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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 1995 number 1-5805
CHEMICAL BANKING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2624428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
270 Park Avenue, New York, N.Y. 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on
------------------- which Registered
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Common Stock........................................................................ New York Stock Exchange, Inc.
10.96% Cumulative Preferred Stock (Stated Value--$25)............................... New York Stock Exchange, Inc.
8 3/8% Cumulative Preferred Stock (Stated Value--$25)............................... New York Stock Exchange, Inc.
7.92% Cumulative Preferred Stock (Stated Value--$100) evidenced by
Depositary Shares Representing One Quarter Share of Preferred Stock............... New York Stock Exchange, Inc.
7.58% Cumulative Preferred Stock (Stated Value--$100) evidenced by
Depositary Shares Representing One Quarter Share of Preferred Stock............... New York Stock Exchange, Inc.
7 1/2% Cumulative Preferred Stock (Stated Value--$100) evidenced by
Depositary Shares Representing One Quarter Share of Preferred Stock............... New York Stock Exchange, Inc.
Adjustable Rate Cumulative Preferred Stock, Series L (Stated Value--$100)........... New York Stock Exchange, Inc.
Rights to Purchase Units of Junior Participating Preferred Stock.................... New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: None
Number of Shares of Common Stock outstanding on February 29, 1996: 250,539,802
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Chemical Banking Corporation Common Stock
held by non-affiliates of Chemical Banking Corporation on February 29, 1996 was
$17,810,000,000.
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<CAPTION>
Document incorporated by reference Part of Form 10-K into
in this Form 10-K which incorporated
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<S> <C>
Proxy statement for the annual meeting of stockholders to be held May 21, 1996 Part III
(other than information included in the proxy statement pursuant to
Rule 402 (i), (k) and (l) of Regulation S-K)
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FORM 10-K INDEX
PART I PAGE
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Item 1 Business................................................................................. 1
Overview............................................................................. 1
Organizational Review................................................................ 1
Competition.......................................................................... 1
Government Monetary Policies and Economic Controls................................... 2
Supervision and Regulation........................................................... 2
Foreign Operations................................................................... 5
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential........................................... 77
Investment Portfolio................................................................. 52
Loan Portfolio......................................................... 24-28, 55, 84-85
Summary of Loan Loss Experience............................................ 30, 56, 86-87
Deposits........................................................................... 87-88
Return on Equity and Assets.......................................................... 13
Short-Term Borrowings................................................................ 57
Item 2 Properties............................................................................... 5
Item 3 Legal Proceedings........................................................................ 6
Item 4 Submission of Matters to a Vote of Security Holders...................................... 6
Executive Officers of the Registrant..................................................... 7
Part II
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Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.................................................................. 8
Item 6 Selected Financial Data.................................................................. 8
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 8
Item 8 Financial Statements and Supplementary Data.............................................. 8
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................. 8
Part III
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Item 10 Directors and Executive Officers of the Corporation...................................... 9
Item 11 Executive Compensation................................................................... 9
Item 12 Security Ownership of Certain Beneficial Owners and
Management........................................................................... 9
Item 13 Certain Relationships and Related Transactions........................................... 9
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................................................. 10
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Part I
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ITEM 1: BUSINESS
On March 31, 1996, The Chase Manhattan Corporation ("Chase") will merge with and
into Chemical Banking Corporation (the "Corporation"). Upon consummation of the
merger, Chemical Banking Corporation will change its name to "The Chase
Manhattan Corporation". (See The Merger with Chase on page 15 for a more
complete description of the merger).
Because the merger, which will be accounted for as a pooling of interests,
occurred subsequent to December 31, 1995, the information presented in this
Annual Report on Form 10-K does not give effect to the impact of the merger.
Unless otherwise stated, the information presented relates to Chemical Banking
Corporation prior to the merger with Chase. However, supplemental financial
statements included on pages 97 through 103 present the combined financial
condition and results of operations of Chemical Banking Corporation and Chase as
if the merger had been in effect for all periods presented.
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OVERVIEW
The Corporation is a bank holding company organized under the laws of the State
of Delaware in 1968 and registered under the Bank Holding Company Act of 1956,
as amended (the "BHCA").
The Corporation conducts domestic and international financial services
business through various bank and non-bank subsidiaries. At December 31, 1995,
the principal bank subsidiaries of the Corporation were Chemical Bank, a New
York banking corporation ("Chemical Bank"), and Texas Commerce Bank National
Association, a subsidiary of Texas Commerce Equity Holdings, Inc. ("Texas
Commerce"), a Delaware bank holding company subsidiary of the Corporation. On
December 31, 1991, Manufacturers Hanover Corporation ("MHC") merged with and
into the Corporation (the "MHC Merger") and, on March 31, 1996, The Chase
Manhattan Corporation ("Chase") will merge with and into the Corporation (the
"Chase Merger"). At December 31, 1995, the Corporation was the fifth largest
bank holding company in the United States in terms of total assets and
Chemical Bank was the third largest bank in the United States in terms of
total assets.
The bank and non-bank subsidiaries of the Corporation operate nationally as
well as through overseas branches and an international network of representative
offices, subsidiaries and affiliated banks.
The financial services provided by the Corporation's domestic subsidiaries
include personal and commercial checking accounts, savings and time deposit
accounts, personal and business loans, consumer financing, leasing, real estate
financing, investment banking, mortgage banking, money transfer, cash
management, safe deposit facilities, personal trust and estate administration,
corporate and institutional trust and securities processing services, full
investment services, discount brokerage, United States Government and Federal
agency securities dealership, corporate debt and equity securities dealership
and underwriting, and United States corporate tax depository facilities.
Internationally, services also include correspondent banking arrangements,
merchant banking, and underwriting and trading of Eurosecurities.
The Corporation also provides products to ensure that a customer will have a
specific currency exchange or interest rate at some future date. These products
include interest rate and currency swaps, interest rate options, forward rate
agreements, forward interest rate contracts, foreign exchange contracts and
financial futures.
The Corporation retains a 20% interest in the CIT Group Holdings, Inc.
("CIT"). CIT, directly or through its subsidiaries, engages in diversified
financial services activities, primarily in the United States. For additional
information pertaining to CIT, see the sections entitled "Overview",
"Noninterest Revenue" and "Other Events" in the Management's Discussion and
Analysis section at pages 14, 16 and 39, respectively.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
ORGANIZATIONAL REVIEW
The Corporation's activities are internally organized, for management reporting
purposes, into various business sectors. A description of the Corporation's
business sectors, as well as developments that have occurred during 1995 with
respect to these business sectors, are discussed in the Management's Discussion
and Analysis section beginning on page 20.
COMPETITION
The Corporation and its subsidiaries and affiliates operate in a highly
competitive environment. The Corporation's bank subsidiaries compete with other
domestic and foreign banks, thrift institutions, credit unions, and money market
and other mutual funds for deposits and other sources of funds. In addition, the
Corporation and its bank and non-bank subsidiaries face increased competition
with respect to the diverse financial services and products they offer.
Competitors also include finance companies, brokerage firms, investment banking
companies,
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merchant banks, insurance companies, leasing companies, and a variety of other
financial services and advisory companies. Many of these competitors are not
subject to the same regulatory restrictions as are domestic bank holding
companies and banks, such as the Corporation and its bank subsidiaries.
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and business of the Corporation are affected by general economic
conditions, both domestic and international. In addition, fiscal or other
policies that are adopted by various regulatory authorities of the United
States, by foreign governments, and by international agencies can have important
consequences on the financial performance of the Corporation. The Corporation is
particularly affected by the policies of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), which regulates the national
supply of bank credit. Among the instruments of monetary policy available to the
Federal Reserve Board are engaging in open-market operations in United States
Government securities; changing the discount rates of borrowings of depository
institutions; imposing or changing reserve requirements against depository
institutions' deposits and certain assets of foreign branches; and imposing or
changing reserve requirements against certain borrowings by banks and their
affiliates (including parent corporations such as the Corporation). These
methods are used in varying combinations to influence the overall growth of bank
loans, investments, and deposits, and the interest rates charged on loans or
paid for deposits.
The Corporation has economic, credit, legal, and other specialists who
monitor economic conditions, and domestic and foreign government policies and
actions. However, since it is difficult to predict changes in macroeconomic
conditions and in governmental policies and actions relating thereto, it is
difficult to foresee the effects of any such changes on the business and
earnings of the Corporation and its subsidiaries.
SUPERVISION AND REGULATION
The Corporation is subject to regulation as a registered bank holding company
under the BHCA. As such, the Corporation is required to file with the Federal
Reserve Board an annual report and other information required quarterly pursuant
to the BHCA. The Corporation is also subject to the examination powers of the
Federal Reserve Board.
Under the BHCA, the Corporation may not engage in any business other than
managing and controlling banks or furnishing certain specified services to
subsidiaries, and may not acquire voting control of non-banking corporations,
except those corporations engaged in businesses or furnishing services which the
Federal Reserve Board deems to be so closely related to banking as "to be a
proper incident thereto". Further, the Corporation is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any corporation that is engaged in activities that
are not closely related to banking, and may not acquire direct or indirect
ownership or control of more than 5% of the voting shares of any domestic bank
without the prior approval of the Federal Reserve Board.
Dividend Restrictions: Federal law imposes limitations on the payment of
dividends by the subsidiaries of the Corporation that are state member banks of
the Federal Reserve System (a "state member bank") or national banks. Non-bank
subsidiaries of the Corporation are not subject to such limitations. The amount
of dividends that may be paid by a state member bank, such as Chemical Bank, or
by a national bank, such as Texas Commerce Bank National Association, is limited
to the lesser of the amounts calculated under a "recent earnings" test and an
"undivided profits" test. Under the recent earnings test, a dividend may not be
paid if the total of all dividends declared by a bank in any calendar year is in
excess of the current year's net income combined with the retained net income of
the two preceding years, unless the bank obtains the approval of its appropriate
Federal banking regulator (which, in the case of a member bank, is the Federal
Reserve Board and, in the case of a national bank, is the Office of the
Comptroller of the Currency (the "Comptroller of the Currency")). Under the
undivided profits test, a dividend may not be paid in excess of a bank's
"undivided profits". The New York State Banking Department imposes a similar
recent earnings test on the payment of dividends by New York State-chartered
banks, such as Chemical Bank.
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1996, without the approval of their relevant banking
regulators, pay dividends estimated at approximately $423 million to their
respective bank holding companies, plus an additional amount equal to their net
income from January 1, 1996 through the date in 1996 of any such dividend
payment.
In addition to the dividend restrictions described above, the Federal Reserve
Board, the Comptroller of the Currency and the Federal Deposit Insurance
Corporation ("FDIC") have authority under the Financial Institutions Supervisory
Act to prohibit or to limit the payment of dividends by the banking
organizations they supervise, including the Corporation and its subsidiaries
that are banks or bank holding companies, if, in the banking regulator's
opinion, payment of a dividend would constitute an unsafe or unsound practice in
light of the financial condition of the banking organization.
For a further discussion of the dividend restrictions imposed on the
Corporation's bank subsidiaries, see Note 15, "Restrictions on Cash and
Intercompany Fund Transfers" on page 62.
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Risk-Based Capital: The Federal banking regulatory authorities have also adopted
risk-based capital and leverage guidelines, which require that the
Corporation's capital-to-assets ratios meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and
specified off-balance sheet financial instruments into four weighted categories,
with higher levels of capital being required for the categories perceived as
representing greater risk. Under the guidelines, a banking organization's
capital is divided into two tiers. Tier 1 Capital includes common equity,
qualifying perpetual preferred stock, minority interests in the equity accounts
of consolidated subsidiaries, less goodwill and other non-qualifying intangibles
and other assets. Tier 2 Capital includes, among other items, perpetual
preferred equity not qualifying for Tier 1, limited-life preferred stock with an
original maturity of greater than 20 years, mandatory convertible debt,
subordinated debt and intermediate-term preferred stock with an original
weighted average maturity of at least five years, qualifying allowance for
credit losses, less required deductions as provided by regulation. The amount of
Tier 2 Capital may not exceed the amount of Tier 1 Capital. Total Capital is the
sum of Tier 1 Capital and Tier 2 Capital.
Banking organizations are required to maintain a Total risk-based capital
ratio (Total Capital to risk-weighted assets) of 8% of which at least 4% must
be Tier 1 Capital.
The Federal banking regulatory authorities have also established minimum
leverage ratio guidelines. The leverage ratio is defined as Tier 1 Capital
divided by average total assets (net of allowance for credit losses, goodwill
and certain intangible assets). The minimum leverage ratio is 3% for banking
organizations that have well-diversified risk (including no undue interest rate
risk); excellent asset quality; high liquidity; good earnings; and, in general,
are considered strong banking organizations. Other banking organizations are
expected to have ratios of at least 4% - 5% depending upon their particular
condition and growth plans. Higher capital ratios could be required if
warranted by the particular circumstances or risk profile of a given banking
organization.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each Federal banking regulator to revise its risk-based
capital standards within 18 months of enactment of the statute to ensure that
those standards take adequate account of interest rate risk, concentration of
credit risk and the risk of nontraditional activities. On December 15, 1994, the
Federal banking regulators adopted amendments to their respective risk-based
capital requirements that explicitly identify concentration of credit risk and
certain risks arising from nontraditional activities, and the management of such
risks, as important factors to consider in assessing an institution's overall
capital adequacy. The amendments do not, however, mandate any specific
adjustments to the risk-based capital calculation as a result of such factors.
On August 2, 1995, the Federal banking regulators published amendments to their
risk-based capital rules that include interest-rate risk as a qualitative factor
to be considered in assessing capital adequacy. Concurrent with the publication
of the amendments, the Federal banking regulators proposed a system for
measuring interest rate risk and announced their intention, after a trial period
to evaluate the reliability and accuracy of the proposed system, to initiate a
rulemaking process for the purpose of amending the risk-based capital rules to
include an explicit capital charge for interest-rate risk that will be based
upon the level of a banking organization's measured interest-rate risk exposure.
On July 14, 1995, the Federal banking regulators issued a proposal to amend
their risk-based capital rules to incorporate a measure for market risk in
foreign exchange and commodity activities and in the trading of debt and equity
instruments. Under the proposal, banking organizations with relatively large
trading activities would calculate their capital charges for market risk using
their own internal value-at-risk models (subject to parameters set by the
regulators) or, alternatively, risk management techniques developed by the
regulators. The effect of the proposed rules would be that, in addition to
existing capital requirements for credit risk, certain institutions, including
the Corporation, would be required to hold capital based on the measure of their
market risk exposure. These institutions would be able to satisfy this
additional requirement, in part, by issuing short-term subordinated debt that
qualifies as Tier 3 Capital. The proposed rule would go into effect at the end
of 1997.
FDICIA: FDICIA required the FDIC to establish a risk-based assessment system for
FDIC deposit insurance and revises certain provisions of the Federal Deposit
Insurance Act as well as certain other Federal banking statutes. In general,
FDICIA provides for expanded regulation of depository institutions and their
affiliates, including parent holding companies, by such institutions' Federal
banking regulators, and requires the Federal banking regulator to take "prompt
corrective action" with respect to a depository institution if such institution
does not meet certain capital adequacy standards.
Prompt Corrective Action: Pursuant to FDICIA, the Federal Reserve Board, the
FDIC and the Comptroller of the Currency adopted regulations setting forth a
five-tier scheme for measuring the capital adequacy of the depository
institutions they supervise. Under the regulations (commonly referred to as the
"prompt corrective action" rules), an institution would be placed in one of the
following capital categories: (i) well capitalized (an institution that has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a Tier 1 leverage ratio of at least 5%); (ii)
adequately capitalized (an institution that has a total risk-based capital ratio
of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1
leverage ratio of at least 4%); (iii) undercapitalized (an institution that has
a total risk-based capital ratio of under 8% or a Tier 1 risk-based capital
ratio under 4% or a Tier 1 leverage ratio under 4%); (iv) significantly
undercapitalized (an institution that has a total risk-based capital ratio of
under 6% or a Tier 1 risk-based capital ratio under 3% or a Tier 1 leverage
ratio under 3%); and (v) critically undercapitalized (an institution that has a
ratio of tangible equity to total assets of 2% or less).
Supervisory actions by the appropriate Federal banking regulator will depend
upon an institution's classification within the five categories. All
institutions are generally prohibited from declaring any dividends, making any
other capital distribution, or paying a management fee to any controlling
person, if such payment would cause the institution to become undercapitalized.
Additional supervisory actions are mandated for an institution falling into one
of the three "undercapitalized" categories, with the severity of supervisory
action increasing at greater levels of capital deficiency. For example,
critically undercapitalized institutions are, among other things, restricted
from making any principal or interest payments on subordinated debt without
prior approval of their Federal banking regulator. The regulations apply only to
banks and not to bank holding companies, such as the Corporation; however, the
Federal Reserve Board is authorized to take appropriate action at the holding
company level based on the undercapitalized status of such holding company's
subsidiary banking institution. In certain instances relating to an
undercapitalized banking institution, the bank holding company would be required
to guarantee the performance of the undercapitalized subsidiary and may be
liable for civil money damages for failure to fulfill its commitments on such
guarantee.
At December 31, 1995, each of the Corporation's banking subsidiaries were
"well capitalized".
Brokered Deposits: The ability of depository institutions to accept brokered
deposits is regulated under FDICIA. The term "brokered deposits" is defined to
include deposits that are solicited by a bank's affiliates on its behalf. A
significant portion of Chemical Bank's wholesale deposits are solicited on its
behalf by a broker-dealer affiliate of Chemical Bank and are considered brokered
deposits. Under the rule, (i) an "undercapitalized" institution is prohibited
from accepting, renewing or rolling over brokered deposits, (ii) an "adequately
capitalized" institution must obtain a waiver from the FDIC before accepting,
renewing or rolling over brokered deposits and is not permitted to pay interest
on brokered deposits accepted in such institution's normal market area at rates
that "significantly exceed" rates paid on deposits of similar maturity in such
area, and (iii) a "well capitalized" institution may accept, renew or roll over
brokered deposits without restriction. The definitions of "well capitalized",
"adequately capitalized", and "undercapitalized" are the same as those utilized
in the "prompt corrective action" rules described above.
FDIC Insurance Assessments: Under the FDIC's risk-based insurance premium
assessment system, each depository institution is assigned to one of nine risk
classifications based upon certain capital and supervisory measures and,
depending upon its classification, is assessed insurance premiums on its
deposits. Effective June 1995, such premiums ranged from 4 basis points to
31 basis points of domestic deposits. Effective January 1, 1996, depository
institutions in the top risk classification category will pay only the statutory
minimum of $2,000 annually for deposit insurance and remaining depository
institutions will pay premiums ranging from 3 basis points to 30 basis points of
domestic deposits. Each of the Corporation's banks, including Chemical Bank and
Texas Commerce Bank National Association, will pay the statutory minimum
premium. The rate schedule is subject to future adjustments by the FDIC. In
addition, the FDIC has authority to impose special assessments from time to
time.
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Other FDICIA Rules: Other rules that have been adopted pursuant to FDICIA
include: (i) real estate lending standards for banks, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
rules relating to consumer lending, including regulations governing advertising
and disclosures required for consumer deposit accounts; (iii) rules requiring
depository institutions to develop and implement internal procedures to evaluate
and control credit and settlement exposure to their correspondent banks; (iv)
rules implementing the FDICIA provision prohibiting, with certain exceptions,
FDIC-insured state banks from making equity investments of the types and amount,
or from engaging as principal in activities, not permissible for national banks;
(v) rules mandating enhanced financial reporting and audit requirements; (vi)
notice provisions in the case of branch closings; and (vii) rules addressing
certain "safety and soundness" issues.
POWERS OF THE FDIC UPON INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION: The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA")
imposes liability on an FDIC-insured depository institution (such as the
Corporation's bank subsidiaries) for costs incurred by the FDIC in connection
with the insolvency of other FDIC-insured institutions under common control with
such institution (commonly referred to as "cross-guarantees" of insured
depository institutions). An FDIC cross-guarantee claim against a depository
institution is superior in right of payment to claims of the holding company and
its affiliates against such depository institution.
In the event an insured depository institution becomes insolvent, or upon the
occurrence of certain other events specified in the Federal Deposit Insurance
Act, whenever the FDIC is appointed the conservator or receiver of such insured
depository institution, the FDIC has the power: (i) to transfer any of such
bank's assets and liabilities to a new obligor (including, but not limited to,
another financial institution acquiring all or a portion of the bank's business,
assets or liabilities), without the approval of such bank's creditors; (ii) to
enforce the terms of such bank's contracts pursuant to their terms; or (iii) to
repudiate or disaffirm any contract or lease to which such depository
institution is a party, the performance of which is determined by the FDIC to be
burdensome and the disaffirmance or repudiation of which is determined by the
FDIC to promote the orderly administration of such depository institution's
assets. Such provisions of the Federal Deposit Insurance Act would be applicable
to obligations and liabilities of those of the Corporation's subsidiaries that
are insured depository institutions, such as Chemical Bank and Texas Commerce
Bank National Association, including without limitation, obligations under
senior or subordinated debt issued by such banks to investors (hereinafter
referred to as "public noteholders") in the public markets.
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is not permitted to take any action
that would have the effect of increasing the losses to a deposit insurance fund
by protecting depositors for more than the insured portion of their deposits or
by protecting creditors of the insured depository institution (including public
noteholders), other than depositors. In addition, the FDIC is authorized to
settle all uninsured and unsecured claims in the insolvency of an insured
institution by making a final settlement payment after the declaration of
insolvency based upon a percentage determined by the FDIC reflecting an average
of the FDIC's receivership recovery experience, regardless of the assets of the
insolvent institution actually available for distribution to creditors. Such a
payment would constitute full payment and disposition of the FDIC's obligations
to claimants.
The Omnibus Budget Reconciliation Act of 1993 included a "depositor
preference" provision, which provided that the claims of a receiver of an
insured depository institution for administrative expenses and the claims of
holders of deposit liabilities (including the FDIC, as subrogee of such holders)
have priority over the claims of other unsecured creditors of such institution,
including public noteholders, in the event of the liquidation or other
resolution of such institution.
As a result of the provisions described above, whether or not the FDIC ever
sought to repudiate any obligations held by public noteholders of any subsidiary
of the Corporation that is an insured depository institution, such as Chemical
Bank or Texas Commerce Bank National Association, the public noteholders would
be treated differently from, and could receive, if anything, substantially less
than, holders of deposit obligations of such depository institution.
OTHER SUPERVISION AND REGULATION: Under Federal Reserve Board policy, the
Corporation is expected to act as a source of financial strength to each bank
subsidiary and to commit resources to support such bank subsidiary in
circumstances where it might not do so absent such policy. Any loans by a bank
holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of the subsidiary banks.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a Federal bank regulatory agency to maintain the capital of a
subsidiary bank at a certain level will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
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The bank subsidiaries of the Corporation are subject to certain restrictions
imposed by Federal law on extensions of credit to, and certain other
transactions with, the Corporation and certain other affiliates and on
investments in stock or securities thereof. Such restrictions prevent the
Corporation and other affiliates from borrowing from a bank subsidiary unless
the loans are secured in specified amounts. Without the prior approval of the
Federal Reserve Board, secured loans, other transactions and investments by any
bank subsidiary are generally limited in amount as to the Corporation and as to
each of the other affiliates to 10% of the bank's capital and surplus and as to
the Corporation and all such other affiliates to an aggregate of 20% of the
bank's capital and surplus. Federal law also requires that transactions between
a bank subsidiary and the Corporation or certain non-bank affiliates, including
extensions of credit, sales of securities or assets and the provision of
services, be conducted on terms at least as favorable to the bank subsidiary as
those that apply or that would apply to comparable transactions with
unaffiliated parties.
The Corporation's bank and non-bank subsidiaries are subject to direct
supervision and regulation by various other Federal and state authorities.
Chemical Bank, as a New York State-chartered bank and member bank of the Federal
Reserve System, is subject to supervision and regulation of the New York State
Banking Department as well as by the Federal Reserve Board and the FDIC. The
Corporation's national bank subsidiaries, such as Texas Commerce Bank National
Association and Chemical Bank National Association, are subject to substantially
similar supervision and regulation by the Comptroller of the Currency.
Supervision and regulation by each of the foregoing regulatory agencies
generally include comprehensive annual reviews of all major aspects of the
relevant bank's business and condition, as well as the imposition of periodic
reporting requirements and limitations on investments and other powers. The
activities of the Corporation's broker-dealers are subject to the regulations of
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc., and, in the case of Chemical Securities Inc. (the
Corporation's "Section 20" subsidiary ("CSI")), are subject to the supervision
and regulation of the Federal Reserve Board (which has imposed conditions
governing CSI's activities, including limitations on the gross revenues that may
be derived from certain of CSI's activities). Additionally, various securities
activities conducted by the bank subsidiaries of the Corporation, such as acting
as a transfer agent, the making available of mutual funds and providing other
types of investment management services, are subject to the regulations of the
Securities and Exchange Commission and, with respect to certain activities of
its mutual funds, the Federal Reserve Board. Numerous Federal and state consumer
laws impose requirements on the making, enforcement and collection of consumer
loans, including credit card loans, and on the types of disclosures that need to
be made in connection with such loans. Finally, the types of activities in which
the foreign branches of Chemical Bank and the international subsidiaries of the
Corporation may engage are subject to various restrictions imposed by the
Federal Reserve Board. Such foreign branches and international subsidiaries are
also subject to the laws and banking authorities of the countries in which they
operate.
FOREIGN OPERATIONS
For geographic distributions of average assets, total revenue, total expense,
income before income tax expense and net income, see Note Twenty Four,
"International Operations", on page 71. For a discussion of foreign loans, see
Note Five, "Loans", on page 55 and see the sections entitled "Foreign Portfolio"
and "Cross-Border Outstandings," on pages 27 and 28.
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ITEM 2: PROPERTIES
The headquarters of the Corporation is located in New York City at 270 Park
Avenue, which is a 50-story bank and office building owned by the Corporation.
This location contains approximately 1.3 million square feet of commercial
office and retail space. The Corporation also owns and occupies a 22-story bank
and office building at 4 New York Plaza with 900,000 square feet of commercial
office and retail space. The Corporation also occupies, under leasehold
agreements, office space at 55 Water Street, 95 Wall Street and various other
locations in New York City.
The Corporation, as lessee, also occupies offices in the United Kingdom. The
most significant office space leased in the United Kingdom is 168,000 square
feet at 125 London Wall, which lease expires in December 2017.
In addition, the Corporation and its subsidiaries own and occupy
administrative and operational facilities in Hicksville, New York; Houston,
Texas; McAllen, Texas; Austin, Texas; Arlington, Texas and El Paso, Texas.
The Corporation and its subsidiaries occupy branch offices and other
locations throughout the United States and in foreign countries under various
types of ownership and leasehold agreements which, when considered in the
aggregate, are not material to its operations.
5
<PAGE> 8
- --------------------------------------------------------------------------------
ITEM 3: LEGAL PROCEEDINGS
The Securities and Exchange Commission has commenced an investigation relating
to the $70 million loss incurred by the Corporation in the fourth quarter of
1994 resulting from unauthorized foreign exchange transactions involving the
Mexican peso. 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 CHASE 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 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 Chase
Merger entails breaches of fiduciary duties owed by the director defendants to
Chase stockholders, (ii) the consideration provided in the Chase Merger by the
Corporation is inadequate, (iii) the Chase Merger is unfair to Chase
stockholders and a product of Chase 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, an injunction
preventing consummation of the Chase Merger and damages in unspecified amounts.
The Corporation and Chase believe the actions to be without merit and intend
to contest them vigorously.
- --------------------------------------------------------------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote at a Special Meeting of
Stockholders of the Corporation. The Special Meeting of the Stockholders was
held on December 11, 1995. A total of 195,065,240 shares, or 78.1% of the
249,904,977 shares entitled to vote at the Special Meeting, were represented at
the meeting.
(1) Approval and Adoption of the Agreement and Plan of
Merger ("the Merger Agreement")
- - The approval and adoption of the Merger Agreement providing for a merger of
The Chase Manhattan Corporation with and into the Corporation, with the
combined entity adopting the Chase name was approved by 99.4% of the votes
cast. The proposal received a "for" vote of 193,265,800 and an "against"
vote of 1,164,519. The number of votes abstaining was 634,921. There were no
broker non-votes.
(2) Amendment and Restatement of the Corporation's
Certificate of Incorporation
- - A proposal to amend and restate the Corporation's Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock,
par value $1.00 per share, from 400 million to 750 million shares and to
make certain other technical amendments was approved by 99.0% of the votes
cast. The proposal received a "for" vote of 192,109,363 and an "against"
vote of 1,916,798. The number of votes abstaining was 1,039,079. There were
no broker non-votes.
6
<PAGE> 9
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITIONS AND OFFICES HELD
NAME AGE WITH THE CORPORATION AND WITH CHEMICAL BANK
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Walter V. Shipley 60 Chairman of the Board and Chief Executive Officer of the Corporation
and Chemical Bank. From the MHC Merger until December 31, 1993,
President of the Corporation and Chemical Bank. Prior to the MHC
Merger, Mr. Shipley had served as Chairman and Chief Executive
Officer of Chemical Banking Corporation and Chemical Bank since 1983.
Director of the Corporation and Chemical Bank since 1982.
Edward D. Miller 55 President of the Corporation and Chemical Bank. From the MHC Merger
until December 31, 1993, Vice Chairman of the Corporation and
Chemical Bank. A Director of the Corporation and Chemical Bank since
the MHC Merger. Prior to the MHC Merger, Mr. Miller had served as a
Vice Chairman and a Director of MHC since December 1988.
William B. Harrison Jr. 52 Vice Chairman of the Corporation and Chemical Bank. A Director of the
Corporation since the MHC Merger and of Chemical Bank since August
1990. Prior to the MHC Merger, Mr. Harrison had been an Executive
Officer of the Corporation since 1988.
Peter J. Tobin 52 Executive Vice President and Chief Financial Officer of the Corporation
and Chemical Bank. Prior to the MHC Merger, Mr. Tobin had served in the
same capacity for MHC since December 1985.
William C. Langley 57 Executive Vice President and Chief Credit and Risk Policy Officer of
the Corporation and Chemical Bank. Prior to the MHC Merger, Mr.
Langley had served as Executive Vice President of MHC since 1983.
</TABLE>
Unless otherwise noted, all of the Corporation's above-named executive officers
have continuously held senior-level positions with the Corporation and Chemical
Bank during the five fiscal years ended December 31, 1995. There are no family
relationships among the foregoing executive officers.
7
<PAGE> 10
Part II
- --------------------------------------------------------------------------------
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of the Corporation's Common Stock are listed on the New
York Stock Exchange and the International Stock Exchange of the United Kingdom
and the Republic of Ireland. For the quarterly high and low prices of the Common
Stock on the New York Stock Exchange and the quarterly dividends declared data
for the Corporation's common stock for the last two years, see the section
entitled "Quarterly Financial Information" on page 75.
At February 29, 1996, there were approximately 56,640 holders of record of
the Corporation's Common Stock.
- --------------------------------------------------------------------------------
ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see "Summary of Selected Financial Data"
on page 13.
- --------------------------------------------------------------------------------
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations, entitled "Management's Discussion and Analysis", appears on pages 13
through 41.
- --------------------------------------------------------------------------------
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements appear, together with the Notes thereto
and the report of Price Waterhouse LLP dated January 16, 1996 thereon, on pages
42 through 74.
Supplementary financial data for each full quarter within the two years ended
December 31, 1995 is included on page 75 in the table entitled "Quarterly
Financial Information". Also included is the "Consolidated Balance Sheet" for
Chemical Bank and Subsidiaries on page 76.
- --------------------------------------------------------------------------------
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
8
<PAGE> 11
Part III
- -----------------------------------------------------------------------
ITEM 10:DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
See Item 13 below.
- -----------------------------------------------------------------------
ITEM 11:EXECUTIVE COMPENSATION
See Item 13 below.
- -----------------------------------------------------------------------
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13 below.
- -----------------------------------------------------------------------
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G (3) to Form 10-K, the information to be provided by
Items 10, 11, 12 and 13 of Form 10-K (other than information pursuant to Rule
402 (i), (k) and (l) of Regulation S-K) are incorporated by reference to the
Corporation's definitive proxy statement for the annual meeting of stockholders,
to be held May 21, 1996, which proxy statement will be filed with Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the close of
the Corporation's 1995 fiscal year.
9
<PAGE> 12
Part IV
- ------------------------------------------------------------------------
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS
1. Financial Statements
The consolidated financial statements, the Notes thereto and the report
thereon listed in Item 8 are set forth commencing on page 42.
2. Financial Statement Schedules
None.
3. Exhibits
2.1 Agreement and Plan of Merger, dated as of August 27, 1995, between
Chemical Banking Corporation and The Chase Manhattan Corporation
(incorporated by reference to Exhibit 2.1 to the Registration
Statement on Form S-4 (File No. 33-63833) of Chemical Banking
Corporation).
2.2 Stock Option Agreement, dated as of August 27, 1995, between
Chemical Banking Corporation, as Issuer, and The Chase Manhattan
Corporation, as Grantee (incorporated by reference to Exhibit 2.2 to
the Registration Statement on Form S-4 (File No. 33-63833) of
Chemical Banking Corporation).
2.3 Stock Option Agreement, dated as of August 27, 1995, between The
Chase Manhattan Corporation, as Issuer, and Chemical Banking
Corporation, as Grantee (incorporated by reference to Exhibit 2.3 to
the Registration Statement on Form S-4 (File No. 33-63833) of
Chemical Banking Corporation.
2.4 Employee Benefits Agreement, dated as of August 27, 1995, between
Chemical Banking Corporation and The Chase Manhattan Corporation
(incorporated by reference to Exhibit 2.4 to the Registration
Statement on Form S-4 (File No. 33-63833) of Chemical Banking
Corporation).
3.1 (a) Restated Certificate of Incorporation of Chemical Banking
Corporation (incorporated by reference to Exhibit 3.1 of the Annual
Report on Form 10-K dated December 31, 1993 of Chemical Banking
Corporation).
3.1 (b) Certificate of Designations of Adjustable Rate Cumulative Preferred
Stock, Series L (incorporated by reference to Exhibit 2 to the
Registration Statement on Form 8-A dated June 6, 1994 of Chemical
Banking Corporation).
3.2 By-laws of Chemical Banking Corporation, as amended (incorporated by
reference to Exhibit 3.2 of the Annual Report on Form 10-K dated
December 31, 1993 of Chemical Banking Corporation).
4.1 (a) Form of Rights Agreement, dated as of April 13, 1989 between
Chemical Banking Corporation and Harris Trust Company of New York,
as amended (incorporated by reference to Exhibit 4 to the Current
Report on Form 8-K of Chemical Banking Corporation dated April 13,
1989).
4.1 (b) Letter of Appointment dated December 23, 1991 of Chemical Banking
Corporation appointing Chemical Bank, as successor Rights Agent
under the Rights Agreement (incorporated by reference to Exhibit
4.13(b) of the Annual Report on Form 10-K dated December 31, 1991 of
Chemical Banking Corporation).
4.2 Form of Indenture dated as of December 1, 1989 between Chemical
Banking Corporation and The Chase Manhattan Bank (National
Association), which Indenture includes the form of Debt Securities
(incorporated by reference to Exhibit 4.9 to the Registration
Statement on Form S-3 (File No. 33-32409) of Chemical Banking
Corporation).
4.3 Form of Indenture dated as of April 1, 1987, as amended and restated
as of December 15, 1992, between Chemical Banking Corporation and
Morgan Guaranty Trust Company of New York, as succeeded to by First
Trust of New York (National Association), as Trustee, which
Indenture includes the form of Subordinated Debt Securities
(incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K dated December 22, 1992 of Chemical Banking Corporation).
4.4 (a) Form of Indenture dated as of June 1, 1982 between Manufacturers
Hanover Corporation and Morgan Guaranty Trust Company of New York,
as succeeded to by First Trust of New York (National Association),
as Trustee, which Indenture includes the form of Debt Securities
(incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-3 (File No. 2-82433) of Manufacturers Hanover
Corporation).
4.4 (b) Form of First Supplemental Indenture dated as of January 15, 1986 to
the Indenture dated as of June 1, 1982 between Manufacturers Hanover
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, relating to the Senior Debt Securities (incorporated by
reference to Exhibit 1 to the Current Report on Form 8-K dated as of
January 29, 1986 of Manufacturers Hanover Corporation).
4.4 (c) Form of Second Supplemental Indenture dated as of March 13, 1991 to
the Indenture dated as of June 1, 1982 between Manufacturers Hanover
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, relating to the Senior Debt Securities (incorporated by
reference to Exhibit 4 to the Current Report on Form 8-K dated March
19, 1991 of Manufacturers Hanover Corporation).
10
<PAGE> 13
- ------------------------------------------------------------------------
4.4 (d) Form of Third Supplemental Indenture dated as of December 31, 1991
among Chemical Banking Corporation, Manufacturers Hanover
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, to the Indenture dated as of June 1, 1982 (incorporated by
reference to Exhibit 4.14(d) of the Annual Report on Form 10-K dated
December 31, 1991 of Chemical Banking Corporation).
4.5 (a) Form of Indenture dated as of June 1, 1985 between Manufacturers
Hanover Corporation and IBJ Schroder Bank and Trust Company, as
Trustee, relating to 8 1/2% Subordinated Capital Notes Due February
15, 1999 (incorporated by reference to Exhibit 4 (b) to the Current
Report on Form 8-K dated February 27, 1987 of Manufacturers Hanover
Corporation).
4.5 (b) Form of First Supplemental Indenture dated as of December 31, 1991
among Chemical Banking Corporation, Manufacturers Hanover
Corporation and IBJ Schroder Bank and Trust Company to the Indenture
dated June 1, 1985 (incorporated by reference to Exhibit 4.18(b) to
the Annual Report on Form 10-K dated December 31, 1991 of Chemical
Banking Corporation).
4.6 (a) Form of Indenture dated as of May 15, 1993 between Margaretten
Financial Corporation and The Bank of New York, as Trustee, relating
to the 6 3/4% Guaranteed Notes due June 15, 2000 (incorporated by
reference to Exhibit 4(a) to Registration Statement on Form S-3 (No.
33-60262) of Margaretten Financial Corporation).
4.6 (b) Form of Supplemental Indenture dated as of July 22, 1994 to the
Indenture dated as of May 15, 1993 among Margaretten Financial
Corporation, Chemical Banking Corporation and The Bank of New York,
as Trustee, and Guarantee dated as of July 22, 1994 by Chemical
Banking Corporation (incorporated by reference to Exhibit 4.34 to
the Current Report on Form 8-K dated September 28, 1994 of Chemical
Banking Corporation).
10.1 Key Executive Performance Plan of Chemical Banking Corporation
(incorporated by reference to Exhibit 10.4 to the Annual Report
on Form 10-K for the year ended December 31, 1994 of Chemical
Banking Corporation).
10.2 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993
(incorporated by reference to Exhibit 10.5 to the Annual Report
on Form 10-K for the year ended December 31, 1994 of Chemical
Banking Corporation).
10.3 Deferred Compensation Plan for Non-Employee Directors of Chemical
Banking Corporation and Chemical Bank, as amended and restated
effective December 15, 1992 (incorporated by reference to Exhibit
10.6 to the Annual Report on Form 10-K for the year ended December
31, 1992 of Chemical Banking Corporation).
10.4 Chemical Banking Corporation Long-Term Stock Incentive Plan, as
amended and restated as of May 19, 1992 (incorporated by reference
to Exhibit 10.7 to the Annual Report on Form 10-K for the year ended
December 31, 1992 of Chemical Banking Corporation).
10.5 Forms of employment agreements as entered into by Chemical Banking
Corporation and certain of its executive officers.
10.6 Post-Retirement Compensation Plan for Non-Employee Directors, as
amended and restated as of December 15, 1992 (incorporated by
reference to Exhibit 10.10 to the Annual Report on Form 10-K for the
year ended December 31, 1992 of Chemical Banking Corporation).
11
<PAGE> 14
- ------------------------------------------------------------------------
10.7 Permanent Life Insurance Options Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K for the year ended
December 31, 1992 of Chemical Banking Corporation).
10.8 Executive Retirement Plan of Chemical Banking Corporation and
Certain Subsidiaries.
10.9 Supplemental Retirement Plan of Chemical Bank and Certain
Affiliated Companies, restated effective January 1, 1993 and as
amended through January 1, 1995.
11.1 Computation of Net Income per Common Share.
12.0 Computation of ratio of earnings to fixed charges.
12.1 Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements.
21.1 List of Subsidiaries of Chemical Banking Corporation.
22.1 Annual Report on Form 11-K of the Chemical Savings Plan of Chemical
Bank and Certain Affiliates (to be filed by amendment pursuant to
Rule 15d-21 under the Securities Exchange Act of 1934).
22.2 Annual Report on Form 11-K of the Margaretten Financial Corporation
Savings Plan (to be filed by amendment pursuant to Rule 15d-21 under
the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
99.0 Supplemental Pro Forma Financial Statements.
The Corporation hereby agrees to furnish to the Commission, upon request, copies
of instruments defining the rights of holders for the following outstanding
nonregistered long-term debt of the Corporation and its subsidiaries: Floating
Rate Subordinated Note Due 1998 of the Corporation; Subordinated Floating Rate
Notes Due 2003 of the Corporation; Floating Rate Note Due 2002 of the
Corporation; Zero-Coupon Note Due 2002 of the Corporation; Serial Zero Coupon
Guaranteed Notes Due 1984-2003 of the Corporation; 8.35% Senior Notes Due
January 27, 2000 of the Corporation; Floating Rate Senior Notes Due October 17,
2001 of the Corporation; Senior Floating Rate Notes Due to 2000 of the
Corporation; 7 1/4% Subordinated Notes Due 2002 of Chemical Bank; 7%
Subordinated Notes Due 2005 of Chemical Bank; Floating Rate Subordinated Notes
Due May 5, 2003 of Chemical Bank; Floating Rate Subordinated Notes Due June 15,
2000 of Chemical Bank; Floating Rate Subordinated Notes Due July 29, 2003 of
Chemical Bank; 6.58% Subordinated Notes Due 2005 of Chemical Bank; 6.70%
Subordinated Notes Due 2008 of Chemical Bank; 6.125% Subordinated Notes Due 2008
of Chemical Bank; Adjustable Rate Notes Due April 1, 2011 of Texas Commerce
Bancshares, Inc.; Floating Rate Subordinated Notes Due 1997 of Manufacturers
Hanover Corporation; Floating Rate Subordinated Capital Notes Due April 1997 of
Manufacturers Hanover Trust Company; and LIBOR Note, Series C, Due March 1998 of
Manufacturers Hanover Corporation. These instruments have not been filed as
exhibits hereto by reason that the total amount of each issue of such securities
does not exceed 10% of the total assets of the Corporation and its subsidiaries
on a consolidated basis.
(b) REPORTS ON FORM 8-K
- - A Current Report on Form 8-K dated October 18, 1995 was filed setting forth
the Corporation's financial results for the 1995 third quarter.
- - A Current Report on Form 8-K dated October 26, 1995 was filed setting forth
certain financial information for The Chase Manhattan Corporation and pro
forma combined financial information for the combined entity giving effect to
the merger.
- - A Current Report on Form 8-K dated December 14, 1995 was filed announcing that
stockholders of the Corporation as well as stockholders of The Chase Manhattan
Corporation had approved the planned merger of the two companies.
