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, 1996 Commission file number 1-5805
------------------ ------
THE CHASE MANHATTAN 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 438,831,444
- --------------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
October 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
FORM 10-Q INDEX
<S> <C>
Part I Page
- ------
Item 1 Financial Statements - The Chase Manhattan Corporation
and Subsidiaries:
Consolidated Balance Sheet at September 30, 1996 and
December 31, 1995. 3
Consolidated Statement of Income for the three months
ended September 30, 1996 and September 30, 1995. 4
Consolidated Statement of Income for the nine months ended
September 30, 1996 and September 30, 1995. 5
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 1996 and September 30, 1995. 6
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1995. 7
Notes to Financial Statements. 8-15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. 16-48
Part II
- -------
Item 1 Legal Proceedings 49
Item 6 Exhibits and Reports on Form 8-K. 49
==============================================================================================
</TABLE>
2
<PAGE>
Part I
Item 1.
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions, except share data)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 13,729 $ 14,794
Deposits with Banks 4,433 8,468
Federal Funds Sold and Securities
Purchased Under Resale Agreements 26,586 17,461
Trading Assets:
Debt and Equity Instruments 32,952 26,212
Risk Management Instruments 26,883 25,825
Securities:
Available-for-Sale 42,477 37,141
Held-to-Maturity (Fair Value: $3,925 and $4,659) 3,956 4,628
Loans (Net of Unearned Income: $1,366 and $1,073) 150,333 150,207
Allowance for Credit Losses (3,697) (3,784)
Premises and Equipment 3,636 3,757
Due from Customers on Acceptances 2,789 1,896
Accrued Interest Receivable 2,828 2,541
Other Assets 15,699 14,843
---------- -----------
TOTAL ASSETS $ 322,604 $ 303,989
========== ===========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 37,382 $ 36,983
Interest-Bearing 64,374 63,071
Foreign:
Noninterest-Bearing 3,591 3,849
Interest-Bearing 59,695 67,631
---------- -----------
Total Deposits 165,042 171,534
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 57,533 37,263
Other Borrowed Funds 17,624 13,936
Acceptances Outstanding 2,776 1,915
Trading Liabilities 32,972 34,341
Accounts Payable, Accrued Expenses and Other Liabilities 12,588 11,339
Long-Term Debt 12,379 12,825
---------- -----------
TOTAL LIABILITIES 300,914 283,153
---------- -----------
COMMITMENTS AND CONTINGENCIES (See Note 9)
PREFERRED STOCK OF SUBSIDIARY 550 --
---------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,650
Common Stock (Issued 439,936,546 and 457,587,675 Shares) 440 458
Capital Surplus 10,444 11,075
Retained Earnings 8,091 7,997
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (480) (237)
Treasury Stock, at Cost (61,530 and 22,583,225 Shares) (5) (1,107)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 21,140 20,836
---------- -----------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 322,604 $ 303,989
========== ===========
<FN>
The Notes to Financial Statements are an integral part of these Statements.
</FN>
</TABLE>
3
<PAGE>
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended September 30,
(in millions, except per share data)
1996 1995
--------- --------
INTEREST INCOME
<S> <C> <C>
Loans $ 3,042 $ 3,280
Securities 690 639
Trading Assets 525 360
Federal Funds Sold and Securities
Purchased Under Resale Agreements 549 448
Deposits with Banks 112 194
--------- --------
Total Interest Income 4,918 4,921
--------- --------
INTEREST EXPENSE
Deposits 1,416 1,593
Short-Term and Other Borrowings 1,213 1,020
Long-Term Debt 220 239
--------- --------
Total Interest Expense 2,849 2,852
--------- --------
NET INTEREST INCOME 2,069 2,069
Provision for Losses 220 192
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 1,849 1,877
--------- --------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 234 210
Trust and Investment Management Fees 295 258
Credit Card Revenue 277 210
Service Charges on Deposit Accounts 97 105
Fees for Other Financial Services 393 370
Trading Revenue 304 342
Securities Gains 34 53
Other Revenue 222 162
--------- --------
Total Noninterest Revenue 1,856 1,710
--------- --------
NONINTEREST EXPENSE
Salaries 1,040 1,074
Employee Benefits 211 213
Occupancy Expense 204 227
Equipment Expense 179 177
Foreclosed Property Expense 2 (7)
Restructuring Charge and Expenses 32 -
Other Expense 652 648
--------- --------
Total Noninterest Expense 2,320 2,332
--------- --------
INCOME BEFORE INCOME TAX EXPENSE 1,385 1,255
Income Tax Expense 527 491
--------- --------
NET INCOME $ 858 $ 764
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 803 $ 708
========= ========
NET INCOME PER COMMON SHARE:
Primary $ 1.80 $ 1.58
========= ========
Assuming Full Dilution $ 1.78 $ 1.55
========= ========
<FN>
The Notes to Financial Statements are an integral part of these Statements.
</FN>
</TABLE>
4
<PAGE>
Part I
Item 1. (continued)
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended September 30,
(in millions, except per share data)
1996 1995
--------- --------
INTEREST INCOME
<S> <C> <C>
Loans $ 9,311 $ 9,590
Securities 2,095 1,873
Trading Assets 1,360 1,062
Federal Funds Sold and Securities
Purchased Under Resale Agreements 1,564 1,398
Deposits with Banks 440 637
--------- --------
Total Interest Income 14,770 14,560
--------- --------
INTEREST EXPENSE
Deposits 4,518 4,689
Short-Term and Other Borrowings 3,326 3,036
Long-Term Debt 668 711
--------- --------
Total Interest Expense 8,512 8,436
--------- --------
NET INTEREST INCOME 6,258 6,124
Provision for Losses 715 572
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 5,543 5,552
--------- --------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 716 576
Trust and Investment Management Fees 882 741
Credit Card Revenue 743 588
Service Charges on Deposit Accounts 296 316
Fees for Other Financial Services 1,152 1,090
Trading Revenue 1,022 742
Securities Gains 110 107
Other Revenue 735 833
--------- --------
Total Noninterest Revenue 5,656 4,993
--------- --------
NONINTEREST EXPENSE
Salaries 3,162 3,078
Employee Benefits 741 693
Occupancy Expense 632 673
Equipment Expense 544 568
Foreclosed Property Expense (15) (60)
Restructuring Charge and Expenses 1,710 15
Other Expense 1,963 2,059
--------- --------
Total Noninterest Expense 8,737 7,026
--------- --------
INCOME BEFORE INCOME TAX EXPENSE AND
EFFECT OF ACCOUNTING CHANGE 2,462 3,519
Income Tax Expense 837 1,376
--------- --------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE 1,625 2,143
Effect of Change in Accounting Principle -- (11)
--------- --------
NET INCOME $ 1,625 $ 2,132
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 1,461 $ 1,959
========= ========
INCOME PER COMMON SHARE:
Primary:
Income Before Effect of Accounting Change $ 3.28 $ 4.49
Effect of Change in Accounting Principle -- (0.02)
--------- --------
Net Income $ 3.28 $ 4.47
========= ========
Assuming Full Dilution:
Income Before Effect of Accounting Change $ 3.23 $ 4.32
Effect of Change in Accounting Principle -- (0.02)
--------- --------
Net Income $ 3.23 $ 4.30
========= ========
<FN>
The Notes to Financial Statements are an integral part of these Statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(in millions)
Nine Months Ended
September 30,
------------------------
1996 1995
---- ----
<S> <C> <C>
Balance at Beginning of Year $ 2,650 $ 2,850
Conversion of Preferred Stock -- (200)
--------- ----------
Balance at End of Period $ 2,650 $ 2,650
--------- ----------
Common Stock:
Balance at Beginning of Year $ 458 $ 447
Retirement of Treasury Stock (20)(a) --
Issuance of Common Stock 2 10
--------- ----------
Balance at End of Period $ 440 $ 457
--------- ----------
Capital Surplus:
Balance at Beginning of Year $ 11,075 $ 10,671
Retirement of Treasury Stock (433)(a) --
Issuance of Common Stock (114) 324
Restricted Stock Granted, Net of Amortization (84) (7)
---------- ----------
Balance at End of Period $ 10,444 $ 10,988
--------- ----------
Retained Earnings:
Balance at Beginning of Year $ 7,997 $ 6,045
Net Income 1,625 2,132
Retirement of Treasury Stock (557)(a) --
Cash Dividends Declared:
Preferred Stock (164) (173)
Common Stock (818)(b) (584)
Accumulated Translation Adjustment 8 10
--------- ----------
Balance at End of Period $ 8,091 $ 7,430
--------- ----------
Net Unrealized Loss on Securities Available-for-Sale:
Balance at Beginning of Year $ (237) $ (473)
Net Change in Fair Value of Securities Available-for-Sale, Net of Taxes (243) 343
---------- ----------
Balance at End of Period $ (480) $ (130)
---------- -----------
Common Stock in Treasury, at Cost:
Balance at Beginning of Year $ (1,107) $ (667)
Retirement of Treasury Stock 1,010 (a) --
Purchase of Treasury Stock (1,007) (797)
Reissuance of Treasury Stock 1,099 671
--------- ----------
Balance at End of Period $ (5) $ (793)
---------- ----------
Total Stockholders' Equity $ 21,140 $ 20,602
========= ==========
<FN>
(a) Under the terms of the merger agreement, on March 31, 1996, all of the
former Chase Manhattan Corporation's ("Chase") treasury stock was cancelled
and retired. In accordance with existing accounting pronouncements, if the
average price per share of the treasury stock at the time of retirement is
higher than the average price per share in capital surplus, then the excess
amount is applied against retained earnings.
(b) Includes fourth quarter 1995 common stock dividends of $80 million declared
and paid by Chase in 1996.
The Notes to Financial Statements are an integral part of these Statements.
</FN>
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
(in millions)
1996 1995
-------- --------
Operating Activities
<S> <C> <C>
Net Income $ 1,625 $ 2,132
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Effect of Change in Accounting Principle -- 11
Provision for Losses 715 572
Restructuring Charge and Expenses 1,710 15
Depreciation and Amortization 631 639
Net Change In:
Trading-Related Assets (11,286) (5,102)
Accrued Interest Receivable (287) (37)
Other Assets 1,515 142
Trading-Related Liabilities (954) 5,749
Accrued Interest Payable 146 123
Other Liabilities (220) (854)
Other, Net 475 (219)
-------- --------
Net Cash Provided (Used) by Operating Activities (5,930) 3,171
-------- --------
Investing Activities
Net Change In:
Deposits with Banks 4,035 2,952
Federal Funds Sold and Securities Purchased Under Resale Agreements (8,237) (5,065)
Loans Due to Sales and Securitizations 27,984 21,222
Other Loans, Net (28,667) (29,651)
Other, Net (1,198) (582)
Proceeds from the Maturity of Held-to-Maturity Securities 859 1,715
Purchases of Held-to-Maturity Securities (187) (1,055)
Proceeds from the Maturity of Available-for-Sale Securities 6,288 5,272
Proceeds from the Sale of Available-for-Sale Securities 32,792 38,832
Purchases of Available-for-Sale Securities (45,323) (51,423)
-------- --------
Net Cash Used by Investing Activities (11,654) (17,783)
-------- --------
Financing Activities
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 399 (2,711)
Domestic Time and Savings Deposits 1,303 (2,320)
Foreign Deposits (8,194) 4,790
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 19,382 11,875
Other Borrowed Funds 3,688 2,719
Other, Net 921 17
Proceeds from the Issuance of Long-Term Debt 866 1,628
Repayments of Long-Term Debt (1,378) (1,603)
Proceeds from the Issuance of Stock 914 443
Proceeds from the Issuance of Preferred Stock of Subsidiary 550 --
Treasury Stock Purchased (1,007) (797)
Cash Dividends Paid (886) (719)
-------- --------
Net Cash Provided by Financing Activities 16,558 13,322
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks (39) 4
-------- --------
Net Decrease in Cash and Due from Banks (1,065) (1,286)
Cash and Due from Banks at January 1, 14,794 13,545
-------- --------
Cash and Due from Banks at September 30, $ 13,729 $ 12,259
======== ========
Cash Interest Paid $ 8,366 $ 8,197
-------- --------
Taxes Paid $ 1,296 $ 887
-------- --------
<FN>
The Notes to Financial Statements are an integral part of these Statements.
</FN>
</TABLE>
-7-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The unaudited financial statements of The Chase Manhattan Corporation and
subsidiaries are prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of operations for
the interim periods presented have been included. In addition, certain amounts
have been reclassified to conform to the current presentation.
NOTE 2 - MERGER BETWEEN CHASE AND CHEMICAL
- ------------------------------------------
On March 31, 1996, The Chase Manhattan Corporation ("Chase") merged with and
into Chemical Banking Corporation ("Chemical"). Upon consummation of the merger,
Chemical changed its name to "The Chase Manhattan Corporation" (the
"Corporation"). The merger was accounted for as a pooling-of-interests and,
accordingly, the information included in the financial statements presents the
combined results of Chase and Chemical as if the merger had been in effect for
all periods presented.
In connection with the merger, $1.9 billion of one-time merger-related costs
have been identified, of which $1.65 billion was taken as a restructuring charge
on March 31, 1996. The remaining $250 million of merger-related expenses will be
recognized as incurred in accordance with an existing accounting pronouncement.
Approximately $60 million of these merger-related expenses have been incurred
($6 million in the first quarter, $22 million in the second quarter and $32
million in the third quarter) and included in the restructuring charge and
expenses caption in the income statement. The remaining one-time merger-related
expenses are expected to be incurred substantially over the next one and a half
years. The $1.9 billion of merger-related costs reflect severance and other
termination-related costs to be incurred in connection with anticipated staff
reductions (approximately $600 million), costs in connection with planned
dispositions of certain facilities, premises and equipment (approximately $700
million), and other merger-related expenses, including costs to eliminate
redundant back office and other operations and other expenses related directly
to the merger (approximately $600 million).
At September 30, 1996, the reserve balance associated with the above $1.65
billion restructuring charge was approximately $1,201 million, of which $349
million related to severance and other termination-related costs, $666 million
related to the disposition of certain facilities and premises and equipment, and
$186 million related to other merger costs, including costs to eliminate
redundant back office and other operations.
Under the terms of the merger agreement, all 18.6 million shares of Chase's
treasury stock amounting to $1,010 million at March 31, 1996, were cancelled and
retired.
On July 14, The Chase Manhattan Bank, N.A., a national bank, merged with and
into Chemical Bank, a New York State bank, and Chemical Bank changed its name to
"The Chase Manhattan Bank".
NOTE 3 - TREASURY STOCK
- -----------------------
During the first nine months of 1996, the Corporation issued 20.2 million shares
of common stock and repurchased approximately 15.2 million shares of its
outstanding common stock in the open market. These repurchases were made as part
of a buy-back program which terminated at September 30, 1996.
On October 15, 1996, the Corporation announced a common stock purchase program
in which the Corporation is authorized until December 31, 1998 to purchase up to
$2.5 billion of its common stock, in addition to such other number of common
shares as may be necessary to provide for expected issuances under its dividend
reinvestment plan and its various stock-based director and employee benefits
plans.
-8-
<PAGE>
NOTE 4 - TRADING ACTIVITIES
- ---------------------------
For a discussion of the Corporation's risk management instrument activity and
related trading revenue for the 1996 third quarter and first nine months, see
Management's Discussion and Analysis ("MD&A") on pages 21-22 and page 38 of this
Form 10-Q.
Trading Assets and Liabilities
Trading assets and trading liabilities (which are carried at estimated fair
value, after taking into account the effects of legally enforceable master
netting agreements on risk management instruments) are presented in the
following table for the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
(in millions) 1996 1995
------------- ------------
Trading Assets - Debt and Equity Instruments:
<S> <C> <C>
U.S. Government, Federal Agencies and Municipal Securities $ 12,824 $ 9,601
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,777 2,560
Debt Securities Issued by Foreign Governments 8,724 6,318
Debt Securities Issued by Foreign Financial Institutions 5,313 3,467
Loans 995 666
Corporate Securities 1,810 2,224
Other 1,509 1,376
------------ -----------
Total Trading Assets - Debt and Equity Instruments (a) $ 32,952 $ 26,212
============ ===========
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $ 13,954 $ 12,408
Foreign Exchange Contracts 10,439 12,384
Stock Index Options and Commodity Contracts 2,490 1,033
------------ -----------
Total Trading Assets - Risk Management Instruments $ 26,883 $ 25,825
============ ===========
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $ 13,618 $ 13,975
Foreign Exchange Contracts 10,153 13,295
Stock Index Options and Commodity Contracts 1,809 831
------------ -----------
Trading Liabilities - Risk Management Instruments $ 25,580 $ 28,101
Securities Sold, Not Yet Purchased $ 7,392 $ 6,240
------------ -----------
Total Trading Liabilities $ 32,972 $ 34,341
============ ===========
<FN>
(a) Includes emerging markets instruments of $6,306 million at September 30, 1996.
</FN>
</TABLE>
NOTE 5 - SECURITIES
- -------------------
For a discussion of the accounting policies relating to securities, see Note One
of the Corporation's 1995 Annual Report to its stockholders filed with the
Securities and Exchange Commission on Form 8-K dated April 16, 1996 (the "1995
Annual Report").
The valuation of the securities classified as available-for-sale (including
securities classified as loans which are subject to the provisions of SFAS 115)
resulted in a net after-tax unfavorable impact of $480 million on the
Corporation's stockholders' equity at September 30, 1996, compared with a net
after-tax unfavorable impact of $237 million at December 31, 1995. The change
from the 1995 year-end was the result of an increase in U.S. dollar interest
rates during the first nine months of 1996, thereby causing a decline in the
market value of the securities portfolio. This decline was partially offset by a
steady improvement in the value of the Corporation's emerging markets securities
classified as loans since December 31, 1995.
