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 September 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 250,037,942
- --------------------------- -----------
Number of shares outstanding of each of the issuer's classes of common stock on
October 31, 1995.
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FORM 10-Q INDEX
Part I Page
- ------ ----
<S> <C>
Item 1 Financial Statements - Chemical Banking Corporation
and Subsidiaries:
Consolidated Balance Sheet at September 30, 1995 and
December 31, 1994. 3
Consolidated Statement of Income for the three months
ended September 30, 1995 and September 30, 1994. 4
Consolidated Statement of Income for the nine months
ended September 30, 1995 and September 30, 1994. 5
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1995 and September 30, 1994. 6
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 1995 and September 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 6 Exhibits and Reports on Form 8-K. 54
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Part I
Item 1.
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions)
September 30, December 31,
1995 1994
------------- ------------
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 7,118 $ 8,832
Deposits with Banks 3,690 5,649
Federal Funds Sold and Securities
Purchased Under Resale Agreements 13,348 12,797
Trading Assets:
Debt and Equity Instruments 14,080 11,093
Risk Management Instruments 19,750 17,709
Securities:
Held-to-Maturity (Market Value: $8,088 and $8,106) 8,074 8,566
Available-for-Sale 26,017 18,431
Loans (Net of Unearned Income: $510 and $460) 85,623 78,767
Allowance for Credit Losses (2,405) (2,480)
Premises and Equipment 2,134 2,134
Due from Customers on Acceptances 1,200 1,088
Accrued Interest Receivable 1,301 1,190
Assets Acquired as Loan Satisfactions 56 210
Assets Held for Accelerated Disposition 202 526
Other Assets 7,665 6,911
---------- ----------
TOTAL ASSETS $ 187,853 $ 171,423
========== ==========
LIABILITIES
Deposits:
Demand (Noninterest Bearing) $ 18,482 $ 21,399
Time and Savings 45,826 46,799
Foreign 32,480 28,308
---------- ----------
Total Deposits 96,788 96,506
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 30,911 23,098
Other Borrowed Funds 14,690 11,843
Acceptances Outstanding 1,203 1,104
Accounts Payable and Accrued Liabilities 2,790 2,361
Other Liabilities 22,103 17,808
Long-Term Debt 7,537 7,991
---------- ----------
TOTAL LIABILITIES 176,022 160,711
---------- ----------
COMMITMENTS AND CONTINGENCIES (See Note 10)
STOCKHOLDERS' EQUITY
Preferred Stock 1,250 1,450
Common Stock (Issued 254,930,904 and 254,009,187 Shares) 255 254
Capital Surplus 6,444 6,544
Retained Earnings 4,153 3,263
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (135) (438)
Treasury Stock, at Cost (2,423,717 and 9,497,533 Shares) (136) (361)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 11,831 10,712
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 187,853 $ 171,423
========== ==========
The Notes to Financial Statements are an integral part of these Statements.
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Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended September 30,
(in millions, except per share data)
1995 1994
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $ 1,844 $ 1,473
Securities 535 422
Trading Assets 211 181
Federal Funds Sold and Securities
Purchased Under Resale Agreements 181 151
Deposits with Banks 62 86
--------- --------
Total Interest Income 2,833 2,313
--------- --------
INTEREST EXPENSE
Deposits 943 597
Short-Term and Other Borrowings 559 405
Long-Term Debt 134 134
--------- --------
Total Interest Expense 1,636 1,136
--------- --------
NET INTEREST INCOME 1,197 1,177
Provision for Losses 122 100
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 1,075 1,077
--------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 96 104
Corporate Finance and Syndication Fees 157 97
Service Charges on Deposit Accounts 75 78
Fees for Other Financial Services 307 285
Trading Revenue 213 212
Securities Gains 47 6
Other Revenue 82 202
--------- --------
Total Noninterest Revenue 977 984
--------- --------
NONINTEREST EXPENSE
Salaries 616 574
Employee Benefits 104 108
Occupancy Expense 131 145
Equipment Expense 97 100
Foreclosed Property Expense -- 2
Other Expense 309 382
--------- --------
Total Noninterest Expense 1,257 1,311
--------- --------
INCOME BEFORE INCOME TAX EXPENSE 795 750
Income Tax Expense 318 311
--------- --------
NET INCOME $ 477 $ 439
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 452 $ 396
========= ========
EARNINGS PER SHARE:
Primary $ 1.74 $ 1.59
========= ========
Assuming Full Dilution $ 1.70 $ 1.56
========= ========
The Notes to Financial Statements are an integral part of these Statements.
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Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended September 30,
(in millions, except per share data)
1995 1994
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $ 5,275 $ 4,155
Securities 1,553 1,270
Trading Assets 615 545
Federal Funds Sold and Securities
Purchased Under Resale Agreements 612 372
Deposits with Banks 211 280
--------- --------
Total Interest Income 8,266 6,622
--------- --------
INTEREST EXPENSE
Deposits 2,725 1,660
Short-Term and Other Borrowings 1,614 1,056
Long-Term Debt 412 401
--------- --------
Total Interest Expense 4,751 3,117
--------- --------
NET INTEREST INCOME 3,515 3,505
Provision for Losses 362 465
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 3,153 3,040
--------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 284 322
Corporate Finance and Syndication Fees 405 272
Service Charges on Deposit Accounts 225 222
Fees for Other Financial Services 891 854
Trading Revenue 440 600
Securities Gains 98 65
Other Revenue 465 447
--------- --------
Total Noninterest Revenue 2,808 2,782
--------- --------
NONINTEREST EXPENSE
Salaries 1,719 1,634
Employee Benefits 328 329
Occupancy Expense 395 431
Equipment Expense 295 275
Foreclosed Property Expense (21) 39
Restructuring Charge --- 48
Other Expense 1,035 1,160
--------- --------
Total Noninterest Expense 3,751 3,916
--------- --------
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT OF
ACCOUNTING CHANGE 2,210 1,906
Income Tax Expense 884 791
--------- --------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE 1,326 1,115
Effect of Change in Accounting Principle (11) ---
--------- --------
NET INCOME $ 1,315 $ 1,115
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 1,234 $ 1,007
========= ========
EARNINGS PER SHARE:
Primary:
Income Before Effect of Accounting Change $ 4.95 $ 3.98
Effect of Change in Accounting Principle (0.04) ---
--------- --------
Net Income $ 4.91 $ 3.98
========= ========
Assuming Full Dilution:
Income Before Effect of Accounting Change $ 4.66 $ 3.92
Effect of Change in Accounting Principle (0.04) ---
--------- --------
Net Income $ 4.62 $ 3.92
========= ========
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
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Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(in millions)
1995 1994
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 1,315 $ 1,115
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Losses 362 465
Restructuring Charge --- 48
Depreciation and Amortization 280 276
Net Change In:
Trading-Related Assets (1,145) 742
Accrued Interest Receivable (111) 28
Accrued Interest Payable 40 38
Other, Net (19) (838)
-------- --------
Net Cash Provided by Operating Activities 722 1,874
-------- --------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 1,959 800
Federal Funds Sold and Securities Purchased Under Resale Agreements (1,386) (2,617)
Loans Due to Sales and Securitizations 7,212 6,085
Other Loans, Net (14,289) (8,001)
Other, Net (248) (210)
Proceeds from the Maturity of Held-to-Maturity Securities 1,194 2,465
Purchases of Held-to-Maturity Securities (733) (1,056)
Proceeds from the Maturity of Available-for-Sale Securities 4,268 2,555
Proceeds from the Sale of Available-for-Sale Securities 36,767 13,861
Purchases of Available-for-Sale Securities (47,891) (17,769)
Cash Used in Acquisitions --- (373)
-------- --------
Net Cash Used by Investing Activities (13,147) (4,260)
-------- --------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (2,917) (3,010)
Domestic Time and Savings Deposits (973) (5,585)
Foreign Deposits 4,172 3,299
Federal Funds Purchased, Securities Sold Under Repurchase Agreements
and Other Borrowed Funds 11,628 8,816
Other Liabilities (325) 634
Other, Net 40 240
Proceeds from the Issuance of Long-Term Debt 913 1,592
Redemption and Maturity of Long-Term Debt (1,368) (1,395)
Proceeds from the Issuance of Common Stock 382 16
Issuance of Preferred Stock --- 200
Redemption of Preferred Stock --- (420)
Treasury Stock Purchased (445) (354)
Cash Dividends Paid (398) (384)
-------- --------
Net Cash Provided by Financing Activities 10,709 3,649
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks 2 (35)
-------- --------
Net Increase (Decrease) in Cash and Due from Banks (1,714) 1,228
-------- --------
Cash and Due from Banks at January 1, 8,832 6,852
-------- --------
Cash and Due from Banks at September 30, $ 7,118 $ 8,080
======== ========
Cash Interest Paid $ 4,711 $ 3,079
Taxes Paid $ 673 $ 687
The Notes to Financial Statements are an integral part of these Statements.
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Part I
Item 1. (continued)
CHEMICAL BANKING CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30,
(in millions)
1995 1994
---- ----
<S> <C> <C>
BALANCE AT JANUARY 1, $ 10,712 $ 11,164
--------- ---------
Net Income 1,315 1,115
Dividends Declared:
Preferred Stock (81) (96)
Common Stock (354) (299)
Issuance of Preferred Stock --- 200
Redemption of Preferred Stock --- (404)
Premium on Redemption of Preferred Stock --- (12)
Conversion of Preferred Stock (200) ---
Issuance of Common Stock 1 1
Net Change in Capital Surplus (93) 15
Restricted Stock Granted, Net of Amortization (7) (11)
Net Change in Treasury Stock 225 (354)
Net Change in Fair Value of Available-for-Sale Securities, Net of Taxes 303 (511)
Accumulated Translation Adjustment 10 ---
--------- ---------
Net Change in Stockholders' Equity 1,119 (356)
--------- ---------
BALANCE AT SEPTEMBER 30, $ 11,831 $ 10,808
========= =========
</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.
NOTE 2 - AGREEMENT TO MERGE WITH CHASE MANHATTAN CORPORATION
- ------------------------------------------------------------
On August 28, 1995, the Corporation and The Chase Manhattan Corporation
("Chase") announced a definitive agreement to merge in a stock-for-stock
transaction. The merger agreement, which was approved by the Boards of Directors
of both the Corporation and Chase, provides that 1.04 shares of the
Corporation's common stock will be exchanged for each share of Chase common
stock on a tax-free basis. All of Chase's series of preferred stock will be
exchanged for similar preferred stock of the Corporation. The merger, which is
expected to be completed in the first quarter of 1996, is subject to approval by
the common shareholders of both institutions as well as by federal and state
regulatory authorities and will be accounted for as a pooling of interests. The
Corporation and Chase have scheduled their special stockholder meetings on
December 11, 1995. The effects of the merger have not been reflected in the
financial statements herein.
In connection with the merger, it is currently estimated that a one-time pretax
restructuring charge of $1.5 billion ($925 million after-tax) will be incurred
upon consummation of the merger, principally as a result of severance expenses
to be incurred in connection with anticipated staff reductions, costs in
connection with planned office eliminations, and other merger-related expenses,
including costs to eliminate redundant back-office and other operations of the
Corporation and Chase.
Reference is made to the Form 8-K and Form S-4 which the Corporation has filed
with the Securities and Exchange Commission on October 26, 1995 and October 31,
1995, respectively, for more information concerning the merger.
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Part I
Item 1. (continued)
NOTE 3 - 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>
September 30, December 31,
(in millions) 1995 1994
------------ -----------
<S> <C> <C>
U.S. Government, Federal Agencies and Municipal Securities $ 3,956 $ 2,875
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,793 1,644
Debt Securities Issued by Foreign Governments 3,699 1,983
Foreign Financial Institutions 3,089 3,119
Other, includes corporate securities and eurodollar bonds 1,543 1,472
--------- --------
Total Trading Assets - Debt and Equity Instruments (a) $ 14,080 $ 11,093
========= ========
<FN>
(a) Includes emerging markets instruments of $582 million at September 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 (after taking into
account the effects of master netting agreements). Such risk management
instruments are presented in the following table for the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
(in billions) 1995 1994
------------- ------------
Trading Assets-Risk Management Instruments:
<S> <C> <C>
Interest Rate Contracts $ 9.4 $ 7.9
Foreign Exchange Contracts 10.1 9.5
Stock Index Options and Commodity Contracts 0.3 0.3
------- ------
Total $ 19.8 $ 17.7
======= ======
Trading Liabilities-Risk Management Instruments:
Interest Rate Contracts $ 11.0 $ 7.0
Foreign Exchange Contracts 9.5 8.9
Stock Index Option and Commodity Contracts 0.2 0.1
------- ------
Total $ 20.7 $ 16.0
======= ======
</TABLE>
Descriptions 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
third quarter and first nine months, see Management's Discussion and Analysis on
pages 25-26 and pages 42-44 of this Form 10-Q.
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Part I
Item 1. (continued)
NOTE 4 - 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 $135 million on the Corporation's stockholders' equity at September
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 the fair value of the securities as a result of lower
long-term interest rate levels at September 30, 1995, when compared with
December 31, 1994, as well as the result of the disposition of a
portion of the Corporation's available-for-sale Brady Bonds. See Note 5 for
further discussion.
Net gains from available-for-sale securities sold in the third quarter and first
nine months of 1995 amounted to $47 million (gross gains of $105 million and
gross losses of $58 million) and $98 million (gross gains of $326 million and
gross losses of $228 million), respectively. Net gains on such sales for the
same periods in 1994 amounted to $6 million (gross gains of $14 million and
gross losses of $8 million) in the third quarter and $65 million (gross gains of
$119 million and gross losses of $54 million) in the first nine months. There
were no sales of held-to-maturity securities during the first nine months of
1995 and 1994.
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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>
September 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 $ 3,474 $ 35 $ 2 $ 3,507
Collateralized Mortgage Obligations 3,456 6 31 3,431
Other, primarily U.S. Treasuries 200 --- --- 200
Obligations of State and Political Subdivisions 320 --- --- 320
Debt Securities Issued by Foreign Governments 48 --- --- 48
Collateralized Mortgage Obligations (b) 127 3 --- 130
Other, primarily Asset-Backed Securities 449 3 --- 452
-------- ------ ------ --------
Total Held-to-Maturity Securities $ 8,074 $ 47 $ 33 $ 8,088
======== ====== ====== ========
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>
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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>
September 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 $ 14,822 $ 57 $ 28 $ 14,851
Collateralized Mortgage Obligations 355 --- 2 353
Other, primarily U.S. Treasuries 3,175 --- 139 3,036
Debt Securities Issued by Foreign Governments 6,146 52 83 6,115
Corporate Debt Securities 477 14 8 483
Collateralized Mortgage Obligations (b) 185 1 1 185
Other (c) 998 5 9 994
-------- ------ ------ ---------
Total Available-for-Sale Securities
Carried at Fair Value $ 26,158 $ 129 $ 270 $ 26,017
======== ====== ====== =========
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>
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<PAGE>
Part I
Item 1. (continued)
NOTE 5 - 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. A significant portion
of both the held-to-maturity portfolio and the available-for-sale portfolio are
collateralized by zero-coupon United States Treasury obligations and the
interest on a significant portion of the securities in both portfolios is also
collateralized for up to two years. Management continually evaluates and
monitors the ability of each of the countries within each of such portfolios to
perform and believes that any unrealized losses on its held-to-maturity and
available-for-sale portfolios are temporary in nature. The amortized cost and
estimated fair value of loans measured pursuant to SFAS 115 for the dates
indicated were as follows:
<TABLE>
<CAPTION>
September 30, 1995 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Held-to-Maturity $ 1,978 $ 10 $ 768 $ 1,220
Available-for-Sale 605 50 150 505
-------- ------ -------- --------
Total $ 2,583 $ 60 $ 918 $ 1,725
======== ====== ======== ========
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 third quarter and first nine months of 1995 included a net loss of $36
million and $86 million, respectively, related to the disposition of emerging
market securities previously recorded as available-for-sale. Such dispositions
are part of the Corporation's ongoing efforts to manage its exposure in its
available-for-sale portfolios. Cash proceeds from the sales of
available-for-sale loans were $919 million during each of the third quarter and
first nine months of 1995. Cash proceeds from the sales of available-for-sale
loans during the 1994 third quarter and first nine months were $89 million and
$409 million, respectively.