- - A Current Report on Form 8-K dated December 19, 1995 was filed announcing that
the Corporation had completed the sale of half of its 40% interest in The CIT
Group.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS Chemical Banking Corporation
SUMMARY OF SELECTED FINANCIAL DATA and Subsidiaries
<TABLE>
<CAPTION>
(in millions, except per share and ratio data)
As of or for the year ended December 31, 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net Interest Income $ 4,689 $ 4,674 $ 4,636 $ 4,598 $ 4,080
Provision for Losses 478 550 1,259 1,365 1,345
Noninterest Revenue 3,766 3,597 4,024 3,026 2,862
Noninterest Expense 5,001 5,509 5,293 4,930 5,307
Income Tax Expense 1,160 918 539 243 136
Income Before Effect of Accounting Changes 1,816 1,294 1,569 1,086 154
Net Effect of Changes in Accounting Principles(a) (11) -- 35 -- --
Net Income $ 1,805 $ 1,294 $ 1,604 $ 1,086 $ 154
- -----------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income Before Effect of Accounting Changes: Primary $ 6.77 $ 4.60 $ 5.57 $ 3.85 $ .11
Income Before Effect of Accounting Changes:
Fully-Diluted 6.51 4.54 5.48 3.81 .11
Net Income Per Share: Primary 6.73 4.60 5.71 3.85 .11
Net Income Per Share: Fully-Diluted 6.47 4.54 5.62 3.81 .11
Book Value at December 31, 42.56 37.88 37.60 32.43 31.02
Market Value at December 31, 58.75 35.88 40.13 38.63 21.25
Cash Dividends Declared(b) 1.94 1.64 1.37 1.20 1.05
- -----------------------------------------------------------------------------------------------------------------------
PRO FORMA(c)
Net Income $ 1,816 $ 1,446 $ 1,305 $ 784 $ 540
Net Income Per Common Share: Primary 6.77 5.20 4.53 2.61 2.21
Net Income Per Common Share:Fully-Diluted 6.51 5.13 4.47 2.61 2.20
Return on Average Common Stockholders' Equity 17.19% 13.94% 13.22% 8.37% 6.74%
- -----------------------------------------------------------------------------------------------------------------------
TOTAL AT YEAR-END
Loans $ 82,143 $ 78,767 $ 75,381 $ 82,010 $ 84,237
Total Assets 182,926(d) 171,423(d) 149,888 139,655 138,930
Deposits 98,417 96,506 98,277 94,173 92,950
Long-Term Debt 7,329 7,991 8,192 6,798 5,738
Total Stockholders' Equity 11,912 10,712 11,164 9,851 7,281
- -----------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on Average Total Assets 1.00%(d) .78%(d) 1.11% .78% .11%
Return on Average Common Stockholders' Equity 17.08 12.32 16.66 12.36 .33
Return on Average Total Stockholders' Equity 16.00 11.80 15.16 11.65 2.02
Common Dividend Payout 28 35 24 32 1,280
Efficiency Ratio(e) 59 63 58 61 65
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Tier 1 Leverage(f) 6.43% 6.26% 7.16% 6.88% 4.81%
Tier 1 Risk-Based Capital Ratio(f) 8.45 8.02 7.93 7.20 5.01
Total Risk-Based Capital Ratio(f) 12.10 11.97 11.86 11.29 8.90
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"), for the accounting for other postretirement
benefits relating to the Corporation's foreign plans. On January 1, 1993, the
Corporation adopted SFAS 106 for its domestic plans, which resulted in a charge
of $415 million and Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109")which resulted in an income tax
benefit of $450 million. (b) The 1991 amount excludes cash dividends of $.29 per
share of Class B Common Stock. The Class B Common Stock was converted into the
Corporation's Common Stock in the first quarter of 1992. (c) The Corporation
recognized its remaining Federal income tax benefits in 1993. The pro forma
section presents the earnings prior to 1994 on a fully-taxed basis and excludes
the impact of the $11 million accounting change in 1995, the $260 million
restructuring charge in 1994, the $115 million merger-related charge and $35
million benefit of accounting changes in 1993 and the $625 million restructuring
charge in 1991. (d) On January 1, 1994, the Corporation adopted Financial
Accounting Standards Board ("FASB") Interpretation No. 39 ("FASI 39"). Excluding
the gross up impact of FASI 39, the return on average assets for 1995 and 1994
was 1.14% and 0.86%, respectively. (e) Excludes restructuring charges,
foreclosed property expense and, in 1994 and 1993, gains on emerging markets
past-due interest bond sales. (f) Risk-based capital and leverage ratios exclude
the assets and off-balance sheet financial instruments of the Corporation's
securities subsidiary, Chemical Securities Inc., as well as the Corporation's
investment in this subsidiary.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
On March 31, 1996, The Chase Manhattan Corporation ("Chase") will merge with and
into Chemical Banking Corporation (the "Corporation"). Upon consummation of the
merger, Chemical Banking Corporation will change its name to "The Chase
Manhattan Corporation" ("New Chase"). (See The Merger with Chase on page 15 for
a further description of the merger).
Because the merger, which will be accounted for as a pooling of interests,
occurred subsequent to December 31, 1995, the information presented in this
Annual Report on Form 10-K does not give effect to the impact of the merger.
Consequently, unless otherwise expressly stated, the information presented
relates to Chemical Banking Corporation prior to the merger with Chase.
Supplemental financial statements that reflect the combined financial condition
and results of operations of the Corporation and Chase, as if the merger had
been in effect for all periods presented, are included on pages 97 through 103.
- --------------------------------------------------------------------------------
- - OVERVIEW
Chemical Banking Corporation (the "Corporation") reported record net income of
$1,805 million for 1995, an increase of 39% from net income of $1,294 million in
1994. The 1994 results included a fourth quarter restructuring charge of $260
million ($152 million after-tax). The Corporation's primary earnings per share
were $6.73 in 1995, an increase of 46% from $4.60 in 1994. On a fully-diluted
basis, earnings per share were $6.47 in 1995, compared with $4.54 for the
prior year.
Excluding the fourth quarter of 1994 restructuring charge, net income for
1995 increased 25% from comparable earnings of $1,446 million in 1994. Primary
earnings per share increased 29% from $5.20 in 1994, while fully-diluted
earnings per share increased 26% from $5.13 a year ago. The 1995 results were
characterized by revenue growth, lower expenses and a disciplined use of
capital.
On December 1, 1994, the Corporation announced a two-year program ("Actions
to Improve Earnings Per Share") designed to produce earnings per share growth of
more than 15% in 1995 and in 1996, an efficiency ratio of 60% in 1995 and 57% by
1996, and a return on common stockholders' equity of 15% in 1995 and 16% by
1996.
The following table compares the Corporation's 1995 actual results with the
goals announced in the Corporation's Actions to Improve Earnings Per Share
program.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Goals 1995 Results
- ----------------------------------------------------------------------
<S> <C> <C>
Earnings Per Share Growth Above 15% 26%
Efficiency Ratio 60% 59%
Return on Common Stockholders'
Equity 15% 17%
Annual Core Revenue Growth 4% 4%
Annual Core Expense Growth Flat Declined 1%
Capital Discipline: Divestitures Completed
Stock buyback In process(a)
- ----------------------------------------------------------------------
(a) Buyback program modified in accordance with
"pooling-of-interests" accounting rules.
</TABLE>
In connection with the capital discipline phase of the program, the
Corporation took the following actions during 1995:
- - The Corporation completed two transactions in the fourth quarter as part of
its plan to free up capital through the sale of non-strategic businesses. On
October 6, 1995, the Corporation sold its banking operations in southern and
central New Jersey to PNC Bank Corp. for approximately $490 million. The sale
did not include the Corporation's franchise in northeastern New Jersey, where
it retains 39 branches and private banking operations. On December 15, 1995,
the Corporation completed the sale of half its 40% interest in the CIT Group
Holdings, Inc. ("CIT") to The Dai-Ichi Kangyo Bank for approximately $430
million. The two transactions resulted in a net after-tax gain of
approximately $25 million.
- - In the 1995 first quarter, the Corporation sold its interest in Far East Bank
and Trust Company in the Philippines, resulting in an $85 million gain ($51
million after tax). This transaction was part of the Corporation's plan to
sell minority interests in overseas entities that are not considered
strategic.
- - The Corporation formed a joint venture with Mellon Bank Corporation that
provides stock transfer and related shareholder services to publicly-held
companies. The joint venture is a 50/50 partnership, with both entities
sharing equally in the joint venture's initial capitalization, including
investments in new technology.
CREDIT PROFILE
The Corporation's nonperforming assets at December 31, 1995 were $906 million, a
decline of 20% from $1,139 million at year-end 1994. As a result of the
continued decline in nonperforming assets, the ratio of the allowance for credit
losses to nonperforming loans reached 278% at December 31, 1995, compared with
267% at December 31, 1994. Nonperforming assets have declined by $5,681 million,
or 86%, from their peak level of $6,587 million in September 1992.
CAPITAL
At December 31, 1995, the Corporation's Tier 1 Capital and Total Capital ratios
were 8.45% and 12.10%, respectively, well in excess of the minimum ratios
specified by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). At December 31, 1995, the Corporation was "well capitalized",
as defined by the Federal Reserve Board.
14
<PAGE> 17
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
- -THE MERGER WITH CHASE
On March 31, 1996, Chase will merge with and into the Corporation. Upon
consummation of the merger, the Corporation will have in excess of $300 billion
in total assets and $20 billion in shareholders' equity making it the largest
banking institution in the United States.
Under the terms of the merger agreement, approximately 186 million shares of
the Corporation's common stock will be issued in exchange for all of the
outstanding shares of Chase's common stock (based on an exchange ratio of 1.04
shares of the Corporation's common stock for each share of Chase's common
stock). All of Chase's series of preferred stock will be exchanged on a
one-for-one basis for a corresponding series of the Corporation's preferred
stock having substantially the same terms as the Chase preferred stock so
converted. The merger will be accounted for as a pooling of interests. The
supplemental financial statements presented on pages 97 through 103 of this
report present the financial condition and results of operations of the
Corporation and Chase as if the merger had been in effect for all periods
presented.
At the time of the merger announcement on August 28, 1995, it was estimated
that annual cost savings from the merger would be $1.5 billion to be achieved
within three years of the merger date by consolidating certain operations and
eliminating redundant costs. In connection with the merger announcement, the
Corporation estimated that it would take a pre-tax merger charge of $1.5
billion, principally as a result of severance expenses associated with the
elimination of approximately 12,000 positions from a combined staff of 75,000
located in 39 states and 51 countries and expenses associated with the
elimination of offices and redundant operations. Since the date of the merger
announcement, the Corporation has continued to evaluate the costs anticipated
to be incurred in connection with the merger, as well as the cost savings from
the merger, and currently anticipates that the merger-related restructuring
charge, as well as the cost savings, will each be higher than originally
announced.
For further information regarding the merger, see Note Two of the Notes to
Consolidated Financial Statements.
- --------------------------------------------------------------------------------
- -RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET INTEREST INCOME
Year Ended December 31, (in millions) 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C>
Net Interest Income:
Domestic $ 3,887 $ 3,818
Overseas 802 856
- -----------------------------------------------------------------------
Total Net Interest Income 4,689 4,674
Taxable Equivalent Adjustment 26 24
- -----------------------------------------------------------------------
Net Interest Income-Taxable Equivalent Basis(a) $ 4,715 $ 4,698
- -----------------------------------------------------------------------
Average Interest-Earning Assets:
Domestic $104,060 $ 96,448
Overseas 37,555 33,597
- -----------------------------------------------------------------------
Total Average Interest-Earning Assets: $141,615 $130,045
- -----------------------------------------------------------------------
Net Yield on Interest-Earning Assets:
Domestic 3.76% 3.98%
Overseas 2.14 2.55
- -----------------------------------------------------------------------
Consolidated Net Yield on Interest-Earning Assets 3.33% 3.61%
- -----------------------------------------------------------------------
</TABLE>
(a) Reflected on a taxable equivalent basis in order to permit comparisons of
yields on tax-exempt and taxable assets.
Reported net interest income for 1995 was $4,689 million, compared with
$4,674 million in 1994. The 1995 results were affected by the securitization of
$2.25 billion in credit card receivables and the sale of certain New Jersey
operations in the fourth quarter, which reduced 1995 net interest income by $49
million and $33 million, respectively. Excluding the impact of these factors,
the improvement in 1995 when compared with the prior year was primarily due to
an $11.6 billion increase in interest-earning assets (led by growth in consumer
loans) and a reduction in the cost of carrying nonperforming loans, partially
offset by narrower spreads.
The interest rate spread, which is the difference between the average rate on
interest-earning assets and the average rate on interest-bearing liabilities,
was 2.59% for 1995, compared with 3.07% for 1994. 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 3.33% in 1995, compared with 3.61% in 1994. The
declines in 1995 principally reflected narrower loan spreads due to increased
pressure on loan pricing, the impact of higher interest rates on wholesale
funding, and the securitization of credit card receivables. These factors
were partially offset by the reduction in nonperforming loans and an increased
contribution from noninterest-bearing funds.
The following table reflects the composition of interest-earning assets as a
percentage of total earning assets as well as the interest rate spread and the
net yield on interest-earning assets for the periods indicated.
<TABLE>
<CAPTION>
AVERAGE INTEREST-EARNING ASSET MIX
Year Ended December 31, (in billions) 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer Loans $ 33.2 24% $ 27.3 21%
Commercial Loans 48.4 34 47.9 37
- ---------------------------------------------------------------------------
Total Loans 81.6 58 75.2 58
Securities 29.9 21 26.2 20
Liquid Interest-Earning Assets 30.1 21 28.6 22
- ---------------------------------------------------------------------------
Total Interest-Earning Assets $141.6 100% $130.0 100%
- ---------------------------------------------------------------------------
Interest Rate Spread 2.59% 3.07%
- ---------------------------------------------------------------------------
Consolidated Net Yield on
Interest-Earning Assets 3.33% 3.61%
- ---------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The Corporation's average total loans in 1995 were $81.6 billion, compared
with $75.2 billion in 1994. The increase reflected the continued growth in
consumer loans (principally from residential mortgage and credit card
activities) and commercial lending, partially offset by a reduction in the
commercial real estate portfolio.
The growth in interest-earning assets was funded by a $9.6 billion increase
in interest-bearing liabilities. For 1995, average interest-bearing liabilities
were $121.7 billion, compared with $112.1 billion for 1994, principally due to a
higher level of foreign interest-bearing deposits and Federal funds purchased
and securities sold under repurchase agreements. The Corporation utilizes
repurchase agreements as a source of short-term funding for trading-related
positions and for its securities portfolio.
The negative impact on net interest income from nonperforming loans
(excluding nonperforming loans held for accelerated disposition) in 1995 was $53
million, compared with $65 million in 1994, reflecting the continued reduction
in the level of the Corporation's nonperforming loans.
The favorable impact on net interest income from the Corporation's
asset/liability derivative activities, whereby derivative instruments are used
in order to alter the yield on certain of the Corporation's assets and
liabilities, was $28 million for 1995, compared with $190 million for 1994. For
a further discussion of derivative instruments used in the Corporation's
asset/liability management ("ALM") activities as well as the Corporation's
sensitivity to interest rates, see the Asset/Liability Management section on
pages 32-36.
For additional information on average balances and net interest income, see
the Average Consolidated Balance Sheets, Interest and Rates on pages 78 to 83.
PROVISION FOR LOSSES
The provision for losses in 1995 was $478 million, compared with $550 million in
1994, as a result of a decline in loan net charge-offs due to an overall
improvement in the Corporation's credit profile. For a discussion of the
Corporation's net charge-offs, see page 24.
NONINTEREST REVENUE
Noninterest revenue totaled $3,766 million in 1995, an increase of 5% when
compared with 1994. The 1995 results reflected increased revenues from corporate
finance and syndication fees, fees for other financial services, credit card
revenue and securities gains. These increases were partially offset by declines
in trust and investment management fees, trading revenue, and losses on emerging
markets bond sales.
The following table presents the components of noninterest revenue for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Corporate Finance and Syndication Fees $ 531 $ 405
Trust and Investment Management Fees 379 421
Credit Card Revenue 378 315
Service Charges on Deposit Accounts 297 300
Fees for Other Financial Services 850 833
- -------------------------------------------------------------
Total Fees and Commissions 2,435 2,274
Trading Revenue 624 645
Securities Gains 119 66
Other Revenue 588 612
- -------------------------------------------------------------
Total Noninterest Revenue $3,766 $3,597
- -------------------------------------------------------------
</TABLE>
FEES AND COMMISSIONS
Corporate finance and syndication fees include revenue from managing and
syndicating loan arrangements; providing financial advisory services in
connection with leveraged buyouts, recapitalizations and mergers and
acquisitions; and arranging private placements and underwriting debt and equity
securities. Corporate finance and syndication fees in 1995 reached a record
level of $531 million, a 31% increase from the prior year, reflecting increases
in global investment banking activities, especially loan syndications and new
issues of high-yield securities. During 1995, the Corporation acted as agent or
co-agent for approximately $423 billion of syndicated credit facilities,
compared with $319 billion in 1994, a reflection of the Corporation's large
client base and strong emphasis on distribution.
Trust and investment management fees are primarily comprised of corporate,
institutional and private banking (personal trust) activities provided to
corporations and individuals on a global basis. The Corporation's corporate and
institutional trust area provides customers with a full range of services such
as trustee and securities processing, as well as investment advisory and
administrative functions for customers' pension and other employee benefit
plans. The Corporation's private banking area provides a full range of services
for high-net worth individuals. The Corporation's family of proprietary mutual
funds, The Hanover Funds, are managed within the private banking area.
The following table reflects the components of trust and investment
management fees for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C>
Trust and Investment Management Fees:
Personal Trust and Investment Management Fees $206 $206
Corporate and Institutional Trust Fees 131 176
Other, primarily Foreign Asset Management 42 39
- -------------------------------------------------------------------------
Total Trust and Investment Management Fees $379 $421
- -------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
Personal trust and investment management fees in 1995 remained consistent
with the prior year due to an increase in assets under management, offset by
pricing pressures. Corporate and institutional trust fees decreased 26% from the
1994 level largely due to the absence of $46 million in fees in 1995 related to
the joint venture with Mellon Bank Corporation. As a result of the shareholder
services joint venture between the Corporation and Mellon Bank Corporation,
effective January 1, 1995, revenues and expenses of the affected business units
were reflected on an equity basis within other revenue.
Credit card revenue increased $63 million from the 1994 level due to an
increased volume of retail credit card receivables from a growing cardholder
base, as well as increased fees related to the securitization of $2.25 billion
in credit card outstandings in the fourth quarter of 1995. For a further
discussion of the credit card portfolio and related securitization activity, see
page 25.
Fees for other financial services for 1995 were $850 million, an increase of
$17 million from a year ago. The following table reflects the components of fees
for other financial services for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
Fees in Lieu of Compensating Balances $187 $203
Commissions on Letters of Credit and Acceptances 154 151
Loan Commitment Fees 87 86
Mortgage Servicing Fees 94 79
Other 328 314
- ----------------------------------------------------------------------
Total Fees for Other Financial Services $850 $833
- ----------------------------------------------------------------------
</TABLE>
Mortgage servicing fees increased $15 million in 1995 reflecting a higher
level of mortgage servicing volume resulting from the acquisition of Margaretten
Financial Corporation ("Margaretten") on July 1, 1994, as well as additions to
the portfolio from mortgage originations. The Corporation's residential mortgage
servicing portfolio increased $1.9 billion to $54.6 billion in 1995. For a
further discussion on the Corporation's mortgage banking activities, see the
residential mortgage section on page 25.
The improvement in other fees for 1995 reflected higher brokerage commissions
of $17 million, due to higher transaction volume at the Corporation's discount
brokerage firm, Brown and Company.
Fees in lieu of compensating balances decreased by $16 million in 1995 when
compared with 1994. Customers often pay for cash management or other banking
services by maintaining noninterest-bearing deposits. As interest rates
increase, the required compensating balance for a given level of service will
decrease. As a result, during 1995, when short-term interest rates were higher
than in 1994, a greater volume of customers maintained a compensating balance in
lieu of paying a fee for services.
TRADING REVENUE
The following table sets forth the components of total trading-related revenue
for 1995 and 1994. Net interest income related to trading activities should be
reviewed in conjunction with the trading revenue amounts in the following table.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Trading Revenue $624 $645
Net Interest Income Impact(a) 177 15
- -----------------------------------------------------------
Total Trading Related Revenue $801 $660
- -----------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $275 $384
Foreign Exchange Revenues(c) 291 157
Debt Instruments and Other(d) 235 119
- -----------------------------------------------------------
Total Trading Related Revenue $801 $660
- -----------------------------------------------------------
</TABLE>
(a) Net interest income attributable to trading activities includes accruals on
interest-earning and interest-bearing trading-related positions as well as a
management allocation reflecting the funding cost or benefit associated with
trading positions.
(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.
The $109 million decrease in revenue from interest rate contracts during 1995
was primarily due to unexpected volatility in certain European interest rate
markets. During 1995, combined foreign exchange revenue increased $134 million,
benefiting from anticipated volatility in the currency markets (in particular
from changes in the Yen, Deutsche mark and Pound Sterling) and from the
Corporation's market-making activities, which increase during periods of
volatility. The 1994 foreign exchange amount reflects a $70 million loss
resulting from unauthorized foreign exchange transactions involving the Mexican
peso. The $116 million increase in combined debt instruments and other revenue
during 1995 was primarily due to a strong performance in high-yield securities
as well as increased stability in the prices of emerging markets securities
during the year.
Trading revenues are affected by many factors, including volatility of
currencies and interest rates, the volume of transactions executed by the
Corporation on behalf of its customers, the Corporation's success in proprietary
positioning, the improvements in its credit ratings, and the steps taken by
central banks and governments which affect financial markets. The Corporation
expects its trading revenues will fluctuate as these factors will vary from
period to period.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
OTHER NONINTEREST REVENUE
The following table presents securities gains and the composition of other
revenue for 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C>
Securities Gains $ 119 $ 66
- ---------------------------------------------------------------------
Other Revenue:
Revenue from Equity-Related Investments $ 378 $362
Net Gains (Losses) on Emerging Markets
Securities Sales (86) 127
Gain on the Sale of the Corporation's Investment
in Far East Bank & Trust Company 85 --
Residential Mortgage Originations/
Sales Activities 55 (15)
All Other Revenue 156 138
- ---------------------------------------------------------------------
Total Other Revenue $ 588 $612
- ---------------------------------------------------------------------
</TABLE>
Securities gains were $119 million in 1995, compared with $66 million in
1994. The higher level of securities gains, all of which resulted from sales
from the available-for-sale portfolio, were made in connection with the
Corporation's ALM activities. Included in the 1995 results was a $13 million
permanent impairment loss on Barings Bank PLC securities held by the Corporation
and an $11 million loss on available-for-sale securities sales recorded at
Chemical Bank New Jersey as part of the repositioning of the retained branches.
For further discussion of the Corporation's securities, see Note Four of the
Notes to Consolidated Financial Statements.
The Corporation's other revenue was $588 million in 1995, compared with $612
million in 1994. Revenue from equity-related investments, which includes income
from venture capital activities and emerging markets investments, was $378
million in 1995, an increase of 4% from 1994. There was no significant
individual transaction gain recognized in the 1995 results, while the 1994
results included the recognition of a $78 million gain related to a single
emerging market equity investment. At December 31, 1995, the Corporation had
equity-related investments with a carrying value of $2.0 billion. Average
revenue from equity-related investments was approximately $93 million per
quarter, based upon revenues during the last eight quarterly periods.
The 1995 results included net losses of $86 million related to the
disposition of emerging market available-for-sale securities. Such dispositions
are part of the Corporation's ongoing efforts to manage its exposure in its
available-for-sale portfolios. The 1994 results included net gains of $127
million from sales of emerging markets past-due interest bonds.
Residential mortgage originations/sales activities in 1995 increased by $70
million from 1994 results primarily due to a more favorable interest rate
environment in 1995 and the impact of the adoption in 1995 of Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"). For a further discussion of SFAS 122, see Note One of the
Notes to Consolidated Financial Statements on page 47.
All other revenue includes the Corporation's share of net income from its
interest in CIT which, after purchase accounting adjustments, was $77 million in
1995, an increase from $73 million in 1994. On December 15, 1995, the
Corporation reduced its interest in CIT from 40% to 20%.
NONINTEREST EXPENSE
Noninterest expense in 1995 was $5,001 million, compared with $5,509 million in
1994. Included in the results for 1994 was a $260 million restructuring charge
taken in connection with the Corporation's Actions to Improve Earnings Per
Share, and a $48 million restructuring charge related to the closing of 50 New
York State branches. Excluding the restructuring charges in 1994, noninterest
expense for 1995 decreased by $200 million, or 4% from 1994.
The improvement from the prior year reflects the benefits of certain
expense-reduction initiatives announced on December 1, 1994 by the Corporation
as part of its Actions to Improve Earnings Per Share. Also contributing to the
reduction in noninterest expense in 1995 was lower FDIC premium expense of $83
million reflecting a reduction in the FDIC assessment rate and the sale of
Chemical New Jersey Holdings to PNC Bank Corp. ("PNC") which resulted in a
noninterest expense reduction of approximately $31 million. Additionally, as a
result of the shareholder services joint venture agreement with Mellon Bank
Corporation, approximately $67 million of 1995 expenses associated with the
stock transfer and related shareholder servicing operations were recorded on an
equity basis within noninterest revenue. The decrease in noninterest expense
from 1994 was partially offset by the inclusion of a full year of noninterest
expense relating to Margaretten (compared with only six months of noninterest
expense in 1994), as Margaretten was acquired in July 1994.
The following table presents the components of noninterest expense for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Salaries $2,332 $2,205
Employee Benefits 434 439
Occupancy Expense 520 573
Equipment Expense 395 382
Foreclosed Property Expense (23) 41
Restructuring Charge -- 308
Other Expense 1,343 1,561
- -------------------------------------------------------------
Total Noninterest Expense $5,001 $5,509
- -------------------------------------------------------------
</TABLE>
18
<PAGE> 21
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
The Corporation's efficiency ratio improved to 59.4% in 1995 compared with
63.4% in 1994. Achieving an efficiency ratio of 60% in 1995 was a primary goal
of the Corporation's Actions to Improve Earnings Per Share. The computation of
the efficiency ratio (noninterest expense as a percentage of the total of net
interest income and noninterest revenue) excludes any restructuring charges,
foreclosed property expense and, in 1994, gains on emerging markets-related
past-due interest bond sales.
SALARIES AND EMPLOYEE BENEFITS
The increase in salaries in 1995 was primarily due to higher incentive costs as
a result of improved earnings for most businesses and a competitive recruiting
environment for specialized skills at selected businesses. Also contributing to
the increase in salaries was the vesting of various stock incentive awards
due to the improvement in the Corporation's stock price during 1995, the
continued growth in the Corporation's securities underwriting business and the
additional staff costs resulting from the 1994 Margaretten acquisition.
Partially offsetting these increases were the impact of personnel reductions
undertaken in 1995 and lower salaries expense as a result of the sale of the
southern and central New Jersey banking operations of Chemical New Jersey
Holdings and the equity accounting for the shareholder services joint venture
with Mellon Bank Corporation.
The following table presents the Corporation's full-time equivalent employees
at the dates indicated.
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Domestic Offices 35,646 38,706
Foreign Offices 3,432 3,424
- --------------------------------------------------------------
Total Full-Time Equivalent Employees 39,078 42,130
- --------------------------------------------------------------
</TABLE>
At December 31, 1995, there were approximately 2,800 positions eliminated
from the 3,700 positions targeted for elimination as part of the Corporation's
Actions to Improve Earnings Per Share.
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense was $520 million in 1995, a decrease of $53 million from 1994.
The decline from 1994 is largely the result of the consolidation of operational
and branch facilities and other expense-reduction initiatives.
Equipment expense in 1995 was $395 million, compared with $382 million in
1994. The higher level of equipment expense in 1995 was due to continued
technology enhancements to support the Corporation's investment in certain key
businesses (in particular its trading and consumer banking businesses).
FORECLOSED PROPERTY EXPENSE
Foreclosed property expense was a credit of $23 million in 1995, compared with
an expense of $41 million in 1994, reflecting the significant progress in
reducing the Corporation's nonperforming real estate portfolio. The 1995 amount
included proceeds received by Texas Commerce on the sale of certain foreclosed
properties previously written down. Included in the 1994 results was a $12
million charge in conjunction with the transfer of certain real estate assets to
the held-for-accelerated-disposition category.
RESTRUCTURING CHARGE
As part of the Actions to Improve Earnings Per Share announced in the fourth
quarter of 1994, the Corporation recorded a $260 million restructuring charge.
This charge was related to severance and other termination-related costs of $138
million associated with the elimination of 3,700 positions and costs of $122
million for the disposition of certain facilities, premises and equipment, and
the termination of leases. The staff reductions are tied to specific expense
reduction initiatives such as commercial lending re-engineering, branch network
rationalization, and the process improvement program at Texas Commerce and have
occurred within all business sectors of the Corporation.
During 1994, the Corporation also recorded a restructuring charge of $48
million related to the closing of 50 New York branches and a staff reduction of
650. For a further discussion of the Corporation's restructuring charges
included in noninterest expense, see Note Sixteen of the Notes to Consolidated
Financial Statements.
OTHER NONINTEREST EXPENSE
The following table presents the components of other expense for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Other Expense:(a)
Professional Services $ 205 $ 225
Marketing Expense 178 186
FDIC Assessments 77 160
Telecommunications 148 153
Amortization of Intangibles 101 115
All Other 634 722
- -------------------------------------------------------------
Total Other Expense $1,343 $1,561
- -------------------------------------------------------------
</TABLE>
(a) Certain prior period amounts have been reclassified to conform with the
current year's presentation.
Professional services, marketing expense and telecommunications expense all
decreased in 1995 when compared with 1994 primarily as a result of the
Corporation's sourcing and other expense-reduction initiatives. FDIC
assessments declined $83 million during 1995 reflecting a reduction in FDIC
assessment rates. Amortization of intangibles decreased by $14 million during
1995 due in part to the sale of the southern and central New Jersey banking
operations of Chemical New Jersey Holdings. All other expense, which includes
various smaller expense categories such as stationery and other supplies,
postage, shipping, travel and insurance, decreased by 12% in 1995 when compared
with 1994 reflecting the Corporation's sourcing and other expense-reduction
initiatives.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
INCOME TAXES
The following table presents the Corporation's income tax expense and effective
tax rate for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, ($ in millions) 1995 1994
- ----------------------------------------------------------
<S> <C> <C>
Income Tax Expense $1,160 $ 918
Effective Tax Rate 39.0% 41.5%
- ----------------------------------------------------------
</TABLE>
Included in the 1995 income tax expense is a tax benefit of approximately $25
million related to the sale of Chemical New Jersey Holdings and half of the
Corporation's 40% interest in CIT.
For additional information, refer to Note Seventeen of the Notes to
Consolidated Financial Statements.
- --------------------------------------------------------------------------------
- - LINES OF BUSINESS RESULTS
The Corporation conducts domestic and international financial services
businesses through various bank and non-bank subsidiaries. At December 31, 1995,
the principal bank subsidiaries of the Corporation were Chemical Bank and Texas
Commerce Bank National Association.
Lines-of-Business Results: Profitability of the Corporation is tracked with an
internal management information system that produces lines-of-business
performance data for all sectors. A set of management accounting policies has
been developed and implemented to ensure that the reported results reflect the
economics of their businesses. Lines-of-business results are subject to
restatement as appropriate whenever there are refinements in management
reporting policies or changes to the management organization. Thus, certain
amounts reported in prior periods have been restated to conform with the current
1995 presentation. Lines-of-business results are subject to further restatements
as may be necessary to reflect future changes in internal management reporting.
Guidelines exist for assigning expenses that are not directly incurred by
businesses, such as overhead and taxes, as well as for allocating shareholders'
equity and the provision for losses, utilizing a risk-based methodology.
Noninterest expenses of the Corporation are fully allocated to the business
units except for special corporate one-time charges. Management has developed a
risk-adjusted capital methodology that quantifies different types of risk -
credit, market, operating/business - within various businesses and assigns
capital accordingly. Credit risk is computed using a risk-grading system that is
consistently applied throughout the Corporation. A long-term expected tax rate
is assigned in evaluating the Corporation's businesses.
Commencing in 1995, Texas Commerce's results are reported on a management
accounting basis instead of a legal entity basis. The 1994 results for Texas
Commerce have been restated to conform to the current presentation. The results
for Texas Commerce are included within the Consumer and Relationship Banking
results.
<TABLE>
<CAPTION>
Consumer and Terminal
Global Bank Relationship Banking (LDC and Real Estate) Total(a)
Year Ended December 31,
(in millions, except ratios) 1995 1994 1995 1994 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 1,119 $ 1,055 $ 3,686 $ 3,687 $ 38 $ 80 $ 4,689 $ 4,674
Noninterest Revenue 1,896 1,538 1,831 1,767 (14) 276 3,766 3,597
Noninterest Expense 1,366 1,292 3,574 3,779 51 58 5,024 5,468(b)
- ------------------------------------------------------------------------------------------------------------------------------
Operating Margin 1,649 1,301 1,943 1,675 (27) 298 3,431 2,803
Credit Provision(c) 152 194 543 467 39 165 478 550
Foreclosed Property Expense (1) (1) (33) (26) 3 53 (23) 41
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes 1,498 1,108 1,433 1,234 (69) 80 2,976 2,212
Income Taxes (Benefits) 567 418 562 506 (22) 38 1,160 918
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before
Accounting Changes 931 690 871 728 (47) 42 1,816 1,294
Accounting Changes (SFAS 106) -- -- -- -- -- -- (11) --
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 931 $ 690 $ 871 $ 728 $ (47) $ 42 $ 1,805 $ 1,294
- ------------------------------------------------------------------------------------------------------------------------------
Average Assets $109,797 $100,342 $66,824 $63,191 $6,617 $8,199 $180,697 $166,679
Return on Common Equity 23.6% 16.2% 19.3% 16.4% NM NM 17.1% 12.3%
Return on Assets .85% .69% 1.30% 1.15% NM NM 1.00% 0.78%
Efficiency Ratio(d) 45.3% 49.8% 64.8% 68.4% NM NM 59.4% 63.4%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total column includes Corporate sector. See description of Corporate sector
on page 22.
(b) Includes restructuring charges of $308 million in 1994.
(c) The provision is allocated to each sector utilizing a credit risk
methodology which is computed using a risk-grading system for that sector's loan
portfolio. The difference between the risk-based provision and the Corporation's
provision is included in the Corporate sector.
(d) 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, in 1994, gains on
emerging markets past-due interest bond sales.
NM - Not meaningful.
20
<PAGE> 23
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
GLOBAL BANK
The Global Bank provides banking, financial advisory, trading and investment
services to corporations and public-sector clients worldwide through a network
of offices in 35 countries, including major operations in all key international
financial centers.
The Global Bank is comprised of three principal business lines: Global
Banking & Investment Banking (client management, loan syndications and portfolio
investments; high-yield finance; venture capital; mergers and acquisitions and
other advisory services); Global Markets (foreign exchange dealing; derivatives
trading and structuring, risk management and sales; securities structuring,
underwriting, trading and sales; and management of the Corporation's funding and
securities investment activities); and Regional Centers (all wholesale banking;
investment banking; capital markets and other activities outside of the United
States and the major cross-border financial centers). The Global Bank seeks to
optimize its risk profile and profitability by emphasizing originations,
underwriting, distribution, and risk management products.
The Global Bank's net income in 1995 was $931 million, an increase of $241
million from 1994. The sector's return on equity in 1995 was 23.6%, compared
with 16.2% in 1994. The increase in the 1995 results reflects higher corporate
finance and syndication fees, the gain related to the sale of the Corporation's
investment in Far East Bank and Trust Company and securities gains, partially
offset by lower trading revenue.
The following table sets forth the significant components of the Global
Bank's total revenue by business for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Total Revenue:
Global Banking & Investment Banking $ 1,212 $ 961
Global Markets 1,092 1,122
Regional Centers 617 437
- -------------------------------------------------------------
</TABLE>
Revenue for Global Banking & Investment Banking increased in 1995 by $251
million when compared with 1994. The increase from last year was primarily due
to higher fee revenue as a result of the Corporation's leading market share in
the loan syndication business and increased revenue from equity-related
investments in 1995.
Revenue for Global Markets decreased in 1995 when compared with 1994,
primarily as a result of a $69 million decline in trading revenue, reflecting
unexpected volatility of interest rates in the foreign trading markets. The
decrease in revenue from last year was also affected by lower net interest
income due to higher short-term interest rates in 1995.
Revenue for Regional Centers increased $180 million in 1995, when compared
with 1994. Increased commercial loan volume and improved interest rate
environments, primarily in Latin America, increased net interest income by $42
million for 1995, compared with 1994 results. Trading revenue increased $34
million, primarily in Europe. Also contributing to the increase in revenue for
1995 was the gain related to the sale of the Corporation's interest in Far East
Bank and Trust Company.
CONSUMER AND RELATIONSHIP BANKING
Consumer and Relationship Banking includes Metropolitan Banking (consumer
banking and commercial and professional banking); Retail Card Services; Mortgage
Bank; National Consumer Finance (home secured lending, student lending, and
other consumer lending); Middle Market (regional commercial banking); Private
Banking; Geoserve (cash management, funds transfer, trade, corporate trust and
securities services worldwide); and Texas Commerce. The Corporation maintains a
leading market share position in serving the financial needs of middle market
commercial enterprises and small businesses in the New York metropolitan area.
Private Banking serves a high net-worth clientele with banking, advisory and
investment services. Texas Commerce is a leader in providing financial products
and services to businesses and individuals throughout Texas and is the primary
bank for more large corporations and middle market companies than any other bank
in Texas.
On October 6, 1995, the Corporation sold Chemical New Jersey Holdings, Inc.
to PNC for approximately $490 million. The sale did not include Chemical's
franchise in northeastern New Jersey, where it retains 39 branches and its
private banking operations. For a further discussion of this sale, see Other
Events section on Page 39.
For 1995, Consumer and Relationship Banking's net income was $871 million, an
increase of $143 million from the prior year. The 1994 results included a $48
million restructuring charge ($28 million after-tax) related to the closing of
50 New York branches and a staff reduction of 650. Excluding the restructuring
charge, Consumer and Relationship Banking's earnings for 1995 increased by $115
million when compared with 1994 due to lower noninterest expense of $157 million
(relating to the reduced FDIC premium expense coupled with the positive effects
of the Corporation's Actions to Improve Earnings Per Share program), higher
noninterest revenue of $64 million and lower foreclosed property expense of $7
million. These factors were partially offset by a higher credit provision of $76
million. The higher credit provision in 1995 reflects the substantial growth in
credit card outstandings.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table sets forth the significant components of Consumer and
Relationship Banking's total revenue by business for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Total Revenue:
Metropolitan Banking $1,089 $1,041
Retail Card Services 1,126 1,020
Mortgage Bank 240 212
National Consumer Finance 211 211
Middle Market 567 571
Private Banking 323 307
Geoserve 700 688(a)
Texas Commerce 1,126 1,087
- -----------------------------------------------------------
</TABLE>
(a) Effective January 1, 1995, revenues and expenses of the business units that
contributed to the shareholder services joint venture with Mellon Bank
Corporation were reflected on an equity basis within the Geoserve line. The 1994
amounts have been restated to disclose revenue related to the shareholder
services joint venture on a comparable basis.
Metropolitan Banking had revenue growth of $48 million in 1995, an increase
of 5% when compared with 1994. The improvement in 1995 was due mainly to
favorable deposit spreads, targeted customer segmentation and repricing
initiatives.
Retail Card Services revenue increased $106 million, or 10%, in 1995,
compared with 1994. An increase in Shell MasterCard outstandings and resulting
strong fee growth contributed to the increase in revenue. In the fourth quarter
of 1995, Retail Card Services securitized approximately $2.25 billion of credit
card receivables which reduced net interest income. However, this decrease was
offset by increased fee revenue and a lower provision for credit losses. Total
outstandings for Retail Card Services at the 1995 year-end were $8.7 billion,
compared with $9.3 billion at the end of 1994. The decrease in 1995 reflects the
aforementioned securitization.
The Mortgage Bank continues to be faced with fierce competition due to
industry overcapacity and higher interest rates, both of which have adversely
affected the 1995 results. Despite these factors, during 1995 the Mortgage Bank
recorded increased revenues when compared with 1994, primarily due to the
implementation of SFAS 122 as well as higher servicing-related revenues as a
result of the acquisition of Margaretten.
National Consumer Finance revenues have remained relatively stable in 1995,
when compared with 1994. National Consumer Finance outstandings increased in
1995 by more than 18% over 1994. Despite the increase in outstandings,
competitive pricing pressures largely offset the favorable impact from the
higher level of outstandings.
Middle Market revenues were essentially flat for 1995, when compared with
1994. Middle Market experienced favorable deposit spreads and a reduction in the
level of nonperforming assets in 1995; however, loan spreads and deposit volumes
have decreased primarily due to heightened competition.
Private Banking revenue increased $16 million, or 5%, in 1995, compared with
1994. Private Banking revenue for 1995 includes the adverse impact of an $11
million loss from the sale of Barings Bank PLC securities. Excluding this loss,
Private Banking's revenues for 1995 would have reflected a 9% increase over
1994. These positive results are attributable to loan and deposit growth,
favorable deposit spreads and higher fees generated by greater volume in the
brokerage business for 1995.
Geoserve revenues increased $12 million in 1995, when compared with 1994. The
improvement in 1995 reflects a 6% increase experienced by treasury management
products, partially offset by a decline in global securities and trust revenue.
Texas Commerce revenue increased $39 million, or 4%, in 1995, compared with
1994. The improvement in 1995 was due to higher net interest income resulting
from growth in loan volume and more favorable interest rate spreads.
Also, contributing to the increase in earnings for 1995 was lower foreclosed
property expense. The substantial decrease in foreclosed property expense is
attributable to the improvement in the Texas real estate market and payments
received related to certain foreclosed properties that were previously written
down.
TERMINAL BUSINESSES (LDC AND REAL ESTATE)
Terminal Businesses represents discontinued portfolios which are primarily the
refinancing country debt portfolio and the Corporation's commercial real
estate nonperforming portfolio, primarily at Chemical Bank. Terminal businesses
had net losses of $47 million for 1995 compared with net income of $42 million
in 1994. The unfavorable 1995 results, when compared with 1994, were primarily
due to losses of $86 million related to the disposition of available-for-sale
emerging markets securities, compared with gains of $127 million from sales of
such securities in 1994. Net interest income decreased $42 million in 1995 due
to a decline in loan outstandings. The improvements in credit provision and
foreclosed property expense reflects the significant progress made in managing
the Corporation's real estate portfolio. Total nonperforming assets for this
category at December 31, 1995 were $207 million, down $79 million from $286
million at December 31, 1994. The improvement in nonperforming asset levels
from last year is the result of increased liquidity in the real estate markets
and successful workout activities.
CORPORATE
Corporate includes the management results attributed to the parent company; the
Corporation's investment in CIT; and some effects remaining at the corporate
level after the implementation of management accounting policies, including
residual credit provision and tax expense. On December 15, 1995, the Corporation
completed the sale of half its 40% interest in the CIT to The Dai-Ichi Kangyo
Bank for approximately $430 million. Corporate had net income of $50 million for
1995, which includes an $11 million after-tax charge due to the adoption of SFAS
106 for foreign employees and a $6 million writedown associated with certain
nonperforming residential mortgages. In 1994, the net loss of $166 million
included a $152 million after-tax restructuring charge associated with the
Actions to Improve Earnings Per Share.
22
<PAGE> 25
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
- - CREDIT RISK MANAGEMENT
Credit risk for both lending-related products and derivative and foreign
exchange products represents the possibility that a loss may occur if a borrower
or counterparty fails to honor fully the terms of a contract. Under the
direction of the Chief Credit Officer, risk policies are formulated, approved
and communicated throughout the Corporation. The Credit Risk Management
Committee, chaired by the Chief Credit Officer, is responsible for maintaining a
sound credit process, addressing risk issues, and reviewing the portfolio.
The Corporation's credit risk management is an integrated process operating
concurrently at the transaction and portfolio levels. For credit origination,
business professionals formulate strategies, target markets, and determine
acceptable levels of risk. Credit executives work with business originators
during the underwriting process to review adherence to risk policies.
Portfolio diversification lowers the Corporation's risk profile. In addition
to the diversification achieved by the expanse of the Corporation's businesses,
the Corporation diversifies by securitizing and selling credit assets such as
loans, thereby seeking to avoid unacceptable risk concentrations.
Loan Portfolio: The consumer and commercial segments of the portfolio have
different risk characteristics and different techniques are utilized to measure
and manage their respective credit risks. The consumer loan risk management
process utilizes sophisticated credit scoring and other analytical methods to
differentiate risk characteristics. Risk management procedures include
monitoring both loan origination credit standards and loan performance quality
indicators. The consumer portfolio review process also includes evaluating
product-line performance, geographic diversity and consumer economic trends.
Within the commercial segment, each credit facility is risk graded.
Facilities are subject to hold targets based on risk, and are often syndicated
in order to lower potential concentration risks. Syndication consists of
arranging a credit facility between a borrower and a group of lenders, in which
each lender assumes a share of the facility thereby limiting the Corporation's
risk with regard to the facility. The syndicated portions are not recorded on
the Corporation's consolidated balance sheet. These activities enable the
Corporation to function as a financial intermediary between other suppliers and
users of funds. In contrast, loan sales occur only after a loan is funded by the
Corporation. Such loans are generally sold to maturity and without recourse to
the Corporation.
Real estate problem assets are managed in special units staffed for
restructuring, workout and collection. The Corporation reassesses the market
value of real estate owned for possible impairment on a continual basis.
The loan review process includes industry specialists and country-risk
managers who provide expert insight into the portfolio. Industries and countries
are also evaluated in a process which is incorporated into credit-risk decisions
through the facility-risk grading system and by direct consultation with
originating officers.
Overseas extensions of credit require not only the normal credit-risk
analysis associated with the decision to extend financing to a particular
customer, but also an assessment of country risk. Country risk arises from
economic, social and political factors that might affect a borrower's ability to
repay in the currency of the extension of credit. Cross-border credit exposures
are those that borrowers must repay in a currency other than their local
currency or to a lender in a different country. One of the major risk factors
associated with cross-border credit exposures is the possibility that a
country's foreign exchange reserves may be insufficient or unavailable to permit
timely repayment by borrowers domiciled in that country, even if the borrowers
possess sufficient local currency. In addition, global economic, social and
political conditions, local and foreign government actions and associated events
can affect business activities in a country and a borrower's ability and/or
willingness to repay external debt obligations.
The Corporation has a country-risk assessment process by which it monitors
and analyzes the economic, social and political environments in all countries in
which it conducts business or in which its borrowers reside. These in-depth
assessments, conducted by a team of economists and political analysts, in
conjunction with local management, are utilized by the Corporation in connection
with its system of managing total country exposures.