-9-
<PAGE>
Net gains from available-for-sale securities sold in the third quarter and first
nine months of 1996 amounted to $34 million (gross gains of $83 million and
gross losses of $49 million) and $110 million (gross gains of $234 million and
gross losses of $124 million), respectively. Net gains on such sales for the
same periods in 1995 amounted to $51 million (gross gains of $110 million and
gross losses of $59 million) in the third quarter and $105 million (gross gains
of $339 million and gross losses of $234 million) in the first nine months.
Early redemption of certain held-to-maturity securities by their issuers
resulted in a $2 million gain for both the third quarter and first nine months
of 1995.
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale securities,
including the impact of related derivatives, were as follows for the dates
indicated:
<TABLE>
<CAPTION>
September 30, 1996 (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 $ 19,784 $ 25 $ 453 $ 19,356
Collateralized Mortgage Obligations 2,040 1 3 2,038
Other, primarily U.S. Treasuries 12,597 6 268 12,335
Obligations of State and Political Subdivisions 317 2 3 316
Debt Securities Issued by Foreign Governments 5,894 64 17 5,941
Corporate Debt Securities 843 37 -- 880
Collateralized Mortgage Obligations (b) 120 -- 5 115
Equity Securities 969 130 -- 1,099
Other, primarily Asset-Backed Securities 397 6 6 397
--------- ------ ------ ---------
Total Available-for-Sale Securities $ 42,961 $ 271 $ 755 $ 42,477
========= ====== ====== =========
December 31, 1995 (in millions)
- ------------------------------- Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
------------ ------------ ----------- -----
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 19,029 $ 205 $ 2 $ 19,232
Collateralized Mortgage Obligations 1,132 -- 8 1,124
Other, primarily U.S. Treasuries 5,020 4 53 4,971
Obligations of State and Political Subdivisions 633 6 -- 639
Debt Securities Issued by Foreign Governments 8,084 234 146 8,172
Corporate Debt Securities 716 31 10 737
Collateralized Mortgage Obligations (b) 246 -- 1 245
Equity Securities 999 169 4 1,164
Other, primarily Asset-Backed Securities 853 9 5 857
--------- ------ ------ ---------
Total Available-for-Sale Securities $ 36,712 $ 658 $ 229 $ 37,141
========= ====== ====== =========
<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
nonactively-traded securities is based on independent broker quotations.
(b) Collateralized mortgage obligations of private issuers generally have
underlying collateral consisting of obligations of U.S. Government and
Federal agencies and corporations.
</FN>
</TABLE>
-10-
<PAGE>
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity securities for
the dates indicated were as follows:
<TABLE>
<CAPTION>
September 30, 1996 (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 $ 1,589 $ 2 $ 23 $ 1,568
Collateralized Mortgage Obligations 2,159 5 16 2,148
Other, primarily U.S. Treasuries 82 -- -- 82
Other, primarily Asset-Backed Securities (b) 126 1 -- 127
-------- ------ ------ ---------
Total Held-to-Maturity Securities $ 3,956 $ 8 $ 39 $ 3,925
======== ====== ====== =========
December 31, 1995 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value(a)
------------ ------------ ----------- -----
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 1,782 $ 24 $ 1 $ 1,805
Collateralized Mortgage Obligations 2,624 11 6 2,629
Other, primarily U.S. Treasuries 82 -- -- 82
Other, primarily Asset-Backed Securities (b) 140 3 -- 143
--------- ------- ------- ---------
Total Held-to-Maturity Securities $ 4,628 $ 38 $ 7 $ 4,659
========= ======= ======= =========
<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
nonactively-traded securities is based on independent broker quotations.
(b) Also includes collateralized mortgage obligations of private issuers which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
</FN>
</TABLE>
-11-
<PAGE>
NOTE 6 - LOANS
- --------------
For a discussion of the accounting policies relating to loans, including
securities classified as loans which are subject to the provisions of SFAS 115,
reference is made to page 63 and to Note One of the Corporation's 1995 Annual
Report. The following table reflects the amortized cost and estimated fair value
of loans measured pursuant to SFAS 115 (which are all available-for-sale),
including the impact of related derivatives, for the dates indicated.
<TABLE>
<CAPTION>
(in millions) Gross Gross
- ------------- Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ----------- ---------- ------
<S> <C> <C> <C> <C>
September 30, 1996 $ 2,167 $ 140 $ 506 $ 1,801
========== ======= ======= =========
December 31, 1995 $ 2,849 $ 47 $ 917 $ 1,979
========== ======= ======= =========
</TABLE>
There were no net gains or losses in the third quarter of 1996 related to the
disposition of available-for-sale emerging market securities, compared with a
net loss of $36 million in the third quarter of 1995. For the first nine months,
net losses on such sales totaled $65 million in 1996 and $62 million in 1995,
respectively.
The following table sets forth impaired loan disclosures under SFAS 114. The
Corporation uses the discounted cash flow method as its primary method for
valuing impaired loans.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(in millions) 1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
Impaired Loans with an Allowance $ 579 $ 481 $ 619
Impaired Loans without an Allowance (a) 447 740 843
----------- ---------- ---------
Total Impaired Loans $ 1,026 $ 1,221 $ 1,462
=========== ========== =========
Allowance for Impaired Loans under
SFAS 114 (b) $ 212 $ 152 $ 167
----------- ---------- ---------
Average Balance of Impaired Loans
during the year-to-date period ended: $ 1,160 $ 1,534 $ 1,605
----------- ---------- ---------
Interest Income Recognized on Impaired
Loans during the year-to-date period ended: $ 26 $ 26 $ 19
----------- ---------- ---------
<FN>
(a) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the loan. Such loans
do not require an allowance under SFAS 114.
(b) The Allowance for Impaired Loans under SFAS 114 is a part of the
Corporation's overall Allowance for Credit Losses.
</FN>
</TABLE>
-12-
<PAGE>
NOTE 7 - POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
- -----------------------------------------------------------
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"), for postretirement medical benefits for its
foreign plans. Consistent with the January 1, 1993 adoption of SFAS 106 for
domestic plans, the Corporation elected to expense the entire unrecognized
accumulated obligation as of the date of adoption of SFAS 106 related to its
foreign plans via a one-time pre-tax charge of $17 million ($11 million
after-tax).
NOTE 8 - RESTRUCTURING CHARGES
- ------------------------------
See Note 2 for a discussion of the merger-related restructuring charge. For a
discussion of the Corporation's restructuring charges taken in prior years,
reference is made to Note Fifteen of the Corporation's 1995 Annual Report. At
September 30, 1996, the reserve balance related to prior years' restructuring
charges was approximately $101 million relating substantially to the disposition
of certain facilities, premises and equipment and the termination of leases.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
For a discussion of certain legal proceedings, see Part II, Item 1 of this Form
10-Q.
NOTE 10 - PREFERRED STOCK OF SUBSIDIARY
- ---------------------------------------
Chase Preferred Capital Corporation ("CPCC"), a newly formed real estate
investment trust established for the purpose of acquiring, holding and managing
real estate mortgage assets, is a wholly-owned subsidiary of The Chase Manhattan
Bank. On September 18, 1996, CPCC issued 22 million shares of 8.10% Cumulative
Preferred Stock, Series A with a liquidation preference of $25 per share.
Dividends are cumulative, will be payable quarterly commencing December 31, 1996
and will be considered minority interest expense by the Corporation.
The Series A Preferred Shares are generally not redeemable prior to September
18, 2001. On and after September 18, 2001, the Series A Preferred Shares may be
redeemed for cash at the option of CPCC, in whole or in part, at a redemption
price of $25 per share, plus accrued and unpaid dividends, if any, thereon.
The Series A Preferred Shares will be treated as Tier 1 capital for the
Corporation. The Series A Preferred Shares will not be subject to any sinking
fund or mandatory redemption and will not be convertible into any other
securities of CPCC or the Corporation and any of its subsidiaries.
NOTE 11 - 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.
For a discussion of the credit and market risks involved with derivative and
foreign exchange financial instruments, reference is made to pages 32 and 38-44
and to Note Eighteen of the Corporation's 1995 Annual Report.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR TRADING PURPOSES: The
financial instruments used for the Corporation's trading activities are
disclosed in Note 4 of this Form 10-Q. The credit risk relating to the
Corporation's trading activities is recorded on the balance sheet. 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. A
discussion of the Corporation's objectives and strategies for employing
derivative and foreign exchange instruments for ALM activities is included on
pages 41 and 44 of the Corporation's 1995 Annual Report.
At September 30, 1996, gross deferred gains and gross deferred losses relating
to closed derivative contracts used in ALM activities were $592 million and $654
million, respectively. See page 56 of the Corporation's 1995 Annual Report for
the accounting method used for these contracts and see page 41 of this Form 10-Q
for the Amortization of Net Deferred Gains (Losses) on Closed ALM Contracts.
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,
1996, deferred gains and losses associated with such transactions were
immaterial.
-13-
<PAGE>
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 legally enforceable master
netting agreements) for the dates indicated below. The table should be read in
conjunction with the descriptions of these products and their risks included on
pages 74-75 of the Corporation's 1995 Annual Report.
<TABLE>
<CAPTION>
Notional Amounts (a) Credit Exposure
-------------------- ---------------
September 30, December 31, September 30, December 31,
(in billions) 1996 1995 1996 1995
- ------------- ------------- ------------ ------------- ------------
Interest Rate Contracts
Futures, Forwards and Forward Rate Agreements
<S> <C> <C> <C> <C>
Trading $ 1,276.5 $ 1,047.5 $ 0.5 $ 1.3
Asset and Liability Management 68.1 40.0 0.1 0.1
Interest Rate Swaps
Trading 2,171.8 1,692.6 11.9 10.4
Asset and Liability Management 98.7 69.7 0.6 0.3
Purchased Options
Trading 170.1 147.2 1.6 0.7
Asset and Liability Management 42.2 26.0 --- ---
Written Options
Trading 172.1 161.0 --- ---
Asset and Liability Management 19.7 6.4 --- ---
---------- ---------- ---------- --------
Total Interest Rate Contracts $ 4,019.2 $ 3,190.4 $ 14.7 $ 12.8
========== ========== ========== ========
Foreign Exchange Contracts
Spot, Forward and Futures Contracts
Trading $ 1,330.4 $ 1,352.1 $ 6.2 $ 8.8
Asset and Liability Management 48.3 10.9 --- ---
Other Foreign Exchange Contracts (b)
Trading 241.7 241.6 4.2 3.6
Asset and Liability Management 3.0 1.6 --- ---
---------- ---------- --------- --------
Total Foreign Exchange Contracts $ 1,623.4 $ 1,606.2 $ 10.4 $ 12.4
========== ========== ========== ========
Stock Index Options and Commodity
Contracts
Trading $ 43.4 $ 37.7 $ 2.5 $ 1.0
--------- ---------- ---------- -------
Total Stock Index Options and
Commodity Contracts $ 43.4 $ 37.7 $ 2.5 $ 1.0
========== ========== ========== =======
Total Credit Exposure Recorded on the Balance Sheet $ 27.6 $ 26.2
<FN>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and stock index options and commodity contracts were
$596.9 billion, $4.7 billion and $2.7 billion, respectively, at September
30, 1996, compared with $417.7 billion, $10.6 billion and $5.1 billion,
respectively, at December 31, 1995. The credit risk amounts of these
contracts were minimal since exchange-traded contracts principally settle
daily in cash.
(b) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $73.2 billion, $85.3 billion and
$86.2 billion, respectively, at September 30, 1996, compared with $92.2
billion, $92.4 billion and $58.6 billion, respectively, at December 31,
1995.
</FN>
</TABLE>
-14-
<PAGE>
NOTE 12 - 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, 1996 and December 31, 1995. The table should be
read in conjunction with the description of these products and their risks
included on page 75 of the Corporation's 1995 Annual Report.
<TABLE>
<CAPTION>
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
- -------------------------------------------------------
September 30, December 31,
(in millions) 1996 1995
------------- ------------
<S> <C> <C>
Commitments to Extend Credit $ 93,704(a) $ 95,555(a)
Standby Letters of Credit and Guarantees (Net of Risk
Participations of $4,518 and $4,861) 29,451 24,745
Other Letters of Credit 6,069 5,907
Customers' Securities Lent 36,835 27,169
<FN>
(a) Excludes credit card commitments of $49.0 billion and $47.6 billion at
September 30, 1996 and December 31, 1995, respectively.
</FN>
</TABLE>
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------------
For a discussion of the Corporation's fair value methodologies, see pages 76-77
of the Corporation's 1995 Annual Report. The following table presents the
carrying value and estimated fair value at September 30, 1996 and December 31,
1995 of the Corporation's financial assets and liabilities valued under SFAS
107.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
Carrying Estimated Appreciation/ Carrying Estimated Appreciation/
(in millions) Value Fair Value (Depreciation) Value Fair Value (Depreciation)
- ------------- -------- ---------- -------------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total Financial Assets $ 317,863 $ 320,020 $ 2,157 $ 294,627 $ 299,879 $ 5,252
========== =========== =========== ===========
Total Financial Liabilities $ 300,637 $ 300,120 517 $ 283,065 $ 283,698 (633)
========== =========== --------- =========== =========== ----------
Estimated Fair Value in Excess
of Carrying Value $ 2,674 $ 4,619
========= ==========
</TABLE>
Derivative contracts used for ALM activities are included in the above amounts
and are valued using market prices or pricing models consistent with methods
used by the Corporation in valuing similar instruments used for trading
purposes. The following table presents the carrying value and estimated fair
value of derivatives contracts used for ALM activities excluding those
derivatives contracts used by the Corporation to manage the risks associated
with its mortgage servicing portfolio, which are disclosed on page 33.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
Carrying Estimated Net Unrealized Carrying Estimated Net Unrealized
(in millions) Value Fair Value Gains/(Losses) Value Fair Value Gains/(Losses)
- ------------- -------- ---------- -------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Financial Assets $ 238 $ 111 $ (127) (a) $ 92 $ (67) $ (159)
Total Financial Liabilities $ 250 $ (77) $ (327) (a) $ 270 $ 643 $ 373
<FN>
(a) Unrealized gains and losses related to total financial assets were $453
million and $580 million, respectively, at September 30, 1996. Unrealized
gains and losses related to total financial liabilities were $271 million
and $598 million, respectively, at September 30, 1996.
</FN>
</TABLE>
-15-
<PAGE>
Part I
Item 2.
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(in millions, except per share and ratio data)
1996 1995 Nine Months Ended
-------------------- ---- ------------------------
Third Second Third Sept. 30, Sept. 30,
Quarter Quarter Quarter 1996 1995
------- ------- ------- --------- ---------
EARNINGS:
<S> <C> <C> <C> <C> <C>
Income Before Restructuring Charge $ 878 $ 870 $ 764 $ 2,685 $ 2,152
Restructuring Charge (After-Tax) (20)(a) (14)(a) -- (1,060)(a) (9)(b)
------- -------- ------- -------- --------
Income After Restructuring Charge and
Before Effect of Accounting Change 858 856 764 1,625 2,143
Effect of Change in Accounting Principle -- -- -- -- (11)(c)
------- ------- -------- -------- --------
Net Income $ 858 $ 856 $ 764 $ 1,625 $ 2,132
======= ======== ======== ======== ========
Net Income Applicable to Common Stock $ 803 $ 801 $ 708 $ 1,461 $ 1,959
======= ======== ======== ======== ========
INCOME PER COMMON SHARE:
Primary:
Income Before Restructuring Charge $ 1.85 $ 1.83 $ 1.58 $ 5.66 $ 4.51
Restructuring Charge (After-Tax) (0.05)(a) (0.03)(a) -- (2.38)(a) (0.02)(b)
------- -------- -------- -------- --------
Income After Restructuring Charge and
Before Effect of Accounting Change 1.80 1.80 1.58 3.28 4.49
Effect of Change in Accounting Principle -- -- -- -- (0.02)(c)
------- -------- -------- -------- -------
Net Income $ 1.80 $ 1.80 $ 1.58 $ 3.28 $ 4.47
======= ======== ======== ======== ========
Assuming Full Dilution:
Income Before Restructuring Charge $ 1.83 1.82 $ 1.55 $ 5.57 $ 4.34
Restructuring Charge (After-Tax) (0.05)(a) (0.03)(a) -- (2.34)(a) (0.02)(b)
------- -------- -------- -------- --------
Income After Restructuring Charge and
Before Effect of Accounting Change 1.78 1.79 1.55 3.23 4.32
Effect of Change in Accounting Principle -- -- -- -- (0.02)(c)
------- --------- -------- -------- -------
Net Income $ 1.78 $ 1.79 $ 1.55 $ 3.23 $ 4.30
======= ======== ======== ======== ========
PER COMMON SHARE:
Book Value $ 42.03 $ 40.47 $ 40.93 $ 42.03 $ 40.93
Market Value $ 80.13 $ 70.63 $ 60.88 $ 80.13 $ 60.88
Common Stock Dividends Declared (d) $ 0.56 $ 0.56 $ 0.50 $ 1.68 $ 1.44
COMMON SHARES OUTSTANDING:
Average Common and Common Equivalent Shares 447.2 444.8 448.4 446.0 438.5
Average Common Shares Assuming Full Dilution 450.5 448.4 456.4 452.3 457.5
Common Shares at Period End 439.9 437.1 438.6 439.9 438.6
PERFORMANCE RATIOS: (Average Balances)
Income Before Restructuring Charge: (e)
Return on Assets 1.08% 1.10% .99% 1.13% .94%
Return on Common Stockholders' Equity 18.35% 19.00% 16.17% 18.96% 15.89%
Return on Total Stockholders' Equity 17.04% 17.58% 15.14% 17.57% 14.83%
Net Income (Loss): (e)
Return on Assets 1.06% 1.08% .99% .68% .93%
Return on Common Stockholders' Equity 17.90% 18.67% 16.17% 10.99% 15.73%
Return on Total Stockholders' Equity 16.65% 17.30% 15.14% 10.63% 14.69%
Efficiency Ratio (f) 58.2% 58.4% 61.9% 58.7% 64.1%
<FN>
(a) Reflects merger-related restructuring charge of $1,022 million, after-tax,
which was recorded on March 31, 1996. In addition, $38 million, after-tax,
of merger-related expenses were incurred ($4 million in the first quarter,
$14 million in the second quarter and $20 million in the third quarter) and
recognized under an existing accounting pronouncement.
