SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 436,251,530
- -----------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
July 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 June 30, 1996 and
December 31, 1995. 3
Consolidated Statement of Income for the three months
ended June 30, 1996 and June 30, 1995. 4
Consolidated Statement of Income for the six months ended
June 30, 1996 and June 30, 1995. 5
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1996 and June 30, 1995. 6
Consolidated Statement of Cash Flows for the six months
ended June 30, 1996 and June 30, 1995. 7
Notes to Financial Statements. 8-15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. 16-47
Part II
Item 1 Legal Proceedings 48
Item 4 Submission of Matters to a Vote of Security Holders 48
Item 6 Exhibits and Reports on Form 8-K. 49
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1.
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions, except share data)
June 30, December 31,
1996 1995
----------- ------------
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 13,291 $ 14,794
Deposits with Banks 5,805 8,468
Federal Funds Sold and Securities
Purchased Under Resale Agreements 33,039 17,461
Trading Assets:
Debt and Equity Instruments 25,297 26,212
Risk Management Instruments 26,414 25,825
Securities:
Available-for-Sale 37,855 37,141
Held-to-Maturity (Fair Value: $4,080 and $4,659) 4,125 4,628
Loans (Net of Unearned Income: $1,052 and $1,073) 151,274 150,207
Allowance for Credit Losses (3,692) (3,784)
Premises and Equipment 3,667 3,757
Due from Customers on Acceptances 2,438 1,896
Accrued Interest Receivable 2,534 2,541
Other Assets 19,714 14,843
---------- -----------
TOTAL ASSETS $ 321,761 $ 303,989
========== ===========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 34,274 $ 35,414
Interest-Bearing 68,368 64,640
Foreign:
Noninterest-Bearing 3,599 3,702
Interest-Bearing 62,102 67,778
---------- -----------
Total Deposits 168,343 171,534
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 54,584 37,263
Other Borrowed Funds 13,881 13,936
Acceptances Outstanding 2,445 1,915
Trading Liabilities 36,186 34,341
Accounts Payable, Accrued Expenses and Other Liabilities 13,212 11,339
Long-Term Debt 12,770 12,825
---------- -----------
TOTAL LIABILITIES 301,421 283,153
---------- -----------
COMMITMENTS AND CONTINGENCIES (See Note 9)
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,650
Common Stock (Issued 438,166,749 and 457,587,675 Shares) 438 458
Capital Surplus 10,432 11,075
Retained Earnings 7,534 7,997
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (640) (237)
Treasury Stock, at Cost (1,112,101 and 22,583,225 Shares) (74) (1,107)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 20,340 20,836
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 321,761 $ 303,989
========== ===========
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended June 30,
(in millions, except per share data)
1996 1995
--------- --------
INTEREST INCOME
<S> <C> <C>
Loans $ 3,028 $ 3,241
Securities 685 616
Trading Assets 406 343
Federal Funds Sold and Securities
Purchased Under Resale Agreements 514 482
Deposits with Banks 156 218
--------- --------
Total Interest Income 4,789 4,900
--------- --------
INTEREST EXPENSE
Deposits 1,458 1,596
Short-Term and Other Borrowings 1,087 1,038
Long-Term Debt 221 238
--------- --------
Total Interest Expense 2,766 2,872
--------- --------
NET INTEREST INCOME 2,023 2,028
Provision for Losses 250 195
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 1,773 1,833
--------- --------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 258 197
Trust and Investment Management Fees 302 243
Credit Card Revenue 233 196
Service Charges on Deposit Accounts 100 107
Fees for Other Financial Services 381 353
Trading Revenue 379 301
Securities Gains 24 72
Other Revenue 254 257
--------- --------
Total Noninterest Revenue 1,931 1,726
--------- --------
NONINTEREST EXPENSE
Salaries 1,046 1,007
Employee Benefits 225 246
Occupancy Expense 207 218
Equipment Expense 181 193
Foreclosed Property Expense (8) (28)
Restructuring Charge and Expenses 22 15
Other Expense 651 708
--------- --------
Total Noninterest Expense 2,324 2,359
--------- --------
INCOME BEFORE INCOME TAX EXPENSE 1,380 1,200
Income Tax Expense 524 471
--------- --------
NET INCOME $ 856 $ 729
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 801 $ 673
========= ========
NET INCOME PER COMMON SHARE:
Primary $ 1.80 $ 1.54
========= ========
Assuming Full Dilution $ 1.79 $ 1.52
========= ========
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Six Months Ended June 30,
(in millions, except per share data)
1996 1995
--------- --------
INTEREST INCOME
<S> <C> <C>
Loans $ 6,269 $ 6,310
Securities 1,405 1,234
Trading Assets 835 702
Federal Funds Sold and Securities
Purchased Under Resale Agreements 1,015 950
Deposits with Banks 328 443
--------- --------
Total Interest Income 9,852 9,639
--------- --------
INTEREST EXPENSE
Deposits 3,102 3,096
Short-Term and Other Borrowings 2,113 2,016
Long-Term Debt 448 472
--------- --------
Total Interest Expense 5,663 5,584
--------- --------
NET INTEREST INCOME 4,189 4,055
Provision for Losses 495 380
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES 3,694 3,675
--------- --------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 482 366
Trust and Investment Management Fees 587 483
Credit Card Revenue 466 378
Service Charges on Deposit Accounts 199 211
Fees for Other Financial Services 759 720
Trading Revenue 718 400
Securities Gains 76 54
Other Revenue 513 671
--------- --------
Total Noninterest Revenue 3,800 3,283
--------- --------
NONINTEREST EXPENSE
Salaries 2,122 2,004
Employee Benefits 530 480
Occupancy Expense 428 446
Equipment Expense 365 391
Foreclosed Property Expense (17) (53)
Restructuring Charge and Expenses 1,678 15
Other Expense 1,311 1,411
--------- --------
Total Noninterest Expense 6,417 4,694
--------- --------
INCOME BEFORE INCOME TAX EXPENSE AND
EFFECT OF ACCOUNTING CHANGE 1,077 2,264
Income Tax Expense 310 885
--------- --------
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE 767 1,379
Effect of Change in Accounting Principle -- (11)
--------- --------
NET INCOME $ 767 $ 1,368
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 658 $ 1,251
========= ========
INCOME PER COMMON SHARE:
Primary:
Income Before Effect of Accounting Change $ 1.48 $ 2.91
Effect of Change in Accounting Principle -- (0.02)
--------- --------
Net Income $ 1.48 $ 2.89
========= ========
Assuming Full Dilution:
Income Before Effect of Accounting Change $ 1.46 $ 2.85
Effect of Change in Accounting Principle -- (0.02)
--------- --------
Net Income $ 1.46 $ 2.83
========= ========
The Notes to Financial Statements are an integral part of these Statements.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(in millions)
Six Months Ended
June 30,
----------------------------
1996 1995
--------- ----------
Preferred Stock:
<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
--------- ----------
Balance at End of Period $ 438 $ 449
--------- ----------
Capital Surplus:
Balance at Beginning of Year $ 11,075 $ 10,671
Retirement of Treasury Stock (433)(a) --
Issuance of Common Stock (226) (23)
Restricted Stock Granted, Net of Amortization 16 (10)
--------- ----------
Balance at End of Period $ 10,432 $ 10,638
--------- ----------
Retained Earnings:
Balance at Beginning of Year $ 7,997 $ 6,045
Net Income 767 1,368
Retirement of Treasury Stock (557)(a) --
Cash Dividends Declared:
Preferred Stock (109) (117)
Common Stock (572)(b) (381)
Accumulated Translation Adjustment 8 10
--------- ----------
Balance at End of Period $ 7,534 $ 6,925
--------- ----------
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 (403) 250
--------- ----------
Balance at End of Period $ (640) $ (223)
--------- ----------
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 (885) (376)
Reissuance of Treasury Stock 908 343
--------- ----------
Balance at End of Period $ (74) $ (700)
--------- ----------
Total Stockholders' Equity $ 20,340 $ 19,739
========= ==========
<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
Six Months Ended June 30,
(in millions)
1996 1995
-------- --------
Operating Activities
- --------------------
<S> <C> <C>
Net Income $ 767 $ 1,368
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Effect of Change in Accounting Principle -- 11
Provision for Losses 495 380
Restructuring Charge and Expenses 1,678 15
Depreciation and Amortization 406 437
Net Change In:
Trading-Related Assets 1,574 (2,617)
Accrued Interest Receivable 7 73
Other Assets (2,959) (1,829)
Trading-Related Liabilities (197) 7,235
Accrued Interest Payable (152) 129
Other Liabilities (1,527) (708)
Other, Net 216 (409)
-------- --------
Net Cash Provided by Operating Activities 308 4,085
-------- --------
Investing Activities
- --------------------
Net Change In:
Deposits with Banks 2,663 2,914
Federal Funds Sold and Securities Purchased Under Resale Agreements (14,354) (1,528)
Loans Due to Sales and Securitizations 20,976 12,749
Other Loans, Net (22,288) (19,443)
Other, Net (429) (488)
Proceeds from the Maturity of Held-to-Maturity Securities 613 1,030
Purchases of Held-to-Maturity Securities (112) (629)
Proceeds from the Maturity of Available-for-Sale Securities 5,826 3,461
Proceeds from the Sale of Available-for-Sale Securities 22,575 26,452
Purchases of Available-for-Sale Securities (29,771) (30,460)
-------- --------
Net Cash Used by Investing Activities (14,301) (5,942)
-------- --------
Financing Activities
- --------------------
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (1,140) (709)
Domestic Time and Savings Deposits 3,728 (1,306)
Foreign Deposits (5,779) (1,276)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 16,097 3,665
Other Borrowed Funds (55) 1,012
Other, Net 436 25
Proceeds from the Issuance of Long-Term Debt 820 1,272
Repayments of Long-Term Debt (917) (1,570)
Proceeds from the Issuance of Stock 712 125
Treasury Stock Purchased (882) (376)
Cash Dividends Paid (532) (485)
-------- --------
Net Cash Provided by Financing Activities 12,488 377
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks 2 --
-------- --------
Net Decrease in Cash and Due from Banks (1,503) (1,480)
Cash and Due from Banks at January 1, 14,794 13,545
-------- --------
Cash and Due from Banks at June 30, $ 13,291 $ 12,065
======== ========
Cash Interest Paid $ 5,815 $ 5,368
======== ========
Taxes Paid $ 915 $ 771
======== ========
The Notes to Financial Statements are an integral part of these Statements.
</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.
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. In addition, $28 million of merger-related expenses have been
incurred ($6 million in the first quarter and $22 million in the second quarter)
and included in the restructuring charge and expenses caption in the income
statement. The estimated remaining one-time merger-related expenses of $222
million will be incurred substantially over the next two years as these costs do
not qualify for immediate recognition under an existing accounting
pronouncement. These remaining costs will be reflected in the restructuring
charge and expenses caption when incurred. The $1.9 billion of merger-related
costs reflects 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 of
Chemical and Chase and other expenses related directly to the merger
(approximately $600 million).
At June 30, 1996, the reserve balance associated with the above $1.65 billion
restructuring charge was approximately $1,414 million, of which $448 million
related to severance and other termination-related costs, $695 million related
to the disposition of certain facilities and premises and equipment, and $271
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, 1996, in connection with the merger of the Corporation discussed
above, 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
- -----------------------
The Corporation has revised its previously announced buy-back program to
terminate at September 30, 1996 and to provide that purchases of shares of
common stock of the Corporation under the plan to such date would be in
accordance with the pooling-of-interests accounting rules.
During the first six months of 1996, the Corporation issued 15.7 million shares
of common stock and repurchased approximately 13.5 million shares of its
outstanding common stock in the open market. These repurchases were largely
undertaken to meet the anticipated needs of the Corporation's employee stock
option and incentive plans in accordance with pooling-of-interests accounting
rules and in compliance with newly issued Staff Accounting Bulletin No. 96.
-8-
<PAGE>
NOTE 4 - TRADING ACTIVITIES
- ---------------------------
The Corporation uses its trading assets and liabilities to meet the financing
needs of its customers and to generate revenue through its trading activities.
For a discussion of the Corporation's risk management instrument activity and
related trading revenue for the 1996 second quarter and first six months, see
Management's Discussion and Analysis on pages 21-22 and page 38 of this Form
10-Q.
Trading Assets and Liabilities
Trading assets include debt and equity instruments and risk management
instruments with positive fair values. Trading liabilities are comprised of
securities sold, not yet purchased and risk management instruments with negative
fair values. 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>
June 30, December 31,
(in millions) 1996 1995
------------ ------------
Trading Assets - Debt and Equity Instruments:
<S> <C> <C>
U.S. Government, Federal Agencies and Municipal Securities $ 6,644 $ 9,601
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 2,328 2,560
Debt Securities Issued by Foreign Governments 7,271 6,318
Debt Securities Issued by Foreign Financial Institutions 4,196 3,467
Loans 855 666
Corporate Securities 2,131 2,224
Other 1,872 1,376
------------ -----------
Total Trading Assets - Debt and Equity Instruments (a) $ 25,297 $ 26,212
============ ===========
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $ 12,349 $ 12,408
Foreign Exchange Contracts 12,058 12,384
Stock Index Options and Commodity Contracts 2,007 1,033
------------ -----------
Total Trading Assets - Risk Management Instruments $ 26,414 $ 25,825
============ ===========
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $ 12,466 $ 13,975
Foreign Exchange Contracts 12,604 13,295
Stock Index Options and Commodity Contracts 1,433 831
------------ -----------
Trading Liabilities - Risk Management Instruments $ 26,503 $ 28,101
Securities Sold, Not Yet Purchased $ 9,683 $ 6,240
------------ -----------
Total Trading Liabilities $ 36,186 $ 34,341
============ ===========
<FN>
(a) Includes emerging markets instruments of $6,748 million at June 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 $640 million on
the Corporation's stockholders' equity at June 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 interest rates
during the first half of 1996.
