------------------------------------
Total Loans 75,234 5,745(c) 7.64 78,739 5,637(c) 7.16
------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 130,045 9,112 7.01% 124,934 8,424 6.74%
------------------------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses (2,872) (3,084)
Cash and Due from Banks 8,491 8,537
Risk Management Instruments 17,779 --
All Other Assets 13,236 14,494
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 166,679 $ 144,881
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Domestic Retail Deposits $ 43,861 1,164 2.66% $ 46,598 1,237 2.65%
Domestic Negotiable Certificates of Deposit
and Other Deposits 5,128 186 3.64 6,242 191 3.05
Deposits in Foreign Offices 24,051 1,028 4.27 21,066 813 3.86
------------------------------------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 73,040 2,378 3.26 73,906 2,241 3.03
------------------------------------------------------------------------------------------------------------------------------------
Short-Term and Other Borrowings:
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 19,154 844 4.41 15,461 472 3.05
Commercial Paper 2,760 118 4.29 2,438 83 3.42
Other Borrowings 8,775 538 6.12 6,663 437 6.56
------------------------------------------------------------------------------------------------------------------------------------
Total Short-Term and Other Borrowings 30,689 1,500 4.89 24,562 992 4.04
Long-Term Debt 8,419 536 6.37 8,053 534 6.64
------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 112,148 4,414 3.94 106,521 3,767 3.54
------------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 21,723 21,750
Risk Management Instruments 16,143 --
All Other Liabilities 5,703 6,027
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 155,717 134,298
------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 1,579 1,887
Common Stockholders' Equity 9,383 8,696
------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 10,962(d) 10,583(d)
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 166,679 $ 144,881
------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 3.07% 3.20%
------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $4,698 3.61% $4,657 3.73%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On December 31, 1993, the Corporation adopted SFAS 115. Previously reported
amounts have not been restated to conform with 1994 presentation. (b) For the
year ended December 31, 1994, the annualized rate for securities
available-for-sale based on amortized cost was 6.42%. (c) Fees and commissions
on loans included in loan interest amounted to $141 million in 1994 and $176
million in 1993. (d) The ratio of average stockholders' equity to average assets
was 6.6% for 1994 and 7.3% for 1993.
74
<PAGE> 90
Chemical Bank
and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, (in millions, except share data) 1994 1993
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 6,258 $ 4,335
Deposits with Banks 5,484 5,829
Federal Funds Sold and Securities Purchased Under Resale Agreements 5,898 4,271
Trading Assets:
Debt and Equity Instruments 8,088 8,556
Risk Management Instruments 17,694 --
Securities:
Held-to-Maturity (Market Value: $5,981 and $8,429) 6,316 8,269
Available-for-Sale 16,362 13,562
Loans (Net of Unearned Income: $405 and $332) 62,272 59,350
Allowance for Credit Losses (2,022) (2,447)
Premises and Equipment 1,409 1,238
Due from Customers on Acceptances 1,064 1,063
Accrued Interest Receivable 989 899
Assets Acquired as Loan Satisfactions 135 759
Assets Held for Accelerated Disposition 466 --
Other Assets 3,101 7,318
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 133,514 $ 113,002
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 15,143 $ 15,950
Time and Savings 31,868 35,626
Foreign 31,230 24,886
------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 78,241 76,462
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 16,183 13,508
Other Borrowed Funds 6,654 4,426
Acceptances Outstanding 1,081 1,084
Accounts Payable and Accrued Liabilities 1,705 2,190
Other Liabilities 18,274 2,945
Long-Term Debt 2,303 2,537
Long-Term Debt Payable to Parent Company 1,867 1,867
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 126,308 105,019
------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common Stock ($12 Par Value; Issued and Outstanding 51,633,170 Shares) 620 620
Capital Surplus 4,501 4,501
Retained Earnings 2,495 2,703
Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Taxes (410) 159
------------------------------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 7,206 7,983
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $ 133,514 $ 113,002
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 91
APPENDIX I
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations in Section B.
<TABLE>
<CAPTION>
GRAPHIC
NUMBER PAGE DESCRIPTION
------- ---- -----------
<S> <C> <C>
1 16 Bar Graph entitled "Net Income in millions of dollars" presenting
the following information:
1992 1993 1994
---- ---- ----
Net Income as reported $1,086 $1,604 $1,294
Net Income excluding
Federal Tax Benefits,
Accounting Changes and
Restructuring Charges
of $260 million in 1994
and $115 million in 1993 784 1,305 1,446
2 16 Bar Graph entitled "Earnings Per Common Share" presenting the
following information:
1992 1993 1994
---- ---- ----
Net Income Per Common
Share as reported $3.90 $5.77 $4.64
Net Income Per Common
Share excluding
Federal Tax Benefits,
Accounting Changes and
Restructuring Charges
of $260 million in 1994
and $115 million in 1993 2.64 4.58 5.25
3 20 Bar Graph entitled "Noninterest Revenue in millions of dollars"
presenting the following information:
1992 1993 1994
---- ---- ----
Fee-Based Revenue $1,930 $2,099 $2,274
Combined Trading 853 1,073 645
All Other Noninterest
Revenue 243 852 678
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
GRAPHIC
NUMBER PAGE DESCRIPTION
------ ---- -----------
<S> <C> <C>
4 26 Bar Graph entitled "Nonperforming Assets in millions of dollars"
presenting the following information:
At December 31, 1992 1993 1994
---- ---- ----
Nonperforming Loans $4,816 $2,591 $929
Assets Acquired as
Loan Satisfactions 1,276 934 210
5 26 Bar Graph entitled "Net Charge-offs and Provision for Losses in
millions of dollars" presenting the following information:
1992 1993 1994
---- ---- ----
Net Charge-offs $1,609 $1,281 $1,095
Provision for Losses 1,365 1,259 550
6 34 Bar Graph entitled "Histogram of Daily Market Risk-Related Trading
Revenue for 1994" presenting the following information:
Millions of dollars 0-5 5-10 10-15 15-20 20-25
--- ---- ----- ----- -----
Number of days trading
revenue was within the
above prescribed positive
dollar range 119 59 19 7 1
Millions of dollars 0-(5) (5)-(10) (10)-(15) (15)-(20) (20)-(25)
----- -------- --------- --------- ---------
Number of days trading
revenue was within the
above prescribed negative
dollar range 38 19 3 0 1
The Histogram includes all business trading days for international
and domestic units.
</TABLE>
<PAGE> 93
------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on behalf
of the undersigned, thereunto duly authorized, on the 21st day of March, 1995.