Derivative and Foreign Exchange Financial Instruments: The Corporation seeks to
control the credit risk arising from derivative and foreign exchange
transactions through its credit approval process and the use of risk control
limits and monitoring procedures. The Corporation uses the same credit
procedures when entering into derivative and foreign exchange transactions as it
does for traditional lending products. The credit approval process involves,
first, evaluating each counterparty's creditworthiness,
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
then, where appropriate, assessing the applicability of such instruments to the
risks the counterparty is attempting to manage and determining if there are
specific transaction characteristics which alter the risk profile. Credit limits
are calculated and monitored on the basis of potential exposure which takes into
consideration current market value and estimates of potential future movements
in market values. If collateral is deemed necessary to reduce credit risk, the
amount and nature of the collateral obtained is based on management's credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant and equipment, and
real estate.
LOAN PORTFOLIO
The Corporation's loans outstanding totaled $82.1 billion at December 31, 1995,
an increase of $3.4 billion from the 1994 year end, reflecting growth in both
the domestic consumer and the commercial and industrial loan portfolios.
The Corporation's nonperforming assets at December 31, 1995 were $906
million, a decrease of $233 million from the 1994 year-end level. The reduction
in nonperforming assets reflects the improvement in the Corporation's credit
profile as a result of a lower level of loans being placed on nonperforming
status, repayments, charge-offs and the Corporation's continuing loan workout
and collection activities.
Total net charge-offs were $553 million in 1995 compared with $947 million in
1994. The 1994 amount excluded a $148 million charge related to the decision to
designate certain real estate assets as held-for-accelerated-disposition. For a
further discussion of nonperforming assets and net charge-offs, see the various
credit portfolio sections that follow.
The following table presents the Corporation's loan and nonperforming asset
balances by portfolio at December 31, 1995 and 1994 and the related net
charge-off amounts for the periods indicated. Additionally, loans which were
past due 90 days or more as to principal or interest but not characterized as
nonperforming are also included in the table below.
<TABLE>
<CAPTION>
Past Due
90 Days or More
Loans Nonperforming Assets Net Charge-offs and Still Accruing
As of or for the year ended December 31, (in millions) 1995 1994 1995 1994 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic Consumer:
Residential Mortgage(a) $17,746 $13,560 $123 $ 92 $ 52 $ 47 $ -- $ --
Credit Card 8,678 9,261 -- -- 411 329 208 176
Other Consumer (b) 7,009 7,265 5 12 31 19 120 118
- -----------------------------------------------------------------------------------------------------------------------------------
Total Domestic Consumer 33,433 30,086 128 104 494 395 328 294
- -----------------------------------------------------------------------------------------------------------------------------------
Domestic Commercial:
Commercial and Industrial 22,451 20,805 321 354 24 81 21 18
Commercial Real Estate(c) 4,850 5,650 176 156 53 165 12 18
Financial Institutions 4,123 3,918 1 4 (3) (1) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Domestic Commercial 31,424 30,373 498 514 74 245 33 36
- -----------------------------------------------------------------------------------------------------------------------------------
Total Domestic 64,857 60,459 626 618 568 640 361 330
Foreign, primarily Commercial 17,286 18,308 230 311 (15) 307 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans $82,143 $78,767 $856(d) $ 929 $553 $947 $361 $330
- -----------------------------------------------------------------------------------------------------------------------------------
Assets Acquired as Loan Satisfactions -- -- 50(d) 210 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets -- -- $906 $1,139 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Assets Held for Accelerated Disposition -- -- $412 $ 526 -- $148 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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. At December 31, 1995 and 1994, student loans which were past
due 90 days or more and still accruing were approximately $107 million and $105
million, respectively.
(c) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
(d) Total loans include $727 million of loans considered impaired under SFAS No
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). In
addition, on January 1, 1995, $122 million of assets for which the Corporation
did not have possession were reclassified from Assets Acquired as Loan
Satisfactions to Nonperforming Loans pursuant to the adoption of SFAS 114.
24
<PAGE> 27
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
DOMESTIC CONSUMER PORTFOLIO
The domestic consumer loan portfolio consists of one-to-four family residential
mortgages, credit cards and other consumer loans. The domestic consumer loan
portfolio totaled $33.4 billion at December 31, 1995, an increase of 11% from
the prior year end. As a percentage of the total loan portfolio, consumer loans
grew to 41% at the end of 1995, an increase from 38% at December 31, 1994.
Residential Mortgage Loans: Residential mortgage loans at December 31, 1995 were
$17.7 billion, an increase of $4.2 billion from the 1994 year-end, primarily
reflecting increases in adjustable-rate loan outstandings.
The following table presents the residential mortgage loans outstanding by
geographic region at the dates indicated.
RESIDENTIAL MORTGAGE LOANS BY GEOGRAPHIC REGION
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
New York City $ 2,532 $ 2,656
New York (Excluding New York City) 2,225 2,295
Remaining Northeast 2,755 3,167
- --------------------------------------------------------------
Total Northeast 7,512 8,118
Southeast 2,388 1,367
Midwest 1,793 1,057
Southwest(a) 1,671 1,368
West(b) 4,382 1,650
- --------------------------------------------------------------
Total $17,746 $13,560
- --------------------------------------------------------------
</TABLE>
(a) Includes mortgage loans in the Texas market of $1,505 million and $1,254
million at December 31, 1995 and December 31, 1994, respectively.
(b) Includes mortgage loans in the California market of $2,910 million and $758
million at December 31, 1995 and December 31, 1994, respectively.
Total nonperforming residential mortgage loans at December 31, 1995 were $123
million, compared with $92 million at December 31, 1994. Net charge-offs were
$52 million in 1995, an increase of 11% when compared with $47 million in 1994,
primarily resulting from the growth in residential mortgage loans during 1995.
The percentage of net charge-offs to average residential mortgage loans for 1995
declined to .32% from .37% for the prior year.
During the 1995 fourth quarter, the Corporation transferred $421 million of
residential mortgage loans into the accelerated disposition portfolio. For a
further discussion of the transfer, see the Assets Held for Accelerated
Disposition section on page 28.
The Corporation both originates and services residential mortgage loans as
part of its mortgage banking activities. After origination, the Corporation
typically sells loans to investors, primarily in the secondary market, while
retaining the rights to service such loans.
In addition to originating mortgage servicing rights, the Corporation also
purchases and sells mortgage servicing rights. The Corporation may purchase bulk
rights to service a loan portfolio or the Corporation may purchase loans
directly and then sell such loans while retaining the servicing rights. As
disclosed in Note One of the Notes to Consolidated Financial Statements, the
Corporation adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122") in 1995. SFAS 122
requires that when a definitive plan exists to sell or securitize mortgage loans
and retain the servicing rights related thereto, a mortgage banking enterprise
should recognize as separate assets the rights to service mortgage loans for
others, irrespective of whether those servicing rights are acquired through the
purchase or origination of mortgage loans.
The following table presents the residential mortgage servicing activity
for 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Year $52,694 $33,133
Originations 13,560 12,674
Acquisitions -- 17,005
Repayments 6,757 5,240
Sales 4,907 4,878
- -------------------------------------------------------------
Balance at End of Year $54,590 $52,694
- -------------------------------------------------------------
</TABLE>
Mortgage servicing rights (included in other assets) amounted to $496 million
at December 31, 1995, compared with $469 million at December 31, 1994. The
increase from the 1994 year-end level reflects the corresponding increase in the
Corporation's residential mortgage servicing portfolio and the recognition of
originated mortgage servicing rights as assets beginning in 1995 pursuant to
SFAS 122. Capitalized mortgage servicing rights are amortized into income in
proportion to, and over the period of, the estimated future net servicing income
stream of the underlying mortgage loans. The Corporation continually evaluates
prepayment exposure of the portfolio, adjusting the balance and remaining life
of the servicing rights as a result of prepayments and utilizing derivative
contracts to reduce its exposure to such prepayments. The mortgage loans to
which the Corporation's servicing rights relate are, to a substantial degree, of
recent vintage (i.e., originated in the period 1992 through 1995 when interest
rates were relatively low). For a further discussion, see the Other Market Risk
Management section on page 35.
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
fourth quarter of 1995, the Corporation securitized $2.25 billion of credit card
receivables, compared with none in 1994. At December 31, 1995, the
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Corporation had $10.9 billion of managed receivables ($8.7 billion of
receivables on the balance sheet) compared with $9.3 billion at year-end 1994,
reflecting the continued strong growth in credit card outstandings, principally
due to the co-branded Shell Mastercard program.
The following table presents the Corporation's domestic credit card
receivables by geographic region at the dates indicated.
DOMESTIC CREDIT CARD RECEIVABLES BY GEOGRAPHIC REGION
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
New York City $ 880 $1,036
New York (Excluding New York City) 774 916
Remaining Northeast 1,450 1,618
- -------------------------------------------------------------
Total Northeast 3,104 3,570
Southeast 1,248 1,238
Midwest 1,734 1,841
Southwest(a) 877 864
West(b) 1,715 1,748
- -------------------------------------------------------------
Total $8,678 $9,261
- -------------------------------------------------------------
</TABLE>
(a) Includes credit card receivables in the Texas market of $670 million and
$658 million at December 31, 1995 and December 31, 1994, respectively.
(b) Includes credit card receivables in the California market of $1,226 million
and $1,252 million at December 31, 1995 and December 31, 1994, respectively.
Total credit card net charge-offs were $411 million in 1995, an increase of
$82 million from the 1994 level due largely to growth in outstandings in the
credit card portfolio.
The following table presents the Corporation's average managed credit card
receivables (credit card receivables on the balance sheet plus securitized
credit card receivables), 90 days and over and accruing, net credit losses as
well as related ratios for the managed credit card portfolio for the periods
presented.
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
(in millions, except ratios) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Managed Credit Card Receivables $9,780(a) $7,541
Past Due 90 Days & Over and Accruing 272 176
As a Percentage of Average Credit Card Receivables 2.78% 2.33%
Net Charge-offs 423(b) 329
As a Percentage of Average Credit Card Receivables 4.33% 4.36%
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes $409 million of average securitized credit card receivables.
(b) Includes $12 million of net charge-offs related to securitized credit card
receivables.
Credit Card Securitization: During the 1995 fourth quarter, the Corporation
securitized $2.25 billion of credit card receivables.
The securitization of credit card receivables does not significantly affect
the Corporation's reported net income. The initial gains on these sales are
recorded at the time of the securitization. Given the revolving nature of the
receivables sold, recognition of servicing fees results in a pattern of
income recognition that is similar to the pattern that would be experienced if
the receivables had not been sold. Gains on securitizations were not material in
1995.
The term of each securitization transaction averages approximately five
years. However, because securitization changes the Corporation's status from
that of a lender to that of a loan servicer, there is a change in the
classification in which the revenue associated with the securitization is
reported in the income statement. For securitized receivables, amounts that
would previously have been reported as net interest income and as provision for
losses are instead reported as components of noninterest revenue (i.e., as
credit card revenue and as other revenue). Because credit losses become a
component of the cash flows arising from the securitized transaction, the
Corporation's revenues over the terms of a securitization transaction may vary
depending upon the credit performance of the securitized receivables. However,
the Corporation's exposure to credit losses on the securitized receivables is
contractually limited to these cash flows.
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.
<TABLE>
<CAPTION>
Favorable (Unfavorable)
Year Ended December 31, (in millions) Impact 1995
- ---------------------------------------------------------------------
<S> <C>
Net Interest Income $(49)
Provision for Losses 12
Credit Card Revenue 30
Other Revenue 7
- ---------------------------------------------------------------------
Pre-tax Income Impact of Securitization $ --
- ---------------------------------------------------------------------
</TABLE>
Other Consumer Loans: Other consumer loans consists of installment loans (direct
and indirect types of consumer finance), automobile financings and student
loans. Other consumer loans were $7,009 million at December 31, 1995 compared
with $7,265 million at December 31, 1994. The decrease in loan outstandings at
December 31, 1995 was primarily due to the sale of the Corporation's banking
operations in southern and central New Jersey. Excluding the impact of this
sale, other consumer loans increased approximately 10% from the 1994 level due
to growth in the installment loan portfolio, primarily in Texas. Total net
charge-offs were $31 million in 1995, an increase of $12 million from the 1994
level. The percentage of net charge-offs to average other consumer loans
(excluding student loans) was .64% in 1995, compared with .41% in 1994. The
increase in the charge-offs percentage was largely due to charge-offs taken in
connection with small discontinued product lines. There are essentially no
credit losses in the student loan portfolio due to the existence of Federal
and State government agency guarantees.
DOMESTIC COMMERCIAL PORTFOLIO
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $22.5 billion at December 31, 1995, compared with
$20.8 billion at December 31, 1994. The portfolio consists primarily of loans
made to large corporate and middle market customers and is diversified
geographically and by industry. The largest industry concentrations are oil and
gas and retailing which approximate $2.1 billion (or 2.6% of total loans) and
$1.7 billion (or 2.0% of total loans), respectively. All of the other industries
are each less than 2% of total loans.
26
<PAGE> 29
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
The Corporation is a leading participant in loan originations and sales. This
loan distribution capability allows the Corporation to compete aggressively and
profitably in wholesale lending markets by enabling it to reduce larger
individual credit exposures and thereby to price more flexibly than if all loans
were held as permanent investments. The Corporation also benefits from increased
liquidity. During 1995, the Corporation acted as agent or co-agent for
approximately $423 billion in syndicated credit facilities, compared with $319
billion in 1994.
Nonperforming domestic commercial and industrial loans were $321 million at
December 31, 1995, compared with $354 million at December 31, 1994.
Domestic commercial and industrial loan net charge-offs in 1995 totaled $24
million, compared with $81 million in the prior year.
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 $4.9 billion at December 31, 1995, a decline from $5.7 billion at
December 31, 1994. The decrease from the 1994 year-end was principally
attributable to repayments.
The following table sets forth the major components of the domestic
commercial real estate loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Commercial Mortgages $4,051 $4,680
Construction Loans 799 970
- -----------------------------------------------------------------
Total Domestic Commercial Real Estate Loans $4,850 $5,650
- -----------------------------------------------------------------
</TABLE>
Commercial mortgages provide financing for the acquisition or refinancing of
commercial properties, and typically have terms ranging from two-to-five years.
Construction loans are generally originated to finance the construction of real
estate projects. When the real estate project has cash flows sufficient to
support a commercial mortgage, the loan is transferred from construction status
to commercial mortgage status.
The largest concentration of domestic commercial real estate loans is in the
New York/New Jersey and Texas markets, representing 48% and 32%, respectively,
of the domestic commercial real estate portfolio. No other state represents more
than 2% of the domestic commercial real estate loan portfolio.
Nonperforming domestic commercial real estate assets were $187 million at
December 31, 1995, compared with $249 million at December 31, 1994. The
improvement in nonperforming domestic commercial real estate asset levels in
1995 is the result of increased liquidity in the commercial real estate markets
coupled with successful workout activities.
Domestic commercial real estate net charge-offs in 1995 totaled $53 million,
compared with $165 million in the prior year. The lower net charge-offs are due
in part to the decision in December 1994 to designate certain real estate assets
for accelerated disposition. For a more detailed discussion see the Assets Held
for Accelerated Disposition section on page 28.
During 1995, the Corporation recorded a $26 million net recovery of
writedowns as a result of payments received on certain foreclosed properties
which had been previously written down. Net writedowns of domestic commercial
real estate owned totaled $68 million in 1994.
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 $4,123 million at December 31,
1995 or 5% of total loans outstanding at December 31, 1995, compared with $3,918
million at December 31, 1994. Loans to domestic financial institutions are
predominantly secured loans to broker-dealers, which account for approximately
half of the total portfolio. The portfolio maintained its strong credit quality
during 1995 as the Corporation had net recoveries of $3 million in 1995 compared
with net recoveries of $1 million in 1994.
FOREIGN PORTFOLIO
The foreign portfolio includes commercial and industrial loans, loans to
financial institutions, commercial real estate loans, loans to foreign
governments and official institutions, and consumer loans. At December 31, 1995,
the Corporation's total foreign loans were $17.3 billion, compared with $18.3
billion at December 31, 1994.
Included in foreign loans were commercial and industrial loans of $8.4
billion at the end of 1995, an increase of $.8 billion from the 1994 year-end.
Total foreign commercial real estate loans at December 31, 1995 were $.4
billion, compared with $.5 billion at December 31, 1994. The bulk of the foreign
real estate portfolio is located in the United Kingdom and Hong Kong.
Foreign nonperforming loans at December 31, 1995 were $230 million, a
decrease from $311 million at December 31, 1994.
The foreign portfolio experienced net recoveries of $15 million in 1995
compared with net charge-offs of $307 million in 1994. A $291 million charge was
incurred in 1994 in connection with management's final valuation of the emerging
markets portfolio, at which time the Corporation's medium- and long-term
outstandings to the various emerging markets countries were adjusted to
estimated net recoverable values of such loans. The remaining emerging markets
allowance was transferred to the general allowance for credit losses.
For year-end loan balances by type of loan included in the foreign portfolio,
refer to Note Five of the Notes to Consolidated Financial Statements.
27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CROSS-BORDER OUTSTANDINGS
The following table lists all countries in which the Corporation's
cross-border outstandings exceeded 1% of consolidated assets as of any of the
dates specified. The Corporation does not have significant local currency
outstandings in the individual countries listed in the following table that are
not hedged or funded by local currency borrowings.
CROSS-BORDER OUTSTANDINGS EXCEEDING ONE PERCENT OF TOTAL ASSETS(a)(b)
<TABLE>
<CAPTION>
Cross-Border
Total Outstandings
Cross-Border as a Percentage
(in millions) At December 31 Public Banks Other Outstandings(c) of Total Assets
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan 1995 $ 895 $1,158 $ 524 $2,577(d) 1.41%
1994 238 3,200 368 3,806(d) 2.22
1993 27 3,955 257 4,239(d) 2.83
- ----------------------------------------------------------------------------------------------------
United Kingdom 1995 92 215 1,634 1,941 1.06%
1994 95 605 914 1,614 0.94
1993 106 1,035 1,086 2,227 1.49
- ----------------------------------------------------------------------------------------------------
Germany 1995 4,305 269 113 4,687(e) 2.56%
1994 1,480 246 453 2,179(e) 1.27
1993 2,021 314 356 2,691(e) 1.80
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Outstandings (including loans and accrued interest, interest-bearing
deposits with banks, securities, acceptances and other monetary assets, except
equity investments) represent those of both the public and private sectors and
are presented on a risk basis, i.e., net of written guarantees and tangible
liquid collateral when held outside the foreign country. At December 31, 1995,
outstandings to Norway and Korea amounted to $1,589 million and $1,469 million,
respectively, which were in excess of .75% of total assets. At December 31, 1994
and 1993, outstandings to Brazil amounted to $1,327 million and $1,328 million,
respectively, which were in excess of .75% of total assets in each respective
year. At December 31, 1993, outstandings to Italy amounted to $1,281 million,
which were in excess of .75% of 1993 total assets.
(b) At December 31, 1995, 1994 and 1993, the Corporation's total exposure to
Mexico was $1,156 million, $879 million and $708 million, respectively, which
was composed largely of trade and short-term credits. The above amounts exclude
bonds received as part of debt renegotiations (i.e., Brady Bonds) with a face
value of $1,486 million, $2,199 million and $2,195 million, respectively, and
current carrying value of $996 million, $1,827 million and $2,097 million,
respectively, which are collateralized by zero-coupon United States Treasury
obligations.
(c) Outstandings exclude equity received in debt-for-equity conversions, which
is recorded initially at fair market value and generally accounted for under the
cost method. Commitments (outstanding letters of credit, standby letters of
credit, guarantees and unused legal commitments) are excluded. At December 31,
1995, off-balance sheet commitments, after adjusting for transfers of risk,
amounted to $1,692 million for Japan, $970 million for the United Kingdom, and
$691 million for Germany.
(d) The average outstandings to Japan during 1995, 1994 and 1993 (based on
quarter-end amounts) were approximately $2.2 billion, $3.2 billion and $3.6
billion, respectively.
(e) The average outstandings to Germany during 1995, 1994 and 1993 (based on
quarter-end amounts) were approximately $3.8 billion, $2.2 billion and $1.2
billion, respectively.
The majority of outstandings to Japan and Germany are short-term in nature,
which mitigates the credit risk as transactions settle quickly. These
outstandings generally represent interbank placements and trading assets. Due to
the short-term nature of interbank placements and trading assets, the
Corporation's balances with Japan and Germany tend to fluctuate greatly and the
amount of outstandings at year-end tends to be a function of timing, rather than
representing a consistent trend.
ASSETS HELD FOR ACCELERATED DISPOSITION
In the fourth quarter of 1995, the Corporation transferred $421 million of
residential mortgage loans into the accelerated-disposition portfolio. This was
done as part of a decision to accelerate the disposition of residential mortgage
loans originally extended several years earlier under a reduced documentation
mortgage program that was discontinued.
In December 1994, the Corporation segregated real estate loans and real
estate owned and designated such assets as assets held for accelerated
disposition. In conjunction with this transfer, the Corporation reevaluated its
carrying values for these assets to facilitate their rapid disposition and
recorded a charge of $148 million to the allowance for credit losses. As a
result of these actions, these assets were excluded from the December 31, 1995
and 1994 nonperforming assets category.
The following table presents the reconciliation of Assets Held for
Accelerated Disposition for 1995 and 1994.
<TABLE>
<CAPTION>
Carrying Value
Year Ended December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Year $ 526 $ --
Additions 421 526
Sales (535) --
- -------------------------------------------------------------
Balance at End of Year $ 412(a) $526(a)
- -------------------------------------------------------------
</TABLE>
(a) Includes $412 million and $87 million of loans that were performing at
December 31, 1995 and 1994, respectively.
28
<PAGE> 31
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
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.
Derivative and foreign exchange instruments represent contracts with
counterparties where payments are made to or from the counterparty based upon
specific interest rates, currency levels, other market rates, or on terms
predetermined by the contract. These instruments can provide a cost-effective
alternative to assuming and mitigating risk associated with traditional
on-balance sheet instruments. Derivative and foreign exchange transactions
involve, to varying degrees, credit risk (i.e., the possibility that a loss may
occur because a party to a transaction fails to perform according to the terms
of a contract) and market risk (i.e., the possibility that a change in interest
or currency rates will cause the value of a financial instrument to decrease or
become more costly to settle).
The effective management of credit and market risk is vital to the success of
the Corporation's trading activities and asset/liability management. Because of
the changing market environment, the monitoring and managing of these risks is a
continual process. For a further discussion of market risk, see the Market Risk
Management section on page 31.
The Corporation believes the true measure of credit risk exposure is the
replacement cost of the derivative or foreign exchange product (i.e., the cost
to replace the contract at current market rates should the counterparty default
prior to the settlement date). This is also referred to as repayment risk or the
mark-to-market exposure amount. The notional principal of derivative and foreign
exchange instruments is the amount on which interest and other payments in a
transaction are based. For derivative transactions, the notional principal
typically does not change hands; it is simply a quantity that is used to
calculate payments. While notional principal is the most commonly used volume
measure in the derivative and foreign exchange markets, it is not a measure of
credit or market risk. The notional principal of the Corporation's derivative
and foreign exchange products greatly exceeds the possible credit and market
loss that could arise from such transactions. As a result, the Corporation does
not consider the notional principal to be indicative of its credit or market
risk exposure.
Mark-to-market exposure is a measure, at a point in time, of the value of a
derivative or foreign exchange contract in the open market. When the
mark-to-market is positive, it indicates the counterparty owes the Corporation
and, therefore, creates a repayment risk for the Corporation. When the
mark-to-market is negative, the Corporation owes the counterparty. In this
situation, the Corporation does not have repayment risk.
When the Corporation has more than one transaction outstanding with a
counterparty, and there exists a legally enforceable master netting agreement
with the counterparty, the "net" mark-to-market exposure represents the netting
of the positive and negative exposures with the same counterparty. If there is a
net negative number, the Corporation's exposure to the counterparty is
considered zero. Net mark-to-market is, in the Corporation's view, the best
measure of credit risk when there is a legally enforceable master netting
agreement between the Corporation and the counterparty.
The Corporation routinely enters into derivative and foreign exchange product
transactions with regulated financial institutions, which the Corporation
believes have relatively low credit risk. At December 31, 1995, approximately
86% of the mark-to-market exposure of such activities were with commercial bank
and financial institution counterparties most of which are dealers in these
products. Non-financial institutions accounted for only approximately 14% of the
Corporation's derivative and foreign exchange mark-to-market exposure.
The Corporation does not deal, to any material extent, in derivatives which
dealers of derivatives (such as other banks and financial institutions) consider
to be "complex" (i.e., exotic and/or leveraged). As a result, the
mark-to-market exposure of such derivatives was approximately 2% of the
Corporation's total mark-to-market exposure of all its derivatives contracts
at December 31, 1995.
Many of the Corporation's contracts are short-term, which mitigates credit
risk as transactions settle quickly. The following table provides the remaining
maturities of derivative and foreign exchange contracts outstanding at December
31, 1995 and 1994, respectively. Percentages are based upon remaining contract
life of mark-to-market exposure amounts.
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------------------
Interest Rate Foreign Exchange Interest Rate Foreign Exchange
At December 31, Contracts Contracts Total Contracts Contracts Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Less than 3 months 11% 60% 28% 11% 57% 32%
3 to 6 months 8 27 15 8 24 15
6 to 12 months 8 11 9 12 12 12
1 to 5 years 42 2 28 54 6 33
Over 5 years 31 -- 20 15 1 8
- --------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------
</TABLE>
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 net effects of legally
enforceable master netting agreements) for the dates indicated below.
<TABLE>
<CAPTION>
Notional Amounts Credit Exposure
December 31, (in billions) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Interest Rate Contracts $2,496.2 $2,289.4 $ 9.9 $ 8.1
Total Foreign Exchange Contracts 954.8 901.1 7.9 9.5
Total Stock Index Options and Commodity Contracts 11.3 4.5 0.2 0.3
- --------------------------------------------------------------------------------------
Total(a) $3,462.3 $3,195.0 $18.0 $17.9
- --------------------------------------------------------------------------------------
</TABLE>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and commodity contracts were $362.5 billion, $.8 billion and
$2.9 billion, respectively, at December 31, 1995. The credit risk exposure for
these contracts was minimal since exchange-traded contracts principally settle
daily in cash.
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 December
31, 1995 to be adequate. Although the Corporation considers that it has
sufficient reserves to absorb losses that may currently exist in the portfolio,
but are not yet identifiable, the precise loss content is subject to continuing
review based on quality indicators, industry and geographic concentrations,
changes in business conditions, and other external factors such as competition
and legal and regulatory requirements. The Corporation will continue to reassess
the adequacy of the allowance for credit losses.
During 1995, 1994 and 1993, the Corporation's actual credit losses arising
from derivative and foreign exchange transactions were immaterial. Additionally,
at December 31, 1995 and 1994, nonperforming derivatives contracts were
immaterial.
The following tables reflect the activity in the Corporation's allowance for
credit losses for the years ended December 31, 1995 and 1994 as well as the
allowance coverage ratios.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994
- ----------------------------------------------------------------
<S> <C> <C>
Total Allowance at January 1 $2,480 $ 3,020
Provision for Losses 478 550
Charge-Offs (825) (1,266)
Recoveries 272 319
- ----------------------------------------------------------------
Net Charge-Offs (553) (947)
Charge for Assets Transferred to Held for
Accelerated Disposition -- (148)
Other (26)(a) 5
- ----------------------------------------------------------------
Total Allowance at December 31 $2,379 $ 2,480
- ----------------------------------------------------------------
</TABLE>
(a) Includes $28 million related to sale of the Corporation's banking operations
in southern and central New Jersey.
ALLOWANCE COVERAGE RATIOS
<TABLE>
<CAPTION>
December 31, 1995 1994
- ---------------------------------------------------------------
<S> <C> <C>
Allowance for Credit Losses to:
Loans at Period-End 2.90% 3.15%
Average Loans 2.91 3.30
Nonperforming Loans 277.92 266.95
- ---------------------------------------------------------------
</TABLE>
30
<PAGE> 33
- --------------------------------------------------------------------------------
- - MARKET RISK MANAGEMENT
The Corporation's management of its market risk deals with the risks related to
its trading activities and asset/liability management activities.
TRADING ACTIVITIES
The Corporation uses its trading assets and liabilities, comprised of debt and
equity instruments and risk management instruments, to meet the financial needs
of its customers and to generate revenues through its trading activities. A
description of the classes of debt and equity instruments and risk management
instruments used in the Corporation's trading activities as well as the credit
risk and market risk factors involved in such activities are disclosed in Notes
Three and Nineteen of the Notes to Consolidated Financial Statements.
The Corporation has four fundamental trading activities which generate
revenue. The Corporation is primarily engaged in the generally stable businesses
of market-making, sales and arbitrage, while placing less emphasis on the
potentially less-stable business of positioning.
Market-making: The Corporation trades with the intention of making a profit
based on the spread between bid and ask prices. Market-making, compared with
other trading activities, is considered to be a relatively stable business by
the Corporation because revenue is related principally to market volumes, rather
than to anticipating correctly material changes in the prices of various
financial instruments. The Corporation considers market-making to be a key
trading activity in its over-the-counter traded businesses, particularly in its
derivative, foreign exchange, and government markets businesses.
Sales: The Corporation provides products for its clients at competitive prices.
The Corporation believes sales to be a relatively stable business because
revenue is related principally to the volume of products sold to the
Corporation's worldwide client base.
Arbitrage: The Corporation enters into a risk position and offsets that risk in
different but closely related markets or instruments. Because of the nature of
trading markets, where there are numerous instruments that relate to one
another, the Corporation believes it can effectively utilize this strategy. The
Corporation considers arbitrage to be a key fundamental of its trading business.
Positioning: The Corporation takes certain positions in the market in
anticipation of changes that may occur within the market. This strategy has the
lowest stability of all four trading activities and the Corporation's emphasis
in this area is less than in the other trading activities.
The Corporation manages the market risk associated with these trading
activities on an aggregate basis at the business unit level. Risk limits
originate with the Chairman of the Market Risk Committee who determines
instrument authorities and exposure levels of individual business units.
Criteria for risk limit determination include, among other factors, relevant
market analysis, market liquidity, prior track record, business strategy, and
management experience and depth. Procedures and policies specify authorized
instruments and exposure levels. Critical risk limits that are designated as
primary are centrally tracked and reported on a daily basis, while less-critical
risk limits are independently monitored and centrally reported on a periodic
basis. Individual business units often set additional internal limits.
The Market Risk Management Group (the "Group") performs independent analysis
of instrument authority, limit requests, and limit utilization. In addition, the
Group tracks market risk-related revenue and compares it to the actual market
risk incurred to produce such revenue and assesses risk levels and related
topics. Other focuses include measurement and calculation of value-at-risk,
criteria for official volatility and correlation statistics, and formulas for
determination of market-related credit exposure. Additionally, the Group reviews
the market risk related to new products (as one element of the Corporation's new
product process) and provides independent review of the mathematical and
simulation models utilized by business units. The Group combines efforts with
other functional units to assess cross-discipline risks in business units having
significant market risk. In addition to the Chairman of the Market Risk
Committee and the Group, the Board of Directors of the Corporation also reviews
the market risk related to trading activities.
The Corporation's business strategy seeks to manage the market risks
associated with its trading activities through product, functional and
geographic diversification. The Corporation trades in a wide range of products
which include not only foreign exchange and derivatives but also securities,
including emerging markets debt instruments. The Corporation's trading
activities are geographically diverse. Trading activities are undertaken in more
than 20 countries, with a majority of the Corporation's transactions in the
developed countries, such as the United States, Japan, Singapore, United Kingdom
and Western Europe.
The effects of market gains or losses on the Corporation's trading activities
are reported in trading revenue, as the trading instruments are marked-to-market
on a daily basis.
Measuring Market Risk: The Corporation's overall risk management process
utilizes a limit system incorporating three types of risk control:
value-at-risk, non-statistical limits, and stop loss advisories. Value-at-risk
is defined as the potential overnight dollar loss from adverse market movements
that would cover 97.5% of likely market movements, which are determined by using
two years of
31
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
historical price and rate data. The value-at-risk calculations employ nearly
3,100 volatilities and 1.24 million correlations (updated quarterly) of various
market instruments. The Corporation monitors value-at-risk figures for major
business units on a daily basis so that the potential for market loss can be
properly reflected. The methodology generally used to offset positions within a
business unit is deemed by the Corporation to be conservative. Only partial
credit for correlation between instruments within each business unit is
incorporated since correlations can exhibit instability during volatile market
environments. Aggregating across business units with no correlation offset
resulted in an aggregated daily average value-at-risk figure of $30 million in
1995. The historical correlation among business units is captured by using
actual trading results. Based on actual 1995 trading results, 95% of the
variation in the Corporation's daily trading results fell within a $19 million
band centered on the daily average amount for the year. The 1995 presentation of
the Corporation's measure of risk, based on actual trading results, has changed
from prior period disclosures.
Value-at-risk is an important concept, but it is not the sole control measure
used in the risk management process. Non-statistical limits include net open
positions, basis point values, position concentrations, and position ages. These
non-statistical measures are accorded the same importance as value-at-risk. Stop
loss advisories also are used to advise senior management when losses of a
certain threshold are sustained from a business activity. The use of
non-statistical measures and stop loss advisories to complement value-at-risk
limits reduces the likelihood that potential trading losses will reach the daily
average value-at-risk amount.
HISTOGRAM OF DAILY MARKET RISK-RELATED TRADING REVENUE FOR 1995
[GRAPH 1 -- SEE APPENDIX 1]
The above chart contains a histogram of the Corporation's daily market
risk-related revenue for 1995. Market risk-related revenue is defined as the
daily change in value in the trading portfolios plus any trading-related net
interest income or other revenue. Net interest income related to funding and
investment activity is excluded. The histogram covers the Corporation's major
trading units which constitute approximately 98% of its trading activity.
For the twelve months ended December 31, 1995, the Corporation posted
positive daily market risk-related revenue for 225 out of 266 business trading
days for international and domestic units. For 243 of the 266 days, the
Corporation's daily market risk-related revenue or losses occurred within the
negative $5 million to positive $10 million range, which is representative of
the Corporation's emphasis on market-making and sales activities. The low number
of outlier results (13 days having positive or negative market risk-related
revenues exceeding $10 million) exemplifies the Corporation's diversified
approach to market risk management as a business strategy.
ASSET/LIABILITY MANAGEMENT
The objective of the asset/liability management process is to manage and control
the sensitivity of the Corporation's income to changes in market interest rates.
The process operates under the authority and direction of the Asset and
Liability Policy Committee, comprised of the Office of the Chairman and senior
business and finance executives. The Committee seeks to ensure that the risk to
earnings from adverse movements in interest rates are kept within specified
limits deemed acceptable by the Corporation.
The Corporation's net interest income is affected by changes in the level of
market interest rates based upon differences in timing between the contractual
maturity or 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 altered by
adjusting the Corporation's investments and the maturities of its wholesale
funding activities, and with the use of derivative instruments.
The Corporation, as part of its asset/liability management process, employs a
variety of on-balance sheet and derivative instruments in managing its exposure
to fluctuations in market interest rates. The Corporation primarily uses its
securities portfolio, and to a lesser degree derivative instruments, to adjust
the interest rate repricing characteristics of specific on-balance sheet assets
and liabilities, or groups of assets and liabilities with similar repricing
characteristics. Derivative instruments include interest rate swaps, futures,
forward rate agreements and options and are generally accorded accrual
accounting treatment in the Corporation's financial statements. (See Note One of
the Notes to Consolidated Financial Statements for a discussion of the
Corporation's accounting policy relative to
32
<PAGE> 35
derivative instruments used for asset/liability management and Note Nineteen of
the Notes to Consolidated Financial Statements for the aggregate notional
principal of derivative instruments).
Risk Management and Control: A key element of the Corporation's asset/liability
management process is that it allows the assumption of interest sensitivity at a
decentralized level by authorized units with close contacts to the markets.
These units are subject to individual authorities and limits administered
centrally which are intended to control the size of exposures by currency and
the instruments that can be used to manage the sensitivities.
The Asset and Liability Policy Committee has ultimate responsibility for the
Corporation's consolidated interest rate exposure. In addition to the individual
limits placed on the decentralized risk management units, the Committee has
established "global" limits for consolidated exposures along three dimensions of
risk. These limits cover net gap exposure, earnings at risk, and the sensitivity
of the Corporation's equity to changes in interest rate levels.
Measuring Interest Rate Sensitivity: Management uses a variety of techniques to
measure its interest rate sensitivity. One such tool is aggregate net gap
analysis, an example of which is presented below. Assets and liabilities are
placed in gap intervals based on their contractual maturities or repricing
dates. Assets and liabilities, for which no specific repricing dates exist,
are placed in gap intervals based on management's judgments concerning their
most likely repricing behaviors. Derivatives used in asset/liability
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.
INTEREST SENSITIVITY TABLE
<TABLE>
<CAPTION>
Over
At December 31, 1995 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years 5 Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Deposits With Banks $ 2,461 $ 185 $ 20 $ -- $ -- $ 2,666
Federal Funds Sold and Securities Purchased
Under Resale Agreements 8,033 -- -- -- -- 8,033
Trading Account Assets 36,020 -- -- -- -- 36,020
Securities 2,342 1,518 1,541 13,442 15,942 34,785
Loans 45,809 6,899 6,050 16,256 4,750 79,764
Noninterest Earning Assets 9,065 169 368 2,667 9,389 21,658
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $103,730 $ 8,771 $ 7,979 $32,365 $30,081 $182,926
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits $ 56,066 $ 7,586 $ 7,177 $11,493 $16,095 $ 98,417
Short-Term and Other Borrowings 34,231 655 1 5 21 34,913
Long-Term Debt 2,655 463 12 1,526 2,673 7,329
Other Liabilities 24,297 8 8 70 5,972 30,355
Stockholders' Equity -- -- -- -- 11,912 11,912
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $117,249 $ 8,712 $ 7,198 $13,094 $36,673 $182,926
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet (13,519) 59 781 19,271 (6,592) --
- ----------------------------------------------------------------------------------------------------------------------------------
Derivative Instruments Affecting
Interest-Rate Sensitivity(a) 4,411 (375) (2,302) (2,119) 385 --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-Rate-Sensitivity Gap (9,108) (316) (1,521) 17,152 (6,207) --
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative Interest-Rate Sensitivity Gap (9,108) (9,424) (10,945) 6,207 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
% of Total Assets (5)% (5)% (6)% 3% -- --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents net repricing effect of derivative positions, which include
interest rate swaps, futures, forward rate agreements and options that are used
as part of the Corporation's overall asset/liability management activities.
33
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
At December 31, 1995, the Corporation had $10,945 million more liabilities
than assets repricing within one year (including net repricing effect of
derivative positions), amounting to 6.0% of total assets. The
consolidated gaps include exposure to U.S. dollar interest rates as well as
exposure to non-U.S. dollar rates in currency markets in which the Corporation
does business. Since U.S. interest rates and non-U.S. interest rates may not
move in tandem, the overall cumulative gaps may tend to overstate the exposures
of the Corporation.
Gap analysis is the simplest representation of the Corporation's interest
rate sensitivity. However, it cannot reveal the impact of factors such as
administered rates (e.g., the prime lending rate), pricing strategies on
consumer and business deposits, changes in balance sheet mix, or the effect of
various options embedded in the balance sheet. Accordingly, the Asset and
Liability Policy Committee conducts simulations of net interest income under a
variety of market interest rate scenarios. These simulations provide the
Committee with an estimate of earnings at risk for given changes in interest
rates. The difference between these projections of net interest income (after
tax), as a percentage of projected net income, represent earnings at risk.
At December 31, 1995, based on these simulations, earnings at risk to an
immediate 100 basis point rise in market interest rates was estimated to be less
than four percent of projected 1996 after-tax net income excluding any
merger-related restructuring charges. The 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.
All the measurements of risk described above are based upon the Corporation's
business mix and interest rate exposures at a particular point in time. The
exposures change continuously as a result of the Corporation's ongoing business
and its risk management initiatives. While management believes these measures
provide a meaningful representation of the Corporation's interest rate
sensitivity, they do not necessarily take into account all business developments
which have an effect on net income, such as changes in credit quality or the
size and composition of the balance sheet.
Interest rate swaps: Interest rate swaps are one of the various financial
instruments used in the Corporation's 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 group of financial instruments, the interest rate
swap maturity table, which follows, provides an indication of the Corporation's
interest rate swaps activity.
The following table summarizes the outstanding ALM interest rate swaps
notional amounts at December 31, 1995, by yearly intervals. The decrease in
notional amounts from one period to the next period represents maturities of the
underlying contracts. The weighted average interest rates to be received and
paid on such swaps are presented for each yearly interval. Variable rates
presented are generally based on the short-term interest rates for relevant
currencies such as the London Interbank Offered Rate (LIBOR). Basis swaps are
interest rate swaps based on two floating rate indices (e.g., LIBOR and prime).
The table was prepared under the assumption that variable interest rates
remain constant at December 31, 1995 levels and, accordingly, the actual
interest rates to be received or paid will be different to the extent that such
variable rates fluctuate from December 31, 1995 levels. However, 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.
34
<PAGE> 37
- --------------------------------------------------------------------------------
OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY
INTERVALS
<TABLE>
<CAPTION>
For the Year Beginning January 1, ($ in millions) 1996 1997 1998 1999 2000 Thereafter
- ----------------------------------------------------------------------------------------------------------------------
RECEIVE FIXED SWAPS:
<S> <C> <C> <C> <C> <C> <C>
Notional amount $19,898 $12,374 $ 6,758 $ 5,284 $4,557 $2,354
Weighted-average:
Receive rate 6.67% 6.88% 7.06% 7.08% 6.93% 6.60%
Pay rate 5.28 5.71 5.94 5.95 5.88 5.79
PAY FIXED SWAPS:
Notional amount $22,107 $12,463 $ 7,850 $ 5,592 $3,830 $2,106
Weighted-average:
Receive rate 5.64% 5.69% 5.84% 5.93% 5.91% 5.94%
Pay rate 6.89 7.14 7.33 7.38 7.35 7.49
BASIS SWAPS
Notional amount $ 5,437 $ 3,910 $ 2,984 $ 2,065 $ 767 $ 612
Weighted-average:
Receive rate 6.35% 5.82% 5.89% 5.91% 5.94% 5.94%
Pay rate 6.18 5.45 5.82 5.89 5.93 5.92
- ----------------------------------------------------------------------------------------------------------------------
Total Notional Amounts(a) $47,442 $28,747 $17,592 $12,941 $9,154 $5,072
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At December 31, 1995, approximately $17 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,
$10 billion is expected to mature in 1996, $4 billion in 1997 with the
remaining $3 billion in 1998 and thereafter. The unrecognized net gain related
to these positions was approximately $49 million. See Note One of the Notes
to Consolidated Financial Statements for a discussion of the Corporation's
accounting policy relative to derivative instruments used for ALM.
The following table summarizes certain of the Corporation's assets and
liabilities at December 31, 1995 with the notional or contract amount of related
derivatives used for ALM purposes.
DERIVATIVE PRODUCTS AND RELATED BALANCE SHEET POSITIONS
<TABLE>
<CAPTION>
Contract/
Notional Amount(a)
-------------------------
Published Interest Other
Balance Sheet Rate ALM
December 31, (in millions) Amount Swaps Contracts(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities $30,157 $ 1,824 $ 560
Loans 82,143 21,797 39,571
Other Assets 8,036 305 3,143
Deposits 98,417 3,343 15,644
Long-Term Debt 7,329 2,910 --
- --------------------------------------------------------------------------------
</TABLE>
(a) At December 31, 1995, the total notional amounts of approximately $17
billion for interest rate swaps and $3 billion for other ALM contracts, both of
which are used in place of cash instruments (See Note One of the Notes to
Consolidated Financial Statements), have been excluded from the above table.
(b) Includes futures, forward rate agreements and options.
In the normal course of its ALM business, the Corporation does not generally
terminate its interest rate swaps. Deferred gains/losses primarily relate to
securities futures and forward contracts used in connection with
available-for-sale securities. The unrecognized gains/losses relating to ALM
activities primarily relate to interest rate swap contracts. The following
table reflects changes in value of the Corporation's ALM derivative contracts
(both deferred gains/losses and unrecognized gains/losses) for the year ended
1995. For further discussion of both the Corporation's deferred and
unrecognized gains/losses relating to its ALM activities, see Notes Nineteen and
Twenty Two, respectively.
CHANGE IN VALUE OF ALM DERIVATIVE PRODUCTS
<TABLE>
<CAPTION>
Change in
December 31, ($ in millions) 1995 1994 Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ALM Derivative Contracts:
Net Deferred Gains (Losses) $(130) $ 14 $(144)
Net Unrecognized Gains (Losses) (96)(a) (784) 688
- -------------------------------------------------------------------------------
Net ALM Derivative Gains (Losses) $(226) $(770) $ 544
- --------------------------------------------------------------------------------
</TABLE>
(a) Amount includes $97 million in net unrecognized losses from daily margin
settlements on open futures contracts. For additional information, refer to Note
Twenty Two of the Notes to Consolidated Financial Statements.