(b) Reflects a restructuring charge related to exiting from a futures brokerage
business.
(c) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for
other postretirement benefits relating to its foreign plans.
(d) The Corporation increased its quarterly common stock dividend from $0.50
per share to $0.56 per share in the first quarter of 1996.
(e) Performance ratios are based on annualized net income amounts.
(f) Excludes restructuring charges, foreclosed property expense, and
nonrecurring items.
</FN>
</TABLE>
-16-
<PAGE>
Part 1
Item 2 (continued)
On March 31, 1996, The Chase Manhattan Corporation ("Chase") merged with and
into Chemical Banking Corporation ("Chemical"). Upon consummation of the merger,
Chemical changed its name to "The Chase Manhattan Corporation" (the
"Corporation"). The merger was accounted for as a pooling-of-interests and,
accordingly, the information included in this Form 10-Q presents the combined
results of Chase and Chemical as if the merger had been in effect for all
periods presented. Certain forward-looking statements contained herein are
subject to risks and uncertainties. The Corporation's actual results following
the merger may differ materially from those set forth in such forward-looking
statements. Reference is made to the Corporation's reports filed with the
Securities and Exchange Commission, in particular the Form 8-K dated July 17,
1996, the Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 and the Corporation's Annual Report to Stockholders (as filed with the
Corporation's Current Report on Form 8-K dated April 16, 1996) for a discussion
of factors that may cause such differences to occur.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
The Chase Manhattan Corporation (the "Corporation") reported earnings for the
third quarter of 1996 were $858 million, a 12% increase when compared with 1995
third quarter earnings of $764 million. Primary earnings per share ("primary
EPS") were $1.80 for the 1996 third quarter, compared with $1.58 for the 1995
third quarter, and fully diluted earnings per share ("fully diluted EPS") for
the 1996 and 1995 third quarters were $1.78 and $1.55, respectively.
Excluding merger-related expenses of $20 million, after tax, net income for the
1996 third quarter was $878 million, primary EPS were $1.85 and fully diluted
EPS were $1.83.
The Corporation's net income, including restructuring charges and expenses of
$1,060 million, after tax, was $1,625 million for the first nine months of 1996,
compared with $2,132 million for the first nine months of 1995. Primary EPS and
fully diluted EPS for the first nine months of 1996 were $3.28 and $3.23,
respectively, compared with $4.47 and $4.30, respectively, for the same periods
in 1995. Excluding restructuring charges and expenses, the Corporation's
earnings for the first nine months of 1996 rose 25% to $2,685 million. Primary
and fully diluted EPS were $5.66 and $5.57, respectively, in 1996, compared with
$4.51 and $4.34, respectively, in the same 1995 period.
The Corporation's third quarter and first nine months 1996 results reflected
revenue growth in its global wholesale and nationwide consumer businesses, and
effective management of its operating and credit costs. Merger savings were $180
million in the 1996 third quarter and $320 million for the first nine months of
1996. Management expects to achieve its previously announced performance target
of $510 million of merger-related savings for 1996.
The Corporation's return on average common stockholders' equity was 17.9% for
the third quarter of 1996, compared with 16.2% for the 1995 comparable quarter.
Excluding restructuring charges and expenses, the return on common stockholders'
equity was 19.0% for the first nine months of 1996 versus 15.9% for the same
period of 1995. The Corporation's efficiency ratio improved to 58.2% for the
third quarter of 1996, compared with 61.9% for the third quarter of 1995.
Excluding the impact of credit card securitizations (see further discussions on
pages 33 and 34), the efficiency ratio for the third quarters of 1996 and 1995
was 56.1% and 61.1%, respectively.
In connection with reporting the Corporation's 1996 third quarter earnings,
management announced that it believed that the Corporation will generally meet
previously announced operating goals for 1996. Management of the Corporation
currently expects the Corporation to continue to realize annual operating
revenue growth, on a managed basis, of 5-7% into 1997, and continues to target
as financial goals double digit operating earnings per share growth in each of
the next two years, a return on average common equity of 18% or higher by 1998,
and an efficiency ratio in the low 50% range by 1998.
On October 15, 1996, the Corporation announced that its Board of Directors had
authorized a common stock repurchase program for the Corporation. The
Corporation is authorized until December 31, 1998 to purchase up to $2.5 billion
of its common stock, in addition to such other number of common shares as may be
necessary to provide for expected issuances under its dividend reinvestment plan
and its various stock-based director and employee benefits plans.
At September 30, 1996, the Corporation's Tier 1 Capital and Total Capital ratios
were 8.36% and 12.17%, respectively (excluding the assets and off-balance sheet
financial instruments of the Corporation's securities subsidiary, as well as the
Corporation's investment in this subsidiary). These 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, 1996,
the Corporation and all of its depository institutions were "well capitalized"
as defined by the Federal Reserve Board.
The Corporation's nonperforming assets at September 30, 1996 were $1,517
million, a decline of $147 million compared with $1,664 million on December 31,
1995, and $369 million from $1,886 million at September 30, 1995. Nonperforming
assets have declined by approximately $10.0 billion, or 87%, from their peak
level of $11.5 billion in 1991.
-17-
<PAGE>
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
TOTAL REVENUE
The Corporation's total revenue for the 1996 third quarter was $3,925 million,
an increase of 4% from the same 1995 period. For the first nine months of 1996,
total revenue increased 7% to $11,914 million from the comparable 1995 period.
On a managed basis, which excludes the impact of credit card securitizations,
total revenue for the 1996 third quarter increased 6% to $4,074 million and for
the 1996 nine months increased 10% to $12,325 million.
NET INTEREST INCOME
Reported net interest income for the 1996 and 1995 third quarter was unchanged
at $2,069 million. For the first nine months, reported net interest income was
$6,258 million (including $54 million of interest related to Federal and State
tax audit settlements) in 1996, $134 million higher than the comparable period
in 1995. Excluding the impact of securitizations and the tax audit settlements,
net interest income on a managed basis increased 7% in the 1996 third quarter
and 8% for the first nine months, reflecting growth in consumer receivables (on
a managed basis) and higher levels of trading-related assets.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
(in millions) 1996 1995 1996 1995
------------ ------------ ------------ -----------
Net Interest Income:
<S> <C> <C> <C> <C>
Domestic $ 1,649 $ 1,660 $ 4,965 $ 4,868
Overseas 420 409 1,293 1,256
----------- ------------ ----------- -----------
Net Interest Income - Reported $ 2,069 $ 2,069 $ 6,258 $ 6,124
=========== ============ =========== ===========
Net Interest Income - Managed Basis (a) $ 2,313 $ 2,161 $ 6,843 $ 6,350
=========== ============ =========== ===========
Average Interest-Earning Assets:
Domestic $ 190,369 $ 174,315 $ 184,240 $ 171,007
Overseas 73,049 71,179 74,174 70,415
----------- ------------ ----------- -----------
Total Average Interest-Earning Assets $ 263,418 $ 245,494 $ 258,414 $ 241,422
=========== ============ =========== ===========
Total Average Interest-Earning Assets
Managed Basis (a) $ 275,303 $ 250,208 $ 268,455 $ 245,117
=========== ============ =========== ===========
Net Yield on Interest-Earning Assets:
Domestic 3.46% 3.80% 3.62% 3.83%
Overseas 2.29 2.28 2.33 2.38
Consolidated Net Yield on Interest-Earning Assets (b) 3.14 3.36 3.25 3.41
Consolidated Net Yield on Interest-Earning Assets
Managed Basis (a)(b) 3.36 3.44 3.42 3.48
<FN>
(a) Managed basis excludes the impact of credit card securitizations and, in
the first nine months of 1996, $54 million of interest related to Federal
and State tax audit settlements. See page 34 for further discussion of
credit card securitizations.
(b) Reflected on a taxable equivalent basis in order to permit comparison of
yields on tax-exempt and taxable assets. For net interest income on a
taxable equivalent basis, see the Average Balance Sheets on pages 46 and
47.
</FN>
</TABLE>
Excluding the impact of credit card securitizations and the tax audit
settlements, the net yield was 3.36% in the 1996 third quarter, a decline of 8
basis points from the prior year quarter, and 3.42% for the first nine months of
1996, a decline of 6 basis points when compared with the same prior-year period.
The decline in both 1996 periods was due to an increase in lower-yielding
securities and trading-related assets.
-18-
<PAGE>
The following table reflects the composition of interest-earning assets as a
percentage of total earning assets for the periods indicated.
<TABLE>
<CAPTION>
AVERAGE INTEREST-EARNING ASSET MIX
Third Quarter
-------------
(in billions) 1996 1995
--------------------------- -----------------------
<S> <C> <C> <C> <C>
Consumer Loans $ 72.8 28% $ 72.5 30%
Commercial Loans 77.3 29 77.4 31
--------- ------ -------- -----
Total Loans 150.1 57 149.9 61
Securities 42.5 16 36.3 15
Liquid Interest-Earning Assets 70.8 27 59.3 24
--------- ------ -------- -----
Total Interest-Earning Assets $ 263.4 100% $ 245.5 100%
========= ====== ======== =====
Nine Months
-----------
(in billions) 1996 1995
--------------------------- -----------------------
Consumer Loans $ 72.8 28% $ 69.4 29%
Commercial Loans 77.3 30 76.6 31
--------- ------ -------- -----
Total Loans 150.1 58 146.0 60
Securities 42.6 17 35.2 15
Liquid Interest-Earning Assets 65.7 25 60.2 25
--------- ------ -------- -----
Total Interest-Earning Assets $ 258.4 100% $ 241.4 100%
========= ====== ======== =====
</TABLE>
Average interest-earning assets increased during the third quarter and nine
month periods in 1996, when compared with the respective 1995 periods,
principally as a result of increases in liquid interest-earning assets and the
available-for-sale securities portfolio. The Corporation has continued to
increase its liquid interest-earning assets through its trading and Section 20
activities. The Corporation increased its securities portfolio in both 1996
periods as part of its asset/liability management activities. Additionally, the
Corporation's average total loans in the 1996 third quarter were stable when
compared with the third quarter of 1995, but increased by $4.1 billion in the
1996 nine month period when compared with the comparable nine month 1995 period.
The increase reflected growth in consumer loans (despite the impact of a higher
level of credit card securitizations) and, to a lesser extent, commercial
lending, partially offset by the continued reduction in the commercial real
estate portfolio.
The growth in interest-earning assets in the 1996 third quarter was funded by a
$14.9 billion increase in interest-bearing liabilities. The increase in
interest-bearing liabilities was principally due to a higher level of Federal
funds purchased and securities sold under repurchase agreements, partially
offset by a decline in total interest-bearing deposits. The Corporation utilizes
repurchase agreements as a source of short-term funding for trading-related
positions and for its securities portfolio.
For additional information on average balances and net interest income on a
taxable equivalent basis, see Average Consolidated Balance Sheet, Interest and
Rates on pages 46 and 47.
Management anticipates that, given its current expectations for interest rate
movements for the remainder of 1996, the Corporation's net interest income for
1996 will be higher than net interest income for 1995 (prior to the impact of
credit card securitizations).
-19-
<PAGE>
PROVISION FOR LOSSES
The Corporation's provision for losses was $220 million for the 1996 third
quarter, compared with $250 million in the 1996 second quarter, and $192 million
in the 1995 third quarter. For the first nine months, the provision for losses
was $715 million in 1996, compared with $572 million in 1995. The increase in
the provision for losses for both 1996 periods, when compared with the
same 1995 periods, was primarily the result of higher commercial net
charge-offs as a result of a lower level of recoveries. For the same periods,
the Corporation had lower consumer net charge-offs due, in part, to a decline in
the level of credit card receivables retained on the balance sheet.
Management anticipates that the provision for losses in 1997 will be modestly
higher than in 1996, primarily as a result of an anticipated further decline in
recoveries in the commercial portfolio and anticipated growth in assets,
particularly in the Corporation's national consumer receivables. For a
discussion of the Corporation's net charge-offs, see the Credit Risk Management
Section on pages 31-37.
NONINTEREST REVENUE
Noninterest revenue increased for the 1996 third quarter and nine-month period
when compared with the corresponding 1995 periods reflecting increases in fees
and commissions principally from corporate finance and syndication activities,
credit card revenue and trust and investment management fees. The Corporation
continued to generate fee growth by offering clients integrated solutions and
products. New product offerings such as advisory services have been integrated
with other products and services of the Corporation, contributing to the
Corporation's fee growth. The 1996 third quarter increases in fees and
commissions were partially offset by lower trading revenue. While the 1996 nine
month results reflected increased fees and commissions and a 38% increase in
trading revenue, these increases were partially offset by lower other revenue
which included a loss of $60 million on the sale of a building in Japan.
Additionally, the 1995 nine month period included a gain of $85 million on the
sale of the Corporation's investment in Far East Bank and Trust Company.
The following table presents the components of noninterest revenue for the
periods indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
(in millions) 1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Corporate Finance and Syndication Fees $ 234 $ 210 $ 716 $ 576
Trust and Investment Management Fees 295 258 882 741
Credit Card Revenue 277 210 743 588
Service Charges on Deposit Accounts 97 105 296 316
Fees for Other Financial Services 393 370 1,152 1,090
--------- --------- --------- --------
Total Fees and Commissions 1,296 1,153 3,789 3,311
Trading Revenue 304 342 1,022 742
Securities Gains 34 53 110 107
Other Revenue 222 162 735 833
--------- --------- --------- --------
Total $ 1,856 $ 1,710 $ 5,656 $ 4,993
========= ========= ========= ========
</TABLE>
FEES AND COMMISSIONS
Corporate finance and syndication fees were $234 million in the 1996 third
quarter, an increase of 11% from the prior-year period. For the first nine
months of 1996, such fees rose 24% from the comparable period a year ago. The
increases from both 1995 periods were the result of strong loan syndication,
securities underwriting related to the high-yield business and advisory
activities. During the first nine months of 1996, the Corporation acted as agent
or co-agent for approximately $353 billion of syndicated credit facilities, a
reflection of the Corporation's large client base and strong emphasis on
distribution.
Trust and investment management fees rose 14% in the 1996 third quarter and 19%
for the 1996 first nine months, reflecting increased global services and
securities processing activities, growth in the Vista mutual funds and higher
trust fees attributable to growth in assets under management. Also contributing
to the increases were higher fees due to the acquisition of the securities
processing businesses of U.S. Trust Corporation ("US Trust") in September 1995,
which contributed approximately $27 million of revenue in the 1996 third quarter
and $75 million for the first nine months of 1996.
Credit card revenue increased $67 million, or 32%, for the 1996 third quarter
and $155 million, or 26%, for the 1996 first nine months as a result of an
increase in securitization volume as well as growth in managed outstandings and
active accounts. The higher level of securitizations accounted for $50 million
of the increase in credit card revenue in the 1996 third quarter and $105
million of the increase in the first nine months of 1996. Average managed credit
card receivables (credit card receivables on the balance sheet plus securitized
credit card receivables) grew to $23.9 billion for the third quarter of 1996,
compared with $21.6 billion for the prior-year's comparable period. For a
further discussion of the credit card portfolio and related securitization
activity, see pages 33-34 of this Form 10-Q.
-20-
<PAGE>
The following table sets forth the components of fees for other financial
services for the periods indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
(in millions) 1996 1995 1996 1995
-------- ------- ------- --------
Fees for Other Financial Services:
<S> <C> <C> <C> <C>
Commissions on Letters of Credit and Acceptances $ 81 $ 88 $ 252 $ 262
Fees in Lieu of Compensating Balances 75 73 223 213
Mortgage Servicing Fees 55 52 159 159
Loan Commitment Fees 32 31 92 96
Other Fees 150 126 426 360
-------- ------- ------ --------
Total $ 393 $ 370 $ 1,152 $ 1,090
======== ======= ====== ========
</TABLE>
Fees related to automobile securitizations and brokerage commissions contributed
to the increase in other fees, reflecting the impact of automobile
securitizations in late 1995 and early 1996, as well as higher transaction
volume and a larger customer base at the Corporation's discount brokerage firm,
Brown and Company.
Trading Revenue
The following table sets forth the components of trading revenue for the third
quarter and first nine months of 1996 and 1995.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trading Revenue $ 304 $ 342 $ 1,022 $ 742
Net Interest Income Impact (a) 175 125 465 317
-------- ------- ------- --------
Total Trading-Related Revenue $ 479 $ 467 $ 1,487 $ 1,059
======== ======= ======= ========
Product Diversification:
Interest Rate Contracts (b) $ 124 $ 124 $ 450 $ 308
Foreign Exchange Contracts (c) 108 142 341 459
Debt Instruments and Other (d) 247 201 696 292
-------- ------- ------- --------
Total Trading-Related Revenue $ 479 $ 467 $ 1,487 $ 1,059
======== ======= ======= ========
<FN>
(a) 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 funding cost or benefit
associated with trading positions. This amount is included in the net
interest income caption on the Consolidated Statement of Income.
