SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1995 Commission file number 1-5805
------------- ------
CHEMICAL BANKING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2624428
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
270 Park Avenue, New York, New York 10017
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 270-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes.X.. No....
Common Stock, $1 Par Value 252,109,615
---------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
July 31, 1995.
- 1 -
<PAGE>
FORM 10-Q INDEX
Part I Page
------ ----
Item 1 Financial Statements - Chemical Banking Corporation
and Subsidiaries:
Consolidated Balance Sheet at June 30, 1995 and
December 31, 1994. 3
Consolidated Statement of Income for the three months
ended June 30, 1995 and June 30, 1994. 4
Consolidated Statement of Income for the six months
ended June 30, 1995 and June 30, 1994. 5
Consolidated Statement of Cash Flows for the six months
ended June 30, 1995 and June 30, 1994. 6
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1995 and June 30, 1994. 7
Notes to Financial Statements. 7-18
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19-53
Part II
-------
Item 1 Legal Proceedings 54
Item 4 Submission of Matters to a Vote of Security Holders 54
Item 6 Exhibits and Reports on Form 8-K. 55
- 2 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1.
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions, except share data)
June 30, December 31,
1995 1994
------- ------------
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 7,756 $ 8,832
Deposits with Banks 2,903 5,649
Federal Funds Sold and Securities
Purchased Under Resale Agreements 12,883 12,797
Trading Assets:
Debt and Equity Instruments 12,059 11,093
Risk Management Instruments 18,412 17,709
Securities:
Held-to-Maturity (Market Value: $8,285 and $8,106) 8,287 8,566
Available-for-Sale 19,965 18,431
Loans (Net of Unearned Income: $521 and $460) 84,675 78,767
Allowance for Credit Losses (2,430) (2,480)
Premises and Equipment 2,138 2,134
Due from Customers on Acceptances 1,156 1,088
Accrued Interest Receivable 1,197 1,190
Assets Acquired as Loan Satisfactions 54 210
Assets Held for Accelerated Disposition 240 526
Other Assets 9,236 6,911
---------- ----------
TOTAL ASSETS $ 178,531 $ 171,423
========== ==========
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 21,387 $ 21,399
Time and Savings 45,860 46,799
Foreign 27,642 28,308
---------- ----------
Total Deposits 94,889 96,506
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 23,557 23,098
Other Borrowed Funds 15,780 11,843
Acceptances Outstanding 1,162 1,104
Accounts Payable and Accrued Liabilities 2,585 2,361
Other Liabilities 21,976 17,808
Long-Term Debt 7,202 7,991
---------- ----------
TOTAL LIABILITIES 167,151 160,711
---------- ----------
COMMITMENTS AND CONTINGENCIES (See Note 9)
STOCKHOLDERS' EQUITY
Preferred Stock 1,250 1,450
Common Stock (Issued 254,931,474 and 254,009,187 Shares) 255 254
Capital Surplus 6,476 6,544
Retained Earnings 3,826 3,263
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (216) (438)
Treasury Stock, at Cost (5,496,561 and 9,497,533 Shares) (211) (361)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 11,380 10,712
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,531 $ 171,423
========== ==========
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended June 30,
(in millions, except per share data)
1995 1994
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $ 1,770 $ 1,375
Securities 513 432
Trading Assets 205 191
Federal Funds Sold and Securities
Purchased Under Resale Agreements 212 121
Deposits with Banks 67 100
--------- --------
Total Interest Income 2,767 2,219
--------- --------
INTEREST EXPENSE
Deposits 931 543
Short-Term and Other Borrowings 536 359
Long-Term Debt 138 132
--------- --------
Total Interest Expense 1,605 1,034
--------- --------
NET INTEREST INCOME 1,162 1,185
Provision for Losses 120 160
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 1,042 1,025
--------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 97 108
Corporate Finance and Syndication Fees 129 93
Service Charges on Deposit Accounts 76 75
Fees for Other Banking Services 290 279
Trading Revenue 171 203
Securities Gains 69 13
Other Revenue 129 96
--------- --------
Total Noninterest Revenue 961 867
--------- --------
NONINTEREST EXPENSE
Salaries 557 542
Employee Benefits 117 102
Occupancy Expense 129 140
Equipment Expense 97 91
Foreclosed Property Expense (14) 2
Other Expense 362 404
--------- --------
Total Noninterest Expense 1,248 1,281
--------- --------
INCOME BEFORE INCOME TAX EXPENSE 755 611
Income Tax Expense 302 254
--------- --------
NET INCOME $ 453 $ 357
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 427 $ 324
========= ========
EARNINGS PER SHARE:
Primary $ 1.72 $ 1.27
========= ========
Assuming Full Dilution $ 1.68 $ 1.25
========= ========
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Six Months Ended June 30,
(in millions, except per share data)
1995 1994
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $ 3,431 $ 2,682
Securities 1,018 848
Trading Assets 404 364
Federal Funds Sold and Securities
Purchased Under Resale Agreements 431 221
Deposits with Banks 149 194
-------- --------
Total Interest Income 5,433 4,309
-------- --------
INTEREST EXPENSE
Deposits 1,782 1,063
Short-Term and Other Borrowings 1,055 651
Long-Term Debt 278 267
-------- --------
Total Interest Expense 3,115 1,981
-------- --------
NET INTEREST INCOME 2,318 2,328
Provision for Losses 240 365
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 2,078 1,963
-------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 188 218
Corporate Finance and Syndication Fees 248 175
Service Charges on Deposit Accounts 150 144
Fees for Other Banking Services 584 569
Trading Revenue 227 388
Securities Gains 51 59
Other Revenue 383 245
--------- --------
Total Noninterest Revenue 1,831 1,798
--------- --------
NONINTEREST EXPENSE
Salaries 1,103 1,060
Employee Benefits 224 221
Occupancy Expense 264 286
Equipment Expense 198 175
Foreclosed Property Expense (21) 37
Restructuring Charge --- 48
Other Expense 726 778
--------- --------
Total Noninterest Expense 2,494 2,605
--------- --------
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT OF
ACCOUNTING CHANGE 1,415 1,156
Income Tax Expense 566 480
--------- --------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE 849 676
Effect of Change in Accounting Principle (11) ---
--------- --------
NET INCOME $ 838 $ 676
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 782 $ 611
========= ========
EARNINGS PER SHARE:
Primary:
Income Before Effect of Accounting Change $ 3.21 $ 2.39
Effect of Change in Accounting Principle (0.04) ---
--------- --------
Net Income $ 3.17 $ 2.39
========= ========
Assuming Full Dilution:
Income Before Effect of Accounting Change $ 3.12 $ 2.36
Effect of Change in Accounting Principle (0.04) ---
--------- --------
Net Income $ 3.08 $ 2.36
========= ========
The Notes to Financial Statements are an integral
part of these Statements.
</TABLE>
- 5 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(in millions)
1995 1994
---- ----
Operating Activities
--------------------
<S> <C> <C>
Net Income $ 838 $ 676
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Losses 240 365
Restructuring Charge --- 48
Depreciation and Amortization 192 146
Net Change In:
Trading-Related Assets 1,233 318
Accrued Interest Receivable (7) 77
Accrued Interest Payable 94 45
Other, Net (382) (444)
-------- --------
Net Cash Provided by Operating Activities 2,208 1,231
-------- --------
Investing Activities
--------------------
Net Change In:
Deposits with Banks 2,746 1,581
Federal Funds Sold and Securities Purchased Under Resale Agreements (86) (2,247)
Loans Due to Sales and Securitizations 2,987 4,787
Other Loans, Net (9,050) (4,919)
Other, Net (1,667) (102)
Proceeds from the Maturity of Held-to-Maturity Securities 722 1,925
Purchases of Held-to-Maturity Securities (447) (761)
Proceeds from the Maturity of Available-for-Sale Securities 2,564 1,925
Proceeds from the Sale of Available-for-Sale Securities 25,274 11,252
Purchases of Available-for-Sale Securities (28,653) (14,775)
--------- ---------
Net Cash Used by Investing Activities (5,610) (1,334)
--------- ---------
Financing Activities
--------------------
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (12) (1,374)
Domestic Time and Savings Deposits (939) (4,186)
Foreign Deposits (666) (741)
Federal Funds Purchased, Securities Sold Under Repurchase Agreements
and Other Borrowed Funds 5,119 8,538
Other Liabilities (23) 353
Other, Net 21 106
Proceeds from the Issuance of Long-Term Debt 582 1,215
Redemption and Maturity of Long-Term Debt (1,368) (1,080)
Proceeds from the Issuance of Stock 89 216
Treasury Stock Purchased (192) (56)
Cash Dividends Paid (273) (257)
-------- --------
Net Cash Provided by Financing Activities 2,338 2,734
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks (12) (20)
-------- --------
Net Increase (Decrease) in Cash and Due from Banks (1,076) 2,611
-------- --------
Cash and Due from Banks at January 1, 8,832 6,852
-------- --------
Cash and Due from Banks at June 30, $ 7,756 $ 9,463
======== ========
Cash Interest Paid $ 3,021 $ 1,936
Taxes Paid $ 607 $ 564
The Notes to Financial Statements are an integral
part of these Statements.
</TABLE>
- 6 -
<PAGE>
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Six Months Ended June 30,
(in millions)
1995 1994
---- ----
<S> <C> <C>
BALANCE AT JANUARY 1, $ 10,712 $ 11,164
--------- ---------
Net Income 838 676
Dividends Declared:
Preferred Stock (56) (65)
Common Stock (229) (192)
Issuance of Preferred Stock --- 200
Conversion of Preferred Stock (200) ---
Issuance of Common Stock 1 1
Net Change in Capital Surplus (58) 15
Restricted Stock Granted, Net of Amortization (10) (11)
Net Change in Treasury Stock 150 (102)
Net Change in Fair Value of Available-for-Sale Securities, Net of Taxes 222 (506)
Accumulated Translation Adjustment 10 ---
--------- ---------
Net Change in Stockholders' Equity 668 16
--------- ---------
BALANCE AT JUNE 30, $ 11,380 $ 11,180
========= =========
</TABLE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The unaudited financial statements of Chemical Banking Corporation and
subsidiaries (the "Corporation") are prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and the results of
operations for the interim periods presented have been included.
In the 1995 second quarter, the Corporation adopted, retroactive to January 1,
1995, Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends Statement of Financial
Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities" ("SFAS 65"), to require that when a definitive plan exists to sell
or securitize mortgage loans and to retain the servicing rights related thereto,
a mortgage banking enterprise should recognize as separate assets the rights to
service mortgage loans for others, irrespective of whether those servicing
rights are acquired through the purchase or the origination of the mortgage
loans. Under SFAS 65, only purchased mortgage servicing rights were permitted to
be recognized as separate assets. SFAS 122 also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights.
The adoption of SFAS 122 did not have a material effect on the Corporation's
earnings, liquidity and capital resources. As a result of the adoption of SFAS
122, the Corporation recognized an immaterial gain; consequently, 1995 first
quarter results have not been restated due to the immateriality of the related
gain.
The Corporation's policy for evaluating mortgage servicing rights for impairment
is to stratify the mortgage servicing rights capitalized by year of origination.
Fair value is determined based on discounted cash flows using incremental direct
and indirect costs.
- 7 -
<PAGE>
Part I
Item 1. (continued)
NOTE 2 - TRADING ACTIVITIES
---------------------------
The Corporation uses its trading assets, such as debt and equity instruments and
risk management instruments, to meet the financing needs of its customers and to
generate revenue through its trading activities.
DEBT AND EQUITY INSTRUMENTS
Trading assets-debt and equity instruments, which are carried at fair value, are
presented in the following table for the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
(in millions) 1995 1994
-------- ------------
<S> <C> <C>
U.S. Government, Federal Agencies and Municipal Securities $ 4,491 $ 2,875
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,460 1,644
Debt Securities Issued by Foreign Governments 2,162 1,983
Foreign Financial Institutions 2,421 3,119
Other, primarily includes corporate securities and eurodollar bonds 1,525 1,472
--------- --------
Total Trading Assets - Debt and Equity Instruments (a) $ 12,059 $ 11,093
========= ========
<FN>
(a) Includes emerging markets instruments of $340 million at June 30, 1995
and $544 million at December 31, 1994.
</FN>
</TABLE>
RISK MANAGEMENT INSTRUMENTS
Trading Assets-risk management instruments represent unrealized gains on
derivative contracts while trading liabilities-risk management instruments
represent unrealized losses on derivative contracts. Such risk management
instruments are presented in the following table for the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
(in billions) 1995 1994
------- -----------
Trading Assets-Risk Management Instruments:
<S> <C> <C>
Interest Rate Contracts $ 8.6 $ 7.9
Foreign Exchange Contracts 9.5 9.5
Stock Index Options and Commodity Contracts 0.3 0.3
------- ------
Total $ 18.4 $ 17.7
======= ======
Trading Liabilities-Risk Management Instruments:
Interest Rate Contracts $ 10.1 $ 7.0
Foreign Exchange Contracts 10.1 8.9
Stock Index Option and Commodity Contracts 0.1 0.1
------- ------
Total $ 20.3 $ 16.0
======= ======
</TABLE>
A description of the classes of derivative and foreign exchange instruments used
in the Corporation's trading activities as well as the related accounting
policies and the credit risk and market risk factors involved in these
activities are disclosed in Note One on page B48 and in Note Nineteen on pages
B64-B66 of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 (the "1994 Form 10-K"). For a discussion of the Corporation's
risk management instrument activity and related trading revenue for the 1995
second quarter and first six months, see Management's Discussion and Analysis on
page 25 and pages 42-44.
- 8 -
<PAGE>
Part I
Item 1. (continued)
NOTE 3 - SECURITIES
-------------------
Securities that may be sold in response to or in anticipation of changes in
interest rates and resulting prepayment risk or other factors are classified as
available-for-sale and carried at fair value. The unrealized gains and losses on
these securities, along with any unrealized gains and losses on related
derivatives, 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.
The fair valuation of the securities classified as available-for-sale (including
loans classified as available-for-sale) resulted in a net after-tax unfavorable
impact of $216 million on the Corporation's stockholders' equity at June 30,
1995, compared with a net after-tax unfavorable impact of $438 million at
December 31, 1994. The net change from the 1994 year-end was primarily due to
the improvement in fair values as a result of lower interest rate levels at June
30, 1995 when compared with December 31, 1994. See Note 4 for further
discussion.
Net gains from available-for-sale securities sold in the second quarter and
first six months of 1995 amounted to $69 million (gross gains of $183 million
and gross losses of $114 million) and $51 million (gross gains of $221 million
and gross losses of $170 million), respectively. Net gains on such sales for the
same periods in 1994 amounted to $13 million (gross gains of $32 million and
gross losses of $19 million) in the second quarter and $59 million (gross gains
of $105 million and gross losses of $46 million) in the first six months. There
were no sales of held-to-maturity securities during the first six months of 1995
and 1994.
- 9 -
<PAGE>
Part I
Item 1. (continued)
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity securities were
as follows for the dates indicated:
<TABLE>
<CAPTION>
June 30, 1995 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- ------
U.S. Government and Federal
Agency/Corporation Obligations:
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $ 3,578 $ 36 $ 6 $ 3,608
Collateralized Mortgage Obligations 3,643 4 41 3,606
Other, primarily U.S. Treasuries 170 --- --- 170
Obligations of State and Political Subdivisions 170 --- --- 170
Debt Securities Issued by Foreign Governments 48 --- --- 48
Collateralized Mortgage Obligations (b) 134 3 2 135
Other, primarily Asset-Backed Securities 544 6 2 548
-------- ------ ------ --------
Total Held-to-Maturity Securities $ 8,287 $ 49 $ 51 $ 8,285
======== ====== ====== ========
December 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- ------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 3,615 $ --- $ 209 $ 3,406
Collateralized Mortgage Obligations 3,871 --- 237 3,634
Other, primarily U.S. Treasuries 130 --- 2 128
Obligations of State and Political Subdivisions 118 1 --- 119
Collateralized Mortgage Obligations (b) 140 1 4 137
Other, primarily Asset-Backed Securities 692 2 12 682
-------- ------ ------ --------
Total Held-to-Maturity Securities $ 8,566 $ 4 $ 464 $ 8,106
======== ====== ====== ========
<FN>
(a) The Corporation's portfolio of securities generally consists of investment
grade securities. The fair value of actively-traded securities is
determined by the secondary market, while the fair value for non-actively-
traded securities is based on independent broker quotations.
(b) Collateralized mortgage obligations of private issuers generally have
underlying collateral consisting of obligations of U.S. Government and
Federal agencies and corporations.
</FN>
</TABLE>
- 10 -
<PAGE>
Part I
Item 1. (continued)
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale securities for
the dates indicated were as follows:
<TABLE>
<CAPTION>
June 30, 1995 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- ------
U.S. Government and Federal
Agency/Corporation Obligations:
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $ 9,187 $ 58 $ 29 $ 9,216
Collateralized Mortgage Obligations 136 --- 3 133
Other, primarily U.S. Treasuries 4,445 1 134 4,312
Debt Securities Issued by Foreign Governments 4,414 35 131 4,318
Corporate Debt Securities 521 10 13 518
Collateralized Mortgage Obligations (b) 208 --- 1 207
Other (c) 1,270 7 16 1,261
-------- ------ ------ ---------
Total Available-for-Sale Securities
Carried at Fair Value $ 20,181 $ 111 $ 327 $ 19,965
======== ====== ====== =========
December 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
--------- ---------- ---------- ------
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 8,151 $ 554 $ 593 $ 8,112
Collateralized Mortgage Obligations 354 1 28 327
Other, primarily U.S. Treasuries 6,414 8 359 6,063
Debt Securities Issued by Foreign Governments 2,736 16 134 2,618
Corporate Debt Securities 358 6 5 359
Collateralized Mortgage Obligations (b) 262 1 3 260
Other (c) 702 1 11 692
--------- ------- ------- --------
Total Available-for-Sale Securities
Carried at Fair Value $ 18,977 $ 587 $ 1,133 $ 18,431
========= ======= ======= ========
<FN>
(a) The Corporation's portfolio of securities generally consists of investment
grade securities. The fair value of actively-traded securities is
determined by the secondary market, while the fair value for non-actively-
traded securities is based on independent broker quotations.
(b) Collateralized mortgage obligations of private issuers generally have
underlying collateral consisting of obligations of U.S. Government and
Federal agencies and corporations.
(c) Comprised of all other debt, asset-backed and equity securities.