CHEMICAL BANKING CORPORATION
(Registrant)
By /s/ WALTER V. SHIPLEY
----------------------------
(Walter V. Shipley,
Chairman of the Board and
Chief Executive Officer)
This report has been reviewed by each member of the Board of Directors and
pursuant to the requirements of the Securities Exchange Act of 1934, signed on
behalf of the registrant by members present at the meeting of the Board of
Directors on the date indicated. The Corporation does not exercise the power of
attorney to sign on behalf of any Director.
<TABLE>
<CAPTION>
CAPACITY DATE
<S> <C> <C>
/s/ WALTER V. SHIPLEY Director and Chairman of
------------------------ the Board
(Walter V. Shipley) (Principal Executive Officer)
/s/ EDWARD D. MILLER Director and President
-------------------------
(Edward D. Miller)
/s/ WILLIAM B. HARRISON JR. Director and Vice Chairman
---------------------------
(William B. Harrison Jr.)
/s/ FRANK A. BENNACK JR. Director March 21, 1995
-------------------------
(Frank A. Bennack Jr.)
/s/ MICHEL C. BERGERAC Director
-------------------------
(Michel C. Bergerac)
/s/ RANDOLPH W. BROMERY Director
-------------------------
(Randolph W. Bromery)
/s/ CHARLES W. DUNCAN JR. Director
-------------------------
(Charles W. Duncan Jr.)
/s/ MELVIN R. GOODES Director
-------------------------
(Melvin R. Goodes)
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
CAPACITY DATE
<S> <C> <C>
/s/ GEORGE V. GRUNE Director
----------------------
(George V. Grune)
/s/ HAROLD S. HOOK Director
----------------------
(Harold S. Hook)
/s/ HELENE L. KAPLAN Director
----------------------
(Helene L. Kaplan)
/s/ J. BRUCE LLEWELLYN Director
-----------------------
(J. Bruce Llewellyn)
/s/ JOHN P. MASCOTTE Director
----------------------
(John P. Mascotte)
/s/ JOHN F. MCGILLICUDDY Director
------------------------
(John F. McGillicuddy)
/s/ ANDREW C. SIGLER Director March 21, 1995
----------------------
(Andrew C. Sigler)
/s/ MICHAEL I. SOVERN Director
----------------------
(Michael I. Sovern)
/s/ JOHN R. STAFFORD Director
----------------------
(John R. Stafford)
/s/ W. BRUCE THOMAS Director
----------------------
(W. Bruce Thomas)
/s/ MARINA V.N. WHITMAN Director
------------------------
(Marina v.N. Whitman)
/s/ RICHARD D. WOOD Director
----------------------
(Richard D. Wood)
/s/ PETER J. TOBIN Executive Vice President
---------------------- and Chief Financial Officer
(Peter J. Tobin) (Principal Financial Officer)
/s/ JOSEPH L. SCLAFANI Senior Vice President and Controller
---------------------- (Principal Accounting Officer)
(Joseph L. Sclafani)
</TABLE>
<PAGE> 95
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.4 Key Executive Performance Plan of Chemical Banking Corporation.
10.5 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993.
11.1 Computation of Net Income per Common Share.
12.0 Computation of ratio of earnings to fixed charges.
12.1 Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements.
21.1 List of Subsidiaries of Chemical Banking Corporation.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.4
KEY EXECUTIVE PERFORMANCE PLAN
OF
CHEMICAL BANKING CORPORATION
SECTION 1 - PURPOSE
1.1 The Key Executive Performance Plan of Chemical Banking
Corporation (the "Plan") is designed to attract and retain the services of
selected employees who are in a position to make a material contribution to the
successful operation of the business of Chemical Banking Corporation or one or
more of its Subsidiaries. The Plan shall become effective as of January 1, 1994,
subject to approval by stockholders in the manner required by Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code").
SECTION 2 - DEFINITIONS
2.1 For purposes of this Plan, the following terms shall have the
following meanings:
(a) "Award" means an amount payable to a Participant
pursuant to Section 4 of this Plan.
(b) "Board of Directors" means the Board of Directors of
the Corporation.
(c) "Compensation Committee" or "Committee" means the
Compensation and Benefits Committee of the Board of Directors.
(d) "Corporation" means Chemical Banking Corporation.
<PAGE> 2
(e) "Participant" means an employee of the Corporation or of a
Subsidiary who has been designated by the Committee as eligible to
receive an Award pursuant to the Plan for the Plan Year.
(f) "Plan Year" means the calendar year.
(g) "Subsidiary" means (i) any corporation, domestic or
foreign, more than 50 percent of the voting stock of which is owned or
controlled, directly or indirectly, by the Corporation; or, (ii) any
partnership, more than 50 percent of the profits interest or capital
interest of which is owned or controlled, directly or indirectly, by
the Corporation; or (iii) any other legal entity, more than 50 percent
of the ownership interest, such interest to be determined by the
Committee, of which is owned or controlled, directly or indirectly, by
the Corporation.
SECTION 3 - DETERMINATION OF BONUS POOL
3.1 Not later than three months after the beginning of the Plan
Year, the Committee shall prescribe an objective formula pursuant to which a
pool of funds (a "bonus pool") will be created for that Plan Year. The bonus
pool will consist of:
(a) a percentage, established by the Committee, of the
Corporation's income before income tax expense for that Plan
Year in excess of a percentage, established by the Committee,
of total stockholders' equity of the Corporation at the
beginning of that Plan Year. At the time that it determines
the bonus pool formula, the Committee may make provision for
excluding the effect of extraordinary events
2
<PAGE> 3
and changes in accounting methods, practices or policies on
the amount of the bonus pool; plus
(b) commencing in 1995, an amount, not in excess of $2,000,000
(the "Carryover Amount") consisting of the excess of the
cumulative bonus pools for all prior Plan Years under the
Plan over the actual Awards made for such Plan Years.
SECTION 4 - AWARDS
4.1 Coincident with the establishment of the formula under which
the bonus pool will be created for a Plan Year the Committee shall assign shares
of the bonus pool for that Plan Year to those individuals whom the Committee
designates as Participants for that Plan Year (which shares in the aggregate may
not exceed 100% of such bonus pool except to the extent permitted by the Code).
The maximum annual Award which can be made to any one Participant for a Plan
Year is the sum of (a) .2% of the Corporation's total income before income tax
expense, extraordinary items and effect of accounting changes, as set forth on
the Corporation's Consolidated Statement of Income for such Plan Year and (b)
50% of the Carryover Amount, determined under Section 3(b), for such Plan Year.
4.2 Notwithstanding the provisions of Section 4.1, the Committee
may, in its sole discretion, reduce the amount otherwise payable to a
Participant at any time prior to the payment of the Award to the Participant.