(b) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures, and forward rate
agreements and related hedges.
(c) Includes foreign exchange spot and option contracts.
(d) Includes U.S. and foreign government and government agency securities,
corporate debt securities, emerging markets debt instruments, debt-related
derivatives, equity securities, equity derivatives, and commodity
derivatives.
</FN>
</TABLE>
The increase in revenue from interest rate contracts during the 1996 first nine
months was primarily due to anticipated volatility in certain Western European,
Asian and U.S. interest rate markets, as well as higher customer demand for
derivatives used for risk management purposes. The declines in foreign exchange
revenue in the 1996 third quarter and first nine months were caused by several
factors, prominent among them the decrease in the level of cross-currency
trading activity in the European markets in anticipation of the integration of
the European Monetary System. The increases in debt instrument revenue during
the 1996 third quarter and first nine months were primarily the result of strong
performances in emerging markets in Latin America and Eastern Europe. In
addition, the 1995 nine-month results had been adversely affected by major
declines in the prices of emerging markets debt instruments during the early
part of 1995.
-21-
<PAGE>
Trading revenues are affected by many factors, including volatility of
currencies and interest rates, the volume of transactions executed by the
Corporation on behalf of its customers, the Corporation's success in proprietary
positioning, the credit standing of the Corporation, and the steps taken by
central banks and governments which affect financial markets. The Corporation
expects its trading revenues will fluctuate as these factors will vary from
period to period.
OTHER NONINTEREST REVENUE
The following table presents securities gains and the composition of other
revenue for the third quarter and first nine months of 1996 and 1995.
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------- --------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Securities Gains $ 34 $ 53 $ 110 $ 107
Other Revenue:
Revenue from Equity-Related Investments $ 112 $ 106 $ 554 $ 495
Net Losses on Emerging Markets Securities Sales -- (36) (65) (62)
Gain on Sale of Investment in Far East Bank
& Trust Company -- -- -- 85
Residential Mortgage Origination/Sales Activities 15 17 41 112
Loss on Sale of a Building in Japan -- -- (60) --
All Other Revenue 95 75 265 203
-------- ------- -------- -------
Total Other Revenue $ 222 $ 162 $ 735 $ 833
======== ======= ======== =======
</TABLE>
All securities sales were from the available-for-sale portfolio. For a further
discussion of the Corporation's securities, see Note 5 of the Notes to Financial
Statements.
Revenue from equity-related investments, which includes income from venture
capital activities and emerging markets investments, was $112 million in the
1996 third quarter, $6 million higher than the comparable 1995 quarter. For the
first nine months of 1996, revenue from equity-related investments was $554
million, an increase of 12% from 1995, reflecting the continuing benefits of a
broad-based portfolio of investments in an active market. At September 30, 1996,
the Corporation had equity-related investments with a carrying value of
approximately $2.7 billion. The Corporation believes that equity-related
investments will continue to make contributions to the Corporation's earnings
(averaging approximately $160 million per quarter for the previous eight
quarters), although the timing of the recognition of gains from these activities
is unpredictable and revenues from such activities could vary significantly from
period to period.
Residential mortgage origination/sales activities declined $71 million for the
first nine months of 1996, when compared with the 1995 periods reflecting the
impact of gains from the sale of servicing rights during 1995.
The increases in all other revenue in the 1996 third quarter and first nine
months were primarily due to gains on the sale of various nonstrategic assets.
These gains were partially offset by lower income of $9 million in the 1996
third quarter and $23 million in the first nine months of 1996 from the
Corporation's investment in CIT, as a result of the sale of half of the
Corporation's investment in CIT in December 1995.
-22-
<PAGE>
NONINTEREST EXPENSE
Noninterest expense, before restructuring charges and expenses, was $2,288
million in the 1996 third quarter, a decline of $44 million from the third
quarter of 1995. The decrease reflects merger-related expense savings of $180
million, primarily reflecting lower salaries and benefits related to personnel
reductions and other merger integration efforts. This was partially offset by
higher incentive costs related to strong revenue growth.
For the first nine months, noninterest expense excluding restructuring charges
and expenses, foreclosed property expense and a $40 million charge to conform
retirement benefits provided to foreign employees, decreased by approximately
$69 million from the same 1995 period. The decline is primarily due to merger
integration efforts and lower FDIC expenses. The results for the first nine
months of 1996 include noninterest expenses relating to the U.S. Trust
processing business which was acquired in September 1995, and reflect the
absence of expenses relating to the southern and central New Jersey banking
operations which were sold in the fourth quarter of 1995.
Noninterest expense for the full year 1996 is expected to be approximately $100
million higher than the previously targeted $9.1 billion, primarily as a result
of higher incentive costs in line with higher than expected revenue growth. The
increase in this expense does not include additional expenses (approximately $40
million) related to the introduction of the Corporation's co-branded Wal-Mart
MasterCard, and expenses (approximately $10 million) associated with preferred
stock dividends issued by a newly organized real estate investment trust
subsidiary of the Corporation.
<TABLE>
<CAPTION>
Third Quarter Nine Months
---------------------- ---------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries $ 1,040 $ 1,074 $ 3,162 $ 3,078
Employee Benefits 211 213 741 693
Occupancy Expense 204 227 632 673
Equipment Expense 179 177 544 568
Foreclosed Property Expense 2 (7) (15) (60)
Other Expense 652 648 1,963 2,059
---------- --------- ---------- -----
Total Before Restructuring Charge 2,288 2,332 7,027 7,011
Restructuring Charge and Expenses 32 -- 1,710 15
---------- --------- ---------- ---------
Total $ 2,320 $ 2,332 $ 8,737 $ 7,026
========== ========= ========== =========
Efficiency Ratio (a) 58.2% 61.9% 58.7% 64.1%
Efficiency Ratio Excluding Securitizations (a) 56.1% 61.1% 56.8% 63.5%
<FN>
(a) 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
nonrecurring items. During the first nine months of 1996, nonrecurring
items reflected the receipt of interest related to Federal and State tax
audit settlements, a loss on sale of a building in Japan and costs incurred
in combining the Corporation's foreign retirement plans. The 1995 first
nine months excluded the gain on the sale of the Corporation's investment
in Far East Bank and Trust Company.
</FN>
</TABLE>
SALARIES AND EMPLOYEE BENEFITS
The decrease in salaries for the 1996 third quarter reflects the favorable
impact of approximately 7,300 reductions in full-time equivalent employees since
September 30, 1995 as a result of the merger and the aforementioned sale of the
southern and central New Jersey banking operations. The $84 million increase in
salaries for the first nine months was primarily due to higher incentive costs
as a result of stronger earnings for most businesses. Also contributing to the
increase in salaries was the vesting in the first quarter of 1996 of certain
stock-based incentive awards due to the improvement in the Corporation's stock
price, the continued investment in the Corporation's securities underwriting
business and the additional staff costs resulting from the U.S. Trust processing
business acquisition in September 1995.
-23-
<PAGE>
The following table presents the Corporation's full-time equivalent employees at
the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Domestic Offices 57,629 60,904
Foreign Offices 10,199 11,792
------ ------
Total Full-Time Equivalent Employees 67,828 72,696
====== ======
</TABLE>
The increase in employee benefits in the first nine months of 1996 was primarily
the result of a $40 million charge (relating to conforming retirement benefits
provided to foreign employees) and expenses associated with a newly consolidated
foreign investment. Also impacting employee benefits was an increase in social
security expenses associated with the exercise of options granted under
broad-based employee plans and the vesting of certain stock-based incentive
awards in the first quarter of 1996.
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense in the 1996 third quarter and first nine months decreased by
$23 million and $41 million, respectively, largely as a result of the
consolidation of operations and branch facilities from a pre-merger expense
initiative program as well as a result of merger integration efforts.
For the first nine months of 1996, the $24 million decline in equipment expense
was primarily the result of expense reduction initiatives relating to software
costs and equipment rentals.
FORECLOSED PROPERTY EXPENSE
For the first nine months, foreclosed property expense was a credit of
$15 million in 1996, compared with a credit of $60 million in 1995 due to
lower gains on the sale of foreclosed properties.
RESTRUCTURING CHARGE
In connection with the merger, $1.9 billion of one-time merger-related costs
have been identified, of which $1.65 billion was taken as a restructuring charge
on March 31, 1996. In addition, merger-related expenses of $32 million and $60
million were incurred in the 1996 third quarter and first nine months,
respectively, and were included in the restructuring charge and expenses caption
on the income statement. For a further discussion of the restructuring charge,
see Note 2 on page 8. Because of the inherent uncertainties associated with
merging two large corporations, there can be no assurance that the $1.9 billion
of merger-related costs will reflect the actual costs ultimately incurred by the
Corporation in implementing the merger or that the Corporation would not deem it
appropriate to take additional charges, as the merger implementation process
continues.
OTHER EXPENSE
The following table presents the components of other expense for the periods
indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------ ---------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
Other Expense:
<S> <C> <C> <C> <C>
Professional Services $ 127 $ 130 $ 397 $ 407
Marketing Expense 73 99 236 284
FDIC Assessments 6 (5) 8 107
Telecommunications 82 84 249 249
Amortization of Intangibles 42 45 127 139
All Other 322 295 946 873
------- ------ --------- ---------
Total $ 652 $ 648 $ 1,963 $ 2,059
======= ====== ========= =========
</TABLE>
-24-
<PAGE>
All other expenses increased by $27 million in the 1996 third quarter. The
increase primarily reflected the consolidation of a foreign investment and
higher travel and other incidental costs related to services provided by
employees involved with merger integration efforts. FDIC assessments for the
1996 third quarter reflected a special assessment for Savings Association
Insurance Fund-related deposits.
For the first nine months of 1996, other expense decreased $96 million, or 5%,
from the 1995 comparable period. The improvement reflected a $48 million decline
in marketing expense as a result of expense reduction initiatives and lower FDIC
assessments of $99 million (which resulted from the elimination of FDIC
assessments other than with respect to deposits associated with the acquisition
of former savings and loan branches). Partially offsetting these declines were
increases in other expenses during the first nine months of 1996, as discussed
above.
INCOME TAXES
The Corporation recognized income tax expense of $527 million in the third
quarter of 1996, compared with $491 million in the third quarter of 1995. For
the first nine months, the Corporation recorded income tax expense of $837
million in 1996, compared with $1,376 million in 1995. The 1996 nine-month
amount includes tax benefits related to the restructuring charge and aggregate
tax benefits and refunds of $132 million. The Corporation's effective tax rates,
for both periods in 1996 and 1995 (excluding the aforementioned tax benefits and
refunds), were 38% and 39%, respectively.
- --------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
- --------------------------------------------------------------------------------
Profitability of the Corporation is tracked with an internal management
information system that produces lines-of-business performance. The current
presentation of lines-of-business results is based on uniform management
accounting policies. Lines-of-business results are subject to restatement as
appropriate whenever there are refinements in management reporting policies or
changes to the management organization.
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. Also
incorporated in the guidelines is a process for matching assets and liabilities
with similar maturity, liquidity and interest characteristics within each
business. 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, market, and operating/business -- within various businesses and
assigns capital accordingly. A long-term expected tax rate is assigned in
evaluating the Corporation's businesses.
-25-
<PAGE>
<TABLE>
<CAPTION>
Regional and Nationwide Global
Global Bank Consumer Banking Services
-------------------- --------------------- ----------------
For the three months ended September 30, 1996 1995 1996 1995 1996 1995
---------- --------- --------- -------- -------- --------
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 639 $ 576 $ 1,488 $ 1,394 $ 233 $ 199
Noninterest Revenue 848 844 558 564 308 281
Noninterest Expense 751 753 1,123 1,193 423 359
---------- ---------- ---------- --------- ------- --------
Operating Margin 736 667 923 765 118 121
Credit Provision (a) 63 74 368 276 4 --
Foreclosed Property Expense (1) -- 3 2 -- --
----------- ---------- ---------- --------- ------- --------
Income Before Taxes 674 593 552 487 114 121
Income Taxes 250 212 222 195 43 46
---------- ---------- ---------- --------- ------- --------
Operating Net Income 424 381 330 292 71 75
Restructuring Charge & Expenses (9) -- (9) -- (4) --
----------- ---------- ----------- --------- -------- --------
Net Income $ 415 $ 381 $ 321 $ 292 $ 67 $ 75
========== ========== ========== ========= ======= ========
Average Assets $ 211,524 $ 182,040 $ 113,501 $ 110,343 $10,572 $ 10,101
Return on Common Equity (b) 21.7% 20.0% 19.2% 16.4% 21.0% 22.4%
Return on Assets (b) .80% .83% 1.16% 1.05% 2.67% 2.95%
Efficiency Ratio (c) 50.5% 53.0% 54.9% 60.9% 78.2% 74.8%
Terminal
(LDC and Real Estate) Total(d)
--------------------- ---------------------
For the three months ended September 30, 1996 1995 1996 1995
(in millions, except ratios) ---- ---- ---- ----
Net Interest Income $ (52) $ 22 $ 2,069 $ 2,069
Noninterest Revenue 36 (29) 1,856 1,710
Noninterest Expense 13 17 2,286 2,339
------- ------- --------- ----------
Operating Margin (29) (24) 1,639 1,440
Credit Provision (a) 16 5 220 192
Foreclosed Property Expense (1) (9) 2 (7)
------- ------- --------- ----------
Income (Loss) Before Taxes (Benefits) (44) (20) 1,417 1,255
Income Taxes (Benefits) (15) (4) 539 491
------- -------- --------- ----------
Operating Net Income (Loss) (29) (16) 878 764
Restructuring Charge & Expenses -- -- (20) --
------- ------- --------- ----------
Net Income (Loss) $ (29) $ (16) $ 858 $ 764
======= ======== ========= ==========
Average Assets $ 4,421 $ 7,556 $ 322,913 $ 306,974
Return on Common Equity (b) NM NM 18.4% 16.2%
Return on Assets (b) NM NM 1.08% .99%
Efficiency Ratio (c) NM NM 58.2% 61.9%
<FN>
(a) The provision is allocated to business units using a credit risk
methodology applied consistently across the Corporation and a risk grading
system appropriate for a business unit's portfolio. The difference between
the risk-based provision and the Corporation's provision is included in
the Corporate results.
(b) Based on annualized operating net income amounts.
(c) The computation of the efficiency ratio excludes restructuring charges,
foreclosed property expense and, if applicable, nonrecurring items.
(d) Total column includes Corporate results. See description of Corporate
results on page 30.
NM - Not meaningful.
</FN>
</TABLE>
-26-
<PAGE>
Part 1
Item 2 (continued)
<TABLE>
<CAPTION>
Regional and Nationwide Global
Global Bank Consumer Banking Services
--------------------- --------------------- ----------------
For the nine months ended September 30, 1996 1995 1996 1995 1996 1995
(in millions, except ratios) ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 1,909 $ 1,672 $ 4,370 $ 4,136 $ 672 $ 560
Noninterest Revenue 2,891 2,331 1,668 1,612 919 805
Noninterest Expense 2,273 2,183 3,352 3,633 1,209 1,061
---------- ---------- ---------- --------- ------- --------
Operating Margin 2,527 1,820 2,686 2,115 382 304
Credit Provision (a) 188 220 1,056 801 11 --
Foreclosed Property Expense (1) (2) 1 (27) -- --
----------- ----------- ---------- --------- ------- --------
Income Before Taxes 2,340 1,602 1,629 1,341 371 304
Income Taxes 871 593 642 534 142 114
---------- ---------- ---------- --------- ------- --------
Operating Net Income 1,469 1,009 987 807 229 190
Restructuring Charge & Expenses (14) (9) (16) -- (6) --
Special Items (b) -- 51 -- -- -- --
---------- ---------- ---------- --------- ------- --------
Net Income $ 1,455 $ 1,051 $ 971 $ 807 $ 223 $ 190
========== ========== ========== ========= ======= ========
Average Assets $ 204,914 $ 183,306 $ 111,558 $ 106,500 $10,201 $ 9,778
Return on Common Equity (c) 25.2% 17.7% 19.3% 15.3% 23.0% 18.7%
Return on Assets (c) .96% .74% 1.18% 1.01% 3.00% 2.60%
Efficiency Ratio (d) 47.4% 54.5% 55.5% 63.2% 76.0% 77.7%
Terminal
(LDC and Real Estate) Total(e)
--------------------- --------------------
For the nine months ended September 30, 1996 1995 1996 1995
(in millions, except ratios) ---- ---- ---- ----
Net Interest Income $ (3) $ 73 $ 6,205 $ 6,124
Noninterest Revenue 10 10 5,716 4,908
Noninterest Expense 42 52 7,002 7,071
-------- -------- --------- ----------
Operating Margin (35) 31 4,919 3,961
Credit Provision (a) 55 (2) 715 572
Foreclosed Property Expense (15) (43) (15) (60)
-------- -------- --------- ----------
Income (Loss) Before Taxes (Benefits) (75) 76 4,219 3,449
Income Taxes (Benefits) (17) 39 1,604 1,348
-------- -------- --------- ----------
Operating Net Income (Loss) (58) 37 2,615 2,101
Restructuring Charge & Expenses -- -- (1,060) (9)
Special Items (b) -- -- 70 51
Accounting Change -- -- -- (11)
-------- -------- --------- ----------
Net Income (Loss) $ (58) $ 37 $ 1,625 $ 2,132
======== ======== ========= ==========
Average Assets $ 4,459 $ 8,276 $ 317,824 $ 304,901
Return on Common Equity (c) NM NM 18.4% 15.5%
Return on Assets (c) NM NM 1.10% .92%
Efficiency Ratio (d) NM NM 58.7% 64.1%
<FN>
(a) The provision is allocated to business units using a credit risk
methodology applied consistently across the Corporation and a risk grading
system appropriate for a business unit's portfolio. The difference between
the risk-based provision and the Corporation's provision is included in
the Corporate results.