-9-
<PAGE>
Net gains from available-for-sale securities sold in the second quarter and
first six months of 1996 amounted to $24 million (gross gains of $77 million and
gross losses of $53 million) and $76 million (gross gains of $151 million and
gross losses of $75 million), respectively. Net gains on such sales for the same
periods in 1995 amounted to $72 million (gross gains of $191 million and gross
losses of $119 million) in the second quarter and $54 million (gross gains of
$229 million and gross losses of $175 million) in the first six months.
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>
June 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 $ 20,229 $ 25 $ 482 $ 19,772
Collateralized Mortgage Obligations 1,004 -- 3 1,001
Other, primarily U.S. Treasuries 8,223 -- 299 7,924
Obligations of State and Political Subdivisions 293 2 3 292
Debt Securities Issued by Foreign Governments 6,189 74 20 6,243
Corporate Debt Securities 986 30 12 1,004
Collateralized Mortgage Obligations (b) 191 1 6 186
Equity Securities 1,004 143 -- 1,147
Other, primarily Asset-Backed Securities 283 3 -- 286
--------- ------ ------ ---------
Total Available-for-Sale Securities $ 38,402 $ 278 $ 825 $ 37,855
========= ====== ====== =========
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>
June 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 $ 1,653 $ 1 $ 30 $ 1,624
Collateralized Mortgage Obligations 2,261 4 22 2,243
Other, primarily U.S. Treasuries 82 -- -- 82
Other, primarily Asset-Backed Securities (b) 129 2 -- 131
-------- ------ ------ ---------
Total Held-to-Maturity Securities $ 4,125 $ 7 $ 52 $ 4,080
======== ====== ====== =========
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 Note One and page 63 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>
June 30, 1996 $ 2,461 $ 76 $ 651 $ 1,886
========== ======= ======= =========
December 31, 1995 $ 2,849 $ 47 $ 917 $ 1,979
========== ======= ======= =========
</TABLE>
The second quarter and first six months of 1996 included a net loss of $30
million and $65 million, respectively, related to the disposition of
available-for-sale emerging market securities, compared with a net loss of $50
million and $26 million, respectively, in the same 1995 periods.
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>
June 30, June 30,
(in millions) 1996 1995
----------- --------
<S> <C> <C>
Impaired Loans with an Allowance $ 480 $ 721
Impaired Loans without an Allowance (a) 699 890
---------- --------
Total Impaired Loans $ 1,179 $ 1,611
========== ========
Allowance for Impaired Loans under
SFAS 114 (b) $ 164 $ 228
========== ========
Average Balance of Impaired Loans
during the six months ended June 30, $ 1,208 $ 1,637
========== ========
Interest Income Recognized on Impaired
Loans during the six months ended June 30, $ 15 $ 14
========== ========
<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
June 30, 1996, the reserve balance related to prior years' restructuring charges
was approximately $95 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 - 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 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 June 30, 1996, gross deferred gains and gross deferred losses relating to
closed derivative contracts used in ALM activities were $631 million and $699
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 June 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
----------------------------- ---------------------------
June 30, December 31, June 30, December 31,
(in billions) 1996 1995 1996 1995
-------- ------------ -------- ------------
Interest Rate Contracts
Futures, Forwards and Forward Rate Agreements
<S> <C> <C> <C> <C>
Trading $ 1,223.8 $ 1,047.5 $ 0.6 $ 1.3
Asset and Liability Management 72.6 40.0 --- 0.1
Interest Rate Swaps
Trading 2,061.8 1,692.6 10.3 10.4
Asset and Liability Management 96.8 69.7 0.5 0.3
Purchased Options
Trading 142.0 147.2 1.4 0.7
Asset and Liability Management 65.1 26.0 --- ---
Written Options
Trading 156.5 161.0 --- ---
Asset and Liability Management 33.1 6.4 --- ---
----------- ------------ ---------- -----------
Total Interest Rate Contracts $ 3,851.7 $ 3,190.4 $ 12.8 $ 12.8
=========== ============ ========== ===========
Foreign Exchange Contracts
Spot, Forward and Futures Contracts
Trading $ 1,429.3 $ 1,352.1 $ 8.0 $ 8.8
Asset and Liability Management 23.5 10.9 --- ---
Other Foreign Exchange Contracts (b)
Trading 365.7 241.6 4.1 3.6
Asset and Liability Management 3.3 1.6 --- ---
----------- ------------ ---------- -----------
Total Foreign Exchange Contracts $ 1,821.8 $ 1,606.2 $ 12.1 $ 12.4
=========== ============ ========== ===========
Stock Index Options and Commodity
Contracts
Trading $ 56.0 $ 37.7 $ 2.0 $ 1.0
----------- ------------ ---------- -----------
Total Stock Index Options and
Commodity Contracts $ 56.0 $ 37.7 $ 2.0 $ 1.0
=========== ============ ========== ===========
Total Credit Exposure Recorded on the Balance Sheet $ 26.9 $ 26.2
========== ===========
<FN>
(a) The notional amounts of exchange-traded interest rates contracts, foreign
exchange contracts, and stock index options and commodity contracts were
$515.7 billion, $5.1 billion and $10.1 billion, respectively, at June 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 $131.7 billion, $150.8 billion and
$86.5 billion, respectively, at June 30, 1996, compared with $92.2
billion, $92.4 billion and $58.6 billion, respectively, at December 31,
1995.
</FN>
</TABLE>
-14-
<PAGE>
NOTE 11 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
- -----------------------------------------------------------------
The following table summarizes the Corporation's credit risk which is
represented by contract amounts relating to lending-related financial
instruments at June 30, 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
- -------------------------------------------------------
June 30, December 31,
(in millions) 1996 1995
-------- ------------
<S> <C> <C>
Commitments to Extend Credit $97,427(a) $ 95,555(a)
Standby Letters of Credit and Guarantees (Net of Risk
Participations of $4,348 and $4,861) 24,287 24,745
Other Letters of Credit 6,000 5,907
Customers' Securities Lent 35,908 27,169
<FN>
(a) Excludes credit card commitments of $50.1 billion and $47.6 billion at
June 30, 1996 and December 31, 1995, respectively.
</FN>
</TABLE>
NOTE 12 - 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 June 30, 1996 and December 31, 1995
of the Corporation's financial assets and liabilities valued under SFAS 107.
<TABLE>
<CAPTION>
June 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 $ 314,778 $ 319,252 $ 4,474 $ 294,627 $ 299,879 $ 5,252
========= ========== ========== ==========
Total Financial Liabilities $ 299,227 $ 299,576 (349) $ 283,065 $ 283,698 (633)
========= ========== -------- ========== ========== --------
Estimated Fair Value in Excess
of Carrying Value $ 4,125 $ 4,619
======== ========
</TABLE>
At June 30, 1996, estimated fair value exceeded carrying value by $4,125
million, compared with $4,619 million at December 31, 1995. The decrease is
primarily due to the estimated fair value of loans decreasing in relation to
their carrying value (i.e., reduction in the estimated fair value in excess of
carrying value) from December 31, 1995, as a result of a rising interest rate
environment in 1996.
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.
<TABLE>
<CAPTION>
June 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 $ 274 $ 117 $(157)(a) $ 92 $ (67) $ (159)
Total Financial Liabilities $ 269 $ (75) $(344)(a) $ 270 $ 643 $ 373
<FN>
(a) Unrealized gains and losses related to financial assets were $517 million
and $674 million, respectively, at June 30, 1996. Unrealized gains and
losses related to financial liabilities were $267 million and $611 million,
respectively, at June 30, 1996.
</FN>
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Part I
Item 2.
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 Six Months Ended
--------------------- ------ -----------------------
Second First Second June 30, June 30,
Quarter Quarter Quarter 1996 1995
------- ------- ------- --------- --------
EARNINGS:
<S> <C> <C> <C> <C> <C>
Income Before Restructuring Charge $ 870 $ 937 $ 738 $ 1,807 $ 1,388
Restructuring Charge (After-Tax) (14)(a) (1,026)(a) (9)(b) (1,040) (a) (9)(b)
-------- -------- -------- -------- --------
Income (Loss) After Restructuring Charge and
Before Effect of Accounting Change 856 (89) 729 767 1,379
Effect of Change in Accounting Principle -- -- -- -- (11)(c)
-------- -------- -------- -------- --------
Net Income (Loss) $ 856 $ (89) $ 729 $ 767 $ 1,368
======== ======== ======== ======== ========
Net Income (Loss) Applicable to Common Stock $ 801 $ (143) $ 673 $ 658 $ 1,251
======== ======== ======== ======== ========
INCOME (LOSS) PER COMMON SHARE:
Primary:
Income Before Restructuring Charge $ 1.83 $ 1.98 $ 1.56 $ 3.81 $ 2.93
Restructuring Charge (After-Tax) (0.03)(a) (2.30)(a) (0.02)(b) (2.33) (a) (0.02)(b)
--------- --------- -------- -------- --------
Income (Loss) After Restructuring Charge and
Before Effect of Accounting Change 1.80 (0.32) 1.54 1.48 2.91
Effect of Change in Accounting Principle -- -- -- -- (0.02)(c)
-------- --------- ------- -------- --------
Net Income (Loss) $ 1.80 $ (0.32) $ 1.54 $ 1.48 $ 2.89
========= ======== ======== ======== ========
Assuming Full Dilution:
Income Before Restructuring Charge $ 1.82 $ 1.97 $ 1.54 $ 3.77 $ 2.87
Restructuring Charge (After-Tax) (0.03)(a) (2.29)(a) (0.02)(b) (2.31)(a) (0.02)(b)
--------- --------- -------- -------- --------
Income (Loss) After Restructuring Charge and
Before Effect of Accounting Change 1.79 (0.32) 1.52 1.46 2.85
Effect of Change in Accounting Principle -- -- -- -- (0.02)(c)
-------- --------- -------- -------- --------
Net Income (Loss) $ 1.79 $ (0.32) $ 1.52 $ 1.46 $ 2.83
========= ======== ========= ======== ========
PER COMMON SHARE:
Book Value $ 40.47 $ 39.41 $ 39.66 $ 40.47 $ 39.66
Market Value $ 70.63 $ 70.50 $ 47.25 $ 70.63 $ 47.25
Common Stock Dividends Declared (d) $ 0.56 $ 0.56 $ 0.50 $ 1.12 $ 0.94
COMMON SHARES OUTSTANDING:
Average Common and Common Equivalent Shares 444.8 446.1 436.2 445.4 433.5
Average Common Shares Assuming Full Dilution 448.4 449.1 444.4 450.2 444.7
Common Shares at Period End 437.1 434.3 430.9 437.1 430.9
PERFORMANCE RATIOS: (Average Balances) (e)
Income Before Restructuring Charge:
Return on Assets 1.10% 1.20% .96% 1.15% .92%
Return on Common Stockholders' Equity 19.00% 19.53% 16.53% 19.27% 15.74%
Return on Total Stockholders' Equity 17.58% 18.09% 15.32% 17.84% 14.66%
Net Income (Loss):
Return on Assets 1.08% N/M .95% .49% .91%
Return on Common Stockholders' Equity 18.67% N/M 16.31% 7.47% 15.50%
Return on Total Stockholders' Equity 17.30% N/M 15.13% 7.57% 14.45%
Efficiency Ratio (f) 58.4% 59.5% 63.2% 59.0% 65.2%
<FN>
(a) Reflects the after-tax impact of a $1,650 million merger-related
restructuring charge, which was recorded on March 31, 1996. In addition,
$28 million of merger-related expenses were incurred ($6 million in the
first quarter and $22 million in the second 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.
N/M - As a result of the loss, these ratios are
not meaningful.
</FN>
</TABLE>
-16-
<PAGE>
Part I
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, for a discussion of factors that may cause such differences to occur.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
The Corporation reported 1996 second quarter net income of $856 million, a 17%
increase from 1995 second quarter results of $729 million. Primary
earnings per share in the second quarter of 1996 were $1.80, compared with $1.54
in the same 1995 period. Fully diluted earnings per share in the second quarter
of 1996 were $1.79, compared with $1.52 in the second quarter of 1995.
The Corporation's net income, excluding restructuring charges and merger-related
expenses, rose 30% to $1,807 million from $1,388 million in the first
half of 1995. Primary earnings per share in the first half of 1996 were $3.81
and fully diluted earnings per share were $3.77; primary earnings per share were
$2.93 and fully diluted earnings per share were $2.87 in the same 1995 period.