</FN>
</TABLE>
- 11 -
<PAGE>
Part I
Item 1. (continued)
NOTE 4 - LOANS
--------------
Certain loans that meet the accounting definition of a security are classified
as loans and are measured pursuant to SFAS 115. Bonds that have been issued by
foreign governments (such as Mexico, Venezuela and Brazil) to financial
institutions, including the Corporation, as part of a debt renegotiation (i.e.,
"Brady Bonds") are subject to the provisions of SFAS 115. The amortized cost and
estimated fair value of loans measured pursuant to SFAS 115 for the dates
indicated were as follows:
<TABLE>
<CAPTION>
June 30, 1995 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Held-to-Maturity $ 1,983 $ 9 $ 785 $ 1,207
Available-for-Sale 1,585 146 315 1,416
-------- ------ -------- --------
Total $ 3,568 $ 155 $ 1,100 $ 2,623
======== ====== ======== ========
December 31, 1994 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Held-to-Maturity $ 1,998 $ 10 $ 848 $ 1,160
Available-for-Sale 1,635 150 369 1,416
--------- ------- -------- --------
Total $ 3,633 $ 160 $ 1,217 $ 2,576
========= ======= ======== ========
</TABLE>
The second quarter of 1995 included a loss of approximately $50 million related
to the planned disposition of emerging market securities previously recorded as
available-for-sale. Cash proceeds from the sales of available-for-sale loans in
the first six months of 1994 were $318 million (all of these proceeds were
recorded in the 1994 first quarter).
On January 1, 1995, the Corporation adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS
114"), and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS
118"), an amendment to SFAS 114. SFAS 114 and SFAS 118 require that the carrying
value of an impaired loan be based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. Under SFAS 114, a loan is
considered impaired when, based on current information, it is probable that the
borrower will be unable to pay contractual interest or principal payments as
scheduled in the loan agreement. SFAS 114 applies to all loans except
smaller-balance homogenous consumer loans, loans carried at fair value or the
lower of cost or fair value, debt securities and leases. The adoption of SFAS
114 and SFAS 118 did not have an effect on the Corporation's earnings,
liquidity, or capital resources.
The Corporation's impaired loans are those non-consumer loans currently reported
as nonperforming. The Corporation recognizes interest income on those loans to
the extent received in cash. However, where there is doubt regarding the
ultimate collectibility of the loan principal, cash receipts, whether designated
as principal or interest, are applied to reduce the carrying value of the loan.
For a further description of the Corporation's accounting policies for
recognition of interest income on nonperforming loans, see Note One of the Notes
to the Consolidated Financial Statements on pages B48-B51 of the Corporation's
1994 Form 10-K.
- 12 -
<PAGE>
Part I
Item 1. (continued)
The following table sets forth impaired loan disclosures as of and for the six
months ended June 30, 1995.
June 30,
(in millions) 1995
-------
Impaired Loans with an Allowance $ 671
Impaired Loans without an Allowance (a) 272
-------
Total Impaired Loans $ 943
=======
Allowance for Impaired Loans under
SFAS 114 (b) $ 211
=======
Average Balance of Impaired Loans
during the six months ended June 30, 1995 $ 919
=======
Interest Income Recognized on Impaired
Loans during the six months ended June 30, 1995 $ 8
=======
(a) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the loan. Such loans
do not require an allowance under SFAS 114.
(b) The Allowance for Impaired Loans under SFAS 114 is a part of the
Corporation's overall Allowance for Credit Losses.
NOTE 5 - EARNINGS PER SHARE
---------------------------
In the 1995 second quarter, the Corporation changed its reporting of earnings
per share ("EPS") from reporting "simple" EPS (which is based solely on the
average number of common shares outstanding) to reporting "primary" and "fully
diluted" EPS (which are based on the average number of common and common
equivalent shares outstanding).
Previously, the Corporation reported simple EPS, since the differences between
simple EPS and primary EPS or simple EPS and fully diluted EPS were not material
(less than 3%). Primary and fully diluted EPS are now being reported for all
periods presented. For a further discussion on the Corporation's EPS
calculation, see page 58 of this Form 10-Q.
NOTE 6 - COMMON STOCK
---------------------
On July 18, 1995, the Corporation announced that its Board of Directors had
authorized the repurchase of up to $1.2 billion of its outstanding common stock
on the open market over the 24 months following the announcement. In total, this
proposed repurchase would represent approximately 25 million shares or
approximately 10% of the Corporation's outstanding common shares, assuming a
June 30, 1995 closing price of $47.25.
During the 1995 first half, the Corporation repurchased 4 million shares of its
common stock on the open market under a previously announced plan to repurchase
up to 6 million shares in 1995. The 2 million shares remaining available for
repurchase are included in the July 1995 $1.2 billion repurchase plan.
During the second quarter of 1995, the Corporation called all of the outstanding
shares of its 10% convertible preferred stock for redemption. Substantially all
of the 10% convertible preferred stock was converted prior to the redemption
date, at the option of the holders thereof, into approximately 7.6 million
shares of the Corporation's common stock. The shares of common stock issued upon
such conversion were issued from treasury.
- 13 -
<PAGE>
Part I
Item 1. (continued)
NOTE 7 - POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
-----------------------------------------------------------
For a discussion of the Corporation's postretirement medical and life insurance
benefits provided to domestic employees, reference is made to page B60 of the
Corporation's 1994 Form 10-K.
On January 1, 1995, the Corporation adopted Statement of Financial Accounting
Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), for postretirement medical benefits for the
Corporation's foreign employees. SFAS 106 requires recognition, during the years
of the employees' active service, of the employer's expected cost and obligation
of providing postretirement benefits other than pensions to employees and
eligible dependents. The Corporation has not prefunded these benefits.
Consistent with the January 1, 1993 adoption of SFAS 106 for its domestic
employees, the Corporation elected to expense the entire unrecognized
accumulated obligation related to its foreign employees via a one-time pre-tax
charge of $17 million ($11 million after-tax or $0.04 per share) on January 1,
1995.
NOTE 8 - RESTRUCTURING CHARGES
------------------------------
In December 1994, the Corporation announced a two-year program to improve
earnings per share and return on equity and, in connection therewith, recorded a
pre-tax restructuring charge of $260 million. The charge (which is primarily
comprised of cash charges) is related to severance and other termination-related
costs of $138 million associated with the elimination of 3,700 positions and
costs of $122 million for the disposition of certain facilities, premises and
equipment, and the termination of leases. The staff reductions are tied to
specific expense reduction initiatives such as commercial lending
re-engineering, branch network rationalization and the process improvement
program at Texas Commerce Equity Holdings Inc. ("Texas Commerce") and will occur
within the Global Bank, Regional Bank, Texas Commerce and Corporate sectors. At
June 30, 1995 the reserve balance associated with this charge was approximately
$183 million of which $83 million related to severance and other
termination-related costs and $100 million related to the disposition of certain
facilities, premises and equipment and termination of leases.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
For a discussion of certain legal proceedings, see Part II, Item 1 of this Form
10-Q. The Corporation and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all actions and proceedings pending
against or involving the Corporation and its subsidiaries, management does not
expect the aggregate liability or loss, if any, resulting therefrom to have a
material adverse effect on the consolidated financial condition of the
Corporation.
NOTE 10 - 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 ("ALM"). These financial instruments represent
contracts with counterparties where payments are made to or from the
counterparty based upon specific interest rates, currency levels, other market
rates or on terms predetermined by the contract. Such derivative and foreign
exchange transactions involve, to varying degrees, credit risk and market risk.
A discussion of the credit and market risks involved with derivative and foreign
exchange financial instruments is provided on pages B31-B34 of the Corporation's
1994 Form 10-K.
Derivative and Foreign Exchange Instruments Used for Trading Purposes: The
financial instruments used for the Corporation's trading activities are
disclosed in Note 2 of this Form 10-Q.
The amount of credit risk relating to the Corporation's trading activities is
recorded on the balance sheet in accordance with Financial Accounting Standards
Board Interpretation No. 39 ("FASI 39"). These amounts are disclosed in Note 2
of this Form 10-Q. The effects of market risk (gains or losses) on the
Corporation's trading activities have been reflected in trading revenue, as the
trading instruments are marked-to-market on a daily basis.
- 14 -
<PAGE>
Part I
Item 1. (continued)
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 ALM activities. The
majority of the Corporation's derivatives used for such activities are
transacted through its trading units. A discussion of the Corporation's
objectives and strategies for employing derivative and foreign exchange
instruments for ALM activities is included on page B34 of the Corporation's 1994
Form 10-K.
At June 30, 1995, net unamortized deferred losses relating to closed derivative
contracts used in ALM activities were approximately $195 million, which will be
amortized into earnings over the period for which the related assets or
liabilities exposure is managed. Approximately 35% of the net deferred loss at
June 30, 1995 will be amortized within the next twelve months; the remaining 65%
will be amortized over periods in excess of one year.
The Corporation also uses selected derivative financial instruments to manage
the sensitivity to changes in market interest rates on anticipated transactions;
however, such transactions are not significant. Accordingly, at June 30, 1995,
deferred gains and losses associated with such transactions were immaterial.
- 15 -
<PAGE>
Part I
Item 1. (continued)
The following table summarizes the aggregate notional amounts of interest rate
and foreign exchange contracts as well as the credit exposure related to these
instruments (after taking into account the effects of master netting agreements)
for the dates indicated below. The table should be read in conjunction with the
preceding narrative as well as the descriptions of these products and their
risks included on pages B65-B66 of the Corporation's 1994 Form 10-K.
<TABLE>
<CAPTION>
Notional Amounts Credit Exposure
June 30, December 31, June 30, December 31,
(in billions) 1995 1994 1995 1994
-------- ------------ -------- ------------
INTEREST RATE CONTRACTS
Futures and Forward Rate Agreements
<S> <C> <C> <C> <C>
Trading $ 981.4 $ 938.1 $ 1.4 $ 0.8
Asset and Liability Management 45.9 32.8 --- ---
Interest Rate Swaps
Trading 1,409.2 1,107.9 7.1 6.9
Asset and Liability Management 53.1 50.7 0.3 0.2
Purchased Options
Trading 75.1 60.5 0.1 0.2
Asset and Liability Management 31.2 13.7 --- ---
Written Options
Trading 86.4 69.5 --- ---
Asset and Liability Management 23.4 3.3 --- ---
----------- ---------- --------- ---------
Total Interest Rate Contracts $ 2,705.7 $ 2,276.5 $ 8.9 $ 8.1
=========== ========== ========= =========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 822.2 $ 794.0 $ 7.0 $ 7.3
Asset and Liability Management 14.5 12.3 --- ---
Other Foreign Exchange Contracts (a)
Trading 117.8 94.5 2.5 2.2
Asset and Liability Management 0.1 0.3 --- ---
----------- ---------- --------- ---------
Total Foreign Exchange Contracts $ 954.6 $ 901.1 $ 9.5 $ 9.5
=========== ========== ========== =========
Stock Index Options and Commodity Contracts
Trading $ 6.6 $ 4.5 $ 0.3 $ 0.3
=========== ========== ========= =========
Total Credit Exposure Recorded on the Balance Sheet $ 18.7 $ 17.9
========= =========
<FN>
(a) Includes purchased options, written options and cross-currency interest
rate swaps of $45.2 billion, $46.3 billion and $26.4 billion, respectively
at June 30, 1995, compared with $34.2 billion, $38.4 billion and $22.2
billion, respectively, at December 31, 1994.
</FN>
</TABLE>
In addition to the financial instruments presented in the preceding notional
table, the Corporation also enters into transactions involving "when-issued
securities", primarily as part of its trading activities. When-issued securities
are commitments to purchase or sell securities authorized for issuance, but not
yet actually issued. Accordingly, they are not recorded on the balance sheet
until issued. At June 30, 1995 and December 31, 1994, commitments to purchase
when-issued securities were $5,276 million and $6,289 million, respectively, and
commitments to sell when-issued securities were $5,838 million and $6,658
million, respectively.
- 16 -
<PAGE>
Part I
Item 1. (continued)
Derivatives and foreign exchange products are generally either negotiated
over-the-counter ("OTC") contracts or standardized contracts executed on a
recognized exchange (such as the Chicago Board of Options Exchange).
Standardized exchange-traded derivatives primarily include futures and options.
Negotiated over-the-counter derivatives are generally entered into between two
counterparties that negotiate specific agreement terms, including the underlying
instrument, amount, exercise price and maturity.
All of the Corporation's interest rate swaps and forward rate agreements are
OTC-traded and all of the Corporation's financial futures contracts are
exchange-traded. As of June 30, 1995, approximately 35% of the Corporation's
options activity was exchange-traded, with the balance being OTC-traded. As of
December 31, 1994, approximately 19% of the Corporation's options activity was
exchange-traded, with the balance being OTC-traded. The percentage of options
activity that is exchange-traded versus OTC-traded will vary depending upon
conditions in the market place.
NOTE 11 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
-----------------------------------------------------------------
The following table summarizes the Corporation's credit risk which is
represented by contract amounts relating to lending-related financial
instruments at June 30, 1995 and December 31, 1994. The table should be read in
conjunction with the description of these products and their risks included on
pages B66-B67 of the Corporation's 1994 Form 10-K.
<TABLE>
<CAPTION>
Off-Balance Sheet Lending-Related Financial Instruments
June 30, December 31,
(in millions) 1995 1994
-------- ------------
<S> <C> <C>
Commitments to Extend Credit $ 57,778(a) $ 49,266(a)
Standby Letters of Credit (Net of Risk
Participations of $4,661 and $5,218) 13,415 12,451
Other Letters of Credit 3,283 2,860
Customers' Securities Lent 17,474 18,979
<FN>
(a) Excludes credit card commitments of $20.1 billion and $19.0 billion at
June 30, 1995 and December 31, 1994, respectively.
</FN>
</TABLE>
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------------
For a discussion of the Corporation's fair value methodologies, see pages
B67-B69 of the Corporation's 1994 Form 10-K. At June 30, 1995, the carrying
value and estimated fair value of financial assets required to be valued for
purposes of SFAS 107 were $173.4 billion and $175.0 billion, respectively,
compared with $166.0 billion and $166.8 billion, respectively, at December 31,
1994. At June 30, 1995, the carrying value and estimated fair value of financial
liabilities required to be valued for purposes of SFAS 107 were $166.6 billion
and $166.9 billion, respectively, compared with $160.2 billion and $160.8
billion at December 31, 1994.
- 17 -
<PAGE>
Part I
Item 1. (continued)
The following table presents the carrying value and estimated fair value at June
30, 1995 of financial assets and liabilities valued under SFAS 107 and certain
derivatives contracts used for ALM activities related to such financial assets
and liabilities.
<TABLE>
<CAPTION>
Financial Assets/
Financial Liabilities Derivative Contracts Used for ALM Activities
----------------------- ------------------------------------------------
Estimated Gross Gross Estimated
Carrying Fair Carrying Unrecognized Unrecognized Fair
(in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value
-------- ---------- -------- ------------ ------------ ---------
FINANCIAL ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Assets for Which Fair Value
Approximates Book Value $ 30,385 $ 30,385 $ --- $ --- $ --- $ ---
Trading Assets:
Debt and Equity Instruments 12,059 12,059 --- --- --- ---
Risk Management Instruments 18,412 18,412 --- --- --- ---
Securities Held-to-Maturity 8,287 8,285 --- --- --- ---
Securities Available-for-Sale 19,965 19,965 36 --- --- 36
Loans, Net 82,245 83,430 85 85 (248) (78)
Derivatives in Lieu of Cash
Market Instruments (d) 67 142 67 298 (223) 142
Other Assets 1,950 2,350 --- --- --- ---
---------- ----------
Total Financial Assets $ 173,370 $ 175,028
========== ==========
FINANCIAL LIABILITIES:
Liabilities for Which Fair Value
Approximates Book Value $ 123,472 $ 123,472 (10) 5 (21) (26)
Domestic Time Deposits 15,530 15,769 48 51 (144) (45)
Long-Term Debt 7,202 7,326 17 57 (53) 21
Trading Liabilities - Risk
Management Instruments 20,353 20,353 --- --- --- ---
---------- ----------
Total Financial Liabilities $ 166,557 $ 166,920
========== ==========
<FN>
(a) The carrying value and estimated fair value include the
carrying value and estimated fair value of derivative contracts used in
asset/liability management activities.
(b) The carrying value and estimated fair value of the daily margin
settlements on open futures and options contracts are primarily included
in Other Assets on the balance sheet, except when 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. The
Corporation uses these contracts in its ALM activities to modify the
interest rate characteristics of balance sheet instruments such as
securities available-for-sale, loans and deposits. Gross deferred gains
and losses from daily margin settlements on open futures and options
contracts were $4 million and $104 million, respectively, at June 30,
1995. The deferred gains and losses from such contracts are amortized to
income after the contracts close. See page 15 of this Form 10-Q for a
discussion of closed derivative contracts related to ALM activities.
(c) The carrying value of derivatives used for asset/liability management is
recorded as receivables and payables and is primarily included in Other
Assets on the balance sheet, except derivatives used in connection with
available-for-sale securities which are carried at fair value and are
included in Securities: Available-for-Sale on the balance sheet.