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 nine
months ended September 30, 1995.
<TABLE>
<CAPTION>
September 30,
(in millions) 1995
-------------
<S> <C>
Impaired Loans with an Allowance $ 570
Impaired Loans without an Allowance (a) 285
-------
Total Impaired Loans $ 855
=======
Allowance for Impaired Loans under
SFAS 114 (b) $ 152
-------
Average Balance of Impaired Loans
during the nine months ended September 30, 1995 $ 910
-------
Interest Income Recognized on Impaired
Loans during the nine months ended September 30, 1995 $ 11
-------
<FN>
(a) Impaired loans for which the discounted amount of expected future 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.
</FN>
</TABLE>
NOTE 6 - EARNINGS PER SHARE
- ---------------------------
Effective with the 1995 second quarter, the Corporation changed its reporting of
earnings per share ("EPS") for all periods from "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%). For a further discussion on the Corporation's EPS calculation,
see page 57 of this Form 10-Q.
NOTE 7 - COMMON STOCK
- ---------------------
During the 1995 third quarter, the Corporation repurchased 4 million shares of
its common stock on the open market, with such shares being used for common
stock issuances under the Corporation's various employee benefit plans.
Furthermore, during the first half of 1995, the Corporation also repurchased
4 million shares of its common stock on the open market under a
previously announced 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 8 - 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 9 - 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 September 30, 1995, the Corporation had eliminated approximately
2,300 of the 3,700 positions targeted for elimination. Also at September 30,
1995, the reserve balance associated with this charge was approximately $164
million.
NOTE 10 - 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 11 - MORTGAGE SERVICING RIGHTS
- -----------------------------------
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 in the 1995 second quarter.
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.
- 14 -
<PAGE>
Part I
Item 1. (continued)
NOTE 12 - 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 3 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 3
of this Form 10-Q. The effects of market risk (gains or losses) on the
Corporation's trading activities have been reflected in trading revenue, as the
trading instruments are marked-to-market on a daily basis.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR PURPOSES OTHER THAN
TRADING: The Corporation's principal objective in using off-balance sheet
instruments for purposes other than trading is for its 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 September 30, 1995, net unamortized deferred losses relating to closed
derivative contracts used in ALM activities were approximately $180 million,
which amount will be amortized into earnings over the period for which the
related assets or liabilities exposure is managed. Approximately 31% of the net
deferred loss at September 30, 1995 will be amortized within the next twelve
months.
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 September 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
September 30, December 31, September 30, December 31,
(in billions) 1995 1994 1995 1994
------------ ----------- ------------ -----------
INTEREST RATE CONTRACTS
Futures and Forward Rate Agreements
<S> <C> <C> <C> <C>
Trading $ 947.0 $ 938.1 $ 1.3 $ 0.8
Asset and Liability Management 58.9 32.8 --- ---
Interest Rate Swaps
Trading 1,386.2 1,107.9 7.9 6.9
Asset and Liability Management 50.7 50.7 0.3 0.2
Purchased Options
Trading 77.0 60.5 0.2 0.2
Asset and Liability Management 18.5 13.7 --- ---
Written Options
Trading 106.0 69.5 --- ---
Asset and Liability Management 17.6 3.3 --- ---
----------- ---------- ---------- ---------
Total Interest Rate Contracts $ 2,661.9 $ 2,276.5 $ 9.7 $ 8.1
=========== ========== ========== =========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 886.2 $ 794.0 $ 7.7 $ 7.3
Asset and Liability Management 16.0 12.3 --- ---
Other Foreign Exchange Contracts (a)
Trading 132.0 94.5 2.4 2.2
Asset and Liability Management 0.1 0.3 --- ---
----------- ---------- ---------- ---------
Total Foreign Exchange Contracts $ 1,034.3 $ 901.1 $ 10.1 $ 9.5
=========== ========== ========== =========
Stock Index Options and Commodity Contracts
Trading $ 10.7 $ 4.5 $ 0.3 $ 0.3
Total Credit Exposure Recorded on the Balance Sheet $ 20.1 $ 17.9
<FN>
(a) Includes purchased options, written options and cross-currency interest
rate swaps of $50.3 billion, $53.0 billion and $28.8 billion, respectively
at September 30, 1995, compared with $34.2 billion, $38.4 billion and
$22.2 billion, respectively, at December 31, 1994.
</FN>
</TABLE>
- 16 -
<PAGE>
Part I
Item 1. (continued)
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 September 30, 1995 and December 31, 1994, commitments to
purchase when-issued securities were $8,659 million and $6,289 million,
respectively, and commitments to sell when-issued securities were $8,702 million
and $6,658 million, respectively.
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 September 30, 1995, approximately 33% of the
Corporation's options activity was exchange-traded, with the balance being
OTC-traded. As of December 31, 1994, approximately 19% of the Corporation's
options activity was exchange-traded, with the balance being OTC-traded. The
percentage of options activity that is exchange-traded versus OTC-traded will
vary depending upon conditions in the market place.
NOTE 13 - 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 September 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
September 30, December 31,
(in millions) 1995 1994
------------- ------------
<S> <C> <C>
Commitments to Extend Credit $ 57,398(a) $ 49,266(a)
Standby Letters of Credit (Net of Risk
Participations of $3,855 and $5,218) 13,431 12,451
Other Letters of Credit 3,225 2,860
Customers' Securities Lent 18,554 18,979
<FN>
(a) Excludes credit card commitments of $20.2 billion and $19.0 billion at
September 30, 1995 and December 31, 1994, respectively.
</FN>
</TABLE>
NOTE 14 - 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. The following table presents the
carrying value and estimated fair value at September 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.
- 17 -
<PAGE>
Part I
Item 1. (continued)
<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:
Assets for Which Fair Value
<S> <C> <C> <C> <C> <C> <C>
Approximates Book Value $ 29,521 $ 29,521 $ --- $ --- $ --- $ ---
Trading Assets:
Debt and Equity Instruments 14,080 14,080 --- --- --- ---
Risk Management Instruments 19,750 19,750 --- --- --- ---
Securities Held-to-Maturity 8,074 8,089 --- --- --- ---
Securities Available-for-Sale 26,017 26,017 88 --- --- 88
Loans, Net 83,218 84,644 140 81 (240) (19)
Derivatives in Lieu of Cash
Market Instruments (d) 54 81 54 263 (236) 81
Other Assets 2,008 2,532 --- --- --- ---
---------- ----------
Total Financial Assets $ 182,722 $ 184,714
========== ==========
FINANCIAL LIABILITIES:
Liabilities for Which Fair Value
Approximates Book Value $ 131,643 $ 131,643 (18) 8 (26) (36)
Domestic Time Deposits 15,592 15,819 56 42 (150) (52)
Long-Term Debt 7,537 7,675 20 46 (48) 18
Trading Liabilities - Risk
Management Instruments 20,664 20,664 --- --- --- ---
---------- ----------
Total Financial Liabilities $ 175,436 $ 175,801
========== ==========
<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 daily margin settlements on
open futures contracts are 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 contracts were $3 million and $74
million, respectively, at September 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
these 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; the fair value of these mortgage
servicing rights are not required to be disclosed under SFAS 107. At September
30, 1995, the notional amount of such derivatives was $2.6 billion, the carrying
value was $6.5 million, and gross unrecognized gains and losses were $7.7
million and $2.0 million, respectively, resulting in an estimated fair value of
$12.2 million.
- 18 -
<PAGE>
Part I
Item 2.
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHEMICAL BANKING CORPORATION
QUARTERLY FINANCIAL HIGHLIGHTS
(in millions, except per share and ratio data)
1995 1994
------------------------------------ --------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
EARNINGS:
<S> <C> <C> <C> <C> <C>
Income Before Effect of Accounting Change....... $ 477 $ 453 $ 396 $ 179 $ 439
Effect of Change in Accounting Principle........ --- --- (11)(b) --- ---
-------- -------- --------- -------- --------
Net Income...................................... $ 477 $ 453 $ 385 $ 179 $ 439
======== ======== ========= ======== ========
Net Income Applicable to Common Stock........... $ 452 $ 427 $ 355 $ 149 $ 396
======== ======== ========= ======== ========
EARNINGS PER SHARE (a):
Primary:
Income Before Effect of Accounting Change....... $ 1.74 $ 1.72 $ 1.49 $ 0.61 $ 1.59
Effect of Change in Accounting Principle........ --- --- (0.04)(b) --- ---
-------- -------- --------- -------- --------
Net Income...................................... $ 1.74 $ 1.72 $ 1.45 $ 0.61 $ 1.59
======== ======== ========= ======== ========
Assuming Full Dilution:
Income Before Effect of Accounting Change....... $ 1.70 $ 1.68 $ 1.46 $ 0.61 $ 1.56
Effect of Change in Accounting Principle........ --- --- (0.04)(b) --- ---
-------- -------- --------- -------- --------
Net Income...................................... $ 1.70 $ 1.68 $ 1.42 $ 0.61 $ 1.56
======== ======== ========= ======== ========
PER COMMON SHARE:
Book Value...................................... $ 41.90 $ 40.62 $ 38.79 $ 37.88 $ 38.29
Market Value.................................... $ 60.88 $ 47.25 $ 37.75 $ 35.88 $ 35.00
Common Dividends Declared....................... $ .50 $ .50(c) $ .44 $ .44 $ .44
COMMON SHARES OUTSTANDING:
Average Common and Common Equivalent Shares 260.1 248.3 245.3 246.3 248.6
Average Common Shares Assuming Full Dilution 266.1 254.8 253.0 254.0 256.3
Common Shares at Period End..................... 252.5 249.4 240.8 244.5 244.4
PERFORMANCE RATIOS:
Return on Average Assets (d).................... 1.04% 1.01% .89% .42% 1.03%
Return on Average Common Equity (d)............. 17.34% 17.67% 15.50% 6.29% 16.92%
Return on Average Stockholders' Equity (d)...... 16.33% 16.42% 14.54% 6.54% 16.14%
Efficiency Ratio (e)............................ 57.8% 59.4% 64.6% 67.2% 62.9%
CAPITAL RATIOS:
Common Stockholders' Equity to Assets........... 5.6% 5.7% 5.0% 5.4% 5.5%
Total Stockholders' Equity to Assets ........... 6.3% 6.4% 5.8% 6.2% 6.4%
Tier 1 Leverage (f)............................. 6.2% 6.1% 6.0% 6.3% 6.3%
Risk-Based Capital Ratios (f):
Tier I (4.0% required) ....................... 7.9% 7.8% 7.8% 8.0% 8.0%
Total (8.0% required)........................ 11.5% 11.4% 11.6% 12.0% 12.0%
<FN>
(a) Primary and Fully Diluted EPS are now reported for all periods presented.
See Note 6 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.
(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) For all periods presented, risk-based capital and leverage ratios exclude
the assets and off-balance sheet financial instruments of the
Corporation's securities subsidiary, Chemical Securities Inc., as well as
the Corporation's investment in this subsidiary. These ratios also 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 $477
million for the 1995 third quarter, an increase of 9% from earnings of $439
million reported for the third quarter of 1994. The Corporation's primary
earnings per share increased 9% to $1.74 per share in the 1995 third quarter,
compared with primary earnings of $1.59 per share in the third quarter of 1994.
For the first nine months of 1995, the Corporation's net income was $1.315
billion, an increase of 18% from $1.115 billion for the first nine months of
1994. Primary earnings per share for the 1995 first nine months increased 23% to
$4.91 per share, compared with $3.98 per share in the comparable period of 1994.
The Corporation's 1995 third quarter and year-to-date results reflect continued
progress on the Corporation's announced performance goals to increase its
earnings per share, achieve a higher return on common stockholders' equity and
an improved efficiency ratio. The Corporation's 1995 third quarter core earnings
increased by more than 20% from the comparable period in 1994, led by gains in
global finance, regional banking and national consumer businesses.
The Corporation's return on average common stockholders' equity was 17.3% for
the third quarter of 1995, compared with 16.9% for the 1994 comparable quarter.
For the first nine months, the Corporation's return on average common
stockholders' equity was 16.9% in 1995, compared with 14.4% in 1994. The
Corporation's efficiency ratio improved to 58% for the third quarter of 1995,
compared with 63% for the third quarter of 1994. At September 30, 1995, the
Corporation's ratios of Tier 1 Capital to risk-weighted assets and Total Capital
to risk- weighted assets were 7.91% and 11.54%, respectively (excluding the
assets and off-balance sheet financial instruments of the Corporation's
securities subsidiary, Chemical Securities, Inc., as well as the Corporation's
investment in such subsidiary). Such risk-based capital ratios were well in
excess of the minimum ratios specified by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board") and at September 30, 1995, the
Corporation was "well capitalized" as defined by the Federal Reserve Board.
The Corporation's nonperforming assets at September 30, 1995 were $1,047
million, down from $1,139 million at December 31, 1994 and a decline of $1,146
million from $2,193 million at September 30, 1994. As a result of the continued
decline in nonperforming assets, the ratio of the allowance for credit losses to
nonperforming loans reached 243% at September 30, 1995, compared with 174% at
September 30, 1994. Nonperforming assets have declined by $5,540 million, or
84%, from their peak level of $6,587 million in September 1992.
On October 6, 1995, the Corporation sold its banking operations in southern and
central New Jersey to PNC Bank Corp. The transaction is not reflected in the
Corporation's 1995 third quarter results. The sale did not include the
Corporation's franchise in northeastern New Jersey, where it retains private
banking operations and 39 branches.
- 20 -
<PAGE>
Part I
Item 2 (continued)
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
NET INTEREST INCOME
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------ ----------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Interest Income $ 2,833 $ 2,313 $ 8,266 $ 6,622
Total Interest Expense 1,636 1,136 4,751 3,117
-------- -------- -------- --------
Net Interest Income 1,197 1,177 3,515 3,505
Taxable Equivalent Adjustment (a) 7 7 21 16
-------- -------- -------- --------
Net Interest Income - Taxable
Equivalent Basis $ 1,204 $ 1,184 $ 3,536 $ 3,521
======== ======== ======== ========
<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 third quarter of 1995 was $1,197 million, compared
with $1,177 million for the same period in 1994. For the first nine months, net
interest income was $3,515 million in 1995, compared with $3,505 million in
1994. The improvements in both 1995 periods from the prior year were primarily
due to an increase in interest-earning assets (led by growth in consumer loans),
and a higher contribution from noninterest-bearing funds, partially offset by
the impact of higher short-term interest rates.