The net deferred losses at December 31, 1995 are expected to be amortized
over the periods reflected in the following table. The amortization of deferred
gains and losses are recognized as yield adjustments in interest income or
interest expense.
AMORTIZATION OF NET DEFERRED GAINS/(LOSSES)
ON CLOSED ALM CONTRACTS
<TABLE>
<CAPTION>
Year Ended December 31, (in millions)
- --------------------------------------------------------------------------------
<S> <C>
1996 $ (34)
1997 (33)
1998 (32)
1999 (21)
2000 and After (10)
- --------------------------------------------------------------------------------
Net Deferred Gains/(Losses) on ALM Contracts Closed $(130)
- --------------------------------------------------------------------------------
</TABLE>
The Consolidated Balance Sheet includes net unamortized premiums paid on open
ALM option contracts amounting to $10 million at December 31, 1995 which will be
amortized in 1996.
OTHER MARKET RISK MANAGEMENT
The Corporation uses various derivative contracts to reduce risks associated
with its mortgage servicing, loan sales, other consumer loan activities and
capital-related foreign currency exposures.
35
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The value of the Corporation's mortgage servicing rights is affected by the
level of prepayments made by mortgage holders resulting from changes in interest
rates. Purchased interest rate floor contracts are used to mitigate such risk.
Essentially all contracts linked to mortgage servicing assets mature within
three years. The Corporation also originates certain mortgage and consumer
loans for sale or securitization to third-party investors. To reduce the risk
of changes in value between the time that such loans are originated and the
date of sale, the Corporation enters into futures, forward, and purchased
option contracts. Contracts related to loans available for sale generally
mature within one year.
Foreign currency exposures, primarily the net investment in overseas
entities, are managed through the use of foreign exchange forward contracts
matching outstanding foreign currency positions on a currency-by-currency basis.
These contracts hedge the impact of foreign exchange rate changes on the
Corporation's net investment in its overseas entities.
- --------------------------------------------------------------------------------
- - 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
CAPITAL
The Corporation's level of capital at December 31, 1995 remained strong, with
capital ratios well in excess of regulatory guidelines. The Corporation's Tier 1
and Total Capital ratios were 8.45% and 12.10%, respectively, at December 31,
1995. These ratios, as well as the leverage ratio discussed below, exclude the
assets and off-balance sheet financial instruments of the Corporation's
securities subsidiary, Chemical Securities, Inc. ("CSI"), 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 as
discussed below) increased by $1.3 billion during 1995 to $15.8 billion at
December 31, 1995. The Corporation manages its capital to execute its strategic
business plans and support its growth and investments, including acquisition
strategies in its core businesses. As part of the Corporation's Actions to
Improve Earnings Per Share, the Corporation completed two divestitures in the
fourth quarter of 1995 - the sale of Chemical New Jersey Holdings' banking
operations in southern and central New Jersey to PNC Bank Corp. and the sale of
half the Corporation's 40% interest in CIT.
During 1995, the Corporation repurchased approximately 14.4 million shares of
its outstanding common stock in the open market. These share repurchases were
largely undertaken to meet the anticipated needs of the Corporation's employee
stock option and incentive plans. During 1995, approximately 12.8 million shares
(11.9 million from treasury) were issued under various employee stock option and
incentive plans and 7.6 million shares of common stock were issued (from
treasury) due to the conversion of the Corporation's 10% convertible preferred
stock.
In the second quarter of 1995, the Board of Directors of the Corporation
increased the quarterly dividend on the outstanding shares of the Corporation's
common stock to $.50 per share, an increase of 14% from $.44 per share. On an
annualized basis, this represents an increase in the dividend rate to $2.00 per
share from $1.76 per share. For 1995, the Corporation's ratio of common
dividends to earnings applicable to common stock was 28%, compared with 35% in
1994.
The Corporation's total stockholders' equity at the 1995 year-end was $11.9
billion, compared with $10.7 billion at December 31, 1994. The $1.2 billion
increase primarily reflected the retention of earnings (net income of $1.8
billion less total common and preferred stock dividends of $.6 billion)
generated during 1995.
36
<PAGE> 39
Chemical Banking Corporation
and Subsidiaries
- ------------------------------------------------------------------------------
The tables which follow sets forth various capital ratios and components of
capital at the dates indicated.
CAPITAL RATIOS
<TABLE>
<CAPTION>
Minimum
Regulatory
December 31, (ratios) 1995 1994 Requirement
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporation:
Tier 1 Capital Ratio(a)(c) 8.45% 8.02% 4.00%
Total Capital Ratio(a)(c) 12.10 11.97 8.00
Tier 1 Leverage Ratio(b)(c) 6.43 6.26 3.00-5.00
Common Stockholders' Equity to
Total Assets 5.83 5.40 --
Total Stockholders' Equity to
Total Assets 6.51 6.25 --
- --------------------------------------------------------------------------------
Chemical Bank:
Tier 1 Capital Ratio(a)(c) 7.65 7.60 4.00
Total Capital Ratio(a)(c) 11.49 11.91 8.00
Tier 1 Leverage Ratio(b)(c) 5.54 5.72 3.00-5.00
- --------------------------------------------------------------------------------
</TABLE>
(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 December 31, 1995
Tier 1 Capital, Total Capital and Tier 1 Leverage ratios were 8.65%, 12.56% and
6.18%, respectively, compared with 8.20%, 12.35% and 5.95%, respectively, at
December 31, 1994.
COMPONENTS OF CAPITAL
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
TIER 1 CAPITAL:
Common Stockholders' Equity $ 10,965 $ 9,700
Nonredeemable Preferred Stock 1,250 1,450
Minority Interest 70 63
Less: Goodwill 731 1,068
Non-Qualifying Intangible Assets 115 142
50% Investment in CSI 377 246
- --------------------------------------------------------------------------------
Tier 1 Capital 11,062 9,757
- --------------------------------------------------------------------------------
TIER 2 CAPITAL:
Long-Term Debt Qualifying as Tier 2 3,509 3,519
Qualifying Allowance for Credit Losses 1,646 1,532
Less: 50% Investment in CSI 377 246
- --------------------------------------------------------------------------------
Tier 2 Capital 4,778 4,805
- --------------------------------------------------------------------------------
Total Qualifying Capital $ 15,840 $ 14,562
- --------------------------------------------------------------------------------
Risk-Weighted Assets(a) $130,909 $121,660
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes off-balance sheet risk-weighted assets in the amount of $41,704
million and $37,157 million, respectively, at December 31, 1995 and December 31,
1994.
Under the risk-based capital guidelines of the Federal bank regulatory
authorities, banking organizations are required to maintain certain ratios of
"Qualifying Capital" to "risk-weighted assets". "Qualifying Capital" is
classified into two tiers, referred to as Tier 1 Capital and Tier 2 Capital.
Under the guidelines, both the Corporation's and Chemical Bank's Tier 1 Capital
ratio and Total Capital ratio to risk-weighted assets were well in excess of the
minimum ratios of 4% and 8%, respectively. To be "well capitalized," a banking
organization must have a Tier 1 Capital ratio of at least 6%, Total Capital
ratio of at least 10%, and Tier 1 leverage ratio of at least 5%. At December 31,
1995, the capital ratios for each of the Corporation's banking subsidiaries
exceeded the ratios required to be well capitalized.
The Tier 1 leverage ratio is defined as Tier 1 Capital (as defined under the
risk-based capital guidelines) divided by average total assets (net of allowance
for credit losses, goodwill and certain intangible assets). The minimum leverage
ratio is 3% for banking organizations that have well-diversified risk (including
no undue interest rate risk); excellent asset quality; high liquidity; good
earnings; and, in general, are considered strong banking organizations. Other
banking organizations are expected to have ratios of at least 4%-5% depending
upon their particular condition and growth plans. Higher capital ratios could be
required if warranted by the particular circumstances or risk profile of a given
banking organization. The Federal Reserve Board has not advised the Corporation
of any specific minimum Tier 1 leverage ratio applicable to it.
At December 31, 1995, the Corporation had in place a Shareholders' Rights
Plan. The Shareholders' Rights Plan contains provisions intended to protect
stockholders in the event of unsolicited offers, attempts to acquire the
Corporation and other coercive or unfair takeover tactics that could impair the
Board of Directors' ability to represent stockholders' interests fully.
On January 18, 1996, the Corporation announced that it would redeem all
outstanding rights issued under its Shareholders' Rights Plan. The redemption
will be effective on the first regular common stock dividend record date
occurring after the consummation of the merger with Chase. The merger is
scheduled to be completed on March 31, 1996, and the rights would be redeemed
from all stockholders of record on the anticipated common stock dividend record
date of April 4, 1996. Under the Shareholder Rights Plan, the redemption price
is $0.01 per right. Payment of the redemption price is intended to be made at
the same time as payment of the 1996 first-quarter common stock dividend.
37
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LIQUIDITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Corporation's financial commitments and
to capitalize on opportunities for the Corporation's business expansion.
Liquidity management addresses the Corporation's ability to meet deposit
withdrawals either on demand or at contractual maturity, to repay borrowings as
they mature, and to make new loans and investments as opportunities arise.
Liquidity is managed on a daily basis at both the parent company and the
subsidiary levels, enabling senior management to monitor effectively changes in
liquidity and to react accordingly to fluctuations in market conditions.
Contingency plans exist and could be implemented on a timely basis to minimize
the risk associated with dramatic changes in market conditions.
In managing liquidity, the Corporation takes into account the various legal
limitations on the extent to which banks may pay dividends to their parent
companies or finance or otherwise supply funds to certain of their affiliates.
For additional information, refer to Note Fifteen of the Notes to Consolidated
Financial Statements.
The primary source of liquidity for the bank subsidiaries of the Corporation
derives from their ability to generate core deposits (which includes all
deposits except noninterest-bearing time deposits, foreign deposits and
certificates of deposit of $100,000 or more). The Corporation considers funds
from such sources to comprise its subsidiary banks' "core" deposit base because
of the historical stability of such sources of funds. The average core deposits
at the Corporation's bank subsidiaries for 1995 were $54 billion. These deposits
fund a portion of the Corporation's asset base, thereby reducing the
Corporation's reliance on other, more volatile, sources of funds. The
Corporation's average core deposits as a percentage of average loans was 66% for
1995. 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 holds marketable securities and other short-term investments
which can be readily converted to cash. As part of the Corporation's on-going
capital management process, loan syndication networks and retail securitization
programs are maintained in order to facilitate the timely disposition of assets,
if and when deemed desirable.
The Corporation is an active participant in the capital markets. In addition
to issuing commercial paper and medium-term notes, the Corporation raises funds
through the issuance of long-term debt, common stock and preferred stock. During
1995, the Corporation issued $1,153 million of long-term debt, including $631
million through its medium-term note program.
The Corporation's long-term debt at December 31, 1995 was $7,329 million, a
decrease of $662 million from the 1994 year-end. The decrease resulted from
maturities of $1,218 million of the Corporation's long-term debt (including $499
million of senior medium-term notes and $719 million of other senior notes) and
the redemption of $600 million of senior notes. These decreases were partially
offset by additions to the Corporation's long-term debt of $1,153 million
(including $360 million of senior medium-term notes, $271 million of
subordinated medium-term notes and $522 million of other senior notes).
As previously discussed, during the second quarter of 1995, the Corporation
called all of the outstanding shares of its 10% convertible preferred stock for
redemption. Substantially all of the 10% convertible preferred stock was
converted prior to the redemption date, at the option of the holders thereof,
into approximately 7.6 million shares of the Corporation's common stock. The
shares of common stock issued upon such conversion were issued from treasury.
The following table shows the debt ratings of the Corporation as well as
Chemical Bank. These ratings upgrades enhanced and should continue to enhance
the Corporation's access to global capital and money markets, a primary source
of liquidity for an international money-center institution. The ability to
access this geographically diverse assortment of distribution channels and to
issue a wide variety of capital and money market instruments at various
maturities provides the Corporation with a full array of alternatives for
managing its liquidity position.
<TABLE>
<CAPTION>
Debt Ratings
Corporation Bank
December 31, 1995 1994 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Moody's
Senior A1 A2 Aa3 Aa3
Subordinated A2 A3 A1 A2
Standard & Poor's
Senior A A A+ A+
Subordinated A- A- A A
- -------------------------------------------------------------
</TABLE>
38
<PAGE> 41
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
- - OTHER EVENTS
JOINT VENTURE WITH MELLON BANK CORPORATION
The Corporation and Mellon Bank Corporation have formed a joint venture that
focuses on providing stock transfer and related shareholder services to
publicly-held companies. The joint venture is called Chemical Mellon Shareholder
Services, and is a 50/50 partnership, with Mellon Bank Corporation and the
Corporation sharing equally in the joint venture's initial capitalization,
including investments in new technology.
The joint venture was accounted for as an equity investment effective January
1, 1995, with revenues and expenses of the affected business units recorded in
other revenue.
SALE OF CHEMICAL BANK NEW JERSEY NATIONAL ASSOCIATION
On October 6, 1995, the Corporation sold Chemical New Jersey Holdings, Inc. and
its subsidiaries, including Chemical Bank New Jersey National Association, to
PNC Bank Corp. for approximately $490 million. The sale did not include the
Corporation's franchise in northeastern New Jersey or the Montclair, Morristown,
Ridgewood and Summit offices of Princeton Bank and Trust Company. These
remaining branches and offices are being repositioned as a strategic component
of the Corporation's regional banking in metropolitan New York. The after-tax
gain on the sale was approximately $45 million.
SALE OF HALF INTEREST IN CIT
On December 15, 1995, the Corporation sold half of its 40% interest in CIT to
The Dai-Ichi Kangyo Bank for approximately $430 million, resulting in an
after-tax loss of approximately $20 million. The Corporation has given Dai-Ichi
Kangyo a five-year option to purchase its remaining 20% interest and CIT has
given the Corporation public offering registration rights with respect to this
20% share, which would take effect at the end of the option period.
- --------------------------------------------------------------------------------
- - ACCOUNTING DEVELOPMENTS
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based compensation plans. Such plans include all
arrangements by which employees or others receive shares of stock or other
equity instruments of the Corporation, or arrangements by which the Corporation
incurs liabilities in amounts based on the price of the Corporation's stock.
Examples are stock options, restricted stock, restricted stock units, stock
appreciation rights and stock purchase plans.
SFAS 123 allows two alternative accounting methods: (1) a fair-value-based
method, or (2) an intrinsic value-based method which is already prescribed by
Accounting Policy Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Both the accounting and disclosure requirements of SFAS
123 are effective for fiscal years beginning after December 15, 1995. 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 in 1996.
39
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
- - COMPARISON BETWEEN 1994 AND 1993
OPERATING HIGHLIGHTS
The Corporation's net income for 1994, including a fourth-quarter restructuring
charge of $260 million ($152 million after-tax), was $1,294 million, or $4.60
per primary share and $4.54 on a fully-diluted basis. Reported 1993 net income
was $1,604 million, or $5.71 per primary share and $5.62 on a fully-diluted
basis, which included the recognition of remaining income tax benefits of $331
million, a $115 million Manufacturers Hanover Corporation ("MHC") merger-related
charge ($67 million after-tax), and a net positive impact of $35 million related
to accounting changes.
Net income, before the fourth-quarter 1994 restructuring charge, was $1,446
million, or $5.20 per primary share and $5.13 on a fully-diluted basis. These
1994 results reflected an 11% increase from comparable pro forma earnings of
$1,305 million, or $4.53 per primary share and $4.47 on a fully-diluted basis in
1993.
On December 1, 1994, the Corporation announced its Actions to Improve
Earnings Per Share Program, designed to produce earnings per share growth of
more than 15% in 1995 and in 1996, as well as an efficiency ratio of 57% and a
return on common stockholders' equity of 16% by 1996.
NET INTEREST INCOME
The Corporation's net interest income was $4,674 million in 1994, compared with
$4,636 million in 1993. The rise in 1994 was attributable to an increase in
average interest-earning assets, which more than offset the effect of rising
interest rates.
Average interest-earning assets were $130.0 billion in 1994, an increase of
4% from $124.9 billion in 1993, reflecting a higher level of liquid assets and
securities. The composition of average interest-earning assets shifted during
the latter part of 1993 and early part of 1994 to support the Corporation's
trading businesses.
PROVISION FOR LOSSES AND NET CHARGE-OFFS
The provision for losses in 1994 was $550 million, compared with $1,259 million
in 1993, a decline of 56%. Net charge-offs in 1994 were $1,095 million compared
with $1,281 million in 1993. The 1994 results included a $148 million charge
related to the decision to designate certain assets as
held-for-accelerated-disposition as well as a $291 million charge incurred in
connection with management's final valuation of its emerging markets portfolio.
As a result of management's evaluation of the continuing improvement in the
Corporation's credit profile, the provision for losses in 1994 was lower than
the Corporation's net charge-offs.
NONINTEREST REVENUE
Noninterest revenue totaled $3,597 million in 1994, compared with $4,024 million
in 1993. The decrease from the prior year reflected lower trading revenue, a
decline in securities gains, and a decline in gains on the sales of emerging
markets-related past-due interest bonds (included in other revenue). These
decreases were partially offset by increased revenues from corporate finance
fees, credit card revenue, trust and investment management fees, as well as
increased revenues from equity-related investments (included in other revenue).
Corporate finance and syndication fees in 1994 reached a then record level of
$405 million, a 20% increase from the prior year, principally resulting from the
continued strong growth in loan syndication and other investment banking
activities.
Trust and investment management fees in 1994 were $421 million, an increase
of $15 million from 1993. The higher level of fees reflected a 5% increase in
personal trust fees, principally due to new customer relationships developed as
a result of the acquisition of Ameritrust Texas Corporation ("Ameritrust") by
Texas Commerce. Corporate and institutional trust fees also increased 5% from
the 1993 level largely due to the inclusion of Ameritrust results for the full
year in 1994 versus only three months in 1993.
Credit card revenue in 1994 was $315 million, an increase of 32% from 1993,
reflecting a growing cardholder base, primarily as a result of the Corporation's
co-branded Shell MasterCard program, which was launched in the fourth quarter of
1993.
Service charges on deposit accounts totaled $300 million in 1994, an increase
of 4% over 1993, principally reflecting pricing initiatives during the first
half of 1994 related to retail accounts, partially offset by a slightly smaller
deposit base.
Fees for other financial services for 1994 were $833 million, an increase of
$4 million from 1993, primarily due to increased mortgage servicing fees
reflecting a higher level of mortgage servicing volume from the Margaretten
acquisition as well as additions to the portfolio from mortgage originations.
Trading-related revenue in 1994 was $660 million, a decrease of 40% from the
prior year due to a difficult trading environment during 1994, when compared
with 1993. The interest rate environment in the U.S. and European markets was
volatile during 1994, while difficult conditions existed in the emerging debt
markets, and European government bond markets. Additionally, during 1994, the
Corporation incurred a $70 million loss resulting from unauthorized foreign
exchange transactions involving the Mexican peso.
Securities gains were $66 million in 1994, compared with $142 million in
1993. The decrease was due to the higher interest rate environment exerting
downward pressure on market prices.
The Corporation's other noninterest revenue for 1994 was $612 million,
compared with $710 million in 1993. Revenue from equity-related investments,
which includes income from venture
40
<PAGE> 43
Chemical Banking Corporation
and Subidiaries
- -------------------------------------------------------------------------------
capital activities and emerging markets investments, was $362 million in 1994,
an increase of 30% from 1993. Included in other noninterest revenue in 1994 was
$127 million of net gains from the sale of emerging markets-related past-due
interest bonds, compared with $306 million in 1993. All other noninterest
revenue was $123 million in 1994, compared with $126 million in 1993. Included
in the 1994 amount was equity income from CIT of $73 million, an increase from
$65 million in 1993.
NONINTEREST EXPENSE
Noninterest expense in 1994 was $5,509 million, compared with $5,293 million in
1993. Included in the results for 1994 was a $260 million restructuring charge
taken in connection with the aforementioned Actions to Improve Earnings Per
Share Program, and a $48 million restructuring charge related to the closing of
50 New York State branches. The 1993 results included a $115 million charge
related to the final assessment of costs associated with the merger with MHC and
a $43 million charge associated with the acquisition of certain assets of the
First City Banks by Texas Commerce. Excluding all restructuring charges in both
years, noninterest expense for 1994 was $5,201 million, an increase of 1% from
1993. Noninterest expense for 1994, when compared with the prior year, reflected
higher expenses associated with investments in certain key businesses such as
the Shell MasterCard program, the trading and securities businesses, Margaretten
and Ameritrust.
Salaries and employee benefits expenses in 1994 were $2,644 million, compared
with $2,466 million in 1993. The increase in 1994 was primarily due to the
Margaretten acquisition, the implementation of the Shell MasterCard program,
additional staff costs resulting from the 1993 acquisition of Ameritrust by
Texas Commerce, and the increase in the Corporation's securities underwriting
business.
Occupancy expense was $573 million in 1994, a decrease of $14 million from
1993. The decline from 1993 principally resulted from the termination of a
facilities lease in London at the beginning of 1994, the impact of branch
divestitures, and the continuing consolidation of the New York branch system.
Partially offsetting these factors were additional occupancy expense related to
the Margaretten acquisition, as well as costs associated with the consolidation
and relocation of certain data centers.
Equipment expense in 1994 was $382 million, an increase of $45 million,
principally due to higher costs incurred for system enhancements to support the
Corporation's trading activities, the consolidation of its data centers, and for
upgrades to its ATM technology.
Foreclosed property expense was $41 million in 1994, compared with $287
million in 1993, reflecting significant progress in managing the Corporation's
real estate portfolio. The 1994 expense benefited by approximately $42 million
of gains from the sale of foreclosed property. Also included in the 1994 results
was a $12 million charge in conjunction with the transfer of certain real estate
assets to the held for accelerated disposition category. Included in the 1993
results was a $20 million writedown related to the accelerated disposition of
nonperforming residential mortgage assets.
For 1994, other expense was $1,561 million, an increase of 7% from the 1993
level. The increase reflects higher professional services and telecommunication
costs, as well as the full-year impact in 1994 of expenses associated with the
First City Banks and Ameritrust acquisitions, and the inclusion of Margaretten
since its acquisition on July 1, 1994.
INCOME TAXES
The Corporation recorded income tax expense of $918 million in 1994, compared
with $539 million in 1993. Included in the 1993 income tax expense were
approximately $331 million of Federal income tax benefits.
The Corporation recognized its remaining available Federal income tax
benefits in accordance with SFAS 109 in the third quarter of 1993. As a result,
earnings, beginning in the fourth quarter of 1993, have been reported on a
fully-taxed basis.
The Corporation's effective tax rate was 41.5% in 1994, compared with 25.6%
in 1993. Excluding the $331 million of benefits recognized under SFAS 109 for
1993, the Corporation's effective tax rate for 1993 would have been 41.3%.
NONPERFORMING ASSETS
The Corporation's total nonperforming assets at December 31, 1994 were $1,139
million, a decline of 68% from $3,525 million at December 31, 1993. This
improvement in the Corporation's credit profile is a result of a significantly
lower level of loans being placed on nonperforming status, repayments,
charge-offs, the Corporation's continuing loan workout and collection
activities, as well as the impact of the strategic actions discussed below.
In October 1994, the Corporation sold a $341 million (face value) portfolio
of commercial real estate mortgage loans and real estate assets, which contained
approximately 86% nonperforming loans and foreclosed properties. Additionally,
in December 1994, the Corporation segregated approximately $735 million of real
estate loans and real estate owned (approximately $580 million nonperforming
assets) and designated such assets as Assets Held for Accelerated Disposition.
ALLOWANCE FOR CREDIT LOSSES
The total allowance for credit losses at December 31, 1994 was $2,480 million,
or 3.15% of total loans and 266.95% of nonperforming loans at year-end, compared
with $3,020 million, or 4.01% of total loans and 116.56% of nonperforming loans
at the 1993 year-end.
41
<PAGE> 44
Chemical Banking Corporation
and Subsidiaries
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
- -------------------------------------------------------------------------------
- - TO OUR STOCKHOLDERS
The management of Chemical Banking Corporation and its subsidiaries has the
responsibility for preparing the accompanying consolidated financial statements
and for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles. The consolidated
financial statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
Management maintains a comprehensive system of internal control to assure the
proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. The Corporation maintains a
strong internal auditing program that independently assesses the effectiveness
of the internal controls and recommends possible improvements thereto.
Management believes that as of December 31, 1995, the Corporation maintains an
effective system of internal control.
The Audit Committee of the Board of Directors reviews the systems of internal
control and financial reporting. The Committee meets and consults regularly with
management, the internal auditors and the independent accountants to review the
scope and results of their work.
The accounting firm of Price Waterhouse LLP has performed an independent
audit of the Corporation's financial statements. Management has made available
to Price Waterhouse LLP all of the Corporation's financial records and related
data, as well as the minutes of stockholders' and directors' meetings.
Furthermore, management believes that all representations made to Price
Waterhouse LLP during its audit were valid and appropriate. The firm's report
appears below.
Walter V. Shipley
Chairman of the Board and Chief Executive Officer
Peter J. Tobin
Chief Financial Officer
Joseph L. Sclafani
Senior Vice President and Controller
January 16, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
- - PRICE WATERHOUSE LLP 1177 AVENUE OF THE AMERICAS, NEW YORK, NY 10036
To the Board of Directors and Stockholders of Chemical Banking Corporation: In
our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Chemical Banking Corporation and its subsidiaries at December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Notes Four, Thirteen and Seventeen to the consolidated
financial statements, in 1993 the Corporation changed its method of accounting
for certain investments in debt and marketable equity securities, postretirement
benefits other than pensions, and income taxes.
January 16, 1996
42
<PAGE> 45
Chemical Banking Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, (in millions, except share data) 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 9,077 $ 8,832
Deposits with Banks 2,666 5,649
Federal Funds Sold and Securities Purchased Under Resale Agreements 8,033 12,797
Trading Assets:
Debt and Equity Instruments 18,317 11,093
Risk Management Instruments 17,703 17,709
Securities:
Available-for-Sale 30,157 18,431
Held-to-Maturity (Market Value: $4,659 in 1995 and $8,106 in 1994) 4,628 8,566
Loans (Net of Unearned Income: $485 in 1995 and $460 in 1994) 82,143 78,767
Allowance for Credit Losses (2,379) (2,480)
Premises and Equipment 2,038 2,134
Due from Customers on Acceptances 1,179 1,088
Accrued Interest Receivable 1,328 1,190
Other Assets 8,036 7,647
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 182,926 $ 171,423
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic Noninterest-Bearing $ 21,673 $ 21,399
Domestic Interest-Bearing 44,491 46,799
Foreign 32,253 28,308
- ------------------------------------------------------------------------------------------------------------------
Total Deposits 98,417 96,506
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 25,675 23,098
Other Borrowed Funds 9,238 7,130
Acceptances Outstanding 1,193 1,104
Trading Liabilities 24,270 20,692
Accounts Payable, Accrued Expenses and Other Liabilities 4,892 4,190
Long-Term Debt 7,329 7,991
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 171,014 160,711
- ------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (See Note Twenty Three)
STOCKHOLDERS' EQUITY
Preferred Stock 1,250 1,450
Common Stock (Authorized 400,000,000 Shares,
Issued 254,930,904 Shares in 1995 and 254,009,187 Shares in 1994) 255 254
Capital Surplus 6,479 6,544
Retained Earnings 4,493 3,263
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (303) (438)
Treasury Stock, at Cost (4,414,830 Shares in 1995 and 9,497,533 Shares in 1994) (262) (361)
- ------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 11,912 10,712
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 182,926 $ 171,423
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
43
<PAGE> 46
Chemical Banking Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, (in millions, except per share data) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 7,024 $5,730 $5,620
Securities 2,162 1,715 1,727
Trading Assets 878 722 449
Federal Funds Sold and Securities Purchased Under Resale Agreements 785 550 339
Deposits With Banks 269 371 268
- -------------------------------------------------------------------------------------------------------------------------
Total Interest Income 11,118 9,088 8,403
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 3,657 2,378 2,241
Short-Term and Other Borrowings 2,226 1,500 992
Long-Term Debt 546 536 534
- -------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 6,429 4,414 3,767
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 4,689 4,674 4,636
Provision for Losses 478 550 1,259
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Losses 4,211 4,124 3,377
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 531 405 338
Trust and Investment Management Fees 379 421 406
Credit Card Revenue 378 315 238
Service Charges on Deposit Accounts 297 300 288
Fees for Other Financial Services 850 833 829
Trading Revenue 624 645 1,073
Securities Gains 119 66 142
Other Revenue 588 612 710
- -------------------------------------------------------------------------------------------------------------------------
Total Noninterest Revenue 3,766 3,597 4,024
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,332 2,205 2,070
Employee Benefits 434 439 396
Occupancy Expense 520 573 587
Equipment Expense 395 382 337
Foreclosed Property Expense (23) 41 287
Restructuring Charge -- 308 158
Other Expense 1,343 1,561 1,458
- -------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,001 5,509 5,293
- -------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Effect of Accounting Changes 2,976 2,212 2,108
Income Tax Expense 1,160 918 539
- -------------------------------------------------------------------------------------------------------------------------
Income Before Effect of Accounting Changes 1,816 1,294 1,569
Net Effect of Changes in Accounting Principles (11) -- 35
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,805 $1,294 $1,604
- -------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 1,700 $1,156 $1,449
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Primary:
Income Before Effect of Accounting Changes $ 6.77 $ 4.60 $ 5.57
Net Effect of Changes in Accounting Principles (0.04) -- .14
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 6.73 $ 4.60 $ 5.71
- -------------------------------------------------------------------------------------------------------------------------
Assuming Full Dilution:
Income Before Effect of Accounting Changes $ 6.51 $ 4.54 $ 5.48
Net Effect of Changes in Accounting Principles (0.04) -- .14
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 6.47 $ 4.54 $ 5.62
- -------------------------------------------------------------------------------------------------------------------------
Average Common and Common Equivalent Shares 252.6 251.3 253.9
- -------------------------------------------------------------------------------------------------------------------------
Average Common Shares Assuming Full Dilution 263.8 258.9 261.6
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
44
<PAGE> 47
Chemical Banking Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at Beginning of Year $ 1,450 $ 1,654 $ 1,848
Issuance of Stock -- 200 400
Redemption of Stock -- (404) (594)
Conversion of Stock (200) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 1,250 1,450 1,654
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at Beginning of Year 254 253 247
Issuance of Stock 1 1 6
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 255 254 253
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at Beginning of Year 6,544 6,553 6,376
Issuance of Stock (72)(a) 12 194
Premium on Redemption of Preferred Stock -- (12) (17)
Restricted Stock Granted, Net of Amortization 7 (9) --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 6,479 6,544 6,553
- ------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 3,263 2,501 1,392
Net Income 1,805 1,294 1,604
Cash Dividends Declared:
Preferred Stock (105) (126) (155)
Common Stock (480) (406) (345)
Accumulated Translation Adjustment(b) 10 -- 5
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year 4,493 3,263 2,501
- ------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES
Balance at Beginning of Year (438) 215 --
Impact of Accounting Change -- -- 215
Net Change in Fair Value of Securities Available-for-Sale, Net of Taxes 135 (653) --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year (303) (438) 215
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY, AT COST
Balance at Beginning of Year (361) (12) (12)
Purchase of Treasury Stock (762) (387) --
Reissuance of Treasury Stock 861 38 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year (262) (361) (12)
- ------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 11,912 $ 10,712 $ 11,164
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily reflects the effect of common stock reissued from Treasury due to
the conversion of the Corporation's 10% convertible preferred stock.
(b) Balance was $0 million, ($10) million and ($10) million at December 31,
1995, 1994, and 1993, respectively.
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
45
<PAGE> 48
Chemical Banking Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,805 $ 1,294 $ 1,604
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Net Effect of Changes in Accounting Principles 11 -- (35)
Provision for Losses 478 550 1,259
Restructuring Charge -- 308 158
Depreciation and Amortization 366 377 333
Net Change In:
Trading-Related Assets (6,120) (1,789) (10,513)
Accrued Interest Receivable (149) (56) (20)
Other Assets (1,042) 889 1,702
Trading-Related Liabilities 3,477 1,696 --
Accrued Interest Payable (85) 91 22
Other Liabilities (594) 622 1,361
Other, Net (252) (808) (730)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities (2,105) 3,174 (4,859)
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 2,983 407 (4,169)
Federal Funds Sold and Securities Purchased Under Resale Agreements 4,278 (2,241) (2,424)
Loans Due to Sales and Securitizations 12,717 9,136 12,403
Other Loans, Net (19,345) (13,123) (5,657)
Other, Net (1,217) 220 389
Proceeds from the Maturity of Held-to-Maturity Securities 1,517 2,816 4,968
Proceeds from the Sale of Held-to-Maturity Securities -- -- 152
Purchases of Held-to-Maturity Securities (678) (1,194) (6,444)
Proceeds from the Maturity of Available-for-Sale Securities 5,566 3,498 1,608
Proceeds from the Sale of Available-for-Sale Securities 51,445 18,556 5,352
Purchases of Available-for-Sale Securities (64,367) (25,697) (7,568)
Proceeds from Divestitures of Non-Strategic Businesses 1,050 -- --
Cash Used in Acquisitions -- (373) (481)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (6,051) (7,995) (1,871)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 837 (2,041) (115)
Domestic Time and Savings Deposits (164) (5,124) (1,716)
Foreign Deposits 3,945 5,414 2,887
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3,063 10,241 (2,278)
Other Borrowed Funds 2,108 (197) 5,625
Other, Net 88 (18) (344)
Proceeds from the Issuance of Long-Term Debt 1,153 1,672 3,451
Repayments of Long-Term Debt (1,818) (2,042) (2,299)
Proceeds from the Issuance of Stock 504 254 591
Redemption of Preferred Stock -- (416) (610)
Treasury Stock Purchased (762) (387) --
Cash Dividends Paid (548) (521) (480)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 8,406 6,835 4,712
- --------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks (5) (34) 24
Net Increase (Decrease) in Cash and Due from Banks 245 1,980 (1,994)
Cash and Due from Banks at the Beginning of the Year 8,832 6,852 8,846
- --------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at the End of the Year $ 9,077 $ 8,832 $ 6,852
- --------------------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 6,514 $ 4,323 $ 3,745
- --------------------------------------------------------------------------------------------------------------------
Taxes Paid $ 911 $ 1,011 $ 390
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
46
<PAGE> 49
Chemical Banking Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chemical Banking Corporation (the "Corporation") is a bank holding company
organized under the laws of the State of Delaware in 1968 and registered under
the Bank Holding Company Act of 1956, as amended.
The Corporation conducts its domestic and international financial services
businesses through various bank and non-bank subsidiaries. The principal bank
subsidiaries of the Corporation are Chemical Bank, a New York banking
corporation ("Chemical Bank"), and Texas Commerce Bank National Association,
a subsidiary of Texas Commerce Equity Holdings, Inc. ("Texas Commerce"), a
Delaware bank holding company subsidiary of the Corporation.
The Corporation provides diversified financial services principally through
two sectors: the Global Bank and Consumer and Relationship Banking. The Global
Bank provides domestic and international corporate finance, wholesale banking,
and investment services and emphasizes originations, underwriting,
distribution, and risk management products. Consumer and Relationship Banking
serves a wide range of customer needs and includes consumer, commercial and
professional, middle market, and private banking; and trust, cash management,
funds transfer, and trade and securities services.
The accounting and financial reporting policies of the Corporation and its
subsidiaries conform to generally accepted accounting principles and prevailing
industry practices and, where applicable, the accounting and reporting
guidelines prescribed by the Securities and Exchange Commission and bank
regulatory authorities. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
The following is a description of significant accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after eliminating material intercompany
balances and transactions. Equity investments in less than majority-owned
companies (20%-50% ownership interest) are generally accounted for in
accordance with the equity method of accounting and are reported in Other
Assets. The Corporation's pro-rata share of earnings (losses) of these
companies is included in Other Revenue.
Assets held in an agency or fiduciary capacity by commercial banking
subsidiaries and by trust and investment advisory subsidiaries are not assets
of the Corporation and, accordingly, are not included in the Consolidated
Balance Sheet.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars using prevailing rates of exchange. Gains and losses on foreign
currency translation from operations for which the functional currency is other
than the U.S. dollar, together with related hedges and tax effects, are
reported in Stockholders' Equity. For foreign operations for which the U.S.
dollar is the functional currency, gains and losses resulting from converting
foreign currency assets and liabilities to the U.S. dollar, including the
related hedges, are reported in the income statement.
TRADING ACTIVITIES
The Corporation trades debt and equity instruments and risk management
instruments, as discussed below. These instruments are carried at their
estimated fair value. Quoted market prices, when available, are used as the
basis to determine the fair value of trading instruments. If quoted market
prices are not available, fair values are estimated on the basis of pricing
models, quoted prices of instruments with similar characteristics, or
discounted cash flows.
Realized and unrealized gains (losses) on these instruments are recognized in
Trading Revenue. A portion of the market valuation relating to certain risk
management instruments is deferred and accreted to income over the life of the
instruments to match ongoing servicing costs and credit risks, as appropriate.
Interest earned on debt and dividends earned on equity instruments and interest
payable on securities sold but not yet purchased are reported as interest
income and interest expense, respectively.
Debt and Equity Instruments and Securities Sold, Not Yet Purchased: Debt and
equity instruments include securities, loans, and other credit instruments held
for trading purposes and are reported as Trading Assets. Obligations to deliver
securities sold but not yet purchased are reported as Trading Liabilities.
Risk Management Instruments: The Corporation primarily deals in interest rate,
foreign exchange, and commodity contracts to generate trading revenues. Such
contracts include futures, forwards, swaps, and options (including interest
rate caps and floors). The estimated fair value of such contracts are reported
on a gross basis as Trading Assets-Risk Management Instruments (positive fair
values) and Trading Liabilities (negative fair values), except for contracts
executed with the same counterparty under legally-enforceable master netting
agreements, which are reported on a net basis.
DERIVATIVES USED IN ASSET/LIABILITY MANAGEMENT ACTIVITIES
As part of its asset/liability management activities, the Corporation primarily
uses interest rate swaps and futures and to a lesser extent forward rate
agreements and option contracts (including interest rate caps and floors) to
hedge exposures or to modify the interest rate characteristics of related
balance sheet instruments. Futures
47
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
contracts are designated as hedges when they reduce risk and there is high
correlation between the futures contract and the item being hedged, both at
inception and throughout the hedge period. Interest rate swaps, forward rate
agreements, and option contracts are generally used to modify the interest rate
characteristics of balance sheet instruments and are linked to specific assets
or groups of similar assets or to specific liabilities or groups of similar
liabilities.
The instruments that meet the above criteria are accounted for under the
accrual method, or available-for-sale fair value method, as discussed below.
Accrual Method: Under the accrual method, interest income or expense on the
derivative contract is accrued and there is no recognition of unrealized gains
and losses on the derivative in the balance sheet. Premiums on option contracts
are amortized to interest income or interest expense over the life of such
contracts.
Available-for-Sale Fair Value Method: Derivatives linked to available-for-sale
securities are carried at fair value. The accrual of interest receivable or
interest payable on these derivatives is reported in Interest Income on
Securities. Changes in the market values of these derivatives, exclusive of net
interest accruals, are reported in Stockholders' Equity, net of applicable
taxes, consistent with the reporting of unrealized gains and losses on the
related securities.
For both the accrual and available-for-sale fair value method, realized
gains and losses from the settlement or termination of derivatives contracts
are deferred on the balance sheet and are amortized to interest income or
interest expense over the appropriate risk management periods. Amortization
commences when the contract is settled or terminated. If the related assets or
liabilities are sold or otherwise disposed, the gain or loss on the derivative
contract is recognized as an adjustment to the gain or loss on disposition of
the related assets or liabilities.
Prior to January 1, 1995, the Corporation used interest rate contracts in
place of cash market instruments. Effective January 1, 1995, this practice was
discontinued. Accordingly, interest rate contracts entered into subsequent to
January 1, 1995 that do not meet the hedge or linkage criteria described above
are designated as trading activities and are accounted for at estimated fair
value.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS
The Corporation enters into short-term purchases of securities under agreements
to resell (resale agreements) and sales of securities under agreements to
repurchase (repurchase agreements) of substantially identical securities. Such
agreements are carried on the balance sheet at the amount advanced or borrowed,
respectively, plus accrued interest. Interest earned on resale agreements and
interest incurred on repurchase agreements are reported as Interest Income and
Interest Expense, respectively. The Corporation offsets resale and repurchase
agreements executed with the same counterparty under legally-enforceable netting
agreements that meet the applicable netting criteria.
It is the Corporation's policy to obtain control or take possession of
securities purchased under resale agreements. The Corporation monitors the
market value of securities and adjusts the level of collateral for resale and
repurchase agreements, as appropriate.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
Effective December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). For a further discussion of SFAS 115 and the
Financial Accounting Series Special Report on SFAS 115, issued during the 1995
fourth quarter, see Note Four.
Securities that may be sold in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or other factors, are classified
as Available-for-Sale and are carried at fair value. Unrealized gains and
losses on these securities, along with any unrealized gains and losses on
related derivatives, are reported, net of applicable taxes, in Stockholders'
Equity. Securities that the Corporation has the positive intent and ability to
hold to maturity are classified as Held-to-Maturity and are carried at
amortized cost. During 1993, securities that might have been sold prior to
maturity were carried at the lower of aggregate cost or market value, with any
valuation adjustments reported in Securities Gains.
Interest and dividend income on securities, including amortization of
premiums and accretion of discounts, are reported in Interest Income on
Securities. Interest income is recognized using the interest method. The
specific identification method is used to determine realized gains and losses
on sales of securities, which are reported in Securities Gains. Individual
securities are reduced through writedowns against Securities Gains to reflect
other-than-temporary impairments in value.
The Corporation anticipates prepayments of principal in the calculation of
the effective yield for collateralized mortgage obligations ("CMOs") and
mortgage-backed securities. The prepayment of CMOs and mortgage-backed
securities is actively monitored through the Corporation's portfolio management
function. The Corporation typically invests in CMOs and mortgage-backed
securities with stable cash flows and relatively short duration, thereby
limiting the impact of interest rate fluctuations on the portfolio. Management
regularly does simulation testing regarding the impact that interest and market
rate changes would have on its CMO and mortgage-backed securities portfolios.
CMOs and mortgage-backed securities which management believes have high
prepayment risk are included in the available-for-sale portfolio.
48
<PAGE> 51
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
LOANS
Loans are generally reported at the principal amount outstanding, net of
unearned income and net deferred loan fees (nonrefundable yield-related loan
fees, net of related direct origination costs), if any. Loans held for sale are
carried at the lower of aggregate cost or fair value. Certain loans meeting the
accounting definition of a security are classified as Loans but are measured
pursuant to SFAS 115. Interest income is recognized using the interest method
or on a basis approximating a level rate of return over the term of the loan.
The Corporation sells or securitizes certain commercial and consumer loans.
Such sales are generally without recourse to the Corporation. Gains or losses,
as appropriate, are reported in Other Revenue.
Nonaccrual loans are those loans on which the accrual of interest has
ceased. Loans, other than certain consumer loans discussed below, are placed
on nonaccrual status immediately if, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan
agreement, or when principal or interest is past due 90 days or more and
collateral, if any, is insufficient to cover principal and interest. Interest
accrued but not collected at the date a loan is placed on nonaccrual status is
reversed against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Interest
income on nonaccrual loans is recognized only to the extent received in cash.
However, where there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or interest, are
thereafter applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal payments are brought current
and future payments are reasonably assured.
Consumer loans (exclusive of residential mortgage products which are
accounted for in accordance with the nonaccrual loan policy discussed above)
are generally charged to the allowance for credit losses upon reaching
specified stages of delinquency. Accrued interest is reversed against interest
income when such consumer loans are charged off.
Renegotiated loans are those for which concessions, such as the reduction of
interest rates or deferral of interest or principal payments, have been granted
due to a deterioration in the borrowers' financial condition. Interest on
renegotiated loans is accrued at the renegotiated rates. Certain renegotiated
loan agreements call for additional interest to be paid on a deferred or
contingent basis. Such interest is taken into income only as collected.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114"), and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"). SFAS 114 requires that the carrying value of an
impaired loan be based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral, if
the loan is collateral-dependent. Under SFAS 114, a loan is considered impaired
when, based on current information, it is probable that the borrower will be
unable to pay contractual interest or principal payments as scheduled in the
loan agreement. SFAS 114 applies to all loans except smaller-balance homogeneous
consumer loans, loans carried at fair value or the lower of cost or fair value,
debt securities, and leases. Generally, the Corporation applies SFAS 114 to
nonaccrual commercial loans and renegotiated loans. In addition, SFAS 114
modified the accounting for in-substance foreclosures ("ISF"). Effective
January 1, 1995, a collateralized loan is considered an ISF and reclassified to
Assets Acquired as Loan Satisfactions only when the Corporation has taken
physical possession of the collateral regardless of whether formal foreclosure
proceedings have taken place.