(d) Represents derivative contracts that, as part of the Corporation's asset/
liability management, are used in place of cash market instruments. For
a discussion of the Corporation's accounting policy relative to off-
balance sheet instruments used for ALM, see page B50 of the Corporation's
1994 Form 10-K.
</FN>
</TABLE>
Certain financial instruments and all nonfinancial instruments are excluded from
the scope of SFAS 107. In addition to the derivative contracts in the above
table, the Corporation also uses derivative contracts (primarily interest rate
floors) to hedge its mortgage servicing rights; these mortgage servicing rights
are not required to be fair valued under SFAS 107. At June 30, 1995, the
notional amount of such derivatives was $1.8 billion, the carrying value was
$3.6 million, and gross unrecognized gains and losses were $8.8 million and $1.5
million, respectively, resulting in an estimated fair value of $10.9 million.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHEMICAL BANKING CORPORATION
QUARTERLY FINANCIAL HIGHLIGHTS
(in millions, except per share and ratio data)
1995 1994
----------------------- -----------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Earnings:
<S> <C> <C> <C> <C> <C>
Income Before Effect of Accounting Change....... $ 453 $ 396 $ 179 $ 439 $ 357
Effect of Change in Accounting Principle........ --- (11)(b) --- --- ---
-------- -------- --------- ------- --------
Net Income...................................... $ 453 $ 385 $ 179 $ 439 $ 357
======== ======== ========= ======== ========
Net Income Applicable to Common Stock........... $ 427 $ 355 $ 149 $ 396 $ 324
======== ======== ========= ======== ========
Earnings Per Share (a):
Primary:
Income Before Effect of Accounting Change....... $ 1.72 $ 1.49 $ 0.61 $ 1.59 $ 1.27
Effect of Change in Accounting Principle........ --- (0.04)(b) --- --- ---
-------- -------- --------- -------- --------
Net Income...................................... $ 1.72 $ 1.45 $ 0.61 $ 1.59 $ 1.27
======== ======== ========= ======== ========
Assuming Full Dilution:
Income Before Effect of Accounting Change....... $ 1.68 $ 1.46 $ 0.61 $ 1.56 $ 1.25
Effect of Change in Accounting Principle........ --- (0.04)(b) --- --- ---
-------- -------- --------- -------- --------
Net Income...................................... $ 1.68 $ 1.42 $ 0.61 $ 1.56 $ 1.25
======== ======== ========= ======== ========
Per Common Share:
Book Value...................................... $ 40.62 $ 38.79 $ 37.88 $ 38.29 $ 37.17
Market Value.................................... $ 47.25 $ 37.75 $ 35.88 $ 35.00 $ 38.50
Common Dividends Declared....................... $ .50(c) $ .44 $ .44 $ .44(c) $ .38
Common Shares Outstanding:
Average Common and Common Equivalent Shares 248.3 245.3 246.3 248.6 255.1
Average Common Shares Assuming Full Dilution 254.8 253.0 254.0 256.3 263.0
Common Shares at Period End..................... 249.4 240.8 244.5 244.4 250.9
Performance Ratios:
Return on Average Assets (d).................... 1.01% .89% .42% 1.03% .87%
Return on Average Common Equity (d)............. 17.67% 15.50% 6.29% 16.92% 13.90%
Return on Average Stockholders' Equity (d)...... 16.42% 14.54% 6.54% 16.14% 12.96%
Efficiency Ratio (e)............................ 59.4% 64.6% 67.2% 62.9% 62.3%
Capital Ratios:
Common Stockholders' Equity to Assets........... 5.7% 5.0% 5.4% 5.5% 5.5%
Total Stockholders' Equity to Assets ........... 6.4% 5.8% 6.2% 6.4% 6.6%
Tier 1 Leverage (f)............................. 5.8% 5.8% 5.9% 5.9% 6.4%
Risk-Based Capital Ratios (f):
Tier I (4.0% required) ....................... 8.0% 8.1% 8.2% 8.2% 8.7%
Total (8.0% required)........................ 11.9% 12.1% 12.3% 12.3% 12.8%
<FN>
(a) Primary and Fully Diluted EPS are now reported for all periods presented.
See Note 5 on page 13 for a further discussion.
(b) On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106") for the accounting for other
postretirement benefits relating to the Corporation's foreign plans.
(c) The Corporation increased its quarterly common stock dividend to $0.50
per share from $0.44 per share in the second quarter of 1995. The
Corporation had previously increased its quarterly common stock dividend
from $0.38 per share to $0.44 per share in the third quarter of
1994.
(d) Quarterly performance ratios are based on annualized net
income amounts.
(e) Excludes restructuring charges, foreclosed property expense,
emerging markets past-due interest bond sales and, in the 1995 first
quarter, an $85 million gain related to the sale of the Corporation's
investment in Far East Bank and Trust Company.
(f) In accordance with current regulatory guidelines, these ratios exclude the
impact on stockholders' equity resulting from the adoption of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115").
</FN>
</TABLE>
- 19 -
<PAGE>
Part I
Item 2 (continued)
OVERVIEW
--------
Chemical Banking Corporation (the "Corporation") reported net income of $453
million for the 1995 second quarter, an increase of 27% from earnings of $357
million reported for the second quarter of 1994. The Corporation's primary
earnings per share increased 35% to $1.72 per share in the 1995 second quarter,
compared with primary earnings of $1.27 per share in the second quarter of 1994.
For the first six months of 1995, the Corporation's net income was $838 million,
an increase of 24% from $676 million for the first half of 1994. Primary
earnings per share for the 1995 first six months was up 33% to $3.17 per share,
compared with primary earnings of $2.39 per share in the comparable period of
1994.
The Corporation's results for the 1995 second quarter and first six months
reflect continued progress on the Corporation's performance initiatives to
increase its earnings per share and achieve a higher return on shareholders'
equity and an improved efficiency ratio. The Corporation's core earnings
continued to improve, led by revenue growth in certain nationwide consumer and
corporate finance businesses. Additionally, by managing expenses in line with
revenue opportunities, the Corporation also achieved an 11% improvement in the
core operating margin.
During the 1995 second quarter, the Corporation increased the quarterly dividend
on the outstanding shares of its common stock to 50 cents a share, an increase
of 14% from 44 cents per common share. On an annual basis, this represents an
increase in the dividend rate to $2.00 per share from $1.76 per share. The
increase marked the fourth time the dividend has been increased since March
1993, for a total increase of 66.6%.
The Corporation's return on average common stockholders' equity was 17.7% for
the second quarter of 1995, compared with 13.9% for the 1994 comparable quarter.
For the first six months, the Corporation's return on average common
stockholders' equity was 16.6% in 1995, compared with 13.1% in 1994. At June 30,
1995, the Corporation's ratios of Tier 1 Capital to risk-weighted assets and
Total Capital to risk-weighted assets were 8.00% and 11.90%, respectively, well
in excess of the minimum ratios specified by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). At June 30, 1995, the
Corporation was "well capitalized" as defined by the Federal Reserve Board.
The Corporation's nonperforming assets at June 30, 1995 were $1,118 million,
down from $1,139 million at December 31, 1994 and a decline of $1,375 million
from $2,493 million at June 30, 1994. Nonperforming assets have declined by
$5,469 million, or 83%, from their peak level of $6,587 million in September
1992.
In the second quarter of 1995, the Corporation adopted Statement of Financial
Accounting Standards, No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS
122") related to the accounting for originated mortgage servicing rights and, as
a result, the Corporation recognized an immaterial gain during the quarter.
- 20 -
<PAGE>
Part I
Item 2 (continued)
RESULTS OF OPERATIONS
---------------------
NET INTEREST INCOME
<TABLE>
<CAPTION>
Second Quarter Six Months
----------------------------- --------------------------
(in millions) 1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Interest Income $ 2,767 $ 2,219 $ 5,433 $ 4,309
Total Interest Expense 1,605 1,034 3,115 1,981
-------- -------- -------- --------
Net Interest Income 1,162 1,185 2,318 2,328
Taxable Equivalent Adjustment (a) 6 4 14 9
-------- -------- -------- --------
Net Interest Income - Taxable
Equivalent Basis $ 1,168 $ 1,189 $ 2,332 $ 2,337
======== ======== ======== ========
<FN>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
</FN>
</TABLE>
Net interest income for the second quarter of 1995 was $1,162 million, compared
with $1,185 million for the same period in 1994. For the first six months, net
interest income was $2,318 million in 1995, compared with $2,328 million in
1994. The decreases from both 1994 periods were primarily due to narrower loan
spreads experienced in 1995 partly offset by an increase in interest-earning
assets (including growth in consumer loans), and the favorable impact of the
decrease in nonperforming loans. The following tables reflect the composition of
interest-earning assets as a percentage of total interest-earning assets and the
net yield on interest-earning assets for the periods indicated.
<TABLE>
<CAPTION>
Average Earning Asset Mix
Second Quarter
---------------------------------------------------------------------
1995 1994
------------------------------ --------------------------------
% of Total % of Total
Interest- Interest-
Average Earning Average Earning
(Taxable equivalent rates; in millions) Balance Assets Balance Assets
------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consumer Loans $ 32,822 24% $ 26,570 20%
Commercial Loans 49,024 35 47,574 37
Securities 27,938 20 26,594 21
Liquid Interest-Earning Assets 29,320 21 28,380 22
---------- --- ---------- ---
Total Interest-Earning Assets $ 139,104 100% $ 129,118 100%
========== === ========== ===
Interest Rate Spread (a) 2.61% 3.16%
Net Yield on Interest-Earning Assets (b) 3.36% 3.69%
<FN>
(a) Represents the difference between the average rate on interest-earning
assets and the average rate on interest-bearing liabilities.
(b) Represents the average rate for interest-earning assets less the average
rate paid for all sources of funds, including the impact of interest-free
funds.
</FN>
</TABLE>
- 21 -
<PAGE>
Part I
Item 2 (continued)
<TABLE>
<CAPTION>
Average Earning Asset Mix
Six Months
--------------------------------------------------------------------
1995 1994
------------------------------ -------------------------------
% of Total % of Total
Interest- Interest-
Average Earning Average Earning
(Taxable equivalent rates; in millions) Balance Assets Balance Assets
------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consumer Loans $ 31,552 23% $ 26,281 20%
Commercial Loans 48,359 35 48,031 37
Securities 27,838 20 26,500 21
Liquid Interest-Earning Assets 29,701 22 28,647 22
---------- --- ---------- ---
Total Interest-Earning Assets $ 137,450 100% $ 129,459 100%
========== === ========== ===
Interest Rate Spread (a) 2.70% 3.13%
Net Yield on Interest-Earning Assets (b) 3.42% 3.64%
<FN>
(a) Represents the difference between the average rate on interest-earning
assets and the average rate on interest-bearing liabilities.
(b) Represents the average rate for interest-earning assets less the average
rate paid for all sources of funds, including the impact of interest-free
funds.
</FN>
</TABLE>
The Corporation's average total loans in the 1995 second quarter and first six
months increased by $7.7 billion and $5.6 billion, respectively, from the
comparable 1994 periods. The increases reflected the continued growth in
consumer loans (principally from residential mortgage and credit card
activities) and commercial lending, partially offset by a reduction in the
commercial real estate portfolio. Commercial loans outstandings at June 30, 1995
represented the fourth consecutive quarterly increase since the June 30, 1994
level reflecting an upward trend in commercial lending activity. For the
remainder of 1995, the Corporation expects continued growth in its loan
portfolio, with its consumer loans continuing to grow faster than its commercial
loans. For a further discussion of the Corporation's loans, see the loan
portfolio section on page 35.
The negative impact on net interest income from nonperforming loans (excluding
nonperforming loans held for accelerated disposition) in the second quarter of
1995 was $17 million, compared with $38 million in the same quarter in 1994. For
the first six months, the negative impact was $37 million in 1995, compared with
$57 million in 1994. The improvement in both 1995 periods is principally due to
the significant reduction in the level of the Corporation's nonperforming loans.
The favorable impact on net interest income from the Corporation's
asset/liability derivative activities, whereby derivative instruments are used
in order to alter the yield on certain of the Corporation's assets and
liabilities, was immaterial for the second quarter of 1995, compared with $59
million for the second quarter of 1994. For the first six months, the favorable
impact was approximately $16 million in 1995, compared with $119 million in
1994. For a further discussion of derivative instruments used in the
Corporation's asset/liability management activities, see Note 12 of the Notes to
Financial Statements and the Asset/Liability Management section on pages 45-46
of this Form 10-Q.
The decreases in the interest rate spread and the net yield for both 1995
periods reflected narrower loan spreads and the impact of higher interest rates
on wholesale funding, partially offset by wider deposit spreads and an increased
contribution from noninterest-bearing funds. The contribution from interest-free
funds to the net yield was 75 basis points in the 1995 second quarter, an
increase from a 53 basis point contribution in the comparable 1994 period. The
improvement from the prior year is due to the higher interest rate environment
during 1995 and an increase of $1.6 billion in interest-free funds in the second
quarter of 1995.
- 22 -
<PAGE>
Part I
Item 2 (continued)
Despite its outlook for continued loan growth in 1995, management anticipates
that net interest income over the next two quarters will be relatively flat
with 1995 second quarter results and that net interest income for full year 1995
will approximate or be somewhat lower than the 1994 full year level.
For additional information on average balances and net interest income, see
Average Consolidated Balance Sheet, Interest and Rates on pages 51-52.
PROVISION FOR LOSSES
The Corporation's provision for losses was $120 million for the 1995 second
quarter, down from $160 million in the 1994 second quarter. For the first six
months, the provision for losses was $240 million in 1995 compared with $365
million in 1994.
As a result of management's evaluation of the continuing improvement in the
Corporation's credit profile, the quarterly provision for losses during the
remainder of 1995 is expected to be generally consistent with the 1995 second
quarter level.
NONINTEREST REVENUE
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trust and Investment Management Fees $ 97 $ 108 $ 188 $ 218
Corporate Finance and Syndication Fees 129 93 248 175
Service Charges on Deposit Accounts 76 75 150 144
Fees for Other Banking Services 290 279 584 569
Trading Revenue 171 203 227 388
Securities Gains 69 13 51 59
Other Revenue 129 96 383 245
------ ------- -------- -------
Total $ 961 $ 867 $ 1,831 $ 1,798
====== ======= ======== =======
</TABLE>
The increase in noninterest revenue for the 1995 second quarter and first six
months when compared with the corresponding 1994 periods primarily reflected
higher corporate finance and syndication fees and higher other revenue,
partially offset by lower trading revenue. Securities gains were higher in the
1995 second quarter versus the prior year period.
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 following table presents the
components of trust and investment management fees for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Trust and Investment Management Fees:
<S> <C> <C> <C> <C>
Personal Trust Fees $ 53 $ 54 $ 103 $ 107
Corporate and Institutional Trust Fees 33 45 64 91
Other, primarily Foreign Asset Management 11 9 21 20
------ ------ ------ -----
Total $ 97 $ 108 $ 188 $ 218
====== ====== ====== =====
</TABLE>
- 23 -
<PAGE>
Part I
Item 2 (continued)
Trust and investment management fees for the 1995 second quarter were $97
million, a decline of $11 million from the prior year period. Corporate and
institutional trust fees in the 1995 second quarter declined $12 million from
the same period a year ago due entirely to the absence of approximately $13
million in fees in 1995 related to the joint venture with Mellon Bank
Corporation. As a result of the agreement between the Corporation and Mellon
Bank Corporation relating to the shareholder services joint venture, effective
January 1, 1995 revenues and expenses of the business units contributed to the
joint venture were reflected on an equity basis within other revenue.
Corporate finance and syndication fees were $129 million in the 1995 second
quarter, an increase of 39% from the prior year period. For the first six
months of 1995, such fees increased 42% from the comparable 1994 period. The
increases from both 1994 periods reflect continued strong growth in loan
syndications and high-yield securities underwritings. During the first half of
1995, the Corporation acted as agent or co-agent for approximately $207 billion
of syndicated credit facilities, a reflection of the Corporation's large client
base and strong emphasis on distribution. Management expects the strong activity
level in the loan syndication marketplace to continue throughout the remainder
of 1995.
The following table sets forth the components of fees for other banking services
for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Fees for Other Banking Services:
<S> <C> <C> <C> <C>
Credit Card Services Revenue $ 83 $ 75 $ 163 $ 150
Fees in Lieu of Compensating Balances 47 49 94 107
Commissions on Letters of Credit
and Acceptances 36 39 77 76
Loan Commitment Fees 20 23 44 45
Mortgage Servicing Fees 23 18 46 34
Other Fees 81 75 160 157
------ ----- ------ ------
Total $ 290 $ 279 $ 584 $ 569
====== ===== ====== ======
</TABLE>
The higher level of credit card services revenue for both 1995 periods reflected
increased volume of retail credit cards from a growing cardholder base,
primarily as a result of the Corporation's co-branded Shell MasterCard program.
Outstandings in the credit card lending portfolio were $10.1 billion at June 30,
1995, compared with $7.8 billion at the same date a year ago.
Mortgage servicing fees increased $5 million in the 1995 second quarter and $12
million in the first six months of 1995 from the prior year levels, reflecting a
higher level of mortgage servicing volume as a result of the acquisition of
Margaretten Financial Corporation ("Margaretten") on July 1, 1994.
Fees in lieu of compensating balances decreased by $2 million in the 1995 second
quarter and by $13 million in the first six months of 1995 when compared with
the corresponding 1994 periods. Customers often pay for cash management or other
banking services by maintaining noninterest-bearing deposits. As interest rates
increase, the required compensating balance for a given level of service will
decrease. As a result, during the first six months of 1995, when interest rates
were higher than in the first six months of 1994, a greater volume of customers
maintained a compensating balance in lieu of paying a fee.
- 24 -
<PAGE>
Part I
Item 2 (continued)
The following table sets forth the components of trading revenue for the second
quarter and first six months of 1995 and 1994.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Trading Revenue:
<S> <C> <C> <C> <C>
Interest Rate Contracts (a) $ 38 $ 135 $ 57 $ 223
Foreign Exchange Revenue (b) 66 55 141 100
Debt Instruments and Other (c) 67 13 29 65
------ ----- ------ ------
Total $ 171 $ 203 $ 227 $ 388
====== ===== ====== ======
<FN>
(a) Includes interest rate swaps, currency swaps, foreign exchange forward
contracts, interest rate futures, and forward rate agreements and related
hedges.
(b) Includes foreign exchange spot and option contracts.
(c) Includes U.S. government and foreign government agency and corporate debt
securities, emerging markets debt instruments, debt-related derivatives,
equity securities, equity derivatives, and commodity derivatives.
</FN>
</TABLE>
The decrease in revenue from interest rate contracts was due to unexpected
increases in certain European interest rates (particularly in the U.K.). Foreign
exchange revenue in 1995 continued to benefit from volatility in the currency
markets. Debt instrument revenue for the 1995 second quarter, when compared with
the same 1994 period, primarily reflected an improvement in prices of emerging
markets debt instruments during the 1995 second quarter. The decrease in debt
instrument revenue for the first six months of 1995, when compared with the same
1994 period, was due to major declines in the prices of emerging markets debt
instruments that occurred during the 1995 first quarter.
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,
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 has improved the
Corporation's trading capabilities 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.
Securities gains were $69 million in the 1995 second quarter, compared with
gains of $13 million in the same period last year. The higher level of
securities gains from the available-for-sale portfolio reflected the
Corporation's ability to take advantage of favorable bond market conditions. For
the first six months, securities gains were $51 million in 1995, as compared
with $59 million in 1994. Included in the 1995 six month results was a $13
million permanent impairment loss on Barings Bank PLC securities held by the
Corporation and an $11 million loss on sales of available-for-sale securities at
Chemical Bank New Jersey undertaken as part of the repositioning of the
remaining branches in anticipation of the sale of the bank to PNC. For further
discussion of the Corporation's securities, see Note 3 - Securities of the Notes
to Financial Statements. For a further discussion of the sale of Chemical Bank
New Jersey, see page 50.
- 25 -
<PAGE>
Part I
Item 2 (continued)
The following table presents the composition of other noninterest revenue for
the second quarter and first six months of 1995 and 1994.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Other Revenue:
<S> <C> <C> <C> <C>
Revenue from Equity-Related Investments $ 126 $ 66 $ 233 $ 149
Net Gains (Losses) on Emerging Markets
Bond Sales (50) --- (50) 45
Investment in CIT 20 19 39 36
Residential Mortgage Sales Activities 13 (6) 14 (31)
Gain Related to the Sale of the
Corporation's Investment in Far East
Bank & Trust --- --- 85 ---
Other 20 17 62 46
------ ----- ------ ------
Total $ 129 $ 96 $ 383 $ 245
====== ===== ====== ======
</TABLE>
Revenue from equity-related investments, which includes income from venture
capital activities and emerging markets investments, was $126 million in the
1995 second quarter compared with $66 million in the same 1994 period. For the
first half of 1995, revenue from equity-related investments was $233 million, a
56% increase from the comparable 1994 period. Average revenue from
equity-related investments was approximately $91 million per quarter, based on
revenues during the last eight quarterly periods. At June 30, 1995, the
Corporation had equity-related investments with a carrying value of $1.9
billion. The Corporation believes that equity-related investments will continue
to make 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.