The interest rate spread and the net yield on interest-earning assets declined
in both 1995 periods from the prior year. These declines were principally the
result of narrower loan spreads and 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 77 basis points in the 1995 third quarter, versus a 54 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
$3.4 billion in interest-free funds in the third quarter of 1995.
The following table reflects 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.
- 21 -
<PAGE>
Part I
Item 2 (continued)
<TABLE>
<CAPTION>
AVERAGE EARNING ASSET MIX
Third 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 $ 35,967 25% $ 27,645 21%
Commercial Loans 49,090 34 47,742 37
Securities 29,531 21 25,717 20
Liquid Interest-Earning Assets 28,576 20 28,350 22
---------- --- ---------- ---
Total Interest-Earning Assets $ 143,164 100% $ 129,454 100%
========== === ========== ===
Interest Rate Spread (a) 2.57% 3.09%
Net Yield on Interest-Earning Assets (b) 3.34% 3.63%
Nine Months
-----------
1995 1994
---------------------------- ----------------------------
% of Total % of Total
Interest- Interest-
Average Earning Average Earning
(Taxable equivalent rates; in millions) Balance Assets Balance Assets
------- ---------- ------- ----------
Consumer Loans $ 33,039 24% $ 26,741 21%
Commercial Loans 48,606 35 47,933 37
Securities 28,408 20 26,238 20
Liquid Interest-Earning Assets 29,322 21 28,546 22
---------- --- ---------- ---
Total Interest-Earning Assets $ 139,375 100% $ 129,458 100%
========== === ========== ===
Interest Rate Spread (a) 2.65% 3.11%
Net Yield on Interest-Earning Assets (b) 3.39% 3.63%
<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 third quarter and first nine
months increased by $9.7 billion and $7.0 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. Domestic commercial loan outstandings at
September 30, 1995 represented the fifth 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.
- 22 -
<PAGE>
Part I
Item 2 (continued)
The negative impact on net interest income from nonperforming loans (excluding
nonperforming loans held for accelerated disposition) in the third quarter of
1995 was $13 million, compared with $1 million in the same quarter in 1994. The
1994 third quarter amount was unusually low due to the significant amount of
cash collections received by the Corporation during that quarter. For the first
nine months, the negative impact was $51 million in 1995, compared with $58
million in 1994. The results for the first nine months of 1995 has benefited
from the 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 $8 million for the third quarter of 1995, compared with a
favorable impact of $42 million for the third quarter of 1994. For the first
nine months, the favorable impact was approximately $24 million in 1995,
compared with $161 million in 1994. For a further discussion of derivative
instruments used in the Corporation's asset/liability management activities,
see Note 13 of the Notes to Financial Statements and the Asset/Liability
Management section on pages 45-46 of this Form 10-Q.
Notwithstanding the sale of its banking operations in southern and central New
Jersey to PNC Bank Corp. ("PNC") and credit card securitizations that are
expected to occur in the 1995 fourth quarter, management anticipates that net
interest income for the fourth quarter of 1995 will be slightly higher than the
1994 fourth quarter results primarily as a result of continued loan growth for
the remainder of 1995. Management also anticipates that net interest income for
full year 1995 will be higher 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 $122 million for the 1995 third
quarter, compared with $120 million in the 1995 second quarter, and $100 million
in the 1994 third quarter. The increase in the provision for losses from the
1994 third quarter is mainly the result of higher consumer net charge-offs,
notably in the credit card portfolio, a consequence of the significant growth in
credit card outstandings. For further information, see Domestic Consumer
Portfolio section on page 38. For the first nine months, the provision for
losses was $362 million in 1995 compared with $465 million in 1994, a result of
the continued improvement in the Corporation's credit profile. The provision for
losses for the fourth quarter of 1995 is expected to be generally consistent
with the 1995 third quarter level.
<TABLE>
<CAPTION>
NONINTEREST REVENUE
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trust and Investment Management Fees $ 96 $ 104 $ 284 $ 322
Corporate Finance and Syndication Fees 157 97 405 272
Service Charges on Deposit Accounts 75 78 225 222
Fees for Other Financial Services 307 285 891 854
Trading Revenue 213 212 440 600
Securities Gains 47 6 98 65
Other Revenue 82 202 465 447
------ ------- -------- -------
Total $ 977 $ 984 $ 2,808 $ 2,782
====== ======= ======== =======
</TABLE>
- 23 -
<PAGE>
Part I
Item 2 (continued)
Noninterest revenue declined in the 1995 third quarter but rose in the first
nine months of 1995 when compared with the corresponding 1994 periods. The
decrease in noninterest revenue for the 1995 third quarter primarily reflects a
decline in other revenue resulting from losses from the disposition of emerging
markets-related securities, compared with gains on such securities recorded in
the prior year's quarter. Noninterest revenue for both the 1995 third quarter
and first nine months when compared with the comparable 1994 periods benefited
from higher corporate finance and syndication fees, as well as higher securities
gains and fees for other financial services. Trading revenues were stable
quarter-to-quarter but declined in the first nine months of 1995 compared with
the same period last year.
The following table presents the components of trust and investment management
fees for the periods indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Trust and Investment Management Fees:
<S> <C> <C> <C> <C>
Personal Trust Fees $ 51 $ 49 $ 154 $ 156
Corporate and Institutional Trust Fees 34 45 98 136
Other, primarily Foreign Asset Management 11 10 32 30
------ ------ ------ -----
Total $ 96 $ 104 $ 284 $ 322
====== ====== ====== =====
</TABLE>
Trust and investment management fees for the 1995 third quarter were $96
million, a decline of $8 million from the prior year period. Corporate and
institutional trust fees in the 1995 third quarter declined $11 million from the
same period a year ago, due to the absence of approximately $13 million
in fees in the 1995 third quarter (for the 1995 nine month period, such fees
were approximately $36 million) related to the shareholder services joint
venture with Mellon Bank Corporation (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 a record $157 million in the 1995
third quarter, an increase of 62% from the prior year period. For the first nine
months of 1995, such fees rose 49% from the comparable 1994 period. The
increases from both 1994 periods reflect continued strong growth in global
investment banking activities, especially loan syndications and new issues of
high-yield securities. During the first nine months of 1995, the Corporation
acted as agent or co-agent for approximately $282 billion of syndicated credit
facilities, a reflection of the Corporation's large client base and strong
emphasis on distribution.
The following table sets forth the components of fees for other banking services
for the periods indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Fees for Other Financial Services:
<S> <C> <C> <C> <C>
Credit Card Services Revenue $ 87 $ 79 $ 250 $ 229
Fees in Lieu of Compensating Balances 47 49 141 156
Commissions on Letters of Credit
and Acceptances 40 40 117 116
Loan Commitment Fees 22 21 66 66
Mortgage Servicing Fees 24 23 70 57
Other Fees 87 73 247 230
------ ----- ------ ------
Total $ 307 $ 285 $ 891 $ 854
====== ===== ====== ======
</TABLE>
- 24 -
<PAGE>
Part I
Item 2 (continued)
Credit card services revenue for both 1995 periods continues to benefit from the
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 $10.7 billion at
September 30, 1995, compared with $8.3 billion at the same date a year ago.
Fees in lieu of compensating balances decreased by $2 million in the 1995 third
quarter and by $15 million in the first nine 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 nine months of 1995, when short-term
interest rates were higher than in the first nine months of 1994, a greater
volume of customers maintained a compensating balance in lieu of paying a fee
for services.
Mortgage servicing fees increased $13 million in the first nine months of 1995
compared with the prior year period, reflecting a higher level of mortgage
servicing volume as a result of the acquisition of Margaretten Financial
Corporation ("Margaretten") on July 1, 1994.
Contributing to the rise in other fees for the third quarter and nine months of
1995 were increased brokerage commissions of $6 million and $12 million,
respectively, due to higher transaction volume at the Corporation's discount
brokerage firm, Brown and Company.
The following table sets forth the components of trading revenue for the third
quarter and first nine months of 1995 and 1994.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Trading Revenue:
<S> <C> <C> <C> <C>
Interest Rate Contracts (a) $ 48 $ 95 $ 105 $ 318
Foreign Exchange Revenue (b) 70 56 211 156
Debt Instruments and Other (c) 95 61 124 126
------ ----- ------ ------
Subtotal $ 213 $ 212 $ 440 $ 600
Net Interest Income Impact (d) 52 13 120 5
------ ----- ------ ------
Total Trading Related Activities $ 265 $ 225 $ 560 $ 605
====== ===== ====== ======
<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.
(d) Net interest income attributable to trading activities includes accruals on
interest-earning and interest-bearing trading-related positions as well as
management allocations reflecting the cost or benefit associated with
trading positions.
</FN>
</TABLE>
The decreases in revenue from interest rate contracts during the 1995 third
quarter and first nine months were primarily due to unexpected volatility in
certain European and Asian (particularly Japan) interest rate markets. Foreign
exchange revenue in 1995 continued to benefit from volatility in the currency
markets (in particular from changes in the Yen, DM and pound sterling) and from
the Corporation's market-making activities (as trading volume was heavy in the
third quarter). The increase in debt instrument revenue during the 1995 third
quarter, when compared to the same 1994 period, was primarily due to strong
performance in high-yield securities. Emerging markets debt instrument revenue
remained stable in the 1995 third quarter, when compared with the same period in
1994.
- 25 -
<PAGE>
Part I
Item 2 (continued)
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 $47 million in the 1995 third quarter, compared with gains
of $6 million in the same period last year. For the first nine months,
securities gains were $98 million in 1995, as compared with $65 million in 1994.
The higher level of securities gains, all of which occurred from the
available-for-sale portfolio, reflected the Corporation's ability to take
advantage of favorable bond market conditions. Included in the 1995 nine 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 National Association
that were undertaken as part of the repositioning of the remaining branches
prior to the sale of the bank to PNC. For further discussion of the
Corporation's securities, see Note 4 - Securities of the Notes to Financial
Statements.
The following table presents the composition of other noninterest revenue for
the third quarter and first nine months of 1995 and 1994.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Other Revenue:
<S> <C> <C> <C> <C>
Revenue from Equity-Related Investments $ 77 $ 86 $ 310 $ 235
Net Gains (Losses) on Emerging Markets
Bond Sales (36) 80 (86) 125
Investment in CIT 21 19 60 55
Residential Mortgage Sales Activities 10 4 24 (27)
Gain on Sale of the Corporation's Investment
in Far East Bank & Trust --- --- 85 ---
Other 10 13 72 59
------ ----- ------ ------
Total $ 82 $ 202 $ 465 $ 447
====== ===== ====== ======
</TABLE>
Revenue from equity-related investments, which includes income from venture
capital activities and emerging markets investments, was $77 million in the 1995
third quarter, a decline of $9 million from the comparable 1994 quarter. For the
first nine months of 1995, revenue from equity-related investments was $310
million, a 32% increase from the comparable 1994 period. Revenue from
equity-related investments has averaged approximately $94 million per quarter,
based on revenues during the last eight quarterly periods. At September 30,
1995, the Corporation had equity-related investments with a carrying value of
$2.0 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
revenues from such activities could vary significantly from period to period.
The third quarter and first nine months of 1995 included losses of $36 million
and $86 million, respectively, related to the disposition of emerging market
available-for-sale securities. Such dispositions are part of the Corporation's
ongoing efforts to manage its exposure in its available-for-sale
portfolios. The comparable periods in 1994 included net gains of $80 million and
$125 million, respectively, from sales of emerging markets past-due interest
bonds.
- 26 -
<PAGE>
Part I
Item 2 (continued)
NONINTEREST EXPENSE
Noninterest expense in the 1995 third quarter was $1,257 million, compared with
$1,248 million in the 1995 second quarter and $1,311 million in the third
quarter of 1994. For the first nine months, noninterest expense was $3,751
million in 1995, compared with $3,868 million in 1994 (exclusive of a $48
million restructuring charge). The improvement from the prior year reflects the
benefits of various expense-reduction efforts as part of the Corporation's
actions to improve earnings per share and a reduced Federal Deposit Insurance
Corporation ("FDIC") premium expense in the 1995 third quarter of approximately
$42 million (which included a FDIC refund of $39 million). Additionally, as a
result of the shareholder services joint venture with Mellon Bank Corporation,
approximately $48 million of expenses for the first nine months of 1995 were
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.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries $ 616 $ 574 $ 1,719 $ 1,634
Employee Benefits 104 108 328 329
Occupancy Expense 131 145 395 431
Equipment Expense 97 100 295 275
Foreclosed Property Expense --- 2 (21) 39
Restructuring Charge --- --- --- 48
Other Expense 309 382 1,035 1,160
------- ------- ------- -------
Total $ 1,257 $ 1,311 $ 3,751 $ 3,916
======= ======= ======= =======
</TABLE>
The increases in salaries for the 1995 third quarter and first nine months were
primarily due to higher incentive costs as a result of stronger earnings and the
vesting of various stock-based incentive plans due to the improvement in the
Corporation's stock price. For the first nine months of 1995, additional
staff costs resulting from the 1994 Margaretten acquisition and the continued
growth in the Corporation's securities underwriting business also contributed
to the increases. Partially offsetting these increases were 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 full-time equivalent staff at September 30, 1995 amounted
to 40,695, compared with the 1994 year-end level of 42,130 and the September 30,
1994 level of 42,492. At September 30, 1995, the Corporation had eliminated
approximately 2,300 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.
Occupancy expense in the 1995 third quarter and first nine months decreased by
$14 million and $36 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 and other
expense-reduction initiatives. The nine month decline was partially offset by
the inclusion of Margaretten's expense since the acquisition date.
The lower level of equipment expense in the 1995 third quarter was primarily the
result of expense reduction initiatives relating to rentals and other equipment
expenses. The equipment expense per quarter has decreased from its highest level
at $107 million in the fourth quarter of 1994. For the first nine months of
1995, the higher level of equipment expense was due to 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.
There was no net foreclosed property expense in the 1995 third quarter compared
with an expense of $2 million in the third quarter of 1994. For the first nine
months, foreclosed property expense was a credit of $21 million in 1995,
compared with an expense of $39 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>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Other Expense: (a)
<S> <C> <C> <C> <C>
Professional Services $ 50 $ 55 $ 157 $ 160
Marketing Expense 44 45 138 142
FDIC Assessments (3) 39 70 122
Telecommunications 37 44 114 116
Amortization of Intangibles 25 29 80 85
All Other 156 170 476 535
------- ------- ------- -------
Total $ 309 $ 382 $ 1,035 $ 1,160
======= ======= ======= =======
<FN>
(a) Certain prior period amounts have been reclassified to conform with the
September 30, 1995 presentation.
</FN>
</TABLE>
Other expense for the 1995 third quarter was $309 million, a decrease of $73
million, or 19%, from the same period in 1994. For the first nine months of
1995, other expense decreased $125 million when compared with 1994. The 1995
nine month amount included an additional six months of operating costs of
approximately $28 million relating to Margaretten and excluded approximately $18
million of expenses relating to the joint venture with Mellon Bank Corporation.