(b) Special items for the first nine months of 1996 include the loss on the
sale of a building in Japan and costs incurred in combining the
Corporation's foreign retirement plans as well as aggregate tax benefits
and refunds. The 1995 first nine months included the gain on the sale of
the Corporation's investment in Far East Bank and Trust Company.
(c) Based on annualized operating net income amounts.
(d) The computation of the efficiency ratio excludes restructuring charges,
foreclosed property expense, and the nonrecurring items discussed in (b)
above.
(e) Total column includes Corporate results. See description of Corporate
results on page 30.
NM - Not meaningful.
</FN>
</TABLE>
-27-
<PAGE>
GLOBAL BANK
The Global Bank provides investment banking, financial advisory, trading and
investment services to corporations and public-sector clients worldwide through
a network of offices in 52 countries, including major operations in all key
international financial centers. This network enables the Corporation to
identify users and sources of capital on a global basis and to serve the
cross-border requirements of clients through integrated delivery across all its
businesses.
The Global Bank includes Corporate Lending (focusing on corporate clients, both
credit and general advisory); Investment Banking (including acquisition finance,
syndicated finance, high-yield finance, private placements, leasing, mergers and
acquisitions, and other global investment banking activities); Global Markets
(foreign exchange dealing and trading; derivatives trading and structuring,
including equity and commodity derivatives; securities structuring,
underwriting, trading and sales; and the Corporation's funding and securities
investment activities) and Chase Capital Partners (venture capital and mezzanine
finance). In addition, the Global Asset Management and Private Banking group
serves high net worth individuals worldwide with banking and investment
services, including the Vista family of mutual funds and Vista unit trust funds.
The Global Bank seeks to optimize its risk profile and profitability by
emphasizing originations, underwriting, distribution and risk management
products.
The Global Bank's operating net income in the third quarter of 1996 was $424
million, an increase of $43 million from the 1995 third quarter. Return on
equity in the third quarter of 1996 was 21.7%, compared with 20.0% in the third
quarter of 1995. The Global Bank's operating net income of $1,469 million and
return on equity of 25.2% for the first nine months of 1996 increased from last
year's results of $1,009 million and 17.7%, respectively. These favorable
results were due primarily to higher trading-related revenue, strong growth in
net interest income and an increase in corporate finance fees.
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) 1996 1995 1996 1995
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Corporate Lending and Investment Banking $ 587 $ 539 $ 1,713 $ 1,589
Global Markets 625 610 1,880 1,502
Chase Capital Partners 67 77 525 354
Global Asset Management & Private Banking 197 182 617 528
</TABLE>
Revenue from Corporate Lending and Investment Banking increased $48 million, or
9%, in the 1996 third quarter and $124 million, or 8%, for the first nine months
of 1996, reflecting a higher level of investment banking activity including loan
syndications, high-yield securities underwriting and advisory activities.
Revenue at Global Markets increased in the third quarter of 1996 compared with
the 1995 third quarter due to a 24% increase in net interest income and higher
fees and commissions from growth in customer volume partially offset by lower
securities gains. Trading-related revenue at Global Markets was higher for the
first nine months of 1996 primarily due to the particularly strong performance
in the emerging markets. Also, the 1995 nine-month results had been adversely
affected by the declines in the prices of emerging markets debt instruments.
Revenue from Chase Capital Partners decreased in the 1996 third quarter due to a
decline in venture capital income. For the first nine months of 1996, revenue
from Chase Capital Partners increased due to higher revenue from equity-related
investments reflecting a broad-based portfolio of investments in an active
market, especially during the first half of 1996.
Revenues at Global Asset Management and Private Banking increased $15 million,
or 8%, in the 1996 third quarter and $89 million, or 17%, for the first nine
months of 1996 when compared to the same 1995 periods. The increase in the third
period reflects growth in trust fees. The increase for the first nine months
reflects higher trust fees, growth in brokerage (Brown & Co.) and an
increase in both loans (13%) and deposit (6%) volumes. In addition, 1996 results
include a $25 million gain on the sale of client assets.
-28-
<PAGE>
REGIONAL AND NATIONWIDE CONSUMER BANK
Regional and Nationwide Consumer Bank includes Credit Cards (Chase cardmember
services); Deposits and Investments (consumer banking and commercial and
professional banking); Mortgage Banking; National Consumer Finance (home equity
secured lending, student lending, and other consumer lending); International
Consumer (consumer activities in Asia and Latin America); Middle Market
(regional commercial banking); Texas Commerce; and the Corporation's franchise
in northeastern New Jersey, where it has 39 branches and private banking
operations. The Corporation maintains a leading market share position in serving
the financial needs of consumers, middle market commercial enterprises and small
businesses in the New York metropolitan area. 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.
Regional and Nationwide Consumer Bank's operating net income of $330 million in
the third quarter of 1996 increased $38 million from last year's third quarter
results of $292 million due primarily to an increase in net interest income and
lower noninterest expense, partially offset by a higher credit provision. For
the first nine months of 1996, Regional and Nationwide Consumer Bank's operating
net income was $987 million, an increase of $180 million from the same period
last year. This increase is due to lower noninterest expense and increases in
net interest income and noninterest revenue, partially offset by a higher credit
provision and an increase in foreclosed property expense. The decrease in
noninterest expense for both the 1996 three months and nine months periods is
the result of lower marketing expenses at Credit Cards, the absence of expenses
as a result of the sale of the southern and central New Jersey banking
operations in the fourth quarter of 1995 and merger savings. The 1996 nine month
period was also impacted by reduced FDIC assessments. The growth in net interest
income for both 1996 periods reflects higher volumes at Credit Cards and
Mortgage Banking; the higher credit provision is the result of the substantial
growth in managed credit card outstandings.
The following table sets forth the significant components of Regional and
Nationwide Consumer Bank's total revenue by business for the periods indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
----------------- ------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Credit Cards $ 671 $ 593 $ 1,946 $ 1,722
Deposits and Investments 482 482 1,423 1,420
Mortgage Banking 168 143 493 447
National Consumer Finance 142 139 443 396
International Consumer 65 54 187 155
Middle Market 226 237 685 680
Texas Commerce 315 281 928 834
</TABLE>
Credit Cards revenue increased $78 million, or 13%, in the third quarter of
1996. For the first nine months of 1996, Credit Cards revenue rose $224 million,
or 13%. The improvement in both 1996 periods compared with last year's results
is due to higher net interest income, reflecting the substantial growth in the
loan portfolio and the implementation of a risk-adjusted pricing policy for
delinquent credit card receivables, and higher fee revenue reflecting increased
receivables.
Deposits and Investments revenue was flat for the 1996 and 1995 third quarters
and increased $3 million for the first nine months of 1996. The slight
improvement in revenue for the nine-month period reflects an increase in net
interest income reflecting higher deposit volume. In addition, the 1995 results
included a $25 million gain on the sale of upstate branches.
Revenue from Mortgage Banking increased $25 million, or 17%, in the 1996 third
quarter and $46 million, or 10%, for the first nine months of 1996, when
compared with the same 1995 periods. Both the 1996 third quarter and nine month
results were favorably impacted by higher net interest income resulting from an
increase in loan volume and improved loan spreads. This positive impact was
partially offset by lower noninterest revenue due to a decline in the gain on
sales of mortgage servicing rights.
National Consumer Finance revenues increased $3 million, or 2%, in the 1996
third quarter and $47 million, or 12%, for the first nine months of 1996, when
compared with 1995. The favorable results in both 1996 periods is due to an
increase in net interest income reflecting the strong growth in loan volume and
higher retail banking fees.
-29-
<PAGE>
The revenue for International Consumer increased $11 million in the third
quarter of 1996 and $32 million for the first nine months of 1996 when compared
to the prior year periods. Improvement in both 1996 periods is due to higher net
interest income reflecting increased loan volumes.
Revenue from Middle Market decreased $11 million in the third quarter of 1996
from the same period in 1995 due to a decline in corporate finance fees during
the 1996 third quarter. Revenue from Middle Market increased $5 million in the
first nine months of 1996 when compared with 1995, primarily due to higher
corporate finance and other fee revenue.
Texas Commerce's revenue rose $34 million, or 12%, in the 1996 third quarter and
$94 million, or 11%, for the first nine months of 1996 when compared to prior
year periods. The improvements were due to higher net interest income resulting
from 13% growth in loan volume in the first nine months of 1996. Also
contributing to the 1996 nine-month increase was a 8% increase in fee revenue,
primarily higher corporate finance fees. These favorable results were partially
offset by higher foreclosed property expense in the first nine months of 1996
reflecting lower gains on the sale of foreclosed properties.
GLOBAL SERVICES
Global Services includes custody, cash management, payments, trade services,
trust and other fiduciary services. The strategy for Global Services is to build
world class product capabilities in transaction and information services. At
September 30, 1996, the Corporation was custodian or trustee for approximately
$4.1 trillion of assets. The operating net income for Global Services decreased
$4 million from last year's third quarter results due to a loss related to the
termination of a partnership agreement with a payment services provider. For the
first nine months of 1996, operating net income increased $39 million when
compared with the same 1995 period primarily due to increases in noninterest
revenue and net interest income partially offset by higher noninterest expense,
all of which resulted from the acquisition of the securities processing
businesses of U.S. Trust in September 1995. The increase in noninterest revenue
also reflected higher fee revenue as a result of earnings growth in custody
services, and the increase in net interest income also reflected higher
investable balances.
TERMINAL BUSINESSES (LDC AND REAL ESTATE)
Terminal Businesses represents discontinued portfolios, which are primarily
refinancing country debt and the Corporation's commercial real estate problem
asset and nonperforming portfolio, primarily at The Chase Manhattan Bank.
Terminal businesses had net losses of $29 million for the third quarter of 1996
and $58 million for the first nine months of 1996, compared with a net loss of
$16 million and net income of $37 million in last year's third quarter and the
first nine months of 1995, respectively. The net loss in the 1996 third quarter
relates primarily to a decrease in net interest income as a result of lower loan
volume during the period. For the first nine months of 1996, the results include
a $65 million loss related to the disposition of available-for-sale emerging
markets securities compared with $62 million in losses from the sales of such
securities last year ($36 million loss in the 1995 third quarter).
CORPORATE
Corporate includes the management results attributed to the parent company; the
Corporation's investment in CIT; the impact of credit card securitizations; 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 $84 million for the 1996 third quarter
compared with last year's third quarter net income of $32 million. For the first
nine months of 1996, Corporate had a net loss of $966 million, reflecting the
merger-related restructuring charge of $1,026 million (after-tax) and the
following special items: $132 million (after-tax) in tax refunds and benefits;
$37 million loss (after-tax) on the sale of a building in Japan and $25 million
loss (after-tax) related to the costs incurred in combining the Corporation's
foreign retirement plans. For the nine months of 1995, Corporate had net income
of $47 million which included an $11 million after-tax charge due to the
adoption of SFAS 106 for its foreign plans.
-30-
<PAGE>
- --------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following discussion of the Corporation's credit risk management focuses
primarily on developments since December 31, 1995. A discussion of the
Corporation's procedures for the management of its credit risk is provided on
pages 31-32 of the Corporation's 1995 Annual Report. A description of the
Corporation's accounting policies for its nonperforming loans, renegotiated
loans and assets acquired as loan satisfactions is provided in Note One of the
Notes to the Consolidated Financial Statements on page 57 of the Corporation's
1995 Annual Report.
LOAN PORTFOLIO
The Corporation's loans outstanding totaled $150.3 billion at September 30,
1996, compared with $150.2 billion at the 1995 year-end, and $151.0 billion at
September 30, 1995. Excluding the impact of credit card and automobile
securitizations, the Corporation's loans on a managed basis increased to $167.2
billion at September 30, 1996 from $160.0 billion at December 31, 1995 and
$157.3 billion at September 30, 1995 reflecting increased demand for consumer
and commercial loans (excluding commercial real estate).
The Corporation's nonperforming assets at September 30, 1996 were $1,517
million, a decrease of $147 million from the 1995 year-end level and a decrease
of $369 million, or 20%, from last year's comparable period-end. The reduction
in nonperforming assets reflects the ongoing improvement in the Corporation's
credit profile as a result of a lower level of loans being placed on
nonperforming status, repayments, charge-offs, and the Corporation's continuing
loan workout and collection activities.
Total net charge-offs were $220 million in the third quarter of 1996, compared
with $225 million in the 1995 third quarter. For the first nine months, net
charge-offs were $817 million in 1996, compared with $654 million in 1995. The
1996 year-to-date amount included a charge of $102 million, recorded in the 1996
first quarter, related to conforming the credit card charge-off policies of
Chase and Chemical. Total net charge-offs (on a managed basis) were $365 million
in the 1996 third quarter, compared with $268 million in the third quarter of
1995. For the first nine months, total net charge-offs (on a managed basis) were
approximately $1.2 billion in 1996, compared with $762 million in 1995.
Management believes that the credit quality of the Corporation's overall
consumer and commercial and industrial portfolio will remain relatively stable
into 1997 and expects net charge-offs and the provision for losses in 1997 to be
modestly higher than in 1996, primarily as a result of an anticipated decline in
recoveries in the commercial portfolio and anticipated growth in assets,
particularly in the Corporation's national consumer receivables.
The following table presents the Corporation's loan and nonperforming asset
balances by portfolio at the dates indicated and the related net charge-off
amounts for the periods indicated. Additionally, loans which were past due 90
days and over as to principal or interest but not characterized as nonperforming
are also included in the table.
-31-
<PAGE>
<TABLE>
<CAPTION>
Loans Nonperforming Assets
--------------------------------------- -----------------------------------
Sept 30, Dec 31, Sept 30, Sept 30, Dec 31, Sept 30,
(in millions) 1996 1995 1995 1996 1995 1995
----------- ---------- ---------- ------- -------- --------
Domestic Consumer:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage(a) $ 35,672 $ 34,060 $ 33,664 $ 269 $ 238 $ 245
Credit Card 12,600 17,078 17,675 -- -- --
Auto Financings 11,283 8,327 9,673 21 20 16
Other Consumer(b) 10,893 9,966 9,785 7 19 18
----------- ---------- ----------- -------- -------- --------
Total Domestic Consumer 70,448 69,431 70,797 297 277 279
----------- ---------- ----------- -------- -------- --------
Domestic Commercial:
Commercial and Industrial 33,251 32,276 31,243 457 496 445
Commercial Real Estate(c) 6,078 6,660 7,170 430 375 525
Financial Institutions 5,117 5,714 5,515 2 2 22
----------- ---------- ----------- -------- -------- --------
Total Domestic Commercial 44,446 44,650 43,928 889 873 992
----------- ---------- ----------- -------- -------- --------
Total Domestic 114,894 114,081 114,725 1,186 1,150 1,271
----------- ---------- ----------- -------- -------- --------
Foreign, primarily Commercial 35,439 36,126 36,306 184 343 465
----------- ---------- ----------- -------- -------- --------
Total Loans $ 150,333 $ 150,207 $ 151,031 1,370 1,493 1,736
=========== ========== =========== -------- -------- --------
Assets Acquired as Loan Satisfactions 147 171 150
-------- -------- --------
Total Nonperforming Assets $ 1,517 $ 1,664 $ 1,886
======== ========= ========
Past Due 90 Days and Over
Net Charge-offs & Still Accruing
----------------------------------------------- --------------------------------
Nine Months Ended
Third Quarter September 30, Sept 30, Dec 31, Sept 30,
(in millions) 1996 1995 1996 1995 1996 1995 1995
---- ---- ---- ---- ---- ---- ----
Domestic Consumer:
Residential Mortgage(a) $ 7 $ 20 $ 22 $ 51 $ 20 $ 12 $ 13
Credit Card 152 172 462 503 253 352 349
Auto Financings 11 6 25 14 4 15 12
Other Consumer(b) 40 26 103 77 179 149 139
------ ------- ------ ------ -------- -------- ------
Total Domestic Consumer 210 224 612 645 456 528 513
------ ------- ------ ------ -------- -------- ------
Domestic Commercial:
Commercial and Industrial (4) (1) 90 21 50 38 62
Commercial Real Estate(c) 6 8 32 22 19 54 86
Financial Institutions -- (1) -- (6) -- -- --
------ -------- ------ ------ -------- -------- ------
Total Domestic Commercial 2 6 122 37 69 92 148
------ ------- ------ ------ -------- -------- ------
Total Domestic 212 230 734 682 525 620 661
------ ------- ------ ------ -------- -------- ------
Foreign, primarily Commercial 8 (5) (19) (28) 7 44 7
------ ------- ------ ------ -------- -------- ------
Total Loans 220 225 715 654 $ 532 $ 664 $ 668
------ ------- ------ ------ ======== ======== ======
Charge Related to Conforming
Credit Card Charge-off Policies -- -- 102 --
------ ------- ------ ------
Total $ 220 $ 225 $ 817 $ 654
====== ======= ====== ======
<FN>
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured revolving lines of credit. There are
essentially no credit losses in the student loan portfolio due to the
existence of Federal and State government agency guarantees. Student loans
which were past due 90 days and over and still accruing were approximately
$131 million, $107 million, and $92 million at September 30, 1996, December
31, 1995 and September 30, 1995, respectively.