The second quarter of 1995 included a loss of approximately $50 million related
to the disposition of emerging market securities previously recorded as
available-for-sale.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries $ 557 $ 542 $ 1,103 $ 1,060
Employee Benefits 117 102 224 221
Occupancy Expense 129 140 264 286
Equipment Expense 97 91 198 175
Foreclosed Property Expense (14) 2 (21) 37
Restructuring Charge --- --- --- 48
Other Expense 362 404 726 778
------- ------- ------- -------
Total $ 1,248 $ 1,281 $ 2,494 $ 2,605
======= ======= ======= =======
</TABLE>
- 26 -
<PAGE>
Part I
Item 2 (continued)
Noninterest expense in the 1995 second quarter was $1,248 million, compared
with $1,246 million in the 1995 first quarter and $1,281 million in the second
quarter of 1994. For the first six months, noninterest expense was $2,494
million in 1995, compared with $2,557 million in 1994 (which amount excludes a
$48 million restructuring charge). The improvement from the prior year reflects
the benefits of various expense efforts as part of the Corporation's actions to
improve earnings per share. Additionally, as a result of the shareholder
services joint venture with Mellon Bank Corporation, approximately $29 million
of expenses associated with the stock transfer and related shareholder servicing
operations for the first six months of 1995 are being recorded on an equity
basis within noninterest revenue. The decrease in noninterest expense was
partially offset by the inclusion of $53 million of noninterest expenses in the
first six months of 1995 relating to Margaretten, which was acquired in July
1994.
The increases in salaries for the 1995 second quarter and first six months were
primarily due to additional staff costs resulting from the 1994 Margaretten
acquisition and the continued growth in the Corporation's securities
underwriting business. These increases were partially offset by the impact of
personnel reductions undertaken in 1995 and lower salaries expense as a result
of the equity accounting for the joint venture with Mellon Bank Corporation.
Total staff at June 30, 1995 amounted to 40,992, compared with the 1994 year-end
level of 42,130 (which included 1,423 staff from the Margaretten acquisition)
and the June 30, 1994 level of 40,988. At June 30, 1995, the Corporation has
eliminated approximately half of the 3,700 positions that it had targeted for
elimination as part of its actions to improve earnings per share announced in
December 1994.
Employee benefits expense in the second quarter of 1995 was $117 million,
compared with $102 million in the same 1994 period. For the first six months of
1995, employee benefits expense was $224 million, compared with $221 million in
the first half of 1994. The increases primarily resulted from higher retirement
plan expense as well as higher OPEB expense.
Occupancy expense in the 1995 second quarter and first six months decreased by
$11 million and by $22 million, respectively, from the prior year's comparable
periods. The declines for both periods are largely the result of the
consolidation of headquarters, operational and branch facilities together with
the impact of divestitures and other expense reduction initiatives. These
declines are partially offset by the inclusion of Margaretten's expense since
the acquisition date.
The higher level of equipment expense in both 1995 periods was primarily the
result of continued technology enhancements to support the Corporation's
investment in certain key businesses (in particular its trading and consumer
banking businesses) and the inclusion of Margaretten's results subsequent to the
July 1, 1994 acquisition.
Foreclosed property expense in the 1995 second quarter was a credit of $14
million, compared with an expense of $2 million in the second quarter of 1994.
For the first six months, foreclosed property expense was a credit of $21
million in 1995, compared with an expense of $37 million in 1994. The decreases
reflect significant progress in managing the Corporation's real estate
portfolio. Included in the 1995 amounts were payments received at Texas Commerce
Equity Holdings Inc. ("Texas Commerce") related to certain foreclosed properties
previously written down.
- 27 -
<PAGE>
Part I
Item 2 (continued)
The following table presents the components of other expense for the periods
indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Other Expense: (a)
<S> <C> <C> <C> <C>
Professional Services $ 53 $ 59 $ 107 $ 105
Marketing Expense 51 57 94 97
FDIC Assessments 36 41 73 83
Telecommunications 39 37 77 72
Amortization of Intangibles 27 27 55 56
All Other 156 183 320 365
------- ------- ------- -------
Total $ 362 $ 404 $ 726 $ 778
======= ======= ======= =======
<FN>
(a) Certain prior period amounts have been reclassified to conform with the June
30, 1995 presentation.
</FN>
</TABLE>
Other expense for the 1995 second quarter was $362 million, a decrease of $42
million, or 10%, from the same period in 1994. For the first six months of 1995,
other expense decreased $52 million when compared with 1994. The 1995 six-month
amount included operating costs of approximately $28 million relating to
Margaretten and excluded approximately $12 million of expenses relating to the
joint venture with Mellon Bank Corporation. Federal Deposit Insurance
Corporation ("FDIC") assessments decreased 12% from the 1994 first six months
level reflecting a lower domestic deposit base. The Corporation expects further
decreases in FDIC assessments in 1995, in light of a recent announcement by the
FDIC that it intends to reduce the premiums to be paid by banks to the Bank
Insurance Fund. All other expenses, which includes various smaller expense
categories such as stationery, operating losses, postage, shipping, travel and
insurance, decreased by $45 million, or 12%, in the first six months of 1995,
primarily as a result of the Corporation's aggressive sourcing and other expense
reduction initiatives. Partially offsetting these decreases were higher
telecommunications expenses, primarily attributable to higher market data
services.
The Corporation announced on December 1, 1994 that, as a result of the expense
reduction initiatives undertaken at that time, it was targeting noninterest
expense in each of 1995 and 1996 to be flat with full year 1994. At the current
time, the Corporation believes that 1995 and 1996 noninterest expense will be
approximately equal to or less than 1994 noninterest expense.
The Corporation's efficiency ratio (excluding restructuring charges, foreclosed
property expense, emerging markets-related past-due interest bond sales and the
gain from the sale of the Corporation's investment in Far East Bank and Trust
Company) was 59.4% in the 1995 second quarter, compared with 62.3% in the same
1994 period. This ratio for the first six months of 1995 was 61.9%, compared
with 61.7% for the first six months of 1994. 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.
The Corporation is managing its expenses in line with its revenue opportunities
and is benefiting from the implementation of its expense reduction initiatives.
As a result, the Corporation currently believes it is in a position to achieve
the efficiency ratio and other performance goals announced on December 1, 1994.
INCOME TAXES
The Corporation recorded income tax expense of $302 million in the 1995 second
quarter, compared with $254 million in the comparable 1994 period. For the first
six months, the Corporation recorded income tax expense of $566 million in 1995,
compared with $480 million in 1994. The Corporation's effective tax rate was
40.0% in the second quarter and the first six months of 1995, compared with
41.5% in the respective 1994 periods.
- 28 -
<PAGE>
Part I
Item 2 (continued)
BUSINESS ORGANIZATION
---------------------
The Corporation conducts domestic and international financial services
businesses through various bank and non-bank subsidiaries. The principal bank
subsidiaries of the Corporation are Chemical Bank and Texas Commerce Bank
National Association.
LINES-OF-BUSINESS RESULTS
Profitability of the Corporation is tracked with an internal management
information system that produces lines-of- business performance for all sectors.
A set of management accounting policies has been developed and implemented to
ensure that the reported results of the groups reflect the economics of their
businesses. Lines- of-business results are subject to restatement as appropriate
whenever there are refinements in management reporting policies or changes to
the management organization. Lines-of-business results are subject to further
restatements as may be necessary to reflect future changes in internal
management reporting.
Guidelines exist for assigning expenses that are not directly incurred by
businesses, such as overhead and taxes, as well as for allocating shareholders'
equity and the provision for losses, utilizing a risk-based methodology.
Noninterest expenses of the Corporation are fully allocated to the business
units except for special corporate one-time charges. Management has developed a
risk-adjusted capital methodology that quantifies different types of risk --
credit, operating and market -- within various businesses and assigns capital
accordingly. Credit risk is computed using a risk grading system that is
consistently applied throughout the Corporation. A long-term expected tax rate
is assigned in evaluating the Corporation's businesses.
Commencing with the first quarter of 1995, Texas Commerce is being reported on a
management accounting basis instead of a legal entity basis. The 1994 results
for Texas Commerce have been restated to conform to the current presentation.
- 29 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 2 (continued)
Global Bank Regional Bank Texas Commerce
For the three months ended June 30, 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 255 $ 259 $ 735 $ 752 $ 174 $ 173
Noninterest Revenue 485 431 359 333 104 103
Noninterest Expense 319 320 719 728 198 203
---------- ---------- --------- --------- ---------- ---------
Operating Margin 421 370 375 357 80 73
Credit Provision (a) 35 42 127 108 15 15
Foreclosed Property Expense --- (1) 2 (3) (17) (9)
---------- ---------- --------- --------- ---------- ---------
Income Before Taxes 386 329 246 252 82 67
Income Taxes 151 123 106 107 30 25
---------- ---------- --------- --------- ---------- ---------
Net Income $ 235 $ 206 $ 140 $ 145 $ 52 $ 42
========== ========== ========= ========= ========== =========
Average Assets $ 114,108 $ 102,241 $ 47,557 $ 42,096 $ 19,037 $ 20,100
Return on Common Equity 22.6% 19.2% 17.5% 21.2% 14.9% 10.4%
Return on Assets 0.83% 0.81% 1.18% 1.38% 1.10% 0.84%
Efficiency Ratio (b) 43.1% 46.4% 65.7% 67.1% 71.2% 73.6%
Real Estate Total(c)
For the three months ended June 30, 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except ratios)
Net Interest Income $ 33 $ 35 $ 1,162 $ 1,185
Noninterest Revenue 4 4 961 867
Noninterest Expense 21 25 1,262 1,279
--------- --------- ----------- -----------
Operating Margin 16 14 861 773
Credit Provision (a) 10 68 120 160
Foreclosed Property Expense --- 10 (14) 2
--------- --------- ----------- -----------
Income (Loss) Before Taxes 6 (64) 755 611
Income Taxes (Benefits) 3 (28) 302 254
---------- --------- ----------- -----------
Net Income (Loss) $ 3 $ (36) $ 453 $ 357
========= ========= =========== ===========
Average Assets $ 3,783 $ 5,330 $ 180,388 $ 164,066
Return on Common Equity NM NM 17.7% 13.9%
Return on Assets NM NM 1.01% 0.87%
Efficiency Ratio (b) NM NM 59.4% 62.3%
<FN>
(a) The provision is allocated to each sector utilizing a credit risk
methodology which is computed using a risk grading system for that
sector's loan portfolio that is consistently applied throughout the
Corporation. The difference between the risk-based provision and the
Corporation provision is included in the Corporate sector.
(b) Efficiency ratio excludes restructuring charges, foreclosed property
expense and gains on emerging markets bond sales.
(c) Total column includes Corporate sector. See description of Corporate
sector on page 35.
NM - Not meaningful.
</FN>
</TABLE>
- 30 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 2 (continued)
Global Bank Regional Bank Texas Commerce
For the six months ended June 30, 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 510 $ 492 $ 1,463 $ 1,482 $ 347 $ 335
Noninterest Revenue 930 930 667 640 206 209
Noninterest Expense 617 612 1,425 1,471(a) 397 403
---------- ---------- --------- --------- ---------- ---------
Operating Margin 823 810 705 651 156 141
Credit Provision (b) 72 85 242 218 30 30
Foreclosed Property Expense --- 2 4 (2) (38) (9)
---------- ---------- --------- --------- ---------- ---------
Income Before Taxes 751 723 459 435 164 120
Income Taxes 280 284 203 185 61 44
---------- ---------- --------- --------- ---------- ---------
Net Income Before Accounting
Change 471 439 256 250 103 76
Accounting Change --- --- --- --- --- ---
---------- ---------- --------- --------- ---------- ---------
Net Income $ 471 $ 439 $ 256 $ 250 $ 103 $ 76
========== ========== ========= ========= ========== =========
Average Assets $ 111,663 $ 101,471 $ 46,607 $ 41,985 $ 19,012 $ 20,395
Return on Common Equity 22.7% 20.4% 16.1% 18.0% 14.8% 9.2%
Return on Assets 0.85% 0.87% 1.11% 1.20% 1.09% 0.75%
Efficiency Ratio (c) 45.5% 44.4% 66.9% 67.1% 71.8% 74.1%
Real Estate Total(d)
For the six months ended June 30, 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except ratios)
Net Interest Income $ 70 $ 76 $ 2,318 $ 2,328
Noninterest Revenue 6 10 1,831 1,798
Noninterest Expense 45 49 2,515 2,568(a)
--------- --------- ----------- ----------
Operating Margin 31 37 1,634 1,558
Credit Provision (b) 23 134 240 365
Foreclosed Property Expense 6 40 (21) 37
--------- --------- ----------- ----------
Income (Loss) Before Taxes 2 (137) 1,415 1,156
Income Taxes (Benefits) 1 (60) 566 480
--------- --------- ----------- ----------
Net Income (Loss) Before
Accounting Change 1 (77) 849 676
Accounting Change --- --- (11) ---
--------- --------- ----------- -----------
Net Income (Loss) $ 1 $ (77) $ 838 $ 676
========= ========= =========== ===========
Average Assets $ 3,912 $ 5,621 $ 177,941 $ 164,109
Return on Common Equity NM NM 16.6% 13.1%
Return on Assets NM NM 0.95% 0.83%
Efficiency Ratio (c) NM NM 61.9% 61.7%
<FN>
(a) Includes restructuring charge of $48 million.
(b) The provision is allocated to each sector utilizing a credit risk
methodology which is computed using a risk grading system for that
sector's loan portfolio that is consistently applied throughout the
Corporation. The difference between the risk-based provision and the
Corporation provision is included in the Corporate sector.
(c) Efficiency ratio excludes restructuring charges, foreclosed property
expense, gains on emerging markets bond sales, and the gain related to the
sale of the Corporation's investment in Far East Bank and Trust Company
recognized in the 1995 first quarter.
(d) Total column includes Corporate sector. See description of Corporate
sector on page 35.
NM - Not meaningful.
</FN>
</TABLE>
- 31 -
<PAGE>
Part I
Item 2 (continued)
GLOBAL BANK
The Global Bank is currently organized into three principal management units;
Global Banking & Investment Banking (client management, loan syndications and
portfolio investments; high yield finance, venture capital; mergers and
acquisitions and other advisory services); Global Markets (foreign exchange
dealing; derivatives trading and structuring, risk management and sales;
securities structuring, underwriting, trading and sales; and management of the
Corporation's funding and securities investment activities); and Other
International (all wholesale banking; investment banking; markets and other
activities outside of the United States and the major cross-border financial
centers). Also, included are the Corporation's "terminal businesses" which
represent discontinued portfolios, especially refinancing country debt. The
Global Bank seeks to optimize its risk profile and profitability by emphasizing
originations, underwriting, distribution and risk management products.
The Global Bank's net income in the second quarter of 1995 was $235 million, an
increase of $29 million from the second quarter of 1994. The sector's return on
equity in the second quarter of 1995 was 22.6% compared with 19.2% in the 1994
second quarter. The improvement in the 1995 second quarter results was primarily
due to increases in noninterest revenue from corporate finance and syndication
fees, revenue from equity-related investments, and securities gains, partially
offset by a decrease in trading revenue. The Global Bank's net income of $471
million and return on equity of 22.7% for the first six months of 1995 increased
from last year's six month results of $439 million and 20.4%, respectively. The
increase in the 1995 six month results reflects higher fees from corporate
finance and syndications and the gain related to the sale of the Corporation's
investment in Far East Bank and Trust Company, partially offset by lower trading
revenue.
The following table sets forth the significant components of Global Bank's total
revenue by business for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Global Banking & Investment Banking $ 331 $ 214 $ 636 $ 471
Global Markets 305 344 463 654
Other International 135 95 354 214
Terminal Businesses (22) 52 5 115
</TABLE>
Total revenue for the Global Bank increased $50 million in the second quarter
and $18 million for the first half of 1995, when compared with the same periods
last year. Revenue for Global Banking & Investment Banking increased in the 1995
second quarter and 1995 first half by $117 million and $165 million,
respectively, when compared with the same periods in 1994. The increases from
last year were primarily due to increased revenue from equity-related
investments of $58 million in the 1995 second quarter and $81 million for the
first half of 1995 and increased fee revenue as a result of the Corporation's
leading market share in the loan syndication business.
Contributing to the revenue declines in Global Markets were trading revenues
which decreased by $54 million in the 1995 second quarter (partially offset by
higher emerging markets trading revenue) and $176 million for the first six
months of 1995 reflecting higher interest rates and unexpected volatile
conditions in both domestic and foreign trading markets. The decrease in revenue
from last year was also affected by lower net interest income due to higher
short-term interest rates in 1995. These decreases in the second quarter of 1995
were partially offset by an increase in securities gains.
Revenue for Other International increased $40 million compared with last year's
second quarter. For the first six months of 1995, revenue for Other
International increased $140 million compared with 1994. Increased commercial
loan volume and improved interest rate environments, primarily in Latin America,
increased net interest income by $14 million in the second quarter and by $28
million for the first half of 1995, compared with the same periods in 1994.
Trading revenue increased $25 million in the second quarter of 1995, primarily
in Europe, and $13 million for the first six months of 1995, split between
Europe and Asia. Also contributing to the
- 32 -
<PAGE>
Part I
Item 2 (continued)
increase in revenue for the first half of 1995 was the gain related to the sale
of the Corporation's interest in Far East Bank and Trust Company.
Revenue from the Corporation's "terminal businesses" decreased from 1994 levels
by $74 million in the second quarter and $110 million for the first six months
of 1995, primarily due to decreases in net interest income and other revenue.
Net interest income decreased $16 million in the second quarter of 1995 and $32
million for the first six months compared with 1994, due to a decrease in loan
outstandings. The decrease in other revenue from last year was $57 million in
the second quarter of 1995 and primarily reflects a loss of approximately $50
million related to the disposition of available-for-sale emerging markets
securities. For the first six months of 1995, the decrease in other revenue was
$75 million due to the absence of gains from emerging markets bond sales
compared with 1994, partially offset by increased gains on the disposition of
emerging markets equity investments.