FDIC assessments for the first nine months of 1995 decreased 43% compared with
the comparable 1994 period as a result of a $39 million refund received in the
third quarter of 1995 due to reduced FDIC assessment rates. All other expenses,
which includes various smaller expense categories such as stationery, operating
losses, postage, shipping, travel and insurance, decreased by $59 million, or
11%, in the first nine months of 1995, primarily as a result of the
Corporation's sourcing and other expense-reduction initiatives.
The Corporation's efficiency ratio improved to 57.8% in the 1995 third quarter,
compared with 62.9% in the same 1994 period. This ratio for the first nine
months of 1995 was 60.4%, compared with 62.1% for the first nine months of 1994.
The computation of the efficiency ratio (noninterest expense as a percentage of
the total of net interest income and noninterest revenue) excludes any
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. 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
announced and undertaken on December 1, 1994. 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 and that 1995 and 1996
noninterest expense will be approximately equal to or less than 1994 noninterest
expense.
INCOME TAXES
The Corporation recorded income tax expense of $318 million in the 1995 third
quarter, compared with $311 million in the comparable 1994 period. For the first
nine months, the Corporation recorded income tax expense of $884 million in
1995, compared with $791 million in 1994. The Corporation's effective tax rate
was 40.0% in the third quarter and the first nine 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. Thus, certain amounts reported in the
prior periods have been restated to conform with the presentation of the current
quarter's results. 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 the
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 has been 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 1995 presentation. The
results for Texas Commerce are included within the results of Consumer and
Relationship Banking.
- 29 -
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 2 (continued)
Consumer and
Global Bank Relationship Banking
------------------- ---------------------
For the three months ended September 30, 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C>
Net Interest Income $ 280 $ 286 $ 932 $ 928
Noninterest Revenue 531 432 463 450
Noninterest Expense 365 321 873 951
---------- ---------- --------- ----------
Operating Margin 446 397 522 427
Credit Provision (a) 37 52 148 124
Foreclosed Property Expense --- --- --- (4)
---------- ---------- --------- ----------
Income Before Taxes 409 345 374 307
Income Taxes 155 133 146 125
---------- ---------- --------- ----------
Net Income (loss) $ 254 $ 212 $ 228 $ 182
========== ========== ========= ==========
Average Assets $ 106,813 $ 103,524 $ 69,007 $ 63,025
Return on Common Equity 25.9% 20.1% 19.6% 16.0%
Return on Assets .94% .81% 1.31% 1.15%
Efficiency Ratio (b) 45.0% 44.7% 62.6% 69.0%
Terminal
(LDC and Real Estate) Total(c)
--------------------- --------------------
For the three months ended September 30, 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except ratios)
Net Interest Income $ 9 $ 14 $ 1,197 $ 1,177
Noninterest Revenue (30) 93 977 984
Noninterest Expense 14 16 1,257 1,309
--------- --------- --------- -----------
Operating Margin (35) 91 917 852
Credit Provision (a) 10 21 122 100
Foreclosed Property Expense (1) 5 --- 2
--------- --------- --------- -----------
Income (Loss) Before Taxes (44) 65 795 750
Income Taxes (Benefits) (14) 25 318 311
--------- --------- --------- -----------
Net Income (Loss) $ (30) $ 40 $ 477 $ 439
========= ========= ========= ===========
Average Assets $ 6,378 $ 7,617 $ 181,526 $ 168,979
Return on Common Equity NM NM 17.3% 16.9%
Return on Assets NM NM 1.04% 1.03%
Efficiency Ratio (b) NM NM 57.8% 62.9%
<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) The computation of the efficiency ratio (noninterest expense as a
percentage of the total of net interest income and noninterest revenue)
excludes restructuring charges, foreclosed property expense and gains on
emerging markets-related past-due interest 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)
Consumer and
Global Bank Relationship Banking
------------------- --------------------
For the nine months ended September 30, 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C>
Net Interest Income $ 829 $ 802 $ 2,743 $ 2,745
Noninterest Revenue 1,455 1,284 1,337 1,298
Noninterest Expense 1,002 950 2,695 2,823(a)
---------- ---------- --------- ----------
Operating Margin 1,282 1,136 1,385 1,220
Credit Provision (b) 113 155 419 372
Foreclosed Property Expense (1) 2 (34) (15)
---------- ---------- --------- ----------
Income Before Taxes 1,170 979 1,000 863
Income Taxes 436 377 410 354
---------- ---------- --------- ----------
Net Income (loss) $ 734 $ 602 $ 590 $ 509
========== ========== ========= ==========
Average Assets $ 107,733 $ 100,127 $ 66,686 $ 62,599
Return on Common Equity 25.0% 18.9% 17.1% 15.3%
Return on Assets .91% .80% 1.18% 1.09%
Efficiency Ratio (c) 45.6% 45.5% 66.1% 68.6%
Terminal
(LDC and Real Estate) Total(d)
--------------------- --------------------
For the nine months ended September 30, 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except ratios)
Net Interest Income $ 32 $ 65 $ 3,515 $ 3,505
Noninterest Revenue (19) 182 2,808 2,782
Noninterest Expense 39 47 3,772 3,877(a)
--------- --------- --------- -----------
Operating Margin (26) 200 2,551 2,410
Credit Provision (b) 29 138 362 465
Foreclosed Property Expense 5 45 (21) 39
--------- --------- --------- -----------
Income (Loss) Before Taxes (60) 17 2,210 1,906
Income Taxes (Benefits) (17) 5 884 791
--------- --------- --------- -----------
Net Income (Loss) Before
Accounting Change (43) 12 1,326 1,115
Accounting Change --- --- (11) ---
--------- --------- ---------- -----------
Net Income (Loss) $ (43) $ 12 $ 1,315 $ 1,115
========= ========= ========= ===========
Average Assets $ 7,030 $ 8,280 $ 179,149 $ 165,750
Return on Common Equity NM NM 16.9% 14.4%
Return on Assets NM NM .98% .90%
Efficiency Ratio (c) NM NM 60.4% 62.1%
<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) The computation of the efficiency ratio (noninterest expense as a
percentage of the total of net interest income and noninterest revenue)
excludes restructuring charges, foreclosed property expense, gains on
emerging markets-related past-due interest bond sales, and the
gain on 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 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 Regional Centers (all wholesale banking;
investment banking; capital markets and other activities outside of the United
States and the major cross-border financial centers). 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 third quarter was $254 million, an increase
of $42 million from the third quarter of 1994. The sector's return on equity in
the third quarter of 1995 was 25.9%, compared with 20.1% in the 1994 third
quarter. The improvement in the 1995 third quarter results was primarily due to
increases in noninterest revenue from corporate finance and syndication fees, as
well as securities gains. The Global Bank's net income of $734 million and
return on equity of 25.0% for the first nine months of 1995 increased from last
year's nine month results of $602 million and 18.9%, respectively. The increase
in the 1995 nine month results reflects higher corporate finance and syndication
fees, the gain related to the sale of the Corporation's investment in Far East
Bank and Trust Company and securities gains, 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>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Global Banking & Investment Banking $ 309 $ 228 $ 930 $ 690
Global Markets 342 326 799 980
Regional Centers 121 120 476 336
</TABLE>
Revenue for Global Banking & Investment Banking increased in the 1995 third
quarter and the first nine months of 1995 by $81 million and $240 million,
respectively, when compared with the same periods in 1994. The increases in both
1995 periods when compared with last year were primarily due to higher fee
revenue as a result of the Corporation's leading market share in the loan
syndication business and increased revenue from equity-related investments.
Revenue for Global Markets increased in the 1995 third quarter when compared
with the same period last year primarily due to higher securities gains of $43
million, partially offset by lower trading revenues of $13 million. For the
first nine months of 1995, the decline in revenue when compared with the same
period last year is attributable to the $189 million decrease in trading revenue
reflecting unexpected volatility of interest rates in the 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.
Revenue for Regional Centers was essentially flat for the third quarter of 1995
when compared with last year's third quarter. For the first nine months of 1995,
revenue for Regional Centers increased $140 million compared with 1994.
Increased commercial loan volume and improved interest rate environments,
primarily in Latin America, increased net interest income by $27 million for the
first nine months of 1995, when compared with the same period last year. Trading
revenue increased $18 million primarily in the European regional centers. Also
contributing to the increase in revenue for the first nine months of 1995 was
the gain related to the sale of the Corporation's interest in Far East Bank and
Trust Company.
- 32 -
<PAGE>
Part I
Item 2 (continued)
CONSUMER AND RELATIONSHIP BANKING
Consumer and Relationship Banking 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.; Geoserve (cash management, funds
transfer, trade, corporate trust and securities services worldwide); and Texas
Commerce. 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. Texas Commerce is a
leader in providing financial products and services to businesses and
individuals throughout Texas and is the primary bank for more large corporations
and middle market companies than any other bank in Texas.
On October 6, 1995, the Corporation sold Chemical New Jersey Holdings, Inc. to
PNC Bank Corp. The transaction is not reflected in the Corporation's third
quarter results. The sale did not include Chemical's franchise in northeastern
New Jersey, where it retains 39 branches and its private banking operations.
The net income for Consumer and Relationship Banking was $228 million in the
third quarter of 1995, an increase from last year's third quarter results of
$182 million. The increase in earnings was due to lower noninterest expense of
$78 million relating to the reduced FDIC premium expense coupled with the
positive effects of the margin improvement program and higher noninterest
revenue of $13 million, partially offset by higher credit provision of $24
million.
For the first nine months of 1995, Consumer and Relationship Banking's net
income was $590 million, an increase of $81 million from the same period last
year. The results for the first nine 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,
Consumer and Relationship Banking's earnings for the first nine months of 1995
increased by $53 million, when compared with the first nine months of 1994, due
to lower noninterest expense of $80 million, higher noninterest revenue of $39
million and lower foreclosed property expense of $19 million, partially offset
by higher credit provision of $47 million. The higher credit provision
for the first nine months of 1995 reflects the substantial growth in credit card
outstandings.
The following table sets forth the significant components of Consumer and
Relationship Banking's total revenue by business for the periods indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- ---------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Metropolitan Banking $ 270 $ 273 $ 820 $ 756
Retail Card Services 291 255 816 746
Mortgage Bank 57 60 162 160
National Consumer Finance 51 51 158 159
Middle Market 144 145 423 428
Private Banking 88 77 235 226
Geoserve 176 171(a) 522 517(a)
Texas Commerce 282 271 835 814
<FN>
(a) Effective January 1, 1995, revenues and expenses of the business units that
contributed to the shareholder services joint venture with Mellon Bank
Corporation were reflected on an equity basis within the Geoserve line.
The 1994 amounts have been restated to disclose revenue related to the
shareholder services joint venture on a comparable basis.
</FN>
</TABLE>
Metropolitan Banking had revenue of $270 million in the 1995 third quarter,
which was essentially flat with the 1994 third quarter. For the first nine
months of 1995, Metropolitan Bank experienced revenue growth of $64 million, or
8%, compared with 1994. The improvement in 1995 compared with last year's
results was due mainly to favorable deposit spreads, targeted customer
segmentation and repricing initiatives.
- 33 -
<PAGE>
Part I
Item 2 (continued)
Retail Card Services revenue increased $36 million, or 14%, in the 1995 third
quarter and $70 million, or 9%, for the first nine months of 1995, compared with
the same periods in 1994. An increase in Shell MasterCard outstandings and
resulting strong fee growth contributed to the increases in revenue. Total
outstandings for Retail Card Services at the end of the third quarter were $10.7
billion compared with $8.3 billion at the end of the third quarter of 1994.
The Mortgage Bank continues to be faced with fierce competition due to industry
overcapacity and higher interest rates, which have adversely affected production
margins and origination volume in both 1995 and 1994. During the first nine
months of 1995, the Mortgage Bank increased revenues, when compared with the
first nine months of 1994, due to higher servicing-related revenues as a result
of the acquisition of Margaretten.
National Consumer Finance revenues have remained relatively stable in the third
quarter and first nine months of 1995, when compared with the 1994 third quarter
and first nine months. National Consumer Finance outstandings have increased in
the third quarter of 1995 by more than 20% over the third quarter of 1994;
partially offsetting this favorable impact was a reduction in spreads.
Middle Market revenues were essentially flat for the third quarter and first
nine 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 spreads and deposit volumes have decreased primarily due to
heightened competition coupled with the higher interest rate environment.
Private Banking revenue increased $11 million, or 14%, in the 1995 third quarter
and $9 million, or 4%, for the first nine months of 1995, compared with the same
periods in 1994. Private Banking revenue for the first nine months of 1995
includes the adverse impact of a $13 million loss from the permanent impairment
of Barings Bank PLC securities. Excluding this loss, Private Banking's revenues
for the first nine months of 1995 would have reflected a 9% increase over the
same period in 1994. These positive results are attributable to continued loan
and deposit growth, wider deposit spreads and higher fees generated by greater
volume in the brokerage business for the third quarter and the first nine months
of 1995.
Revenue in Geoserve increased $5 million in the 1995 third quarter, a 3%
increase from the 1994 third quarter. The increase in revenue reflects an 8%
increase experienced by treasury management products, partially offset by a
decline in global securities and trust revenue.
Texas Commerce revenue increased $11 million, or 4%, in the 1995 third quarter
and $21 million, or 3%, for the first nine months of 1995, compared with the
same periods in 1994. The improvements in both 1995 periods were due to higher
net interest income resulting from growth in loan volume and more favorable
interest rate spreads. Also contributing to the increase in earnings for the
first nine months of 1995 was lower foreclosed property expense. 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.
TERMINAL BUSINESSES (LDC AND REAL ESTATE)
Terminal Businesses represent discontinued portfolios which are primarily
refinancing country debt and the Corporation's commercial real estate
nonperforming portfolio, primarily at Chemical Bank. Terminal businesses had net
losses of $30 million for the third quarter of 1995 and $43 million for the
first nine months of 1995, compared with net income of $40 million and $12
million, respectively, for the same periods in 1994. The unfavorable 1995
results were primarily due to losses of $36 million in the 1995 third quarter
and $86 million for the first nine months of 1995 related to the disposition of
available-for-sale emerging markets securities compared with gains from emerging
markets securities of $80 million in the 1994 third quarter and $125 million in
the first nine months of 1994. Net interest income decreased $5 million in the
third quarter of 1995 and $33 million for the first nine months of 1995
due to a decline in loan outstandings. The improvements in credit provision
and foreclosed property expense compared with last year reflects the
significant progress made in managing the Corporation's real estate portfolio.
Total nonperforming assets at September 30, 1995 were $286 million, down $845
million from $1,131 million at September 30, 1994.