The Corporation's second quarter and first six months 1996 results reflected
strong revenue growth in its global banking and nationwide consumer businesses,
as well as $120 million in merger savings in the second quarter. On July 14,
1996, the Corporation's two flagship banks (The Chase Manhattan Bank, N.A. and
Chemical Bank) merged, and the Corporation anticipates that this should
accelerate the Corporation's merger savings. The Corporation believes it
continues to remain in a strong position to achieve its previously
announced 1996 performance targets.
Reported earnings, which included after-tax merger-related restructuring charges
and expenses of $1,040 million, were $767 million for the first six months of
1996, compared with $1,368 million for the first six months of 1995. Primary
earnings per share and fully diluted earnings per share were $1.48 and $1.46,
respectively, for the first half of 1996, compared with $2.89 and $2.83,
respectively, for the same 1995 period.
The Corporation's return on average common stockholders' equity was 18.7% for
the second quarter of 1996, compared with 16.3% for the 1995 comparable quarter.
Excluding restructuring charges and merger-related expenses, the return on
common stockholders' equity was 19.3% for the first six months of 1996 versus
15.7% for the same period of 1995. The Corporation's efficiency ratio improved
to 58.4% for the second quarter of 1996, compared with 63.2% for the second
quarter of 1995.
At June 30, 1996, the Corporation's Tier 1 Capital and Total Capital ratios were
7.96% and 11.82%, 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 June 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 June 30, 1996 were $1,639 million,
compared with $1,664 million on December 31, 1995, and declined $372 million
from $2,011 million at June 30, 1995. Nonperforming assets have declined by
approximately $9.9 billion, or 86%, from their peak level of $11.5 billion in
1991.
-17-
<PAGE>
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net Interest Income
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------- --------------------------------
(in millions) 1996 1995 1996 1995
------------ ----------- ------------ ------------
Net Interest Income:
<S> <C> <C> <C> <C>
Domestic $ 1,583 $ 1,620 $ 3,316 $ 3,208
Overseas 440 408 873 847
----------- ------------ ------------- ------------
Net Interest Income - Reported $ 2,023 $ 2,028 $ 4,189 $ 4,055
=========== ============ ============= ============
Net Interest Income - Managed Basis (a) $ 2,231 $ 2,105 $ 4,530 $ 4,189
=========== ============ ============= ============
Average Interest-Earning Assets:
Domestic $ 180,393 $ 168,273 $ 181,142 $ 169,327
Overseas 76,713 72,551 74,742 70,026
----------- ------------ ------------- ------------
Total Average Interest-Earning Assets $ 257,106 $ 240,824 $ 255,884 $ 239,353
=========== ============ ============= ============
Total Average Interest-Earning Assets
Managed Basis (a) $ 266,956 $ 244,408 $ 264,994 $ 242,533
=========== ============ ============= ============
Net Yield on Interest-Earning Assets:
Domestic 3.56% 3.89% 3.70% 3.85%
Overseas 2.30 2.25 2.35 2.44
Consolidated Net Yield on Interest-Earning Assets (b) 3.18 3.39 3.31 3.44
Consolidated Net Yield on Interest-Earning Assets
Managed Basis (a)(b) 3.38 3.47 3.45 3.50
<FN>
(a) Managed basis excludes the impact of credit card securitizations and, in the
first six months of 1996, $54 million of interest related to Federal and
State tax audit settlements. See pages 33-34 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 45 and 46.
</FN>
</TABLE>
Reported net interest income for the second quarter of 1996 was $2,023 million,
relatively stable when compared with $2,028 million for the second quarter of
1995. For the first six months of 1996, reported net interest income was $4,189
million (including $54 million of interest related to Federal and State
tax audit settlements), compared with $4,055 million in 1995. Excluding the
impact of securitizations and the tax audit settlements, net interest income on
a managed basis increased $126 million, or 6%, in the 1996 second quarter
and $341 million, or 8%, in the first six months, reflecting consumer loan
growth and higher levels of trading-related net interest income.
The net yield on interest-earning assets, which is the average rate for
interest-earning assets less the average rate paid for all sources of funds,
including the impact of interest-free funds, was 3.18% for the 1996 second
quarter, compared with 3.39% for the 1995 second quarter. For the first six
months, the net yield was 3.31% in 1996, versus 3.44% in 1995. The decline in
both 1996 periods was due to the securitization of credit card receivables and
an increase in lower-yielding securities and trading assets. Excluding the
impact of credit card securitizations and the tax audit settlements, the net
yield declined 9 basis points in the 1996 second quarter compared with the
prior-year period, and declined 5 basis points the first six months of 1996
compared with the same prior-year period.
-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
Second Quarter
--------------
(in billions) 1996 1995
--------------------------- ------------------------
<S> <C> <C> <C> <C>
Consumer Loans $ 73.2 29% $ 69.7 29%
Commercial Loans 77.4 30 77.1 32
--------- ------ --------- -------
Total Loans 150.6 59 146.8 61
Securities 42.5 17 34.7 14
Liquid Interest-Earning Assets 64.0 24 59.3 25
--------- ------ --------- -------
Total Interest-Earning Assets $ 257.1 100% $ 240.8 100%
========= ====== ========= =======
Six Months
----------
(in billions) 1996 1995
--------------------------- ------------------------
Consumer Loans $ 72.8 29% $ 68.1 28%
Commercial Loans 77.3 30 75.9 32
--------- ------ --------- -------
Total Loans 150.1 59 144.0 60
Securities 42.6 17 34.6 14
Liquid Interest-Earning Assets 63.2 24 60.8 26
--------- ------ --------- -------
Total Interest-Earning Assets $ 255.9 100% $ 239.4 100%
========= ====== ========= =======
</TABLE>
Average interest-earning assets increased during both 1996 periods, when
compared with the respective 1995 periods, principally as a result of an
increase in the available-for-sale securities portfolio, more liquid interest-
earning assets (primarily trading assets) and a higher level of consumer
lending. The Corporation increased its securities portfolio by $7.8
billion in the 1996 second quarter and $8.0 billion in the 1996 first six
months, as part of its asset/liability management activities in connection with
the merger of Chase and Chemical. Additionally, the Corporation's average
total loans in the second quarter and first six months of 1996 increased by $3.8
billion and $6.1 billion, respectively, when compared with the comparable
1995 periods. The increases reflected the continued 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 second quarter was funded by a
$4.1 billion increase in interest-bearing liabilities. For the 1996 second
quarter, average interest-bearing liabilities were $210.7 billion, compared with
$206.6 billion in 1995 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.
The negative impact on net interest income from nonperforming loans in the
second quarter of 1996 was $20 million, compared with $29 million in 1995. For
the first six months, the negative impact was $49 million in 1996, compared with
$60 million in 1995. The improvement in both 1996 periods reflects the
continued reduction in the level of the Corporation's nonperforming loans.
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 45 and 46.
Management anticipates that, given its current expectations for interest rate
movements in 1996, the Corporation's net interest income in 1996 will be
modestly higher than in 1995 (prior to the impact of credit card
securitizations).
-19-
<PAGE>
Provision for Losses
The Corporation's provision for losses was $250 million for the 1996 second
quarter, compared with $245 million in the 1996 first quarter, and $195 million
in the 1995 second quarter. For the first six months, the provision for losses
was $495 million in 1996 compared with $380 million in 1995. The increase in the
provision for losses for both 1996 periods was primarily the result of higher
commercial net charge-offs, as a result of a lower level of recoveries,
partially offset by 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 1996 will increase over
the 1995 level due in part to a lower level of commercial loan recoveries. For a
discussion of the Corporation's net charge-offs, see the Credit Risk Management
Section on pages 31-36.
Noninterest Revenue
Noninterest revenue increased for the 1996 second quarter and six-month period
when compared with the corresponding 1995 periods. The 1996 second quarter and
six-month results each reflect increases in trading revenue, and fees and
commissions (principally from corporate finance and syndication activities,
credit card revenue and trust and investment management fees). These increases
were partially offset by lower other revenue as the 1996 six-month period
includes a loss of $60 million on the sale of a building in Japan while the 1995
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>
Second Quarter Six Months
----------------------------- ---------------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Corporate Finance and Syndication Fees $ 258 $ 197 $ 482 $ 366
Trust and Investment Management Fees 302 243 587 483
Credit Card Revenue 233 196 466 378
Service Charges on Deposit Accounts 100 107 199 211
Fees for Other Financial Services 381 353 759 720
--------- --------- --------- --------
Total Fees and Commissions 1,274 1,096 2,493 2,158
Trading Revenue 379 301 718 400
Securities Gains 24 72 76 54
Other Revenue 254 257 513 671
--------- --------- --------- --------
Total $ 1,931 $ 1,726 $ 3,800 $ 3,283
========= ========= ========= ========
</TABLE>
Fees and Commissions
Corporate finance and syndication fees were a record $258 million in the 1996
second quarter, an increase of 31% from the prior-year period. For the first six
months of 1996, such fees rose 32% from the comparable period a year ago. The
increases from both 1995 periods were the result of strong loan syndication,
securities underwriting and advisory activities. During the first six months of
1996, the Corporation acted as agent or co-agent for approximately $240 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 24% in the 1996 second quarter and 22%
for the 1996 first six 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 $24 million of revenue in the second quarter and
$48 million for the first half of 1996.
Credit card revenue increased $37 million for the 1996 second quarter and $88
million for the 1996 first six months, primarily the result of an increase in
securitization volume as well as growth in managed outstandings and active
accounts. Average managed credit card receivables (credit card receivables on
the balance sheet plus securitized credit card receivables) grew to $23.3
billion for the second quarter of 1996, compared with $20.3 billion for the
prior-year's comparable period. For the first six months of 1996, there was an
approximate $6 billion increase in the level of securitized credit card
receivables. The favorable impact on credit card revenues from the higher level
of securitizations was $6 million in the 1996 second quarter and $55 million in
the first six months of 1996. 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>
Second Quarter Six Months
------------------------ ------------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
Fees for Other Financial Services:
<S> <C> <C> <C> <C>
Commissions on Letters of Credit and Acceptances $ 82 $ 83 $ 171 $ 174
Fees in Lieu of Compensating Balances 74 71 148 140
Mortgage Servicing Fees 54 53 104 107
Loan Commitment Fees 30 32 60 65
Other Fees 141 114 276 234
-------- ------- ------ --------
Total $ 381 $ 353 $ 759 $ 720
======== ======= ====== ========
</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 second
quarter and first six months of 1996 and 1995.
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------ -------------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trading Revenue $ 379 $ 301 $ 718 $ 400
Net Interest Income Impact (a) 142 108 290 192
-------- ------- ------- --------
Total Trading-Related Revenue $ 521 $ 409 $ 1,008 $ 592
======== ======= ======= ========
Product Diversification:
Interest Rate Contracts (b) $ 180 $ 118 $ 326 $ 184
Foreign Exchange Contracts (c) 93 143 233 317
Debt Instruments and Other (d) 248 148 449 91
-------- ------- ------- --------
Total Trading-Related Revenue $ 521 $ 409 $ 1,008 $ 592
======== ======= ======= ========
<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 increases in revenue from interest rate contracts during the 1996 second
quarter and first six months were primarily due to anticipated volatility in
certain Western European, Asian and U.S. interest rate markets, as well as
increased customer demand for derivatives used for risk management purposes. The
decline in foreign exchange revenue in the 1996 second quarter and first six
months was caused by several factors, prominent among them was 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 increase in
debt instrument revenue during the 1996 second quarter and first six months was
primarily the result of strong performance in emerging markets in Latin America
and Eastern Europe. In addition, the 1995 six-month results had been adversely
affected by major declines in the prices of emerging markets debt instruments.
-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 second quarter and first six months of 1996 and 1995.
<TABLE>
<CAPTION>
Second Quarter Six Months
----------------------- ----------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Securities Gains $ 24 $ 72 $ 76 $ 54
======== ======= ======== =======
Other Revenue:
Revenue from Equity-Related Investments $ 219 $ 208 $ 442 $ 389
Net Losses on Emerging Markets Securities Sales (30) (50) (65) (26)
Gain on Sale of Investment in Far East Bank
& Trust Company -- -- -- 85
Residential Mortgage Origination/Sales Activities (2) 54 26 95
Loss on Sale of a Building in Japan -- -- (60) --
All Other Revenue 67 45 170 128
-------- ------- -------- -------
Total Other Revenue $ 254 $ 257 $ 513 $ 671
======== ======= ======== =======
</TABLE>
All securities sales were from the available-for-sale portfolio and were made in
connection with the Corporation's asset/liability management ("ALM") activities.
For a further discussion of the Corporation's securities, see Note 5 -
Securities of the Notes to Financial Statements.
The Corporation's other revenue for the second quarter of 1996 was consistent
with the second quarter of 1995, and down $158 million for the first six months
of 1996 when compared with the 1995 first six months. Revenue from equity-
related investments, which includes income from venture capital activities and
emerging markets investments, was $219 million in the 1996 second quarter, an
increase of $11 million from the comparable 1995 quarter. For the first six
months of 1996, revenue from equity-related investments was $442 million, an
increase of 14% from 1995, and continues to benefit from a broad-based portfolio
of investments in an active market. Revenue from equity-related investments has
averaged approximately $170 million per quarter for the last eight quarters. At
June 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, 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.