(c) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
</FN>
</TABLE>
-32-
<PAGE>
DOMESTIC CONSUMER PORTFOLIO
The domestic consumer loan portfolio consists of one-to-four family residential
mortgages, credit cards, auto financings and other consumer loans. Excluding the
effects of credit card and automobile securitizations, consumer loans on a
managed basis increased to $87.3 billion at September 30, 1996, from $79.2
billion at December 31, 1995 and $77.0 billion at September 30, 1995 reflecting
growth in residential mortgages, auto financings and credit card products.
Domestic consumer loans were 47% of the total loan portfolio on a retained basis
and 52% of the total loan portfolio on a managed basis at September 30, 1996.
RESIDENTIAL MORTGAGE LOANS: Residential mortgage loans at September 30, 1996
were $35.7 billion, an increase from $34.1 billion at the 1995 year-end and from
$33.7 billion at September 30, 1995, primarily reflecting a higher level of
adjustable-rate loan outstandings.
At September 30, 1996, nonperforming domestic residential mortgage loans as a
percentage of the portfolio was 0.75%, compared with 0.70% at the 1995 year-end
and 0.73% at September 30, 1995. For the first nine months, the percentage of
residential mortgage net charge-offs to average loan outstandings was 0.08% in
1996, compared with 0.22% in 1995.
RESIDENTIAL MORTGAGE SERVICING PORTFOLIO: The following table presents the
residential mortgage servicing portfolio activity for the periods indicated. A
discussion of the Corporation's mortgage servicing and loan originations
activities is included on page 34 of the Corporation's 1995 Annual Report.
<TABLE>
<CAPTION>
Third Quarter Nine Months
----------------------------- -----------------------
(in billions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 133.3 $ 125.5 $ 132.1 $ 118.3
Originations 6.7 9.0 22.3 18.5
Acquisitions -- 0.9 1.1 10.1
Repayments and Sales (5.1) (6.7) (20.6) (18.2)
---------- ---------- --------- ----------
Balance at September 30, $ 134.9 $ 128.7 $ 134.9 $ 128.7
========== ========== ========= ==========
</TABLE>
Mortgage servicing rights (included in other assets) amounted to $1,264 million
at September 30, 1996, compared with $1,147 million at September 30, 1995,
reflecting the corresponding increase in the Corporation's residential mortgage
servicing portfolio. The Corporation uses derivative contracts (interest rate
swaps and purchased option contracts) to manage the risk associated with its
mortgage servicing portfolio. At September 30, 1996, the carrying value of such
derivative contracts was $62 million, and gross unrecognized gains and losses
were $18 million and $82 million, respectively, resulting in an estimated
negative fair value of $2 million.
CREDIT CARD LOANS: The Corporation analyzes its credit card portfolio on a
"managed basis" which includes credit card receivables on the balance sheet as
well as credit card receivables which have been securitized. No credit card
receivables were securitized in the third quarters of 1996 or 1995. During the
first nine months of 1996, the Corporation securitized $5.8 billion of credit
card receivables, compared with $2.5 billion in the same 1995 period. For the
third quarter of 1996, average managed receivables were $23.9 billion, compared
with $21.6 billion in the 1995 third quarter, reflecting the continued growth in
credit card outstandings.
-33-
<PAGE>
The following table presents credit-related information for the Corporation's
managed credit card receivables.
<TABLE>
<CAPTION>
As of or For The As of or For The
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Managed Credit Card Receivables $ 23,936 $ 21,615 $ 23,457 $ 20,385
Past Due 90 Days & Over and Accruing $ 469 $ 440 $ 469 $ 440
As a Percentage of Average Credit Card Receivables 1.96% 2.04% 2.00% 2.16%
Net Charge-offs $ 296 (a) $ 215 $ 845(a) $ 611
As a Percentage of Average Credit Card Receivables 4.95% 3.98% 4.80% 4.00%
<FN>
(a) Excludes charge related to conforming the credit card charge-off policies of
Chase and Chemical.
</FN>
</TABLE>
The increase in net charge-offs on managed credit card receivables for both the
three-month and nine-month periods ending September 30, 1996, when compared with
the same 1995 periods, reflect growth in average managed credit card
outstandings and higher levels of personal bankruptcies. Management currently
expects that the Corporation's credit card net charge-offs, as a percentage of
average managed credit card receivables, have begun to stabilize and will be
lower than 5% for the full year 1996.
CREDIT CARD SECURITIZATIONS: For a discussion of the Corporation's credit
card securitizations, see page 35 of the Corporation's 1995 Annual Report.
The following table outlines the impact of the securitizations of credit card
receivables by showing the favorable (unfavorable) change in the reported
Consolidated Statement of Income line items for the periods indicated.
<TABLE>
<CAPTION>
Favorable (Unfavorable) Impact Third Quarter Nine Months
(in millions) -------------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Interest Income $ (244) $ (92) $ (639) $ (226)
Provision for Losses 148 43 409 108
Credit Card Revenue 95 45 217 112
Other Revenue - -- 11 17
-------- --------- -------- -------
Pre-tax Income (Loss) Impact of Securitizations $ (1) $ (4) $ (2) $ 11
========= ========== ======== =======
</TABLE>
AUTO FINANCINGS: The auto financings portfolio, which consists of auto loans and
leases, was $11.3 billion at September 30, 1996, an increase from $8.3 billion
at December 31, 1995 and $9.7 billion at September 30, 1995. The increase
reflected strong demand during 1996, partially offset by the impact of
securitizations of auto loans. During the past 12 months, the Corporation has
securitized approximately $4.5 billion of auto loans. On a managed basis, net
charge-offs of auto financings were $12 million in the 1996 third quarter,
compared with $6 million in the same period in 1995. For the first nine months,
such charge-offs were $28 million in 1996, compared with $14 million in 1995.
OTHER CONSUMER LOANS: Other consumer loans, which includes installment loans
(direct and indirect types of consumer finance), student loans and unsecured
revolving lines of credit, were $10.9 billion at September 30, 1996, compared
with $10.0 billion at December 31, 1995, and $9.8 billion at September 30, 1995.
Net charge-offs as a percentage of average other consumer loans were 1.5% in the
third quarter of 1996, compared with 1.0% in the 1995 comparable period. Net
charge-offs as a percentage of average other consumer loans in the first nine
months of 1996 were 1.3%, compared with 1.1% in the comparable 1995 period. The
increase in other consumer net charge-offs for the 1996 periods reflect higher
charge-offs of unsecured revolving lines of credit.
-34-
<PAGE>
DOMESTIC COMMERCIAL PORTFOLIO
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $33.3 billion at September 30, 1996, an increase
from $32.3 billion at December 31, 1995 and $31.2 billion at September 30, 1995.
The portfolio consists primarily of loans made to large corporate and middle
market customers and is diversified geographically and by industry. At September
30, 1996, the largest industry concentration in this portfolio was to the oil
and gas industry which approximated $2.8 billion, or 1.9% of the Corporation's
total loan portfolio.
Nonperforming domestic commercial and industrial loans were $457 million at
September 30, 1996, compared with $445 million at September 30, 1995. In the
third quarter of 1996, the Corporation had net recoveries of $4 million,
compared with net recoveries of $1 million in the third quarter of 1995. For the
first nine months, net charge-offs were $90 million in 1996, compared with net
charge-offs of $21 million in 1995.
Domestic Commercial Real Estate Portfolio: The domestic commercial real estate
portfolio represents loans secured primarily by real property, other than loans
secured by one-to-four family residential properties (which are included in the
consumer loan portfolio). The domestic commercial real estate loan portfolio
totaled $6.1 billion at September 30, 1996, a decrease from $6.7 billion at
December 31, 1995 and from $7.2 billion at September 30, 1995. The decreases are
principally attributable to repayments, collections and sales primarily in the
terminal commercial real estate portfolio.
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) 1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
Commercial Mortgages $ 5,059 $ 5,512 $ 5,769
Construction 1,019 1,148 1,401
--------- ---------- -----------
Total Domestic Commercial Real Estate Loans $ 6,078 $ 6,660 $ 7,170
========= ========== ===========
</TABLE>
Nonperforming domestic commercial real estate loans were $430 million at
September 30, 1996, a 15% increase from the December 31, 1995 level, but a
decrease of $95 million, or 18%, from September 30, 1995. The improvement in
nonperforming domestic commercial real estate asset levels since September 30,
1995 is the result of increased liquidity in the commercial real estate markets
coupled with successful workout activities. The increase from the 1995 year-end
resulted from the classification of two large retail-related loans as
nonperforming in the first quarter of 1996.
Net charge-offs of domestic commercial real estate loans in the third quarter of
1996 totaled $6 million, compared with $8 million in the same period a year ago.
For the first nine months, such net charge-offs were $32 million in 1996,
compared with $22 million in 1995.
Domestic Financial Institutions Portfolio: The domestic financial institutions
portfolio includes loans to commercial banks and companies whose businesses
primarily involve lending, financing, investing, underwriting, or insurance.
Loans to domestic financial institutions were $5.1 billion, or 3% of total loans
outstanding, at September 30, 1996, a decrease from $5.7 billion at December 31,
1995 and $5.5 billion at September 30, 1995. Loans to domestic financial
institutions are predominantly secured loans to broker-dealers, domestic
commercial banks and domestic branches of foreign banks.
FOREIGN PORTFOLIO
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, 1996, the Corporation's total
foreign loans were $35.4 billion, compared with $36.1 billion at December 31,
1995 and $36.3 billion at September 30, 1995. The portfolio included foreign
commercial and industrial loans of $18.9 billion at September 30, 1996, a
decrease of $1.9 billion from the 1995 year-end and a decrease of $1.2 billion
from September 30, 1995.
-35-
<PAGE>
Foreign nonperforming loans at September 30, 1996 were $184 million, a decrease
from $343 million at December 31, 1995 and from $465 million at September 30,
1995. The decrease in foreign nonperforming loans reflect the restructuring of
certain refinancing country debt during the 1996 third quarter. Net charge-offs
of foreign loans were $8 million in the third quarter of 1996, compared with net
recoveries of $5 million in the 1995 third quarter. In the first nine months of
1996, net recoveries of foreign loans were $19 million, compared with $28
million in the first nine months of 1995.
Management believes that the credit quality of the Corporation's commercial loan
portfolio will remain relatively stable into 1997, although it expects net
charge-offs in 1997 to be modestly higher as a result of an anticipated decline
in recoveries.
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 financial
needs of its customers, to generate revenues through its trading activities, and
to manage its exposure to fluctuations in interest and currency rates. For a
discussion of the derivative and foreign exchange financial instruments utilized
in connection with the Corporation's trading activities and asset/liability
management activities, including the notional amounts and credit exposure
outstandings as well as the credit and market risks involved, see Notes 4 and 11
of this Form 10-Q and pages 38-44 and 55-56 of the Corporation's 1995 Annual
Report.
Many of the Corporation's derivative and foreign exchange 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, 1996 and December 31, 1995.
Percentages are based upon remaining contract life of positive mark-to-market
exposure amounts.
<TABLE>
<CAPTION>
At September 30, 1996 At December 31, 1995
--------------------------------------- --------------------------------------
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 15% 54% 28% 11% 55% 29%
3 to 6 months 7 27 14 8 27 15
6 to 12 months 8 14 10 8 13 10
1 to 5 years 52 5 36 45 5 29
Over 5 years 18 -- 12 28 -- 17
---- ---- ---- ----- ----- ----
Total 100% 100% 100% 100% 100% 100%
=== === === === === ===
</TABLE>
The Corporation routinely enters into derivative and foreign exchange
transactions with regulated financial institutions, which the Corporation
believes have relatively low credit risk. At September 30, 1996, approximately
88% of the mark-to-market exposure of such transactions was with commercial bank
and financial institution counterparties, most of which are dealers in these
products. Non-financial institutions accounted for approximately 12% of the
Corporation's derivative and foreign exchange mark-to-market exposure.
-36-
<PAGE>
The Corporation does not deal, to any significant extent, in derivatives, which
dealers of derivatives (such as other banks and financial institutions) consider
to be "leveraged". As a result, the mark-to-market exposure as well as the
notional amount of such derivatives were insignificant at September 30, 1996.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb potential credit losses
from the entire loan portfolio, as well as derivative and foreign exchange
transactions. The Corporation deems its allowance for credit losses at September
30, 1996 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.
During the 1996 first nine months, the Corporation incurred a charge of $102
million against its allowance for credit losses as a result of conforming
charge-off policies with respect to credit card receivables.
The Corporation's actual credit losses arising from derivative and foreign
exchange transactions were immaterial during the first nine months of 1996 and
1995. Additionally, at September 30, 1996 and 1995, nonperforming derivatives
contracts were immaterial.
The accompanying table reflects the activity in the Corporation's allowance for
credit losses for the periods indicated.
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------------- ---------------------------
(in millions) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $ 3,692 $ 3,846 $ 3,784 $ 3,894
Provision for Losses 220 192 715 572
Charge-Offs (295) (337) (925) (943)
Recoveries 75 112 210 289
---------- --------- ---------- ---------
Subtotal Net Charge-Offs (220) (225) (715) (654)
Charge Related to Conforming Credit
Card Charge-off Policies --- --- (102) --
---------- --------- ---------- ---------
Total Net Charge-offs (220) (225) (817) (654)
Other 5 (4) 15 (3)
---------- --------- ---------- ---------
Total Allowance at End of Period $ 3,697 $ 3,809 $ 3,697 $ 3,809
========== ========= ========== =========
The following table presents the Corporation's allowance coverage ratios.
September 30, December 31, September 30,
For the Period Ended: 1996 1995 1995
------------- ------------ -------------
Allowance for Credit Losses to:
Loans at Period-End 2.46% 2.52% 2.52%
Average Loans 2.46 2.58 2.61
Nonperforming Loans 269.85 253.45 219.41
</TABLE>
-37-
<PAGE>
- --------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
- --------------------------------------------------------------------------------
TRADING ACTIVITIES
Measuring Market Risk: Market risk is measured and monitored on a daily basis
through a value-at-risk ("VAR") methodology. VAR is defined as the potential
overnight dollar loss from adverse market movements, with 97.5% confidence,
based on historical prices and market rates. The quantification of market risk
through a VAR methodology requires a number of key assumptions including
confidence level for losses, number of days of price history, the holding
period, the measurement of inter-business correlation, and the treatment of
risks outside the VAR methodology, including event risk and liquidity risk.
[SEE GRAPH NUMBER 1 AT APPENDIX 1]
The preceding chart contains a histogram of the Corporation's daily market
risk-related revenue. Market risk-related revenue is defined as the daily change
in value in marked-to-market trading portfolios plus any trading-related net
interest income or other revenue. Based on actual trading results for the twelve
months ended September 30, 1996, which captures the historical correlation among
business units, 95% of the variation in the Corporation's daily trading results
fell within a $23 million band centered on the daily average amount of $8
million. For the twelve months ended September 30, 1996, the Corporation posted
positive daily market risk-related revenue for 245 out of 260 business trading
days for international and domestic units. For 228 of the 260 days, the
Corporation's daily market risk-related revenue or losses occurred within the
negative $5 million through positive $15 million range, which is representative
of the Corporation's emphasis on non-proprietary activities, including
market-making, sales and arbitrage. For a further discussion of measuring market
risk, see pages 40-41 of the Corporation's 1995 Annual Report.
ASSET/LIABILITY MANAGEMENT ACTIVITIES
The objective of the ALM 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 differences in timing between the contractual maturity or the
repricing (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 managed by altering
the repricing of the Corporation's assets or liabilities, and with the use of
derivative instruments. For a further discussion of the Corporation's ALM
process and the derivative instruments used in its ALM activities, see pages
41-44 and Note Eighteen of the Corporation's 1995 Annual Report. A discussion of
the accounting policies relating to derivatives used for ALM activities is
provided in Note One of the Corporation's 1995 Annual Report.
MEASURING INTEREST RATE SENSITIVITY:
One tool used by management to measure the interest rate sensitivity of the
Corporation is aggregate net gap analysis, an example of which is presented
below. Assets and liabilities are placed in gap intervals based on their
repricing dates. Assets and liabilities for which no specific repricing dates
exist are placed in gap intervals based on management's judgment and statistical
analysis concerning their most likely repricing behaviors. Derivatives used in
interest rate sensitivity management are also included in the applicable gap
intervals.
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.
-38-
<PAGE>
<TABLE>
<CAPTION>
CONDENSED INTEREST SENSITIVITY TABLE
(in millions) 1-3 4-6 7-12 1-5 Over
At September 30, 1996 Months Months Months Years 5 Years Total
- --------------------- ------ ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $ (17,594) $ (3,427) $ 2,940 $ 35,228 $ (17,147) $ ---
Derivative Instruments Affecting
Interest-Rate Sensitivity (a) 1,587 (3,440) 5,936 (8,330) 4,247 ---
Interest-Rate Sensitivity Gap (16,007) (6,867) 8,876 26,898 (12,900) ---
Cumulative Interest-Rate
Sensitivity Gap (16,007) (22,874) (13,998) 12,900 --- ---
% of Total Assets (5)% (7)% (4)% 4% --- ---
(in millions) 1-3 4-6 7-12 1-5 Over
At December 31, 1995 Months Months Months Years 5 Years Total
- -------------------- ------ ------ ------ ----- ------- -----
Balance Sheet $ (18,402) $ 2,454 $ (800) $ 32,239 $ (15,491) $ ---
Derivative Instruments Affecting
Interest-Rate Sensitivity (a) (787) (799) (3,137) (1,945) 6,668 ---
Interest-Rate Sensitivity Gap (19,189) 1,655 (3,937) 30,294 (8,823) ---
Cumulative Interest-Rate
Sensitivity Gap (19,189) (17,534) (21,471) 8,823 --- ---
% of Total Assets (6)% (6)% (7)% 3% --- ---
<FN>
(a) Represents net repricing effect of derivative positions, which include
interest rate swaps, futures, forwards, forward rate agreements and
options, that are used as part of the Corporation's overall
asset/liability management activities.