REGIONAL BANK
The Regional Bank currently includes Metropolitan Banking (consumer banking and
commercial and professional banking); Retail Card Services; Mortgage Bank;
National Consumer Finance (home secured lending, student lending, and other
consumer lending); 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 net income was $140 million in the second quarter of 1995, a
decrease from last year's second quarter results of $145 million. The decrease
in earnings was due to a higher credit provision of $19 million and lower net
interest income of $17 million, partially offset by higher noninterest revenue
and lower noninterest expense of $26 million and $9 million, respectively. For
the first six months of 1995, Regional Bank's net income was $256 million, an
increase of $6 million from the same period last year. The results for the first
six months of 1994 included a $48 million restructuring charge ($28 million
after-tax) related to the closing of 50 New York branches and a staff reduction
of 650. Excluding the restructuring charge, Regional Bank's earnings for the
first half of 1995 decreased by $22 million compared with the first half of 1994
due to higher credit provision of $24 million and lower net interest income of
$19 million, partially offset by higher noninterest revenue of $27 million. The
higher credit provision at June 30, 1995 reflects the substantial growth in
credit card outstandings.
The following table sets forth the significant components of Regional Bank's
total revenue by business for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Metropolitan Banking $ 274 $ 258 $ 550 $ 483
Retail Card Services 268 247 525 491
Mortgage Bank 66 57 105 101
National Consumer Finance 53 52 104 108
Middle Market 138 141 279 283
Private Banking 84 77 147 150
Geoserve 172 170(a) 343 345(a)
<FN>
(a) The 1994 amounts have been restated to include revenue on a comparable
equity basis related to the shareholder services joint venture with Mellon
Bank Corporation.
</FN>
</TABLE>
- 33 -
<PAGE>
Part I
Item 2 (continued)
Metropolitan Banking had revenue of $274 million in the 1995 second quarter, a
6% increase from the 1994 second quarter. For the first six months of 1995,
Metropolitan Banking experienced revenue growth of $67 million, or 14%, compared
with 1994. Improvement in both 1995 periods compared with last year's results
were due to favorable deposit spreads, targeted customer segmentation and
repricing initiatives. Retail Card Services revenue increased $21 million, or
9%, in the 1995 second quarter and $34 million, or 7%, for the first six months
of 1995, compared with the same periods in 1994. An increase in Shell MasterCard
outstandings and resulting strong fee growth contributed to the upturn in
revenue. Total outstandings for Retail Card Services at the end of the second
quarter of 1995 were $10.1 billion compared with $7.8 billion at the end of the
second quarter of 1994. The Mortgage Bank continues to be faced with competition
due to industry overcapacity, which has adversely affected production this year.
During the second quarter and first six months of 1995, the Mortgage Bank
increased revenues by 16% and 4%, respectively, when compared with the 1994
second quarter and first six months, primarily due to higher servicing-related
revenues as a result of the acquisition of Margaretten. National Consumer
Finance revenues have remained relatively stable in the 1995 second quarter when
compared with 1994. National Consumer Finance outstandings have increased in the
second quarter of 1995 by more than 20% over the second quarter of 1994;
partially offsetting this favorable impact was a reduction in spreads.
Middle Market revenues were essentially flat for the second quarter and first
six months of 1995, when compared with the same periods in 1994. Middle Market
has experienced improved credit quality and favorable deposit spreads in 1995;
however loan and deposit volumes have decreased primarily due to heightened
competition coupled with the higher interest rate environment. For the second
quarter of 1995, Private Banking revenue increased compared with last year. The
decline in Private Banking revenue for the first six months of 1995, when
compared with the first six months of 1994, reflects the adverse impact of a $13
million loss on the permanent impairment of Barings Bank PLC securities.
Excluding the loss, Private Banking's revenues for the first half of 1995 would
have reflected a 7% increase over the same period in 1994. These positive
results are attributable to continued loan and deposit growth, wider spreads and
higher fees generated by greater volume in the brokerage business for the second
quarter and first half of 1995. Revenue in Geoserve was essentially flat in the
second quarter and first half of 1995 when compared with 1994. During those
periods, Treasury Management products experienced a 7% increase in revenue
offset by a decline in Global Securities and Trust revenue.
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 June 30, 1995, Texas Commerce had $21 billion in total assets with
120 locations statewide.
Texas Commerce's net income in the second quarter of 1995 was $52 million, an
increase of 24% from last year's second quarter results of $42 million. For the
first six months, Texas Commerce's net income increased to $103 million in 1995,
compared with $76 million in 1994. The increases in the 1995 periods, when
compared with the corresponding 1994 periods, were primarily due to lower
foreclosed property expense, lower noninterest expense and higher net interest
income. The substantial decrease in foreclosed property expense is attributable
to the improvement in the Texas real estate market and payments received related
to certain foreclosed properties that were previously written down. Net interest
income rose $12 million in the 1995 first six months, when compared with the
1994 first six months, due to a 13% growth in loan volume coupled with more
favorable interest rate spreads. The decreases in noninterest revenue during
that period were due to declines in trust income, corporate finance and
syndications, and deposit servicing fees, partially offset by improved trading
results.
REAL ESTATE
Real Estate includes the management of the Corporation's commercial real estate
portfolio, primarily at Chemical Bank. Real Estate had net income of $3 million
for the second quarter of 1995 and net income of $1 million for the first six
months of 1995, compared with net losses of $36 million and $77 million,
respectively, for the same periods in 1994. The improvement in net income was
primarily due to a decrease in credit provision and lower foreclosed property
expense reflecting the significant progress made in managing the Corporation's
real estate
- 34 -
<PAGE>
Part I
Item 2 (continued)
portfolio. Total nonperforming assets at June 30, 1995 were $166 million, a
decline of 85% from $1,074 million at the same date a year ago. The improvement
in nonperforming asset levels from last year is the result of increased
liquidity in the real estate markets and successful workout activities, coupled
with the strategic actions taken during 1994. For more information regarding
such actions, reference is made to page B26 of the Corporation's 1994 Form
10-K.
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
residual credit provision and tax expense. Corporate had net income of $23
million for the 1995 second quarter, an increase of $23 million from last year's
second quarter. For the first six months of 1995, Corporate had net income of $7
million compared with a net loss of $12 million for the same period in 1994.
Included in the net income of $7 million for the first half of 1995 was an $11
million after-tax charge due to the adoption of SFAS 106 for foreign employees
and a $6 million write-down associated with certain nonperforming residential
mortgages.
LOAN PORTFOLIO
--------------
The following loan review discussion focuses primarily on developments since
December 31, 1994 and should be read in conjunction with the Loan Portfolio
section on pages B25 through B30 of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994 (the "1994 Form 10-K").
The Corporation's loans outstanding totaled $84.7 billion at June 30, 1995, an
increase of $5.9 billion from year-end 1994 and $10.0 billion higher than at
June 30, 1994. The growth in loans outstanding reflects increases in both the
consumer and commercial and industrial loan portfolios. For the remainder of
1995, the Corporation expects continued growth in its loan portfolio.
The Corporation's loan balances were as follows for the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(in millions) 1995 1994 1994
-------- ------------ --------
Loans
Domestic Consumer:
<S> <C> <C> <C>
Residential Mortgage (a) $ 17,138 $ 13,560 $ 12,361
Credit Card 10,121 9,261 7,774
Other Consumer (b) 7,481 7,265 6,538
---------- ---------- ---------
Total Consumer Loans 34,740 30,086 26,673
---------- ---------- ---------
Domestic Commercial:
Commercial and Industrial 21,754 20,805 19,601
Commercial Real Estate (c) 5,425 5,650 6,706
Financial Institutions 3,969 3,918 3,384
---------- --------- ---------
Total Commercial Loans 31,148 30,373 29,691
---------- --------- ---------
Total Domestic Loans 65,888 60,459 56,364
Foreign, primarily Commercial 18,787 18,308 18,321
---------- ---------- ---------
Total Loans $ 84,675 $ 78,767 $ 74,685
========== ========== =========
<FN>
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance) and student loans.
(c) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
</FN>
</TABLE>
- 35 -
<PAGE>
Part I
Item 2 (continued)
NONPERFORMING ASSETS
For a description of the Corporation's accounting policies for its nonperforming
loans, renegotiated loans and assets acquired as loan satisfactions, see Note
One of the Notes to the Consolidated Financial Statements on page B49 of the
Corporation's 1994 Form 10-K.
The Corporation's shared loss assets acquired from First City were $55 million
at June 30, 1995. Such assets are not included in the amount of nonperforming
assets below. In July 1995, the Corporation sold all of its nonperforming shared
loss assets at book value and, as a result, the Corporation terminated its
agreement with the FDIC.
The following table sets forth the nonperforming assets and contractually past
due loans of the Corporation at June 30, 1995, December 31, 1994 and June 30,
1994.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(in millions) 1995 1994 1994
-------- ------------ --------
Nonperforming Assets:
Domestic Consumer:
<S> <C> <C> <C>
Residential Mortgage $ 117 $ 92 $ 144
Other Consumer 4 12 21
-------- -------- --------
Total Consumer Loans 121 104 165
-------- -------- --------
Domestic Commercial:
Commercial and Industrial 365 354 570
Commercial Real Estate 209 156 645
Financial Institutions 23 4 14
-------- -------- --------
Total Commercial Loans 597 514 1,229
-------- -------- --------
Total Domestic 718 618 1,394
Foreign, primarily Commercial 346 311 364
-------- -------- --------
Total Nonperforming Loans 1,064(a) 929 1,758
Assets Acquired as Loan Satisfactions 54(a) 210 735
-------- -------- --------
Total Nonperforming Assets $ 1,118 $ 1,139 $ 2,493
======== ======== ========
Contractually Past-Due Loans (b):
Consumer $ 299 $ 294 $ 267
Commercial and Other Loans 91 36 61
-------- -------- --------
Total Contractually Past-Due Loans $ 390 $ 330 $ 328
======== ======== ========
<FN>
(a) Includes $943 million of loans considered impaired under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as
discussed on pages 12 and 13. In addition, on January 1, 1995, $122
million of assets for which the Corporation did not have possession were
reclassified from Assets Acquired as Loan Satisfactions to Nonperforming
Loans pursuant to the adoption of SFAS 114.
(b) Accruing loans past-due 90 days or more as to principal and interest,
which are not characterized as nonperforming loans. Consumer loans are
generally not classified as nonperforming loans but rather are charged-off
on a formula basis.
</FN>
</TABLE>
The Corporation's nonperforming assets at June 30, 1995 were $1,118 million, a
decrease of $21 million from the 1994 year-end level and a decrease of $1,375
million, or 55%, from last year's comparable quarter. These reductions reflect
the improvement in the Corporation's credit profile as a result of a lower level
of loans being placed on nonperforming status, repayments, charge-offs, the
Corporation's continuing loan workout and collection activities, as well as the
impact of several strategic actions undertaken during 1994. A discussion of
these actions is provided on page B26 of the Corporation's 1994 Form 10-K.
Management expects the level of the Corporation's nonperforming assets at
year-end 1995 will be at or moderately below the 1994 year-end level.
- 36 -
<PAGE>
Part I
Item 2 (continued)
The following table presents the reconciliation of nonperforming assets for the
second quarter and first six months of 1995 and 1994.
<TABLE>
<CAPTION>
Reconciliation of Nonperforming Assets Second Quarter Six Months
------------------- -----------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,130 $ 3,203 $ 1,139 $ 3,525
Additions:
Loans placed on nonperforming status 196 220 349 512
Deductions:
Payments 71 299 174 644
Sales 27 91 51 133
Charge-offs of Nonperforming Loans (a) 86 212 107 368
Write-downs of Real Estate Owned (11)(b) 16 (23)(b) 47
Return to accrual status 35 312 61 352
-------- -------- -------- --------
Balance at end of period $ 1,118 $ 2,493 $ 1,118 $ 2,493
======== ======== ======== ========
<FN>
(a) Excludes those consumer charge-offs that are recorded on a formula basis.
(b) The 1995 second quarter and first six months amounts include the
recovery of writedowns as a result of payments received on certain
foreclosed properties which had been previously written down.
</FN>
</TABLE>
ASSETS HELD FOR ACCELERATED DISPOSITION
In December 1994, the Corporation segregated approximately $735 million of real
estate loans and real estate owned (approximately $580 million nonperforming
assets) and designated such assets as Assets Held for Accelerated Disposition.
In conjunction with the transfer of these real estate loans to the held for
accelerated disposition classification, the Corporation reevaluated its carrying
values for these assets to facilitate their rapid disposition and recorded a
charge of $148 million to the allowance for credit losses. As a result of this
action, these assets were excluded from the June 30, 1995 and December 31, 1994
nonperforming assets category.
The following table represents the Corporation's assets held for accelerated
disposition at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(in millions) 1995 1994 1994
-------- ------------ --------
Assets Held for Accelerated Disposition:
<S> <C> <C> <C>
Loans (a) $ 167 $ 336 $ --
Real Estate Owned 73 190 --
-------- -------- --------
Total Assets Held for Accelerated Disposition $ 240 $ 526 $ --
======== ======== ========
<FN>
(a) Includes $8 million and $87 million of loans that were performing at June
30, 1995 and December 31, 1994, respectively.
</FN>
</TABLE>
- 37 -
<PAGE>
Part I
Item 2 (continued)
<TABLE>
<CAPTION>
NET CHARGE-OFFS
Second Quarter Six Months
----------------------- -----------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Net Charge-Offs:
Domestic Consumer:
<S> <C> <C> <C> <C>
Residential Mortgage $ 16 $ 9 $ 27 $ 12
Credit Card 106 81 197 163
Other Consumer 6 4 15 9
------- -------- ------- --------
Total Consumer Net Charge-Offs 128 94 239 184
------- -------- ------- --------
Domestic Commercial:
Commercial and Industrial (6) 37 32 88
Commercial Real Estate 27 49 28 123
Financial Institutions --- (1) --- (1)
------- -------- ------- --------
Total Commercial Net Charge-Offs 21 85 60 210
------- -------- ------- --------
Total Domestic Net Charge-Offs 149 179 299 394
Foreign (4) 297 (9) 318
------- -------- ------- --------
Total Net Charge-Offs $ 145 $ 476 $ 290 $ 712
======= ======== ======= ========
</TABLE>
For a discussion of net charge-offs, see the various credit portfolio sections
that follow. As a result of management's evaluation of the continuing
improvement in the Corporation's credit profile, quarterly net charge-offs
during the remainder of 1995 are expected to be generally consistent with the
1995 second quarter level. For a discussion of special charges the Corporation
incurred in 1994, see page B27 of the Corporation's 1994 Form 10-K.
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 $34.7 billion at June 30, 1995, representing 41% of total
loans, an increase from $30.1 billion, or 38% of total loans, at December 31,
1994 and an increase from $26.7 billion, or 36% of total loans, at June 30,
1994.
Residential mortgage loans at June 30, 1995 increased $4.8 billion from the
comparable 1994 period-end, due in part to the Margaretten acquisition in July
1994 as well as from increases in adjustable rate loan outstandings. Credit card
receivables at June 30, 1995 increased $2.3 billion from the same date a year
ago, primarily due to the co- branded Shell MasterCard program. Management
expects continued growth in the level of Shell credit card outstandings for
1995. Management is exploring other opportunities in the credit card area,
including other co- branded card programs.
Total nonperforming domestic consumer loans were $121 million at June 30, 1995,
$104 million at December 31, 1994 and $165 million at June 30, 1994. The
increase in nonperforming domestic consumer loans since December 31, 1994 is
primarily due to the increase in the volume of consumer loans.
Domestic consumer loan balances are expected to continue to increase in 1995,
particularly in the credit card and residential mortgage portfolios. As a result
of this anticipated growth, management expects consumer loan net charge-offs in
1995 will be higher than in 1994, although the percentage of total consumer net
charge-offs to total consumer loan outstandings are expected to decline.
- 38 -
<PAGE>
Part I
Item 2 (continued)
The following table presents the composition of the Corporation's delinquent
domestic consumer loans that are contractually past due 90 days or more at the
dates indicated and are still accruing. Such consumer loans are generally not
classified as nonperforming but, rather, are charged-off on a formula basis.
<TABLE>
<CAPTION>
90 Days and Over % of Loans Outstanding
----------------------------------------- -----------------------------------------
June 30, December 31, June 30, June 30, December 31, June 30,
(in millions) 1995 1994 1994 1995 1994 1994
-------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Credit Cards $ 201 $ 176 $ 159 1.99% 1.90% 2.05%
Other Consumer Loans (a) 98(b) 118(b) 108(b) 1.31% 1.62% 1.65%
-------- ------- --------
Total $ 299 $ 294 $ 267 0.86% 0.98% 1.00%
======== ======= ========
<FN>
(a) Consists of installment loans (direct and indirect types of consumer
finance) and student loans.
(b) Includes student loans at June 30, 1995, December 31, 1994 and June 30,
1994 of approximately $87 million, $105 million and $93 million,
respectively, which are substantially guaranteed by Federal and
State government agencies.
</FN>
</TABLE>
MORTGAGE BANKING ACTIVITIES
The Corporation both originates and services residential mortgage loans as part
of its mortgage banking activities. After origination, the Corporation typically
sells loans to investors, primarily in the secondary market, while retaining the
rights to service such loans. The Corporation originated $3.1 billion of
residential mortgages in the second quarter of 1995 versus $2.9 billion in the
same 1994 period. For the six months ended June 30, 1995, the Corporation
originated $4.9 billion of residential mortgages, compared with $7.0 billion in
the same 1994 period. During the first six months of 1995, the Corporation sold
to investors approximately 58% of the residential mortgage loans it had
originated, compared with 75% in same 1994 period. The Corporation's residential
mortgage servicing portfolio amounted to $54.7 billion at June 30, 1995,
compared with $55.6 billion at December 31, 1994 and $40.3 billion at June 30,
1994.
In addition to originating mortgage servicing rights, the Corporation also
purchases and sells mortgage servicing rights. The Corporation may purchase bulk
rights to service a loan portfolio or the Corporation may purchase loans
directly and then sell such loans while retaining the servicing rights. As
disclosed in Note 1 of the Notes to Financial Statements of this Form 10-Q, the
Corporation adopted SFAS 122 in the 1995 second quarter. SFAS 122 requires that
when a definitive plan exists to sell or securitize mortgage loans and retain
the servicing rights related thereto, a mortgage banking enterprise should
recognize as separate assets the rights to service mortgage loans for others,
irrespective of whether those servicing rights are acquired through the purchase
or origination of mortgage loans.