-22-
<PAGE>
Residential mortgage origination/sales activities declined $56 million in the
second quarter of 1996, when compared with the second quarter of 1995, and $69
million for the first six months of 1996, when compared with the first six
months of 1995. The decreases were largely the result of a favorable impact
from the implementation of SFAS 122 relating to the accounting for originated
mortgage servicing rights and sale of servicing rights, both of which
occurred in the 1995 second quarter. Additionally, the 1996 second quarter
was unfavorably impacted by rising interest rates.
All other revenue in the 1996 second quarter included a $23 million gain on the
sale of nonstrategic assets. All other revenue also reflected lower income
of $6 million in the 1996 second quarter and $14 million in the first half 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.
Noninterest Expense
Noninterest expense in the 1996 second quarter was $2,302 million compared with
$2,344 million in the second quarter of 1995 (excluding restructuring charges).
The decrease in noninterest expense in the 1996 second quarter reflects
merger-related expense savings of $120 million, primarily reflecting lower
salaries and benefits related to personnel reductions and other merger
integration efforts. Also contributing to the decrease in the 1996 second
quarter were lower FDIC expenses, partially offset by higher incentive costs
related to stronger revenue growth.
For the first six months, noninterest expense was $4,739 million in 1996
compared with $4,679 million in 1995 (excluding restructuring charges).
Excluding foreclosed property expense and a $40 million charge to conform
retirement benefits provided to foreign employees, noninterest expense decreased
by approximately $16 million during the first half of 1996, when compared with
the same 1995 period, primarily due to merger integration efforts and lower FDIC
expenses. Additionally, the results for the first six months of 1996 include
noninterest expense as a result of the acquisition of the U.S. Trust
processing business in September 1995, which is largely offset by the
absence of expenses due to the sale of the southern and central New Jersey
banking operations in the fourth quarter of 1995.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------------- -------------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries $ 1,046 $ 1,007 $ 2,122 $ 2,004
Employee Benefits 225 246 530 480
Occupancy Expense 207 218 428 446
Equipment Expense 181 193 365 391
Foreclosed Property Expense (8) (28) (17) (53)
Other Expense 651 708 1,311 1,411
---------- --------- ---------- -----
Total Before Restructuring Charge 2,302 2,344 4,739 4,679
Restructuring Charge and Expenses 22 15 1,678 15
---------- --------- ---------- ---------
Total $ 2,324 $ 2,359 $ 6,417 $ 4,694
========== ========= ========== =========
</TABLE>
The Corporation's efficiency ratio improved in the 1996 second quarter and first
six months to 58.4% and 59.0%, respectively, from 63.2% and 65.2%, respectively,
in 1995. 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 six 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 six months excluded the gain
on the sale of the Corporation's investment in Far East Bank and Trust Company.
-23-
<PAGE>
Salaries and Employee Benefits
The increase in salaries for the 1996 second quarter and first six 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. Partially offsetting these increases were the
impact of reductions of approximately 5,000 full-time equivalent employees
since June 30, 1995 as well as the aforementioned sale of the southern and
central New Jersey banking operations.
The following table presents the Corporation's full-time equivalent employees at
the dates indicated.
June 30, December 31,
1996 1995
Domestic Offices 58,136 60,904
Foreign Offices 10,692 11,792
------- --------
Total Full-Time Equivalent Employees 68,828 72,696
======= ========
Employee benefits in the 1996 second quarter decreased $21 million from the
prior-year's second quarter due to personnel reductions. The increase in
employee benefits in the first six months of 1996 was primarily the result of a
$40 million charge to conform retirement benefits provided to foreign
employees, and other expenses associated with a newly consolidated foreign
investment. Also impacting employee benefits was an increase in FICA
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 second quarter and first six months decreased by
$11 million and $18 million, respectively, largely as a result of the
consolidation of operations and branch facilities (from a previously announced
program).
The lower level of equipment expense in both 1996 periods was primarily the
result of expense reduction initiatives relating to software costs and equipment
rentals.
Foreclosed Property Expense
Foreclosed property expense was a credit of $8 million compared with a credit of
$28 million in the second quarter of 1995. For the first six months, foreclosed
property expense was a credit of $17 million in 1996, compared with a credit of
$53 million in 1995. The results reflect continued progress in reducing the
Corporation's real estate portfolio as a result of improved real estate market
conditions. The 1995 amounts included proceeds received from the sale of certain
foreclosed properties previously written down.
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, $22 million of merger-related expenses were
incurred in the 1996 second quarter and $28 million for the first six months of
1996 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.
Management does not anticipate that the restructuring charge will have a
material impact on the Corporation's future liquidity. 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.
-24-
<PAGE>
Other Expense
The following table presents the components of other expense for the periods
indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------------------- ---------------------
(in millions) 1995 1996 1996 1995
---- ---- ---- ----
Other Expense:
<S> <C> <C> <C> <C>
Professional Services $ 141 $ 142 $ 270 $ 277
Marketing Expense 73 104 163 185
FDIC Assessments 1 55 2 112
Telecommunications 82 84 167 165
Amortization of Intangibles 42 47 85 94
All Other 312 276 624 578
------- -------- -------- --------
Total $ 651 $ 708 $ 1,311 $ 1,411
======= ======== ======== ========
</TABLE>
Other expense decreased $57 million, or 8%, in the 1996 second quarter when
compared with the second quarter of 1995. For the first six months of 1996,
other expense decreased $100 million, or 7%, from the 1995 comparable period.
The improvement reflected a $31 million decline in marketing expense in the 1996
second quarter primarily as a result of expense reduction initiatives. Lower
FDIC assessments of $54 million in the second quarter of 1996 and $110 million
for the first six months of 1996 resulted from the elimination of a FDIC
assessment, with the exception of deposits associated with the acquisition of
former savings and loan branches. Partially offsetting these declines were
increases in other expenses largely as a result of the aforementioned
acquisition from U.S. Trust and consolidation of a foreign investment.
Income Taxes
The Corporation recognized income tax expense of $524 million in the second
quarter of 1996, compared with $471 million in the second quarter of 1995. For
the first six months, the Corporation recorded income tax expense of $310
million in 1996, compared with $885 million in 1995. The 1996 six-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
were 38.0% and 39.3% for the second quarters of 1996 and 1995, respectively,
and were 38.0% (excluding the aforementioned tax benefits and refunds) and
39.1% for the first six months of 1996 and 1995, 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 Consumer Global
Global Bank Banking Services
------------------------ ------------------------ ------------------
For the three months ended June 30, 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 606 $ 564 $ 1,452 $ 1,375 $ 210 $ 178
Noninterest Revenue 1,038 888 533 539 306 265
Noninterest Expense 753 724 1,102 1,223 397 355
---------- ---------- ---------- --------- ------- --------
Operating Margin 891 728 883 691 119 88
Credit Provision (a) 61 73 345 270 4 --
Foreclosed Property Expense -- (1) (4) (12) -- --
---------- ---------- ----------- --------- ------- --------
Income Before Taxes 830 656 542 433 115 88
Income Taxes 310 253 220 173 48 33
---------- ---------- ---------- --------- ------- --------
Operating Net Income 520 403 322 260 67 55
Restructuring Charge & Expenses (5) (9) (6) -- (2) --
----------- ----------- ----------- --------- -------- --------
Net Income $ 515 $ 394 $ 316 $ 260 $ 65 $ 55
========== ========== ========== ========= ======= ========
Average Assets $ 208,286 $ 187,537 $ 110,767 $ 106,013 $ 9,699 $ 9,592
Return on Common Equity (b) 24.9% 21.5% 18.8% 14.8% 20.2% 16.0%
Return on Assets (b) 1.00% .86% 1.17% .98% 2.78% 2.30%
Efficiency Ratio (c) 45.8% 49.9% 55.5% 63.9% 76.9% 80.1%
Terminal
(LDC and Real Estate) Total(d)
----------------------- ------------------------
For the three months ended June 30, 1996 1995 1996 1995
---- ---- ---- ----
(in millions, except ratios)
Net Interest Income $ 18 $ 21 $ 2,023 $ 2,028
Noninterest Revenue (6) (18) 1,931 1,726
Noninterest Expense 14 16 2,310 2,372
------- ------- --------- ----------
Operating Margin (2) (13) 1,644 1,382
Credit Provision (a) 23 (5) 250 195
Foreclosed Property Expense (4) (21) (8) (28)
------- ------- --------- ----------
Income (Loss) Before Taxes (Benefits) (21) 13 1,402 1,215
Income Taxes (Benefits) (3) 10 532 477
------- ------- --------- ----------
Operating Net Income (Loss) (18) 3 870 738
Restructuring Charge & Expenses -- -- (14) (9)
------- ------- --------- ----------
Net Income (Loss) $ (18) $ 3 $ 856 $ 729
======= ======= ========= ==========
Average Assets $ 4,295 $ 8,364 $ 317,579 $ 308,346
Return on Common Equity (b) NM NM 19.0% 16.5%
Return on Assets (b) NM NM 1.10% .96%
Efficiency Ratio (c) NM NM 58.4% 63.2%
<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>
<TABLE>
<CAPTION>
Regional and Consumer Global
Global Bank Banking Services
------------------------ ------------------------ ------------------
For the six months ended June 30, 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 1,319 $ 1,098 $ 2,885 $ 2,741 $ 428 $ 361
Noninterest Revenue 2,049 1,488 1,106 1,049 606 521
Noninterest Expense 1,508 1,436 2,236 2,439 778 699
---------- ---------- ---------- --------- ------- --------
Operating Margin 1,860 1,150 1,755 1,351 256 183
Credit Provision (a) 125 145 688 525 8 --
Foreclosed Property Expense -- (2) (2) (29) -- --
---------- ----------- ----------- --------- ------- --------
Income Before Taxes 1,735 1,007 1,069 855 248 183
Income Taxes 646 379 430 341 105 69
---------- ---------- ---------- --------- ------- --------
Operating Net Income 1,089 628 639 514 143 114
Restructuring Charge & Expenses (5) (9) (7) -- (2) --
Special Items (b) -- 51 -- -- -- --
---------- ---------- ---------- --------- ------- --------
Net Income $ 1,084 $ 670 $ 632 $ 514 $ 141 $ 114
========== ========== ========== ========= ======= ========
Average Assets $ 202,034 $ 183,955 $ 109,973 $ 104,472 $ 9,769 $ 9,594
Return on Common Equity (c) 26.2% 16.5% 18.8% 14.8% 21.4% 16.7%
Return on Assets (c) 1.08% .69% 1.17% .99% 2.94% 2.40%
Efficiency Ratio (d) 44.8% 55.5% 56.0% 64.4% 75.2% 79.3%
Terminal
(LDC and Real Estate) Total(e)
------------------------ ------------------------
For the six months ended June 30, 1996 1995 1996 1995
---- ---- ---- ----
(in millions, except ratios)
Net Interest Income $ 45 $ 51 $ 4,135 $ 4,055
Noninterest Revenue (26) 40 3,860 3,198
Noninterest Expense 29 35 4,716 4,732
-------- -------- --------- ----------
Operating Margin (10) 56 3,279 2,521
Credit Provision (a) 39 (7) 495 380
Foreclosed Property Expense (14) (34) (17) (53)
-------- -------- --------- ----------
Income (Loss) Before Taxes (Benefits) (35) 97 2,801 2,194
Income Taxes (Benefits) (7) 44 1,064 857
-------- -------- --------- ----------
Operating Net Income (Loss) (28) 53 1,737 1,337
Restructuring Charge & Expenses -- -- (1,040) (9)
Special Items (b) -- -- 70 51
Accounting Change -- -- -- (11)
-------- -------- --------- ----------
Net Income (Loss) $ (28) $ 53 $ 767 $ 1,368
======== ======== ========= ==========
Average Assets $ 4,548 $ 8,641 $ 315,252 $ 303,847
Return on Common Equity (c) NM NM 18.5% 15.1%
Return on Assets (c) NM NM 1.11% .89%
Efficiency Ratio (d) NM NM 59.0% 65.2%
<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 six 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 six 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 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. Its 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 a dedicated Global Client Management organization
(focusing on corporate clients, credit and general advisory); Global 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, risk management, 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 second quarter of 1996 was $520
million, an increase of $117 million from the 1995 second quarter.
Return on equity in the second quarter of 1996 was 24.9%, compared with 21.5% in
1995. The Global Bank's operating net income of $1,089 million and return on
equity of 26.2% for the first six months of 1996 increased from last year's
results of $628 million and 16.5%, 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>
Second Quarter Six Months
------------------- ----------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Global Client Management and Investment Banking $ 578 $ 538 $ 1,162 $ 1,060
Global Markets 629 586 1,322 891
Chase Capital Partners 212 152 460 277
Global Asset Management & Private Banking 219 177 416 346
</TABLE>
Revenue from Global Client Management and Investment Banking increased $40
million, or 7%, in the 1996 second quarter and $102 million, or 10%, for the
first six months of 1996 reflecting a higher level of investment banking
activity including loan syndications, securities underwriting and advisory
activity and new issues of high-yield bonds.
Trading-related revenue at Global Markets was higher in the second quarter of
1996 and the first six months of 1996 due to the particularly strong performance
in the emerging markets. Also, the 1995 six-month results had been adversely
affected by the major declines in the prices of emerging markets debt
instruments during that period.
Revenue from Chase Capital Partners increased in the second quarter of 1996 and
the first six months of 1996 due to higher revenue from equity-related
investments reflecting a broad-based portfolio of investments in an active
market.