- 34 -
<PAGE>
Part I
Item 2 (continued)
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 $25
million for the 1995 third quarter and net income of $34 million for the first
nine months of 1995, compared with net income of $5 million and a net loss of $8
million, respectively, for the corresponding 1994 periods. Included in the net
income for the first nine months of 1995 was an $11 million after-tax
charge due to the adoption of SFAS 106 for foreign employees and a $6 million
writedown 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 $85.6 billion at September 30, 1995,
an increase of $6.9 billion from year-end 1994 and an increase of $8.5 billion,
or 11%, from September 30, 1994. The growth in loans outstanding reflects
increases in both the consumer and commercial and industrial loan portfolios
with growth rates of 29% and 4%, respectively, over the past twelve months. 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>
September 30, December 31, September 30,
(in millions) 1995 1994 1994
------------- ------------ -------------
Loans
Domestic Consumer:
<S> <C> <C> <C>
Residential Mortgage (a) $ 18,170 $ 13,560 $ 13,152
Credit Card 10,737 9,261 8,329
Other Consumer (b) 7,766 7,265 6,990
---------- ---------- ---------
Total Consumer Loans 36,673 30,086 28,471
---------- ---------- ---------
Domestic Commercial:
Commercial and Industrial 21,676 20,805 20,783
Commercial Real Estate (c) 5,229 5,650 6,361
Financial Institutions 4,188 3,918 3,084
---------- ---------- ---------
Total Commercial Loans 31,093 30,373 30,228
---------- ---------- ---------
Total Domestic Loans 67,766 60,459 58,699
Foreign, primarily Commercial 17,857 18,308 18,439
---------- ---------- ---------
Total Loans $ 85,623 $ 78,767 $ 77,138
========== ========== =========
<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 following table sets forth the nonperforming assets and contractually
past-due loans of the Corporation at September 30, 1995, December 31, 1994 and
September 30, 1994.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(in millions) 1995 1994 1994
------------- ------------ -------------
Nonperforming Assets:
Domestic Consumer:
<S> <C> <C> <C>
Residential Mortgage $ 132 $ 92 $ 147
Other Consumer 4 12 23
- -- --
-------- -------- --------
Total Consumer Loans 136 104 170
-------- -------- --------
Domestic Commercial:
Commercial and Industrial 287 354 460
Commercial Real Estate 215(a) 156 570
Financial Institutions 20 4 14
-------- -------- --------
Total Commercial Loans 522 514 1,044
-------- -------- --------
Total Domestic 658 618 1,214
Foreign, primarily Commercial 333 311 310
-------- -------- --------
Total Nonperforming Loans 991(a) 929 1,524
Assets Acquired as Loan Satisfactions 56(a) 210 669
-------- -------- --------
Total Nonperforming Assets $ 1,047 $ 1,139 $ 2,193
======== ======== ========
Contractually Past-Due Loans (b):
Consumer $ 331 $ 294 $ 268
Commercial and Other Loans 102 36 42
-------- -------- --------
Total Contractually Past-Due Loans $ 433 $ 330 $ 310
======== ======== ========
<FN>
(a) Includes $855 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 September 30, 1995 were $1,047
million, a decrease of $92 million from the 1994 year-end level and a decrease
of $1,146 million, or 52%, from last year's comparable quarter. The reduction in
nonperforming assets reflects 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.
Management expects the level of the Corporation's nonperforming assets at
year-end 1995 will be comparable with the level at 1994 year-end.
- 36 -
<PAGE>
Part I
Item 2 (continued)
The following table presents the reconciliation of nonperforming assets for the
third quarter and first nine months of 1995 and 1994.
<TABLE>
<CAPTION>
RECONCILIATION OF NONPERFORMING ASSETS Third Quarter Nine Months
------------------- ----------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,118 $ 2,493 $ 1,139 $ 3,525
Additions:
Loans placed on nonperforming status 181 196 530 708
Deductions:
Payments 124 263 298 907
Sales 37 79 88 212
Charge-offs of Nonperforming Loans (a) 87 89 194 457
Write-downs of Real Estate Owned (2)(b) 5 (25)(b) 52
Return to accrual status 6 60 67 412
-------- -------- -------- --------
Balance at end of period $ 1,047 $ 2,193 $ 1,047 $ 2,193
======== ======== ======== ========
<FN>
(a) Excludes those consumer charge-offs that are recorded on a formula basis.
(b) The 1995 third quarter and first nine 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 September 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>
September 30, December 31, September 30,
(in millions) 1995 1994 1994
------------- ------------ -------------
Assets Held for Accelerated Disposition:
<S> <C> <C> <C>
Loans (a) $ 145 $ 336 $ ---
Real Estate Owned 57 190 ---
-------- -------- --------
Total Assets Held for Accelerated Disposition $ 202 $ 526 $ ---
======== ======== ========
<FN>
(a) Includes $8 million and $87 million of loans that were performing at
September 30, 1995 and December 31, 1994, respectively.
</FN>
</TABLE>
- 37 -
<PAGE>
Part I
Item 2 (continued)
<TABLE>
<CAPTION>
NET CHARGE-OFFS
Third Quarter Nine Months
----------------------- -----------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
Net Charge-Offs:
Domestic Consumer:
<S> <C> <C> <C> <C>
Residential Mortgage $ 18 $ 12 $ 45 $ 24
Credit Card 110 84 307 247
Other Consumer 9 4 24 13
------- -------- ------- --------
Total Consumer Net Charge-Offs 137 100 376 284
------- -------- ------- --------
Domestic Commercial:
Commercial and Industrial 1 9 33 97
Commercial Real Estate 11 20 39 143
Financial Institutions --- --- --- (1)
------- -------- ------- --------
Total Commercial Net Charge-Offs 12 29 72 239
------- -------- ------- --------
Total Domestic Net Charge-Offs 149 129 448 523
Foreign (2) (4) (11) 314
------- -------- ------- --------
Total Net Charge-Offs $ 147 $ 125 $ 437 $ 837
======= ======== ======= ========
</TABLE>
For a discussion of net charge-offs, see the various credit portfolio sections
that follow. Management expects that net charge-offs in the 1995 fourth quarter
will be generally comparable with the 1995 third quarter level.
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 $36.7 billion at September 30, 1995, representing 43% of total
loans, an increase from $30.1 billion, or 38% of total loans, at December 31,
1994 and an increase from $28.5 billion, or 37% of total loans, at September 30,
1994.
Residential mortgage loans at September 30, 1995 increased $5.0 billion from the
comparable 1994 period-end, due in part to increases in adjustable-rate loan
outstandings as well as the acquisition of residential mortgage loans in the
second quarter of 1995. Credit card receivables at September 30, 1995 increased
$2.4 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 the fourth quarter of 1995. Management is
exploring other opportunities in the credit card area, including other
co-branded card programs.
Total nonperforming domestic consumer loans were $136 million at September 30,
1995, $104 million at December 31, 1994 and $170 million at September 30, 1994.
The increase in nonperforming domestic consumer loans since December 31, 1994 is
largely due to the increase in the volume of consumer loans.
Domestic consumer loan balances are expected to continue to increase in the
fourth quarter of 1995, particularly in the credit card portfolio despite a
$1.5 billion credit card securitization in the 1995 fourth quarter. As a
result of this anticipated growth, management expects consumer loan net
charge-offs in 1996 will be higher than in 1995.
- 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 but 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
------------------------------------------ ------------------------------------------
Sept. 30, December 31, Sept. 30, Sept. 30, December 31, Sept. 30,
(in millions) 1995 1994 1994 1995 1994 1994
--------- ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Credit Cards $ 226 $ 176 $ 159 2.10% 1.90% 1.91%
Other Consumer Loans (a) 105(b) 118(b) 109(b) 1.35% 1.62% 1.56%
-------- ------- --------
Total $ 331 $ 294 $ 268 0.90% 0.98% 0.94%
======== ======= ========
<FN>
(a) Consists of installment loans (direct and indirect types of consumer
finance) and student loans.
(b) Includes student loans at September 30, 1995, December 31, 1994 and
September 30, 1994 of approximately $92 million, $105 million and $99
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 $4.3 billion of
residential mortgages in the third quarter of 1995 versus $3.2 billion in the
comparable period in 1994. For the nine months ended September 30, 1995, the
Corporation originated $9.2 billion of residential mortgages, compared with
$10.2 billion in the same 1994 period. During the first nine months of 1995, the
Corporation sold to investors approximately 65% of the residential mortgage
loans it had originated, compared with 75% in same 1994 period. The
Corporation's residential mortgage servicing portfolio amounted to $52.6 billion
at September 30, 1995.
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 11 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 $467 million at
September 30, 1995, compared with $469 million at December 31, 1994 and $473
million at September 30, 1994. The decrease from the September 30, 1994 level
reflected the effects of amortization and sales of mortgage servicing rights.
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 $21.7 billion at
September 30, 1995, an increase from $20.8 billion at each of December 31, 1994
and September 30, 1994. The portfolio is diversified geographically and by
industry. The largest industry concentrations are oil and gas and retailing
which approximate $1.9 billion (or 2.2% 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 September 30, 1995 totaled approximately $1.5
billion, compared with $1.3 billion at the 1994 year-end and $1.5 billion at
September 30, 1994. The increase in the HLT loan portfolio from the 1994
year-end level reflects a rise in the number of HLT transactions during 1995. At
September 30, 1995, the Corporation had $19 million in nonperforming HLT loans,
compared with $82 million at the end of 1994 and $131 million at September 30,
1994. Net recoveries related to HLTs for the first nine months of 1995 totaled
$12 million, compared with $13 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 nine months of 1995, the Corporation acted as agent
or co-agent for approximately $282 billion in syndicated credit facilities,
compared with $263 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 $5.2 billion at September 30,
1995, a decrease from $5.7 billion at December 31, 1994 and from $6.4 billion at
September 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>
September 30, December 31, September 30,
(in millions) 1995 1994 1994
------------- ------------ -------------
<S> <C> <C> <C>
Commercial Mortgages $ 4,221 $ 4,680 $ 5,258
Construction 1,008 970 1,103
-------- -------- --------
Total Domestic Commercial Real Estate Loans $ 5,229 $ 5,650 $ 6,361
======== ======== ========
</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 44% and 28%, respectively, of
the domestic commercial real estate portfolio. No other state represented more
than 2% of the domestic commercial real estate loan portfolio.
- 40 -
<PAGE>
Part I
Item 2 (continued)
Nonperforming domestic commercial real estate assets were $230 million at
September 30, 1995, an 8% decrease from December 31, 1994 and a decrease of $878
million, or 79%, from September 30, 1994. The improvement in nonperforming
domestic commercial real estate asset levels since September 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.
During the first nine months of 1995, the Corporation recorded a $25 million net
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 nine months of 1994 totaled $48 million.
Domestic commercial real estate net charge-offs in the third quarter of 1995
totaled $11 million, compared with $20 million in the same period a year ago.
For the first nine months, such net charge-offs were $39 million in 1995,
compared with $143 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.
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 $4.2
billion at September 30, 1995, or 5% of total loans outstanding. Loans to
domestic financial institutions are predominantly to broker-dealers, which
comprise approximately half the domestic financial institutions total.
FOREIGN PORTFOLIO
The foreign portfolio includes commercial and industrial loans, loans to
financial institutions, commercial real estate, loans to governments and
official institutions, and consumer loans. At September 30, 1995, the
Corporation's total foreign loans were $17.9 billion, compared with $18.3
billion at December 31, 1994, and $18.4 billion at September 30, 1994.
Included in foreign loans were foreign commercial and industrial loans of $8.4
billion at September 30, 1995, an increase of $.8 billion from the 1994 year-end
and an increase of $1.0 billion from September 30, 1994. Total foreign
commercial real estate loans at September 30, 1995 were $.6 billion, a slight
increase from each of December 31, 1994 and September 30, 1994. A significant
portion of the foreign real estate portfolio is located in the United Kingdom
and Hong Kong.
MEXICO
For a discussion of significant developments with respect to Mexican debt, see
page B29 of the Corporation's 1994 Form 10-K.
At September 30, 1995, the Corporation's total exposure to Mexico was $1,236
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
$1,565 million and current carrying value of $1,424 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 September 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-B36 of
the Corporation's 1994 Form 10-K, Notes 3, 12 and 14 of this Form 10-Q and the
Risk Management section on pages B31-B37 of the Corporation's 1994 Form 10-K and
below.
- -------------------------------------------------------------------------------
RISK MANAGEMENT
- -------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
Credit risk exists for both lending-related products and derivative and foreign
exchange products. 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 September 30, 1995, approximately
93% 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 7% of the Corporation's derivative
and foreign exchange mark-to-market exposure.
Many of the Corporation's contracts are short-term, which mitigates credit risk
as transactions settle quickly. The following table provides the remaining
maturities of derivative and foreign exchange contracts outstanding at September
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 Note 12 of this Form 10-Q.
- 42 -
<PAGE>
Part I
Item 2 (continued)
<TABLE>
<CAPTION>
At September 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% 60% 29% 11% 57% 32%
3 to 6 months 7 20 13 8 24 15
6 to 12 months 10 18 13 12 12 12
1 to 3 years 35 2 22 35 6 22
Over 3 years 38 --- 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 as well as on-balance sheet derivative and
foreign exchange transactions. The Corporation deems its allowance for credit
losses at September 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
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 nine months of 1995 and
1994. Additionally, at September 30, 1995 and 1994, nonperforming derivatives
contracts were immaterial.
The accompanying table reflects the activity in the allowance for credit losses
for the third quarter and nine months ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------- -------------------
(in millions) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $ 2,430 $ 2,676 $ 2,480 $ 3,020
Provision for Losses 122 100 362 465
Charge-Offs (227) (201) (611) (1,074)
Recoveries 80 76 174 237
-------- ------- --------- --------
Net Charge-Offs (147) (125) (437) (837)
Other --- (1) --- 2
-------- ------- --------- --------
Total Allowance at End of Period $ 2,405 $ 2,650 $ 2,405 $ 2,650
======== ======= ========= ========
</TABLE>
- 43 -
<PAGE>
Part I
Item 2 (continued)
The following table presents the Corporation's allowance coverage ratios at
September 30, 1995, December 31, 1994 and September 30, 1994.
<TABLE>
<CAPTION>
ALLOWANCE COVERAGE RATIOS
September 30, December 31, September 30,
For the Period Ended: 1995 1994 1994
------------- ------------ -------------
Allowance for Credit Losses to:
<S> <C> <C> <C>
Loans at Period-End 2.81% 3.15% 3.44%
Average Loans 2.95 3.30 3.55
Nonperforming Loans 242.68(a) 266.95 173.88
<FN>
(a) The decrease from December 31, 1994 is primarily due to the aforementioned
reclassification of $122 million 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
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 14 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 1.24
million correlations (updated quarterly) 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
September 30, 1995. Based on actual trading results for the twelve months ended
September 30, 1995, which capture the historical correlation among business
units, the Corporation's daily value-at-risk was reduced to approximately $7
million with 97.5% confidence.
For the twelve months ended September 30, 1995, the Corporation posted positive
daily market risk-related revenue for 212 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 (13 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 institutions, is subject to the risk of fraud and to
the risk of unauthorized activities by employees. The Corporation believes it
maintains a comprehensive system of internal controls designed to manage and
control such operating risks.
In December 1994, the Corporation suffered a trading loss of approximately $40
million (after tax). The loss was the result of the Mexican peso falling
precipitously in value at a time when a currency trader at Chemical Bank had a
large, unauthorized long position in the peso, which he had hidden from his
superiors. After that incident the Corporation conducted a review of various
controls associated with its trading activities and tightened controls in
several areas. Among other things, the respective responsibilities of traders,
trading supervisors and operations personnel were more clearly defined, and
additional procedures for confirming trades and following up on unconfirmed
trades were put in place.