</FN>
</TABLE>
At September 30, 1996, the Corporation had $13,998 million more liabilities than
assets repricing within one year (including net repricing effect of derivative
positions), amounting to 4% of total assets. This compares with $21,471 million,
or 7% of total assets, at December 31, 1995.
At September 30, 1996, based on the Corporation's simulation models, which are
comprehensive simulations of net interest income under a variety of market
interest rate scenarios, earnings at risk to an immediate 100 basis point rise
in market interest rates over the next twelve months was estimated to be
approximately 3.6% of projected after-tax net income. At December 31, 1995, the
Corporation's earnings at risk to a similar increase in market rates was
estimated at approximately 3% of projected after-tax net income. An immediate
100 basis point rise in interest rates is a hypothetical rate scenario, used to
calibrate risk, and does not necessarily represent management's current view of
future market developments.
Interest Rate Swaps: Interest rate swaps are one of the various financial
instruments used in the Corporation's ALM activities. Although the Corporation
believes the results of its ALM activities should be evaluated on an integrated
basis, taking into consideration all on-balance sheet and related derivative
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 following table summarizes the outstanding ALM interest rate swap notional
amounts at September 30, 1996, by twelve-month intervals (i.e., October 1, 1996
through September 30, 1997). The decrease in notional amounts from one period to
the next period represents maturities of the underlying contracts. The
weighted-average fixed interest rates to be received and paid on such swaps are
presented for each twelve-month interval. The three-month London Interbank
Offered Rate (LIBOR), provided for reference in the following table, reflects
the average implied forward yield curve for that index as of September 30, 1996.
However, actual repricings will be based on the applicable rates in effect at
the actual repricing date. To the extent rates change, the variable rates paid
or received will change. The Corporation expects the impact of any interest rate
changes to be largely mitigated by corresponding changes in the interest rates
and values associated with the linked assets and liabilities.
-39-
<PAGE>
<TABLE>
<CAPTION>
OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY INTERVALS
For the twelve-month period beginning October 1,
(in millions) 1996 1997 1998 1999 2000 Thereafter
---- ---- ---- ---- ---- ----------
Receive fixed swaps
<S> <C> <C> <C> <C> <C> <C>
Notional amount $ 33,687 $ 22,696 $ 18,079 $ 15,163 $ 13,507 $ 9,198
Weighted-average Fixed rate 6.49% 6.21% 6.67% 6.71% 6.63% 6.64%
Pay fixed swaps
Notional amount $ 41,579 $ 28,928 $ 19,391 $ 12,227 $ 8,787 $ 4,926
Weighted-average Fixed rate 6.96% 6.85% 7.11% 7.36% 7.35% 7.21%
Basis Swaps
Notional amount $ 23,428 $ 19,323 $ 13,950 $ 1,688 $ 1,385 $ 635
- ------------------------------------------------------------------------------------------------------------------------------
Average Three-Month Implied
Forward LIBOR Rates 5.74% 6.23% 6.32% 6.72% 6.80% 7.20%
- ------------------------------------------------------------------------------------------------------------------------------
Total Notional
Amount (a) $ 98,694 $ 70,947 $ 51,420 $ 29,078 $ 23,679 $ 14,759
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) At September 30, 1996, approximately $11 billion of notional amounts are
interest rate swaps that, as part of the Corporation's asset/liability
management, are used in place of cash market instruments. Of this amount,
$7 billion is expected to mature in the twelve month period beginning
October 1, 1996, $2 billion for the twelve month period beginning October
1, 1997, with the remaining $2 billion on October 1, 1998 and thereafter.
</FN>
</TABLE>
The following table summarizes the Corporation's assets and liabilities at
September 30, 1996 with the notional amount of related derivatives used for ALM
purposes.
<TABLE>
<CAPTION>
DERIVATIVE CONTRACTS AND RELATED BALANCE SHEET POSITIONS Notional Amount (a)
--------------------------------
Balance Interest Other ALM
(in millions) Sheet Amount Rate Swaps Contracts(b)
------------ ---------- ------------
<S> <C> <C> <C>
Deposits with Banks $ 4,433 $ 940 $ 2,660
Securities - Available for Sale 42,477 4,821 744
Loans 150,333 45,944 70,100
Other Assets 15,699 3,450 4,407
Deposits 165,042 26,938 48,852
Long-Term Debt 12,379 4,997 972
<FN>
(a) At September 30, 1996, notional amounts of approximately $11 billion for
interest rate swaps and $1 billion for other ALM contracts, both of which
are used in place of cash market instruments, have been excluded from the
above table.
(b) Includes futures, forwards, forward rate agreements and options.
</FN>
</TABLE>
-40-
<PAGE>
Approximately $7.9 billion notional amount of derivatives related to mortgage
servicing assets and approximately $10.4 billion notional amount of derivatives
related to mortgage and consumer loans held for sale were outstanding at
September 30, 1996. The weighted average maturity of contracts linked to
mortgage servicing assets is approximately four years. Contracts related to
loans held for sale generally mature within one year.
The Corporation's ALM derivative activities, whereby derivative instruments
alter the yield on certain of the Corporation's assets and liabilities, had an
unfavorable $20 million impact on the Corporation's net interest income in the
third quarter of 1996, compared with a favorable impact of $55 million for the
third quarter of 1995. For the first nine months, the unfavorable impact on net
interest income was $55 million in 1996, compared with a favorable impact of
$136 million in 1995.
The following table reflects the deferred gains/losses and unrecognized
gains/losses of the Corporation's ALM derivative contracts for September 30,
1996 and December 31, 1995.
<TABLE>
<CAPTION>
September 30, December 31,
(in millions) 1996 1995 Change
------------- ------------ ------
ALM Derivative Contracts:
<S> <C> <C> <C>
Net Deferred Gains (Losses) $ (62) $ (98) $ 36
Net Unrecognized Gains (Losses)(a) (514) 184 (698)
--------- ------- -------
Net ALM Derivative Gains (Losses) $ (576) $ 86 $ (662)
========= ======= =======
<FN>
(a) The September 30, 1996 amount includes $64 million in net unrecognized
losses from derivatives related to mortgage servicing rights, and $4
million in net unrecognized gains from daily margin settlements on open
futures contracts. At December 31, 1995, there was $69 million in net
unrecognized gains from derivatives related to mortgage servicing rights
and $99 million in net unrecognized losses from daily margin settlements
on open future contracts.
</FN>
</TABLE>
The net deferred losses at September 30, 1996 are expected to be amortized as
yield adjustments in interest income or interest expense, as applicable, over
the periods reflected in the following table.
AMORTIZATION OF NET DEFERRED GAINS (LOSSES) ON CLOSED ALM CONTRACTS
(in millions)
1996 $ 11
1997 4
1998 (49)
1999 (61)
2000 (47)
2001 and After 80
------
Total $ (62)
======
The Consolidated Balance Sheet includes unamortized premiums on open ALM option
contracts which will be amortized as a reduction to net interest income over the
periods indicated in the following table.
AMORTIZATION OF PREMIUMS ON OPEN ALM OPTION CONTRACTS
(in millions)
1996 $ 12
1997 21
1998 26
1999 34
2000 33
2001 and After 55
------
Total $ 181
======
-41-
<PAGE>
- --------------------------------------------------------------------------------
OPERATING RISK MANAGEMENT
- --------------------------------------------------------------------------------
The Corporation, like all large financial institutions, is exposed to many types
of operating risk, including the risk of fraud by employees or outsiders,
unauthorized transactions by employees, and errors relating to computer and
telecommunications systems. The Corporation maintains a system of controls that
is designed to keep operating risk at appropriate levels in view of the
financial strength of the Corporation, the characteristics of the businesses and
markets in which the Corporation operates, competitive circumstances and
regulatory considerations. However, from time to time in the past, the
Corporation has suffered losses from operating risk and there can be no
assurance that the Corporation will not suffer such losses in the future.
- --------------------------------------------------------------------------------
CAPITAL AND LIQUIDITY RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following capital and liquidity discussion focuses primarily on developments
since December 31, 1995. Accordingly, it should be read in conjunction with the
Capital and Liquidity Risk Management section on pages 45-47 of the
Corporation's 1995 Annual Report.
CAPITAL
The Corporation's level of capital at September 30, 1996 remained strong, with
capital ratios well in excess of regulatory guidelines. As part of the
Corporation's commitment to a disciplined capital policy, management has
targeted a Tier 1 capital ratio for the Corporation of 8 to 8.25%. The
Corporation manages its capital to execute its strategic business plans and
support its growth and investments, including acquisition strategies in its core
businesses. At September 30, 1996, the Corporation's Tier 1 and Total Capital
ratios were 8.36% and 12.17%, respectively. These ratios, as well as the
leverage ratio, exclude the assets and off-balance sheet financial instruments
of the Corporation's securities subsidiary as well as the Corporation's
investment in such subsidiary. In addition, the provisions of SFAS 115 do not
apply to the calculation of these ratios.
Total capitalization (the sum of Tier 1 Capital and Tier 2 Capital) increased by
$839 million during the first nine months of 1996 to $29.2 billion at September
30, 1996. The amount of total capital includes the recently issued $550 million
preferred stock of Chase Preferred Capital Corporation, which is accounted for
as minority interest (see Note 10 of this Form 10Q), and the unfavorable impact
of the merger-related restructuring charge.
During the first nine months of 1996, the Corporation issued 20.2 million shares
of common stock and purchased approximately 15.2 million shares of its
outstanding common stock in the open market. These purchases were made as part
of a buy-back program which terminated at September 30, 1996.
On October 15, 1996, the Corporation announced a common stock purchase program
pursuant to which the Corporation is authorized until December 31, 1998 to
purchase up to $2.5 billion of its common stock, in addition to such other
number of common shares as may be necessary to provide for expected issuances
under its dividend reinvestment plan and its various stock-based director and
employee benefits plans.
The Corporation raised the cash dividend on its common stock to $.56 per share,
an increase from $.50 per share, in the first quarter of 1996. Management's
current expectation is that the dividend policy of the Corporation will
generally be to pay a common stock dividend equal to approximately 25-35% of the
Corporation's net income (excluding restructuring charges) less preferred
dividends. 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.
Total stockholders' equity at September 30, 1996 was $21.1 billion, compared
with $20.8 billion at December 31, 1995. The $304 million increase from the 1995
year-end primarily reflects $2,685 million of net income generated during the
first nine months of 1996 before the merger-related restructuring charge. This
amount was partially offset by the after-tax impact of the merger-related
restructuring charge and expenses ($1,060 million); a $243 million unfavorable
impact on the fair value of available-for-sale securities accounted for under
SFAS 115; and the effects of common and preferred stock dividends totaling $982
million.
-42-
<PAGE>
The tables which follow set forth various capital ratios and components of
capital at the dates indicated.
<TABLE>
<CAPTION>
CAPITAL RATIOS
Minimum
September 30, December 31, Regulatory
1996 1995 Requirement
------------- ------------ -----------
<S> <C> <C> <C>
Tier 1 Capital Ratio (a)(c) 8.36% 8.22% 4.00%
Total Capital Ratio (a)(c) 12.17 12.27 8.00
Tier 1 Leverage Ratio (b)(c) 6.97 6.68 3.00 -5.00
Common Stockholders' Equity to Total Assets 5.73 5.98 --
Total Stockholders' Equity to Total Assets 6.55 6.85 --
<FN>
(a) Tier 1 Capital or Total Capital divided by risk-weighted assets.
Risk-weighted assets include assets and off-balance sheet positions,
weighted by the type of instrument and the risk weight of the
counterparty, collateral or guarantor.
(b) Tier 1 Capital divided by adjusted average assets.
(c) Including the Corporation's securities subsidiary, the September 30, 1996
Tier 1 Capital, Total Capital and Tier 1 Leverage ratios were 8.56%,
12.65% and 6.46%, respectively, compared with 8.37%, 12.67% and 6.27%,
respectively, at December 31, 1995.
</FN>
</TABLE>
<TABLE>
<CAPTION>
COMPONENTS OF CAPITAL
September 30, December 31,
(in millions) 1996 1995
------------- ------------
TIER 1 CAPITAL
<S> <C> <C>
Common Stockholders' Equity $ 18,970 $ 18,424
Nonredeemable Preferred Stock 2,650 2,650
Minority Interest 676 162
Less: Goodwill 1,373 1,446
Non-Qualifying Intangible Assets 116 116
50% Investment in Securities and Unconsolidated
Subsidiaries 772 698
-------------- -----------
Tier 1 Capital $ 20,035 $ 18,976
-------------- ------------
TIER 2 CAPITAL
Long-Term Debt Qualifying as Tier 2 $ 6,896 $ 7,139
Qualifying Allowance for Credit Losses 3,004 2,907
Less: 50% Investment in Securities and Unconsolidated
Subsidiaries 772 698
-------------- -----------
Tier 2 Capital $ 9,128 $ 9,348
-------------- -----------
Total Qualifying Capital $ 29,163 $ 28,324
============== ===========
Risk-Weighted Assets (a) $ 239,642 $ 230,887
============== ===========
<FN>
(a) Includes off-balance sheet risk-weighted assets in the amount of $75,547
million and $68,153 million, respectively, at September 30, 1996 and
December 31, 1995.
</FN>
</TABLE>
-43-
<PAGE>
LIQUIDITY
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. These deposits fund a
portion of the Corporation's asset base, thereby reducing the Corporation's
reliance on other, more volatile, sources of funds. The average core deposits at
the Corporation's bank subsidiaries for the first nine months of 1996 were $83
billion and represented 55% of average loans for the period. Foreign deposits
generated in the Corporation's global wholesale and retail businesses are also
considered to be an additional source of liquidity for the Corporation.
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. The
Corporation's long-term debt at September 30, 1996 was $12,379 million, a
decrease of $446 million from the 1995 year-end. The decrease resulted largely
from maturities of the Corporation's long-term debt of $1,358 million (including
$972 million of senior medium-term notes, $365 million of other senior notes,
and $21 million of subordinated notes) and the redemption of $20 million of
senior medium-term notes. These decreases were partially offset by issuances of
$866 million of the Corporation's long-term debt (including $250 million of
senior medium-term notes, $75 million of subordinated medium-term notes, $341
million of other senior notes and $200 million of other subordinated notes). The
Corporation will continue to evaluate the opportunity for future redemptions of
its outstanding debt in light of current market conditions.
During September 1996, Chase Preferred Capital Corporation, a subsidiary of the
Corporation, organized as a real estate investment trust, issued $550 million of
preferred stock. This subsidiary is taxed as a real estate investment trust
whereby dividends on the preferred stock are treated by the Corporation as an
operating expense, thereby reducing taxable income. Such stock is recorded as
minority interest which is included in the Corporation's Tier 1 capital. The
Corporation has approximately $1.1 billion of fixed-rate preferred stock which
becomes callable in 1997.
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION
- --------------------------------------------------------------------------------
The following supervision and regulation discussion focuses primarily on
developments since December 31, 1995; accordingly, it should be read in
conjunction with Supervision and Regulation of The Chase Manhattan Corporation,
filed as Exhibit 99.3 of the Corporation's Form 8-K dated April 16, 1996.
DIVIDENDS
At September 30, 1996, in accordance with the dividend restrictions applicable
to them, the Corporation's bank subsidiaries could, during 1996, without the
approval of their relevant banking regulators, pay dividends in the aggregate of
approximately $1.6 billion to their respective bank holding companies, plus an
additional amount equal to their net income from October 1, 1996 through the
date in 1996 of any such dividend payment. The reduction from the prior
quarter-end in the aggregate amount of dividends that the Corporation's bank
subsidiaries could pay reflects the effects of certain actions taken by the
Corporation in connection with the reorganization of the national consumer
businesses at Chase Manhattan Bank USA, N.A.
In addition to the dividend restrictions set forth in statutes and regulations,
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")
required the FDIC to establish a risk-based assessment system for FDIC deposit
insurance. FDICIA also contained provisions limiting certain activities and
business methods of depository institutions. Finally, FDICIA provided 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 its business operations.
-44-
<PAGE>
- --------------------------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
- --------------------------------------------------------------------------------
ACCOUNTING FOR STOCK-BASED COMPENSATION
For a discussion of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), see page 47 of the
Corporation's 1995 Annual Report. The Corporation intends to continue accounting
for its employee stock compensation plans under its current method (APB 25), and
will adopt the disclosure requirements of SFAS 123 at year-end 1996.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
Under SFAS 125, after an entity transfers financial assets, it recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 provides
standards for distinguishing between transfers of financial assets that are
sales from transfers that are secured borrowings.
As issued, SFAS 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. However,
the FASB has tentatively decided to defer the effective date for one year for
securities lending, repurchase agreements and other secured financing
transactions. The Corporation plans to adopt the requirements of SFAS 125
beginning January 1, 1997, for the following types of transactions:
securitizations, recognition of servicing assets and liabilities, transfers of
receivables with recourse, loan participations, and extinguishments of
liabilities. The Corporation is currently assessing the impact of the adoption
of SFAS 125, but management believes that the adoption of SFAS 125 will not
significantly affect the Corporation's earnings, liquidity, or capital
resources.