3
<PAGE> 4
SECTION 5 - ELIGIBILITY FOR PAYMENT OF AWARDS
5.1 Subject to Section 4.2, a Participant who has been assigned a
share of the bonus pool shall receive payment of an Award if he or she remains
employed by the Corporation or its Subsidiaries through the end of the
applicable Plan Year; provided, however, that no Participant shall be entitled
to payment of an Award hereunder until the Committee certifies in writing that
the performance goals and any other material terms of the Plan have in fact been
satisfied. (Such written certification may take the form of minutes of the
Committee).
SECTION 6 - FORM AND TIMING OF PAYMENT OF AWARDS
6.1 Awards may be paid, in whole or in part, in cash, in the form
of grants of stock based awards (other than options) made under the
Corporation's Long Term Stock Incentive Plan, as amended from time to time, or
any successor plan ("LTSIP"), or in any other form prescribed by the Committee,
and may be subject to such additional restrictions as the Committee, in its sole
discretion, shall impose. Where Awards are paid in property other than cash, the
value of such Awards, for purposes of the Plan, shall be determined by reference
to the fair market value of the property on the date of the Committee's
certification required by Section 5.1. For this purpose the fair market of
shares of common stock of the Corporation on a particular date shall equal the
"Fair Market Value" (as determined under the LTSIP as in effect on January 1,
1994) of such shares on that date.
6.2 If an Award is payable in shares of common stock of the
Corporation or in another form permitted under the LTSIP, such Awards will be
issued in accordance with the LTSIP.
4
<PAGE> 5
6.3 Subject to Sections 5, 6.2 and 7 hereof, Awards shall be paid
at such time as the Committee may determine.
SECTION 7 - DEFERRAL OF PAYMENT OF AWARDS
7.1 The Committee may, in its sole discretion, permit a
Participant to defer receipt of a cash Award. Any such deferral shall be made
pursuant to the terms of the Deferred Compensation Plan of Chemical Banking
Corporation and Participating Companies, as amended from time to time, or any
successor plan.
SECTION 8 - ADMINISTRATION
8.1 The Plan shall be administered by the Compensation Committee.
8.2 Subject to the provisions of the Plan, the Committee shall
have exclusive power to determine the amounts that shall be available for Awards
each Plan Year and to establish the guidelines under which the Awards payable to
each Participant shall be determined.
8.3 The Committee's interpretation of the Plan, grant of any Award
pursuant to the Plan, and all actions taken within the scope of its authority
under the Plan, shall be final and binding on all Participants (or former
Participants) and their executors.
8.4 The Committee shall have the authority to establish, adopt or
revise such rules or regulations relating to the Plan as it may deem necessary
or advisable for the administration of the Plan.
5
<PAGE> 6
SECTION 9 - AMENDMENT AND TERMINATION
9.1 The Board of Directors may amend any provision of the Plan at
any time; provided that no amendment which requires stockholder approval in
order for bonuses paid pursuant to the Plan to be deductible under the Code, as
amended, may be made without the approval of the stockholders of the
Corporation. The Board of Directors shall also have the right to terminate the
Plan at any time.
SECTION 10 - MISCELLANEOUS
10.1 The fact that an employee has been designated a Participant
shall not confer on the Participant any right to be retained in the employ of
the Corporation or one or more of its Subsidiaries, or to be designated a
Participant in any subsequent Plan Year.
10.2 No Award under this Plan shall be taken into account in
determining a Participant's compensation for the purpose of any group life
insurance or other employee benefit plan unless so provided in such benefit
plan.
10.3 This Plan shall not be deemed the exclusive method of
providing incentive compensation for an employee of the Corporation and its
Subsidiaries, nor shall it preclude the Committee or the Board of Directors from
authorizing or approving other forms of incentive compensation.
10.4 All expenses and costs in connection with the operation of the
Plan shall be borne by the Corporation and its Subsidiaries.
10.5 The Corporation or other Subsidiary making a payment under
this Plan shall withhold therefrom such amounts as may be required by federal,
state or local law, and the
6
<PAGE> 7
amount payable under the Plan to the person entitled thereto shall be reduced
by the amount so withheld.
10.6 The Plan and the rights of all persons under the Plan shall be
construed and administered in accordance with the laws of the State of New York
to the extent not superseded by federal law.
10.7 In the event of the death of a Participant, any payment due
under this Plan shall be made to his or her estate.
7
<PAGE> 1
EXHIBIT 10.5
DEFERRED COMPENSATION PLAN
OF
CHEMICAL BANKING CORPORATION
AND PARTICIPATING COMPANIES
AMENDED THROUGH JANUARY 1, 1993
ARTICLE I
DEFINITIONS
The following are defined terms wherever they appear in the
Plan.
1.1 "Administrator" shall mean the Director of Human
Resources of the Corporation, who shall be responsible for those functions
assigned to him under the Plan; provided that the term "Administrator" shall
mean the Committee with respect to any discretionary act hereunder which
affects any person subject to Section 16(a) of the Securities Exchange Act of
1934, as amended.
1.2 "Board of Directors" shall mean the Board of
Directors of the Corporation; provided that any action taken by a duly
authorized committee of the Board of Directors (including any action described
in Section 5.4) within the scope of authority delegated to it by the Board
shall be considered an action of the Board of Directors for the purpose of this
Plan.
1.3 "Committee" shall mean the Compensation and Benefits
Committee of the Board of Directors.
1.4 "Corporation" shall mean Chemical Banking Corporation.
<PAGE> 2
- 2 -
1.5 "Deferred Compensation Account" shall mean the
separate account established under the Plan for each deferral by a Participant
as described in Section 3.1.
1.6 "Employee" shall mean an individual whose employment
classification is that of a regular full-time employee and who is on a United
States payroll of a Participating Company.
1.7 "Former Participant" means a Participant whose
employment has terminated and whose Deferred Compensation Account has not been
fully distributed.
1.8 "Participant" shall mean each Employee of a
Participating Company who participates in the Plan in accordance with the terms
and conditions of the Plan.
1.9 "Participating Company" shall mean: (a) the
Corporation and (b) each Related Company which has been authorized by the
Administrator to participate in the Plan, has adopted the Plan and has agreed
to comply with the provisions of the Plan.
1.10 "Plan" shall mean the Deferred Compensation Plan of
Chemical Banking Corporation and Participating Companies as in effect from time
to time.
1.11 "Related Company" shall mean a corporation of which
more than 50% of the combined voting power of all classes of stock entitled to
vote or equity interest is owned directly or indirectly by the Corporation or a
partnership, joint venture or other unincorporated entity of which more than
50% of the capital, equity or profits interest is owned directly or indirectly
by the Corporation.