Revenues at Global Asset Management and Private Banking increased $42 million,
or 24%, in the 1996 second quarter and $70 million, or 20%, for the first six
months of 1996, when compared to the same 1995 periods. The increase in the
second quarter and first six months of 1996 reflects a $23 million
gain on the sale of deposits as well as higher revenue in Latin America, growth
in net interest income reflecting higher loan volume and an increase in trust
fees related to the growth in the Vista mutual funds.
-28-
<PAGE>
Regional and Consumer Banking
Regional and Consumer Banking 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 and Community
Development (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 Consumer Banking's operating net income of $322 million in the
second quarter of 1996 increased $62 million from last year's second quarter
results of $260 million due primarily to lower noninterest expense and higher
net interest income, partially offset by a higher credit provision. For the
first six months of 1996, Regional and Consumer's operating net income was $639
million, an increase of $125 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 six months periods is the result of
reduced FDIC premium expense and 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. 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
Consumer Banking's total revenue by business for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- -----------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
Total Revenue:
<S> <C> <C> <C> <C>
Credit Cards $ 642 $ 572 $ 1,280 $ 1,136
Deposits and Investments 471 463 933 931
Mortgage Banking 152 164 318 304
National Consumer Finance 151 130 301 257
International Consumer 63 51 122 101
Middle Market and Community Development 223 225 463 448
Texas Commerce 303 277 612 552
</TABLE>
Credit Cards revenue increased $70 million, or 12%, in the second quarter of
1996. For the first six months of 1996, Credit Cards revenue rose $144 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 increased $8 million, or 2%, in the 1996 second
quarter and $2 million for the first six months of 1996, compared with the same
periods in 1995. The slight improvement in revenue reflects growth in service
charges on deposit accounts and trust fees in the first six months of 1996 and
higher deposit volume in the second quarter of 1996.
Revenue from Mortgage Banking decreased $12 million in the second quarter of
1996 from the same period in 1995. For the first six months of 1996, Mortgage
Banking revenue increased $14 million when compared with 1995. The decrease in
the second quarter of 1996 is due to the 1995 second quarter being favorably
affected by the implementation of SFAS 122 (relating to the accounting for
originated mortgage servicing rights) and gains on the sale of mortgage
servicing rights. The 1996 second quarter results were favorably affected by
higher net interest income (resulting from a 21% increase in loan volume) and
improved loan spreads. For the first six months of 1996, the increase in revenue
is due to higher net interest income of $64 million (resulting from a 26%
increase in loan volume) and improved loan spreads, partially offset by lower
noninterest revenue due to the impact of SFAS 122 and a decline in the sale of
mortgage servicing rights.
National Consumer Finance revenues increased $21 million, or 16%, in the 1996
second quarter and $44 million, or 17%, for the first six 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 $12 million in the second
quarter of 1996 and $21 million for the first six 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 for residential mortgages and
improved loan spreads.
Middle Market and Community Development revenues were essentially flat for the
second quarter of 1996 and increased $15 million in the first six months of
1996, when compared with last year's results, primarily due to higher corporate
finance fees.
Texas Commerce's revenue rose $26 million, or 9%, in the 1996 second quarter and
$60 million, or 11%, for the first six months of 1996 when compared to prior
year periods. The improvements were due to higher net interest income resulting
from 14% growth in loan volume in the first six months of 1996. Also
contributing to the 1996 six-month increase was a 5% increase in fee revenue.
These favorable results were partially offset by higher foreclosed property
expense in the first six months of 1996, as the first six months of 1995
reflected the recognition of recoveries from customers in the Texas real estate
market.
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
June 30, 1996, the Corporation was custodian or trustee for approximately $3.5
trillion of assets. The operating net income for Global Services increased $12
million in the second quarter of 1996 and $29 million for the first six months
of 1996 when compared with the same 1995 periods. Improvement in both 1996
periods is due primarily to increases in noninterest revenue and net interest
income partially offset by higher noninterest expense, all which resulted
from the acquisition of the securities processing businesses of U.S. Trust in
September 1995. Furthermore, the increases in noninterest revenue in both
periods reflect higher fee revenue as a result of earnings growth in custody
services, and the increase in net interest income reflects 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, N.A.
and Chemical Bank. Terminal businesses had net losses of $18 million for the
second quarter of 1996 and $28 million for the first six months of 1996,
compared with net income of $3 million in last year's second quarter and $53
million the first six months of 1995. The 1996 second quarter results include a
$30 million loss related to the disposition of available-for-sale emerging
markets securities compared with a $50 million loss from sales of such
securities in last year's second quarter. For the first six months of 1996, the
results include a $65 million loss related to the disposition of
available-for-sale emerging markets securities, compared with $26 million in
losses from the sales of such securities last year.
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 a net loss of $22 million for the 1996 second quarter, a
decrease of $39 million from last year's second quarter. For the first six
months of 1996, Corporate had a net loss of $1,062 million including the
restructuring charge of $1,026 million (after-tax) related to the merger 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 six months of 1995, Corporate had net income
of $17 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 $151.3 billion at June 30, 1996, an
increase from $150.2 billion at the 1995 year-end, and $149.5 billion at June
30, 1995. The growth in loans outstanding from December 31,1995 and June 30,
1995 reflects increases in both the consumer and commercial loan portfolios
(excluding commercial real estate), partially offset by a decline in credit card
balances resulting from securitizations completed during the first half of 1996.
The Corporation's nonperforming assets at June 30, 1996 were $1,639 million,
down $25 million from the 1995 year-end level and $372 million, or 18%, from
last year's comparable quarter. 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 $250 million in the second quarter of 1996, compared
with $222 million in the 1995 second quarter. For the first six months, net
charge-offs were $597 million in 1996, compared with $429 million in 1995. The
1996 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 $386 million in the
1996 second quarter, compared with $256 million in the second quarter of 1995.
For the first six months, total net charge-offs were $839 million in 1996,
compared with $494 million in 1995.
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
------------------------------------------ -----------------------------------
June 30, Dec 31, June 30, June 30, Dec 31, June 30,
1996 1995 1995 1996 1995 1995
----------- ---------- ---------- -------- -------- --------
(in millions)
Domestic Consumer:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage(a) $ 35,388 $ 34,060 $ 32,208 $ 241 $ 238 $ 224
Credit Card 11,447 17,078 15,898 -- -- --
Auto Financings 11,262 8,327 10,058 28 20 10
Other Consumer(b) 10,674 9,966 9,198 11 19 24
----------- ---------- ----------- -------- -------- --------
Total Domestic Consumer 68,771 69,431 67,362 280 277 258
----------- ---------- ----------- -------- -------- --------
Domestic Commercial:
Commercial and Industrial 32,429 32,276 31,731 514 496 516
Commercial Real Estate(c) 6,556 6,660 7,559 439 375 577
Financial Institutions 5,741 5,714 5,527 -- 2 25
----------- ---------- ----------- -------- -------- --------
Total Domestic Commercial 44,726 44,650 44,817 953 873 1,118
----------- ---------- ----------- -------- -------- --------
Total Domestic 113,497 114,081 112,179 1,233 1,150 1,376
----------- ---------- ----------- -------- -------- --------
Foreign, primarily Commercial 37,777 36,126 37,324 265 343 488
----------- ---------- ----------- -------- -------- --------
Total Loans $ 151,274 $ 150,207 $ 149,503 1,498 1,493 1,864
=========== ========== =========== -------- -------- --------
Assets Acquired as Loan Satisfactions 141 171 147
-------- -------- --------
Total Nonperforming Assets $ 1,639 $ 1,664 $ 2,011
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Past Due 90 Days and Over
Net Charge-offs & Still Accruing
----------------------------------------------------- ----------------------------------
Six Months Ended
Second Quarter June 30, June 30, Dec 31, June 30
1996 1995 1996 1995 1996 1995 1995
---------- -------- ------ ------- ------- ------- -------
(in millions)
Domestic Consumer:
<S> <C> <C> <C> <C> <C> <C> <C>
Residential Mortgage(a) $ 7 $ 19 $ 15 $ 31 $ 14 $ 12 $ 12
Credit Card 145 173 310 331 221 352 309
Auto Financings 7 4 15 8 16 15 10
Other Consumer(b) 33 24 62 51 148 149 127
--------- --------- -------- -------- --------- --------- -------
Total Domestic Consumer 192 220 402 421 399 528 458
--------- --------- -------- -------- --------- --------- -------
Domestic Commercial:
Commercial and Industrial 46 (1) 94 22 35 38 49
Commercial Real Estate(c) 30 15 26 14 36 54 49
Financial Institutions -- -- -- (5) -- -- --
--------- --------- -------- --------- --------- --------- -------
Total Domestic Commercial 76 14 120 31 71 92 98
--------- --------- -------- -------- --------- --------- -------
Total Domestic 268 234 522 452 470 620 556
--------- --------- -------- -------- --------- --------- -------
Foreign, primarily Commercial (18) (12) (27) (23) 16 44 167
--------- --------- -------- -------- --------- --------- -------
Total Loans 250 222 495 429 $ 486 $ 664 $ 723
--------- --------- -------- -------- ========= ========= =======
Charge Related to Conforming
Credit Card Charge-off Policies -- -- 102 --
--------- --------- -------- --------
Total $ 250 $ 222 $ 597 $ 429
========= ========= ======== ========
<FN>
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance) and student loans. 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 $104 million, $107 million, and $87
million at June 30, 1996, December 31, 1995 and June 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. The domestic
consumer loan portfolio totaled $68.8 billion at June 30, 1996, a decrease of
$0.6 billion from the 1995 year-end but an increase of $1.4 billion from $67.4
billion at June 30, 1995. Domestic consumer loans were 45% of the total loan
portfolio at June 30, 1996.
Residential Mortgage Loans: Residential mortgage loans at June 30, 1996 were
$35.4 billion, an increase of $1.3 billion from the 1995 year-end and an
increase of $3.2 billion from June 30, 1995, primarily reflecting an increase
in adjustable-rate loan outstandings.
Total nonperforming residential mortgage loans at June 30, 1996 were $241
million, compared with $238 million at December 31, 1995 and $224 million at
June 30, 1995. At June 30, 1996, nonperforming domestic residential mortgage
loans as a percentage of the domestic residential mortgage portfolio was 0.68%,
compared with 0.70% at both the 1995 year-end and at June 30, 1995. Total net
charge-offs of residential mortgage loans were $7 million in the second quarter
of 1996, a decrease of $12 million from the 1995 comparable period. For the
first six months of 1996, such total net charge-offs were $15 million, a 52%
decline from $31 million for the first six months of 1995. For the first six
months, the percentage of net charge-offs to average residential mortgage loan
outstandings was 0.09% in 1996, down from 0.21% in 1995.
The Corporation's residential mortgage servicing portfolio amounted to $133.3
billion at June 30, 1996, compared with $125.5 billion at June 30, 1995. A
discussion of the Corporation's mortgage servicing and loan origination
activities is included on page 34 of the Corporation's 1995 Annual Report. The
following table presents the residential mortgage servicing portfolio activity
for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------ -----------------------------
(in billions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 133.1 $ 119.7 $ 132.1 $ 118.3
Originations 8.1 6.9 15.6 9.5
Acquisitions -- 5.4 1.1 9.2
Repayments and Sales (7.9) (6.5) (15.5) (11.5)
---------- ----------- --------- ----------
Balance at June 30, $ 133.3 $ 125.5 $ 133.3 $ 125.5
========== =========== ========= ==========
</TABLE>
Mortgage servicing rights (included in other assets) amounted to $1,207 million
at June 30, 1996, compared with $1,122 million at June 30, 1995, reflecting the
corresponding increase in the Corporation's residential mortgage servicing
portfolio and the aforementioned adoption of SFAS 122. The Corporation uses
derivative contracts (interest rate swaps and purchased option
contracts) to manage the risk associated with its mortgage servicing portfolio.
At June 30, 1996, the carrying value of such derivative contracts was $30
million, and gross unrecognized gains and losses were $10 million and $84
million, respectively, resulting in an estimated negative fair value of $44
million.
Credit Card Loans: The Corporation evaluates its credit card exposure based on
its "managed receivables" which include credit card receivables on the balance
sheet as well as credit card receivables which have been securitized. During the
1996 second quarter, the Corporation securitized $2.9 billion of credit card
receivables, compared with $1.5 billion in the 1995 second quarter. During the
first six 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
second quarter of 1996, average managed receivables were $23.3 billion, compared
with $20.3 billion in the 1995 second quarter, reflecting the continued growth
in credit card outstandings.
-33-
<PAGE>
The following table presents the Corporation's average managed credit card
receivables, the amount of these receivables past due 90 days and over and
accruing, net charge-offs and related ratios for the managed credit card
portfolio for the periods indicated.
<TABLE>
<CAPTION>
As of or For The As of or For The
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Managed Credit Card Receivables $ 23,348 $ 20,255 $ 23,296 $ 19,768
Past Due 90 Days & Over and Accruing $ 461 $ 390 $ 461 $ 390
As a Percentage of Average Credit Card Receivables 1.97% 1.93% 1.98% 1.97%
Net Charge-offs $ 279(a) $ 207 $ 549(a) $ 396
As a Percentage of Average Credit Card Receivables 4.78% 4.09% 4.71% 4.01%
<FN>
(a) Excludes a charge related to conforming the credit card charge-off policies
of Chase and Chemical.