- 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 September 30, 1995 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $ (20,720) $ 1,913 $ 3,467 $ 10,421 $ 4,919 $ ---
Off-Balance Sheet Items Affecting
Interest-Rate Sensitivity (a) 997 1,985 (933) (2,618) 569 ---
Interest-Rate-Sensitivity Gap (19,723) 3,898 2,534 7,803 5,488 ---
Cumulative Interest-Rate
Sensitivity Gap (19,723) (15,825) (13,291) (5,488) --- ---
% of Total Assets (10)% (8)% (7)% (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 September 30, 1995, the Corporation had $13,291 million more liabilities than
assets repricing within one year, amounting to 7.1% 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 September 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
less 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 September 30, 1995. The table
was prepared under the assumption that variable interest rates remain constant
at September 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 September 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 $ 2,774 $ 8,099 $ 5,824 $ 1,696 $ 721 $ 3,064 $ 22,178
Weighted-average:
Receive rate 6.44% 6.49% 6.72% 6.71% 8.10% 7.38% 6.74%
Pay rate 5.62 4.79 5.65 5.89 6.52 6.01 5.43
Pay fixed swaps
Notional amount $ 2,771 $ 9,382 $ 3,475 $ 1,143 $ 1,259 $ 3,028 $ 21,058
Weighted-average:
Receive rate 5.36% 5.29% 5.78% 5.50% 6.16% 6.27% 5.58%
Pay rate 5.90 6.30 7.17 7.43 7.71 7.70 6.74
Basis Swaps
Notional amount $ 20 $ 1,057 $ 585 $ 352 $ 1,040 $ 329 $ 3,383
Weighted-average:
Receive rate 5.88% 5.89% 4.34% 6.14% 5.75% 8.26% 5.84%
Pay rate 5.88 5.64 4.36 5.86 5.92 8.31 5.79
Forward Starting
Notional amount $ 0 $ 845 $ 1,167 $ 1,012 $ 398 $ 707 $ 4,129
Weighted-average:
Receive rate 0.00% 6.10% 5.78% 5.82% 5.83% 5.65% 5.84%
Pay rate 0.00 7.30 6.65 6.70 6.87 5.63 6.64
--------------------------------------------------------------------------------------
Total notional
amount (a) $ 5,565 $ 19,383 $ 11,051 $ 4,203 $ 3,418 $ 7,128 $ 50,748
======================================================================================
<FN>
(a) At September 30, 1995, approximately $18 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, $4 billion is expected to mature in 1995, $8 billion in
1996 and $4 billion in 1997 with the remaining $2 billion in 1998 and
thereafter. The unrecognized net gain related to these positions was
approximately $27 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 September 30, 1995 remained strong, with
capital ratios well in excess of regulatory guidelines. The Corporation's Tier 1
and Total Capital ratios were 7.9% and 11.5%, respectively.
Total capitalization (the sum of Tier 1 Capital and Tier 2 Capital) increased
by $817 million during the first nine months of 1995.
STOCKHOLDERS' EQUITY
Total stockholders' equity at September 30, 1995 was $11.8 billion, compared
with $10.7 billion at December 31, 1994. The $1.1 billion increase from the 1994
year-end primarily reflected net income generated during the first nine months
of 1995 of $1,315 million and a $303 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 $435
million and the Corporation's common stock buyback program. 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 program, see Note 7 of this Form 10-Q.
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 September 30, 1995 was $7,537 million, a
decrease of $454 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 $913 million
(including $250 million of senior medium-term notes, $240 million of
subordinated medium-term notes and $423 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 September 30, 1995, the Corporation's Tier 1 Capital and Total Capital ratios
were 7.9% and 11.5%, respectively, well in excess of the minimum ratios
specified by the Federal Reserve Board. These ratios, as well as the leverage
ratio discussed below, do not reflect any adjustment in stockholders' equity due
to the adoption of SFAS No. 115 and also exclude the assets and off-balance
sheet financial instruments of the Corporation's securities subsidiary, Chemical
Securities, Inc., as well as the Corporation's investment in this subsidiary. At
September 30, 1995, Chemical Bank's Tier 1 Capital and Total Capital ratios were
7.3% and 11.1%, 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 6.24% at September 30, 1995,
compared with 6.26% at December 31, 1994. At September 30, 1995, Chemical Bank's
Tier 1 leverage ratio was 5.61%, compared with 5.72% at December 31, 1994.
The table which follows sets forth the Corporation's risk based capital and
capital ratios for the dates indicated.
<TABLE>
<CAPTION>
CAPITAL AND RATIOS UNDER FEDERAL RESERVE BANK FINAL GUIDELINES
September 30, December 31,
(in millions, except ratios) 1995 1994
------------- ------------
TIER 1 CAPITAL
<S> <C> <C>
Common Stockholders' Equity $ 10,715 $ 9,700
Nonredeemable Preferred Stock 1,250 1,450
Minority Interest 69 63
Less: Goodwill 993 1,068
Non-Qualifying Intangible Assets 122 142
50% Investment in CSI 378 246
---------- ----------
Tier 1 Capital $ 10,541 $ 9,757
---------- ----------
TIER 2 CAPITAL
Long-Term Debt Qualifying as Tier 2 $ 3,541 $ 3,519
Qualifying Allowance for Credit Losses 1,675 1,532
Less: 50% Investment in CSI 378 246
---------- ----------
Tier 2 Capital $ 4,838 $ 4,805
---------- ----------
TOTAL QUALIFYING CAPITAL $ 15,379 $ 14,562
========== ==========
Risk-Weighted Assets (a) $ 133,290 $ 121,660
Tier 1 Capital Ratio (b) 7.91% 8.02%
Total Capital Ratio (b) 11.54% 11.97%
Tier 1 Leverage Ratio (b) 6.24% 6.26%
<FN>
(a) Includes off-balance sheet risk-weighted assets in the amount of $42,041
million and $37,157 million, respectively, at September 30, 1995 and
December 31, 1994.
(b) Including the Corporation's securities subsidiary, Chemical Securities
Inc., the September 30, 1995 Tier 1 Capital, Total Capital and Tier 1
Leverage ratios were 8.13%, 12.02% and 6.02%, respectively, compared with
8.20%, 12.35% and 5.95%, 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 first nine months of 1995 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 67% for the nine months 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 nine months of 1995, the Corporation issued $913 million of long-term
debt, including $490 million through its medium-term note program.
The following comments apply to the Consolidated Statement of Cash Flows.
Cash and due from banks decreased $1.7 billion during the first nine months of
1995, as net cash used in investing activities exceeded the net cash provided by
financing and operating activities. The $13.1 billion net cash used by investing
activities was primarily impacted by cash outflows from purchases of securities
($48.6 billion) and from an increase in net loans ($7.1 billion), partially
offset by cash inflows from the sales and maturities of securities ($36.8
billion and $5.5 billion, respectively). The $10.7 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
($11.6 billion), partially offset by a decrease in net long-term debt ($.5
billion). The $.7 billion net cash provided by operating activities was
principally due to earnings adjusted for noncash charges and credits, partially
offset by an increase in trading-related assets.
Cash and due from banks increased $1.2 billion during the first nine months of
1994, as net cash provided by financing and operating activities exceeded net
cash used by investing activities. The $3.6 billion net cash provided by
financing activities was due to increases in Federal funds purchased, securities
sold under repurchase agreements and other borrowed funds ($8.8 billion) and
foreign deposits ($3.3 billion), partially offset by decreases in domestic
deposits ($8.6 billion). The $1.9 billion of net cash provided by operating
activities was principally due to earnings adjusted for noncash charges and
credits. The $4.3 billion net cash used in investing activities was largely the
result of cash outflows from purchases of securities ($18.8 billion), from
Federal funds sold and securities purchased under resale agreements ($2.6
billion), and increases in net loans ($1.9 billion), partially offset by cash
inflows from the sales and maturities of securities ($13.9 billion and $5.0
billion, respectively), as well as decreases in deposits with banks ($0.8
billion).
The Corporation's anticipated cash requirements (on a parent company-only basis)
for the remainder of 1995 include approximately $600 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 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 and the repayment of intercompany
advances from its bank and non-bank subsidiaries. In addition, as of September
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 September 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
$1.1 billion to their respective bank holding companies, plus an additional
amount equal to their net income from October 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
provides 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.
SALE OF CHEMICAL BANK NEW JERSEY NATIONAL ASSOCIATION
On October 6, 1995, the Corporation sold Chemical New Jersey Holdings, Inc. and
its subsidiaries, including Chemical Bank New Jersey National Association, to
PNC Bank Corp. for approximately $492 million. The sale did not include the
Corporation's franchise in northeastern New Jersey or the Montclair, Morristown,
Ridgewood and Summit offices of Princeton Bank and Trust Company. These
remaining branches and offices are being repositioned as a strategic component
of the Corporation's regional banking in metropolitan New York.
The sale is not reflected in the Corporation's third quarter results.
- 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
September 30, 1995 September 30, 1994
--------------------------------------- ------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 3,288 $ 62 7.52% $ 5,181 $ 86 6.56%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 13,082 181 5.49% 12,270 151 4.87%
Trading Assets-Debt and Equity
Instruments 12,205 212 6.88% 10,899 181 6.58%
Securities:
Held-to-Maturity 8,153 131 6.40% 8,738 139 6.33%
Available-for-Sale 21,379 405 7.53%(b) 16,979 286 6.68%(b)
Loans 85,057 1,849 8.61% 75,387 1,477 7.78%
---------- -------- ---------- --------
Total Interest-Earning Assets 143,164 2,840 7.87% 129,454 2,320 7.11%
Allowance for Credit Losses (2,437) (2,714)
Cash and Due from Banks 8,165 8,545
Risk Management Instruments 19,594 20,420
Other Assets 13,040 13,274
---------- ----------
Total Assets $ 181,526 $ 168,979
========== ==========
LIABILITIES
Domestic Retail Deposits $ 41,619 379 3.60% $ 43,049 307 2.83%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,119 73 5.67% 4,851 47 3.81%
Deposits in Foreign Offices 29,873 491 6.52% 23,580 243 4.09%
---------- -------- ---------- --------
Total Time and Savings Deposits 76,611 943 4.88% 71,480 597 3.31%
---------- -------- ---------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 24,819 353 5.64% 20,987 242 4.56%
Commercial Paper 4,313 62 5.66% 2,957 32 4.41%
Other Borrowings 9,170 144 6.24% 8,105 131 6.44%
---------- -------- ---------- --------
Total Short-Term and
Other Borrowings 38,302 559 5.78% 32,049 405 5.02%
Long-Term Debt 7,510 134 7.09% 8,546 134 6.22%
---------- -------- ---------- --------
Total Interest-Bearing Liabilities 122,423 1,636 5.30% 112,075 1,136 4.02%
---------- -------- ---------- --------
Demand Deposits 20,274 21,314
Risk Management Instruments 21,431 19,459
Other Liabilities 5,806 5,337
---------- ----------
Total Liabilities 169,934 158,185
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,250 1,511
Common Stockholders' Equity 10,342 9,283
---------- ----------
Total Stockholders' Equity 11,592 10,794
---------- ----------
Total Liabilities and
Stockholders' Equity $ 181,526 $ 168,979
========== ==========
INTEREST RATE SPREAD 2.57% 3.09%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 1,204(a) 3.34% $ 1,184(a) 3.63%
======== ===== ======== =====
<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 September 30, 1995 and September 30, 1994, the
annualized rate for securities available-for-sale based on historical cost
was 7.49% and 6.62%, 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)
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
--------------------------------------- ------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 3,722 $ 211 7.56% $ 4,980 $ 280 7.49%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 14,094 612 5.80% 11,964 372 4.15%
Trading Assets-Debt and Equity
Instruments 11,506 616 7.14% 11,602 545 6.27%
Securities:
Held-to-Maturity 8,355 422 6.76% 9,405 479 6.81%
Available-for-Sale 20,053 1,140 7.59%(b) 16,833 797 6.33%(b)
Loans 81,645 5,286 8.65% 74,674 4,165 7.45%
---------- -------- ---------- --------
Total Interest-Earning Assets 139,375 8,287 7.94% 129,458 6,638 6.85%
Allowance for Credit Losses (2,465) (2,941)
Cash and Due from Banks 7,768 8,664
Risk Management Instruments 21,465 17,284
Other Assets 13,006 13,285
---------- ----------
Total Assets $ 179,149 $ 165,750
========== ==========
LIABILITIES
Domestic Retail Deposits $ 41,415 1,143 3.69% $ 44,457 828 2.49%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 5,656 233 5.51% 5,166 137 3.56%
Deposits in Foreign Offices 28,743 1,349 6.25% 23,079 695 4.01%
---------- -------- ---------- --------
Total Time and Savings Deposits 75,814 2,725 4.80% 72,702 1,660 3.05%
---------- -------- ---------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 24,185 1,028 5.68% 18,549 568 4.09%
Commercial Paper 3,792 164 5.77% 2,646 78 3.96%
Other Borrowings 8,542 422 6.61% 9,047 410 6.06%
---------- -------- ---------- --------
Total Short-Term and
Other Borrowings 36,519 1,614 5.90% 30,242 1,056 4.67%
Long-Term Debt 7,634 412 7.22% 8,472 401 6.33%
---------- -------- ---------- --------
Total Interest-Bearing Liabilities 119,967 4,751 5.29% 111,416 3,117 3.74%
---------- -------- ---------- --------
Demand Deposits 20,252 21,904
Risk Management Instruments 22,071 15,582
Other Liabilities 5,723 5,849
---------- ----------
Total Liabilities 168,013 154,751
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,357 1,623
Common Stockholders' Equity 9,779 9,376
---------- ----------
Total Stockholders' Equity 11,136 10,999
---------- ----------
Total Liabilities and
Stockholders' Equity $ 179,149 $ 165,750
========== ==========
INTEREST RATE SPREAD 2.65% 3.11%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 3,536(a) 3.39% $ 3,521(a) 3.63%
======== ===== ======== =====
<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 nine months ended September 30, 1995 and September 30, 1994, the
annualized rate for securities available-for-sale based on historical cost
was 7.54% and 6.27%, respectively.