1.12 "Retirement" shall mean that a Participant, as of the
date his employment terminates, has met the definition of retirement under the
then current retirement
<PAGE> 3
- 3 -
plan of his Employer; provided that in case of a Participant who has made
deferrals of incentive compensation prior to January 1, 1993 under this Plan,
"Retirement" shall mean with respect to only such deferrals (and any gains or
losses thereon) that the individual has attained at least age 50 and has at
least 15 years of service with a Participating Company.
1.13 "Total and Permanent Disability" or "Totally
Disabled" shall mean a disability that, in the determination of the
Administrator, would qualify an individual for benefits under a long term
disability program maintained by the Corporation or a Related Company.
1.14 "Valuation Date" shall mean the close of business on
the last business day of each calendar quarter; provided that in the case of
termination of employment for reasons other than Retirement or Total and
Permanent Disability, the Valuation Date shall mean the close of business on
the last business day of the month in which (i) employment terminates or (ii)
the documents described in Section 4.4 are received.
ARTICLE II
PARTICIPATION
2.1 ELIGIBILITY. The Employees who shall be eligible to
participate in the Plan are those salaried officers and other key employees of
a Participating Company who:
(i) are participating in a cash incentive plan
permitting deferral; and
(ii) have a position or salary grade with a
Participating Company which has been
designated by the Committee as eligible for
participation in the Plan; or
<PAGE> 4
- 4 -
(iii) have been specifically authorized by the
Committee to participate in the Plan.
2.2 DEFERRAL ELECTIONS. An eligible Employee with the
consent of the Administrator may annually elect to defer incentive compensation
and participate herein by delivering a properly executed election form to the
Administrator. The election form shall specify with respect to the incentive
compensation to be deferred for the year: (i) the amount of incentive
compensation, by percentage or by dollar amount, to be deferred; (ii) the
allocation of the deferred incentive compensation among the forms of
hypothetical investments; (iii) the year for the commencement of payment of
deferred incentive compensation, and (iv) the number of annual installments.
2.3 EFFECTIVE DATE OF ELECTION. (a) An election to defer
incentive compensation must be received at least six months prior to the end of
the calendar year to which such incentive compensation relates. Such an
election shall be irrevocable upon receipt.
(b) Notwithstanding the date specified in this Section
2.3 (a) the Administrator may prescribe an earlier or later date by which
Participant must elect to defer such incentive compensation.
(c) Under no circumstances may a Participant at any time
defer incentive compensation to which the Participant has attained a legally
enforceable right to receive (either currently or at some future time).
2.4 SPECIAL ELECTION. With respect to any amounts
deferred under this Plan before January 1, 1993, each Participant shall be
eligible to make a single irrevocable election as to the method of payment of
such amounts upon Retirement or Total and Permanent
<PAGE> 5
- 5 -
Disability; provided that such election shall not be effective for a Retirement
or Total and Permanent Disability occurring within 12 months of the receipt of
such election by the Administrator, unless an election pre-dating December 31,
1992 is on file with respect to such individual. If such an election is not
received by the Administrator or if the Retirement or Total and Permanent
Disability shall occur within such 12 month period of the receipt of such
election, such deferred incentive compensation shall be distributed in a lump
sum as provided in Section 4.1. The payment terms of such deferred incentive
compensation shall be governed by Sections 4.2 and 4.4.
ARTICLE III
COMPENSATION DEFERRED
3.1 DEFERRED COMPENSATION ACCOUNT.
(a) With respect to any year's deferral, a Deferred
Compensation Account shall be established for each Participant. Incentive
compensation deferred by a Participant in any year under this Plan, along with
hypothetical income (or losses) on such amounts, shall be credited (or debited)
to the Participant's Deferred Compensation Account.
(b) For purposes of hypothetical investment under Section
3.3, deferred incentive compensation shall be considered to be invested as of
the first day of the month immediately following the month in which incentive
compensation would otherwise have been payable; provided that the amount of
such deferred incentive compensation shall accrue interest based on the 30-day
Treasury Bill rate from the date that such incentive compensation would have
been paid but for its deferral to the date that such deferred amount (plus
interest) is deemed invested.
<PAGE> 6
- 6 -
3.2 AMOUNT OF DEFERRAL. A Participant may elect to defer
receipt of all or a specified portion, by percentage or by dollar amount, of
any bonus or other incentive award other than any award payable as shares of
common stock of the Corporation. For these purposes, bonus or incentive
compensation means only compensation otherwise payable in cash to a Participant
for services as an Employee of the Participating Company.
3.3 HYPOTHETICAL INVESTMENT. Subject to the provisions
of Section 3.4, amounts credited to a Participant's Deferred Compensation
Account shall be deemed to be invested, at the Participant's direction, in one
of the following deemed investment vehicles:
(a) GOVERNMENT BOND FUND EQUIVALENT. Credited amounts
deemed allocated to the Government Bond Fund Equivalent hypothetical investment
shall be deemed to be invested in units of participation in the Chemical Bank
Commingled Employee Benefit Fixed Income Fund from January 1, 1993 through
February 18, 1993 and thereafter in shares of The Hanover U.S. Government
Securities Fund. The value of amounts hypothetically invested in units and
shares shall be determined by reference to the value of a unit of participation
in such Commingled Fixed Income Fund or the per share net asset value of The
Hanover U.S. Government Securities Fund plus declared dividends and declared
short term and long term capital gains distributions.
(b) CHEMICAL COMMON STOCK EQUIVALENT. Credited amounts
deemed allocated to the Common Stock Equivalent hypothetical investment shall
be deemed to be invested in shares of common stock of the Corporation (adjusted
to reflect dividends, splits and reclassifications) as of the date deemed
invested. In addition, dividends paid on a share of common stock of the
Corporation shall be deemed to have been paid on each hypothetically invested
share of common stock allocated to the Participant's Deferred Compensation
Account as if such hypothetical share were an actual share of common stock
issued and outstanding on the record date of these dividends. The value of
amounts
<PAGE> 7
- 7 -
hypothetically invested in common stock of the Corporation shall be determined
by reference to the average of the high and low selling price of one share of
common stock of the Corporation as reported in the New York Stock Exchange
Composite Transactions on the particular date, or the immediately prior business
date if such date is not a business day.
(c) FIXED INCOME FUND EQUIVALENT. Credited amounts
deemed allocated to the Fixed Income Fund Equivalent hypothetical investment
shall be deemed to be invested in units of participation in the Income Quality
Fund of Chemical Bank from January 1, 1993 through April 30, 1993 and in units
of participation in Fund B of the Savings Incentive Plan of Chemical Bank and
Certain Affiliated Companies commencing as of May 1, 1993. The value of the
amounts hypothetically invested in such units shall be determined by reference
to the value of a unit of participation in each such Fund.