</FN>
</TABLE>
The increases in net charge-offs on managed credit card receivables for both the
three-month and six-month periods ending June 30, 1996, when compared with the
same 1995 periods, reflect growth in average managed credit card outstandings
and continuing 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, for full year 1996 will be higher than
the 1996 second quarter net charge off percentage, but will be lower than 5% (as
compared with approximately 4.0% for full year 1995), principally as a result of
(i) continuing higher levels of personal bankruptcies and delinquency
charge-offs in 1996 when compared to 1995 levels and (ii) slower growth in
credit card outstandings in 1996 than previously anticipated.
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 Second Quarter Six Months
-------------------------- ------------------------
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Interest Income $ (208) $ (77) $ (395) $ (134)
Provision for Losses 156 34 261 65
Credit Card Revenue 47 41 122 67
Other Revenue 8 10 11 17
-------- --------- -------- -------
Pre-tax Income (Loss) Impact of Securitizations $ 3 $ 8 $ (1) $ 15
======== ========= ======== =======
</TABLE>
Auto Financings and Other Consumer Loans: These consumer loans consist of
auto loans and leases, installment loans (direct and indirect types of
consumer finance) and student loans.
Auto financings were $11.3 billion at June 30, 1996, up from $8.3 billion
at December 31, 1995 and $10.1 billion at June 30, 1995. The increase in
auto financings reflected stronger demand during both periods, partially
offset by securitizations of auto loans. The Corporation securitized
approximately $3.0 billion of auto loans during the last two quarters of 1995
and approximately $1.5 billion during the 1996 first six months. Net charge-offs
of auto financings were $7 million in the 1996 second quarter, compared with $4
million in the same period in 1995. For the first six months, net charge-offs of
auto financings were $15 million in 1996, compared with $8 million in 1995.
Other consumer loans were $10.7 billion at June 30, 1996, compared with $10.0
billion at December 31, 1995, and $9.2 billion at June 30, 1995. Net charge-offs
of other consumer loans were $33 million in the second quarter of 1996, compared
with $24 million in the 1995 comparable period. Net charge-offs of other
consumer loans in the first six months of 1996 were $62 million, compared with
$51 million in the comparable 1995 period.
-34-
<PAGE>
Domestic Commercial Portfolio
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $32.4 billion at June 30, 1996, an increase from
$32.3 billion at December 31, 1995 and $31.7 billion at June 30, 1995. The
portfolio consists primarily of loans made to large corporate and middle market
customers and is diversified geographically and by industry. At June 30, 1996,
the largest industry concentration in this portfolio was to the oil and gas
industry which approximated $2.6 billion, or 1.7% of the Corporation's total
loan portfolio.
Nonperforming domestic commercial and industrial loans were $514 million at June
30, 1996, compared with $516 million at June 30, 1995. In the second quarter of
1996, the Corporation had net charge-offs of $46 million, compared with net
recoveries of $1 million in the second quarter of 1995. For the first six
months, such net charge-offs were $94 million in 1996, compared with $22 million
in 1995.
Management believes that the credit quality of the Corporation's commercial and
industrial loan portfolio will remain relatively stable in 1996, as compared
with 1995 (although it expects to have higher net charge-offs in its commercial
and industrial loan portfolio in 1996 - rather than net recoveries of $4 million
as it did in 1995 - because of lower gross recoveries).
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 $6.6 billion at June 30, 1996, a decrease from $6.7 billion at December
31, 1995 and from $7.6 billion at June 30, 1995. The decreases are principally
attributable to repayments from borrowers.
The table below sets forth the major components of the domestic commercial real
estate loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(in millions) 1996 1995 1995
---------- ------------ -----------
<S> <C> <C> <C>
Commercial Mortgages $ 5,327 $ 5,512 $ 6,055
Construction 1,229 1,148 1,504
--------- ---------- -----------
Total Domestic Commercial Real Estate Loans $ 6,556 $ 6,660 $ 7,559
========= ========== ===========
</TABLE>
Nonperforming domestic commercial real estate loans were $439 million at June
30, 1996, a 17% increase from the December 31, 1995 level, but a decrease of
$138 million, or 24%, from June 30, 1995. The improvement in nonperforming
domestic commercial real estate asset levels since June 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 second quarter
of 1996 totaled $30 million, compared with $15 million in the same period a year
ago. For the first six months, such net charge-offs were $26 million in 1996,
compared with $14 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 $5.7 billion, or 4% of total loans
outstanding, at June 30, 1996, unchanged from December 31, 1995
and an increase from $5.5 billion at June 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 June 30, 1996, the Corporation's total
foreign loans were $37.8 billion, compared with $36.1 billion at December 31,
1995 and $37.3 billion at June 30, 1995.
Included in foreign loans were foreign commercial and industrial loans of $23.9
billion at June 30, 1996, an increase of $3.1 billion from the 1995 year-end and
an increase of $3.5 billion from June 30, 1995. The majority of the increase at
June 30, 1996 related primarily to loans which were short-term in nature and,
therefore, do not add significant credit risk to the portfolio since these loans
are generally due within a year. Total foreign commercial real estate loans at
June 30, 1996 were $0.8 billion, unchanged from each of December 31, 1995 and
June 30, 1995.
-35-
<PAGE>
Foreign nonperforming loans at June 30, 1996 were $265 million, a decrease from
$343 million at December 31, 1995 and from $488 million at June 30, 1995. Net
recoveries of foreign loans were $18 million in the second quarter of 1996,
compared with net recoveries of $12 million in the 1995 second quarter. In the
first six months of 1996, net recoveries of foreign loans were $27 million,
compared with $23 million in the first six months of 1995.
Assets Held for Accelerated Disposition
For a discussion of the Corporation's Assets Held for Accelerated Disposition
portfolio, reference is made to page 38 of the Corporation's 1995 Annual Report.
The following table presents the reconciliation of Assets Held for Accelerated
Disposition for the periods indicated.
For the Six Months Ended
June 30,
------------------------
Carrying Value (in millions) 1996 1995
------- -------
Balance at January 1, $ 412 $ 526
Additions -- --
Sales (242) (286)
------- -------
Balance at June 30, (a) $ 170 $ 240
======= =======
(a) Includes $170 million and $8 million of loans that were performing at June
30, 1996 and 1995, respectively.
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 10
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 June 30, 1996 and December 31, 1995.
Percentages are based upon remaining contract life of positive mark-to-market
exposure amounts.
<TABLE>
<CAPTION>
At June 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 16% 54% 31% 11% 55% 29%
3 to 6 months 8 23 14 8 27 15
6 to 12 months 9 19 13 8 13 10
1 to 5 years 51 4 32 45 5 29
Over 5 years 16 -- 10 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 June 30, 1996, approximately 91% 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 only approximately 9% 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 June 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 June 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 six 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 six months of 1996 and
1995. Additionally, at June 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>
Second Quarter Six Months
-------------------------- ----------------------------
(in millions) 1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $ 3,683 $ 3,874 $ 3,784 $ 3,894
Provision for Losses 250 195 495 380
Charge-Offs (318) (323) (630) (606)
Recoveries 68 101 135 177
---------- --------- ---------- ---------
Subtotal Net Charge-Offs (250) (222) (495) (429)
Charge Related to Conforming Credit
Card Charge-off Policies --- --- (102) --
---------- --------- ---------- ---------
Total Net Charge-offs (250) (222) (597) (429)
Other 9 (1) 10 1
---------- --------- ---------- ---------
Total Allowance at End of Period $ 3,692 $ 3,846 $ 3,692 $ 3,846
========== ========= ========== =========
</TABLE>
The following table presents the Corporation's allowance coverage ratios at June
30, 1996, December 31, 1995 and June 30, 1995.
Allowance Coverage Ratios
- -------------------------
June 30, December 31, June 30,
For the Period Ended: 1996 1995 1995
------- ------------ --------
Allowance for Credit Losses to:
Loans at Period-End 2.44% 2.52% 2.57%
Average Loans 2.46 2.58 2.67
Nonperforming Loans 246.46 253.45 206.33
-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.
[GRAPH NUMBER 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 June 30, 1996, which captures the historical correlation among
business units, 95% of the variation in the Corporation's daily trading results
fell within a $22 million band centered on the daily average amount of $8
million. For the twelve months ended June 30, 1996, the Corporation posted
positive daily market risk-related revenue for 243 out of 259 business trading
days for international and domestic units. For 231 of the 259 days, the
Corporation's daily market risk-related revenue or losses occurred within the
negative $5 million to 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
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 June 30, 1996 Months Months Months Years 5 Years Total
----------- ----------- ----------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $ (15,742) $ 1,409 $ (1,504) $ 32,557 $ (16,720) $ ---
Derivative Instruments Affecting
Interest-Rate Sensitivity (a) 3,811 2,410 (1,216) (8,416) 3,411 ---
Interest-Rate Sensitivity Gap (11,931) 3,819 (2,720) 24,141 (13,309) ---
Cumulative Interest-Rate
Sensitivity Gap (11,931) (8,112) (10,832) 13,309 --- ---
% of Total Assets (4)% (3)% (3)% 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 June 30, 1996, the Corporation had $10,832 million more liabilities than
assets repricing within one year (including net repricing effect of derivative
positions), amounting to 3% of total assets. This compares with $21,471 million,
or 7% of total assets, at December 31, 1995.
At June 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
slightly over 2% of projected 1996 after-tax net income excluding the
restructuring charge. 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 excluding the restructuring charge. 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 June 30, 1996, by twelve-month intervals (i.e., July 1, 1996 to June
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 June 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 July 1,
(in millions) 1996 1997 1998 1999 2000 Thereafter
----------- ------------ ------------ ------------ ----------- ----------
Receive fixed swaps
<S> <C> <C> <C> <C> <C> <C>
Notional amount $ 33,033 $ 24,457 $ 18,419 $ 15,463 $ 13,371 $ 9,597
Weighted-average Fixed rate 6.29% 6.09% 6.57% 6.86% 6.59% 6.58%
Pay fixed swaps
Notional amount $ 40,242 $ 27,941 $ 21,417 $ 12,326 $ 8,604 $ 4,967
Weighted-average Fixed rate 6.39% 6.44% 6.50% 6.68% 6.69% 6.86%
Basis Swaps
Notional amount $ 23,492 $ 18,929 $ 12,803 $ 1,039 $ 751 $ 601
Average Three-Month Implied
Forward LIBOR Rates 6.04% 6.59% 6.80% 7.03% 7.18% 7.45%
--------- ---------- ---------- ---------- ---------- ----------
Total Notional
Amount (a) $ 96,767 $ 71,327 $ 52,639 $ 28,828 $ 22,726 $ 15,165
========= ========== ========== ========== ========== ==========
<FN>
(a) At June 30, 1996, approximately $13 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,
$4 billion is expected to mature in the twelve month period beginning
July 1, 1996, $2 billion for the twelve month period beginning July 1,
1997, with the remaining $7 billion on July 1, 1998 and thereafter.
</FN>
</TABLE>
The following table summarizes the Corporation's assets and liabilities at June
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 $ 5,805 $ 503 $ 129
Securities - Available for Sale 37,855 6,827 4,770
Loans 151,274 40,949 68,614
Other Assets 19,714 3,050 3,455
Deposits 168,343 27,215 80,316
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 54,584 -- 10,210
Long-Term Debt 12,770 5,596 290
<FN>
(a) At June 30, 1996, notional amounts of approximately $13 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 $6.5 billion notional amount of derivatives related to mortgage
servicing assets and approximately $15.6 billion notional amount of derivatives
related to mortgage and consumer loans held for sale were outstanding at June
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 $46 million impact on the Corporation's net interest income
in the second quarter of 1996, compared with a favorable impact of $27 million
for the second quarter of 1995. For the first six months, the unfavorable impact
on net interest income was $35 million in 1996, compared with a favorable impact
of $81 million in 1995.
The following table reflects the deferred gains/losses and unrecognized
gains/losses of the Corporation's ALM derivative contracts for June 30, 1996 and
December 31, 1995.
<TABLE>
<CAPTION>
June 30, December 31,
(in millions) 1996 1995 Change
---------- ------------ ------
ALM Derivative Contracts:
<S> <C> <C> <C>
Net Deferred Gains (Losses) $ (68) $ (98) $ 30
Net Unrecognized Gains (Losses)(a) (577) 184 (761)
--------- ------- -------
Net ALM Derivative Gains (Losses) $ (645) $ 86 $ (731)
========= ======= =======
<FN>
(a) The June 30, 1996 amount includes $74 million in net unrecognized losses
from derivatives related to mortgage servicing rights, and $2 million in
net unrecognized losses 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 June 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 $ 17
1997 1
1998 (48)
1999 (50)
2000 (54)
2001 and After 66
--------
Total $ (68)
========
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 $ 21
1997 29
1998 27
1999 35
2000 33
2001 and After 49
--------
Total $ 194
========
-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 June 30, 1996 remained strong, with
capital ratios well in excess of regulatory guidelines. The Corporation's Tier 1
and Total Capital ratios were 7.96% and 11.82%, 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) decreased by
$176 million during the first six months of 1996 to $28.1 billion at June 30,
1996, primarily due to the impact of the merger-related restructuring charge.