</FN>
</TABLE>
- 52 -
<PAGE>
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1995 1994
----------------------------------- --------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Loans $ 1,844 $ 1,770 $ 1,661 $ 1,575 $ 1,473
Securities 535 513 505 445 422
Trading Assets 211 205 199 177 181
Federal Funds Sold and Securities
Purchased Under Resale Agreements 181 212 219 178 151
Deposits with Banks 62 67 82 91 86
--------- -------- --------- -------- --------
Total Interest Income 2,833 2,767 2,666 2,466 2,313
--------- -------- --------- -------- --------
INTEREST EXPENSE
Deposits 943 931 851 718 597
Short-Term and Other Borrowings 559 536 519 444 405
Long-Term Debt 134 138 140 135 134
--------- -------- --------- -------- --------
Total Interest Expense 1,636 1,605 1,510 1,297 1,136
--------- -------- --------- -------- --------
NET INTEREST INCOME 1,197 1,162 1,156 1,169 1,177
Provision for Losses 122 120 120 85 100
--------- -------- --------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 1,075 1,042 1,036 1,084 1,077
--------- -------- --------- -------- --------
NONINTEREST REVENUE
Trust and Investment Management Fees 96 97 91 99 104
Corporate Finance and Syndication Fees 157 129 119 133 97
Service Charges on Deposit Accounts 75 76 74 78 78
Fees for Other Financial Services 307 290 294 294 285
Trading Revenue 213 171 56 45 212
Securities Gains (Losses) 47 69 (18) 1 6
Other Revenue 82 129 254 165 202
--------- -------- --------- -------- --------
Total Noninterest Revenue 977 961 870 815 984
--------- -------- --------- -------- --------
NONINTEREST EXPENSE
Salaries 616 557 546 571 574
Employee Benefits 104 117 107 110 108
Occupancy Expense 131 129 135 142 145
Equipment Expense 97 97 101 107 100
Foreclosed Property Expense --- (14) (7) 2 2
Restructuring Charge --- --- --- 260 ---
Other Expense 309 362 364 401 382
--------- -------- --------- -------- --------
Total Noninterest Expense 1,257 1,248 1,246 1,593 1,311
--------- -------- --------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE AND EFFECT OF
ACCOUNTING CHANGE 795 755 660 306 750
Income Tax Expense 318 302 264 127 311
--------- -------- --------- -------- --------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE 477 453 396 179 439
Effect of Change in Accounting Principle --- --- (11) --- ---
--------- -------- --------- -------- --------
NET INCOME $ 477 $ 453 $ 385 $ 179 $ 439
========= ======== ========= ======== ========
NET INCOME APPLICABLE TO COMMON STOCK $ 452 $ 427 $ 355 $ 149 $ 396
========= ======== ========= ======== ========
EARNINGS PER SHARE:
Primary:
Income Before Effect of Accounting Change $ 1.74 $ 1.72 $ 1.49 $ 0.61 $ 1.59
Effect of Change in Accounting Principle --- --- (0.04) --- ---
--------- -------- --------- -------- --------
Net Income $ 1.74 $ 1.72 $ 1.45 $ 0.61 $ 1.59
========= ======== ========= ======== ========
Assuming Full Dilution:
Income Before Effect of Accounting Change $ 1.70 $ 1.68 $ 1.46 $ 0.61 $ 1.56
Effect of Change in Accounting Principle --- --- (0.04) --- ---
--------- -------- --------- -------- --------
Net Income $ 1.70 $ 1.68 $ 1.42 $ 0.61 $ 1.56
========= ======== ========= ======== ========
</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.
Litigation Relating to the Merger:
On August 28, 1995, three complaints were filed in the Court of
Chancery for New Castle County, Delaware, in actions entitled Simon
v. Chase Manhattan Corporation, et al., Civil Action No. 14505,
Rampel & Rampel, P.A. Profit Sharing Plan v. Chase Manhattan Corp.,
et. al., Civil Action No. 14506 and Goldstein v. Chase Manhattan
Corp., et al., Civil Action No. 14508. The complaints, each of
which purports to initiate a class action on behalf of all Chase
stockholders, name Chase, the Corporation and certain current and
former directors of Chase as defendants. The complaints allege
that the Merger will entail breaches of fiduciary duties owed by
the director defendants to Chase stockholders, alleging among other
things that the consideration provided in the Merger by the
Corporation is inadequate and that the Merger is unfair to Chase
stockholders and a product of Chase directors' acting out of
self-interest. The complaints also allege that the Corporation
aided and abetted the Chase directors' alleged breach of fiduciary
duties. The complaints seek, among other relief, an injunction
preventing consummation of the Merger and damages in unspecified
amounts. The Corporation and Chase believe the actions to be
without merit and intend to contest them vigorously.
On October 16, 1995, a complaint was filed in the United States
District Court for the Southern District of New York in an action
entitled Lambert v. Tobin and Chemical Banking Corporation. The
complaint, which seeks to initiate a class action on behalf of
persons who sold shares of the Corporation's Common Stock during
the period from July 18, 1995 through August 25, 1995, names the
Corporation and its Chief Financial Officer as defendants and
alleges, among other things, that during such period, defendants
had a duty to disclose the existence of merger negotiations and
that the defendants made materially false and misleading statements
regarding the possibility of a merger with Chase. The Corporation
believes the action to be without merit and intends to contest it
vigorously.
Reference is made to Note 2 of this Form 10-Q for more information
regarding the Merger.
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.
99 - Supplemental Pro Forma Financial Statements.
(B) Reports on Form 8-K:
The Corporation filed two reports on Form 8-K during the
quarter ended September 30, 1995, as follows:
Form 8-K Dated July 20, 1995: July 18, 1995 Press Release -
Results of Operations for Second Quarter 1995.
Form 8-K Dated August 27, 1995: Announcing Agreement and
Plan of Merger, whereby Chase Manhattan Corporation will be
merged with and into Chemical Banking Corporation.
- 54 -
<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 November 14, 1995 By/s/ /s/Joseph L. Sclafani
----------------- ------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
- 55 -
<PAGE>
INDEX TO EXHIBITS
-----------------
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
- ----------- -------- ---------------------
11 Computation of net income 57
per share
12 (a) Computation of ratio of 58
earnings to fixed charges
12 (b) Computation of ratio of 59
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 60
99 Supplemental Pro Forma
Financial Statements 61 - 68
- 56 -
<PAGE>
EXHIBIT 11
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of net income per share
-----------------------------------
Effective with the 1995 second quarter, the Corporation changed its reporting of
earnings per share ("EPS") for all periods from 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%).
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
EARNINGS PER SHARE
Primary
- -------
Earnings:
<S> <C> <C> <C> <C>
Income Before Effect of Accounting Change $ 477 $ 439 $ 1,326 $ 1,115
Effect of Change in Accounting Principle --- --- (11)(a) ---
-------- ------- --------- --------
Net Income $ 477 $ 439 $ 1,315 $ 1,115
Less: Preferred Stock Dividend Requirements 25 43 81 108
-------- ------- --------- --------
Net Income Applicable to Common Stock $ 452 $ 396 $ 1,234 $ 1,007
======== ======= ========= ========
Shares:
Average Common and Common Equivalent
Shares Outstanding 260.1 248.6 251.3 253.0
======== ======= ========= ========
Primary Earnings Per Share:
Income Before Effect of Accounting Change $ 1.74 $ 1.59 $ 4.95 $ 3.98
Effect of Change in Accounting Principle --- --- (0.04)(a) ---
-------- ------- --------- --------
Net Income $ 1.74 $ 1.59 $ 4.91 $ 3.98
======== ======= ========= ========
Assuming Full Dilution
- ----------------------
Earnings:
Net Income Applicable to Common Stock $ 452 $ 396 $ 1,234 $ 1,007
Add: Applicable Dividend on Convertible
Preferred Stock - 5 7 15
-------- ------- --------- --------
Adjusted Net Income $ 452 $ 401 $ 1,241 $ 1,022
======== ======= ========= ========
Shares:
Average Common and Common Equivalent
Shares Outstanding 260.1 248.6 251.3 253.0
Additional Shares Issuable Upon Exercise of Stock
Options for maximum dilutive effect and Conversion
of Preferred Stock (b) 6.0 7.7 17.5 7.6
-------- ------- --------- --------
Adjusted Shares of Common and Equivalent Shares
Outstanding 266.1 256.3 268.8 260.6
======== ======= ========= ========
Earnings Per Share Assuming Full Dilution:
Income Before Effect of Accounting Change $ 1.70 $ 1.56 $ 4.66 $ 3.92
Effect of Change in Accounting Principle --- --- (0.04)(a) ---
-------- ------- --------- --------
Net Income $ 1.70 $ 1.56 $ 4.62 $ 3.92
======== ======= ========= ========
<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>
- 57 -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12(a)
CHEMICAL BANKING CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
(in millions, except ratios)
Nine Months Ended
September 30, 1995
------------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes and Effect of
Accounting Change $ 2,210
--------
Fixed charges:
Interest expense 2,026
One third of rents, net of income from subleases (a) 69
--------
Total fixed charges 2,095
Less: Equity in undistributed income of affiliates (113)
--------
Earnings before taxes, fixed charges and effect of
accounting change, excluding capitalized interest $ 4,192
========
Fixed charges, as above $ 2,095
========
Ratio of earnings to fixed charges 2.00
========
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 2,095
Add: Interest on deposits 2,725
--------
Total fixed charges and interest on deposits $ 4,820
========
Earnings before taxes, fixed charges and effect of accounting
change, excluding capitalized interest, as above $ 4,192
Add: Interest on deposits 2,725
--------
Total earnings before taxes, fixed charges, effect of accounting
change and interest on deposits $ 6,917
========
Ratio of earnings to fixed charges 1.44
========
<FN>
(a) The proportion deemed representative of the interest factor.
</FN>
</TABLE>
- 58 -
<PAGE>
<TABLE>
<CAPTION>
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)
Nine Months Ended
September 30, 1995
------------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes and Effect
of Accounting Change $ 2,210
--------
Fixed charges:
Interest expense 2,026
One third of rents, net of income from subleases (a) 69
--------
Total fixed charges 2,095
--------
Less: Equity in undistributed income of affiliates (113)
--------
Earnings before taxes, fixed charges and effect of accounting
change, excluding capitalized interest $ 4,192
========
Fixed charges, as above $ 2,095
Preferred stock dividends 81
--------
Fixed charges including preferred stock dividends $ 2,176
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.93
========
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends $ 2,176
Add: Interest on deposits 2,725
--------
Total fixed charges including preferred stock
dividends and interest on deposits $ 4,901
========
Earnings before taxes, fixed charges and effect of accounting change,
excluding capitalized interest, as above $ 4,192
Add: Interest on deposits 2,725
--------
Total earnings before taxes, fixed charges, effect of account change
and interest on deposits $ 6,917
========
Ratio of earnings to fixed charges
and preferred stock dividend requirement 1.41
========
<FN>
(a) The proportion deemed representative of the interest factor.
</FN>
</TABLE>
- 59 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000019617
<NAME> CHEMICAL BANKING CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> UNITED STATES DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 7118
<INT-BEARING-DEPOSITS> 3690
<FED-FUNDS-SOLD> 13348
<TRADING-ASSETS> 33830
<INVESTMENTS-HELD-FOR-SALE> 26017
<INVESTMENTS-CARRYING> 8074
<INVESTMENTS-MARKET> 8088
<LOANS> 85623
<ALLOWANCE> 2405
<TOTAL-ASSETS> 187853
<DEPOSITS> 96788
<SHORT-TERM> 45601
<LIABILITIES-OTHER> 24893
<LONG-TERM> 7537
<COMMON> 255
0
1250
<OTHER-SE> 10326
<TOTAL-LIABILITIES-AND-EQUITY> 187853
<INTEREST-LOAN> 5275
<INTEREST-INVEST> 1553
<INTEREST-OTHER> 823
<INTEREST-TOTAL> 8266
<INTEREST-DEPOSIT> 2725
<INTEREST-EXPENSE> 4751
<INTEREST-INCOME-NET> 3515
<LOAN-LOSSES> 362
<SECURITIES-GAINS> 98
<EXPENSE-OTHER> 3751
<INCOME-PRETAX> 2210
<INCOME-PRE-EXTRAORDINARY> 1326
<EXTRAORDINARY> 0
<CHANGES> (11)
<NET-INCOME> 1315
<EPS-PRIMARY> 4.91
<EPS-DILUTED> 4.62
<YIELD-ACTUAL> 3.39
<LOANS-NON> 950
<LOANS-PAST> 433
<LOANS-TROUBLED> 41
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2480
<CHARGE-OFFS> 611
<RECOVERIES> 174
<ALLOWANCE-CLOSE> 2405
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99
CHEMICAL BANKING CORPORATION
AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(In millions)
The following unaudited pro forma combined balance sheet combines the
historical consolidated balance sheets of Chemical Banking Corporation (the
"Corporation") and The Chase Manhattan Corporation ("Chase") giving effect to
the merger of the Corporation and Chase (the "Merger"), which will be accounted
for as a pooling of interests, as if the Merger had been effective on September
30, 1995. The information set forth below should be read in conjunction with the
notes to the pro forma combined financial statements which describe the pro
forma adjustments. The effect of the estimated $1.5 billion restructuring charge
($925 million net of tax) expected to be taken in connection with the Merger has
been reflected in the pro forma combined balance sheet; however, since the
proposed restructuring charge is nonrecurring, it has not been reflected in the
pro forma combined statement of income. The pro forma financial data do not give
effect to the anticipated cost savings in connection with the Merger. The pro
forma financial data are not necessarily indicative of the actual financial
position that would have occurred had the Merger been consummated on September
30, 1995 or that may be obtained in the future.
- 61 -
<PAGE>
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION
AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(In millions)
At September 30, 1995
--------------------------------------------------------------
Chemical Chase Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ------------- ---------
ASSETS (a,i,j,n)
<S> <C> <C> <C> <C>
Cash and Due from Banks $ 7,118 $ 5,141 $ - $ 12,259
Deposits with Banks 3,690 5,798 - 9,488
Federal Funds Sold and Securities
Purchased Under Resale Agreements 13,348 10,959 - 24,307
Trading Assets:
Debt and Equity Instruments 14,080 6,826 - 20,906
Risk Management Instruments 19,750 8,001 - 27,751
Securities: (b)
Held-to-Maturity 8,074 1,900 - 9,974
Available-for-Sale 26,017 5,807 (424)(c) 31,400
Loans 85,623 64,821 424 (c) 151,031
163 (d)
Allowance for Credit Losses (2,405) (1,404) - (3,809)
Premises and Equipment 2,134 1,866 (102)(o) 3,898
Due from Customers on Acceptances 1,200 862 - 2,062
Accrued Interest Receivable 1,301 1,201 - 2,502
Assets Acquired as Loan Satisfactions 56 - 72 (d) 128
Assets Held for Accelerated Disposition 202 - - 202
Other Assets 7,665 8,314 (235)(d) 15,744
-------- -------- ------- ---------
Total Assets $187,853 $120,092 $ (102) $ 307,843
======== ======== ======= ==========
LIABILITIES
Deposits:
Domestic Noninterest-Bearing $ 18,482 $ 12,196 $ - $ 30,678
Domestic Interest-Bearing 45,826 19,917 - 65,743
Foreign 32,480 37,320 - 69,800
-------- -------- ------- ----------
Total Deposits 96,788 69,433 - 166,221
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 30,911 12,539 - 43,450
Other Borrowed Funds 14,690 4,756 (4,946)(e) 14,500
Acceptances Outstanding 1,203 871 - 2,074
Trading Liabilities 20,664 10,959 4,946 (e) 36,569
Accounts Payable, Accrued Expenses and Other Liabilities 4,229 7,038 144 (f) 12,297
925 (g)
(39)(o)
Long-Term Debt 7,537 5,518 -- 13,055
-------- -------- ------- ---------
Total Liabilities 176,022 111,114 1,030 288,166
STOCKHOLDERS' EQUITY
Preferred Stock 1,250 1,400 - 2,650
Common Stock 255 389 (203)(h) 441
Capital Surplus 6,444 4,357 (205)(h) 10,596
Retained Earnings 4,153 3,484 (144)(f) 6,256
(925)(g)
(249)(h)
(63)(o)
Net Unrealized Gain (Loss) on Securities
Available-for-Sale, Net of Taxes (135) 5 - (130)
Treasury Stock, at Cost (136) (657) 657 (h) (136)
--------- --------- -------- ---------
Total Stockholders' Equity 11,831 8,978 (1,132) 19,677
--------- --------- -------- ---------
Total Liabilities and Stockholders' Equity $ 187,853 $ 120,092 $ (102) $ 307,843
========= ========= ======== =========
See Notes to Unaudited Pro Forma Combined Financial Statements
- 62 -
</TABLE>
<PAGE>
EXHIBIT 99
CHEMICAL BANKING CORPORATION
AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(In millions, except per share data)
The following unaudited pro forma combined statements of income, for the
nine month periods ended September 30, 1995 and 1994, combine the historical
consolidated statements of income of the Corporation and Chase giving effect to
the Merger, which will be accounted for as a pooling of interests, as if the
Merger had been effective as of the beginning of the periods indicated after
giving effect to the pro forma adjustments described in the notes to the pro
forma combined financial statements. The effect of the estimated $1.5 billion
restructuring charge ($925 million net of tax) expected to be taken in
connection with the Merger has been reflected in the pro forma combined balance
sheet; however, since the proposed restructuring charge is nonrecurring, it has
not been reflected in the pro forma combined statement of income. The pro forma
financial data do not give effect to the anticipated cost savings in connection
with the Merger. The pro forma financial data are not necessarily indicative of
the results that actually would have occurred had the Merger been consummated on
the dates indicated or that may be obtained in the future.