To avoid delay in making distributions, the
Administrator, in his discretion, may in crediting a rate of return to a
Participant's Deferred Compensation Account, treated as if invested in the
Fixed Income Fund equivalent, utilize the latest monthly rate of return
available with respect to such Fund.
(d) COMMINGLED COMMON STOCK FUND EQUIVALENT. Credited
amounts deemed allocated to the Commingled Common Stock Fund Equivalent
hypothetical investment shall be deemed to be invested in units of
participation in Chemical Bank's Commingled Employee Benefit Common Stock Fund
from January 1, 1993 through February 18, 1993 and thereafter in shares of The
Hanover Blue Chip Growth Fund. The value of amounts hypothetically invested in
such units of participation and shares shall be determined by reference to the
value of a unit of participation in such Common Stock Fund or the per share net
asset value of The Hanover Blue Chip Growth Fund plus declared dividends and
declared short term and long term capital gains distributions.
<PAGE> 8
- 8 -
(e) FORMER FUND EQUIVALENTS. Section 3.7 describes the
former fund equivalents previously available under this Plan and the rules
pertaining to such former fund equivalents.
3.4 LIMITATIONS ON HYPOTHETICAL INVESTMENTS.
Notwithstanding the provisions of Section 3.3, if the Administrator shall
determine in good faith that it is impossible or impractical to maintain any
deemed investment vehicle described in such Section 3.3, the Administrator may,
in his sole discretion either
(i) replace such investment vehicle with a deemed
investment vehicle having comparable investments and
investment objectives and risks substantially similar
to the vehicle being replaced or
(ii) discontinue such vehicle as an alternative for deemed
investment hereunder and provide each affected
Participant the opportunity, without limiting or
otherwise impairing any other right of the
Participant under this Article III regarding changes
of investment directions, to redirect the allocation
of his Deferred Compensation Account that had been
deemed invested in such discontinued investment fund
among the remaining deemed investment vehicles or, in
the discretion of the Administrator, into another
deemed investment vehicle established by the
Administrator.
3.5 MANNER OF HYPOTHETICAL INVESTMENT.
(a) Except as provided in Section 3.5(c), the hypothetical
investment of a Participant's Deferred Compensation Account thereunder in the
hypothetical investments described in Section 3.3 (or, if applicable, Section
3.4) shall be expressed in dollars. As of each Valuation Date, the value of
each such Participant's Account shall be determined by
<PAGE> 9
- 9 -
reference to the value of the hypothetical investment for the particular fund
in which the Account deemed invested plus any income (or loss) on that
hypothetical investment.
(b) The amount of the Participant's Deferred Compensation Account
on each Valuation Date which has not previously been deemed invested in a
hypothetical investment shall be deemed invested in a hypothetical investment
on that Valuation Date.
(c) Notwithstanding the foregoing, with respect to deferrals of
incentive compensation after January 1, 1993 (and amounts deferred prior to
such date if a proper reallocation form has not been received by the
Administrator), amounts deemed invested in the Chemical Common Stock Equivalent
shall be treated as if invested in shares of common stock of the Corporation.
3.6 ALLOCATION OF HYPOTHETICAL INVESTMENTS; REALLOCATION OF
HYPOTHETICAL INVESTMENTS.
(a) A Participant may elect the manner in which the balance of his
Deferred Compensation Account is deemed allocated to one or more of the
hypothetical investments described in Section 3.3 (or, if applicable, Section
3.4); provided that after December 31, 1992, a Participant or Former
Participant may not reallocate any amounts treated as if invested in the
Chemical Common Stock Equivalent to any other hypothetical investment.
Notwithstanding the foregoing, a Participant or Former Participant may
reallocate any amount deemed allocated to the Chemical Common Stock Equivalent
on December 31, 1992 to another hypothetical investment if such Participant or
Former Participant has filed with the Administrator a form setting forth
his/her intention to reallocate and makes such reallocation by December 31,
1993.
(b) A Participant or Former Participant may at any time also
reallocate among the hypothetical investments described in Section 3.3 (or, if
applicable, Section 3.4) amounts
<PAGE> 10
- 10 -
previously credited to his Deferred Compensation Account. This reallocation
may be made only one time in a 6-month period. If the Administrator receives
such individual's written notification of a request for reallocation on or
before the fifth day preceding a Valuation Date, the reallocation shall be
effective as of, and based upon values existing on the Valuation Date which
immediately follows receipt of such written request by Administrator. If
received after such fifth day, such reallocation shall be effective as of, and
based upon the values existing on the Valuation Date, which next succeeds the
Valuation Date referred to in the preceding sentence.
(c) The minimum allocation to any hypothetical investment under
this Section 3.6 shall be 20 percent of the balance of the Deferred
Compensation Account as of the Valuation Date on which such reallocation is
effective.
3.7 FORMER FUND EQUIVALENTS. The following shall apply to amounts
of incentive compensation deferred before January 1, 1993.
(a) Any amount of deferred incentive compensation treated as if
invested in the Treasury Bill Fund Equivalent on December 31, 1992 shall be
treated as if invested in the Government Bond Fund Equivalent, effective
January 1, 1993, unless a Participant or Former Participant has properly
elected another available hypothetical investment under the Plan prior to
December 24, 1992.
(b) Any amounts of deferred incentive compensation treated as if
invested at the 2 1/2-year IRA rate on December 31, 1992 under the former
Manufacturers Hanover Deferred Compensation Plan shall be treated as if
invested in the Fixed Income Fund Equivalent, effective January 1, 1993, unless
a Participant or Former Participant has properly elected an available
hypothetical investment under the Plan prior to such date.
<PAGE> 11
- 11 -
(c) Any amounts of deferred incentive compensation treated as if
invested in the Fixed Income Fund Equivalent December 31, 1992 and not
reallocated to another hypothetical investment under the Plan will be credited
with a rate of return measured by the performance of Fund F of the Chemical
Savings Incentive Plan.
(d) Any amounts of deferred incentive compensation treated as if
invested in the Special Equity Equivalent on December 31, 1992 and not
reallocated to another hypothetical investment under the Plan will be credited
with the rate return measured by the performance of the Chemical Bank Special
Equity Fund (i.e. Emerging Growth Fund) for calendar year 1993. If a
Participant has not properly elected another available hypothetical investment
under the Plan by December 24, 1993, such amount, as of January 1, 1994, shall
be treated as if invested in the Fixed Income Fund Equivalent.