SFAS 118 permits a creditor to use existing methods for recognizing interest
revenue on impaired loans. The Corporation recognizes interest income on
impaired loans pursuant to the discussion above for nonaccrual and renegotiated
loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses provides for risks of losses inherent in the
credit-extension process. The allowance is a general allowance and is based on
periodic reviews and analyses of the portfolio, which comprises primarily loans
and derivatives and foreign exchange contracts. The periodic analyses include
consideration of such factors as the risk rating of individual credits, the
size and diversity of the portfolio, economic and political conditions, prior
loss experience, and results of periodic credit reviews of the portfolio. The
allowance for credit losses is increased by provisions for losses charged
against income and is reduced by charge-offs, net of recoveries. Charge-offs
are recorded when, in the judgment of management, an extension of credit is
deemed uncollectible, in whole or in part. Other charges to the allowance
include amounts related to loans transferred to Assets Held for Accelerated
Disposition.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Capital leases are included in
Premises and Equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization of premises are included in Occupancy Expense,
while depreciation of equipment is included in Equipment Expense. Depreciation
and amortization are computed using the straight-line method over the estimated
useful life of the owned asset and, for leasehold improvements, over the
estimated useful life of the related asset or the lease term, whichever is
shorter. Maintenance and repairs are charged to expense as incurred, while
major improvements are capitalized.
49
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OTHER ASSETS
Assets Acquired As Loan Satisfactions: Assets acquired in full or partial
satisfaction of loans are reported at the lower of cost or estimated fair value
less costs to sell. These assets are primarily real estate. Writedowns at the
date of transfer from Loans to assets acquired as loan satisfactions and within
six months after the date of transfer are charged to the Allowance for Credit
Losses. Writedowns of such assets subsequent to six months from the date of
transfer are included in Foreclosed Property Expense. Operating expenses, net
of related revenue, and gains and losses on sales of such assets are reported
net in Foreclosed Property Expense.
Assets Held for Accelerated Disposition: Assets held for accelerated
disposition consist primarily of real estate loans and real estate assets
acquired as loan satisfactions. At the date of transfer to the accelerated
disposition portfolio, these assets are recorded at their initial estimated
disposition value less costs to sell. Assets held for accelerated disposition
are carried at the lower of cost or current estimated disposition value. Any
adjustments to the carrying value of these assets or realized gains and losses
as assets are sold are reported in Other Revenue.
Equity and Equity-Related Investments: Equity and equity-related investments,
include venture capital activities and emerging markets investments.
Nonmarketable holdings are carried at cost, net of other-than-temporary
impairment losses. Marketable holdings are marked-to-market at a discount to
the public value. Income from these investments is reported in Other Revenue.
Intangibles: Goodwill and other acquisition intangibles, such as core deposits
and credit card relationships are amortized over the estimated periods to be
benefited, generally ranging from 10 to 25 years. An impairment review is
performed periodically on these assets. Goodwill amounted to $0.7 billion at
December 31, 1995 compared with $1.1 billion at December 31, 1994. The decrease
in goodwill during 1995 was primarily due to the sale of the Corporation's
banking operations in southern and central New Jersey and half of its 40%
interest in the CIT Group Holdings, Inc.
Mortgage Servicing Rights: In 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"). SFAS 122 amends Statement of Financial Accounting
Standards No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS
65"), to require that when a definitive plan exists to sell or securitize
mortgage loans and to retain the servicing rights related thereto, a mortgage
banking enterprise should recognize as separate assets the rights to service
mortgage loans for others, irrespective of whether those servicing rights are
acquired through the purchase or the origination of the mortgage loans. Under
SFAS 65, only purchased mortgage servicing rights were permitted to be
recognized as separate assets. Capitalized mortgage servicing assets are
amortized into noninterest revenue in proportion to, and over the period of,
the estimated future net servicing income stream of the underlying mortgage
loans. SFAS 122 requires that capitalized mortgage servicing rights be
assessed for impairment based on the fair value of those rights. The
Corporation's policy for evaluating impairment is to stratify the mortgage
servicing rights by year of origination. Fair value is determined considering
market prices for similar assets and based on discounted cash flows using
market based prepayment estimates for similar coupons and incremental direct
and indirect costs.
FEE-BASED REVENUE
Corporate finance and syndication fees primarily include fees received for
managing and syndicating loan arrangements; providing financial advisory
services in connection with leveraged buyouts, recapitalizations, and mergers
and acquisitions; and arranging private placements and underwriting debt and
equity securities.
Trust and investment management fees primarily include fees received in
connection with personal, corporate, and employee benefit trust and investment
management activities.
Credit card revenues primarily include fees received in connection with
credit card activities such as annual, late payment, cash advance, and
interchange fees, as well as servicing fees earned in connection with
securitization activities.
Fees for other financial services primarily include fees received in
connection with mortgage servicing, loan commitments, standby letters of credit
and compensating balances and other fees.
Corporate finance and syndication fees are recognized when services to which
they relate have been provided. In addition, recognition of syndication fees is
subject to certain tests being satisfied. Trust and investment management fees
and fees for other financial services are generally recognized over the period
that the related service is provided. Credit card revenues are generally
recognized as billed, except for annual fees, which are recognized over a
twelve-month period.
INCOME TAXES
The Corporation recognizes both the current and deferred tax consequences of
all transactions that have been recognized in the financial statements.
Calculations are based on the provisions of enacted tax laws and the tax rates
in effect for current and future years. The deferred tax liability (asset) is
determined based on enacted tax rates which will be in effect when the
underlying items of income and expense are expected to be reported to the
taxing authorities. Net deferred tax assets, whose realization is dependent on
taxable earnings of future years, are recognized when a more-
50
<PAGE> 53
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
likely-than-not criterion is met. Annual deferred tax expense (benefit) is
equal to the change in the deferred tax liability (asset) account from the
beginning to the end of the year. A current tax liability (asset) is recognized
for the estimated taxes payable or refundable for the current year.
EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income after deducting
preferred stock dividends by average common and common equivalent shares which
reflect the dilutive effects of stock options during the respective period. The
dilutive effect of stock options is computed under the treasury stock method
using the average market price of the Corporation's common stock for the
period.
Earnings per common share, assuming full dilution, is computed based on the
average number of common shares outstanding during the period, including the
dilutive effect of stock options and any convertible preferred stock
outstanding during the period. The dilutive effect of outstanding stock options
is computed using the greater of the closing market price or the average market
price of the Corporation's common stock for the period. Any stock options
exercised or any preferred stocks converted are assumed to have occurred at the
beginning of the period. Net income applicable to common stock is adjusted for
dividends declared during the period on the convertible preferred stock.
During 1995, the Corporation changed its reporting of earnings per share
("EPS") for all periods from "simple" EPS (which is based solely on the average
number of common shares outstanding) to reporting "primary" and "fully-diluted"
EPS. Previously, the Corporation reported simple EPS, since the differences
between simple EPS and primary EPS or simple EPS and fully-diluted EPS were not
material (less than 3%).
STATEMENT OF CASH FLOWS
For purposes of preparing the Consolidated Statement of Cash Flows, the
Corporation defines cash and cash equivalents as those amounts included in the
balance sheet caption Cash and Due from Banks. Cash flows from loans and
deposits are reported on a net basis. Changes in assets and liabilities are net
of the effects of sales and acquisitions.
- -------------------------------------------------------------------------------
2 AGREEMENT TO MERGE WITH CHASE MANHATTAN CORPORATION
On August 28, 1995, the Corporation and The Chase Manhattan Corporation
("Chase") announced a definitive agreement to merge in a stock-for-stock
transaction. The merger agreement provides that 1.04 shares of the Corporation's
common stock will be issued in exchange for each share of Chase common stock on
a tax-free basis. All of Chase's series of preferred stock will be exchanged on
a one-for-one basis for a corresponding series of the Corporation's preferred
stock having substantially the same terms as the Chase preferred stock so
converted.
The merger was approved by the common shareholders of both institutions at
special stockholder meetings on December 11, 1995. On January 5, 1996, the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
and the Office of the State Bank Commissioner of Delaware approved the
applications for the merger. On January 11, 1996, the Corporation received
approval from the New York State Banking Department to merge with Chase. As a
result, both companies have received all regulatory approvals necessary to
consummate the merger. The merger is scheduled to be completed on March 31,
1996, and will be accounted for as a pooling of interests. The effects of the
merger have not been reflected in the financial statements herein.
At the time of the merger announcement, it was estimated that a one-time
pre-tax restructuring charge of $1.5 billion would be incurred upon consummation
of the merger, principally as a result of severance expenses associated with the
elimination of approximately 12,000 positions from a combined staff of 75,000
located in 39 states and 51 countries and expenses associated with the
elimination of offices and redundant operations. Since that date, the
Corporation has continued to evaluate the costs anticipated to be incurred in
connection with the merger, as well as the cost savings from the merger, and
currently anticipates that the merger-related restructuring charge, as well as
the cost savings, will each be higher than originally announced.
- --------------------------------------------------------------------------------
3 TRADING ACTIVITIES
The Corporation uses its trading assets and liabilities to meet the financial
needs of its customers and to generate revenues through its trading activities.
The Corporation generates such trading revenue through market-making, sales,
arbitrage and, to a lesser degree, positioning. A description of the classes of
derivative and foreign exchange instruments used in the Corporation's trading
activities, as well as the credit and market risk factors involved in such
activities, are disclosed in Note Nineteen.
TRADING ASSETS AND LIABILITIES
Trading assets include debt and equity instruments and derivative contracts
with positive fair values. Trading liabilities are comprised of securities
sold, not yet purchased and derivative contracts with negative fair values.
Trading assets and trading liabilities (which are
51
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
December 31, (in millions) 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
Trading Assets - Debt and Equity Instruments:
U.S. Government, Federal Agencies and
Municipal Securities $ 7,442 $ 2,875
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,399 1,644
Debt Securities Issued by Foreign Governments 4,144 1,983
Debt Securities Issued by Foreign Financial Institutions 3,145 3,119
Loans 282 339
Corporate Securities 647 325
Other 1,258 808
- ------------------------------------------------------------------------------------
Total Trading Assets-Debt and Equity Instruments(a) $18,317 $11,093
- ------------------------------------------------------------------------------------
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $ 9,566 $ 7,950
Foreign Exchange Contracts 7,873 9,500
Stock Index Options and Commodity Contracts 264 259
- ------------------------------------------------------------------------------------
Total Trading Assets-Risk Management Instruments $17,703 $17,709
- ------------------------------------------------------------------------------------
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $11,130 $ 6,980
Foreign Exchange Contracts 8,159 8,872
Stock Index Options and Commodity Contracts 172 127
- ------------------------------------------------------------------------------------
Total Trading Liabilities-Risk Management Instruments $19,461 $15,979
- ------------------------------------------------------------------------------------
Securities Sold, Not Yet Purchased $ 4,809 $ 4,713
- ------------------------------------------------------------------------------------
Total Trading Liabilities $24,270 $20,692
- ------------------------------------------------------------------------------------
</TABLE>
(a) Includes emerging markets instruments of $522 million in 1995 and $544
million in 1994.
TRADING REVENUE
The following table sets forth the components of total trading-related revenue.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Trading Revenue $624 $645 $1,073
Net Interest Income Impact(a) 177 15 35
- -------------------------------------------------------------------------------
Total Trading-Related Revenue $801 $660 $1,108
- -------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $275 $384 $ 443
Foreign Exchange Revenues(c) 291 157(e) 312
Debt Instruments and Other(d) 235 119 353
- -------------------------------------------------------------------------------
Total Trading-Related Revenue $801 $660 $1,108
- -------------------------------------------------------------------------------
</TABLE>
(a) Net interest income attributable to trading activities includes accruals on
interest-earning and interest-bearing trading-related positions as well as a
management allocation reflecting the funding cost or benefit associated with
trading positions.
(b) Includes interest rate swaps, currency 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.
(e) Reflects $70 million reduction as a result of losses sustained from
unauthorized foreign exchange transactions involving the Mexican peso.
- --------------------------------------------------------------------------------
4 SECURITIES
See Note One for a discussion of the accounting policies relating to
securities. The amortized cost and estimated fair value of available-for-sale
securities and held-to-maturity securities, including the impact of related
derivatives, were as follows for the dates indicated:
52
<PAGE> 55
Chemical Banking Corporation
and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value(a)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $18,886 $204 $2 $19,088
Collateralized Mortgage Obligations 446 -- 1 445
Other, primarily U.S. Treasuries 2,542 3 42 2,503
Obligations of State and Political Subdivisions 319 -- -- 319
Debt Securities Issued by Foreign Governments 5,972 217 138 6,051
Corporate Debt Securities 521 19 9 531
Collateralized Mortgage Obligations(b) 145 -- -- 145
Equity Securities 317 -- 4 313
Other, primarily Asset-Backed Securities 757 6 1 762
- --------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities Carried at Fair Value(c) $29,905 $449 $197 $30,157
- --------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
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
Obligations of State and Political Subdivisions 1 -- -- 1
Collateralized Mortgage Obligations(b) 48 2 -- 50
Other, primarily Asset-Backed Securities 91 1 -- 92
- --------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities(d) $4,628 $38 $7 $4,659
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value(a)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $8,151 $554 $593 $8,112
Collateralized Mortgage Obligations 354 1 28 327
Other, primarily U.S. Treasuries 6,414 8 359 6,063
Obligations of State and Political Subdivisions -- -- -- --
Debt Securities Issued by Foreign Governments 2,736 16 134 2,618
Corporate Debt Securities 358 6 5 359
Collateralized Mortgage Obligations(b) 262 1 3 260
Equity Securities 240 -- -- 240
Other, primarily Asset-Backed Securities 462 1 11 452
- --------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities Carried at Fair Value(c) $18,977 $587 $1,133 $18,431
- --------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $3,615 $-- $209 $3,406
Collateralized Mortgage Obligations 3,871 -- 237 3,634
Other, primarily U.S. Treasuries 130 -- 2 128
Obligations of State and Political Subdivisions 118 1 -- 119
Collateralized Mortgage Obligations(b) 140 1 4 137
Other, primarily Asset-Backed Securities 692 2 12 682
- --------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities(d) $8,566 $4 $464 $8,106
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation's portfolio of securities generally consists of
investment-grade securities. The fair value of actively-traded securities is
determined by the secondary market, while the fair value for
non-actively-traded securities is based on independent broker quotations.
(b) Collateralized mortgage obligations of private issuers generally have
underlying collateral consisting of obligations of U.S. Government and Federal
agencies and corporations.
(c) At December 31, 1993, the fair value of U.S. Treasury and Federal Agencies
and Other securities was $11,897 million and $3,943 million, respectively.
There were no Obligations of State and Political Subdivisions.
(d) At December 31, 1993, the amortized cost of U.S. Treasury and Federal
Agencies, Obligations of State and Political Subdivisions, and Other securities
was $9,142 million, $13 million, and $953 million, respectively.
Cash proceeds from the sale of available-for-sale securities during 1995,
1994 and 1993 were $51,445 million, $18,556 million, and $5,352 million,
respectively. Net gains from available-for-sale securities sold in 1995, 1994
and 1993 amounted to $119 million (gross gains of $436 million and gross losses
of $317 million), $66 million (gross gains of $141 million and gross losses of
$75 million), and $139 million (gross gains of $178 million and gross losses of
$39 million), respectively. There were no sales of held-to-maturity securities
during 1995 and 1994. Cash proceeds from the sales of held-to-maturity
securities during 1993 were $152 million. Gross gains from held-to-maturity
securities sold amounted to $3 million in 1993 (there were no losses from sales
of such securities in 1993).
During the fourth quarter of 1995, the Financial Accounting Standards Board
issued Financial Accounting Series Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115 Implementation Guide"). In accordance with the adoption
of the SFAS 115 Implementation Guide, the Corporation reassessed the
classifications of all securities held. The result of the one-time reassessment
was the reclassification of $3,141 million of held-to-maturity securities to
available-for-sale securities and $11 million of held-to-maturity securities to
trading assets. Unrealized net gains related to the transfer of held-to-maturity
securities to available-for-sale securities were $11 million after-tax. The
amortized cost of the held-to-maturity securities transferred to trading assets
approximated the fair value. See Note Five for a discussion of loans accounted
for pursuant to SFAS 115.
Of the securities held in the Corporation's securities portfolios,
securities issued by the Federal Republic of Germany exceeded 10% of the
Corporation's total stockholders' equity at December 31, 1995, with a fair
value of $2,845 million and an amortized cost of $2,525 million. U.S.
Government and Federal Agencies were the only other issuers whose securities
exceeded 10% of the Corporation's total stockholders' equity at December 31,
1995.
The amortized cost, estimated fair value, and average yield of securities
and related derivatives at December 31, 1995 by contractual maturity range and
type of security are presented in the table which follow:
53
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Maturity Schedule of Available-for-Sale Securities Due in 1 Due After 1 Due After 5 Due After
December 31, 1995 (in millions, except yields) Year or less Through 5 Years Through 10 Years 10 Years(a) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Federal Agencies:
Amortized Cost $ 403 $1,240 $2,029 $18,202 $21,874
Fair Value 404 1,242 1,990 18,400 22,036
Average Yield(b) 6.52% 5.71% 5.77% 7.41% 7.14%
- -----------------------------------------------------------------------------------------------------------------------------------
Obligations of State and Political Subdivisions:
Amortized Cost $ 299 $ 17 $ 2 $ 1 $ 319
Fair Value 299 17 2 1 319
Average Yield(b) 4.00% 5.34% 10.28% 10.46% 4.13%
- -----------------------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $1,494 $3,764 $1,851 $ 603 $ 7,712
Fair Value 1,497 3,847 1,862 596 7,802
Average Yield(b) 7.96% 6.26% 8.04% 6.10% 7.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities:
Amortized Cost $2,196 $5,021 $3,882 $18,806 $29,905
Fair Value 2,200 5,106 3,854 18,997 30,157
Average Yield(b) 7.15% 6.12% 6.85% 7.37% 7.07%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Maturity Schedule of Held-to-Maturity Securities Due in 1 Due After 1 Due After 5 Due After
December 31, 1995 (in millions, except yields) Year or less Through 5 Years Through 10 Years Years(a) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Federal Agencies:
Amortized Cost $ 81 $ 649 $ 936 $ 2,822 $ 4,488
Fair Value 81 655 942 2,838 4,516
Average Yield(b) 5.05% 6.39% 7.04% 6.77% 6.74%
- -----------------------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $ -- $ 3 $ 83 $ 54 $ 140
Fair Value -- 3 84 56 143
Average Yield(b) -- 6.50% 7.28% 9.34% 8.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities:
Amortized Cost $ 81 $ 652 $1,019 $ 2,876 $ 4,628
Fair Value 81 658 1,026 2,894 4,659
Average Yield(b) 5.05% 6.39% 7.06% 6.82% 6.78%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Securities with no stated maturity are included with securities with a
remaining maturity of ten years or more. Substantially all of the Corporation's
mortgage-backed securities are due in ten years or more based on contractual
maturity. The estimated duration of mortgage-backed securities, which reflects
anticipated future prepayments based on a consensus of dealers in the market,
is approximately 5 years.
(b) The average yield is based on amortized cost balances at the end of the
year. Yields are derived by dividing interest income, adjusted for the effect
of related derivatives on the available-for-sale securities and the
amortization of premiums and accretion of discounts, by total amortized cost.
Taxable-equivalent yields are used, where applicable.
(c) Includes investments in debt securities issued by foreign governments,
corporate debt securities, collateralized mortgage obligations of private
issuers, equity and other debt securities.
54
<PAGE> 57
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
5 LOANS
The composition of the loan portfolio at each of the dates indicated was as
follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
December 31, (in millions) Domestic Foreign Total Domestic Foreign Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL:
Commercial Real Estate $ 4,850 $ 420 $ 5,270 $ 5,650 $ 482 $ 6,132
Commercial and Industrial 21,946 7,823 29,769 20,251 6,939 27,190
Financial Institutions 4,175 3,578 7,753 3,958 3,628 7,586
Foreign Governments and Official Institutions -- 4,836 4,836 -- 6,567 6,567
Lease Financings 781 609 1,390 763 699 1,462
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial 31,752 17,266 49,018 30,622 18,315 48,937
- ------------------------------------------------------------------------------------------------------------------------------
CONSUMER:
Residential Mortgage 17,751 121 17,872 13,567 154 13,721
Credit Card 8,678 -- 8,678 9,261 -- 9,261
Auto Loans 1,115 -- 1,115 1,829 -- 1,829
Other Consumer 5,931 14 5,945 5,463 16 5,479
- ------------------------------------------------------------------------------------------------------------------------------
Total Consumer 33,475 135 33,610 30,120 170 30,290
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans 65,227 17,401 82,628 60,742 18,485 79,227
Unearned Income (370) (115) (485) (283) (177) (460)
- ------------------------------------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $ 64,857 $ 17,286 $ 82,143 $ 60,459 $ 18,308 $ 78,767
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain loans that meet the accounting definition of a security are classified
as loans and are measured pursuant to SFAS 115, along with related derivatives.
Bonds that have been issued by foreign governments (such as Mexico, Venezuela
and Brazil) to financial institutions, including the Corporation, as part of a
debt renegotiation (i.e., "Brady Bonds") are subject to the provisions of SFAS
115.
In connection with the adoption of the SFAS 115 Implementation Guide in the
fourth quarter of 1995, the Corporation reassessed the classification of all
securities held. The result of the one-time reassessment was the
reclassification of the entire held-to-maturity portfolio of Brady Bonds, other
loans, and related derivatives (measured pursuant to SFAS 115), to
available-for-sale. The amount of the reclassification was $1,972 million at
amortized cost. Unrealized net losses related to the transfer were $454 million
after-tax.
A significant portion of the Brady Bonds within the available-for-sale
portfolio are collateralized by zero-coupon United States Treasury obligations.
The interest on Brady Bonds is also collateralized for up to two years.
Management continually evaluates and monitors the ability of each of the
countries within the portfolio to perform and believes that any unrealized
losses on its available-for-sale portfolio are temporary in nature. The
amortized cost and estimated fair value of loans measured pursuant to SFAS 115,
including the impact of related derivatives, for the dates indicated were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 (in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total (and Available-for-Sale) $2,350 $ 25 $ 813 $1,562
- ------------------------------------------------------------------------------------
December 31, 1994
- ------------------------------------------------------------------------------------
Available-for-Sale $1,635 $150 $ 369 $1,416
Held-to-Maturity 1,998 10 848 1,160
- ------------------------------------------------------------------------------------
Total $3,633 $160 $1,217 $2,576
- ------------------------------------------------------------------------------------
</TABLE>
The 1995 results included a net loss of $86 million (gross gains of $167
million and gross losses of $253 million) related to the disposition of
emerging market securities previously recorded as available-for-sale. The sale
was part of the Corporation's ongoing efforts to manage its emerging markets
exposure in its available-for-sale portfolio. The 1994 results included a net
gain of $127 million (gross gains of $146 million and gross losses of $19
million) on the disposition of emerging market securities. Cash proceeds from
the sale of these available-for-sale loans during 1995 and 1994 were $1,130
million and $411 million, respectively.
55
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 ALLOWANCE FOR CREDIT LOSSES
The table below summarizes the changes in the allowance for credit losses
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 2,480 $ 3,020 $ 3,025
Provision for Losses 478 550 1,259(b)
Charge-Offs (825) (1,266) (1,624)(b)
Recoveries 272 319 343
- -------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (553) (947) (1,281)
Charge for Assets Transferred to Held for Accelerated Disposition -- (148) --
Other (26)(a) 5 17(c)
- -------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $ 2,379 $ 2,480 $ 3,020
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $28 million related to the sale of banking operations in southern
and central New Jersey.
(b) Includes $55 million related to the decision to accelerate the disposition
of certain nonperforming residential mortgage loans.
(c) Includes $19 million increase in the allowance related to the acquisition
by Texas Commerce of certain assets of First City Bancorporation of Texas, Inc.
Completion of the Brazilian refinancing package during 1994 essentially
brought to a close the broad rescheduling programs begun in the mid-1980s.
Accordingly, during the second quarter of 1994, the Corporation combined its
then remaining emerging markets allowance with its general allowance for credit
losses.
- --------------------------------------------------------------------------------
7 NONPERFORMING ASSETS
The following table sets forth the nonperforming assets and contractually
past-due loans of the Corporation at the dates indicated.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- ------------------------------------------------------------------
<S> <C> <C>
Total Domestic Nonperforming Loans $626 $ 618
Total Foreign Nonperforming Loans 230 311
- ------------------------------------------------------------------
Total Nonperforming Loans 856(a) 929
Assets Acquired as Loan Satisfactions
(primarily Real Estate) 50(a) 210
- ------------------------------------------------------------------
Total Nonperforming Assets $906 $1,139
- ------------------------------------------------------------------
Contractually Past-Due Loans(b) $361 $ 330
- ------------------------------------------------------------------
</TABLE>
(a) Includes $727 million of loans considered impaired under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). In addition,
on January 1, 1995, $122 million of assets for which the Corporation did not
have possession were reclassified from Assets Acquired as Loan Satisfactions to
Nonperforming Loans pursuant to the adoption of SFAS 114.
(b) Accruing loans past-due 90 days or more as to principal and interest, which
are not characterized as nonperforming loans. Includes consumer loans,
exclusive of residential mortgage loans, which are generally not classified as
nonperforming but, rather, are charged off on a formula basis upon reaching
certain specified stages of delinquency.
The following table presents the Corporation's assets held for accelerated
disposition at the dates indicated:
ASSETS HELD FOR ACCELERATED DISPOSITION
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Loans(a) $412 $336
Real Estate Owned -- 190
- --------------------------------------------------------------------------
Total Assets Held for Accelerated Disposition $412 $526
- --------------------------------------------------------------------------
</TABLE>
(a) Includes $412 million and $87 million of loans that were performing at
December 31, 1995 and 1994, respectively.
The following table presents the amount of interest income recorded by the
Corporation on its nonaccrual and renegotiated loans and the amount of interest
income on the carrying value of such loans that would have been recorded had
these loans been current in accordance with their original terms (interest
at original rates).
56
<PAGE> 59
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
IMPACT OF NONPERFORMING LOANS ON INTEREST INCOME(a)
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic:
Gross Amount of Interest That Would Have
Been Recorded at the Original Rate $ 58 $ 80 $ 180
Interest That Was Recognized in Income (15) (28) (38)
- -------------------------------------------------------------------------------------
Negative Impact-Domestic 43 52 142
- -------------------------------------------------------------------------------------
Foreign:
Gross Amount of Interest That Would Have
Been Recorded at the Original Rate 17 22 54
Interest That Was Recognized in Income (7) (9) (85)
- -------------------------------------------------------------------------------------
Negative (Positive) Impact-Foreign 10 13 (31)
- -------------------------------------------------------------------------------------
Total Negative Impact on Interest Income $53 $ 65 $ 111
- -------------------------------------------------------------------------------------
</TABLE>
(a) Excludes nonperforming loans held for accelerated disposition.
IMPAIRED LOANS
The following table presents the Corporation's impaired loans disclosures. The
Corporation uses the discounted cash flow method as its primary method for
valuing its impaired loans.
<TABLE>
<CAPTION>
December 31, (in millions) 1995
- ---------------------------------------------------------------
<S> <C>
Impaired Loans with an Allowance $425
Impaired Loans without an Allowance(a) 302
- ---------------------------------------------------------------
Total Impaired Loans $727
- ---------------------------------------------------------------
Allowance for Impaired Loans under SFAS 114(b) $136
- ---------------------------------------------------------------
Average Balance of Impaired Loans During the
Year Ended December 31, 1995 $876
- ---------------------------------------------------------------
Interest Income Recognized on Impaired Loans During
the Year Ended December 31, 1995 $ 15
- ---------------------------------------------------------------
</TABLE>
(a) Impaired loans for which the discounted cash flow, 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.
- --------------------------------------------------------------------------------
8 SHORT-TERM AND OTHER BORROWED FUNDS
<TABLE>
<CAPTION>
(in millions) 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities
sold under repurchase agreements:
Balance at year end $25,675 $23,098 $12,857
Average daily balance during the year 25,299 19,154 15,461
Maximum month-end balance 30,911 23,241 16,071
Weighted-average rate at December 31 5.85% 5.46% 2.85%
Weighted-average rate during the year 5.70% 4.41% 3.05%
- ------------------------------------------------------------------------------------------
Other Borrowed Funds-Commercial paper:
Balance at year end $4,852 $4,075 $2,423
Average daily balance during the year 3,955 2,760 2,438
Maximum month-end balance 4,852 4,075 2,764
Weighted-average rate at December 31 5.52% 5.18% 2.81%
Weighted-average rate during the year 5.73% 4.29% 3.42%
- ------------------------------------------------------------------------------------------
Other Borrowed Funds-Other borrowings:
Balance at year end $4,386 $3,055 $4,431
Average daily balance during the year 3,166 2,965 3,382
Maximum month-end balance 5,345 5,607 9,428
Weighted-average rate at December 31 6.53% 6.35% 8.31%
Weighted-average rate during the year 6.41% 6.12% 6.56%
- ------------------------------------------------------------------------------------------
</TABLE>
Federal funds purchased represent overnight funds. Securities sold under
repurchase agreements generally mature between one day and three months.
Commercial paper is generally issued in amounts not less than $100,000 and with
maturities of 270 days or less. Other borrowings consist of demand notes of one
year or less, and various other borrowings in domestic and foreign offices that
generally have maturities of one year or less.
At December 31, 1995, the Corporation had unused lines of credit available
for general corporate purposes, including the payment of commercial paper
borrowings, amounting to $750 million.
- --------------------------------------------------------------------------------
9 FEES FOR OTHER FINANCIAL SERVICES AND OTHER REVENUE
Details of fees for other financial services were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees in Lieu of Compensating Balances $187 $203 $209
Commissions on Letters of Credit and Acceptances 154 151 155
Loan Commitment Fees 87 86 90
Mortgage Servicing Fees 94 79 63
Other 328 314 312
- ---------------------------------------------------------------------------------------
Total Fees for Other Financial Services $850 $833 $829
- ---------------------------------------------------------------------------------------
</TABLE>
Details of other revenue were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue from Equity-Related Investments $378 $362 $278
Net Gains (Losses) on Emerging Markets
Securities Sales (86) 127 306
Gain on the Sale of the Corporation's Investment
in Far East Bank & Trust Company 85 -- --
Residential Mortgage Origination/Sales Activities 55 (15) 6
All Other Revenue 156 138 120
- ----------------------------------------------------------------------------------------
Total Other Revenue $ 588 $612 $710
- ----------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10 LONG-TERM DEBT
The accompanying table is a summary of long-term debt (net of unamortized
original issue debt discount, where applicable) displayed by remaining maturity
at December 31, 1995. The distribution by remaining maturity is based on
contractual maturity.
<TABLE>
<CAPTION>
Under Due Due 1995 1994
By remaining maturity at December 31, (in millions) 1 year 1-5 years 6-15 years Total Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Parent Company:
Senior Debt:
Fixed Rate $30 $663 $20 $713 $647
Variable Rate 805 1,180 325 2,310 2,563
Modified Interest Rates(a) 5.56 - 9.80% 5.75 - 8.13% 5.73 - 10.21% 5.56 - 10.21% 3.23 - 10.85%
Subordinated Debt:
Fixed Rate -- 699 1,467 2,166 1,895
Variable Rate -- 142 100 242 242
Modified Interest Rates(a) --% 6.19 - 10.38% 5.84 - 8.63% 5.84 - 10.38% 5.64 - 10.38%
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal $835 $2,684 $1,912 $5,431 $5,347
- -----------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Senior Debt:
Fixed Rate $15 $208 $100 $323 $391
Variable Rate 10 -- -- 10 710
Modified Interest Rates(a) 10.48% 6.43 - 10.26% 10.23 - 10.26% 6.43 - 10.48% 3.76 - 10.52%
Subordinated Debt:
Fixed Rate -- -- 969 969 947
Variable Rate -- 346 250 596 596
Modified Interest Rates(a) --% 5.75 - 6.21% 6.00 - 7.25% 5.75 - 7.25% 5.64 - 7.25%
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal $25 $554 $1,319 $1,898 $2,644
- -----------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $860 $3,238 $3,231 $7,329 $7,991
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The interest rates shown have been adjusted to reflect the effect of ALM
derivative contracts, primarily interest rate swaps, used to convert a majority
of the Corporation's fixed-rate debt to variable rates. The interest rates
shown for variable rate issues, including those converted to variable rate, are
those in effect at December 31, 1995.
The Corporation issues long-term debt denominated in various currencies,
predominately in U.S. dollars, with both fixed and variable interest rates.
Fixed-rate debt outstanding at December 31, 1995 matures at various dates
through 2010 at contractual interest rates ranging from 5.00% to 11.83%. The
consolidated weighted-average contractual interest rate on fixed-rate debt was
7.82% at both December 31, 1995 and 1994. Variable-rate debt outstanding, with
contractual interest rates ranging from 5.34% to 6.63% at December 31, 1995,
matures at various dates through 2005. The consolidated weighted-average
interest rates on variable-rate debt at December 31, 1995 and 1994 were 6.06%
and 5.64%, respectively.
Included in long-term debt are equity commitment notes and equity contract
notes totaling $693 million at both December 31, 1995 and 1994.
Equity commitment notes require that the Corporation issue, prior to the
maturity of such notes, shares of common stock or perpetual preferred stock or
other securities of the Corporation (collectively, "Capital Securities")
approved by the Federal Reserve Board equal to 100% of the original aggregate
principal amount of the notes.
Equity contract notes require the Corporation to exchange the notes at
maturity for Capital Securities with a market value equal to the principal
amount of the notes or, at the Corporation's option, to pay the principal of
the notes from amounts representing designated proceeds from the sale of
Capital Securities.
At December 31, 1995, the Corporation had designated proceeds from the sale
of Capital Securities in an amount sufficient to satisfy fully the dedication
requirements of its equity commitment and equity contract notes.
The Corporation has guaranteed several long-term debt issues of its
subsidiaries. Such guaranteed debt totaled $420 million and $435 million at
December 31, 1995 and 1994, respectively.
At December 31, 1995, long-term debt aggregating $200 million was redeemable
at the option of the Corporation, in whole or in part, prior to maturity, based
on the terms specified in the respective notes.
The aggregate principal amount of debt that matures in each of the five years
subsequent to December 31, 1995 is $860 million in 1996, $738 million in 1997,
$758 million in 1998, $699 million in 1999, and $1,043 million in 2000.
58
<PAGE> 61
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
11 PREFERRED STOCK
At December 31, 1995, the Corporation was authorized to issue 200 million
shares of preferred stock, in one or more series, with a par value of $1 per
share. At December 31, 1995 and 1994, 26 million and 30 million shares,
respectively, of preferred stock were outstanding.
During 1995, the Corporation called all of the outstanding shares of its 10%
convertible preferred stock for redemption. Substantially all of the 10%
convertible preferred stock was converted prior to the redemption date, at the
option of the holders thereof, into approximately 7.6 million shares of the
Corporation's common stock. The shares of common stock issued upon the
conversion were issued from treasury.
At December 31, 1995, four million shares of preferred stock designated as
Junior Participating Preferred Stock were reserved for issuance under the
Corporation's Shareholders' Rights Plan (see Note Eighteen).
During 1994, the Corporation redeemed all 33.6 million outstanding shares of
its Adjustable Rate Cumulative Preferred Stock, Series C. The redemption price
was $12.36 per share (which included a premium of $.36 per share) plus accrued
but unpaid dividends to the date of redemption. During 1994, the Corporation
issued two million shares of Adjustable Rate Cumulative Preferred Stock, Series
L Preferred ("Adjustable Rate, Series L"), with a stated value of $100 per
share.
Dividends on shares of each preferred stock issue are payable quarterly and
are cumulative. All the preferred stocks outstanding have preference over the
Corporation's common stock with respect to the payment of dividends and the
distribution of assets in the event of a liquidation or dissolution of the
Corporation.
The following is a summary of the Corporation's preferred stocks outstanding
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars and shares in millions, Stated Outstanding at December 31, Earliest Redemption Rate in Effect at
except per share data and rates) Value Shares 1995 1994 Redemption Date Price(b) December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10.96% Cumulative $ 25.00 4.0 $100 $100 6/30/2000 $ 25.00 10.960%
10.00% Convertible 50.00 4.0 -- 200 -- -- --
8.375% Cumulative 25.00 14.0 350 350 6/1/1997 25.00 8.375%
7.92% Cumulative 100.00 2.0(a) 200 200 10/1/1997 100.00 7.920%
7.58% Cumulative 100.00 2.0(a) 200 200 4/1/1998 100.00 7.580%
7.50% Cumulative 100.00 2.0(a) 200 200 6/1/1998 100.00 7.500%
Adjustable Rate, Series L 100.00 2.0 200 200 6/30/1999 100.00 5.502(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock $1,250 $1,450
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Such shares are represented by depositary shares, each representing
one-quarter share of preferred stock.
(b) Plus accrued but unpaid dividends.
(c) Floating rates are based on certain money market rates. The minimum and
maximum rates are 4.50% and 10.50%, respectively for the Adjustable Rate,
Series L.
- --------------------------------------------------------------------------------
12 COMMON STOCK
At December 31,1995, the Corporation was authorized to issue 400 million shares
of common stock, $1 par value per share. In December 1995, the shareholders of
the Corporation approved an amendment to increase the number of authorized
shares of common stock to 750 million. The amendment will be effective upon
consummation of the merger with Chase. At December 31, 1995, 1994, and 1993,
the number of shares of common stock issued and outstanding were as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Issued 254,930,904 254,009,187 253,397,864
Held in Treasury (4,414,830) (9,497,533) (515,782)
- ----------------------------------------------------------------------------
Outstanding 250,516,074 244,511,654 252,882,082
- ----------------------------------------------------------------------------
</TABLE>
During 1995, the Corporation repurchased approximately 14.4 million shares of
its outstanding common stock in the open market. These share repurchases have
been utilized to offset the effects of common stock issuances upon the exercise
of options in various outstanding employee stock option and incentive plans.
During 1995, approximately 12.8 million shares (11.9 million from treasury) were
issued under various employee stock option and incentive plans. Additionally, in
1995, 7.6 million shares of common stock were issued (also from treasury) upon
the conversion of the Corporation's 10% convertible preferred stock.
59
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1995, approximately 15,131,468 shares of common stock
were reserved for issuance under various employee incentive and stock purchase
plans and under the Corporation's Dividend Reinvestment Plan. Under the
Corporation's Dividend Reinvestment Plan, stockholders may reinvest all or part
of their quarterly dividends in shares of common stock.
Common stock issued, or distributed from treasury, during 1995, 1994 and
1993 was as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee Benefit and
Compensation Plans 12,692,961(a) 1,210,011 1,733,973
Dividend Reinvestment
and Stock Purchase Plans 121,065 456,767 539,919
Conversion of 10% Convertible
Preferred Stock 7,639,424 -- --
Public Offerings -- -- 3,800,000
- -------------------------------------------------------------------------------------------
Total Shares Issued, or Distributed
from Treasury(b) 20,453,450 1,666,778 6,073,892
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Amount includes 8,886,969 of common stock issued related to the Employee
Stock Option Plan. See Note Fourteen for a discussion of the Corporation's
Employee Stock Option Plan.
(b) During 1995 and 1994, 19,530,163 and 1,055,455, respectively, of these
shares were distributed from treasury. No shares were distributed from treasury
in 1993.
13 POSTRETIREMENT BENEFITS
Pension Plans: The Corporation has a noncontributory pension plan that covers
substantially all domestic employees and provides for defined benefits pursuant
to a cash balance feature and a final-average-pay feature (the "noncontributory
pension plan"). Contributions will be made to the noncontributory pension plan
within the range of levels permitted under applicable law.
The accompanying tables present the aggregate funded status and the net
asset amounts included in other assets and the components of expense included
in employee benefits expense for the Corporation's noncontributory pension
plan.
FUNDED STATUS OF PENSION PLANS
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligation:
Accumulated Benefit Obligation
Vested Benefits $ (974) $ (817)
Nonvested Benefits (51) (44)
Additional Benefits Based on Future Salary Levels (160) (135)
- -----------------------------------------------------------------------------------------
Projected Benefit Obligation for Service
Rendered to Date (1,185) (996)
Plan Assets at Fair Value, primarily Listed Stocks,
U.S. Bonds and Commingled Funds 1,525 1,296
- -----------------------------------------------------------------------------------------
Plan Assets in Excess of Projected Benefit Obligation 340 300
Unrecognized Net Loss 76 161
Unrecognized Net Asset (46) (60)
Unrecognized Prior Service (Benefit) Cost (34) (31)
- -----------------------------------------------------------------------------------------
Prepaid Pension Cost $ 336 $ 370
- -----------------------------------------------------------------------------------------
Annualized Actuarial Assumptions:
Discount Rate 7.25% 8.75%
Rate of Increase in Future Compensation 5.00 5.00
- -----------------------------------------------------------------------------------------
</TABLE>
COMPONENTS OF NET PENSION EXPENSE
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of Benefits Earned $ 85 $ 96 $ 87
Interest Cost on Projected Benefit Obligation 81 72 69
Actual (Gain) Loss on Plan Assets (326) 15 (157)
Net Amortization and Deferral 192 (145) 24
- ----------------------------------------------------------------------------------------
Net Periodic Pension Expense $ 32 $ 38 $ 23
- ----------------------------------------------------------------------------------------
Annualized Actuarial Assumptions:
Discount Rate 8.75% 7.50% 8.75%
Assumed Rate of Long-Term Return on
Plan Assets 9.50 8.50 9.50
Rate of Increase in Future Compensation 5.00 5.00 6.00
- ----------------------------------------------------------------------------------------
</TABLE>
In addition to the noncontributory pension plan, the Corporation also
maintains a number of defined benefit pension plans in foreign jurisdictions
covering the employees of certain foreign operations. Contributions are made to
the foreign plans in accordance with local plan and legal requirements.
The Corporation has elected not to prefund fully several defined benefit
plans based on plan and legal requirements. At December 31, 1995 and 1994, the
Corporation's accrued liability included in accrued expenses related to those
plans totaled $56 million and $46 million, respectively. The employee benefits
expense related to these plans was $12 million in 1995, $11 million in 1994,
and $8 million in 1993.
The Corporation has several defined contribution plans. The most significant
is a Savings Incentive Plan ("SIP") offered to domestic employees. Subject to
certain limits, the SIP allows employees to make tax-deferred investments and
earn matching contributions from the Corporation. Employee benefits expense
related to defined contribution plans totaled $58 million in 1995, $51 million
in 1994, and $42 million in 1993.
60
<PAGE> 63
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
Postretirement Medical and Life Insurance Benefits: The Corporation provides
postretirement medical and life insurance benefits to substantially all
domestic employees hired prior to April 15, 1992, and to certain foreign
employees. The employees must meet certain age and length-of-service
requirements at retirement. The amount of benefits provided varies with length
of service and date of hire. The Corporation has not prefunded these benefits.
Effective January 1, 1995, the Corporation adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), for
postretirement medical benefits for its foreign employees. Consistent with the
January 1, 1993 adoption of SFAS 106 for domestic employees, the Corporation
elected to expense the entire unrecognized accumulated obligation as of the
date of adoption of SFAS 106 related to its foreign employees via a one-time
pre-tax charge of $17 million ($11 million after-tax).
The accompanying tables present the components of the liability included in
accrued expenses, and the periodic expense included in employee benefits
expense related to providing postretirement medical and life insurance
benefits. The discount rates and rates of increase in future compensation used
to determine the actuarial values for these benefits generally are consistent
with those used for the noncontributory pension plan. For 1995, the assumed
medical benefits cost trend rate used to measure the expected cost of benefits
was 11% for 1996, declining by 1% per year to a floor of 6%. The effect of a 1%
increase in the assumed medical benefits cost trend rate would be to increase
each of the December 31, 1995 accumulated obligation and related periodic
expense by approximately 8%.
COMPONENTS OF POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Accumulated Benefit Obligation:
Retirees $ 455 $ 391
Active Employees 73 57
- -------------------------------------------------------------
Accumulated Benefit Obligation 528 448
Unrecognized Net Loss (72) (24)
- -------------------------------------------------------------
Accrued Postretirement Medical and
Life Insurance Benefits $ 456 $ 424
- -------------------------------------------------------------
</TABLE>
The unrecognized net loss at December 31, 1995 resulted primarily from the
change in the discount rate at December 31, 1995.
COMPONENTS OF NET POSTRETIREMENT MEDICAL AND
LIFE INSURANCE EXPENSE
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of Benefits Earned $ 4 $ 4 $ 3
Interest Cost on Accumulated Benefit Obligation 38 36 35
Amortization of Net Loss -- 2 --
- ----------------------------------------------------------------------------------------
Net Postretirement Medical and Life Insurance Expense $42 $42 $ 38
- ----------------------------------------------------------------------------------------
</TABLE>
14 EMPLOYEE STOCK INCENTIVE PLANS
EXECUTIVE INCENTIVE PLANS
The Corporation has a long-term stock incentive plan (the "Plan") which
provides for stock-based awards, including stock options, restricted stock, and
restricted stock units, to certain key employees.
Pursuant to the Plan, stock options are issued at prices at least equal to
the market value of the Corporation's common stock on the grant date.