Mortgage servicing rights (included in other assets) amounted to $453 million at
June 30, 1995, compared with $469 million at December 31, 1994 and $293 million
at June 30, 1994. The increase in mortgage servicing rights at June 30, 1995,
when compared with the same date a year-ago, was primarily due to the
Margaretten acquisition, while the decrease from the 1994 year-end reflected the
effects of sales of mortgage servicing rights, amortization and impairment
reserves during the six month period. The Corporation utilizes an amortization
method based on adjusted cash flows to amortize mortgage servicing rights. The
mortgage loans to which the Corporation's servicing rights relate are, to a
substantial degree, of recent vintage (i.e., originated in the period 1992
through the first half of 1994 when interest rates were relatively low). The
Corporation continually evaluates prepayment exposure of the portfolio,
adjusting the balance and remaining life of the servicing rights as a result of
prepayments.
- 39 -
<PAGE>
Part I
Item 2 (continued)
DOMESTIC COMMERCIAL AND INDUSTRIAL PORTFOLIO
The domestic commercial and industrial portfolio totaled $21.8 billion at June
30, 1995, an increase from $20.8 billion at December 31, 1994 and $19.6 billion
at June 30, 1994. The portfolio is diversified geographically and by industry.
The largest industry concentrations are oil and gas and retailing which
approximate $2.0 billion (or 2.4% of total loans) and $1.8 billion (or 2.1% of
total loans), respectively. All of the other remaining industries are each less
than 2% of total loans.
Included in the domestic commercial and industrial portfolio are loans related
to highly leveraged transactions ("HLTs"). The Corporation originates and
syndicates loans in HLTs, which include acquisitions, leveraged buyouts and
recapitalizations. HLT loans at June 30, 1995 totaled approximately $1.5
billion, up from $1.3 billion at the 1994 year-end but down from $1.6 billion at
June 30, 1994. The increase in the HLT loan portfolio from the 1994 year-end
reflects a rise in the number of HLT transactions during the first half of 1995,
while the decrease from June 30, 1994 can be largely attributed to repayments
and reclassifications to non-HLT status. At June 30, 1995, the Corporation had
$62 million in nonperforming HLT loans, compared with $82 million at the end of
1994 and $182 million at June 30, 1994. Net recoveries related to HLTs for the
first six months of 1995 totaled $9 million, compared with net charge-offs of $2
million in the comparable 1994 period.
The Corporation is a leading participant in loan originations and sales. This
activity is comprised of the sale of loans and lending commitments to investors,
generally without recourse. These sales include syndication, assignment and
participation, and include both short- and medium-term transactions. This loan
distribution capability allows the Corporation to compete aggressively and
profitably in wholesale lending markets by enabling it to reduce larger
individual credit exposures and thereby to price more flexibly than if all loans
were held as permanent investments. The Corporation also benefits from increased
liquidity. During the first six months of 1995, the Corporation acted as agent
or co-agent for approximately $207 billion in syndicated credit facilities,
compared with $129 billion in the same period last year.
DOMESTIC COMMERCIAL REAL ESTATE
The domestic commercial real estate portfolio represents loans secured primarily
by real property, other than loans secured by one-to-four family residential
properties (which are included in the consumer loan portfolio). The domestic
commercial real estate loan portfolio totaled $5.4 billion at June 30, 1995, a
decrease from $5.7 billion at December 31, 1994 and from $6.7 billion at June
30, 1994. The decreases are attributable to repayments, the designation of
certain real estate assets for accelerated disposition in December 1994, a bulk
asset sale in October 1994, transfers to real estate owned and charge-offs.
The table below sets forth the major components of the domestic commercial real
estate loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(in millions) 1995 1994 1994
-------- ------------ --------
<S> <C> <C> <C>
Commercial Mortgages $ 4,384 $ 4,680 $ 5,584
Construction 1,041 970 1,122
-------- -------- --------
Total Domestic Commercial Real Estate Loans $ 5,425 $ 5,650 $ 6,706
======== ======== ========
</TABLE>
Commercial mortgages provide financing for the acquisition or refinancing of
commercial properties, and typically have terms ranging from two-to-five years.
Construction loans are generally originated to finance the construction of real
estate projects. When the real estate project has cash flows sufficient to
support a commercial mortgage, the loan is transferred from construction status
to commercial mortgage status.
The largest concentration of domestic commercial real estate loans is in the New
York/New Jersey and Texas markets, representing 43% and 29%, respectively, of
the domestic commercial real estate portfolio. No other state represented more
than 3% of the domestic commercial real estate loan portfolio.
- 40 -
<PAGE>
Part I
Item 2 (continued)
Nonperforming domestic commercial real estate assets were $226 million at June
30, 1995, a 9% decrease from December 31, 1994 and a decrease of $1.0 billion,
or 82%, from June 30, 1994. The improvement in nonperforming domestic commercial
real estate asset levels since June 30, 1994 is the result of increased
liquidity in the commercial real estate markets coupled with successful workout
activities, as well as the aforementioned strategic actions taken during 1994.
Domestic commercial real estate net charge-offs in the second quarter of 1995
totaled $27 million, compared with $49 million in the same period a year ago.
For the first six months, such net charge-offs were $28 million in 1995,
compared with $123 million in 1994. The lower net charge-offs are due in part to
the decision in December 1994 to designate certain real estate assets for
accelerated disposition. During the first six months of 1995, the Corporation
recorded a $29 million recovery of writedowns as a result of payments received
on certain foreclosed properties which had been previously written down.
Writedowns on commercial real estate owned in the first half of 1994 totaled $43
million. Approximately $21 million and $45 million in commercial real estate
assets were sold during the first six months of 1995. Generally, these assets
were sold at or above carrying value. The second quarter of 1995 was the tenth
consecutive quarter in which nonperforming domestic commercial real estate
assets declined.
Domestic commercial real estate net charge-offs and writedowns for the full year
1995 are expected to be below the full year 1994 levels.
DOMESTIC FINANCIAL INSTITUTIONS PORTFOLIO
The domestic financial institutions portfolio includes commercial banks and
companies whose businesses primarily involve lending, financing, investing,
underwriting, or insurance. Loans to domestic financial institutions were $4.0
billion at June 30, 1995 or 5% of total loans outstanding. Loans to domestic
financial institutions are predominantly to broker-dealers, which comprise over
half the domestic financial institutions total.
FOREIGN PORTFOLIO
The foreign portfolio includes foreign commercial and industrial loans, loans to
foreign financial institutions, foreign commercial real estate, loans to foreign
governments and official institutions, and foreign consumer loans. At June 30,
1995, the Corporation's total foreign loans were $18.8 billion, compared with
$18.3 billion at both December 31, 1994 and June 30, 1994.
Included in foreign loans were foreign commercial and industrial loans of $8.6
billion at June 30, 1995, an increase of $1.0 billion from the 1994 year-end and
an increase of $1.5 billion from June 30, 1994. Total foreign commercial real
estate loans at June 30, 1995 were $.5 billion, unchanged from each of December
31, 1994 and June 30, 1994. A significant portion of the foreign real estate
portfolio is located in the United Kingdom and Hong Kong.
In the second quarter of 1995, the Corporation incurred a loss of approximately
$50 million in noninterest revenue related to the disposition of emerging market
securities previously recorded as available-for-sale.
MEXICO
For a discussion of significant developments with respect to Mexican debt, see
page B29 of the Corporation's 1994 Form 10-K.
At June 30, 1995, the Corporation's total exposure to Mexico was $1,175 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 $2,200
million and current carrying value of $1,842 million, which are collateralized
by zero-coupon United States Treasury obligations.
- 41 -
<PAGE>
Part I
Item 2 (continued)
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 risks 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
below.
The Corporation does not deal, to any material extent, in derivatives which
dealers of derivatives (such as other banks and financial institutions) consider
to be "complex" (i.e., exotic and/or leveraged). As a result, the notional
amount of such derivatives were less than 0.5% of the Corporation's total
notional amount of derivative contracts at June 30, 1995.
A discussion of the derivative and foreign exchange financial instruments
utilized in connection with the Corporation's trading activities and
asset/liability management activities is provided on pages B31 and B34 of the
Corporation's 1994 Form 10-K, Notes 2, 10 and 12 of this Form 10-Q and the Risk
Management section below.
RISK MANAGEMENT
---------------
The following discussion of risk management focuses primarily on developments
since December 31, 1994 and, accordingly, should be read in conjunction with the
Risk Management section on pages B31-B37 of the Corporation's 1994 Form 10-K.
CREDIT RISK MANAGEMENT
Credit risk for both lending-related products and derivative and foreign
exchange products represents the possibility that a loss may occur if a borrower
or counterparty fails to honor fully the terms of a contract. Under the
direction of the Chief Credit Officer, risk policies are formulated, approved
and communicated throughout the Corporation. The Credit Risk Management
Committee, chaired by the Chief Credit Officer, is responsible for maintaining a
sound credit process, addressing risk issues, and reviewing the portfolio.
The Corporation routinely enters into derivative and foreign exchange product
transactions with regulated financial institutions, which the Corporation
believes have relatively low credit risk. At June 30, 1995, approximately 94% of
the mark-to-market exposure of the Corporation's derivative and foreign exchange
transactions were with commercial bank and financial institution counterparties,
most of which are dealers in these products. Non-financial institutions only
accounted for approximately 6% of the Corporation's derivative and foreign
exchange mark-to-market exposure.
- 42 -
<PAGE>
Part I
Item 2 (continued)
Many of the Corporation's contracts are short-term, which mitigates credit risk
as transactions settle quickly. The following table provides the remaining
maturities of derivative and foreign exchange contracts outstanding at June 30,
1995 and December 31, 1994. Percentages are based upon remaining contract life
of mark-to-market exposure amounts. For the notional amounts and credit exposure
outstandings of the Corporation's interest rate contracts and foreign exchange
contracts, see page 16 of this Form 10-Q.
<TABLE>
<CAPTION>
At June 30, 1995 At December 31, 1994
-------------------------------------- ------------------------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
Contracts Contracts Total Contracts Contracts Total
--------- --------- ----- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Less than 3 months 10% 52% 26% 11% 57% 32%
3 to 6 months 7 26 15 8 24 15
6 to 12 months 11 18 14 12 12 12
1 to 3 years 34 3 22 35 6 22
Over 3 years 38 1 23 34 1 19
--- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100%
=== === === === === ===
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb potential credit losses
from the entire loan portfolio, credit-related transactions, as well as
on-balance sheet derivative and foreign exchange transactions. The Corporation
deems its allowance for credit losses at June 30, 1995 to be adequate. Although
the Corporation considers that it has sufficient reserves to absorb losses that
may currently exist in the portfolio, but are not yet identifiable, the precise
loss content from the loan portfolio, off-balance sheet credit-related
instruments, and on-balance sheet derivative and foreign exchange transactions
is subject to continuing review based on quality indicators, industry and
geographic concentrations, changes in business conditions, and other external
factors such as competition and legal and regulatory requirements. The
Corporation will continue to reassess the adequacy of the allowance for credit
losses.
The Corporation's actual credit losses arising from derivative and foreign
exchange transactions were immaterial during the first half of 1995 and 1994.
Additionally, at June 30, 1995 and 1994, nonperforming derivatives contracts
were immaterial.
The accompanying table reflects the activity in the allowance for credit losses
for the second quarter and six months ended June 30, 1995 and 1994.
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------------- --------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $ 2,455 $ 2,991 $ 2,480 $ 3,020
Provision for Losses 120 160 240 365
Charge-Offs (209) (531) (384) (873)
Recoveries 64 55 94 161
-------- ------- --------- --------
Net Charge-Offs (145) (476) (290) (712)
Other --- 1 --- 3
-------- ------- --------- --------
Total Allowance at End of Period $ 2,430 $ 2,676 $ 2,430 $ 2,676
======== ======= ========= ========
</TABLE>
- 43 -
<PAGE>
Part I
Item 2 (continued)
The following table presents the Corporation's allowance coverage ratios at June
30, 1995, December 31, 1994 and June 30, 1994.
<TABLE>
<CAPTION>
Allowance Coverage Ratios
June 30, December 31, June 30,
For the Period Ended: 1995 1994 1994
-------- ------------ --------
Allowance for Credit Losses to:
<S> <C> <C> <C>
Loans at Period-End 2.87% 3.15% 3.58%
Average Loans 3.04 3.30 3.60
Nonperforming Loans 228.38(a) 266.95 152.22
<FN>
(a) The decrease from December 31, 1994 is primarily due to the aforementioned
reclassification of certain assets from assets acquired as loan
satisfactions to nonperforming loans as a result of the adoption of SFAS
114.
</FN>
</TABLE>
MARKET RISK MANAGEMENT - TRADING ACTIVITIES
For a discussion of the Corporation's market risk management, see pages B33-B34
of the Corporation's 1994 Form 10-K.
The effects of market gains or losses on the Corporation's trading activities
have been reflected in trading revenue, as the trading instruments are
marked-to-market on a daily basis. For the impact of any unrecognized market
gains or losses on the Corporation's asset/liability management portfolio, see
Note 12 - Fair Value of Financial Instruments of this Form 10-Q.
Measuring Market Risk: One of the risk controls the Corporation utilizes in its
overall risk management process is value-at-risk. The Corporation defines
value-at-risk as the potential overnight dollar loss from adverse market
movements that would cover 97.5% of likely market movements, which are
determined by using two years of historical price and rate data. The
Corporation's value-at-risk calculations employ over 3,100 volatilities and
1,240,000 correlations (updated semi-annually) of various market instruments.
The Corporation monitors value- at-risk figures for major business units on a
daily basis to ensure the potential for market loss is properly reflected. The
methodology generally used to offset positions within a business unit is deemed
by the Corporation to be conservative. Only partial credit for correlation
between instruments within each business unit is incorporated since correlations
can exhibit instability during volatile market environments. Aggregating across
business units with no correlation offset resulted in an aggregated daily
average value-at-risk figure of $29 million for the twelve months ended June 30,
1995. Based on actual trading results for the twelve months ended June 30, 1995,
which capture the historical correlation among business units, the Corporation's
daily value-at-risk was reduced to approximately $8 million with 97.5%
confidence.
For the twelve months ended June 30, 1995, the Corporation posted positive daily
market risk-related revenue for 199 out of 267 business trading days for
international and domestic units. For 136 of the 267 days, the Corporation's
daily market risk-related revenue or losses centered around the $0 million to $5
million range, which is representative of the Corporation's emphasis on
market-making and sales activities. The low number of outlier results (19 days
having positive or negative market risk-related revenues exceeding $10 million)
exemplifies the Corporation's diversified approach to market risk management as
a business strategy.
OPERATING RISK MANAGEMENT
The Corporation, like all financial institutions, is subject to the risk of
fraud and to the risk of unauthorized activities by employees. The Corporation
maintains a comprehensive system of internal controls designed to manage such
risks.
- 44 -
<PAGE>
Part I
Item 2 (continued)
ASSET/LIABILITY MANAGEMENT
The objective of the asset/liability management process is to manage and control
the sensitivity of the Corporation's income to changes in market interest rates.
The Corporation's net interest income is affected by changes in the level of
market interest rates based upon mismatches between the repricing of its assets
and liabilities. Interest rate sensitivity arises in the ordinary course of the
Corporation's banking business as the repricing characteristics of its loans do
not necessarily match those of its deposits and other borrowings. This
sensitivity can be altered by adjusting the Corporation's investments and the
maturities of its wholesale funding activities, and with the use of off-balance
sheet derivative instruments. For a further discussion of the Corporation's
asset/liability management process and the variety of techniques used to measure
its interest rate sensitivity, see pages B34-B36 of the Corporation's 1994 Form
10-K.
Measuring Interest Rate Sensitivity:
Management uses a variety of techniques to measure its interest rate
sensitivity. One such tool is aggregate net gap analysis, an example of which is
presented below. Assets and liabilities are placed in maturity ladders based on
their contractual maturities or repricing dates. Assets and liabilities for
which no specific contractual maturity or repricing dates exist are placed in
ladders based on management's judgments concerning their most likely repricing
behaviors.
A net gap for each time period is calculated by subtracting the liabilities
repricing in that interval from the assets repricing. A negative gap - more
liabilities repricing than assets - will benefit net interest income in a
declining interest rate environment and will detract from net interest income in
a rising interest rate environment. Conversely, a positive gap - more assets
repricing than liabilities - will benefit net interest income if rates are
rising and will detract from net interest income in a falling rate environment.
<TABLE>
<CAPTION>
(in millions) 1-3 4-6 7-12 1-5 Over
At June 30, 1995 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $ (18,647) $ 4,688 $ 1,949 $ 6,626 $ 5,384 $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity (a) 4,844 (3,816) 2,027 (3,665) 610 ---
Interest-Rate-Sensitivity Gap (13,803) 872 3,976 2,961 5,994 ---
Cumulative Interest-Rate
Sensitivity Gap (13,803) (12,931) (8,955) (5,994) --- ---
% of Total Assets (8)% (7)% (5)% (3)% --- ---
1-3 4-6 7-12 1-5 Over
At December 31, 1994 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
Balance Sheet $ (11,529) $ 4,393 $ 175 $ 4,269 $ 2,692 $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity (a) 1,622 (4,366) 587 1,581 576 ---
Interest-Rate-Sensitivity Gap (9,907) 27 762 5,850 3,268 ---
Cumulative Interest-Rate
Sensitivity Gap (9,907) (9,880) (9,118) (3,268) --- ---
% of Total Assets (6)% (6)% (5)% (2)% --- ---
<FN>
(a) Represents repricing effect of off-balance sheet positions, which include
interest rate swaps and options, financial futures, and similar agreements
that are used as part of the Corporation's overall asset/liability
management activities.
</FN>
</TABLE>
At June 30, 1995, the Corporation had $8,955 million more liabilities than
assets repricing within one year, amounting to 5.0% of total assets. This
compares with $9,118 million, or 5.3%, of total assets at December 31, 1994.
- 45 -
<PAGE>
Part I
Item 2 (continued)
At June 30, 1995, based on the Corporation's simulation models, which are
comprehensive simulations of net interest income under a variety of market
interest rate scenarios, net interest income sensitivity to a gradual 150 basis
point rise in market rates over the next twelve months was estimated at slightly
more than 5% of projected after-tax net income. At December 31, 1994, the
Corporation's interest rate sensitivity to a similar increase in market rates
was estimated at 3%.
Interest Rate Swaps: Interest rate swaps are one of the various financial
instruments used in the Corporation's asset/liability management activities.
Although the Corporation believes the results of its asset/liability management
activities should be evaluated on an integrated basis, taking into consideration
all on- and related off-balance sheet instruments and not a specific financial
instrument, the interest rate swap maturity table, which follows, provides an
indication of the Corporation's interest rate swap activity.
The table below summarizes maturities and weighted-average interest rates to be
received and paid on domestic and international interest rate swaps utilized in
the Corporation's asset/liability management at June 30, 1995. The table was
prepared under the assumption that variable interest rates remain constant at
June 30, 1995 levels and, accordingly, the actual interest rates to be received
or paid will be different to the extent that such variable rates fluctuate from
June 30, 1995 levels. Variable rates presented are generally based on the
short-term interest rates for relevant currencies (e.g., London Interbank
Offered Rate (LIBOR)). Basis swaps are interest rate swaps based on two floating
rate indices (e.g., LIBOR and prime). Forward starting swaps are interest rate
swap contracts that become effective at a future time.