The unaudited pro forma combined statements of income for each of the
three years ended December 31, 1994, 1993 and 1992 are included in the
Corporation's current report on Form 8-K filed with the Securities and Exchange
Commission on October 26, 1995.
- 63 -
<PAGE>
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION
AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(In millions, except per share data)
For the Nine Months Ended September 30, 1995
----------------------------------------------------------------
Chemical Chase Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
INTEREST INCOME (a,j,n)
<S> <C> <C> <C> <C>
Loans $ 5,275 $ 4,323 $ 38 (c) $ 9,636
Securities 1,553 358 (38)(c) 1,873
Trading Assets 615 332 - 947
Federal Funds Sold and Securities Purchased
Under Resale Agreements 612 786 - 1,398
Deposits with Banks 211 426 - 637
------- ------- ------- -------
Total Interest Income 8,266 6,225 - 14,491
------- ------- ------- -------
INTEREST EXPENSE
Deposits 2,725 1,964 - 4,689
Short-Term and Other Borrowings 1,614 1,307 - 2,921
Long-Term Debt 412 299 - 711
------- ------- ------- -------
Total Interest Expense 4,751 3,570 - 8,321
------- ------- ------- -------
Net Interest Income 3,515 2,655 - 6,170
Provision for Credit Losses 362 210 - 572
------- ------- ------- -------
Net Interest Income After Provision for Credit Losses 3,153 2,445 - 5,598
NONINTEREST REVENUE
Trust and Investment Management Fees 284 409 - 693
Corporate Finance and Syndication Fees 405 207 - 612
Service Charges on Deposit Accounts 225 - 91 (k) 316
Fees for Other Financial Services 891 831 (91)(k) 1,631
Trading Revenue 440 315 - 755
Securities Gains 98 32 (23)(c) 107
Other Revenue 465 345 23 (c) 833
------- ------- ------- -------
Total Noninterest Revenue 2,808 2,139 - 4,947
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 1,719 1,362 (3)(l) 3,078
Employee Benefits 328 418 (10)(f) 736
Occupancy Expense 395 278 - 673
Equipment Expense 295 249 24 (o) 568
Foreclosed Property Expense (21) - (39)(m) (60)
Restructuring Charge - - 15 (l) 15
Other Expense 1,035 954 (12)(l) 2,016
- - 39 (m) -
------- ------- ------- -------
Total Noninterest Expense 3,751 3,261 14 7,026
------- ------- ------- -------
Income Before Income Tax Expense and Effect of
Accounting Change 2,210 1,323 (14) 3,519
Income Tax Expense 884 498 (6) 1,376
------- ------- ------- -------
Income Before Effect of Accounting Change $ 1,326 $ 825 $ (8) $ 2,143
------- ------- ------- -------
Income Applicable to Common Stock $ 1,245 $ 733 $ (8) $ 1,970
------- ------- ------- -------
Income Per Share (Before Accounting Change):
Primary $ 4.95 $ 4.07 $ 4.49
Assuming Full Dilution $ 4.66 $ 4.04 $ 4.32
Average Common Shares Outstanding:
Primary 251.3 180.0 438.5(h)
Assuming Full Dilution 268.8 181.4 457.5(h)
See Notes to Unaudited Pro Forma Combined Financial Statements
- 64 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHEMICAL BANKING CORPORATION
AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(In millions, except per share data)
For the Nine Months Ended September 30, 1994
---------------------------------------------------------
Chemical Chase Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ------------ ---------
INTEREST INCOME (a,j,n)
<S> <C> <C> <C> <C>
Loans $ 4,155 $ 3,929 $ 44 (c) $ 8,128
Securities 1,270 545 (44)(c) 1,771
Trading Assets 545 300 - 845
Federal Funds Sold and Securities Purchased Under Resale Agreements 372 1,048 - 1,420
Deposits with Banks 280 365 - 645
------- --------- ------ ------
Total Interest Income 6,622 6,187 - 12,809
------- --------- ------ -------
INTEREST EXPENSE
Deposits 1,660 1,717 - 3,377
Short-Term and Other Borrowings 1,056 1,456 - 2,512
Long-Term Debt 401 229 - 630
------- ------- ------- -------
Total Interest Expense 3,117 3,402 - 6,519
------- ------- ------- -------
Net Interest Income 3,505 2,785 - 6,290
Provision for Credit Losses 465 410 - 875
------- ------- ------- -------
Net Interest Income After Provision for Credit Losses 3,040 2,375 - 5,415
NONINTEREST REVENUE
Trust and Investment Management Fees 322 423 - 745
Corporate Finance and Syndication Fees 272 162 - 434
Service Charges on Deposit Accounts 222 - 80 (k) 302
Fees for Other Financial Services 854 799 (80)(k) 1,573
Trading Revenue 600 519 - 1,119
Securities Gains 65 95 (93) (c) 67
Other Revenue 447 383 93 (c) 923
------- ------- ------- -------
Total Noninterest Revenue 2,782 2,381 - 5,163
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 1,634 1,298 - 2,932
Employee Benefits 329 369 (10)(f) 688
Occupancy Expense 431 296 - 727
Equipment Expense 275 222 24 (o) 521
Foreclosed Property Expense 39 - 36 (m) 75
Restructuring Charge 48 - - 48
Other Expense 1,160 1,012 (36)(m) 2,136
------- ------- ------- -------
Total Noninterest Expense 3,916 3,197 14 7,127
------- ------- ------- -------
Income Before Income Tax Expense 1,906 1,559 (14) 3,451
Income Tax Expense 791 583 (6) 1,368
------- ------- ------- -------
Net Income $ 1,115 $ 976 $ (8) $ 2,083
------- ------- ------- -------
Income Applicable to Common Stock $ 1,007 $ 880 $ (8) $ 1,879
------- ------- ------- -------
Income Per Share:
Primary $ 3.98 $ 4.76 $ 4.22
Assuming Full Dilution $ 3.92 $ 4.73 $ 4.17
Average Common Shares Outstanding:
Primary 253.0 185.0 445.4(h)
Assuming Full Dilution 260.6 186.1 454.1(h)
See Notes to Unaudited Pro Forma Combined Financial Statements
- 65 -
</TABLE>
<PAGE>
EXHIBIT 99
Notes to Unaudited Pro Forma Combined Financial Statements
(a) The Corporation and Chase are in the process of reviewing their
accounting policies and as a result of this review, it may be necessary
to restate either the Corporation's or Chase's financial statements to
conform to those accounting policies that are determined to be most
appropriate by the combined company. While some restatements of prior
periods have been included in the pro forma combined financial statements
included in this Exhibit, further restatements may be necessary upon the
completion of this review process.
(b) The Corporation and Chase intend to review their combined securities
portfolio to determine the classification of such securities as either
available-for-sale or held-to-maturity in connection with the combined
company's anticipated interest rate risk position. As a result of this
review, certain reclassifications of the combined company's securities
might take place. No such adjustments have been made to existing
securities classifications in the pro forma condensed combined balance
sheet. Any such reclassifications will be accounted for in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(c) Chase's historical financial data includes within available-for-sale
securities certain securities issued by foreign governments (such as
Mexico) to financial institutions as part of a debt renegotiation (i.e.,
"Brady Bonds"). To conform to the Corporation's classification, Chase's
historical financial data have been reclassified on a pro forma basis to
reflect such securities as a component of loans. Both the Corporation and
Chase have accounted for Brady Bonds in accordance with the provisions of
SFAS 115.
Chase's historical financial data reflect sales of Brady Bonds as a
component of securities gains and interest income from Brady Bonds as a
component of interest income from securities. To conform to the
Corporation's classification, Chase's historical financial data have been
reclassified on a pro forma basis to reflect sales of Brady Bonds as a
component of other revenue and interest income from Brady Bonds as a
component of interest income from loans.
(d) Chase's historical financial data reflect assets acquired as loan
satisfactions as a component of other assets. Effective January 1, 1995,
Chase adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan," and prospectively classified in substance foreclosures (ISFs) as
nonperforming loans (the ISF balance as of the January 1, 1995 adoption
remained in other assets). To conform to the Corporation's
classification, Chase's September 30, 1995 historical financial data have
been reclassified on a pro forma basis to reflect the remaining $163
million balance of ISFs as nonperforming loans. To conform to the
Corporation's classification, Chase's historical financial data have been
reclassified on a pro forma basis to reflect assets acquired as loan
satisfactions (excluding ISFs) as a separate balance sheet caption.
(e) The Corporation's historical financial data reflect securities sold but
not yet purchased as a component of other borrowed funds. To conform to
Chase's classification, the Corporation's historical financial data have
been reclassified on a pro forma basis to reflect its securities sold but
not yet purchased as a component of trading liabilities.
(f) Chase elected at the time of its adoption of SFAS No. 106 (effective
January 1, 1993) to amortize the transition liability for accumulated
postretirement benefits over 20 years, while the Corporation upon its
adoption of SFAS No. 106 (effective January 1, 1993) elected to expense
its entire transition liability. To conform with the Corporation's
adoption of SFAS No. 106, Chase's historical financial data have been
- 66 -
<PAGE>
adjusted on a pro forma basis to reverse the amortization of Chase's
transition liability reflected as a component of OPEB expense under SFAS
106. Chase's transition liability of approximately $270 million ($167
million after-tax), net of the $38 million ($23 million after-tax)
reversal of amortization expense, has been reflected in retained earnings
on the pro forma consolidated balance sheet. Both the pre-tax and tax
effect are included in the caption "Accounts Payable, Accrued Expenses
and Other Liabilities" on the pro forma balance sheet.
(g) In connection with the Merger, it is expected that a one-time
restructuring charge of approximately $1.5 billion ($925 million
after-tax) will be incurred at the time of the consummation of the
Merger. The restructuring charge is the result of severance expenses to
be incurred in connection with anticipated staff reductions, costs
incurred in connection with planned office eliminations and other
merger-related expenses, including costs to eliminate redundant back
office and other operations of the Corporation and Chase. The
restructuring charge is assumed to have the following components for the
purpose of the pro forma financial statements:
(in millions)
Severance.................................. $ 550
Real Estate Costs.......................... 550
Other...................................... 400
---
$ 1,500
The effect of the proposed restructuring charge has been reflected in the
pro forma combined balance sheet; however, since the proposed
restructuring charge is nonrecurring, it has not been reflected in the
pro forma combined statement of income. Both the pre-tax and tax effect
are included in the caption "Accounts Payable, Accrued Expenses and Other
Liabilities" on the pro forma balance sheet.
(h) It is assumed that the Merger will be accounted for on a pooling of
interests accounting basis and, accordingly, the related pro forma
adjustments to the common stock, capital surplus and retained earnings
accounts at September 30, 1995 reflect (i) an exchange of 186.1 million
shares of the Corporation's Common Stock (using the exchange ratio of
1.04) for the 179.0 million shares of Chase common stock outstanding at
September 30, 1995; (ii) the exchange of each outstanding share of Chase
preferred stock into one share of the Corporation's preferred stock; and
(iii) the cancellation and retirement of all remaining shares of Chase
common stock held in Chase's treasury. Reference is made to the Form
8-K, which the Corporation has filed with the Securities and Exchange
Commission on October 26, 1995, for more information regarding the
Merger.
For the income per share calculations, the pro forma combined average
common shares outstanding (primary and assuming full dilution) reflects
the exchange of the Corporation's Common Stock (using the exchange ratio
of 1.04) for the outstanding shares of Chase common stock.
(i) The pro forma financial information presented does not give effect to the
planned net repurchase of up to a maximum of 9 million shares in the
aggregate of the Corporation's Common Stock and of Chase's Common Stock
(after giving effect to the issuance of shares by both the Corporation
and Chase under various employee benefit plans) prior to the consummation
of the Merger pursuant to their respective previously announced buyback
programs.
(j) On September 2, 1995, Chase acquired the securities processing businesses
of U.S. Trust Corporation which was merged into Chase and accounted for
under the purchase method. The results of U.S. Trust Corporation are
included in these statements from the date of acquisition.
- 67 -
<PAGE>
The Corporation's disposition of approximately 60% of Chemical Bank New
Jersey, National Association in the 1995 fourth quarter is not considered
significant to the pro forma combined financial statements and,
therefore, its impact is not included in these statements.
(k) Chase's historical financial data reflect service charges on deposit
accounts as a component of fees for other financial services. To conform
to the Corporation's classification, such charges have been reclassified
under a separate caption.
(l) Chase's historical financial statements reflect the components of
restructuring charges within various noninterest expense categories. To
conform to the Corporation's classification, all such charges have been
reclassified to restructuring charge. The following costs have been
reclassified:
Nine Months
ended September 30, 1995
(in millions)
Salaries........................................... $ 3
Other Expense...................................... 12
------
Costs reclassified to Restructuring Charge......... $ 15
======
(m) Chase's historical financial data reflect foreclosed property expense as
a component of other expense. To conform to the Corporation's
classification, Chase's historical financial data have been reclassified
on a pro forma basis to reflect foreclosed property expense as a separate
income statement caption.
(n) Transactions between the Corporation and Chase are not material in
relation to the pro forma combined financial statements and therefore
intercompany balances have not been eliminated from the pro forma
combined amounts.
(o) Chase's historical financial data reflect the capitalization of computer
software costs. To conform to the Corporation's accounting policy,
Chase's historical financial data have been adjusted on a pro forma basis
to recognize immediately as expense those computer software costs that
are capitalized.
The pro forma adjustment to the balance sheet reflects the unamortized
capitalized computer software costs of $102 million ($63 million net of
tax) as of September 30, 1995. The pro forma adjustment to the statement
of income for each period reflects the net impact of (i) charging to
expense computer software costs that were capitalized during each
respective period less (ii) the elimination of the previously recorded
amortization of capitalized computer software costs.
- 68 -