Generally, options cannot be exercised until one year after the grant date and
become exercisable over various periods as determined at the time of grant.
Options generally expire ten years after the grant date. No compensation
expense is required to be recognized in conjunction with such options granted
or exercised; amounts received upon the exercise of options are recorded as
common stock and capital surplus.
Restricted stock and restricted stock units are issued under the Plan at no
cost to the recipient. Restricted stock is awarded subject to the risk of
forfeiture until certain restrictions, including continued employment for a
specified number of years, have lapsed. The recipient is, however, entitled to
the voting rights and dividends on the stock. Restricted stock units entitle
their holders to receive shares of common stock after a certain period of
continued employment. The holders of restricted stock units are entitled to
receive cash payments equivalent to the dividends that would have been received
if the units were shares of common stock.
Most restricted stock and restricted stock units awarded under the
Plan during 1995 and 1994 vest when the Corporation's common stock price
reaches and sustains targeted prices for a minimum period of time. At December
31, 1995, more than half of all such awards had vested as a result of the first
two targets having been attained. During 1995, restricted stock and restricted
stock units totaling 858,680 were issued under the Plan. The number of such
awards issued under the Plan during 1994 totaled 901,300.
Compensation expense relating to most restricted stock and restricted stock
units (i.e., for awards where the number of shares to be issued at the end of
the restricted period is determined on the grant date) is equal to the market
value of the Corporation's common stock on the grant date; for other awards,
compensation expense generally is equal to the market value on the date the
restrictions lapse (i.e., for awards that are forfeitable in the event that
targets are not attained or that are payable in cash). Compensation expense is
recognized over the restricted period.
The following table presents a summary of the aggregate option transactions
under the Plan during 1995 and 1994.
61
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
Stock Stock
Year ended December 31, Options Option Price Options Option Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Outstanding, January 1 14,066,326 $10.88 - $43.13 11,440,548 $10.88 - $43.13
Granted 3,127,300 37.82 - 51.25 3,335,337 21.80 - 40.19
Exercised 1,835,515 10.88 - 43.13 457,620 10.88 - 39.06
Cancelled 188,645 25.13 - 47.33 251,939 10.88 - 43.13
- -------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 15,169,466 $10.88 - $51.25 14,066,326 $10.88 - $43.13
- -------------------------------------------------------------------------------------------------------------------------
Options Exercisable at December 31 8,964,994 $10.88 - $47.33 7,546,369 $10.88 - $43.13
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, 201,422 and 197,924 shares, respectively, of
the Corporation's common stock were reserved for issuance and available for
future awards under the Plan. In January of each year the Corporation reserves
additional shares equal to 1.5% of its outstanding shares of common stock for
future awards under the Plan.
EMPLOYEE STOCK OPTION PLAN
In 1994, the Corporation granted 20,025,250 non-qualified stock options to
purchase shares of its common stock to all full-time (500 options each) and
part-time (250 options each) employees (excluding senior officers). These
options were granted at the $40.50 market price of the Corporation's common
stock on June 15, 1994 and were exercisable in three installments if the
Corporation's common stock price closed at, or above, certain targeted prices
for a pre-specified period. During 1995, all three minimum target prices were
met and maintained for the specified periods, giving grant recipients the right
to exercise all of their options. Any options not exercised by June 14, 2004
will be forfeited as of that date.
Neither the grant nor the exercise of the options result in a charge to the
Corporation's earnings under current accounting rules.
The following table presents the activity in the employee stock option plan
during 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
Number of Number of
Year ended December 31, Options Option Price Options Option Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Outstanding, January 1 18,784,750 $40.50 -- $ --
Granted -- -- 20,025,250 40.50
Exercised 8,884,550 40.50 -- --
Cancelled 1,074,475 40.50 1,240,500 40.50
- --------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 8,825,725 $40.50 18,784,750 $40.50
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
15 RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS
Federal Reserve Board regulations require depository institutions to maintain
cash reserves with a Federal Reserve Bank. The average amount of reserve
balances deposited by the Corporation with various Federal Reserve Banks was
approximately $675 million during 1995 and $1 billion during 1994.
Restrictions imposed by Federal law prohibit the Corporation and certain
other affiliates from borrowing from banking subsidiaries unless the loans are
secured in specified amounts. Such secured loans to the Corporation or to each
of certain other affiliates generally are limited to 10% of the banking
subsidiary's capital and surplus; the aggregate amount of all such loans is
limited to 20% of the banking subsidiary's capital and surplus. The Corporation
was well within these limits throughout the year.
The principal sources of the Corporation's income (on a parent company-only
basis) are dividends and interest from Chemical Bank and the other banking and
non-banking subsidiaries of the Corporation. Federal law imposes limitations on
the payment of dividends by the subsidiaries of the Corporation that are state
member banks of the Federal Reserve System (a "state member bank") or are
national banks. Under such limitations, dividend payments by such banks are
limited to the lesser of (i) the amount of "undivided profits" (as defined) and
(ii) absent regulatory approval, an amount not in excess of "net income" (as
defined) for the current year plus "retained net income" (as defined) for the
preceding two years. Non-bank subsidiaries of the Corporation are not subject
to such limitations.
In accordance with the foregoing restrictions, the Corporation's bank
subsidiaries could, during 1996, without the approval of their relevant banking
regulators, pay dividends of approximately $423 million to their respective
bank holding companies, plus an additional amount equal to their net income
from January 1, 1996 through the date in 1996 of any such dividend payment. In
determining whether, and to what extent, to pay dividends, each subsidiary bank
must also consider the effect of applicable regulatory capital guidelines and
leverage limitations.
62
<PAGE> 65
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
In addition to dividend restrictions, the Federal Reserve Board, the Office
of the Comptroller of the Currency, and the Federal Deposit Insurance
Corporation ("FDIC") have authority under the Financial Institutions
Supervisory Act to prohibit or to limit the payment of dividends by the banking
organizations they supervise, including the Corporation and its subsidiaries
that are banks or bank holding companies, if, in the banking regulator's
opinion, payment of a dividend would constitute an unsafe or unsound practice
in light of the financial condition of the banking organization.
- -------------------------------------------------------------------------------
16 RESTRUCTURING CHARGES AND OTHER EXPENSE
Restructuring Charges: In December 1994, the Corporation announced a two-year
program to improve earnings per share and return on equity and, as a result,
recorded a pre-tax restructuring charge of $260 million. The charge is related
to severance and other termination-related costs of $138 million associated
with the elimination of 3,700 positions and costs of $122 million for the
disposition of certain facilities, premises and equipment, and the termination
of leases. The staff reductions have been tied to specific expense-reduction
initiatives, such as commercial lending re-engineering, branch network
rationalization, and the process improvement program at Texas Commerce and have
occurred within the Global Bank, Consumer and Relationship Banking and
Corporate sectors. At December 31, 1995, the Corporation had eliminated
approximately 2,800 of the 3,700 positions targeted for elimination. Also at
December 31, 1995, the reserve balance associated with this charge was
approximately $115 million.
During 1994, the Corporation also included in noninterest expense a
restructuring charge of $48 million related to the closing of 50 New York
branches and a staff reduction of 650.
In 1993, the Corporation completed an assessment of costs associated with
the merger of the Corporation and MHC on December 31, 1991, and, as a result,
included in noninterest expense a charge of $115 million. Also in 1993, the
Corporation's Texas Commerce subsidiary incurred a restructuring charge of $43
million in connection with the acquisition of assets and assumption of
liabilities of four banks (the "First City Banks") of the former First City
Bancorporation of Texas, Inc. from the FDIC.
At December 31, 1995, the remaining reserve related to the New York branch
restructuring charge taken in 1994 and both restructuring charges taken in 1993
was immaterial.
Other Expense: Details of other expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Other Expense:(a)
Professional Services $ 205 $225 $193
Marketing Expense 178 186 187
FDIC Assessments 77(b) 160 175
Telecommunications 148 153 131
Amortization of Intangibles 101 115 106
All Other 634 722 666
- --------------------------------------------------------------------------------
Total Other Expense $1,343 $1,561 $1,458
- --------------------------------------------------------------------------------
</TABLE>
(a) Certain prior period amounts have been reclassified to conform with the
current year's presentation.
(b) Reflects the impact of a reduction in the FDIC assessment rate.
- -------------------------------------------------------------------------------
17 INCOME TAXES
The Corporation accounts for income taxes pursuant to SFAS 109. The Corporation
adopted SFAS 109 as of January 1, 1993 on a prospective basis and recognized a
favorable cumulative effect on income tax expense of $450 million.
A valuation reserve was established as of January 1, 1993, in accordance
with the requirements of SFAS 109, for tax benefits available to the
Corporation but for which realization was in doubt. The Corporation's valuation
reserve for Federal taxes was $86 million at December 31, 1995, relating
primarily to tax benefits associated with foreign operations which are subject
to tax law limitations on realization.
Deferred income tax expense (benefit) results from differences between
amounts of assets and liabilities as measured for income tax return and
financial reporting purposes. The significant components of Federal deferred
tax assets and liabilities as of December 31, 1995 and 1994 are reflected in
the following table.
63
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Federal Deferred Tax Assets:
Reserves for Credit Losses $ 491 $ 510
Reserves Other Than Credit Losses 417 487
Fair Value Adjustments--Available-for-Sale Securities 162 230
Interest and Fee Accrual Differences 84 225
Foreign Operations 237 188
Postretirement Benefits 159 144
Other 138 179
- -------------------------------------------------------------------------------------
Gross Federal Deferred Tax Assets $1,688 $1,963
- -------------------------------------------------------------------------------------
Federal Deferred Tax Liabilities:
Leasing Transactions $ 489 $ 563
Pension Benefits 110 134
Depreciation and Amortization 122 148
Other 126 185
- -------------------------------------------------------------------------------------
Gross Federal Deferred Tax Liabilities $ 847 $1,030
- -------------------------------------------------------------------------------------
Deferred Federal Tax Asset Valuation Reserve $ 86 $ 115
- -------------------------------------------------------------------------------------
Net Federal Deferred Tax Asset After Valuation Reserve $ 755 $ 818
- -------------------------------------------------------------------------------------
</TABLE>
A valuation reserve approximating $148 million at December 31, 1995, has
been established against all New York State and City deferred tax assets. The
Corporation has recorded deferred New York State and City tax liabilities of
approximately $130 million, net of deferred tax assets and related valuation
reserve, as of December 31, 1995. Foreign deferred taxes are approximately $150
million as of December 31, 1995 and a federal deferred tax asset has been
recorded in accordance with SFAS 109. The Corporation expects that when paid,
these foreign taxes will be creditable against its federal income tax liability.
The components of income tax expense included in the Consolidated Statement of
Income were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Income Tax Expense (Benefit):
Federal $ 768 $489 $ 360
Foreign 204 122 201
State and Local 162 197 203
- -------------------------------------------------------------------------------------
Total Current 1,134 808 764
- -------------------------------------------------------------------------------------
Deferred Income Tax Expense (Benefit):
Federal (84) 68 (229)
Foreign 78 28 (17)
State and Local 32 14 21
- -------------------------------------------------------------------------------------
Total Deferred 26 110 (225)
- -------------------------------------------------------------------------------------
Total Income Tax Expense $ 1,160 $918 $ 539
- -------------------------------------------------------------------------------------
</TABLE>
Not reflected in the preceding table are the tax effects of unrealized gains
and losses, with respect to available-for-sale securities that are recorded
directly in stockholders' equity, pursuant to SFAS 115 and certain tax benefits
associated with the Corporation's employee stock plans. Stockholders' equity
decreased by $19 million and $145 million, respectively, in 1995 and 1993 and
increased by $472 million in 1994 due to the tax effects.
The tax expense applicable to securities gains and losses for the years
1995, 1994 and 1993 was $47 million, $27 million, and $62 million,
respectively.
A reconciliation of the income tax expense computed at the applicable
statutory U.S. income tax rate to the actual income tax expense for the past
three years is shown in the following table.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. Federal Tax Expense $ 1,042 $ 774 $ 738
Increase (Decrease) in Tax Expense Resulting From:
(Recognized) Unrecognized Tax Benefits -- -- (331)
Tax-Exempt Interest and Dividends (39) (34) (34)
State and Local Income Taxes, Net of
Federal Income Tax Benefit 126 137 145
Nondeductible Expense 65 22 24
Other--Net (34) 19 (3)
- ---------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 1,160 $ 918 $ 539
- ---------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the domestic and foreign components of income
before income taxes for the past three years.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $2,561 $1,665 $1,783
Foreign(a) 415 547 325
- --------------------------------------------------------------------------
Income Before Income Taxes $2,976 $2,212 $2,108
- --------------------------------------------------------------------------
</TABLE>
(a) For purposes of this disclosure, foreign income is defined as income
generated from operations located outside the United States.
- ---------------------------------------------------------------------------
18 SHAREHOLDERS' RIGHTS PLAN
At December 31, 1995, the Corporation had in place a Shareholders' Rights Plan.
The Shareholders' Rights Plan contains provisions intended to protect
stockholders in the event of unsolicited offers or attempts to acquire the
Corporation, including offers that do not treat all stockholders equally,
acquisitions in the open market of shares constituting control without offering
fair value to all stockholders, and other coercive or unfair takeover tactics
that could impair the Board of Directors' ability to represent stockholders'
interests fully. The Shareholders' Rights Plan provides that attached to each
share of common stock is one right (a "Right") to purchase a unit consisting of
one one-hundredth of a share of Junior Participating Preferred Stock for an
exercise price of $150 per unit, subject to adjustment.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person that attempts to acquire the Corporation
without the approval of the Board of Directors unless the offer is conditioned
on a substantial number of Rights being acquired. The Rights, however, should
not affect offers for all outstanding shares of common stock at a fair price
and otherwise in the best interests of the Corporation and its stockholders as
determined by the Board of Directors. The Board of Directors may, at its
option, redeem all, but not fewer than all, of the then outstanding Rights at
any time until the 10th business day following a public announcement that a
person or a group had acquired beneficial ownership of 20% or more of the
Corporation's outstanding common stock or total voting power.
64
<PAGE> 67
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
19 DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
The Corporation utilizes various derivative and foreign exchange financial
instruments for trading purposes and for purposes other than trading, such as
asset/liability management. These financial instruments represent contracts
with counterparties where payments are made to or from the counterparty based
upon specific interest rates, currency levels, other market rates or on terms
predetermined by the contract. Such derivative and foreign exchange transactions
involve, to varying degrees, credit risk and market risk. For a discussion of
the credit and market risks involved with derivative and foreign exchange
financial instruments, reference is made to the first three paragraphs of the
Derivative and Foreign Exchange Financial Instruments section of the
Management's Discussion and Analysis ("MD&A") on page 29, the first ten
paragraphs of the Credit Risk Management section of the MD&A on page 23, and
paragraphs eight through eleven of the Market Risk Management section of the
MD&A on page 31.
Derivative and Foreign Exchange Instruments Used for Trading Purposes: The
credit risk associated with the Corporation's trading activities is disclosed
on the balance sheet. The effects of any market risk (gains or losses) on the
Corporation's trading activities have been reflected in trading revenue, as the
trading instruments are marked-to-market on a daily basis. See Note One for a
discussion of the Corporation's trading activities and Note Three for the types
and categories of these trading instruments.
Derivative and Foreign Exchange Instruments Used for Purposes Other than
Trading: The Corporation's principal objective in using derivatives for purposes
other than trading is for its asset/liability management. For a further
discussion of the Corporation's objectives and strategies for employing
derivative and foreign exchange instruments for asset/liability management
activities, reference is made to the first three paragraphs of the
Asset/Liability Management discussion in the MD&A on page 32 and the Other
Market Risk Management section on page 35.
The majority of the Corporation's derivatives used for asset/ liability
management are transacted through its trading units.
For the disclosure of the fair value associated with the Corporation's
asset/liability management activities, see Note Twenty Two.
At December 31, 1995, gross deferred gains and gross deferred losses
relating to closed derivative contracts used in asset/liability management
activities were $57 million and $187 million, respectively. See Note One on
page 47 for the accounting method used for these contracts and the
Amortization of Net Deferred Gains/Losses on Closed ALM Contracts table on page
35 of the MD&A.
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
December 31, 1995, deferred gains and losses associated with such transactions
were immaterial.
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 preceding narrative as well as the descriptions of
these products and their risks immediately following.
65
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Notional Amounts(a) Credit Exposure
December 31, (in billions) 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Futures, Forwards and Forward Rate Agreements
Trading $ 877.2 $ 951.0 $ 1.2 $ 0.8
Asset and Liability Management 33.9 32.8 0.1 --
Interest Rate Swaps
Trading 1,387.6 1,107.9 8.2 6.9
Asset and Liability Management 47.4 50.7 0.2 0.2
Purchased Options
Trading 60.2 60.5 0.2 0.2
Asset and Liability Management 17.8 13.7 -- --
Written Options
Trading 65.8 69.5 -- --
Asset and Liability Management 6.3 3.3 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $2,496.2 $2,289.4 $ 9.9 $ 8.1
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 824.8 $ 794.0 $ 5.9 $ 7.3
Asset and Liability Management 8.9 12.3 -- --
Other Foreign Exchange Contracts(b)
Trading 120.4 94.5 2.0 2.2
Asset and Liability Management 0.7 0.3 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Foreign Exchange Contracts $ 954.8 $ 901.1 $ 7.9 $ 9.5
- ---------------------------------------------------------------------------------------------------------------------------
STOCK INDEX OPTIONS AND COMMODITY CONTRACTS
Trading $ 11.3 $ 4.5 $ 0.2 $ 0.3
- ---------------------------------------------------------------------------------------------------------------------------
Total Stock Index Options and Commodity Contracts $ 11.3 $ 4.5 $ 0.2 $ 0.3
- ---------------------------------------------------------------------------------------------------------------------------
Total Credit Exposure Recorded on the Balance Sheet $ 18.0 $ 17.9
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and commodity contracts were $362.5 billion, $.8 billion
and $2.9 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 $42.1 billion, $46.1 billion and $32.9
billion, respectively, at December 31, 1995, compared with $34.2 billion,
$38.4 billion and $22.2 billion, respectively, at December 31, 1994.
Classes of Derivative and Foreign Exchange Instruments: The following classes
of derivative and foreign exchange instruments refer to instruments that are
used by the Corporation for purposes of both trading and asset/liability
management.
Interest rate futures and forwards are contracts for the delayed delivery of
securities or money market instruments in which the seller agrees to deliver on
a specified future date, a specified instrument, at a specified price or yield.
The credit risk inherent in futures and forwards is the risk that the exchange
party may default. Futures contracts settle in cash daily and, therefore, there
is minimal credit risk to the Corporation. The credit risk inherent in forwards
arises from the potential inability of counterparties to meet the terms of
their contracts. Both futures and forwards are also subject to the risk of
movements in interest rates or the value of the underlying securities or
instruments.
Forward rate agreements are contracts to exchange payments on a certain
future date, based on a market change in interest rates from trade date to
contract settlement date. The notional amount on which the interest payments are
based is not exchanged. The maturity of these agreements is typically less than
two years.
Interest rate swaps are contracts in which a series of interest rate flows
in a single currency are exchanged over a prescribed period. The notional
amount on which the interest payments are based is not exchanged. Most interest
rate swaps involve the exchange of fixed and floating interest payments.
Cross-currency interest rate swaps are contracts that involve the exchange of
both interest and principal amounts in two different currencies. The risks
inherent in interest rate and cross-currency swap contracts are the potential
inability of a counterparty to meet the terms of its contract and the risk
associated with changes in the market values of the contracts due to movements
in the underlying interest rates.
Interest rate options, which include caps and floors, are contracts which
transfer, modify, or reduce interest rate risk in exchange for the payment of a
premium when the contract is initiated. As a writer of interest rate caps,
floors, and other options, the Corporation receives a premium in exchange for
bearing the risk of unfavorable changes in interest rates. Conversely, as a
purchaser of an option, the Corporation pays a premium for the right, but not
the obligation, to buy or sell a financial instrument or currency at
predetermined terms in the future. Foreign currency options are similar to
interest rate option contracts, except that they are based on currencies
instead of interest rates.
66
<PAGE> 69
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
The Corporation's use of written options as part of its asset/liability
management is permitted only in those circumstances where they are specifically
linked to purchased options and in order to mitigate interest rate risk. All
unmatched written options are included in the trading portfolio and are
marked-to-market.
Foreign exchange contracts are contracts for the future receipt or delivery
of foreign currency at previously agreed-upon terms. The risks inherent in
these contracts are the potential inability of a counterparty to meet the terms
of its contract and the risk associated with changes in the market values of
the underlying currencies.
Stock index option contracts are contracts to pay or receive cash flows from
counterparties based upon the increase or decrease in the underlying index.
Commodity contracts include swaps, caps and floors and are similar to interest
rate contracts, except that they are based on commodity indices instead of
interest rates.
To reduce its exposure to market risk related to the above-mentioned classes
of derivative and foreign exchange instruments, the Corporation may enter into
offsetting positions.
To reduce credit risk, management may deem it necessary to obtain
collateral. The amount and nature of the collateral obtained is based on
management's credit evaluation of the customer. Collateral held varies but may
include cash, securities, accounts receivable, inventory, property, plant and
equipment, and real estate.
Derivatives and foreign exchange products are generally either negotiated
over-the-counter ("OTC") contracts or standardized contracts executed on a
recognized exchange. Standardized exchange-traded derivatives primarily include
futures and options. Negotiated OTC derivatives are generally entered into
between two counterparties that negotiate specific agreement terms, including
the underlying instrument, amount, exercise price, and maturity.
Included as part of the financial instruments presented in the preceding
notional table are transactions involving "when-issued securities", which the
Corporation enters into primarily as part of its trading activities.
When-issued securities are commitments to purchase or sell securities
authorized for issuance, but not yet actually issued. Accordingly, such
commitments are not recorded on the balance sheet until issued. However, these
commitments are marked-to-market with the resulting gains or losses reflected
in trading revenue.
- -------------------------------------------------------------------------------
20 OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
In addition to using derivative and foreign exchange financial instruments, the
Corporation also utilizes lending-related financial instruments in order to
meet the financing needs of its customers. The Corporation issues commitments
to extend credit, standby and other letters of credit, and guarantees, and also
provides securities-lending services. For these instruments, the contractual
amount of the financial instrument represents the maximum potential credit risk
if the counterparty does not perform according to the terms of the contract. A
large majority of these commitments expire without being drawn upon. As a
result, total contractual amounts are not representative of the Corporation's
actual future credit exposure or liquidity requirements for such commitments.
The following table summarizes the lending-related contract amounts relating
to these financial instruments at December 31, 1995 and 1994.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Commitments to Extend Credit $60,755(a) $49,266(a)
Standby Letters of Credit and Guarantees (Net of
Risk Participations of $3,646 and $5,218) 13,554 12,451
Other Letters of Credit 2,825 2,860
Customers' Securities Lent 18,388 18,979
- -------------------------------------------------------------------------------
</TABLE>
(a) Excludes credit card commitments of $20 billion and $19 billion at December
31, 1995 and 1994, respectively.
Unfunded commitments to extend credit are agreements to lend to a customer
who has complied with predetermined contractual conditions. Commitments
generally have fixed expiration dates.
Standby letters of credit and guarantees are conditional commitments issued
by the Corporation generally to guarantee the performance of a customer to a
third party in borrowing arrangements, such as commercial paper, bond
financing, construction, and similar transactions. The credit risk involved in
issuing standby letters of credit is essentially the same as that involved in
extending loan facilities to customers and may be reduced by participations to
third parties. The Corporation holds collateral to support those standby
letters of credit and guarantees written for which collateral is deemed
necessary. At December 31, 1995, all of the Corporation's standby letters of
credit and guarantees written expire in less than five years.
Customers' securities lent are customers' securities held by the
Corporation, as custodian, which are lent to third parties. The Corporation
obtains collateral, with a market value exceeding 100% of the contract amount,
which is used to indemnify customers against possible losses resulting from
third-party defaults.
67
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
21 CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
Concentrations of credit risk indicate the relative sensitivity of the
Corporation's performance to both positive and negative developments affecting
a particular industry. Based on the nature of the banking business, management
does not believe that any of these concentrations are unusual.
The accompanying table presents the Corporation's significant concentrations
of credit risk for all financial instruments, including both on-balance sheet
as well as off-balance sheet instruments (which primarily include
lending-related financial instruments). The Corporation has procedures to
monitor counterparty credit risk and to obtain collateral when deemed
necessary. Accordingly, management believes that the total credit exposure
shown below is not representative of the potential risk of loss inherent in the
portfolio.
<TABLE>
<CAPTION>
1995 1994
Distributions Distributions
Total Credit % of On-Balance Off-Balance Total Credits % of On-Balance Off-Balance
December 31, (in billions) Exposure Total Sheet Sheet Exposure Total Sheet Sheet
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer $ 55 19% $ 35 $ 20 $ 52 20% $ 31 $21
Real Estate Related 9 3 7 2 10 4 8 2
Financial Institutions 53 19 37 16 57 21 43 14
U.S. Government and Agencies 34 12 34 -- 25 9 25 --
Foreign Governments and
Official Institutions 20 7 17 3 15 6 13 2
Brokers and Dealers 35 12 11 24 36 14 13 23
Commercial and Industrial and Other 80 28 36 44 70 26 33 37
- -------------------------------------------------------------------------------------------------------------------------------
Total $286 100% $177 $109 $265 100% $166 $99
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's balance sheet exposure to consumers was mainly residential
mortgages and credit card outstandings, with off-balance sheet exposure
concentrated in unfunded credit card commitments. For a geographic
concentration of residential mortgages and credit card outstandings, reference
is made to the tables entitled Residential Mortgage Loans by Geographic Region
and Domestic Credit Card Receivables by Geographic Region within the Domestic
Consumer Portfolio section of the MD&A on pages 25 and 26, respectively.
Geographic concentrations are a factor most directly affecting the credit
risk of the real estate and emerging markets segments of the Corporation's loan
portfolio. The Corporation's real estate portfolio is primarily concentrated in
the New York Metropolitan area and in Texas. Its emerging markets portfolio is
largely concentrated in Latin America, principally Mexico, Venezuela and
Brazil.
- --------------------------------------------------------------------------------
22 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires the Corporation to
disclose fair value information about financial instruments for which it is
practicable to estimate the value, whether or not such financial instruments
are recognized on the balance sheet. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation, and is best
evidenced by a quoted market price, if one exists.
Quoted market prices are not available for a significant portion of the
Corporation's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may not
be indicative of the net realizable value. In addition, the calculation of
estimated fair value is based on market conditions at a specific point in time
and may not be reflective of future fair values.
Certain financial instruments and all nonfinancial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 provide only a partial estimate of the fair value of the Corporation.
For example, the values associated with the various ongoing businesses which
the Corporation operates are excluded. The Corporation has developed long-term
relationships with its customers through its deposit base and its credit card
accounts, commonly referred to as core deposit intangibles and credit card
relationships. In addition, relationships with mortgage servicing customers
that originated prior to the adoption of SFAS 122 also provide significant
economic value not currently reflected in the balance sheet. In the opinion of
management, these items in the aggregate add significant value to the
Corporation, but their fair value is not disclosed in this Note.
68
<PAGE> 71
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
Fair values among financial institutions are not comparable due to the wide
range of permitted valuation techniques and the numerous estimates that must be
made. This lack of objective valuation standard introduces a great degree of
subjectivity to these derived or estimated fair values. Therefore, readers are
cautioned in using the information disclosed in this Note for purposes of
evaluating the financial condition of the Corporation compared with other
financial institutions.
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Corporation's financial instruments required to
be valued pursuant to SFAS 107.
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value: The fair value of
certain financial assets carried at cost, including cash and due from banks,
deposits with banks, federal funds sold and securities purchased under resale
agreements, due from customers on acceptances, short-term receivables, and
accrued interest receivable, is considered to approximate their respective
carrying values due to their short-term nature and negligible credit losses.
The fair value of loans held for accelerated disposition is also considered to
approximate carrying value. As discussed in Note One, such loans are carried at
the lower of cost or current estimated disposition value.
Trading Assets: The Corporation carries trading assets, which includes debt and
equity instruments as well as the positive fair values of derivative and foreign
exchange instruments, at estimated fair value. The fair value of these
instruments were valued using either quoted market prices, pricing models,
quoted market prices of financial instruments with similar characteristics or
discounted cash flows. For the fair value of trading assets, see Note Three.
Securities: Securities held-to-maturity are carried at amortized cost.
Securities available-for-sale and interest rate contracts used in connection
with the available-for-sale portfolio are carried at fair value. The valuation
methodologies for securities are discussed in Note Four.
Loans: Loans are valued using methodologies suitable for each loan type.
Certain of these methodologies and key assumptions made are discussed below.
The fair value of the Corporation's commercial loan portfolio was estimated
by assessing the two main risk components of the portfolio: credit and
interest. The estimated cash flows were adjusted to reflect the inherent
credit risk and then discounted, using rates appropriate for each maturity that
incorporate the effects of interest rate changes. Generally, emerging market
loans were valued based on secondary market prices.
For consumer installment loans and residential mortgages, for which market
rates for comparable loans are readily available, the fair value was estimated
by discounting cash flows, adjusted for prepayments. The discount rates used
for consumer installment loans were current rates offered by commercial banks
and thrifts; for residential mortgages, secondary market yields for comparable
mortgage-backed securities, adjusted for risk, were used. The fair value of
credit card receivables was estimated by discounting expected cash flows. The
discount rates used incorporated the effects of interest rate changes only,
since the estimated cash flows were adjusted for credit risk.
Other Assets: Other Assets consist primarily of equity investments, including
venture capital investments. The fair value of these investments was determined
on an individual basis. The valuation methodologies included market values of
publicly-traded securities, independent appraisals, and cash flow analyses.
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value: SFAS 107 requires
that the fair value disclosed for deposit liabilities with no stated maturity
(i.e., demand, savings and certain money market deposits) be equal to the
carrying value. SFAS 107 does not allow for the recognition of the inherent
funding value of these instruments.
The fair value of foreign deposits, federal funds purchased and securities
sold under repurchase agreements, other borrowed funds, acceptances
outstanding, short-term payables, and accounts payable and accrued liabilities
are considered to approximate their respective carrying values due to their
short-term nature.
Domestic Time Deposits: The fair value of time deposits was estimated by
discounting cash flows based on contractual maturities at the interest rates
for funds of similar maturity.
Trading Liabilities-Risk Management Instruments: The Corporation records the
negative fair values on derivatives and foreign exchange instruments at
estimated fair value. These instruments were valued using either quoted market
prices, pricing models, quoted market prices of financial instruments with
similar characteristics or discounted cash flows. For the fair value of trading
liabilities, see Note Three.
Long-Term Debt: The valuation of long-term debt takes into account several
factors, including current market interest rates and the Corporation's credit
rating. Quotes were gathered from various investment banking firms for
indicative yields for the Corporation's securities over a range of maturities.
UNUSED COMMITMENTS AND LETTERS OF CREDIT
The Corporation has reviewed the unfunded portion of commitments to extend
credit as well as standby and other letters of credit, and has determined that
the fair value of such financial instruments is not material.
The following tables present the carrying value and estimated fair value at
December 31, 1995 and 1994, of financial assets and liabilities valued under
SFAS 107 and certain derivative contracts used for ALM activities related to
such financial assets and liabilities.
69
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Assets/
Financial Liabilities Derivative Contracts Used for ALM Activities(e)
- ----------------------------------------------------------------------------------------------------------------------------------
Estimated Gross Gross Estimated
Carrying Fair Carrying Unrecognized Unrecognized Fair
December 31, 1995 (in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Assets for Which Fair Value Approximates
Carrying Value $ 25,210 $ 25,210 $ -- $ -- $ -- $ --
Trading Assets:
Debt and Equity Instruments 18,317 18,317(f) -- -- -- --
Risk Management Instruments 17,703 17,703(g) -- -- -- --
Securities Held-to-Maturity 4,628 4,659 -- -- -- --
Securities Available-for-Sale 30,157 30,157 (78) -- -- (78)
Loans, Net of Unearned Income 82,143 82,116 81 155 (322) (86)
Allowance for Credit Losses (2,379) -- -- -- -- --
Derivatives in Lieu of Cash Market Instruments(d) 68 117 68 276 (227) 117
Other Assets 2,050 2,565 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 177,897 $180,844 $ 71 $431 $(549) $(47)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Liabilities for Which Fair Value Approximates
Carrying Value $ 128,097 $128,101 $(14) $ 21 $(25) $(18)
Domestic Time Deposits 14,991 15,092 60 52 (24) 88
Long-Term Debt 7,329 7,477 19 116 (21) 114
Trading Liabilities - Risk Management Instruments 19,461 19,461(g) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 169,878 $170,131 $ 65 $189 $(70) $184
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Assets/
Financial Liabilities Derivative Contracts Used for ALM Activities(e)
- ----------------------------------------------------------------------------------------------------------------------------------
Estimated Gross Gross Estimated
Carrying Fair Carrying Unrecognized Unrecognized Fair
December 31, 1994 (in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Assets for Which Fair Value Approximates
Carrying Value $ 31,883 $ 31,883 $ -- $ -- $ -- $ --
Trading Assets:
Debt and Equity Instruments 11,093 11,093(f) -- -- -- --
Risk Management Instruments 17,709 17,709(g) -- -- -- --
Securities Held-to-Maturity 8,566 8,106 -- -- -- --
Securities Available-for-Sale 18,431 18,431 542 -- -- 542
Loans, Net of Unearned Income 78,767 77,169 123 145 (175) 93
Allowance for Credit Losses (2,480) -- -- -- -- --
Derivatives in Lieu of Cash Market Instruments(d) 97 175 97 194 (116) 175
Other Assets 1,971 2,260 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $166,037 $166,826 $762 $339 $(291) $810
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Liabilities for Which Fair Value Approximates
Carrying Value $120,579 $120,579 $ 4 $ -- $ (18) $ (14)
Domestic Time Deposits 15,675 16,369 20 5 (716) (691)
Long-Term Debt 7,991 7,918 26 1 (104) (77)
Trading Liabilities - Risk Management Instruments 15,979 15,979(g) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $160,224 $160,845 $ 50 $ 6 $(838) $(782)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The carrying value and estimated fair value include the carrying value and
estimated fair value of derivative contracts used for ALM activities.
(b) The carrying value and estimated fair value of daily margin settlements on
open futures contracts are primarily included in Other Assets on the balance
sheet, except when used in connection with available-for-sale securities, which
are carried at fair value and are included in Securities: Available-for-Sale on
the balance sheet. The Corporation uses these contracts in its ALM activities to
modify the interest rate characteristics of balance sheet instruments such as
securities available-for-sale, loans and deposits. Gross unrecognized gains and
losses from daily margin settlements on open futures contracts were $4 million
and $101 million, respectively, at December 31, 1995. The unrecognized gains and
losses from such contracts are amortized to interest income after the contracts
close. See page 35 of the MD&A for a discussion of closed derivative contracts
related to ALM activities.
(c) The carrying value of derivatives used for asset/liability management is
primarily included in Other Assets on the balance sheet, except derivatives
used in connection with available-for-sale securities which are carried at fair
value and are included in Securities: Available-for-Sale on the balance sheet.
(d) Represents derivative contracts that, as part of the Corporation's
asset/liability management, are used in place of cash market instruments. For
further discussion, see Note One.
(e) Derivative Contacts Used for Asset/Liability Management Activities were
valued using market prices or pricing models consistent with methods used by
the Corporation in valuing similar instruments used for trading purposes.
(f) The average fair value of debt and equity instruments held for trading
purposes was $12,811 million during 1995 and $11,347 million during 1994. For a
further breakout of the fair value of Trading Assets - Debt and Equity
Instruments, see Note Three.
(g) The average fair value of Trading Assets - Risk Management Instruments and
Trading Liabilities - Risk Management Instruments in 1995 was $20,963 million
and $21,748 million, respectively. The average fair value of Trading Assets
Risk Management Instruments and Trading Liabilities - Risk Management
Instruments in 1994 was $17,779 million and $16,143 million, respectively.
70
<PAGE> 73
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
In addition to the derivative contracts in the above tables, the Corporation
also uses derivative contracts (primarily interest rate floors and swaps) to
manage the risks associated with its mortgage servicing activities; that
are not required to be fair valued under SFAS 107. At December 31, 1995, the
notional amount of such derivatives was $3.2 billion, the carrying value was
$7.7 million, and gross unrecognized gains and losses were $19.9 million and
$3.4 million, respectively, resulting in an estimated fair value of $24.2
million.
- --------------------------------------------------------------------------------
23 COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Corporation and its subsidiaries were obligated under
a number of noncancelable operating leases for premises and equipment used
primarily for banking purposes. Certain leases contain rent escalation clauses
for real estate taxes and other operating expenses and renewal option clauses
calling for increased rents. No lease agreement imposes any restrictions on the
Corporation affecting its ability to pay dividends, engage in debt or equity
financing transactions, or to enter into further lease agreements. Future
minimum rental payments required under operating leases with initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1995 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions)
- -------------------------------------------------------------
<S> <C>
1996 $ 204
1997 196
1998 180
1999 167
2000 154
After 662
- -------------------------------------------------------------
Total Minimum Payments Required $1,563
- -------------------------------------------------------------
Less: Sublease Rentals Under Noncancelable Subleases $ (181)
- -------------------------------------------------------------
Net Minimum Payment Required $1,382
- -------------------------------------------------------------
</TABLE>
Total rental expense in 1995, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Rentals $ 334 $ 363 $ 384
Sublease Rentals (63) (56) (60)
- --------------------------------------------------------------------------
Total $ 271 $ 307 $ 324
- --------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, assets amounting to $35 billion and $28 billion,
respectively, were pledged to secure public deposits and for other purposes. The
significant components of the $35 billion of assets pledged at December 31, 1995
were as follows: $13 billion were securities, $11 billion were loans, and the
remaining $11 billion were primarily trading account assets. These amounts
compare with $9 billion of securities, $9 billion of loans, and $10 billion of
trading account assets pledged at December 31, 1994.
The Corporation and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all such actions and proceedings
pending against or involving the Corporation and its subsidiaries, management
does not expect the aggregate liability or loss, if any, resulting therefrom to
have a material adverse effect on the consolidated financial condition of the
Corporation.
- --------------------------------------------------------------------------------
24 INTERNATIONAL OPERATIONS
The accompanying table presents average assets and income statement information
for 1995, 1994 and 1993 relating to international and domestic operations of
the Corporation by major geographic areas, based on the domicile of the
customer. The Corporation defines international activities as business
transactions that involve customers residing outside of the United States.
However, a definitive separation of the Corporation's domestic and foreign
businesses cannot be performed because many of the Corporation's domestic
operations service international business.
As these operations are highly integrated, estimates and subjective
assumptions have been made to apportion revenue and expenses between domestic
and international operations. Estimates of the following are allocated on a
management accounting basis: stockholders' equity, interest costs charged to
users of funds, and overhead, administrative, and other expenses incurred by
one area on behalf of another. The provision for losses is allocated based on
charge-off experience and risk characteristics of the portfolio.
The Corporation considers the balance in the allowance for credit losses to
be available for both domestic and foreign exposures; however, a portion of the
allowance is allocated to international operations based on a methodology
consistent with the allocation of the provision for losses.
Certain amounts in prior periods have been reclassified among the geographic
regions to conform to the current year's presentation.
71
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Income
Average Before Net
As of or for the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Europe $ 28,964 $ 751 $ 408 $ 343 $ 206
Asia and Pacific 15,365 501 230 271 163
Latin America and the Caribbean 7,851 195 97 98 60
Middle East and Africa 1,162 25 20 5 3
Other(c) 1,373 12 8 4 2
- -----------------------------------------------------------------------------------------------------------------------------------
Total International 54,715 1,484 763 721 434
Total Domestic 125,982 6,971 4,716 2,255 1,371
- -----------------------------------------------------------------------------------------------------------------------------------
Total Corporation $180,697 $8,455 $5,479 $2,976 $1,805
- -----------------------------------------------------------------------------------------------------------------------------------
1994
Europe $ 28,847 $ 738 $ 409 $ 329 $ 199
Asia and Pacific 10,191 346 216 130 80
Latin America and the Caribbean 7,695 543 273 270 165
Middle East and Africa 1,156 35 21 14 9
Other(c) 780 21 12 9 6
- -----------------------------------------------------------------------------------------------------------------------------------
Total International 48,669 1,683 931 752 459
Total Domestic 118,010 6,588 5,128 1,460 835
- -----------------------------------------------------------------------------------------------------------------------------------
Total Corporation $166,679 $8,271 $6,059 $2,212 $1,294
- -----------------------------------------------------------------------------------------------------------------------------------
1993
Europe $ 15,622 $ 831 $ 569 $ 262 $ 157
Asia and Pacific 6,100 338 202 136 71
Latin America and the Caribbean 8,328 616 161 455 273
Middle East and Africa 984 31 23 8 5
Other(c) 726 18 13 5 3
- -----------------------------------------------------------------------------------------------------------------------------------
Total International 31,760 1,834 968 866 509
Total Domestic 113,121 6,826 5,584 1,242 1,095
- -----------------------------------------------------------------------------------------------------------------------------------
Total Corporation $144,881 $8,660 $6,552 $2,108 $1,604
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue.
(b) Expense is comprised of Noninterest Expense and Provision for Losses.
(c) No geographic region included in other international amounts to more than
10% of the total for the Corporation.
72
<PAGE> 75
Chemical Banking Corporation
and Subsidiaries
- --------------------------------------------------------------------------------
25 PARENT COMPANY
Condensed financial information of Chemical Banking Corporation, the Parent
Company, is presented below.
For purposes of preparing the Statement of Cash Flows, cash and cash
equivalents are those amounts included in the balance sheet caption Cash with
Banks.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash with Banks $ 324 $ 76
Deposits with Banking Subsidiaries 4,822 3,581
Securities Purchased Under Resale
Agreements-Chemical Securities Inc. 80 430
Available-for-Sale Securities 10 --
Short-Term Advances to Subsidiaries:
Banking 3 23
Nonbanking 1,777 1,567
Long-Term Advances to Subsidiaries:
Banking 2,257 2,187
Nonbanking 310 115
Investment (at Equity) in Subsidiaries:
Banking 11,417 10,718
Nonbanking 1,362 1,137
Other Assets 411 673
- ----------------------------------------------------------------------------------
Total Assets $22,773 $20,507
- ----------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other Borrowed Funds, primarily Commercial Paper $ 4,839 $ 3,968
Other Liabilities 451 340
Intermediate- and Long-Term Debt(a) 5,571 5,487
- ----------------------------------------------------------------------------------
Total Liabilities 10,861 9,795
Stockholders' Equity 11,912 10,712
- ----------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $22,773 $20,507
- ----------------------------------------------------------------------------------
</TABLE>
(a) At December 31, 1995, aggregate annual maturities for all issues for the
years 1996 through 2000 were $835 million, $518 million, $745 million, $685
million, and $730 million, respectively.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiaries:
Banking $ 1,078 $ 1,291 $ 588
Nonbanking 15 102 23
Interest from Subsidiaries:
Banking 304 258 255
Nonbanking 182 95 71
All Other Income 9 2 --
- ---------------------------------------------------------------------------------------
Total Income 1,588 1,748 937
- ---------------------------------------------------------------------------------------
Expense
Interest on:
Other Borrowed Funds, primarily
Commercial Paper 224 104 75
Intermediate- and Long-Term Debt 390 357 361
All Other Expense 21 39 96
- ---------------------------------------------------------------------------------------
Total Expense 635 500 532
- ---------------------------------------------------------------------------------------
Income Before Income Tax
Expense (Benefit) and Equity
in Undistributed Net Income
of Subsidiaries 953 1,248 405
Income Tax Expense (Benefit) (58) (42) (76)
Equity in Undistributed Net
Income of Subsidiaries 794 4 1,123
- ---------------------------------------------------------------------------------------
Net Income $ 1,805 $ 1,294 $1,604
- ---------------------------------------------------------------------------------------
</TABLE>
73
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year Ended December 31, (in millions) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 1,805 $ 1,294 $ 1,604
Less--Net Income of Subsidiaries 1,887 1,397 1,734
- ---------------------------------------------------------------------------------------------------------------------------
Parent Company Net Loss (82) (103) (130)
Add--Dividends from Subsidiaries 1,086 1,393 611
Other--Net 248 131 (131)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,252 1,421 350
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Net (Increase) Decrease in Deposits with Banking Subsidiaries (1,241) (2,376) (155)
Net (Increase) Decrease in Short-Term Advances to Subsidiaries (190) 449 242
Net (Increase) Decrease in Long-Term Advances to Subsidiaries (265) (10) 650
Net (Increase) Decrease in Investment (at Equity) in Subsidiaries (342) (300) (430)
Net (Increase) Decrease in Securities Under Resale Agreement-Chemical Securities Inc. 350 156 (586)
Proceeds from the Sale of Banking Operations in Southern and Central New Jersey 490 -- --
Purchase of Available-for-Sale Securities (10) -- --
Other--Net (12) (101) --
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (1,220) (2,182) (279)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net Increase (Decrease) in Other Borrowed Funds 870 1,928 6
Proceeds from the Issuance of Long-Term Debt 1,126 1,217 2,408
Repayments of Long-Term Debt (1,049) (1,307) (2,014)
Proceeds from the Issuance of Stock 579 254 591
Purchase of Treasury Stock (762) (387) --
Redemption of Preferred Stock -- (416) (610)
Cash Dividends Paid (548) (521) (480)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 216 768 (99)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 248 7 (28)
Cash with Banks at the Beginning of the Year 76 69 97
- ---------------------------------------------------------------------------------------------------------------------------
Cash with Banks at the End of the Year $ 324 $ 76 $ 69
- ---------------------------------------------------------------------------------------------------------------------------
Cash Interest Paid $ 611 $ 449 $ 421
Taxes Paid (Refunded) $ 752 $ (123) $ 89
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 77
Chemical Banking Corporation
and Subsidiaries
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL INFORMATION 1995-1994
<TABLE>
<CAPTION>
(in millions, except per share and stock price data) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income $1,174 $1,197 $1,162 $1,156 $1,169 $1,177 $1,185 $1,143
Provision for Losses 116 122 120 120 85 100 160 205
Noninterest Revenue 958 977 961 870 815 984 867 931
Noninterest Expense 1,250 1,257 1,248 1,246 1,593 1,311 1,281 1,324
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense
and Effect of Accounting Change 766 795 755 660 306 750 611 545
Income Tax Expense (Benefit) 276 318 302 264 127 311 254 226
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Effect of
Accounting Change 490 477 453 396 179 439 357 319
Effect of Change in Accounting
Principle -- -- -- (11)(a) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 490 $ 477 $ 453 $ 385 $ 179(b) $ 439 $ 357 $ 319
- -----------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Primary:
Income Before Effect of
Accounting Change $ 1.81 $ 1.74 $ 1.72 $ 1.49 $ .61 $ 1.59 $ 1.27 $ 1.12
Effect of Change in Accounting
Principle -- -- -- (.04)(a) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.81 $ 1.74 $ 1.72 $ 1.45 $ .61(b) $ 1.59 $ 1.27 $ 1.12
- -----------------------------------------------------------------------------------------------------------------------------------
Assuming Full Dilution:
Income Before Effect of
Accounting Change $ 1.81 $ 1.70 $ 1.68 $ 1.46 $ .61 $ 1.56 $ 1.25 $ 1.11
Effect of Change in Accounting
Principle -- -- -- (.04)(a) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.81 $ 1.70 $ 1.68 $ 1.42 $ .61(b) $ 1.56 $ 1.25 $ 1.11
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Share $ .50 $ .50 $ .50 $ .44 $ .44 $ .44 $ .38 $ .38
Average Common and Common
Equivalent Shares 256.5 260.1 248.3 245.3 246.3 248.6 255.1 255.3
Average Common Shares Assuming
Full Dilution 257.3 266.1 254.8 253.0 254.0 256.3 263.0 263.0
- -----------------------------------------------------------------------------------------------------------------------------------
Stock Price Per Common Share:(c)
High $64.75 $61.63 $48.75 $40.88 $38.63 $40.00 $40.88 $42.13
Low 53.88 46.25 37.50 35.75 33.63 34.88 33.88 34.50
Close 58.75 60.88 47.25 37.75 35.88 35.00 38.50 36.38
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for
other postretirement benefits relating to the Corporation's foreign plans.