The Corporation manages its capital to execute its strategic business plans and
support its growth and investments, including acquisition strategies in its core
businesses.
During the first six months of 1996, the Corporation issued 15.7 million shares
of common stock and repurchased approximately 13.5 million shares of its
outstanding common stock in the open market. These repurchases were largely
undertaken to meet the needs of the Corporation's employee stock option and
incentive plans. The Corporation has revised its previously announced buy-back
program to terminate at September 30, 1996 and to provide that purchases of
shares of common stock of the Corporation under the plan to such date would be
in accordance with the pooling-of-interests accounting rules. As a result of
calculating the number of "tainted" shares held in the Corporation's treasury
after merger-consummation date in accordance with a recent clarification
statement of Staff Accounting Bulletin No. 96 (SAB 96), the Corporation would
have authority to repurchase during the third quarter of 1996 an additional
2.0 million shares of its common stock. The Corporation expects it will
issue more than such amount of its common stock during this period as a result
of exercises by its employees of options issued under the Corporation's
various employee benefit programs. Accordingly, the Corporation expects the
number of common shares outstanding in the third quarter of 1996 to be somewhat
higher than the 1996 second quarter. For a further discussion see Note 3 of
this Form 10-Q.
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 June 30, 1996 was $20.3 billion, compared with
$20.8 billion at December 31, 1995. The $496 million decrease from the 1995
year-end primarily reflects the after-tax impact of the merger-related
restructuring charge and expenses ($1,040 million), a $403 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 $681
million. These declines were partially offset by $1,807 million of net income
generated during the first six months of 1996 before the restructuring charge.
-42-
<PAGE>
The tables which follow set forth various capital ratios and components of
capital at the dates indicated.
<TABLE>
<CAPTION>
Capital Ratios
- --------------
Minimum
June 30, December 31, Regulatory
1996 1995 Requirement
-------- ------------ -------------
<S> <C> <C> <C>
Tier 1 Capital Ratio (a)(c) 7.96% 8.22% 4.00%
Total Capital Ratio (a)(c) 11.82 12.27 8.00
Tier 1 Leverage Ratio (b)(c) 6.56 6.68 3.00 -5.00
Common Stockholders' Equity to Total Assets 5.49 5.98 --
Total Stockholders' Equity to Total Assets 6.32 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 June 30, 1996 Tier
1 Capital,Total Capital and Tier 1 Leverage ratios were 8.14%, 12.28% and
6.22%, respectively, compared with 8.37%, 12.67% and 6.27%, respectively,
at December 31, 1995.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Components of Capital
- ---------------------
June 30, December 31,
(in millions) 1996 1995
-------------- ------------
Tier 1 Capital
<S> <C> <C>
Common Stockholders' Equity $ 18,329 $ 18,424
Nonredeemable Preferred Stock 2,650 2,650
Minority Interest 200 162
Less: Goodwill 1,382 1,446
Non-Qualifying Intangible Assets 104 116
50% Investment in Securities and Unconsolidated
Subsidiaries 749 698
-------------- -----------
Tier 1 Capital $ 18,944 $ 18,976
-------------- ------------
Tier 2 Capital
Long-Term Debt Qualifying as Tier 2 $ 6,968 $ 7,139
Qualifying Allowance for Credit Losses 2,985 2,907
Less: 50% Investment in Securities and Unconsolidated
Subsidiaries 749 698
-------------- -----------
Tier 2 Capital $ 9,204 $ 9,348
-------------- -----------
Total Qualifying Capital $ 28,148 $ 28,324
============== ===========
Risk-Weighted Assets (a) $ 238,092 $ 230,887
============== ===========
<FN>
(a) Includes off-balance sheet risk-weighted assets in the amount of $72,382
million and $68,153 million, respectively, at June 30, 1996 and
December 31, 1995.
</FN>
</TABLE>
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%.
-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 half 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 June 30, 1996 was $12,770 million, a decrease of
$55 million from the 1995 year-end. The decrease resulted largely from
maturities of the Corporation's long-term debt of $897 million (including $532
million of senior medium-term notes, $115 million of other senior notes, and
$250 million of subordinated notes) and the redemption of $20 million of senior
medium-term notes. These decreases were partially offset by issuances of $820
million of the Corporation's long-term debt (including $250 million of senior
medium-term notes, $75 million of subordinated medium-term notes, $295 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.
The Corporation is evaluating the opportunity for future redemptions of its
outstanding preferred stock in light of the fact that it currently has
approximately $1.1 billion of fixed-rate preferred stock that becomes callable
in 1997. In that regard, a subsidiary of the Corporation, organized as a real
estate investment trust (REIT), has recently filed a registration statement
covering $500 million of preferred stock intended to be issued to pre-fund some
of the Corporation's preferred stock that may be redeemed. The Corporation
expects that, given the tax deductible features of the REIT preferred stock, the
cost to the Corporation of issuing the REIT preferred would be approximately
150-200 basis points lower than traditional preferred stock.
- --------------------------------------------------------------------------------
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 June 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 $2.9 billion to their respective bank holding companies, plus an
additional amount equal to their net income from July 1, 1996 through the date
in 1996 of any such dividend payment.
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 their business operations.
- --------------------------------------------------------------------------------
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.
-44-
<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
June 30, 1996 June 30, 1995
----------------------------------------- -----------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 7,307 $ 156 8.58% $ 10,757 $ 218 8.12%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 29,354 514 7.05% 30,114 482 6.41%
Trading Assets-Debt and Equity
Instruments 27,293 406 5.98% 18,529 343 7.40%
Securities:
Available-for-Sale 38,295 610 6.41%(b) 24,293 448 7.37%(b)
Held-to-Maturity 4,245 81 7.61% 10,374 174 6.74%
Loans 150,612 3,034 8.09% 146,757 3,247 8.86%
---------- -------- ------------ -------
Total Interest-Earning Assets 257,106 4,801 7.51% 240,824 4,912 8.17%
Allowance for Credit Losses (3,681) (3,877)
Cash and Due from Banks 11,849 13,097
Risk Management Instruments 26,280 35,877
Other Assets 26,025 22,425
---------- ------------
Total Assets $ 317,579 $ 308,346
========== ============
LIABILITIES
Domestic Retail Deposits $ 52,589 479 3.67% $ 55,694 533 3.85%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 10,671 142 5.34% 12,574 142 4.51%
Deposits in Foreign Offices 61,119 837 5.50% 64,067 921 5.74%
---------- -------- ------------ -------
Total Time and Savings
Deposits 124,379 1,458 4.72% 132,335 1,596 4.82%
---------- -------- ------------ -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 52,222 665 5.13% 43,578 647 5.95%
Commercial Paper 4,714 59 5.09% 5,577 83 5.98%
Other Borrowings (c) 16,437 363 8.85% 12,051 308 10.25%
---------- -------- ------------ -------
Total Short-Term and
Other Borrowings 73,373 1,087 5.96% 61,206 1,038 6.79%
Long-Term Debt 12,916 221 6.86% 13,018 238 7.33%
---------- -------- ------------ -------
Total Interest-Bearing Liabilities 210,668 2,766 5.28% 206,559 2,872 5.57%
---------- -------- ------------ -------
Demand Deposits 43,396 34,660
Risk Management Instruments 28,518 36,807
Other Liabilities 15,095 10,999
---------- ------------
Total Liabilities 297,677 289,025
---------- ------------
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,773
Common Stockholders' Equity 17,252 16,548
---------- ------------
Total Stockholders' Equity 19,902 19,321
---------- ------------
Total Liabilities and
Stockholders' Equity $ 317,579 $ 308,346
========== ============
INTEREST RATE SPREAD 2.23% 2.60%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 2,035(a) 3.18% $ 2,040(a) 3.39%
======== ===== ======= =====
<FN>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the three months ended June 30, 1996 and June 30, 1995, the annualized
rate for securities available-for-sale based on historical cost was 6.32%
and 7.36%, respectively.
(c) Includes securities sold but not yet purchased.
</FN>
</TABLE>
-45-
<PAGE>
<TABLE>
<CAPTION>
The Chase Manhattan Corporation and Subsidiaries
Average Consolidated Balance Sheet, Interest and Rates
(Taxable-Equivalent Interest and Rates; in millions)
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
----------------------------------------- -----------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 7,772 $ 328 8.48% $ 11,884 $ 443 7.51%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 28,075 1,015 7.27% 29,694 950 6.45%
Trading Assets-Debt and Equity
Instruments 27,291 835 6.15% 19,153 702 7.38%
Securities:
Available-for-Sale 38,242 1,255 6.60%(b) 24,167 890 7.42%(b)
Held-to-Maturity 4,381 161 7.38% 10,477 358 6.90%
Loans 150,123 6,275 8.41% 143,978 6,322 8.85%
---------- -------- ------------ -------
Total Interest-Earning Assets 255,884 9,869 7.76% 239,353 9,665 8.14%
Allowance for Credit Losses (3,729) (3,884)
Cash and Due from Banks 12,450 13,364
Risk Management Instruments 25,925 32,850
Other Assets 24,722 22,164
---------- ------------
Total Assets $ 315,252 $ 303,847
========== ============
LIABILITIES
Domestic Retail Deposits $ 53,940 968 3.61% $ 55,809 1,015 3.67%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 10,850 215 3.98% 12,582 290 4.64%
Deposits in Foreign Offices 64,836 1,919 5.95% 64,175 1,791 5.61%
---------- -------- ------------ -------
Total Time and Savings
Deposits 129,626 3,102 4.81% 132,566 3,096 4.70%
---------- -------- ------------ -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 48,588 1,286 5.32% 42,839 1,275 6.00%
Commercial Paper 5,146 134 5.26% 5,350 156 5.89%
Other Borrowings (c) 16,323 693 8.53% 12,282 585 9.60%
---------- -------- ------------ -------
Total Short-Term and
Other Borrowings 70,057 2,113 6.07% 60,471 2,016 6.72%
Long-Term Debt 12,946 448 6.95% 13,036 472 7.30%
---------- -------- ------------ -------
Total Interest-Bearing Liabilities 212,629 5,663 5.36% 206,073 5,584 5.46%
---------- -------- ------------ -------
Demand Deposits 40,524 35,067
Risk Management Instruments 28,036 32,879
Other Liabilities 13,693 10,736
---------- ------------
Total Liabilities 294,882 284,755
---------- ------------
STOCKHOLDERS' EQUITY
Preferred Stock 2,650 2,812
Common Stockholders' Equity 17,720 16,280
---------- ------------
Total Stockholders' Equity 20,370 19,092
---------- ------------
Total Liabilities and
Stockholders' Equity $ 315,252 $ 303,847
========== ============
INTEREST RATE SPREAD 2.40% 2.68%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 4,206(a) 3.31% $4,081(a) 3.44%
======== ===== ====== =====
<FN>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the six months ended June 30, 1996 and June 30, 1995, the annualized
rate for securities available-for-sale based on historical cost was 6.53%
and 7.39%, respectively.
(c) Includes securities sold but not yet purchased.
</FN>
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
THE CHASE MANHATTAN CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
1996 1995
----------------------- --------------------------------
Second First Fourth Third Second
Quarter Quarter Quarter Quarter Quarter
--------- -------- ---------- ---------- ----------
Interest Income
<S> <C> <C> <C> <C> <C>
Loans $ 3,028 $ 3,241 $ 3,252 $ 3,280 $ 3,241
Securities 685 720 718 639 616
Trading Assets 406 429 402 360 343
Federal Funds Sold and Securities
Purchased Under Resale Agreements 514 501 491 448 482
Deposits with Banks 156 172 187 194 218
-------- --------- --------- -------- ---------
Total Interest Income 4,789 5,063 5,050 4,921 4,900
-------- --------- --------- -------- ---------
Interest Expense
Deposits 1,458 1,644 1,602 1,593 1,596
Short-Term and Other Borrowings 1,087 1,026 1,139 1,020 1,038
Long-Term Debt 221 227 231 239 238
-------- --------- --------- -------- ---------
Total Interest Expense 2,766 2,897 2,972 2,852 2,872
-------- --------- --------- -------- ---------
Net Interest Income 2,023 2,166 2,078 2,069 2,028
Provision for Losses 250 245 186 192 195
-------- --------- --------- --------- ---------
Net Interest Income After Provision For Losses 1,773 1,921 1,892 1,877 1,833
-------- --------- --------- --------- ---------
Noninterest Revenue
Corporate Finance and Syndication Fees 258 224 220 210 197
Trust and Investment Management Fees 302 285 277 258 243
Credit Card Revenue 233 233 246 210 196
Service Charges on Deposit Accounts 100 99 101 105 107
Fees for Other Financial Services 381 378 363 370 353
Trading Revenue 379 339 274 342 301
Securities Gains 24 52 25 53 72
Other Revenue 254 259 259 162 257
-------- --------- --------- -------- ---------
Total Noninterest Revenue 1,931 1,869 1,765 1,710 1,726
-------- --------- --------- -------- ---------
Noninterest Expense
Salaries 1,046 1,076 1,130 1,074 1,007
Employee Benefits 225 305 206 213 246
Occupancy Expense 207 221 224 227 218
Equipment Expense 181 184 187 177 193
Foreclosed Property Expense (8) (9) (15) (7) (28)
Restructuring Charge and Expenses 22 1,656 --- --- 15
Other Expense 651 660 632 648 708
-------- --------- --------- -------- ---------
Total Noninterest Expense 2,324 4,093 2,364 2,332 2,359
-------- --------- --------- -------- ---------
Income (Loss) Before Income Tax Expense (Benefit) 1,380 (303) 1,293 1,255 1,200
Income Tax Expense (Benefit) 524 (214) 466 491 471
-------- --------- --------- -------- ---------
Net Income (Loss) $ 856 $ (89) $ 827 $ 764 $ 729
======== ========= ========= ======== =========
Net Income (Loss) Applicable To Common Stock $ 801 $ (143) $ 773 $ 708 $ 673
======== ========= ========= ======== =========
Net Income (Loss) Per Common Share:
Primary $ 1.80 $ (0.32) $ 1.73 $ 1.58 $ 1.54
======== ========= ======== ======== =========
Assuming Full Dilution $ 1.79 $ (0.32) $ 1.73 $ 1.55 $ 1.52
======== ========= ========= ======== =========
</TABLE>
-47-
<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 pertaining to the $70 million loss
incurred by the Corporation in the fourth quarter of 1994
resulting from unauthorized foreign exchange transactions
involving the Mexican peso. The Corporation is cooperating
with this investigation. The Corporation cannot determine at
this time the outcome of the investigation but believes it
will not have a material adverse effect on the consolidated
financial condition of the Corporation.