<TABLE>
<CAPTION>
By maturities After
(in millions) 1995 1996 1997 1998 1999 1999 Total
---- ---- ---- ---- ---- ----- -----
Receive fixed swaps
<S> <C> <C> <C> <C> <C> <C> <C>
Notional amount $ 6,600 $ 8,004 $ 5,208 $ 1,657 $ 615 $ 3,354 $ 25,438
Weighted-average:
Receive rate 6.35% 6.43% 6.64% 6.49% 8.28% 7.37% 6.62%
Pay rate 5.89 5.04 5.81 5.84 6.89 6.36 5.69
Pay fixed swaps
Notional amount $ 4,901 $ 8,680 $ 3,507 $ 1,139 $ 827 $ 2,149 $ 21,203
Weighted-average:
Receive rate 6.23% 5.56% 6.10% 6.04% 6.29% 6.14% 5.92%
Pay rate 6.23 6.26 7.19 7.75 7.72 7.40 6.66
Basis Swaps
Notional amount $ 20 $ 1,058 $ 340 $ 352 $ 1,040 $ 172 $ 2,982
Weighted-average:
Receive rate 6.25% 6.04% 6.11% 6.32% 5.83% 6.49% 6.04%
Pay rate 6.25 5.88 6.09 6.08 6.03 6.51 6.02
Forward Starting
Notional amount $ 0 $ 1,342 $ 987 $ 506 $ 260 $ 368 $ 3,463
Weighted-average:
Receive rate 0.00% 6.03% 5.99% 6.13% 6.09% 7.08% 6.15%
Pay rate 0.00 7.12 7.57 7.00 7.00 7.52 7.26
--------- --------- --------- ------- -------- ------- --------
Total notional
amount (a) $ 11,521 $ 19,084 $ 10,042 $ 3,654 $ 2,742 $ 6,043 $ 53,086
========= ========= ========= ======= ======== ======= ========
<FN>
(a) At June 30, 1995, approximately $25 billion of the total notional amount
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,
$10 billion is expected to mature in 1995, $8 billion in 1996 and $4
billion in 1997 with the remaining $3 billion in 1998 and thereafter. The
unrecognized net gain related to these positions was approximately $75
million.
</FN>
</TABLE>
- 46 -
<PAGE>
Part I
Item 2 (continued)
CAPITAL AND LIQUIDITY
---------------------
The following capital and liquidity discussion focuses primarily on developments
since December 31, 1994. Accordingly, it should be read in conjunction with the
Capital and Liquidity section on pages B37-B40 of the Corporation's 1994 Form
10-K.
The Corporation's capital base at June 30, 1995 remained strong, with capital
ratios well in excess of regulatory guidelines. The Corporation's Tier 1 and
Total Capital ratios continued to approximate 8% and 12%, respectively. Total
capitalization (the sum of Tier 1 Capital and Tier 2 Capital) increased by $576
million during the first six months of 1995.
STOCKHOLDERS' EQUITY
Total stockholders' equity at June 30, 1995 was $11.4 billion, compared with
$10.7 billion at December 31, 1994. The $668 million increase from the 1994
year-end primarily reflected net income generated during the first six months of
1995 of $838 million and a $222 million favorable impact in the fair value of
available-for-sale securities accounted for under SFAS 115. These amounts were
partially offset by common and preferred stock dividends totaling $285 million
and the Corporation's common stock buyback program (in an amount, net of
issuance of stock under various employee benefit plans, of approximately $107
million). The market valuation of the available-for-sale securities does not
include the impact of related funding sources. For a further discussion of the
Corporation's common stock repurchase programs, see Note 6 - Common Stock on
page 13.
During the second quarter of 1995, the Corporation called all of the outstanding
shares of its 10% convertible preferred stock for redemption. Substantially all
of the 10% convertible preferred stock was converted prior to the redemption
date, at the option of the holders thereof, into approximately 7.6 million
shares of the Corporation's common stock. The shares of common stock issued upon
such conversion were issued from treasury.
LONG-TERM DEBT
The Corporation's long-term debt at June 30, 1995 was $7,202 million, a decrease
of $789 million from the 1994 year-end. The decrease resulted from maturities of
$1,218 million of the Corporation's long-term debt (including $499 million of
senior medium-term notes and $719 million of other senior notes) and the
redemption of $150 million of long-term debt. These decreases were partially
offset by additions to the Corporation's long-term debt of $582 million
(including $197 million of senior medium-term notes, $185 million of
subordinated medium-term notes and $200 million of other senior notes). See the
Liquidity Management section for further discussion of the Corporation's
long-term debt.
COMMON STOCK DIVIDENDS
In the second quarter of 1995, the Board of Directors of the Corporation
increased the quarterly dividend on outstanding shares of its common stock to
$.50 per share, an increase of 14% from $.44 per share. On an annual basis, this
represents an increase in the dividend rate to $2.00 per common share, from
$1.76 per common share. Future dividend policies will be determined by the Board
of Directors in light of the earnings and financial condition of the Corporation
and its subsidiaries and other factors, including applicable governmental
regulations and policies.
RISK-BASED CAPITAL RATIOS
At June 30, 1995, the Corporation's ratios of Tier 1 Capital to risk-weighted
assets and Total Capital to risk- weighted assets were 8.0% and 11.9%,
respectively, well in excess of the minimum ratios specified by the Federal
Reserve Board. These ratios, as well as the leverage ratio discussed below, do
not reflect any adjustment in stockholders' equity due to the adoption of SFAS
No. 115. At June 30, 1995, Chemical Bank's ratios of Tier 1 Capital and Total
Capital to risk-weighted assets, were 7.3% and 11.3%, respectively. At such
date, all of the Corporation's banking institutions were "well capitalized," as
defined by the Federal Reserve Board. To be "well capitalized," a banking
organization must have a Tier 1 Capital ratio of at least 6%, Total Capital
ratio of at least 10%, and Tier 1 leverage ratio of at least 5%.
- 47 -
<PAGE>
Part I
Item 2 (continued)
LEVERAGE RATIOS
The Tier 1 leverage ratio is defined as Tier 1 Capital (as defined under the
risk-based capital guidelines) divided by average total assets (net of allowance
for credit losses, goodwill and certain intangible assets). The minimum leverage
ratio is 3% for banking organizations that have well-diversified risk (including
no undue interest rate risk); excellent asset quality; high liquidity; good
earnings; and, in general, are considered strong banking organizations. Other
banking organizations are expected to have ratios of at least 4%-5% depending
upon their particular condition and growth plans. Higher capital ratios could be
required if warranted by the particular circumstances or risk profile of a given
banking organization. The Federal Reserve Board has not advised the Corporation
of any specific minimum Tier 1 leverage ratio applicable to it.
The Corporation's Tier 1 leverage ratio was 5.82% at June 30, 1995, compared
with 5.95% at December 31, 1994. At June 30, 1995, Chemical Bank's Tier 1
leverage ratio was 5.49%, compared with 5.72% at December 31, 1994.
The table which follows sets forth the Corporation's Tier 1 Capital, Tier 2
Capital and risk-weighted assets, and the Corporation's risk-based Tier 1
Capital and Total Capital Ratios and Tier 1 leverage ratios for the dates
indicated.
<TABLE>
<CAPTION>
Capital and Ratios Under Federal Reserve Bank Final Guidelines
June 30, December 31,
(in millions, except ratios) 1995 1994
--------- ------------
Tier 1 Capital
<S> <C> <C>
Common Stockholders' Equity $ 10,345 $ 9,700
Nonredeemable Preferred Stock 1,250 1,450
Minority Interest 65 63
Less: Goodwill 1,031 1,068
Non-Qualifying Intangible Assets 128 142
---------- ----------
Tier 1 Capital $ 10,501 $ 10,003
---------- ----------
Tier 2 Capital
Long-Term Debt Qualifying as Tier 2 $ 3,482 $ 3,519
Qualifying Allowance for Credit Losses 1,651 1,536
---------- ----------
Tier 2 Capital $ 5,133 $ 5,055
---------- ----------
Total Qualifying Capital $ 15,634 $ 15,058
========== ==========
Risk-Weighted Assets (a) $ 131,333 $ 121,939
Tier 1 Capital Ratio (b) 8.00% 8.20%
Total Capital Ratio (b) 11.90% 12.35%
Tier 1 Leverage Ratio (b) 5.82% 5.95%
<FN>
(a) Includes off-balance sheet risk-weighted assets in the amount of $41,089
million, and $37,157 million, respectively, at June 30, 1995 and December
31, 1994.
(b) Excluding the Corporation's securities subsidiary, Chemical Securities
Inc., the June 30, 1995 Tier 1 Capital, Total Capital and Tier 1 Leverage
ratios were 7.76%, 11.40% and 6.06%, respectively, compared with 8.02%,
11.97% and 6.26%, respectively, at December 31, 1994.
</FN>
</TABLE>
- 48 -
<PAGE>
Part I
Item 2 (continued)
LIQUIDITY MANAGEMENT
The primary source of liquidity for the bank subsidiaries of the Corporation
derives from their ability to generate core deposits (which includes all
deposits except noninterest-bearing time deposits, foreign deposits and
certificates of deposit of $100,000 or more). The Corporation considers funds
from such sources to comprise its subsidiary banks' "core" deposit base because
of the historical stability of such sources of funds. The average core deposits
at the Corporation's bank subsidiaries for the 1995 first half were $55 billion,
a decrease from $59 billion for the comparable 1994 period. These deposits fund
a portion of the Corporation's asset base, thereby reducing the Corporation's
reliance on other, more volatile, sources of funds. Average core deposits as a
percentage of average loans were 69% for the first half of 1995, compared with
79% for the same period a year ago.
The Corporation is an active participant in the capital markets. In addition to
issuing commercial paper and medium-term notes, the Corporation raises funds
through the issuance of long-term debt, common stock and preferred stock. During
the first six months of 1995, the Corporation issued $582 million of long-term
debt, including $382 million through its medium-term note program.
In June 1995, the international credit rating agency IBCA upgraded its rating of
the Corporation's long-term unsecured deposits to A-plus from A and its rating
of Chemical Bank's long-term deposits to AA-minus from A- plus. Chemical Bank's
short-term deposit rating was also increased to A-1-plus from A-1.
The following comments apply to the Consolidated Statement of Cash Flows.
Cash and due from banks decreased $1.1 billion during the first six months of
1995, as net cash used in investing activities exceeded the net cash provided by
operating and financing activities. The $5.6 billion net cash used by investing
activities was primarily impacted by cash outflows from purchases of securities
($29.1 billion) and from net loans ($6.1 billion), partially offset by cash
inflows from the sales and maturities of securities ($25.3 billion and $3.3
billion, respectively). The $2.2 billion net cash provided by operating
activities was principally due to a reduction in trading-related assets and cash
inflows from earnings. The $2.3 billion net cash provided by financing
activities was primarily due to an increase in Federal funds purchased,
securities sold under repurchase agreements and other borrowed funds ($5.1
billion) partially offset by decreases in net deposits ($1.6 billion) and
long-term debt ($.8 billion).
Cash and due from banks increased $2.6 billion during the first six months of
1994, as net cash provided by operating and financing activities exceeded net
cash used by investing activities. The $2.7 billion net cash provided by
financing activities was due to increases in Federal funds purchased, securities
sold under repurchase agreements and other borrowed funds ($8.5 billion),
partially offset by decreases in net deposits ($6.3 billion). The $1.2 billion
of net cash provided by operating activities was principally due to earnings
adjusted for noncash charges and credits. The $1.3 billion net cash used in
investing activities was largely the result of cash outflows from purchases of
securities ($15.5 billion) and from Federal funds sold and securities purchased
under resale agreements ($2.2 billion), partially offset by cash inflows from
the sales and maturities of securities ($11.3 billion and $3.9 billion,
respectively), as well as decreases in deposits with banks ($1.6 billion).
The Corporation's anticipated cash requirements (on a parent company-only basis)
for the remainder of 1995 include approximately $800 million 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 costs of the initial phase of the aforementioned $1.2 billion stock
buyback program, and other parent company operations. The Corporation considers
the sources of liquidity available to the parent company to be more than
sufficient to meet its obligations. The sources of liquidity available to the
Corporation (on a parent company-only basis) include its liquid assets
(including deposits with its bank subsidiaries and short-term advances to and
repurchase agreements with its securities subsidiaries) as well as dividends or
the repayment of intercompany advances from its bank and non-bank subsidiaries.
In addition, as of June 30, 1995, the Corporation had available to it $750
million in committed credit facilities from a syndicate of domestic and
international banks. The facilities included a $450 million 48-month facility
and a $300 million 364-day facility.
- 49 -
<PAGE>
Part I
Item 2 (continued)
SUPERVISION AND REGULATION
--------------------------
The following supervision and regulation discussion focuses primarily on
developments since December 31, 1994. Accordingly, it should be read in
conjunction with the Supervision and Regulation section on pages A2-A6 of the
Corporation's 1994 Form 10-K.
DIVIDENDS
At June 30, 1995, in accordance with the dividend restrictions applicable to
them, the Corporation's bank subsidiaries could, during 1995, without the
approval of their relevant banking regulators, pay dividends of approximately
$947 million to their respective bank holding companies, plus an additional
amount equal to their net income from July 1, 1995 through the date in 1995 of
any such dividend payment.
In addition to the dividend restrictions described above, the Federal Reserve
Board, the Office of the Comptroller of the Currency and the FDIC have authority
under the Financial Institutions Supervisory Act to prohibit or to limit the
payment of dividends by the banking organizations they supervise, including the
Corporation and its subsidiaries that are banks or bank holding companies, if,
in the banking regulator's opinion, payment of a dividend would constitute an
unsafe or unsound practice in light of the financial condition of the banking
organization.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the FDIC to establish a risk-based assessment system for FDIC deposit
insurance. FDICIA also contains provisions limiting certain activities and
business methods of depository institutions. Finally, FDICIA provides for
expanded regulation of depository institutions and their affiliates, including
parent holding companies, by such institutions' appropriate Federal banking
regulator. Each of the Corporation's banking institutions were "well
capitalized" as that term is defined under the various regulations promulgated
under FDICIA and, therefore, the Corporation does not expect such regulations to
have a material adverse impact on their business operations.
OTHER EVENTS
------------
JOINT VENTURE WITH MELLON BANK CORPORATION
The Corporation and Mellon Bank Corporation have formed a joint venture that
will focus on providing stock transfer and related shareholder services to
publicly-held companies. The joint venture is called Chemical Mellon Shareholder
Services, and is a 50/50 partnership, with Mellon Bank Corporation and the
Corporation sharing equally in the joint venture's initial capitalization,
including investments in new technology.
This joint venture was accounted for as an equity investment effective January
1, 1995 with revenues and expenses of the affected business units recorded
within other revenue.
AGREEMENT TO SELL CHEMICAL BANK NEW JERSEY NATIONAL ASSOCIATION
In March 1995, the Corporation entered into an agreement to sell Chemical New
Jersey Holdings, Inc. and its subsidiaries, including Chemical Bank New Jersey
National Association, to PNC for approximately $500 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 Corporation expects to complete the transaction in the fourth quarter of
1995.
- 50 -
<PAGE>
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION and Subsidiaries
Average Consolidated Balance Sheet, Interest and Rates
(Taxable-Equivalent Interest and Rates; in millions)
Three Months Ended Three Months Ended
June 30, 1995 June 30, 1994
-------------------------------------- -----------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 3,157 $ 67 8.34% $ 4,606 $ 100 8.66%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 14,774 212 5.74% 11,732 121 4.13%
Trading Assets-Debt and Equity
Instruments 11,389 205 7.17% 12,042 191 6.32%
Securities:
Held-to-Maturity 8,390 142 6.80% 9,309 164 7.08%
Available-for-Sale 19,548 375 7.66%(b) 17,285 270 6.25%(b)
Loans 81,846 1,772 8.67% 74,144 1,377 7.44%
---------- ------- ---------- -------
Total Interest-Earning Assets 139,104 2,773 7.98% 129,118 2,223 6.89%
------- -------
Allowance for Losses (2,471) (3,027)
Cash and Due from Banks 7,593 8,618
Risk Management Instruments 23,212 15,984
Other Assets 12,950 13,373
---------- ----------
Total Assets $ 180,388 $ 164,066
========== ==========
LIABILITIES
Domestic Retail Deposits $ 41,287 $ 392 3.80% $ 44,308 $ 273 2.48%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,945 82 5.55% 5,202 44 3.45%
Deposits in Foreign Offices 28,239 457 6.43% 22,680 226 3.94%
---------- -------- ---------- --------
Total Time and Savings Deposits 75,471 931 4.93% 72,190 543 3.01%
---------- -------- ---------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 24,525 342 5.57% 18,546 189 4.08%
Commercial Paper 3,729 55 5.92% 2,566 25 3.81%
Other Borrowings 8,225 139 6.82% 9,391 145 6.20%
---------- -------- ---------- --------
Total Short-Term and
Other Borrowings 36,479 536 5.89% 30,503 359 4.71%
Long-Term Debt 7,542 138 7.32% 8,370 132 6.34%
---------- -------- ---------- --------
Total Interest-Bearing Liabilities 119,492 1,605 5.37% 111,063 1,034 3.73%
---------- -------- ---------- --------
Demand Deposits 20,034 21,788
Risk Management Instruments 24,087 14,148
Other Liabilities 5,708 6,015
---------- ----------
Total Liabilities 169,321 153,014
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,373 1,704
Common Stockholders' Equity 9,694 9,348
---------- ----------
Total Stockholders' Equity 11,067 11,052
---------- ----------
Total Liabilities and
Stockholders' Equity $ 180,388 $ 164,066
========== ==========
INTEREST RATE SPREAD 2.61% 3.16%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $1,168(a) 3.36% $ 1,189(a) 3.69%
====== ===== ======== =====
<FN>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the three months ended June 30, 1995 and June 30, 1994, the annualized
rate for securities available-for-sale based on historical cost was 7.62%
and 6.19%, respectively.