(b) Excluding the impact of the $260 million ($152 million after tax)
restructuring charge in the fourth quarter of 1994, proforma net income was
$331 million or $1.22 per primary share.
(c) The Corporation's common stock is listed and traded on the New York Stock
Exchange and the International Stock Exchange of the United Kingdom and
Republic of Ireland. The high, low and closing prices of the Corporation's
common stock are from the New York Stock Exchange Composite Transaction Tape.
75
<PAGE> 78
Chemical Bank
and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, (in millions, except share data) 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 6,371 $ 6,258
Deposits with Banks 2,544 5,484
Federal Funds Sold and Securities Purchased Under Resale Agreements 5,621 5,898
Trading Assets:
Debt and Equity Instruments 10,338 8,088
Risk Management Instruments 17,625 17,694
Securities:
Available-for-Sale 26,348 16,362
Held-to-Maturity (Market Value: $3,830 in 1995 and $5,981 in 1994) 3,807 6,316
Loans (Net of Unearned Income: $434 in 1995 and $405 in 1994) 67,079 62,272
Allowance for Credit Losses (2,021) (2,022)
Premises and Equipment 1,355 1,409
Due from Customers on Acceptances 1,166 1,064
Accrued Interest Receivable 1,053 989
Other Assets 3,464 3,702
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $144,750 $133,514
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic Noninterest-Bearing $ 15,508 $ 15,143
Domestic Interest-Bearing 31,996 31,868
Foreign 36,978 31,230
- ----------------------------------------------------------------------------------------------------------------------------
Total Deposits 84,482 78,241
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 17,172 16,183
Other Borrowed Funds 7,174 6,654
Acceptances Outstanding 1,180 1,081
Trading Liabilities 19,467 16,950
Accounts Payable, Accrued Expenses and Other Liabilities 3,653 3,029
Long-Term Debt 1,575 2,303
Long-Term Debt Payable to Parent Company 1,867 1,867
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 136,570 126,308
- ----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common Stock ($12 Par Value; Issued and Outstanding 51,633,170 Shares) 620 620
Capital Surplus 4,665 4,501
Retained Earnings 3,185 2,495
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (290) (410)
- ----------------------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 8,180 7,206
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $144,750 $133,514
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 79
- ------------------------------------------------------------------------------
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
A three-year summary of the Corporation's consolidated average balances,
interest rates and interest differentials on a taxable-equivalent basis for the
years 1993 through 1995, is provided on pages 78 and 79. Income computed on a
taxable-equivalent basis is income as reported in the Consolidated Statement of
Income adjusted to make income and earning yields on assets exempt from income
taxes (primarily Federal taxes) comparable to other taxable income. The
incremental tax rate used for calculating the taxable equivalent adjustment was
approximately 43% in each of the years 1993 through 1995. The majority of the
Corporation's securities are taxable.
Within the consolidated average balance sheet, interest and rate schedules,
the principal amounts of nonaccrual and renegotiated loans have been included
in the average loan balances used to determine the average interest rate earned
on loans. Interest accrued but not collected at the date a loan is placed on
nonaccrual status is reversed against interest income. Subsequent cash receipts
are applied either to the outstanding principal balance or recorded as interest
income, depending on management's assessment of the ultimate collectibility of
principal and interest. Interest income is accrued on renegotiated loans at the
renegotiated rates. Certain renegotiated loan agreements call for additional
interest to be paid on a deferred or a contingent basis. Such interest is taken
into income only as collected.
A summary of interest rates and interest differentials segregated between
domestic and foreign operations for the years 1993 through 1995 is presented on
pages 80 and 81 herein. Regarding the basis of segregation between the domestic
and foreign components, see Note Twenty Four of the Notes to Consolidated
Financial Statements at page 71. A portion of the Corporation's international
operations are being funded by domestic sources (intra-company funding).
Generally, the source of such domestic funds is the Parent Company which, in
order to optimize the Corporation's overall liquidity, deposits its excess
short-term funds with Chemical Bank's Nassau Branch to hold until such funds
are needed. Intra-company funding is very short-term in nature and the
Corporation believes such funds are not subject to cross-border risk.
Domestic net interest income was $3,913 million in 1995, an increase of $71
million from the prior year. The increase in 1995 was attributable to a higher
level of interest-earning assets and the reduction in the cost of carrying
nonperforming loans, partially offset by narrower spreads due to higher
short-term interest rates (for further discussion, see the section entitled
"Net Interest Income" in Management's Discussion and Analysis at page 15).
Net interest income from foreign operations was $802 million for 1995,
compared with $856 million in 1994. The decline reflected a lower net yield as
a result of the shift in the composition of the Corporation's foreign
interest-earning assets.
The tables on pages 82 and 83 herein present an analysis of the effect on
net interest income of volume and rate changes for the periods 1995 over 1994
and 1994 over 1993. In this analysis, the change due to the volume/rate
variance has been allocated to volume.
77
<PAGE> 80
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
<TABLE>
<CAPTION>
Year Ended December 31, 1995
(Taxable-Equivalent Interest and Rates; in millions) Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Deposits With Banks $ 3,545 $ 269 7.59%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 13,732 785 5.72
Trading Assets-Debt and Equity Instruments 12,811 878 6.85
Securities:
Held-to-Maturity 7,914 537 6.78
Available-for-Sale 21,964 1,637 7.45(b)
Securities(a) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities 29,878 2,174 7.28
- ------------------------------------------------------------------------------------------------------------------------------
Domestic Loans 63,613 5,414 8.51
Foreign Loans 18,036 1,624 9.00
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans 81,649 7,038(c) 8.62
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 141,615 11,144 7.87%
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses (2,440)
Cash and Due from Banks 7,795
Trading Assets Risk Management Instruments 20,963
All Other Assets 12,764
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $180,697
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Domestic Retail Deposits $ 41,121 1,507 3.67%
Domestic Negotiable Certificates of Deposit
and Other Deposits 5,450 290 5.32
Deposits in Foreign Offices 29,544 1,860 6.29
- ------------------------------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 76,115 3,657 4.80
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term and Other Borrowings:
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 25,299 1,442 5.70
Commercial Paper 3,955 227 5.73
Other Borrowings(e) 8,692 557 6.41
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term and Other Borrowings 37,946 2,226 5.87
Long-Term Debt 7,635 546 7.16
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 121,696 6,429 5.28
- ------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 20,227
Trading Liabilities Risk Management Instruments 21,748
All Other Liabilities 5,743
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 169,414
- ------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 1,330
Common Stockholders' Equity 9,953
- ------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 11,283(d)
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $180,697
- ------------------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 2.59%
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 4,715 3.33%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On December 31, 1993, the Corporation adopted SFAS 115. Previously reported
amounts have not been restated to conform with the current presentation. (b)
For the years ended December 31, 1995 and 1994, the annualized rate for
securities available-for-sale based on amortized cost was 7.41% and 6.42%,
respectively. (c) Fees and commissions on loans included in loan interest
amounted to $111 million in 1995, $141 million in 1994 and $176 million in
1993. (d) The ratio of average stockholders' equity to average assets was 6.2%
for 1995, 6.6% for 1994 and 7.3% for 1993. (e) Includes securities sold but not
yet purchased.
78
<PAGE> 81
Chemical Banking Corporation
and Subsidiaries
<TABLE>
<CAPTION>
1994 1993
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5,257 $ 371 7.07% $ 4,202 $ 268 6.39%
12,000 550 4.58 10,300 339 3.29
11,347 722 6.37 8,039 449 5.59
9,204 620 6.73 -- -- --
17,003 1,104 6.49(b) -- -- --
-- -- -- 23,654 1,731 7.32
- -------------------------------------------------------------------------------------------------------------------------------
26,207 1,724 6.58 23,654 1,731 7.32
- -------------------------------------------------------------------------------------------------------------------------------
57,377 4,522 7.88 57,701 4,197 7.28
17,857 1,223 6.85 21,038 1,440 6.85
- -------------------------------------------------------------------------------------------------------------------------------
75,234 5,745(c) 7.64 78,739 5,637(c) 7.16
- -------------------------------------------------------------------------------------------------------------------------------
130,045 9,112 7.01% 124,934 8,424 6.74%
- -------------------------------------------------------------------------------------------------------------------------------
(2,872) (3,084)
8,491 8,537
17,779 --
13,236 14,494
- -------------------------------------------------------------------------------------------------------------------------------
$166,679 $144,881
- -------------------------------------------------------------------------------------------------------------------------------
$ 43,861 1,164 2.66% $ 46,598 1,237 2.65%
5,128 186 3.64 6,242 191 3.05
24,051 1,028 4.27 21,066 813 3.86
- -------------------------------------------------------------------------------------------------------------------------------
73,040 2,378 3.26 73,906 2,241 3.03
- -------------------------------------------------------------------------------------------------------------------------------
19,154 844 4.41 15,461 472 3.05
2,760 118 4.29 2,438 83 3.42
8,775 538 6.12 6,663 437 6.56
- -------------------------------------------------------------------------------------------------------------------------------
30,689 1,500 4.89 24,562 992 4.04
8,419 536 6.37 8,053 534 6.64
- -------------------------------------------------------------------------------------------------------------------------------
112,148 4,414 3.94 106,521 3,767 3.54
- -------------------------------------------------------------------------------------------------------------------------------
21,723 21,750
16,143 --
5,703 6,027
- -------------------------------------------------------------------------------------------------------------------------------
155,717 134,298
- -------------------------------------------------------------------------------------------------------------------------------
1,579 1,887
9,383 8,696
- -------------------------------------------------------------------------------------------------------------------------------
10,962(d) 10,583(d)
- -------------------------------------------------------------------------------------------------------------------------------
$166,679 $144,881
- -------------------------------------------------------------------------------------------------------------------------------
3.07% 3.20%
- -------------------------------------------------------------------------------------------------------------------------------
$4,698 3.61% $4,657 3.73%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE> 82
INTEREST RATES AND INTEREST DIFFERENTIAL ANALYSIS OF
NET INTEREST INCOME - DOMESTIC AND FOREIGN
<TABLE>
<CAPTION>
1995
---------------------------------------------
Average Average
(in millions; interest and average rates on a taxable-equivalent basis) balance Interest rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC
INTEREST-EARNING ASSETS:
Deposits With Banks $ 135 $ 11 8.05%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 9,642 551 5.71
Securities and Trading Assets 30,670 2,122 6.92
Loans 63,613 5,414 8.51
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 104,060 8,098 7.78
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits:
Domestic Retail Time Deposits 41,121 1,507 3.67
Domestic Negotiable Certificates of
Deposit and Other Deposits 5,450 290 5.32
- -------------------------------------------------------------------------------------------------------------------------------
Total Deposits 46,571 1,797 3.86
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 19,894 1,094 5.50
Other Borrowed Funds 10,705 677 6.33
- -------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 30,599 1,771 5.79
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 7,418 521 7.03
Intra-Company Funding-Net 1,993 96 4.80
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 86,581 4,185 4.83
Noninterest-Bearing Liabilities 17,479 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Investable Funds $104,060 4,185 4.02
- -------------------------------------------------------------------------------------------------------------------------------
Domestic Net Interest Income and Net Yield $3,913 3.76%
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN
INTEREST-EARNING ASSETS:
Deposits With Banks $ 3,410 $ 258 7.57%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 4,090 234 5.72
Securities and Trading Assets 12,019 930 7.74
Loans 18,036 1,624 9.00
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 37,555 3,046 8.11
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits $ 29,544 1,860 6.29
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 5,405 348 6.44
Other Borrowed Funds 1,942 107 5.49
- -------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 7,347 455 6.19
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 217 25 11.54
Intra-Company Funding-Net (1,993) (96) 4.80
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 35,115 2,244 6.39
Noninterest-Bearing Liabilities 2,440 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Investable Funds $ 37,555 2,244 5.97
- -------------------------------------------------------------------------------------------------------------------------------
Foreign Net Interest Income and Net Yield $ 802 2.14%
- -------------------------------------------------------------------------------------------------------------------------------
Percentage of Total Assets and Liabilities
Attributable to Foreign Operations:
Assets 34.0%
Liabilities 33.2%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE> 83
Chemical Banking Corporation
and Subsidiaries
<TABLE>
<CAPTION>
1994 1993
------------------------------------------ -----------------------------------------------
Average Average Average Average
balance Interest rate balance Interest rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 85 $ 6 7.22% $ 232 $ 10 4.65%
10,947 477 4.36 9,946 314 3.16
28,039 1,789 6.38 25,977 1,741 6.70
57,377 4,522 7.88 57,701 4,197 7.28
- -----------------------------------------------------------------------------------------------------------------------------
$96,448 6,794 7.04 $93,856 6,262 6.67
- -----------------------------------------------------------------------------------------------------------------------------
$43,861 1,164 2.66 $46,598 1,237 2.65
5,128 186 3.64 6,242 191 3.05
- -----------------------------------------------------------------------------------------------------------------------------
48,989 1,350 2.76 52,840 1,428 2.70
- -----------------------------------------------------------------------------------------------------------------------------
18,041 710 3.94 14,413 397 2.76
9,983 550 5.50 7,881 412 5.24
- -----------------------------------------------------------------------------------------------------------------------------
28,024 1,260 4.49 22,294 809 3.63
- -----------------------------------------------------------------------------------------------------------------------------
8,190 480 5.86 7,763 494 6.37
(4,348) (138) -- (4,835) (187) --
- -----------------------------------------------------------------------------------------------------------------------------
80,855 2,952 3.65 78,062 2,544 3.26
15,593 -- -- 15,794 -- --
- -----------------------------------------------------------------------------------------------------------------------------
$96,448 2,952 3.06 $93,856 2,544 2.71
- -----------------------------------------------------------------------------------------------------------------------------
$3,842 3.98% $3,718 3.96%
- -----------------------------------------------------------------------------------------------------------------------------
$ 5,172 $ 365 7.07% $ 3,970 $ 258 6.49%
1,053 73 6.91 354 25 6.93
9,515 657 6.90 5,716 439 7.67
17,857 1,223 6.85 21,038 1,440 6.85
- -----------------------------------------------------------------------------------------------------------------------------
$33,597 2,318 6.90 $31,078 2,162 6.95
- -----------------------------------------------------------------------------------------------------------------------------
$24,051 1,028 4.27 $21,066 813 3.86
- -----------------------------------------------------------------------------------------------------------------------------
1,113 134 12.04 1,048 75 7.15
1,552 106 6.85 1,220 108 8.82
- -----------------------------------------------------------------------------------------------------------------------------
2,665 240 9.02 2,268 183 8.05
- -----------------------------------------------------------------------------------------------------------------------------
229 56 24.48 290 40 13.77
4,348 138 3.14 4,835 187 3.86
- -----------------------------------------------------------------------------------------------------------------------------
31,293 1,462 4.67 28,459 1,223 4.29
2,304 -- -- 2,619 -- --
- -----------------------------------------------------------------------------------------------------------------------------
$33,597 1,462 4.35 $31,078 1,223 3.93
- -----------------------------------------------------------------------------------------------------------------------------
$ 856 2.55% $ 939 3.02%
- -----------------------------------------------------------------------------------------------------------------------------
31.7% 24.5%
31.1% 25.2%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE> 84
CHANGE IN NET INTEREST INCOME, VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
Consolidated
-----------------------------------------------
1995 OVER 1994 Increase (decrease) due to change in: Net
-------------------------------------
(in millions; interest and average rates on a taxable-equivalent basis) Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Deposits With Banks $(129) $ 27 $ (102)
Federal Funds Sold and Securities Purchased Under Resale Agreements 100 135 235
Securities and Trading Assets 375 231 606
Loans 548 745 1,293
- -----------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 894 1,138 2,032
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits (100) 443 343
Domestic Negotiable Certificates of Deposit and Other Deposits 18 86 104
Deposits in Foreign Offices 346 486 832
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits 264 1,015 1,279
- -----------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 379 219 598
Other Borrowed Funds 66 62 128
- -----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 445 281 726
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt (56) 66 10
Intra-Company Funding -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 653 1,362 2,015
- -----------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 241 $ (224) $ 17
- -----------------------------------------------------------------------------------------------------------------------------
1994 OVER 1993
INTEREST-EARNING ASSETS
Deposits With Banks $ 74 $ 29 $ 103
Federal Funds Sold and Securities Purchased Under Resale Agreements 92 119 211
Securities and Trading Assets 393 (127) 266
Loans (238) 346 108
- -----------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 321 367 688
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Domestic Retail Time Deposits (78) 5 (73)
Domestic Negotiable Certificates of Deposit and Other Deposits (42) 37 (5)
Deposits in Foreign Offices 129 86 215
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits 9 128 137
- -----------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 151 221 372
Other Borrowed Funds 140 (4) 136
- -----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 291 217 508
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 11 (9) 2
Intra-Company Funding -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 311 336 647
- -----------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 10 $ 31 $ 41
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE> 85
Chemical Banking Corporation
and Subsidiaries
<TABLE>
<CAPTION>
Domestic Foreign
--------------------------------------------------- --------------------------------------------------
Increase (decrease) due to change in: Net Increase (decrease) due to change in: Net
------------------------------------- -------------------------------------
Volume Rate Change Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4 $ 1 $ 5 $(133) $ 26 $(107)
(74) 148 74 174 (13) 161
182 151 333 193 80 273
531 361 892 17 384 401
- -----------------------------------------------------------------------------------------------------------------------------
643 661 1,304 251 477 728
- -----------------------------------------------------------------------------------------------------------------------------
(100) 443 343 -- -- --
18 86 104 -- -- --
-- -- -- 346 486 832
- -----------------------------------------------------------------------------------------------------------------------------
(82) 529 447 346 486 832
- -----------------------------------------------------------------------------------------------------------------------------
103 281 384 276 (62) 214
44 83 127 22 (21) 1
- -----------------------------------------------------------------------------------------------------------------------------
147 364 511 298 (83) 215
- -----------------------------------------------------------------------------------------------------------------------------
(55) 96 41 (1) (30) (31)
306 (72) 234 (306) 72 (234)
- -----------------------------------------------------------------------------------------------------------------------------
316 917 1,233 337 445 782
- -----------------------------------------------------------------------------------------------------------------------------
$ 327 $(256) 71 $ (86) $ 32 (54)
- -----------------------------------------------------------------------------------------------------------------------------
$ (10) $ 6 $ (4) $ 84 $ 23 $ 107
44 119 163 48 -- 48
131 (83) 48 262 (44) 218
(21) 346 325 (217) -- (217)
- -----------------------------------------------------------------------------------------------------------------------------
144 388 532 177 (21) 156
- -----------------------------------------------------------------------------------------------------------------------------
(78) 5 (73) -- -- --
(42) 37 (5) -- -- --
-- -- -- 129 86 215
- -----------------------------------------------------------------------------------------------------------------------------
(120) 42 (78) 129 86 215
- -----------------------------------------------------------------------------------------------------------------------------
143 170 313 8 51 59
118 20 138 22 (24) (2)
- -----------------------------------------------------------------------------------------------------------------------------
261 190 451 30 27 57
- -----------------------------------------------------------------------------------------------------------------------------
26 (40) (14) (15) 31 16
14 35 49 (14) (35) (49)
- -----------------------------------------------------------------------------------------------------------------------------
181 227 408 130 109 239
- -----------------------------------------------------------------------------------------------------------------------------
$ (37) $ 161 $ 124 $ 47 $(130) $ (83)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE> 86
- --------------------------------------------------------------------------
LOAN PORTFOLIO
The table below sets forth the amount of loans outstanding by type for the
dates indicated:
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Commercial and Financial $26,902 $24,972 $23,848 $29,277 $32,904
Consumer 33,475 30,120 25,798 23,599 20,436
Commercial Real Estate 4,850 5,650 7,338 8,103 8,737
- ---------------------------------------------------------------------------------------------------------------------------------
Total Domestic Loans 65,227 60,742 56,984 60,979 62,077
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign Loans:
Commercial, Industrial and Consumer 8,987 8,290 7,353 8,115 8,742
Foreign Governments and Official Institutions 4,836 6,567 7,558 8,266 8,740
Financial Institutions 3,578 3,628 3,963 5,145 5,278
- ----------------------------------------------------------------------------------------------------------------------------------
Total Foreign Loans(a) 17,401 18,485 18,874 21,526 22,760
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans 82,628 79,227 75,858 82,505 84,837
- ---------------------------------------------------------------------------------------------------------------------------------
Unearned Income (485) (460) (477) (495) (600)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans, Net of Unearned Income $82,143 $78,767 $75,381 $82,010 $84,237
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For loans measured pursuant to SFAS 115 at December 31, 1995 and 1994, see
Note Five on page 55. At December 31, 1993, $3,783 million of loans, primarily
renegotiated loans, were measured under SFAS 115, including $1,962 million that
were classified as held-to-maturity and carried at amortized cost, and $1,821
million designated as available-for-sale and carried at fair value.
For a discussion of the Corporation's loan outstandings, see "Net Interest
Income" and "Loan Portfolio" on pages 15 and 24, respectively.
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table shows loan maturity distribution based upon the stated
terms of the loan agreements, and sensitivity to changes in interest rates of
the loan portfolio, excluding consumer loans, at December 31, 1995:
<TABLE>
<CAPTION>
Within 1-5 After 5
December 31, 1995 (in millions) 1 Year(a) Years Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic:
Commercial and Financial $14,419 $ 8,933 $3,550 $26,902
Commercial Real Estate 1,582 2,568 700 4,850
Foreign(b) 9,892 3,695 3,679 17,266
- -----------------------------------------------------------------------------------------------------------------------------
Total $25,893 $15,196 $7,929 $49,018
- -----------------------------------------------------------------------------------------------------------------------------
Loans at Fixed Interest Rates $ 1,722 $1,155
Loans at Variable Interest Rates 13,474 6,774
- -----------------------------------------------------------------------------------------------------------------------------
Total $15,196 $7,929
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes demand loans, overdrafts and loans having no stated schedule of
repayments and no stated maturity.
(b) Substantially all foreign loans that meet the accounting definition of a
security mature in over 10 years.
84
<PAGE> 87
- -------------------------------------------------------------------------------
RISK ELEMENTS
The following table sets forth the nonperforming assets and contractually
past-due loans at the dates indicated:
<TABLE>
<CAPTION>
December 31, (in millions) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Nonperforming Loans:
Nonaccruing Loans $591 $ 581 $1,661 $2,974 $3,099
Renegotiated Loans 35 37 37 -- 7
- ----------------------------------------------------------------------------------------------------------------------------------
Total Domestic Nonperforming Loans 626 618 1,698 2,974 3,106
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign Nonperforming Loans:(a)
Nonaccruing Loans 226 307 889 1,837 1,515
Renegotiated Loans 4 4 4 5 7
- ----------------------------------------------------------------------------------------------------------------------------------
Total Foreign Nonperforming Loans 230 311 893 1,842 1,522
- ----------------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Loans 856(b) 929 2,591 4,816 4,628
- ----------------------------------------------------------------------------------------------------------------------------------
Assets Acquired as Loan Satisfactions (primarily Real Estate) 50(b) 210 934 1,276 1,527
- ----------------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $906 $1,139 $3,525 $6,092 $6,155
- ----------------------------------------------------------------------------------------------------------------------------------
CONTRACTUALLY PAST-DUE LOANS(c)
Domestic $361 $ 330 $ 323 $ 393 $ 393
Foreign -- -- -- -- 30
- ----------------------------------------------------------------------------------------------------------------------------------
Total $361 $ 330 $ 323 $ 393 $ 423
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans previously classified as emerging markets loans. Previously
reported loan amounts have been reclassified to conform with the current
presentation.
(b) Includes $727 million of loans considered impaired under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). In addition, on
January 1, 1995, $122 million of assets for which the Corporation did not have
possession were reclassified from Assets Acquired as Loan Satisfactions to
Nonperforming Loans pursuant to the adoption of SFAS 114.
(c) Accruing loans past-due 90 days or more as to principal and interest, which
are not characterized as nonperforming loans. Primarily consists of consumer
loans, exclusive of residential mortgage loans, which are generally not
classified as nonperforming but, rather, are charged off on a formula basis upon
reaching certain specified stages of delinquency.
See Note Seven, "Nonperforming Assets", on pages 56 and 57 for interest income
calculated on the carrying value of nonaccrual and renegotiated loans that
would have been recorded had these loans been current in accordance with their
original terms ( interest at original rates), and the amount of interest income
on these loans that was included in income for the periods indicated.
85
<PAGE> 88
- ------------------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES
The table below summarizes the changes in the allowance for credit losses
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $2,480 $3,020 $3,025 $ 3,275 $ 4,229
Provision for Losses 478 550 1,259(d) 1,365 1,345
CHARGE-OFFS
Domestic:
Commercial and Financial (150) (206) (496) (511) (528)
Consumer (552) (458) (467)(d) (449) (456)
Commercial Real Estate (77) (201) (259) (302) (265)
Foreign(a) (46) (401)(c) (402) (494) (1,228)(g)
- ---------------------------------------------------------------------------------------------------------------------------
Total Charge-Offs (825) (1,266) (1,624) (1,756) (2,477)
- ---------------------------------------------------------------------------------------------------------------------------
RECOVERIES
Domestic:
Commercial and Financial 129 126 74 61 70
Consumer 58 63 48 49 46
Commercial Real Estate 24 36 15 12 12
Foreign 61 94 206(e) 25 44
- ---------------------------------------------------------------------------------------------------------------------------
Total Recoveries 272 319 343 147 172
- ---------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS (553) (947) (1,281) (1,609) (2,305)
Charge for Assets Transferred to
Held-for-Accelerated Disposition -- (148) -- -- --
Other (26)(b) 5 17(f) (6) 6
- ---------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $2,379 $2,480 $3,020 $ 3,025 $ 3,275
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes losses on sales and swaps of loans previously classified as
emerging markets.
(b) Includes $28 million related to the sale of banking operations in
southern and central New Jersey.
(c) Includes $291 million related to management's final evaluation of the
emerging markets portfolio.
(d) Includes $55 million related to the decision to accelerate the disposition
of certain nonperforming residential mortgage loans.
(e) Includes $175 million of recoveries on the disposition of emerging markets
debt.
(f) Includes $19 million increase in allowance related to the acquisition by
Texas Commerce of certain assets of First City Bancorporation of Texas, Inc.
(g) Includes a $902 million charge to adjust Brazilian medium- and long-term
outstandings to an estimated net recoverable value.
ALLOWANCE FOR CREDIT LOSSES-FOREIGN
The following table shows the changes in the portion of the allowance for
credit losses allocated to loans related to foreign operations, including
activity related to countries engaged in debt rescheduling:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $369 $ 665 $ 887 $1,337 $ 2,464
Provision for Losses (13) 8 174 225 52
Charge-offs (46) (401) (402) (494) (1,228)
Recoveries 61 94 206 25 44
Transfer from (to) Domestic Allowance -- -- (200) (200) --
Other -- 3 -- (6) 5
- ---------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $371 $ 369 $ 665 $ 887 $ 1,337
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The consolidated year-end allowance for credit losses is available to absorb
potential credit losses from the entire loan portfolio, as well as derivative
and foreign exchange transactions.
86
<PAGE> 89
- -------------------------------------------------------------------------------
LOAN LOSS ANALYSIS
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES
Loans-Average $81,649 $75,234 $78,739 $82,173 $84,520
Loans-Year End 82,143 78,767 75,381 82,010 84,237
Net Charge-Offs 553 1,095(a) 1,281 1,609 2,305
Allowance for Credit Losses 2,379 2,480 3,020 3,025 3,275
Nonperforming Loans 856 929 2,591 4,816 4,628
RATIOS
Net Charge-Offs to:
Loans-Average 0.68% 1.46% 1.63% 1.96% 2.73%
Allowance for Credit Losses 23.25 44.15 42.42 53.19 70.38
Allowance for Credit Losses to:
Loans-Year End 2.90 3.15 4.01 3.69 3.89
Nonperforming Loans 277.92 266.95 116.56 62.81 70.76
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a $148 million charge for assets transferred to held for
accelerated disposition.
DEPOSITS
The following data provide a summary of the Corporation's average deposits and
average interest rates for the years 1993-1995:
<TABLE>
<CAPTION>
Average Balances Average Interest Rates
-------------------------- -------------------------
(in millions, except interest rates) 1995 1994 1993 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Noninterest-Bearing Demand $20,227 $21,723 $21,750 --% --% --%
Interest-Bearing Demand 5,956 6,556 6,456 1.44 1.36 1.60
Savings 24,883 26,812 27,553 3.59 2.43 2.22
Time 15,732 15,621 18,831 5.19 3.89 3.79
- -----------------------------------------------------------------------------------------------------------------------------
Total Domestic Deposits 66,798 70,712 74,590 2.69 1.91 1.91
- -----------------------------------------------------------------------------------------------------------------------------
Foreign:
Noninterest-Bearing Demand 137 165 157 -- -- --
Interest-Bearing Demand 10,606 8,893 7,969 5.56 4.28 4.87
Savings 22 23 43 2.88 2.98 2.48
Time 18,779 14,970 12,897 6.76 4.32 3.28
- -----------------------------------------------------------------------------------------------------------------------------
Total Foreign Deposits(a) 29,544 24,051 21,066 6.29 4.27 3.86
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits $96,342 $94,763 $95,656 3.80% 2.51% 2.34%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Substantially all of the foreign deposits are in denominations of $100,000
or more.
87
<PAGE> 90
- -------------------------------------------------------------------------------
The following table presents deposits by maturity range and type for the dates
indicated:
<TABLE>
<CAPTION>
Domestic Time Other Domestic Deposits in
Certificates of Deposit Time Deposits Foreign Offices
(in millions) ($100,000 or More) ($100,000 or More) ($100,000 or More)
- ---------------------------------------------------------------------------------------------------------------------------------
By remaining maturity at December 31, 1995 1994 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three Months or Less $3,346 $3,402 $1,902 $2,088 $28,778 $25,682
Over Three Months but within Six Months 860 469 2 7 2,467 1,204
Over Six Months but within Twelve Months 352 460 2 6 809 1,227
Over Twelve Months 435 849 51 68 199 195
- -------------------------------------------------------------------------------------------------------------------------------
Total $4,993 $5,180 $1,957 $2,169 $32,253 $28,308
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, total time and savings deposits in domestic offices
were $44,491 million, of which $4,993 million were time certificates of deposit
in denominations of $100,000 or more, $1,957 million were other time deposits
in denominations of $100,000 or more, and $29,782 million were money market
deposit accounts and other savings accounts. Deposits of $100,000 or more in
foreign offices totaled $32,253 million, substantially all of which were
interest-bearing.
At December 31, 1994, total time and savings deposits in domestic offices
were $46,799 million, of which $5,180 million were time certificates of deposit
in denominations of $100,000 or more, $2,169 million were other time deposits
in denominations of $100,000 or more, and $31,386 million were money market
deposit accounts and other savings accounts. Deposits of $100,000 or more in
foreign offices totaled $28,308 million, substantially all of which were
interest-bearing.
88
<PAGE> 91
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on behalf of the undersigned, thereunto duly authorized, on the 20th day of
February, 1996.
CHEMICAL BANKING CORPORATION
(Registrant)
By WALTER V. SHIPLEY
------------------------------------
(Walter V. Shipley,
Chairman of the Board and
Chief Executive Officer)
This report has been reviewed by each member of the Board of Directors and
pursuant to the requirements of the Securities Exchange Act of 1934, signed on
behalf of the registrant by members present at the meeting of the Board of
Directors on the date indicated. The Corporation does not exercise the power of
attorney to sign on behalf of any Director.
<TABLE>
<CAPTION>
CAPACITY DATE
-------- ----
<S> <C> <C>
WALTER V. SHIPLEY Director and Chairman of
- ------------------------------ the Board
(Walter V. Shipley) (Principal Executive Officer)
EDWARD D. MILLER Director and President
- ------------------------------
(Edward D. Miller)
WILLIAM B. HARRISON JR. Director and Vice Chairman
- ------------------------------
(William B. Harrison Jr.)
FRANK A. BENNACK JR. Director February 20, 1996
- ------------------------------
(Frank A. Bennack Jr.)
MICHEL C. BERGERAC Director
- ------------------------------
(Michel C. Bergerac)
RANDOLPH W. BROMERY Director
- ------------------------------
(Randolph W. Bromery)
CHARLES W. DUNCAN JR. Director
- ------------------------------
(Charles W. Duncan Jr.)
MELVIN R. GOODES Director
- ------------------------------
(Melvin R. Goodes)
</TABLE>
89
<PAGE> 92
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPACITY DATE
<S> <C> <C>
GEORGE V. GRUNE Director
- ------------------------------
(George V. Grune)
HAROLD S. HOOK Director
- ------------------------------
(Harold S. Hook)
HELENE L. KAPLAN Director
- ------------------------------
(Helene L. Kaplan)
J. BRUCE LLEWELLYN Director
- ------------------------------
(J. Bruce Llewellyn)
JOHN P. MASCOTTE Director
- ------------------------------
(John P. Mascotte)
JOHN F. MCGILLICUDDY Director
- ------------------------------
(John F. McGillicuddy)
ANDREW C. SIGLER Director February 20, 1996
- ------------------------------
(Andrew C. Sigler)
MICHAEL I. SOVERN Director
- ------------------------------
(Michael I. Sovern)
JOHN R. STAFFORD Director
- ------------------------------
(John R. Stafford)
W. BRUCE THOMAS Director
- ------------------------------
(W. Bruce Thomas)
MARINA v.N. WHITMAN Director
- ------------------------------
(Marina v.N. Whitman)
RICHARD D. WOOD Director
- ------------------------------
(Richard D. Wood)
PETER J. TOBIN Executive Vice President
- ------------------------------ and Chief Financial Officer
(Peter J. Tobin) (Principal Financial Officer)
JOSEPH L. SCLAFANI Senior Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
(Joseph L. Sclafani)
</TABLE>
90
<PAGE> 93
APPENDIX I
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
GRAPHIC
NUMBER PAGE DESCRIPTION
- ------ ---- -----------
<S> <C> <C>
1 32 Bar Graph entitled "Histogram of Daily Market Risk-Related Trading
Revenue for 1995" presenting the following information:
Millions of dollars 0-5 5-10 10-15 More than 15
--- ---- ----- ------------
Number of days trading
revenue was within the
above prescribed positive
dollar range 128 88 9 0
Millions of dollars 0-(5) (5)-(10) (10)-(15) Less than (15)
----- -------- --------- --------------
Number of days trading
revenue was within the
above prescribed negative
dollar range 27 10 3 1
The Histogram includes all business trading days for international
and domestic units
</TABLE>
<PAGE> 94
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger, dated as of August 27, 1995, between
Chemical Banking Corporation and The Chase Manhattan Corporation
(incorporated by reference to Exhibit 2.1 to the Registration
Statement on Form S-4 (File No. 33-63833) of Chemical Banking
Corporation).
2.2 Stock Option Agreement, dated as of August 27, 1995, between
Chemical Banking Corporation, as Issuer, and The Chase Manhattan
Corporation, as Grantee (incorporated by reference to Exhibit 2.2 to
the Registration Statement on Form S-4 (File No. 33-63833) of
Chemical Banking Corporation).
2.3 Stock Option Agreement, dated as of August 27, 1995, between The
Chase Manhattan Corporation, as Issuer, and Chemical Banking
Corporation, as Grantee (incorporated by reference to Exhibit 2.3 to
the Registration Statement on Form S-4 (File No. 33-63833) of
Chemical Banking Corporation).
2.4 Employee Benefits Agreement, dated as of August 27, 1995, between
Chemical Banking Corporation and The Chase Manhattan Corporation
(incorporated by reference to Exhibit 2.4 to the Registration
Statement on Form S-4 (File No. 33-63833) of Chemical Banking
Corporation).
3.1 (a) Restated Certificate of Incorporation of Chemical Banking
Corporation (incorporated by reference to Exhibit 3.1 of the Annual
Report on Form 10-K dated December 31, 1993 of Chemical Banking
Corporation).
3.1 (b) Certificate of Designations of Adjustable Rate Cumulative Preferred
Stock, Series L (incorporated by reference to Exhibit 2 to the
Registration Statement on Form 8-A dated June 6, 1994 of Chemical
Banking Corporation).
3.2 By-laws of Chemical Banking Corporation, as amended (incorporated by
reference to Exhibit 3.2 of the Annual Report on Form 10-K dated
December 31, 1993 of Chemical Banking Corporation).
4.1 (a) Form of Rights Agreement, dated as of April 13, 1989 between
Chemical Banking Corporation and Harris Trust Company of New York,
as amended (incorporated by reference to Exhibit 4 to the Current
Report on Form 8-K of Chemical Banking Corporation dated April 13,
1989).
4.1 (b) Letter of Appointment dated December 23, 1991 of Chemical Banking
Corporation appointing Chemical Bank, as successor Rights Agent
under the Rights Agreement (incorporated by reference to Exhibit
4.13(b) of the Annual Report on Form 10-K dated December 31, 1991 of
Chemical Banking Corporation).
4.2 Form of Indenture dated as of December 1, 1989 between Chemical
Banking Corporation and The Chase Manhattan Bank (National
Association), which Indenture includes the form of Debt Securities
(incorporated by reference to Exhibit 4.9 to the Registration
Statement on Form S-3 (File No. 33-32409) of Chemical Banking
Corporation).
4.3 Form of Indenture dated as of April 1, 1987, as amended and restated
as of December 15, 1992, between Chemical Banking Corporation and
Morgan Guaranty Trust Company of New York, as succeeded to by First
Trust of New York (National Association), as Trustee, which
Indenture includes the form of Subordinated Debt Securities
(incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K dated December 22, 1992 of Chemical Banking Corporation).
4.4 (a) Form of Indenture dated as of June 1, 1982 between Manufacturers
Hanover Corporation and Morgan Guaranty Trust Company of New York,
as succeeded to by First Trust of New York (National Association),
as Trustee, which Indenture includes the form of Debt Securities
(incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-3 (File No. 2-82433) of Manufacturers Hanover
Corporation).
4.4 (b) Form of First Supplemental Indenture dated as of January 15, 1986 to
the Indenture dated as of June 1, 1982 between Manufacturers Hanover
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, relating to the Senior Debt Securities (incorporated by
reference to Exhibit 1 to the Current Report on Form 8-K dated as of
January 29, 1986 of Manufacturers Hanover Corporation).
4.4 (c) Form of Second Supplemental Indenture dated as of March 13, 1991 to
the Indenture dated as of June 1, 1982 between Manufacturers Hanover
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, relating to the Senior Debt Securities (incorporated by
reference to Exhibit 4 to the Current Report on Form 8-K dated March
19, 1991 of Manufacturers Hanover Corporation).
<PAGE> 95
Exhibit
No. Description
------- -----------
4.4 (d) Form of Third Supplemental Indenture dated as of December 31, 1991
among Chemical Banking Corporation, Manufacturers Hanover
Corporation and Morgan Guaranty Trust Company of New York, as
succeeded to by First Trust of New York (National Association), as
Trustee, to the Indenture dated as of June 1, 1982 (incorporated by
reference to Exhibit 4.14(d) of the Annual Report on Form 10-K dated
December 31, 1991 of Chemical Banking Corporation).
4.5 (a) Form of Indenture dated as of June 1, 1985 between Manufacturers
Hanover Corporation and IBJ Schroder Bank and Trust Company, as
Trustee, relating to 8 1/2% Subordinated Capital Notes Due February
15, 1999 (incorporated by reference to Exhibit 4 (b) to the Current
Report on Form 8-K dated February 27, 1987 of Manufacturers Hanover
Corporation).
4.5 (b) Form of First Supplemental Indenture dated as of December 31, 1991
among Chemical Banking Corporation, Manufacturers Hanover
Corporation and IBJ Schroder Bank and Trust Company to the Indenture
dated June 1, 1985 (incorporated by reference to Exhibit 4.18(b) to
the Annual Report on Form 10-K dated December 31, 1991 of Chemical
Banking Corporation).
4.6 (a) Form of Indenture dated as of May 15, 1993 between Margaretten
Financial Corporation and The Bank of New York, as Trustee, relating
to the 6 3/4% Guaranteed Notes due June 15, 2000 (incorporated by
reference to Exhibit 4(a) to Registration Statement on Form S-3 (No.
33-60262) of Margaretten Financial Corporation).
4.6 (b) Form of Supplemental Indenture dated as of July 22, 1994 to the
Indenture dated as of May 15, 1993 among Margaretten Financial
Corporation, Chemical Banking Corporation and The Bank of New York,
as Trustee, and Guarantee dated as of July 22, 1994 by Chemical
Banking Corporation (incorporated by reference to Exhibit 4.34 to
the Current Report on Form 8-K dated September 28, 1994 of Chemical
Banking Corporation).
10.1 Key Executive Performance Plan of Chemical Banking Corporation
(incorporated by reference to Exhibit 10.4 to the Annual Report
on Form 10-K for the year ended December 31, 1994 of Chemical
Banking Corporation).
10.2 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993
(incorporated by reference to Exhibit 10.5 to the Annual Report
on Form 10-K for the year ended December 31, 1994 of Chemical
Banking Corporation).
10.3 Deferred Compensation Plan for Non-Employee Directors of Chemical
Banking Corporation and Chemical Bank, as amended and restated
effective December 15, 1992 (incorporated by reference to Exhibit
10.6 to the Annual Report on Form 10-K for the year ended December
31, 1992 of Chemical Banking Corporation).
10.4 Chemical Banking Corporation Long-Term Stock Incentive Plan, as
amended and restated as of May 19, 1992 (incorporated by reference
to Exhibit 10.7 to the Annual Report on Form 10-K for the year ended
December 31, 1992 of Chemical Banking Corporation).
10.5 Forms of employment agreements as entered into by Chemical Banking
Corporation and certain of its executive officers.
10.6 Post-Retirement Compensation Plan for Non-Employee Directors, as
amended and restated as of December 15, 1992 (incorporated by
reference to Exhibit 10.10 to the Annual Report on Form 10-K for the
year ended December 31, 1992 of Chemical Banking Corporation).
<PAGE> 96
Exhibit
No. Description
------- -----------
10.7 Permanent Life Insurance Options Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K for the year ended
December 31, 1992 of Chemical Banking Corporation).