(e) During calendar year 1993, a Participant or Former Participant
may reallocate amounts from a former investment fund equivalent to one or more
of hypothetical investments set forth in Section 3.3 as of any quarterly
Valuation Date.
3.8 STATEMENT OF ACCOUNT. A statement shall be sent to each
Participant or Former Participant with respect to the amount of his Deferred
Compensation Account at least once a calendar year.
ARTICLE IV
PAYMENT OF DEFERRED COMPENSATION
4.1 PAYMENT OF DEFERRED COMPENSATION.
(a) RETIREMENT. Upon termination of the Participant's employment
with the Corporation or a Related Company by reason of his Retirement or upon
the date selected by
<PAGE> 12
- 12 -
Participant for an in-service payment, the deferred incentive compensation
(including gains or losses) shall be distributed to such individual according
to the method, and on the dates, selected by the Participant pursuant to the
elections made under Section 2.2 (or if applicable, Section 2.4) attributable
to such deferred incentive compensation. With respect to a termination of
employment which qualifies as a "Retirement" solely because the Participant has
attained at least age 50 and has at least 15 years of service, distribution
under this Section 3.1(a) shall only be applicable to the value of amounts
deferred prior to January 1, 1993 under this Plan.
(b) TERMINATION OF EMPLOYMENT. Subject to Section 4.1(c), upon
termination of employment with the Corporation or a Related Company for any
reason other than Retirement, the value of the Participant's deferred incentive
compensation shall be distributed to him (or in the event of death, his estate)
in a lump sum (or shares of common stock of the Corporation) as soon as
practicable following the last day of the month in which the date employment
terminates.
(c) TOTAL AND PERMANENT DISABILITY. Upon a termination of
employment due to a Total and Permanent Disability, a Retirement eligible
individual shall have his Deferred Compensation Account distributed pursuant to
Section 4.1(a), provided that if an election dealing with a Total and Permanent
Disability is on file with the Administrator pursuant to Section 2.4, such
election shall govern the distribution of a Participant's pre-January 1, 1993
deferred incentive compensation, including gains and losses.
(d) SHARES OF COMMON STOCK. The value of any incentive
compensation deferred on or after January 1, 1993 and treated as if invested in
the Chemical Common Stock Equivalent shall be distributable solely in shares of
the common stock of the Corporation and shall be distributed as set forth in
Section 4.1(a) or (b) above.
<PAGE> 13
- 13 -
(e) SPECIAL RULE. Any amount treated as invested in the Chemical
Common Stock Equivalent as of December 31, 1992 shall be distributable solely
in shares of common stock of the Corporation; provided that such rule shall not
apply, if a Participant has properly filed a form with the Administrator by
December 24, 1992 setting forth his/her intention to reallocate from such
Common Stock Equivalent to another hypothetical investment and makes such
reallocation by December 31, 1993.
(f) SHARES AVAILABLE FOR ISSUANCE. An aggregate of 500,000 shares
of authorized but unissued shares of common stock of the Corporation has been
reserved for issuance pursuant to the Plan, as subject to adjustment provided
for in Section 5.8.
(g) VALUATION. For purposes of distribution, the balance of each
Deferred Compensation Account shall be valued as of the Valuation Date
coincident with or immediately following the date that the balance of such
Account or the particular installment thereof, is to be distributed.
4.2 ELECTIONS PERTAINING TO PAYMENTS.
(a) With respect to Retirement a distribution to be made during
employment, a Participant may elect for each annual deferral under Section 2.2
the year for commencement of payment and the method of payment of the deferred
incentive compensations; provided that
(i) If the election provides for installment
payments, the payments shall be made annually
and shall be payable for a period not to
exceed 15 years; and
(ii) With respect to Retirement, the first
installment payment or the lump sum shall be
distributed to the Participant as soon as
<PAGE> 14
- 14 -
practical after the January 1 immediately
following the date of Retirement, unless
otherwise elected by the Participant and
approved by the Administrator.
(b) With respect to deferred incentive compensation being paid in
installments more frequent than annual, nothing herein shall be construed to
require the Administrator to reduce the frequency of the payments.
4.3 FINANCIAL EMERGENCY PAYMENTS. Notwithstanding any other
provisions of this Plan, if the Administrator determines, after consideration
of an application of a Participant or Former participant, such individual has a
financial emergency of such a substantial nature and beyond the individual's
control that a contemporaneous payment of incentive compensation previously
deferred under this Plan is warranted, the Administrator may, in his sole and
absolute discretion, direct that all or a portion of the balance of the
Deferred Compensation Account be paid to the Participant or Former Participant
in such manner and at such time as the Administrator shall specify.
Notwithstanding the foregoing, the Administrator, in his sole and absolute
discretion, may utilize the financial hardship criteria in effect on January 1,
1992 to make a determination as to whether a Participant or Former Participant
has a financial hardship with respect to deferrals made prior to January 1,
1993 under this Plan; provided that the amount of a Deferred Compensation
Account available for a hardship distribution under such criteria shall be the
lesser of (i) the value of such Account as of December 31, 1992 or (ii) the
value of the Account (but only with respect to deferrals made prior to January
1, 1993) as of the Valuation Date preceding the date of distribution.
4.4 PAYMENTS TO A DECEASED PARTICIPANT'S ESTATE. In the
event of a death of a Participant or Former Participant before each Deferred
Compensation Account has been fully distributed to him, the Deferred
Compensation Account of such individual shall be determined as of the Valuation
Date coincident with or immediately following the date that
<PAGE> 15
- 15 -
both a written notice of his death and a death certificate is received by the
Administrator. Such Account shall be distributed in a lump sum to the
individual's estate as soon as practicable thereafter; provided that shares of
the common stock of the Corporation shall be distributed with respect to any
deferred incentive compensation treated as if invested in the Chemical Common
Stock Equivalent.
ARTICLE V
GENERAL PROVISIONS
5.1 PARTICIPANT'S RIGHTS UNSECURED. The right of any Participant
or Former Participant to receive future payments under the provisions of the
Plan shall be an unsecured claim against the general assets of the
Participating Company employing the Participant at the time that his
compensation is deferred. Neither the Corporation nor any Participating
Company guarantees or is liable for payment of benefits to the employees of any
other Participating Company under this Plan.
5.2 ASSIGNABILITY. No right to receive payments hereunder shall
be transferrable or assignable by a Participant or Former Participant except by
will or by the laws of descent and distribution or by a court of competent
jurisdiction. Any other attempted assignment or alienation of payments
hereunder shall be void and of no force or effect.