</FN>
</TABLE>
- 51 -
<PAGE>
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION and Subsidiaries
Average Consolidated Balance Sheet, Interest and Rates
(Taxable-Equivalent Interest and Rates; in millions)
Six Months Ended Six Months Ended
June 30, 1995 June 30, 1994
--------------------------------------- ------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 3,942 $ 149 7.57% $ 4,878 $ 194 7.98%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 14,608 431 5.94% 11,809 221 3.77%
Trading Assets-Debt and Equity
Instruments 11,151 404 7.28% 11,960 364 6.12%
Securities:
Held-to-Maturity 8,459 291 6.94% 9,735 339 7.02%
Available-for-Sale 19,379 735 7.63%(b) 16,765 512 6.15%(b)
Loans 79,911 3,437 8.67% 74,312 2,688 7.29%
--------- -------- --------- --------
Total Interest-Earning Assets 137,450 $ 5,447 7.98% 129,459 $ 4,318 6.72%
-------- --------
Allowance for Losses (2,479) (3,057)
Cash and Due from Banks 7,566 8,725
Risk Management Instruments 22,415 15,690
Other Assets 12,989 13,292
---------- ----------
Total Assets $ 177,941 $ 164,109
========== ==========
LIABILITIES
Domestic Retail Deposits $ 41,313 $ 760 3.71% $ 45,173 $ 521 2.32%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,928 164 5.59% 5,325 90 3.44%
Deposits in Foreign Offices 28,168 858 6.11% 22,825 452 3.97%
---------- -------- ---------- --------
Total Time and Savings Deposits 75,409 1,782 4.75% 73,323 1,063 2.92%
---------- -------- ---------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 23,863 675 5.70% 17,310 326 3.80%
Commercial Paper 3,527 102 5.84% 2,488 46 3.69%
Other Borrowings 8,223 278 6.82% 9,526 279 5.90%
---------- -------- ---------- --------
Total Short-Term and
Other Borrowings 35,613 1,055 5.97% 29,324 651 4.47%
Long-Term Debt 7,697 278 7.28% 8,434 267 6.39%
---------- -------- ---------- --------
Total Interest-Bearing Liabilities 118,719 3,115 5.28% 111,081 1,981 3.59%
---------- -------- ---------- --------
Demand Deposits 20,241 22,204
Risk Management Instruments 22,396 13,611
Other Liabilities 5,681 6,110
---------- ----------
Total Liabilities 167,037 153,006
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,412 1,679
Common Stockholders' Equity 9,492 9,424
---------- ----------
Total Stockholders' Equity 10,904 11,103
---------- ----------
Total Liabilities and
Stockholders' Equity $ 177,941 $ 164,109
========== ==========
INTEREST RATE SPREAD 2.70% 3.13%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 2,332(a) 3.42% $ 2,337(a) 3.64%
======== ===== ======== =====
<FN>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the six months ended June 30, 1995 and June 30, 1994, the annualized
rate for securities available-for-sale based on historical cost was 7.56%
and 6.15%, respectively.
</FN>
</TABLE>
- 52 -
<PAGE>
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1995 1994
--------------------- ---------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Interest Income
<S> <C> <C> <C> <C> <C>
Loans $ 1,770 $ 1,661 $ 1,575 $ 1,473 $ 1,375
Securities 513 505 445 422 432
Trading Assets 205 199 177 181 191
Federal Funds Sold and Securities
Purchased Under Resale Agreements 212 219 178 151 121
Deposits with Banks 67 82 91 86 100
--------- -------- -------- -------- --------
Total Interest Income 2,767 2,666 2,466 2,313 2,219
--------- -------- -------- -------- --------
Interest Expense
Deposits 931 851 718 597 543
Short-Term and Other Borrowings 536 519 444 405 359
Long-Term Debt 138 140 135 134 132
--------- -------- -------- -------- --------
Total Interest Expense 1,605 1,510 1,297 1,136 1,034
--------- -------- -------- -------- --------
Net Interest Income 1,162 1,156 1,169 1,177 1,185
Provision for Losses 120 120 85 100 160
--------- -------- -------- -------- --------
Net Interest Income After Provision For Losses 1,042 1,036 1,084 1,077 1,025
--------- -------- -------- -------- --------
Noninterest Revenue
Trust and Investment Management Fees 97 91 99 104 108
Corporate Finance and Syndication Fees 129 119 133 97 93
Service Charges on Deposit Accounts 76 74 78 78 75
Fees for Other Banking Services 290 294 294 285 279
Trading Revenue 171 56 45 212 203
Securities Gains (Losses) 69 (18) 1 6 13
Other Revenue 129 254 165 202 96
--------- -------- -------- -------- --------
Total Noninterest Revenue 961 870 815 984 867
--------- -------- -------- -------- --------
Noninterest Expense
Salaries 557 546 571 574 542
Employee Benefits 117 107 110 108 102
Occupancy Expense 129 135 142 145 140
Equipment Expense 97 101 107 100 91
Foreclosed Property Expense (14) (7) 2 2 2
Restructuring Charge --- --- 260 --- ---
Other Expense 362 364 401 382 404
--------- -------- -------- -------- --------
Total Noninterest Expense 1,248 1,246 1,593 1,311 1,281
--------- -------- -------- -------- --------
Income Before Income Tax Expense and Effect of
Accounting Change 755 660 306 750 611
Income Tax Expense 302 264 127 311 254
--------- -------- -------- ------- --------
Income Before Effect of Accounting Change 453 396 179 439 357
Effect of Change in Accounting Principle --- (11) --- --- ---
--------- -------- --------- -------- --------
Net Income $ 453 $ 385 $ 179 $ 439 $ 357
========= ======== ========= ======== ========
Net Income Applicable To Common Stock $ 427 $ 355 $ 149 $ 396 $ 324
========= ======== ========= ======== ========
Earnings Per Share:
Primary:
Income Before Effect of Accounting Change $ 1.72 $ 1.49 $ 0.61 $ 1.59 $ 1.27
Effect of Change in Accounting Principle --- (0.04) --- --- ---
--------- -------- --------- -------- --------
Net Income $ 1.72 $ 1.45 $ 0.61 $ 1.59 $ 1.27
========= ======== ========= ======== ========
Assuming Full Dilution:
Income Before Effect of Accounting Change $ 1.68 $ 1.46 $ 0.61 $ 1.56 $ 1.25
Effect of Change in Accounting Principle --- (0.04) --- --- ---
--------- -------- --------- -------- --------
Net Income $ 1.68 $ 1.42 $ 0.61 $ 1.56 $ 1.25
========= ======== ========= ======== ========
</TABLE>
- 53 -
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is made to page A19 of the Corporation's 1994 Form 10-K
relating to the investigation commenced by the Securities and
Exchange Commission pertaining to the $70 million loss incurred by
the Corporation in the fourth quarter of 1994 resulting from
unauthorized foreign exchange transactions involving the Mexican
peso.
The Corporation is cooperating with this investigation. The
Corporation cannot determine at this time the outcome of the
investigation but believes it will not have a material adverse
effect on the consolidated financial condition of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The following is a summary of matters submitted to vote at the
Annual Meeting of Stockholders of the Corporation. The Annual
Meeting of the Stockholders was held on May 16, 1995. A total of
214,981,882 shares, or 89.3% of the 240,754,639 shares entitled to
vote at the Annual Meeting, were represented at the meeting.
(a) Election of Directors
---------------------
The following twenty (20) directors were elected to hold office
until the 1996 Annual Meeting or until their successors are elected
and have qualified.
Votes Votes
Received Withheld
-------- --------
Frank A. Bennack, Jr. 213,051,474 1,930,408
Michel C. Bergerac 213,117,446 1,864,436
Randolph W. Bromery 212,983,592 1,998,290
Charles W. Duncan, Jr. 213,056,167 1,925,715
Melvin R. Goodes 213,129,124 1,852,758
George V. Grune 213,117,290 1,864,592
William B. Harrison, Jr. 213,121,938 1,859,944
Harold S. Hook 213,150,212 1,831,670
Helene L. Kaplan 213,107,433 1,874,449
J. Bruce Llewellyn 213,041,582 1,940,300
John P. Mascotte 213,077,342 1,904,540
John F. McGillicuddy 212,943,335 2,038,547
Edward D. Miller 213,081,757 1,900,125
Walter V. Shipley 213,029,715 1,952,167
Andrew C. Sigler 213,106,081 1,875,801
Michael I. Sovern 213,090,880 1,891,002
John R. Stafford 213,141,502 1,840,380
W. Bruce Thomas 213,074,903 1,906,979
Marina v.N. Whitman 213,066,377 1,915,505
Richard D. Wood 212,989,133 1,992,749
(b) (1) Ratifying Independent Accountants
---------------------------------
o A proposal to ratify Price Waterhouse as independent accountants
was approved by 99.6% of the votes cast. The proposal received a
"for" vote of 213,228,324 and an "against" vote of 910,263. The
number of votes abstaining was 843,295. There were no broker
non-votes.
- 54 -
<PAGE>
(2) Amendment to Employee Stock Purchase Plan
-----------------------------------------
o A proposal to amend the Employee Stock Purchase Plan by extending
its term to December 31, 2001, was approved by 97.8% of the votes
cast. The proposal received a "for" vote of 208,651,535 and an
"against" vote of 4,626,401. The number of votes abstaining was
1,703,946. There were no broker non- votes.
(3) Stockholders Proposal Re: Disclosures of Political Contributions
----------------------------------------------------------------
o A proposal by Evelyn Y. Davis that management supply detailed
disclosure of political contributions was rejected by 95.3% of the
votes cast. The vote "for" was 8,683,767 and the vote "against" was
175,762,434. The number of votes abstaining was 8,505,752 and there
were 22,029,929 broker non- votes.
(4) Stockholders Proposal Re: Voting of Unmarked Proxies
----------------------------------------------------
o A proposal by Martha J. Wolff that future unmarked proxies not be
voted on any issue where no direction has been given by the
proxy-holder was rejected by 90.0% of the votes cast. The vote
"for" was 18,562,012 and the vote "against" was 167,111,626. The
number of votes abstaining was 7,278,315 and there were 22,029,929
broker non-votes.
(5) Stockholders Proposal Re: Utilization of Financial Intermediaries
in Emerging Economies
-----------------------------------------------------------------
o A proposal by the Sisters of Charity of Saint Elizabeth and other
religious groups regarding the utilization of financial
intermediaries in emerging economies was rejected by 95.3% of the
votes cast. The vote "for" was 8,684,101 and the vote "against" was
175,304,339. The number of votes abstaining was 8,963,496 and there
were 22,029,946 broker non-votes.
(6) Stockholders Proposal Re: Cumulative Voting
--------------------------------------------
o A proposal by John J. Gilbert that cumulative voting be adopted in
the election of directors was rejected by 75.4% of the votes cast.
The vote "for" was 45,565,129 and the vote "against" was
139,834,501. The number of votes abstaining was 7,552,323 and there
were 22,029,929 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
11 - Computation of net income per share.
12(a) - Computation of ratio of earnings to fixed charges.
12(b) - Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements.
27 - Financial Data Schedule.
(B) Reports on Form 8-K:
The Corporation filed three reports on Form 8-K during the
quarter ended June 30, 1995, as follows:
Form 8-K Dated April 19, 1995: April 18, 1995 Press Release
- Results of Operations for First Quarter 1995.
Form 8-K Dated May 5, 1995: April 28, 1995 Notice of
Redemption pertaining to the Corporation's 10% Convertible
Preferred Stock.
Form 8-K Dated June 20, 1995: June 20, 1995 Press Release -
Common Stock Dividend Increase Announced.
- 55 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHEMICAL BANKING CORPORATION
----------------------------
(Registrant)
Date August 14, 1995 By /s/Joseph L. Sclafani
--------------- ---------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
- 56 -
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
----------- -------- ---------------------
11 Computation of net income 58
per share
12 (a) Computation of ratio of 59
earnings to fixed charges
12 (b) Computation of ratio of 60
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 61
- 57 -
<PAGE>
EXHIBIT 11
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of net income per share
In the 1995 second quarter, the Corporation changed its reporting of earnings
per share ("EPS") from reporting simple EPS, (which is based solely on the
average number of common shares outstanding), to reporting primary and fully
diluted EPS (which are based on the average number of common and common
equivalent shares outstanding).
Previously, the Corporation reported simple EPS, since the differences between
simple EPS and primary EPS or simple EPS and fully diluted EPS were not material
(less than 3%). Primary and fully diluted EPS are now being reported for all
periods presented.
Net income for primary and fully diluted earnings per share are computed by
subtracting from the applicable earnings the dividend requirements on preferred
stock to arrive at earnings applicable to common stock and dividing this amount
by the weighted average number of common and common equivalent shares
outstanding during the period.
<TABLE>
<CAPTION>
(in millions, except per share amounts): Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1995 1994 1995 1994
---- ---- ---- ----
EARNINGS PER SHARE
Primary
Earnings:
<S> <C> <C> <C> <C>
Income Before Effect of Accounting Change $ 453 $ 357 $ 849 $ 676
Effect of Change in Accounting Principle --- --- (11)(a) ---
-------- ------- --------- --------
Net Income $ 453 $ 357 $ 838 $ 676
Less: Preferred Stock Dividend Requirements 26 33 56 65
-------- ------- --------- --------
Net Income Applicable to Common Stock $ 427 $ 324 $ 782 $ 611
======== ======= ========= ========
Shares:
Average Common and Common Equivalent
Shares Outstanding 248.3 255.1 246.8 255.2
======== ======= ======== ========
Primary Earnings Per Share:
Income Before Effect of Accounting Change $ 1.72 $ 1.27 $ 3.21 $ 2.39
Effect of Change in Accounting Principle --- --- (0.04)(a) ---
-------- ------- --------- --------
Net Income $ 1.72 $ 1.27 $ 3.17 $ 2.39
======== ======= ========= ========
Assuming Full Dilution
Earnings:
Net Income Applicable to Common Stock $ 427 $ 324 $ 782 $ 611
Add: Applicable Dividend on Convertible
Preferred Stock 2 5 7 10
-------- ------- --------- --------
Adjusted Net Income $ 429 $ 329 $ 789 $ 621
======== ======= ========= ========
Shares:
Average Common and Common Equivalent
Shares Outstanding 248.3 255.1 246.8 255.2
Additional Shares Issuable Upon Exercise of Stock
Options for maximum dilutive effect and Conversion
of Preferred Stock (b) 6.5 7.9 9.0 7.8
-------- ------- --------- --------
Adjusted Shares of Common and Equivalent Shares
Outstanding 254.8 263.0 255.8 263.0
======== ======= ========= ========
Earnings Per Share Assuming Full Dilution:
Income Before Effect of Accounting Change $ 1.68 $ 1.25 $ 3.12 $ 2.36
Effect of Change in Accounting Principle --- --- (0.04)(a) ---
-------- ------- --------- --------
Net Income $ 1.68 $ 1.25 $ 3.08 $ 2.36
======== ======= ========= ========
<FN>
(a) On January 1, 1995, the Corporation adopted SFAS 106 for accounting for
other postretirement benefits relating to the Corporation's foreign plans.
(b) During the second quarter of 1995, the Corporation called all of the
outstanding shares of its 10% convertible preferred stock for redemption.
Substantially all of the 10% convertible preferred stock was converted, at
the option of the holders thereof, to common stock. The common stock was
issued from treasury.
</FN>
</TABLE>
<PAGE>
-58-
EXHIBIT 12(a)
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
(in millions, except ratios)
Six Months Ended
June 30, 1995
----------------
EXCLUDING INTEREST ON DEPOSITS
Income before Income Taxes and Effect of
Accounting Change $ 1,415
--------
Fixed charges:
Interest expense 1,333
One third of rents, net of income from subleases (a) 46
--------
Total fixed charges 1,379
Less: Equity in undistributed income of affiliates (84)
--------
Earnings before taxes, fixed charges and effect of
accounting change, excluding capitalized interest $ 2,710
========
Fixed charges, as above $ 1,379
========
Ratio of earnings to fixed charges 1.97
========
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 1,379
Add: Interest on deposits 1,782
--------
Total fixed charges and interest on deposits $ 3,161
========
Earnings before taxes, fixed charges and effect of accounting
change, excluding capitalized interest, as above $ 2,710
Add: Interest on deposits 1,782
--------
Total earnings before taxes, fixed charges, effect of accounting
change and interest on deposits $ 4,492
========
Ratio of earnings to fixed charges 1.42
========
(a) The proportion deemed representative of the interest factor.
-59-
<PAGE>
EXHIBIT 12(b)
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
(in millions, except ratios)
Six Months Ended
June 30, 1995
----------------
EXCLUDING INTEREST ON DEPOSITS
Income before Income Taxes and Effect
of Accounting Change $ 1,415
--------
Fixed charges:
Interest expense 1,333
One third of rents, net of income from subleases (a) 46
--------
Total fixed charges 1,379
Equity in undistributed income of affiliates (84)
--------
Earnings before taxes, fixed charges and effect of accounting
change, excluding capitalized interest $ 2,710
========
Fixed charges, as above $ 1,379
Preferred stock dividends 56
--------
Fixed charges including preferred stock dividends $ 1,435
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.89
========
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends $ 1,435
Add: Interest on deposits 1,782
--------
Total fixed charges including preferred stock
dividends and interest on deposits $ 3,217
========
Earnings before taxes, fixed charges and effect of accounting change,
excluding capitalized interest, as above $ 2,710
Add: Interest on deposits 1,782
--------
Total earnings before taxes, fixed charges, effect of account change
and interest on deposits $ 4,492
========
Ratio of earnings to fixed charges
and preferred stock dividend requirement 1.40
========
(a) The proportion deemed representative of the interest factor.
-60-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000019617
<NAME> CHEMICAL BANKING CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 7,756
<INT-BEARING-DEPOSITS> 2,903
<FED-FUNDS-SOLD> 12,883
<TRADING-ASSETS> 30,471
<INVESTMENTS-HELD-FOR-SALE> 19,965
<INVESTMENTS-CARRYING> 8,287
<INVESTMENTS-MARKET> 8,285
<LOANS> 84,675
<ALLOWANCE> 2,430
<TOTAL-ASSETS> 178,531
<DEPOSITS> 94,889
<SHORT-TERM> 39,337
<LIABILITIES-OTHER> 24,561
<LONG-TERM> 7,202
<COMMON> 255
0
1,250
<OTHER-SE> 9,875
<TOTAL-LIABILITIES-AND-EQUITY> 178,531
<INTEREST-LOAN> 3,431
<INTEREST-INVEST> 1,018
<INTEREST-OTHER> 580
<INTEREST-TOTAL> 5,433
<INTEREST-DEPOSIT> 1,782
<INTEREST-EXPENSE> 3,115
<INTEREST-INCOME-NET> 2,318
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 2,494
<INCOME-PRETAX> 1,415
<INCOME-PRE-EXTRAORDINARY> 849
<EXTRAORDINARY> 0
<CHANGES> (11)
<NET-INCOME> 838
<EPS-PRIMARY> 3.17
<EPS-DILUTED> 3.08
<YIELD-ACTUAL> 3.42
<LOANS-NON> 1,023
<LOANS-PAST> 390
<LOANS-TROUBLED> 41
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,480
<CHARGE-OFFS> 384
<RECOVERIES> 94
<ALLOWANCE-CLOSE> 2,430
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