-45-
<PAGE>
<TABLE>
<CAPTION>
The Chase Manhattan 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, 1996 September 30, 1995
----------------------------------------- ---------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 5,519 $ 113 8.11% $ 10,091 194 7.63%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 33,756 548 6.46% 28,606 448 6.21%
Trading Assets-Debt and Equity
Instruments 31,590 525 6.61% 20,637 360 6.92%
Securities:
Available-for-Sale 38,429 619 6.41%(b) 26,233 475 7.19%(b)
Held-to-Maturity 4,048 75 7.41% 10,071 169 6.64%
Loans 150,076 3,045(c) 8.07% 149,856 3,285 (c) 8.70%
--------- ------- ---------- -------
Total Interest-Earning Assets 263,418 4,925 7.44% 245,494 4,931 7.97%
Allowance for Credit Losses (3,654) (3,833)
Cash and Due from Banks 11,503 14,467
Risk Management Instruments 25,299 28,270
Other Assets 26,347 22,576
--------- ----------
Total Assets $ 322,913 $ 306,974
========= ==========
LIABILITIES
Domestic Retail Deposits $ 54,319 494 3.63% $ 54,017 522 3.83%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 9,516 129 5.39% 10,880 139 5.06%
Deposits in Foreign Offices 61,344 792 5.13% 64,597 932 5.72%
--------- ------- ---------- -------
Total Time and Savings
Deposits 125,179 1,415 4.50% 129,494 1,593 4.88%
--------- ------- ---------- -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 61,244 778 5.06% 44,721 655 5.81%
Commercial Paper 5,461 73 5.26% 5,981 86 5.70%
Other Borrowings (d) 17,212 362 8.39% 13,415 279 8.25%
--------- ------- ---------- -------
Total Short-Term and
Other Borrowings 83,917 1,213 5.75% 64,117 1,020 6.31%
Long-Term Debt 12,454 221 7.05% 13,081 239 7.26%
--------- ------- ---------- -------
Total Interest-Bearing Liabilities 221,550 2,849 5.12% 206,692 2,852 5.47%
--------- ------- ---------- -------
Noninterest-Bearing Deposits 41,628 37,816
Risk Management Instruments 25,010 31,101
Other Liabilities 14,152 11,340
--------- ----------
Total Liabilities 302,340 286,949
--------- ----------
PREFERRED STOCK OF SUBSIDIARY 78 --
--------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,650
Common Stockholders' Equity 17,845 17,375
--------- ----------
Total Stockholders' Equity 20,495 20,025
--------- ----------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 322,913 $ 306,974
========= ==========
INTEREST RATE SPREAD 2.32% 2.50%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $2,076(a) 3.14% $2,079 (a) 3.36%
====== ==== ====== ====
<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, 1996 and September 30, 1995, the
annualized rate for securities available-for-sale based on historical cost
was 6.30% and 7.16%, respectively.
(c) For the three months ended September 30, 1996 and September 30, 1995, the
negative impact from nonperforming loans on net interest income was $9
million and $23 million, respectively.
(d) Includes securities sold but not yet purchased.
</FN>
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
The Chase Manhattan 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, 1996 September 30, 1995
----------------------------------------- ----------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 7,016 $ 440 8.38% $ 11,280 $ 637 7.55%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 29,982 1,564 6.97% 29,327 1,398 6.37%
Trading Assets-Debt and Equity
Instruments 28,735 1,360 6.32% 19,653 1,062 7.22%
Securities:
Available-for-Sale 38,306 1,874 6.53%(b) 24,863 1,366 7.34%(b)
Held-to-Maturity 4,268 236 7.39% 10,340 527 6.81%
Loans 150,107 9,320(c) 8.29% 145,959 9,606(c) 8.80%
---------- -------- ------------ -------
Total Interest-Earning Assets 258,414 14,794 7.65% 241,422 14,596 8.08%
Allowance for Credit Losses (3,703) (3,867)
Cash and Due from Banks 12,132 13,735
Risk Management Instruments 25,714 31,307
Other Assets 25,267 22,304
---------- ------------
Total Assets $ 317,824 $ 304,901
========== ============
LIABILITIES
Domestic Retail Deposits $ 53,352 1,462 3.66% $ 54,256 1,537 3.79%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 10,329 344 4.46% 11,843 429 4.84%
Deposits in Foreign Offices 66,197 2,711 5.47% 64,317 2,723 5.65%
---------- -------- ------------ -------
Total Time and Savings
Deposits 129,878 4,517 4.65% 130,416 4,689 4.80%
---------- -------- ------------ -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 52,837 2,064 5.22% 43,473 1,929 5.93%
Commercial Paper 5,251 207 5.28% 5,563 242 5.82%
Other Borrowings (d) 16,622 1,055 8.47% 12,664 865 9.12%
---------- -------- ------------ -------
Total Short-Term and
Other Borrowings 74,710 3,326 5.95% 61,700 3,036 6.58%
Long-Term Debt 12,781 669 6.98% 13,051 711 7.29%
---------- -------- ------------ -------
Total Interest-Bearing Liabilities 217,369 8,512 5.23% 205,167 8,436 5.49%
---------- -------- ------------ -------
Noninterest-Bearing Deposits 39,150 37,108
Risk Management Instruments 27,020 32,280
Other Liabilities 13,847 10,939
---------- ------------
Total Liabilities 297,386 285,494
---------- ------------
PREFERRED STOCK OF SUBSIDIARY 26 --
---------- ------------
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,757
Common Stockholders' Equity 17,762 16,650
---------- ------------
Total Stockholders' Equity 20,412 19,407
---------- ------------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 317,824 $ 304,901
========== ============
INTEREST RATE SPREAD 2.42% 2.59%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $6,282(a) 3.25% $6,160(a) 3.41%
====== ===== ====== =====
<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, 1996 and September 30, 1995, the
annualized rate for securities available-for-sale based on historical cost
was 6.46% and 7.27%, respectively.
(c) For the nine months ended September 30, 1996 and September 30, 1995, the
negative impact from nonperforming loans on net interest income was $58
million and $83 million, respectively.
(d) Includes securities sold but not yet purchased.
</FN>
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1996 1995
------------------------------------- --------------------------------
Third Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- -------
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Loans $ 3,042 $ 3,028 $ 3,241 $ 3,252 $ 3,280 $ 3,241
Securities 690 685 720 718 639 616
Trading Assets 525 406 429 402 360 343
Federal Funds Sold and Securities
Purchased Under Resale Agreements 549 514 501 491 448 482
Deposits with Banks 112 156 172 187 194 218
-------- -------- ------- -------- -------- --------
Total Interest Income 4,918 4,789 5,063 5,050 4,921 4,900
-------- -------- ------- -------- -------- --------
Interest Expense
Deposits 1,416 1,458 1,644 1,602 1,593 1,596
Short-Term and Other Borrowings 1,213 1,087 1,026 1,139 1,020 1,038
Long-Term Debt 220 221 227 231 239 238
-------- -------- ------- -------- -------- --------
Total Interest Expense 2,849 2,766 2,897 2,972 2,852 2,872
-------- -------- ------- -------- -------- --------
Net Interest Income 2,069 2,023 2,166 2,078 2,069 2,028
Provision for Losses 220 250 245 186 192 195
-------- -------- ------- -------- -------- --------
Net Interest Income After Provision For
Losses 1,849 1,773 1,921 1,892 1,877 1,833
-------- -------- ------- -------- -------- --------
Noninterest Revenue
Corporate Finance and Syndication Fees 234 258 224 220 210 197
Trust and Investment Management Fees 295 302 285 277 258 243
Credit Card Revenue 277 233 233 246 210 196
Service Charges on Deposit Accounts 97 100 99 101 105 107
Fees for Other Financial Services 393 381 378 363 370 353
Trading Revenue 304 379 339 274 342 301
Securities Gains 34 24 52 25 53 72
Other Revenue 222 254 259 259 162 257
-------- -------- ------- -------- -------- --------
Total Noninterest Revenue 1,856 1,931 1,869 1,765 1,710 1,726
-------- -------- ------- -------- -------- --------
Noninterest Expense
Salaries 1,040 1,046 1,076 1,130 1,074 1,007
Employee Benefits 211 225 305 206 213 246
Occupancy Expense 204 207 221 224 227 218
Equipment Expense 179 181 184 187 177 193
Foreclosed Property Expense 2 (8) (9) (15) (7) (28)
Restructuring Charge and Expenses 32 22 1,656 --- --- 15
Other Expense 652 651 660 632 648 708
-------- -------- ------- -------- -------- --------
Total Noninterest Expense 2,320 2,324 4,093 2,364 2,332 2,359
-------- -------- ------- -------- -------- --------
Income (Loss) Before Income Tax
Expense (Benefit) 1,385 1,380 (303) 1,293 1,255 1,200
Income Tax Expense (Benefit) 527 524 (214) 466 491 471
-------- -------- ------- -------- -------- --------
Net Income (Loss) $ 858 $ 856 $ (89) $ 827 $ 764 $ 729
======== ======== ======= ======== ======== ========
Net Income (Loss) Applicable To Common
Stock $ 803 $ 801 $ (143) $ 773 $ 708 $ 673
======== ======== ======= ======== ======== ========
Net Income (Loss) Per Common Share:
Primary $ 1.80 $ 1.80 $ (0.32) $ 1.73 $ 1.58 $ 1.54
======== ======== ======== ======== ======== ========
Assuming Full Dilution $ 1.78 $ 1.79 $ (0.32) $ 1.73 $ 1.55 $ 1.52
======== ======== ======== ======== ======== ========
</TABLE>
-48-
<PAGE>
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
Reference is made to page 6 of the Chemical 1995 Form 10-K
relating to the investigation commenced by the Securities
and Exchange Commission (the "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 has
been advised by the staff of the Commission that its inquiry
into this matter has been terminated and that, at this time,
no enforcement action with respect to the Corporation is
being recommended to the Commission.
Litigation Relating to the Merger
----------------------------------
Reference is made to page 6 of the Chemical 1995 Form 10-K
relating to a discussion of three complaints that 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. These actions have been
dismissed without prejudice.
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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) Exhibits:
11 - Computation of net income per share.
12(a) - Computation of ratio of earnings to fixed
charges.
12(b) - Computation of ratio of earnings to fixed
charges and preferred stock dividend
requirements.
27 - Financial Data Schedule.
(B) Reports on Form 8-K:
The Corporation filed two reports on Form 8-K during
the quarter ended September 30, 1996, as follows:
Form 8-K dated July 17, 1996: The Corporation announced
the results of operations for the second quarter of
1996.
Form 8-K dated September 30, 1996: The Corporation
announced the launching of the co-branded Wal-Mart
MasterCard.
-49-
<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.
THE CHASE MANHATTAN CORPORATION
(Registrant)
Date November 14, 1996 By /s/ Joseph L. Sclafani
------------------ -------------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
-50-
<PAGE>
APPENDIX 1
----------
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
-----------------------------------------------
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition.
<TABLE>
<CAPTION>
GRAPH
NUMBER PAGE DESCRIPTION
-------- -------- -----------------------------------------------------------------------
<S> <C> <C>
1 38 Bar Graph entitled "Histogram of Daily Market Risk-Related Revenue
For the Twelve Months ended September 30, 1996" presenting the
following information:
Millions of Dollars 0 -5 5 - 10 10 -15 15 - 20 20 -25 25 -30
------------------- ---- ------ ------ ------- ------ ------
Number of days trading
revenue was within the
above prescribed posi-
tive range 66 99 51 22 6 1
Millions of Dollars 0 -(5) (5)-(10) (10)-(15)
------------------- ------ --------- ---------
Number of days trading
revenue was within the
above prescribed nega-
tive range 12 2 1
The Histogram includes all business trading days for international
and domestic units.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
11 Computation of net income 52
per share
12 (a) Computation of ratio of 53
earnings to fixed charges
12 (b) Computation of ratio of 54
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 55
-51-
<PAGE>
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION and Subsidiaries
Computation of net income per share
-----------------------------------
Net income for primary and fully diluted EPS 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. For a further discussion of the Corporation's earnings per
share computation, reference is made to Note One of the Corporation's 1995
Annual Report.
<TABLE>
<CAPTION>
(in millions, except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
EARNINGS PER SHARE 1996 1995 1996 1995
---- ---- ---- ----
Primary
- -------
Earnings:
<S> <C> <C> <C> <C>
Income Before Effect of Accounting Change $ 858 $ 764 $ 1,625 $ 2,143
Effect of Change in Accounting Principle -- -- -- (11)(a)
------ ------- ------- --------
Net Income $ 858 $ 764 $ 1,625 $ 2,132
Less: Preferred Stock Dividend Requirements 55 56 164 173
------ ------- ------- --------
Net Income Applicable to Common Stock $ 803 $ 708 $ 1,461 $ 1,959
====== ======= ======= ========
Shares:
Average Common and Common Equivalent Shares Outstanding 447.2 448.4 446.0 438.5
Primary Earnings Per Share:
Income Before Effect of Accounting Change $ 1.80 $ 1.58 $ 3.28 $ 4.49
Effect of Change in Accounting Principle -- -- -- (0.02)(a)
------ ------- ------- -------
Net Income $ 1.80 $ 1.58 $ 3.28 $ 4.47
====== ======= ======= =======
Assuming Full Dilution
- ----------------------
Earnings:
Net Income Applicable to Common Stock $ 803 $ 708 $ 1,461 $ 1,959
Add: Applicable Dividend on Convertible Preferred Stock -- -- -- 7
------ ------- ------- --------
Adjusted Net Income $ 803 $ 708 $ 1,461 $ 1,966
====== ======= ======= ========
Shares:
Average Common and Common Equivalent Shares Outstanding 447.2 448.4 446.0 438.5
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect and Conversion of Preferred Stock (b) 3.3 8.0 6.3 19.0
------ ------- ------- -------
Adjusted Shares of Common and Equivalent Shares Outstanding 450.5 456.4 452.3 457.5
Earnings Per Share Assuming Full Dilution:
Income Before Effect of Accounting Change $ 1.78 $ 1.55 $ 3.23 $ 4.32
Effect of Change in Accounting Principle -- -- -- (0.02)(a)
------ ------- ------- -------
Net Income $ 1.78 $ 1.55 $ 3.23 $ 4.30
====== ======= ======= =======
<FN>
(a) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for
other postretirement benefits relating to its 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>
-52-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12(a)
THE CHASE MANHATTAN CORPORATION and Subsidiaries
Computation of ratio of earnings to fixed charges
-------------------------------------------------
(in millions, except ratios)
Nine Months Ended
September 30, 1996
------------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes $ 2,462
--------
Fixed charges:
Interest expense 3,994
One third of rents, net of income from subleases (a) 91
--------
Total fixed charges 4,085
Less: Equity in undistributed income of affiliates (47)
---------
Earnings before taxes and fixed charges, excluding capitalized interest $ 6,500
========
Fixed charges, as above $ 4,085
========
Ratio of earnings to fixed charges 1.59
========
INCLUDING INTEREST ON DEPOSITS
- ------------------------------
Fixed charges, as above $ 4,085
Add: Interest on deposits 4,518
-------
Total fixed charges and interest on deposits $ 8,603
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 6,500
Add: Interest on deposits 4,518
--------
Total earnings before taxes, fixed charges, and interest on deposits $ 11,018
========
Ratio of earnings to fixed charges 1.28
========
<FN>
(a) The proportion deemed representative of the interest factor.
</FN>
</TABLE>
-53-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12(b)
THE CHASE MANHATTAN 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, 1996
------------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes $ 2,462
--------
Fixed charges:
Interest expense 3,994
One third of rents, net of income from subleases (a) 91
--------
Total fixed charges 4,085
Less: Equity in undistributed income of affiliates (47)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 6,500
========
Fixed charges, as above $ 4,085
Preferred stock dividends 164
--------
Fixed charges including preferred stock dividends $ 4,249
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.53
========
INCLUDING INTEREST ON DEPOSITS
- ------------------------------
Fixed charges including preferred stock dividends $ 4,249
Add: Interest on deposits 4,518
--------
Total fixed charges including preferred stock
dividends and interest on deposits $ 8,767
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 6,500
Add: Interest on deposits 4,518
--------
Total earnings before taxes, fixed charges, and interest on deposits $ 11,018
========
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.26
========
<FN>
(a) The proportion deemed representative of the interest factor.
</FN>
</TABLE>
-54-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000019617
<NAME> THE CHASE MANHATTAN CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 13,729
<INT-BEARING-DEPOSITS> 4,433
<FED-FUNDS-SOLD> 26,586
<TRADING-ASSETS> 59,835
<INVESTMENTS-HELD-FOR-SALE> 42,477
<INVESTMENTS-CARRYING> 3,956
<INVESTMENTS-MARKET> 3,925
<LOANS> 150,333
<ALLOWANCE> 3,697
<TOTAL-ASSETS> 322,604
<DEPOSITS> 165,042
<SHORT-TERM> 75,157
<LIABILITIES-OTHER> 45,560
<LONG-TERM> 12,379
0
2,650
<COMMON> 440
<OTHER-SE> 18,050
<TOTAL-LIABILITIES-AND-EQUITY> 322,604
<INTEREST-LOAN> 9,311
<INTEREST-INVEST> 2,095
<INTEREST-OTHER> 2,004
<INTEREST-TOTAL> 14,770
<INTEREST-DEPOSIT> 4,518
<INTEREST-EXPENSE> 8,512
<INTEREST-INCOME-NET> 6,258
<LOAN-LOSSES> 715
<SECURITIES-GAINS> 110
<EXPENSE-OTHER> 8,737
<INCOME-PRETAX> 2,462
<INCOME-PRE-EXTRAORDINARY> 1,625
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,625
<EPS-PRIMARY> 3.28
<EPS-DILUTED> 3.23
<YIELD-ACTUAL> 3.25
<LOANS-NON> 1,370
<LOANS-PAST> 532
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,784
<CHARGE-OFFS> 1,015
<RECOVERIES> 198
<ALLOWANCE-CLOSE> 3,697
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