5.3 ADMINISTRATION. Except as otherwise provided herein, the Plan
shall be administered by the Administrator who shall have the authority to
adopt rules and regulations for carrying out the provisions of the Plan, who
shall interpret, construe and implement the provisions of the Plan, and whose
determinations shall be conclusive and binding. In carrying out his
responsibilities hereunder, the Administrator may appoint such delegatees as he
deems appropriate. Notwithstanding anything herein to the contrary, the
Administrator shall have the absolute right to delay any payments for a
reasonable period following the calendar year
<PAGE> 16
- 16 -
of termination of employment but not beyond April 1 of the calendar year
immediately following the year of termination of employment.
5.4 AMENDMENT. The Plan may at any time or from time to time be
amended, modified or terminated by the Board of Directors; provided that no
amendment, modification, or termination shall, without the consent of the
Participant, reduce the balance of Participant's Deferred Compensation Account
at that time; provided further that as to persons subject to Section 16(a) of
the Securities Exchange Act of 1934, as amended, no provision hereunder which
relates to the Chemical Common Stock Equivalent may be amended at less than six
months intervals, and such amendment shall be subject to stockholder approval
if required by SEC Rule 16b-3.
5.5 LEGAL OPINIONS. The Administrator may consult with legal
counsel, who may be counsel for the Corporation or other counsel, with respect
to his obligations or duties hereunder, or with respect to any action,
proceeding or any question at law, and shall not be liable with respect to any
action taken, or omitted, by him in good faith pursuant to the advice of such
counsel.
5.6 LIABILITY. Any decision made or action taken by the Board of
Directors, the board of directors (or governing body) of a Related Company, the
Committee, the Administrator or any employee of the Corporation or any of any
Related Company, arising out of, or in connection with, the construction,
administration, interpretation and effect of the Plan shall be within his
absolute discretion, and will be conclusive and binding on all parties.
Neither the Administrator nor a member of the Board of Directors of the
Corporation or the board of directors (or governing body) of a Related Company
or the Committee and no employee of the Corporation or of any Related Company
shall be liable for any act or action hereunder, whether of omission or
commission, by any other member or employee or by any agent to whom duties in
connection with the administration of the Plan have been delegated
<PAGE> 17
- 17 -
or, except in circumstances involving bad faith, for anything done or omitted
to be done in connection with this Plan.
5.7 CORPORATE REORGANIZATION. In the event that as of any date a
corporation or unincorporated entity ceases to meet the definition of Related
Company, such corporation or entity shall cease to be a Participating Employer
and its employees shall cease to be Participants under the Plan as of the
Valuation Date coincident with or immediately following such date, and this
Plan shall be treated as though a separate plan for the benefit of its
employees who were Participants in the Plan to govern the balances in each such
Participant's Deferred Compensation Account as of such Valuation Date.
5.8 ADJUSTMENTS. The maximum aggregate number of shares of common
stock of the Corporation to be issued under this Plan shall be proportionately
adjusted for any increase or decrease in the number of issued shares of common
stock of the Corporation resulting from a subdivision or consolidation of such
shares of common stock or other similar capital adjustment, or the payment of a
stock dividend (but only if such stock dividend is 5% or more), or other
increases or decreases in such shares of common stock effected without receipt
of consideration by the Corporation.
5.9 COMPLIANCE. This Plan will be administered to comply with the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended.
5.10 CONSTRUCTION. The masculine gender, where appearing in this
Plan, shall be deemed to also include the feminine gender. The singular shall
also include the plural, where appropriate.
<PAGE> 1
EXHIBIT 11.1
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 stock equivalents, such as
stock options, are not required to be included in the calculation since the
applicable dilution tests are not met.
<TABLE>
<CAPTION>
Average Net Income Net Income
Year ended Common Shares Applicable to Per
December 31 Outstanding Common Shares (a) Share
-------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
1994 249,317,986 $1,156 $4.64
1993 251,207,178 1,449 5.77(b)
1992 240,402,159 936 3.90
</TABLE>
(a) After dividends on preferred stock of $138 million (including $12 million
premium on redemption of preferred stock) in 1994, $155 million in 1993 and $153
million in 1992.
(b) On January 1, 1993, the Corporation adopted SFAS 106 which resulted in a
charge of $415 million, or $1.67 per common share, relating to postretirement
benefits and also adopted SFAS 109 which resulted in an income tax benefit of
$450 million, or $1.81 per common share. Net income before the effect of
accounting changes was $5.63 per common share. The net effect of changes in
accounting principles increased net income per common share by $0.14.
<PAGE> 1
EXHIBIT 12.0
CHEMICAL BANKING CORPORATION
AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31, 1994 (in millions, except ratios)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $2,212
-----------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense 2,036
One third of rents, net of income from subleases(a) 102
-----------------------------------------------------------------------------------------------------------------------------
Total fixed charges 2,138
-----------------------------------------------------------------------------------------------------------------------------
Less: Equity in undistributed income of affiliates (108)
-----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and fixed charges, excluding capitalized interest $4,242
-----------------------------------------------------------------------------------------------------------------------------
Fixed charges, as above $2,138
-----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.98
-----------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $2,138
Add: Interest on deposits 2,378
-----------------------------------------------------------------------------------------------------------------------------
Total fixed charges and interest on deposits $4,516
-----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and fixed charges, excluding capitalized interest, as above $4,242
Add: Interest on deposits 2,378
-----------------------------------------------------------------------------------------------------------------------------
Total earnings before taxes, fixed charges, and interest on deposits $6,620
-----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.47
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The proportion deemed representative of the interest factor.
<PAGE> 1
EXHIBIT 12.1
CHEMICAL BANKING CORPORATION
AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
Year Ended December 31, 1994 (in millions, except ratios)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $2,212
-----------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense 2,036
One third of rents, net of income from subleases(a) 102
-----------------------------------------------------------------------------------------------------------------------------
Total fixed charges 2,138
-----------------------------------------------------------------------------------------------------------------------------
Less: Equity in undistributed income of affiliates (108)
-----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and fixed charges excluding capitalized interest $4,242
-----------------------------------------------------------------------------------------------------------------------------
Fixed charges, as above $2,138
-----------------------------------------------------------------------------------------------------------------------------
Preferred stock dividends(b) 138
-----------------------------------------------------------------------------------------------------------------------------
Fixed charges including preferred stock dividends $2,276
-----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and preferred stock dividend requirements 1.86
-----------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends, as above $2,276
Add: Interest on deposits 2,378
-----------------------------------------------------------------------------------------------------------------------------
Total fixed charges including preferred stock dividends and interest on deposits $4,654
-----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and fixed charges, excluding capitalized interest, as above $4,242
Add: Interest on deposits 2,378
-----------------------------------------------------------------------------------------------------------------------------
Total earnings before taxes and fixed charges, and interest on deposits $6,620
-----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and preferred stock dividend requirements 1.42
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The proportion deemed representative of the interest factor.