Litigation Relating to the Merger
On August 28, 1995, three complaints were filed in the Court
of Chancery for New Castle County, Delaware, in actions
entitled Simon v. Chase Manhattan Corporation, et al., Civil
Action No. 14505, Rampel & Rampel, P.A. Profit Sharing Plan
v. Chase Manhattan Corp., et. al., Civil Action No. 14506
and Goldstein v. Chase Manhattan Corp., et al., Civil Action
No. 14508. The complaints, each of which purports to
initiate a class action on behalf of all Chase stockholders,
name Chase, the Corporation and certain current and former
directors of Chase as defendants. The complaints allege that
(i) the merger entails breaches of fiduciary duties owed by
the director defendants to Chase stockholders, (ii) the
consideration provided in the merger by the Corporation is
inadequate, (iii) the merger is unfair to Chase stockholders
and is a product of Chase's directors' acting out of
self-interest and (iv) the Corporation aided and abetted the
Chase directors' alleged breach of fiduciary duties. The
complaints seek, among other relief, damages in unspecified
amounts. The Corporation believes the actions to be without
merit and intends to contest them vigorously.
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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The following is a summary of matters submitted to vote at
the Annual Meeting of Stockholders of the Corporation. The
Annual Meeting of the Stockholders was held on May 21, 1996.
A total of 373,272,730 shares, or 85.9% of the
434,637,133 shares entitled to vote at the Annual
Meeting, were represented at the meeting.
(a) Election of Directors
---------------------
The following twenty (20) directors were elected to hold
office until the 1997 Annual Meeting or until their
successors are elected and have qualified.
Votes Votes
Received Withheld
----------- ---------
Frank A. Bennack, Jr. 371,725,318 1,547,412
Susan V. Berresford 371,557,164 1,715,566
M. Anthony Burns 371,800,931 1,471,799
H. Laurance Fuller 371,823,739 1,448,991
Melvin R. Goodes 371,787,536 1,485,194
William H. Gray III 371,627,999 1,644,731
George V. Grune 371,763,501 1,509,229
William B. Harrison, Jr. 371,814,485 1,458,245
Harold S. Hook 371,848,361 1,424,369
Helene L. Kaplan 371,717,688 1,555,042
E. Michel Kruse 371,785,988 1,486,742
Thomas G. Labrecque 371,746,391 1,526,339
J. Bruce Llewellyn 371,734,847 1,537,883
-48-
<PAGE>
Edward D. Miller 371,818,608 1,454,122
Edmund T. Pratt, Jr. 371,704,426 1,568,304
Henry B. Schacht 371,838,906 1,433,824
Walter V. Shipley 371,763,618 1,509,112
Andrew C. Sigler 371,814,770 1,457,960
John R. Stafford 371,817,005 1,455,725
Marina N. Whitman 371,732,109 1,540,621
(b) (1) Ratifying Independent Accountants
---------------------------------
A proposal to ratify Price Waterhouse LLP as independent
accountants was approved by 99.8% of the votes cast. The
proposal received a "for" vote of 370,670,844 and an
"against" vote of 590,558. The number of votes abstaining
was 2,011,328. There were no broker non-votes.
(2) Approval of the 1996 Long-Term Incentive Plan
---------------------------------------------
A proposal to approve the 1996 Long-Term Incentive Plan was
approved by 63.4% of the votes cast. The proposal received a
"for" vote of 209,065,352 and an "against" vote of
120,431,228. The number of shares abstaining was 3,276,158
and there were 40,499,992 broker non-votes.
(3) Stockholder Proposal Re: Term Limits for Directors
---------------------------------------------------
A proposal by Evelyn Y. Davis that the Board of Directors
take the necessary steps so that future outside directors
shall not serve for more than six years was rejected by
91.7% of the votes cast. The vote "for" was 26,859,566 and
the vote "against" was 297,553,351. The number of votes
abstaining was 5,880,674 and there were 42,979,139 broker
non-votes.
(4) Stockholder Proposal Re: Efforts of G-7 Ministers
--------------------------------------------------
A proposal by the Sisters of Charity of the Incarnate Word
and other religious groups requesting that the Board of
Directors endorse and work to implement the efforts of the
G-7 Ministers was approved by 93.6% of the votes cast. The
vote "for" was 335,414,883 and the vote "against" was
22,807,243. The number of votes abstaining was 15,050,604
and there were no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
11 - Computation of net income per share.
12(a) - Computation of ratio of earnings to fixed charges.
12(b) - Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements.
27 - Financial Data Schedule.
(B) Reports on Form 8-K:
The Corporation filed one report on Form 8-K during the
quarter ended June 30, 1996, as follows:
Form 8-K Dated April 16, 1996: The Corporation announced the
following: Results of operations for the first quarter of
1996, management's discussion and analysis and audited
financial statements from the 1995 Annual Report of the
Corporation; and supervision and regulation of The Chase
Manhattan Corporation.
-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 August 14, 1996 By /s/ Joseph L. Sclafani
---------------- -------------------------
Joseph L. Sclafani
Controller
[Principal Accounting Officer]
-50-
<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>
<TABLE>
<CAPTION>
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION and Subsidiaries
Computation of Net Income Per Share
-----------------------------------
Net income for primary and fully diluted earnings per share are computed by
subtracting from the applicable earnings the dividend requirements on preferred
stock to arrive at earnings applicable to common stock and dividing this amount
by the weighted-average number of common and common equivalent shares
outstanding during the period. 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.
(in millions, except per share amounts) Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
EARNINGS PER SHARE 1996 1995 1996 1995
------ ------- ------ --------
Primary
Earnings:
<S> <C> <C> <C> <C>
Income Before Effect of Accounting Change $ 856 $ 729 $ 767 $ 1,379
Effect of Change in Accounting Principle -- -- -- (11)(a)
------ ------- ------ --------
Net Income $ 856 $ 729 $ 767 $ 1,368
Less: Preferred Stock Dividend Requirements 55 56 109 117
------ ------- ------ --------
Net Income Applicable to Common Stock $ 801 $ 673 $ 658 $ 1,251
====== ======= ====== ========
Shares:
Average Common and Common Equivalent Shares Outstanding 444.8 436.2 445.4 433.5
Primary Earnings Per Share:
Income Before Effect of Accounting Change $ 1.80 $ 1.54 $ 1.48 $ 2.91
Effect of Change in Accounting Principle -- -- -- (0.02)(a)
------ ------- ------ -------
Net Income $ 1.80 $ 1.54 $ 1.48 $ 2.89
====== ======= ====== ========
Assuming Full Dilution
Earnings:
Net Income Applicable to Common Stock $ 801 $ 673 $ 658 $ 1,251
Add: Applicable Dividend on Convertible Preferred Stock -- 2 -- 7
------ ------- ------ --------
Adjusted Net Income $ 801 $ 675 $ 658 $ 1,258
====== ======= ====== ========
Shares:
Average Common and Common Equivalent Shares Outstanding 444.8 436.2 445.4 433.5
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect and Conversion of Preferred Stock (b) 3.6 8.2 4.8 11.2
------ ------- ------ --------
Adjusted Shares of Common and Equivalent Shares Outstanding 448.4 444.4 450.2 444.7
Earnings Per Share Assuming Full Dilution:
Income Before Effect of Accounting Change $ 1.79 $ 1.52 $ 1.46 $ 2.85
Effect of Change in Accounting Principle -- -- -- (0.02)(a)
------ ------- ------ -------
Net Income $ 1.79 $ 1.52 $ 1.46 $ 2.83
====== ======= ====== ========
<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)
Six Months Ended
June 30, 1996
----------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes $ 1,077
--------
Fixed charges:
Interest expense 2,561
One third of rents, net of income from subleases (a) 62
--------
Total fixed charges 2,623
Less: Equity in undistributed income of affiliates (30)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 3,670
========
Fixed charges, as above $ 2,623
========
Ratio of earnings to fixed charges 1.40
========
INCLUDING INTEREST ON DEPOSITS
- ------------------------------
Fixed charges, as above $ 2,623
Add: Interest on deposits 3,102
Total fixed charges and interest on deposits $ 5,725
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 3,670
Add: Interest on deposits 3,102
Total earnings before taxes, fixed charges, and interest on deposits $ 6,772
========
Ratio of earnings to fixed charges 1.18
========
<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)
Six Months Ended
June 30, 1996
----------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes $ 1,077
--------
Fixed charges:
Interest expense 2,561
One third of rents, net of income from subleases (a) 62
--------
Total fixed charges 2,623
Less: Equity in undistributed income of affiliates (30)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 3,670
========
Fixed charges, as above $ 2,623
Preferred stock dividends 109
--------
Fixed charges including preferred stock dividends $ 2,732
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.34
========
INCLUDING INTEREST ON DEPOSITS
- ------------------------------
Fixed charges including preferred stock dividends $ 2,732
Add: Interest on deposits 3,102
-------
Total fixed charges including preferred stock
dividends and interest on deposits $ 5,834
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 3,670
Add: Interest on deposits 3,102
--------
Total earnings before taxes, fixed charges, and interest on deposits $ 6,772
========
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.16
========
<FN>
(a) The proportion deemed representative of the interest factor.
</FN>
</TABLE>
-54-
<PAGE>
[ARTICLE] 9
[CIK] 0000019617
[NAME] THE CHASE MANHATTAN CORPORATION
[MULTIPLIER] 1,000,000
[CURRENCY] UNITED STATES DOLLAR
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] JUN-30-1996
[EXCHANGE-RATE] 1
[CASH] 13,291
[INT-BEARING-DEPOSITS] 5,805
[FED-FUNDS-SOLD] 33,039
[TRADING-ASSETS] 51,711
[INVESTMENTS-HELD-FOR-SALE] 37,855
[INVESTMENTS-CARRYING] 4,125
[INVESTMENTS-MARKET] 4,080
[LOANS] 151,274
[ALLOWANCE] 3,692
[TOTAL-ASSETS] 321,761
[DEPOSITS] 168,343
[SHORT-TERM] 68,465
[LIABILITIES-OTHER] 49,398
[LONG-TERM] 12,770
[PREFERRED-MANDATORY] 0
[PREFERRED] 2,650
[COMMON] 438
[OTHER-SE] 17,252
[TOTAL-LIABILITIES-AND-EQUITY] 321,761
[INTEREST-LOAN] 6,269
[INTEREST-INVEST] 1,405
[INTEREST-OTHER] 1,343
[INTEREST-TOTAL] 9,852
[INTEREST-DEPOSIT] 3,102
[INTEREST-EXPENSE] 5,663
[INTEREST-INCOME-NET] 4,189
[LOAN-LOSSES] 495
[SECURITIES-GAINS] 76
[EXPENSE-OTHER] 6,417
[INCOME-PRETAX] 1,077
[INCOME-PRE-EXTRAORDINARY] 767
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 767
[EPS-PRIMARY] 1.48
[EPS-DILUTED] 1.46
[YIELD-ACTUAL] 3.31
[LOANS-NON] 1,498
[LOANS-PAST] 486
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 3,784
[CHARGE-OFFS] 732
[RECOVERIES] 135
[ALLOWANCE-CLOSE] 3,692
[ALLOWANCE-DOMESTIC] 0
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
-55-
<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>
GRAPHIC
NUMBER PAGE DESCRIPTION
-------- -------- -----------------------------------------------------------------------
<S> <C> <C>
1 38 Bar Graph entitled "Histogram of Daily Market Risk-Related
Revenue For the Twelve Months ended June 30, 1996" presenting the
following information:
Millions of Dollars 0 -5 5 - 10 10 -15 15 - 20 20 -25
------------------- ---- ------ ------ ------- ------
Number of days trading
revenue was within the
above prescribed posi-
tive range 62 96 59 22 4
Millions of Dollars 0 -(5) (5)-(10) (10)-(15)
------------------- ------ --------- ---------
Number of days trading
revenue was within the
above prescribed nega-
tive range 14 1 1
The Histogram includes all business trading days for international
and domestic units.
-56-
</TABLE>