(b) Includes $12 million premium on redemption of preferred stock.
<PAGE> 1
EXHIBIT 21.1
CHEMICAL BANKING CORPORATION
LIST OF SUBSIDIARIES
The Corporation has the following subsidiaries, all of which are included in the
Corporation's Consolidated Financial Statements:
<TABLE>
<CAPTION>
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Chemical Bank New York 100%
CB Capital Investors Inc. Delaware 100
ChemLease Worldwide, Inc. New York 100
Chemco International, Inc. United States 100
Chemical International Finance, Ltd. United States 100
CB Beteiligungs und Verwaltungs GmbH Germany 100
Chemical Bank A.G. Germany 100
Chemical Bank (Guernsey) Limited Channel Islands 100
Chemical Bank (U.K.) Holdings Limited United Kingdom 100
Chemical Investment Bank Limited United Kingdom 100
Chemical Bank & Trust (Bahamas) Limited Bahamas 100
Chemical Bank - France France 100
Chemical Ireland Limited Ireland 100
Chemical Trust and Banking Company Limited Japan 100
Banco Chemical (Portugal) S.A. Portugal 73
Chemical Bank of Canada Canada 30
Chemical Bank of Canada Canada 70
Chemical Mortgage Company Ohio 100
ChemCredit, Inc. New York 100
Chemical Acceptance Corporation Delaware 100
Chemical Acceptance Corporation I Delaware 100
Chemical Mortgage Acceptance Corp. Delaware 100
Chemical Community Development Inc. Delaware 100
Chemical Investment Services Corp. New York 100
Manufacturers Hanover Leasing Corporation Delaware 100
Texas Commerce Equity Holdings, Inc. Delaware 100
Texas Commerce Bank, N.A. United States 100
Texas Commerce Operating Services, Inc. Delaware 100
Chemical New Jersey Holdings, Inc. New Jersey 100
Chemical Bank New Jersey, N.A. United States 100
Chemical Investor Services, Inc. Delaware 100
Princeton Bank and Trust Company United States 100
Chemical Bank, National Association United States 100
Margaretten Financial Corporation Delaware 100
Chemical Residential Mortgage Corporation New Jersey 100
</TABLE>
<PAGE> 2
--------------------------------------------------------------------------------
LIST OF SUBSIDIARIES
(continued)
<TABLE>
<CAPTION>
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brown & Company Securities Corporation Massachusetts 100%
CBC-USA, Inc. Delaware 100
CBC Capital Partners, Inc. Delaware 100
CBC Holding (Delaware) Inc. Delaware 100
Chemical Bank Delaware Delaware 100
Chemical Insurance Agency, Inc. Delaware 100
The CIT Group Holdings, Inc. Delaware 40
Chatham Ventures, Inc. New York 100
Chemical Venture Capital Associates California 80
Chemical Equity Associates California 80
Chemical European Equity Associates L.P. Delaware 80
Chemical Business Credit Corp. Delaware 100
Chemical Capital Corporation New York 100
Chemical Connecticut Corporation Connecticut 100
Chemical Holding Delaware, Inc. Delaware 100
Chemical Thrift Holdings Inc. Delaware 100
Chemical Bank FSB United States 100
Chemical Trust Company of California California 100
CBC Holding (California) Inc. California 100
Van Deventer & Hoch California 50
Chemical Educational Services Corporation Delaware 100
Chemical Equity Incorporated New York 100
Chemical Financial Management Corporation Ohio 100
Chemical Financial Services Corp., Ltd. Delaware 100
Chemical Futures & Options, Inc. Delaware 100
Chemical Investments, Inc. Delaware 100
Chemical Mortgage Securities, Inc. New York 100
Chemical New York, N.V. Netherlands Antilles 100
Chemical Realty Corporation New York 100
Chemical Securities Inc. Delaware 100
Chemical Technologies Corporation New York 100
Manufacturers Hanover Wheelease, Inc. Delaware 100
Offshore Equities, Inc. New York 100
The Portfolio Group, Inc. New York 100
</TABLE>
The names of certain other direct and indirect subsidiaries of the Corporation
have been omitted from the list above because such unnamed subsidiaries
considered in the aggregate as a single subsidiary would not constitute a
significant subsidiary.
<PAGE> 1
--------------------------------------------------------------------------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-18640,
33-21488, 33-24224, 33-24654, 33-33220, 33-45228, 33-47105, 33-53306, 33-57104,
33-58634, 33-49965, 33-67742 and 33-68724) and in the Registration Statements on
Form S-8 (Nos. 33-01776, 33-13457, 33-14997, 33-19852, 33-26523, 33-40675,
33-40272, 33-45017, 33-45018, 33-49909, 33-49911, 33-49913, 33-54547 and
33-54549) of Chemical Banking Corporation of our report dated January 17, 1995
appearing on page 43 of Section B of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
New York, New York
March 27, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 8832
<INT-BEARING-DEPOSITS> 5649
<FED-FUNDS-SOLD> 12797
<TRADING-ASSETS> 28802
<INVESTMENTS-HELD-FOR-SALE> 18431
<INVESTMENTS-CARRYING> 8566
<INVESTMENTS-MARKET> 8106
<LOANS> 78767
<ALLOWANCE> (2480)
<TOTAL-ASSETS> 171423
<DEPOSITS> 96506
<SHORT-TERM> 34941
<LIABILITIES-OTHER> 21273
<LONG-TERM> 7991
<COMMON> 254
0
1450
<OTHER-SE> 9008
<TOTAL-LIABILITIES-AND-EQUITY> 171423
<INTEREST-LOAN> 5730
<INTEREST-INVEST> 1715
<INTEREST-OTHER> 1643
<INTEREST-TOTAL> 9088
<INTEREST-DEPOSIT> 2378
<INTEREST-EXPENSE> 4414
<INTEREST-INCOME-NET> 4674
<LOAN-LOSSES> 550
<SECURITIES-GAINS> 66
<EXPENSE-OTHER> 5509
<INCOME-PRETAX> 2212
<INCOME-PRE-EXTRAORDINARY> 1294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1294
<EPS-PRIMARY> 4.64
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.61
<LOANS-NON> 888
<LOANS-PAST> 330
<LOANS-TROUBLED> 41
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3020
<CHARGE-OFFS> (1414)
<RECOVERIES> 319
<ALLOWANCE-CLOSE> 2480
<ALLOWANCE-DOMESTIC> 2111
<ALLOWANCE-FOREIGN> 369
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