10.8 Executive Retirement Plan of Chemical Banking Corporation and
Certain Subsidiaries.
10.9 Supplemental Retirement Plan of Chemical Bank and Certain
Affiliated Companies, restated effective January 1, 1993 and as
amended through January 1, 1995.
11.1 Computation of Net Income per Common Share.
12.0 Computation of ratio of earnings to fixed charges.
12.1 Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements.
21.1 List of Subsidiaries of Chemical Banking Corporation.
22.1 Annual Report on Form 11-K of the Chemical Savings Plan of Chemical
Bank and Certain Affiliates (to be filed by amendment pursuant to
Rule 15d-21 under the Securities Exchange Act of 1934).
22.2 Annual Report on Form 11-K of the Margaretten Financial Corporation
Savings Plan (to be filed by amendment pursuant to Rule 15d-21 under
the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
99.0 Supplemental Pro Forma Financial Statements.
<PAGE> 1
Exhibit 10.5
AGREEMENT
THIS AGREEMENT dated as of August 27, 1995 is made by and
between Chemical Banking Corporation, a Delaware corporation, (the "Company"),
and _________________________ (the "Executive").
WHEREAS the Company considers it essential to the best
interests of its shareholders to foster the continuous employment of key
management personnel; and
WHEREAS the Company has entered into an Agreement and Plan of
Merger with The Chase Manhattan Corporation, dated as of August 27, 1995, under
which Chase will be merged into the Company (the "Merger"); and
WHEREAS the Board of Directors of the Company (the "Board")
recognizes that, as is the case with many publicly-held corporations, the Merger
and the uncertainty and questions which it may raise among management may result
in the departure or distraction of management personnel to the detriment of the
Company and its shareholders; and
WHEREAS the Board has determined that appropriate steps should
be taken to reinforce and encourage the continued attention and dedication of
key members of the management of the Company and its subsidiaries, including the
Executive, to their
<PAGE> 2
2
assigned duties without distraction in the face of potential uncertainty arising
from the Merger;
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in
this Agreement are provided in the last Section hereof.
2. Term of Agreement. This Agreement shall commence on
the date hereof and shall continue in effect through December 31, 1996;
provided, however, if Shareholder Approval shall have occurred during the term
of this Agreement, this Agreement shall continue in effect for a period of 24
months beyond the month in which such Shareholder Approval occurred.
3. Company's Covenants Summarized. In order to induce
the Executive to remain in the employ of the Company and its subsidiaries and in
consideration of the Executive's covenants set forth in Section 4 hereof, the
Company agrees, under the conditions described herein, to pay the Executive the
"Severance Payments" described in Section 6.01 hereof and the other payments and
benefits described herein in the event the Executive's employment with the
Company is terminated following Shareholder Approval and during the term of this
Agreement. No amount or benefit shall be payable under this Agreement unless
there shall have been (or, under the terms hereof, there shall be deemed to have
been) a termination of the Executive's employment with the Company, as described
in Section 6.01 hereof, following
<PAGE> 3
3
Shareholder Approval. This Agreement shall not be construed as creating an
express or implied contract of employment and, except as otherwise agreed in
writing between the Executive and the Company, the Executive shall not have any
right to be retained in the employ of the Company or any of its subsidiaries.
4. The Executive's Covenants. The Executive agrees
that, subject to the terms and conditions of this Agreement the Executive will
remain in the employ of the Company until the earliest of (i) a date which is
twelve (12) months from the date of such Board Approval, (ii) the date of
Shareholder Approval, (iii) the date of termination by the Executive of the
Executive's employment for Good Reason (determined by treating the Board
Approval as Shareholder Approval in applying the definition of Good Reason), by
reason of death, Disability or Retirement, or (iv) the termination by the
Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.01 Following Shareholder Approval and during the term of this
Agreement, during any period that the Executive fails to perform the Executive's
full-time duties with the Company as a result of incapacity due to physical or
mental illness, the Executive's full salary shall be paid to the Executive by
the Company at a rate no less than the rate in effect at the commencement of any
such period, together with all compensation and benefits payable to the
Executive under the terms of any compensation or benefit plan, program or
arrangement maintained by the Company or its subsidiaries during such period,
<PAGE> 4
4
until the Executive's employment is terminated by the Company for Disability.
5.02 If the Executive's employment shall be terminated for any
reason following Shareholder Approval and during the term of this Agreement, the
Executive's full salary shall be paid to the Executive by the Company through
the Date of Termination at the rate in effect at the time the Notice of
Termination is given, together with all compensation and benefits payable to or
with respect to the Executive through the Date of Termination under the terms of
any compensation or benefit plan, program or arrangement maintained by the
Company or its subsidiaries during such period.
5.03 If the Executive's employment shall be terminated for any
reason following Shareholder Approval and during the term of this Agreement, the
Executive's normal post-termination compensation and benefits shall be paid to
the Executive as such payments become due. Such post-termination compensation
and benefits shall be determined under, and paid in accordance with, the
retirement, insurance and other compensation or benefit plans, programs and
arrangements maintained by the Company or its subsidiaries.
6. Severance Payments.
6.01 The Company shall pay the Executive the payments described
in this Section 6.01 (the "Severance Payments") upon the termination of the
Executive's employment with the Company following Shareholder Approval and
during the term of this Agreement, in addition to the payments and benefits
described in
<PAGE> 5
5
Section 5 hereof, unless such termination is (i) by the Company for Cause, (ii)
by reason of death, Disability or Retirement, or (iii) by the Executive without
Good Reason. The Executive's employment shall be deemed to have been terminated
following Shareholder Approval by the Company without Cause or by the Executive
with Good Reason if the Executive's employment is terminated prior to
Shareholder Approval without Cause at the request of Chase (or its affiliate) or
if the Executive terminates his employment with Good Reason prior to Shareholder
Approval (determined by treating Board Approval as Shareholder Approval in
applying the definition of Good Reason) if the circumstance or event which
constitutes Good Reason occurs at the request of Chase (or its affiliate). The
Executive's employment with the Company shall not be deemed terminated solely
because of a redesignation of the Executives's title or employer among the
Company and its primary subsidiaries.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive, the Company shall
pay to the Executive a lump sum severance payment, in cash, equal to
three times the sum of (i) the higher of the Executive's Annual Base
Salary in effect immediately prior to the occurrence of the event or
circumstance upon which the Notice of Termination is based or in effect
immediately prior to Shareholder Approval, and (ii) the average
percentage annual bonus paid or determined and payable to the Executive
over the preceding five years
<PAGE> 6
6
(expressed as a percentage of Annual Base Salary) and applied to the
Executive's Annual Base Salary as determined pursuant to clause (i)
above.
(B) For a 36 month period after the Date of Termination, the
Company shall arrange to provide the Executive with life, disability,
accident and health insurance benefits substantially similar to those
which the Executive is receiving immediately prior to the Notice of
Termination (without giving effect to any reduction in such benefits
subsequent to Shareholder Approval which reduction constitutes Good
Reason). Benefits otherwise receivable by the Executive pursuant to
this Section 6.01(B) shall be reduced to the extent comparable benefits
are actually received by or made available to the Executive without
cost during such period following the Executive's termination of
employment (and any such benefits actually received by the Executive
shall be reported to the Company by the Executive). If the benefits
provided to the Executive under this Section 6.01(B) shall result in a
decrease, pursuant to Section 6.02, in the Severance Payments and these
Section 6.01(B) benefits are thereafter reduced pursuant to the
immediately preceding sentence because of the receipt of comparable
benefits, the Company shall, at the time of such reduction, pay to the
Executive the lesser of (i) the amount of the decrease made in the
Severance Payments pursuant to Section 6.02(a), or (ii) the maximum
amount which can be paid to the Executive without being, or causing any
other
<PAGE> 7
7
payment to be, nondeductible by reason of section 280G of the Code.
(C) "Employee Benefits" to which the Executive was entitled
pursuant to an individual agreement with the Company as in effect
immediately prior to the effective date hereof shall be provided to the
Executive in accordance with the terms thereof. Employee Benefits, for
this purpose, shall include benefits and other rights granted under
such individual agreement with respect to the Company's (i) Permanent
Life Insurance Options Plan, (ii) Supplemental Savings Incentive Plan,
(iii) Supplemental Retirement Benefits Plan, (iv) Executive Cash Plan
for Retirement, (v) post-retirement benefits under a welfare benefits
plan and (vi) any additional supplemental pension benefit provided for
under the terms of the individual agreement. Notwithstanding the
foregoing, there shall be no duplication of benefits or payments under
this Agreement and any such individual agreement.
6.02 (a) Notwithstanding any other provisions of this
Agreement, in the event that any payment or benefit received or to be received
by the Executive in connection with Shareholder Approval or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company or any of its
subsidiaries, any Person whose actions result in Shareholder Approval or any
Person affiliated with the Company or such Person) (all such payments and
benefits, including the Severance
<PAGE> 8
8
Payments, being hereinafter called "Total Payments") would subject the Executive
to an Excise Tax, and if such Total Payments less the Excise Tax is less than
the maximum amount of Total Payments which would otherwise be payable to the
Executive without the imposition of an Excise Tax, then, to the extent necessary
to eliminate the imposition of an Excise Tax (and after taking into account any
reduction in the Total Payments provided by reason of Section 280G of the Code
in such other plan, arrangement or agreement), (A) the cash Severance Payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
Severance Payments shall next be reduced (if necessary, to zero). For purposes
of this limitation (i) no portion of the Total Payments the receipt or enjoyment
of which the Executive shall have effectively waived in writing prior to the
Date of Termination shall be taken into account, (ii) no portion of the Total
Payments shall be taken into account which in the opinion of tax counsel
selected by the Company's independent auditors and reasonably acceptable to the
Executive does not constitute a "parachute payment" within the meaning of
section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of
the Code, (iii) the Severance Payments shall be reduced only to the extent
necessary so that the Total Payments (other than those referred to in clauses
(i) or (ii)) in their entirety constitute reasonable compensation for services
actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the tax
counsel referred to in clause (ii); and (iv) the value of any
<PAGE> 9
9
non-cash benefit or any deferred payment or benefit included in the Total
Payments shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) In the event that the Executive becomes entitled to the
Severance Payments, if any of the Total Payments will be subject to the Excise
Tax, and if such Total Payments less the Excise Tax thereon is greater than the
maximum amount of Total Payments which would otherwise be payable to the
Executive without the imposition of a Excise Tax, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section 6.02(b), shall be equal to the Total
Payments. For purposes of determining whether any of the Total Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (i) the Total
Payments shall be treated as "parachute payments" within the meaning of section
280G(b)(2) of the Code, and all "excess parachute payments" within the meaning
of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's independent
auditors and reasonably acceptable to the Executive such Total Payments (in
whole or in part) do not constitute parachute payments, including by reason of
Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services
<PAGE> 10
10
actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in
excess of the Base Amount allocable to such reasonable compensation, or are
otherwise not subject to the Excise Tax, and (ii) the value of any non-cash
benefits or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of sections 280G(d)(3)
and (4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and applicable state and local income taxes
at the highest marginal rate of taxation, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes. In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder at the time of termination of
the Executive's employment, the Executive shall repay to the Company, at the
time that the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax imposed on the Gross-Up Payment being repaid by the
Executive to the extent that such repayment results in a reduction in Excise Tax
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax is determined to
<PAGE> 11
11
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment in respect of such excess
(plus any interest, penalties or additions payable by the Executive with respect
to such excess) at the time that the amount of such excess is finally
determined. The Executive and the Company shall each reasonably cooperate with
the other in connection with any administrative or judicial proceedings
concerning the existence or amount of liability for Excise Tax with respect to
the Severance Payments.
6.03 The payments provided for in Section 6.01(A) and Section
6.02(b) hereof shall be made not later than the fifteenth day following the Date
of Termination, provided, however, that if the amounts of such payments, and the
limitation on such payments set forth in Section 6.02(a) hereof, cannot be
finally determined on or before such day, the Company shall pay to the Executive
on such day an estimate, as determined in good faith by the Company, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth (30th) day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the
<PAGE> 12
12
Company to the Executive, payable on the fifth (5th) business day after demand
by the Company (together with interest at the rate provided in section
1274(b)(2)(B) of the Code). At the time that payments are made under this
Section, the Company shall provide the Executive with a written statement
setting forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or other
advice the Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be attached to the
statement).
6.04 The Company also shall pay to the Executive reasonable
legal fees and reasonable expenses incurred in good faith by the Executive as a
result of a termination which entitles the Executive to the Severance Payments
(including, but not limited, to all such fees and expenses, if any, incurred in
disputing any such termination or in seeking in good faith to obtain or enforce
any benefit or right provided by this Agreement or in connection with any tax
audit or proceeding to the extent attributable to the application of section
4999 of the Code to any payment or benefit provided hereunder). Such payments
shall be made within five (5) business days after delivery of the Executive's
written requests for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.
<PAGE> 13
13
7. Termination Procedures and Compensation During Dispute.
7.01 Notice of Termination. After Shareholder Approval
and during the term of this Agreement, any purported termination of the
Executive's employment with the Company (other than by reason of death) shall be
communicated by written Notice of Termination from one party hereto to the other
party hereto in accordance with Section 10 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment with the Company under the
provision so indicated.
7.02 Date of Termination. "Date of Termination", with
respect to any purported termination of the Executive's employment after
Shareholder Approval and during the term of this Agreement, shall mean (i) if
the Executive's employment is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that the Executive shall not have
returned to the full-time performance of the Executive's duties during such
thirty (30) day period), and (ii) if the Executive's employment is terminated
for any other reason, the date specified in the Notice of Termination (which, in
the case of a termination by the Company, shall not be less than thirty (30)
days (except in the case of a termination for Cause) and, in the case of a
termination by the Executive, shall not be less than fifteen (15)
<PAGE> 14
14
days nor more than sixty (60) days, respectively, from the date such Notice of
Termination is given).
7.03 Dispute Concerning Termination. If within fifteen
(15) days after any Notice of Termination is given, or, if later, prior to the
Date of Termination (as determined without regard to this Section 7.03), the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally resolved, either by mutual written
agreement of the parties or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
7.04 Compensation During Dispute. If a purported
termination occurs following Shareholder Approval and during the term of this
Agreement, and such termination is disputed in accordance with Section 7.03
hereof, the Company shall continue to pay the Executive the full compensation in
effect when the notice giving rise to the dispute was given (including, but not
limited to, salary) and continue the Executive as a participant in all
compensation, benefit and insurance plans in which the Executive was
participating when the notice giving rise to the dispute was given, until the
dispute is finally resolved in
<PAGE> 15
15
accordance with Section 7.03 hereof. Amounts paid under this Section 7.04 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.02 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
8. No Mitigation. The Company agrees that, if the
Executive's employment is terminated during the term of this Agreement, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by the Company pursuant to Section 6
or Section 7.04. Further, the amount of any payment or benefit provided for in
Section 6 (other than Section 6.01(B)) or Section 7.04 shall not be reduced by
any compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company or any of its subsidiaries, or otherwise.
9. Successors; Binding Agreement.
9.01 In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and
<PAGE> 16
16
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after
Shareholder Approval, except that, for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed the Date
of Termination.
9.02 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
10. Notices. For the purpose of this Agreement, notices
and all other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed to
the respective addresses set forth below, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon actual receipt:
<PAGE> 17
17
To the Company:
Chemical Banking Corporation
270 Park Avenue
New York, New York 10017
Attention: General Counsel
To the Executive:
11. Miscellaneous. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of New York without regard
to conflicts of law principles. All references to sections of the Exchange Act
or the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to
<PAGE> 18
18
which the Executive has agreed. The obligations of the Company and the Executive
under Sections 6 and 7 shall survive the expiration of the term of this
Agreement.
12. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration. All claims by the
Executive for benefits under this Agreement shall be directed to and determined
by the Company and shall be in writing. The Company shall respond in writing to
any such claim within sixty (60) days following receipt of such claim. Failure
to respond to such claim within such period shall be deemed a denial of such
claim. Any denial by the Company of a claim for benefits under this Agreement
shall be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Company shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal in writing to the Company a decision of the Company within sixty (60)
days after notification by the Company that the Executive's claim has been
denied. The Company shall respond in writing to any such appeal within sixty
<PAGE> 19
19
(60) days following receipt of such appeal. Failure to respond to such appeal
within such period shall be deemed a denial of such appeal. Any further dispute
or controversy arising under or in connection with this Agreement shall be
settled exclusively by arbitration in New York, New York in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Executive shall be entitled to seek specific performance of
the Executive's right to be paid by the Company until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
15. Definitions. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Annual Base Salary" shall mean the Executive's regular
basic annual compensation prior to any reduction therein under a salary
reduction agreement pursuant to section 401(k) or section 125 of the
Code, and shall not include (without limitation) cost of living
allowances and post allowances for foreign service, fees, retainers,
reimbursements, bonuses, incentive awards, prizes or similar payments.
(B) "Base Amount" shall have the meaning defined in section
280G(b)(3) of the Code.
(C) "Board" shall mean the Board of Directors of the Company.
<PAGE> 20
20
(D) "Board Approval" shall mean the approval by the Board of
the Agreement and Plan of Merger, dated as of August 27, 1995, between
Chemical Banking Corporation and The Chase Manhattan Corporation.
(E) "Cause" for termination by the Company of the Executive's
employment, after Shareholder Approval, shall mean (i) the willful and
continued failure by the Executive to substantially perform the
Executive's duties with the Company, or a subsidiary of the Company, as
such duties may be defined from time to time, or abide by the written
policies of the Company or of the Executive's primary employer (other
than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure
after the issuance of a Notice of Termination for Good Reason by the
Executive pursuant to Section 7.01) after a written demand for
substantial performance is delivered to the Executive by the Company,
which demand specifically identifies the manner in which the Company
believes that the Executive has not substantially performed the
Executive's duties or has not abided by written policies, or (ii) the
willful engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company or its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, no
act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in
good faith and
<PAGE> 21
21
without reasonable belief that the Executive's act, or failure to act,
was in the best interest of the Company and its subsidiaries.
(F) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(G) "Company" shall mean Chemical Banking Corporation and any
successor to its business and/or assets which assumes and agrees to
perform this Agreement by operation of law or otherwise (except in
determining, under Section 15(F) hereof, whether or not Shareholder
Approval of the Company has occurred in connection with such
succession).
(H) "Date of Termination" shall have the meaning stated in
Section 7.02 hereof.
(I) "Disability" shall be deemed the reason for the termination
by the Company of the Executive's employment, if, as a result of the
Executive's incapacity due to physical or mental illness, the Executive
shall have been absent from the full-time performance of the
Executive's duties with the Company for a period of six (6) consecutive
months, the Company shall have given the Executive a Notice of
Termination for Disability, and, within thirty (30) days after such
Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
(J) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
<PAGE> 22
22
(K) "Excise Tax" shall mean any excise tax imposed under
section 4999 of the Code.
(L) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(M) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the
Executive's express written consent) of any one of the following acts,
or failure to act, unless, in the case of any act or failure to act
described in clause (I), (IV), (V), (VI) or (VII) below, such act or
failure to act is corrected prior to the Date of Termination specified
in the Notice of Termination given in respect thereof:
(I) a substantial diminution in the overall importance of the
Executive's role, as determined by balancing (i) any increase or
decrease in the scope of the Executive's management responsibilities
against (ii) any increase or decrease in the relative sizes of the
businesses, activities or functions (or portions thereof) for which the
Executive has responsibility; provided, however, that none of (a) a
change in the Executive's title or employer, (b) a change in the
hierarchy and (c) a change in the Executive's responsibilities from
line to staff or vice versa, shall, by itself, be considered Good
Reason;
(II) a reduction in the Executive's Annual Base Salary as in
effect on the date hereof or as the same may be increased from time to
time;
<PAGE> 23
23
(III) the relocation of the principal place of the Executive's
employment to a location that is more than 50 miles from such principal
place of employment immediately prior to Shareholder Approval (unless
such relocation is to the New York Metropolitan Area or from one
location outside of the United States);
(IV) the failure by the Company or a subsidiary to pay to the
Executive any portion of the Executive's current compensation, or to
pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the Company or
a subsidiary within seven (7) days of the date such compensation is
due;
(V) the failure by the Company or a subsidiary to pay the
Executive by February 15 following any calendar year an annual cash
bonus for such calendar year that, in the reasonable, good faith
judgment of the Compensation Committee of the Board of Directors of the
Company (or its designee), fairly reflects the performance of the
Executive, any unit or units (or portions thereof) for which the
Executive was responsible and the Company as a whole during such
calendar year; provided, however, that the Executive may not claim that
a bonus equal to or greater than the highest annual bonus paid to the
Executive for any of the three calendar years immediately preceding
Shareholder Approval does not fairly reflect such performance;
(VI) the failure by the Company or a subsidiary to include the
Executive in any other employee benefit or
<PAGE> 24
24
compensation plan or arrangement on a basis reasonably comparable to
that of other executives of the Company having responsibilities of
equal importance to those of the Executive; provided, however, that
failure to include the Executive in a plan or arrangement designed for
a general category of positions that does not include the Executive's
position, as determined in good faith by the Compensation Committee of
the Board of Directors of the Company (or its designee), shall not be
considered Good Reason; or
(VII) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7.01; for purposes of this Agreement, no
such purported termination shall be effective.
The Executive's right to terminate employment for Good Reason shall not be
affected by the Executive's incapacity due to physical or mental illness. The
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any act or failure to act constituting Good Reason
hereunder.
(N) "Gross-Up Payment" shall have the meaning given in Section
6.02(b) hereof.
(O) "Notice of Termination" shall have the meaning stated in
Section 7.01 hereof.
(P) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof; however, a Person shall
<PAGE> 25
25
not include (i) the Company or any of its subsidiaries, (ii) a trustee
or other fiduciary holding securities under an employee benefit plan of
the Company or any of its subsidiaries, (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company.
(Q) "Retirement" shall be deemed the reason for the termination
by the Company or the Executive of the Executive's employment if such
employment is terminated in accordance with the Company's retirement
policy, not including early retirement, generally applicable to its
salaried employees, as in effect immediately prior to Board Approval,
or in accordance with any retirement arrangement established by the
Board with the Executive's consent with respect to the Executive.
(R) "Severance Payments" shall mean those payments described in
Section 6.01 hereof.
<PAGE> 26
26
(S) "Shareholder Approval" shall mean the approval by the
shareholders of the Company and Chase of the Agreement and Plan of
Merger, dated as of August 27, 1995, between Chemical Banking
Corporation and The Chase Manhattan Corporation.
(T) "Total Payments" shall mean those payments described in
Section 6.02 hereof.
CHEMICAL BANKING CORPORATION
By _________________________
Name:
Title:
____________________________
Executive
<PAGE> 27
AGREEMENT
THIS AGREEMENT dated as of August 27, 1995 is made by and
between Chemical Banking Corporation, a Delaware corporation, (the "Company"),
and _________________________ (the "Executive").
WHEREAS the Company considers it essential to the best
interests of its shareholders to foster the continuous employment of key
management personnel; and
WHEREAS the Company has entered into an Agreement and Plan of
Merger with The Chase Manhattan Corporation, dated as of August 27, 1995, under
which Chase will be merged into the Company (the "Merger"); and
WHEREAS the Board of Directors of the Company (the "Board")
recognizes that, as is the case with many publicly-held corporations, the Merger
and the uncertainty and questions which it may raise among management may result
in the departure or distraction of management personnel to the detriment of the
Company and its shareholders; and
WHEREAS the Board has determined that appropriate steps should
be taken to reinforce and encourage the continued attention and dedication of
key members of the management of the Company and its subsidiaries, including the
Executive, to their assigned duties without distraction in the face of potential
uncertainty arising from the Merger;
<PAGE> 28
2
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in
this Agreement are provided in the last Section hereof.
2. Term of Agreement. This Agreement shall commence on the date
hereof and shall continue in effect through December 31, 1996; provided,
however, if Shareholder Approval shall have occurred during the term of this
Agreement, this Agreement shall continue in effect for a period of 24 months
beyond the month in which such Shareholder Approval occurred.
3. Company's Covenants Summarized. In order to induce the
Executive to remain in the employ of the Company and its subsidiaries and in
consideration of the Executive's covenants set forth in Section 4 hereof, the
Company agrees, under the conditions described herein, to pay the Executive the
"Severance Payments" described in Section 6.01 hereof and the other payments and
benefits described herein in the event the Executive's employment with the
Company is terminated following Shareholder Approval and during the term of this
Agreement. No amount or benefit shall be payable under this Agreement unless
there shall have been (or, under the terms hereof, there shall be deemed to have
been) a termination of the Executive's employment with the Company, as described
in Section 6.01 hereof, following Shareholder Approval. This Agreement shall not
be construed as creating an express or implied contract of employment and,
except
<PAGE> 29
3
as otherwise agreed in writing between the Executive and the Company, the
Executive shall not have any right to be retained in the employ of the Company
or any of its subsidiaries.
4. The Executive's Covenants. The Executive agrees that,
subject to the terms and conditions of this Agreement the Executive will remain
in the employ of the Company until the earliest of (i) a date which is twelve
(12) months from the date of such Board Approval, (ii) the date of Shareholder
Approval, (iii) the date of termination by the Executive of the Executive's
employment for Good Reason (determined by treating the Board Approval as
Shareholder Approval in applying the definition of Good Reason), by reason of
death, Disability or Retirement, or (iv) the termination by the Company of the
Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.01 Following Shareholder Approval and during the term of this
Agreement, during any period that the Executive fails to perform the Executive's
full-time duties with the Company as a result of incapacity due to physical or
mental illness, the Executive's full salary shall be paid to the Executive by
the Company at a rate no less than the rate in effect at the commencement of any
such period, together with all compensation and benefits payable to the
Executive under the terms of any compensation or benefit plan, program or
arrangement maintained by the Company or its subsidiaries during such period,
until the Executive's employment is terminated by the Company for Disability.
<PAGE> 30
4
5.02 If the Executive's employment shall be terminated for any
reason following Shareholder Approval and during the term of this Agreement, the
Executive's full salary shall be paid to the Executive by the Company through
the Date of Termination at the rate in effect at the time the Notice of
Termination is given, together with all compensation and benefits payable to or
with respect to the Executive through the Date of Termination under the terms of
any compensation or benefit plan, program or arrangement maintained by the
Company or its subsidiaries during such period.
5.03 If the Executive's employment shall be terminated for any
reason following Shareholder Approval and during the term of this Agreement, the
Executive's normal post-termination compensation and benefits shall be paid to
the Executive as such payments become due. Such post-termination compensation
and benefits shall be determined under, and paid in accordance with, the
retirement, insurance and other compensation or benefit plans, programs and
arrangements maintained by the Company or its subsidiaries.
6. Severance Payments.
6.01 The Company shall pay the Executive the payments described
in this Section 6.01 (the "Severance Payments") upon the termination of the
Executive's employment with the Company following Shareholder Approval and
during the term of this Agreement, in addition to the payments and benefits
described in Section 5 hereof, unless such termination is (i) by the Company for
Cause, (ii) by reason of death, Disability or Retirement, or
<PAGE> 31
5
(iii) by the Executive without Good Reason. The Executive's employment shall be
deemed to have been terminated following Shareholder Approval by the Company
without Cause or by the Executive with Good Reason if the Executive's employment
is terminated prior to Shareholder Approval without Cause at the request of
Chase (or its affiliate) or if the Executive terminates his employment with Good
Reason prior to Shareholder Approval (determined by treating Board Approval as
Shareholder Approval in applying the definition of Good Reason) if the
circumstance or event which constitutes Good Reason occurs at the request of
Chase (or its affiliate). The Executive's employment with the Company shall not
be deemed terminated solely because of a redesignation of the Executives's title
or employer among the Company and its primary subsidiaries.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive, the Company shall
pay to the Executive a lump sum severance payment, in cash, equal to
two times the sum of (i) the higher of the Executive's Annual Base
Salary in effect immediately prior to the occurrence of the event or
circumstance upon which the Notice of Termination is based or in effect
immediately prior to Shareholder Approval, and (ii) the average
percentage annual bonus paid or determined and payable to the Executive
over the preceding five years (expressed as a percentage of Annual Base
Salary) and
<PAGE> 32
6
applied to the Executive's Annual Base Salary as determined pursuant to
clause (i) above.
(B) For a 24 month period after the Date of Termination, the
Company shall arrange to provide the Executive with life, disability,
accident and health insurance benefits substantially similar to those
which the Executive is receiving immediately prior to the Notice of
Termination (without giving effect to any reduction in such benefits
subsequent to Shareholder Approval which reduction constitutes Good
Reason). Benefits otherwise receivable by the Executive pursuant to
this Section 6.01(B) shall be reduced to the extent comparable benefits
are actually received by or made available to the Executive without
cost during such period following the Executive's termination of
employment (and any such benefits actually received by the Executive
shall be reported to the Company by the Executive). If the benefits
provided to the Executive under this Section 6.01(B) shall result in a
decrease, pursuant to Section 6.02, in the Severance Payments and these
Section 6.01(B) benefits are thereafter reduced pursuant to the
immediately preceding sentence because of the receipt of comparable
benefits, the Company shall, at the time of such reduction, pay to the
Executive the lesser of (i) the amount of the decrease made in the
Severance Payments pursuant to Section 6.02(a), or (ii) the maximum
amount which can be paid to the Executive without being, or causing any
other
<PAGE> 33
7
payment to be, nondeductible by reason of section 280G of the Code.
(C) "Employee Benefits" to which the Executive was entitled
pursuant to an individual agreement with the Company as in effect
immediately prior to the effective date hereof shall be provided to the
Executive in accordance with the terms thereof. Employee Benefits, for
this purpose, shall include benefits and other rights granted under
such individual agreement with respect to the Company's (i) Permanent
Life Insurance Options Plan, (ii) Supplemental Savings Incentive Plan,
(iii) Supplemental Retirement Benefits Plan, (iv) Executive Cash Plan
for Retirement, (v) post-retirement benefits under a welfare benefits
plan and (vi) any additional supplemental pension benefit provided for
under the terms of the individual agreement. Notwithstanding the
foregoing, there shall be no duplication of benefits or payments under
this Agreement and any such individual agreement.
6.02 (a) Notwithstanding any other provisions of this
Agreement, in the event that any payment or benefit received or to be received
by the Executive in connection with Shareholder Approval or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company or any of its
subsidiaries, any Person whose actions result in Shareholder Approval or any
Person affiliated with the Company or such Person) (all such payments and
benefits, including the Severance
<PAGE> 34
8
Payments, being hereinafter called "Total Payments") would subject the Executive
to an Excise Tax, and if such Total Payments less the Excise Tax is less than
the maximum amount of Total Payments which would otherwise be payable to the
Executive without the imposition of an Excise Tax, then, to the extent necessary
to eliminate the imposition of an Excise Tax (and after taking into account any
reduction in the Total Payments provided by reason of Section 280G of the Code
in such other plan, arrangement or agreement), (A) the cash Severance Payments
shall first be reduced (if necessary, to zero), and (B) all other non-cash
Severance Payments shall next be reduced (if necessary, to zero). For purposes
of this limitation (i) no portion of the Total Payments the receipt or enjoyment
of which the Executive shall have effectively waived in writing prior to the
Date of Termination shall be taken into account, (ii) no portion of the Total
Payments shall be taken into account which in the opinion of tax counsel
selected by the Company's independent auditors and reasonably acceptable to the
Executive does not constitute a "parachute payment" within the meaning of
section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of
the Code, (iii) the Severance Payments shall be reduced only to the extent
necessary so that the Total Payments (other than those referred to in clauses
(i) or (ii)) in their entirety constitute reasonable compensation for services
actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are
otherwise not subject to disallowance as deductions, in the opinion of the tax
counsel referred to in clause (ii); and (iv) the value of any
<PAGE> 35
9
non-cash benefit or any deferred payment or benefit included in the Total
Payments shall be determined by the Company's independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code.
(b) In the event that the Executive becomes entitled to the
Severance Payments, if any of the Total Payments will be subject to the Excise
Tax, and if such Total Payments less the Excise Tax thereon is greater than the
maximum amount of Total Payments which would otherwise be payable to the
Executive without the imposition of a Excise Tax, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section 6.02(b), shall be equal to the Total
Payments. For purposes of determining whether any of the Total Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (i) the Total
Payments shall be treated as "parachute payments" within the meaning of section
280G(b)(2) of the Code, and all "excess parachute payments" within the meaning
of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's independent
auditors and reasonably acceptable to the Executive such Total Payments (in
whole or in part) do not constitute parachute payments, including by reason of
Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services
<PAGE> 36
10
actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in
excess of the Base Amount allocable to such reasonable compensation, or are
otherwise not subject to the Excise Tax, and (ii) the value of any non-cash
benefits or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of sections 280G(d)(3)
and (4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and applicable state and local income taxes
at the highest marginal rate of taxation, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes. In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder at the time of termination of
the Executive's employment, the Executive shall repay to the Company, at the
time that the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax imposed on the Gross-Up Payment being repaid by the
Executive to the extent that such repayment results in a reduction in Excise Tax
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax is determined to
<PAGE> 37
11
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment in respect of such excess
(plus any interest, penalties or additions payable by the Executive with respect
to such excess) at the time that the amount of such excess is finally
determined. The Executive and the Company shall each reasonably cooperate with
the other in connection with any administrative or judicial proceedings
concerning the existence or amount of liability for Excise Tax with respect to
the Severance Payments.
6.03 The payments provided for in Section 6.01(A) and Section
6.02(b) hereof shall be made not later than the fifteenth day following the Date
of Termination, provided, however, that if the amounts of such payments, and the
limitation on such payments set forth in Section 6.02(a) hereof, cannot be
finally determined on or before such day, the Company shall pay to the Executive
on such day an estimate, as determined in good faith by the Company, of the
minimum amount of such payments to which the Executive is clearly entitled and
shall pay the remainder of such payments (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth (30th) day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the
<PAGE> 38
12
Company to the Executive, payable on the fifth (5th) business day after demand
by the Company (together with interest at the rate provided in section
1274(b)(2)(B) of the Code). At the time that payments are made under this
Section, the Company shall provide the Executive with a written statement
setting forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or other
advice the Company has received from outside counsel, auditors or consultants
(and any such opinions or advice which are in writing shall be attached to the
statement).
6.04 The Company also shall pay to the Executive reasonable
legal fees and reasonable expenses incurred in good faith by the Executive as a
result of a termination which entitles the Executive to the Severance Payments
(including, but not limited, to all such fees and expenses, if any, incurred in
disputing any such termination or in seeking in good faith to obtain or enforce
any benefit or right provided by this Agreement or in connection with any tax
audit or proceeding to the extent attributable to the application of section
4999 of the Code to any payment or benefit provided hereunder). Such payments
shall be made within five (5) business days after delivery of the Executive's
written requests for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.
<PAGE> 39
13
7. Termination Procedures and Compensation During Dispute.
7.01 Notice of Termination. After Shareholder Approval and
during the term of this Agreement, any purported termination of the Executive's
employment with the Company (other than by reason of death) shall be
communicated by written Notice of Termination from one party hereto to the other
party hereto in accordance with Section 10 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment with the Company under the
provision so indicated.
7.02 Date of Termination. "Date of Termination", with respect
to any purported termination of the Executive's employment after Shareholder
Approval and during the term of this Agreement, shall mean (i) if the
Executive's employment is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that the Executive shall not have
returned to the full-time performance of the Executive's duties during such
thirty (30) day period), and (ii) if the Executive's employment is terminated
for any other reason, the date specified in the Notice of Termination (which, in
the case of a termination by the Company, shall not be less than thirty (30)
days (except in the case of a termination for Cause) and, in the case of a
termination by the Executive, shall not be less than fifteen (15)
<PAGE> 40
14
days nor more than sixty (60) days, respectively, from the date such Notice of
Termination is given).
7.03 Dispute Concerning Termination. If within fifteen (15)
days after any Notice of Termination is given, or, if later, prior to the Date
of Termination (as determined without regard to this Section 7.03), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of a court of competent
jurisdiction (which is not appealable or with respect to which the time for
appeal therefrom has expired and no appeal has been perfected); provided further
that the Date of Termination shall be extended by a notice of dispute only if
such notice is given in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence.
7.04 Compensation During Dispute. If a purported termination
occurs following Shareholder Approval and during the term of this Agreement, and
such termination is disputed in accordance with Section 7.03 hereof, the Company
shall continue to pay the Executive the full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to,
salary) and continue the Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the notice
giving rise to the dispute was given, until the dispute is finally resolved in
<PAGE> 41
15
accordance with Section 7.03 hereof. Amounts paid under this Section 7.04 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.02 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's
employment is terminated during the term of this Agreement, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Section 6 or Section 7.04.
Further, the amount of any payment or benefit provided for in Section 6 (other
than Section 6.01(B)) or Section 7.04 shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by the
Executive to the Company or any of its subsidiaries, or otherwise.
9. Successors; Binding Agreement.
9.01 In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and
<PAGE> 42
16
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after
Shareholder Approval, except that, for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed the Date
of Termination.
9.02 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
10. Notices. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below, or to such other address as either party
may have furnished to the other in writing in accordance herewith, except that
notice of change of address shall be effective only upon actual receipt:
<PAGE> 43
17
To the Company:
Chemical Banking Corporation
270 Park Avenue
New York, New York 10017
Attention: General Counsel
To the Executive:
11. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of New York without regard
to conflicts of law principles. All references to sections of the Exchange Act
or the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to
<PAGE> 44
18
which the Executive has agreed. The obligations of the Company and the Executive
under Sections 6 and 7 shall survive the expiration of the term of this
Agreement.
12. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration. All claims by the
Executive for benefits under this Agreement shall be directed to and determined
by the Company and shall be in writing. The Company shall respond in writing to
any such claim within sixty (60) days following receipt of such claim. Failure
to respond to such claim within such period shall be deemed a denial of such
claim. Any denial by the Company of a claim for benefits under this Agreement
shall be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Company shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal in writing to the Company a decision of the Company within sixty (60)
days after notification by the Company that the Executive's claim has been
denied. The Company shall respond in writing to any such appeal within sixty
<PAGE> 45
19
(60) days following receipt of such appeal. Failure to respond to such appeal
within such period shall be deemed a denial of such appeal. Any further dispute
or controversy arising under or in connection with this Agreement shall be
settled exclusively by arbitration in New York, New York in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Executive shall be entitled to seek specific performance of
the Executive's right to be paid by the Company until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
15. Definitions. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Annual Base Salary" shall mean the Executive's regular
basic annual compensation prior to any reduction therein under a salary
reduction agreement pursuant to section 401(k) or section 125 of the
Code, and shall not include (without limitation) cost of living
allowances and post allowances for foreign service, fees, retainers,
reimbursements, bonuses, incentive awards, prizes or similar payments.
(B) "Base Amount" shall have the meaning defined in section
280G(b)(3) of the Code.
(C) "Board" shall mean the Board of Directors of the Company.
<PAGE> 46
20
(D) "Board Approval" shall mean the approval by the Board of
the Agreement and Plan of Merger, dated as of August 27, 1995, between
Chemical Banking Corporation and The Chase Manhattan Corporation.
(E) "Cause" for termination by the Company of the Executive's
employment, after Shareholder Approval, shall mean (i) the willful and
continued failure by the Executive to substantially perform the
Executive's duties with the Company, or a subsidiary of the Company, as
such duties may be defined from time to time, or abide by the written
policies of the Company or of the Executive's primary employer (other
than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure
after the issuance of a Notice of Termination for Good Reason by the
Executive pursuant to Section 7.01) after a written demand for
substantial performance is delivered to the Executive by the Company,
which demand specifically identifies the manner in which the Company
believes that the Executive has not substantially performed the
Executive's duties or has not abided by written policies, or (ii) the
willful engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company or its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, no
act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in
good faith and
<PAGE> 47
21
without reasonable belief that the Executive's act, or failure to act,
was in the best interest of the Company and its subsidiaries.
(F) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(G) "Company" shall mean Chemical Banking Corporation and any
successor to its business and/or assets which assumes and agrees to
perform this Agreement by operation of law or otherwise (except in
determining, under Section 15(F) hereof, whether or not Shareholder
Approval of the Company has occurred in connection with such
succession).
(H) "Date of Termination" shall have the meaning stated in
Section 7.02 hereof.
(I) "Disability" shall be deemed the reason for the termination
by the Company of the Executive's employment, if, as a result of the
Executive's incapacity due to physical or mental illness, the Executive
shall have been absent from the full-time performance of the
Executive's duties with the Company for a period of six (6) consecutive
months, the Company shall have given the Executive a Notice of
Termination for Disability, and, within thirty (30) days after such
Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
(J) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
<PAGE> 48
22
(K) "Excise Tax" shall mean any excise tax imposed under
section 4999 of the Code.
(L) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(M) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the
Executive's express written consent) of any one of the following acts,
or failure to act, unless, in the case of any act or failure to act
described in clause (I), (IV), (V), (VI) or (VII) below, such act or
failure to act is corrected prior to the Date of Termination specified
in the Notice of Termination given in respect thereof:
(I) a substantial diminution in the overall importance of the
Executive's role, as determined by balancing (i) any increase or
decrease in the scope of the Executive's management responsibilities
against (ii) any increase or decrease in the relative sizes of the
businesses, activities or functions (or portions thereof) for which the
Executive has responsibility; provided, however, that none of (a) a
change in the Executive's title or employer, (b) a change in the
hierarchy and (c) a change in the Executive's responsibilities from
line to staff or vice versa, shall, by itself, be considered Good
Reason;
(II) a reduction in the Executive's Annual Base Salary as in
effect on the date hereof or as the same may be increased from time to
time;
<PAGE> 49
23
(III) the relocation of the principal place of the Executive's
employment to a location that is more than 50 miles from such principal
place of employment immediately prior to Shareholder Approval (unless
such relocation is to the New York Metropolitan Area or from one
location outside of the United States);
(IV) the failure by the Company or a subsidiary to pay to the
Executive any portion of the Executive's current compensation, or to
pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the Company or
a subsidiary within seven (7) days of the date such compensation is
due;
(V) the failure by the Company or a subsidiary to pay the
Executive by February 15 following any calendar year an annual cash
bonus for such calendar year that, in the reasonable, good faith
judgment of the Compensation Committee of the Board of Directors of the
Company (or its designee), fairly reflects the performance of the
Executive, any unit or units (or portions thereof) for which the
Executive was responsible and the Company as a whole during such
calendar year; provided, however, that the Executive may not claim that
a bonus equal to or greater than the highest annual bonus paid to the
Executive for any of the three calendar years immediately preceding
Shareholder Approval does not fairly reflect such performance;
(VI) the failure by the Company or a subsidiary to include the
Executive in any other employee benefit or
<PAGE> 50
24
compensation plan or arrangement on a basis reasonably comparable to
that of other executives of the Company having responsibilities of
equal importance to those of the Executive; provided, however, that
failure to include the Executive in a plan or arrangement designed for
a general category of positions that does not include the Executive's
position, as determined in good faith by the Compensation Committee of
the Board of Directors of the Company (or its designee), shall not be
considered Good Reason; or
(VII) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7.01; for purposes of this Agreement, no
such purported termination shall be effective.
The Executive's right to terminate employment for Good Reason shall not be
affected by the Executive's incapacity due to physical or mental illness. The
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any act or failure to act constituting Good Reason
hereunder.
(N) "Gross-Up Payment" shall have the meaning given in Section
6.02(b) hereof. (O) "Notice of Termination" shall have the meaning
stated in Section 7.01 hereof.
(P) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof; however, a Person shall
<PAGE> 51
25
not include (i) the Company or any of its subsidiaries, (ii) a trustee
or other fiduciary holding securities under an employee benefit plan of
the Company or any of its subsidiaries, (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company.
(Q) "Retirement" shall be deemed the reason for the termination
by the Company or the Executive of the Executive's employment if such
employment is terminated in accordance with the Company's retirement
policy, not including early retirement, generally applicable to its
salaried employees, as in effect immediately prior to Board Approval,
or in accordance with any retirement arrangement established by the
Board with the Executive's consent with respect to the Executive.
(R) "Severance Payments" shall mean those payments described in
Section 6.01 hereof.
<PAGE> 52
26
(S) "Shareholder Approval" shall mean the approval by the
shareholders of the Company and Chase of the Agreement and Plan of
Merger, dated as of August 27, 1995, between Chemical Banking
Corporation and The Chase Manhattan Corporation.
(T) "Total Payments" shall mean those payments described in
Section 6.02 hereof.
CHEMICAL BANKING CORPORATION
By _________________________
Name:
Title:
____________________________
Executive
<PAGE> 1
EXHIBIT 10.8
[CHEMICAL BANKING CORPORATION LOGO]
EXECUTIVE RETIREMENT PLAN OF
CHEMICAL BANKING CORPORATION AND CERTAIN SUBSIDIARIES
PURPOSE.
This Plan is a pension plan designed to provide supplemental retirement
benefits to a select group of management or highly compensated employees. This
Plan shall be unfunded and shall not be subject to Parts 2, 3 or 4 of Title 1 of
the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended from
time to time.
ARTICLE I. DEFINITIONS.
The following are defined terms wherever they appear in the Plan:
"Accrual Amount" shall mean the amount which has been specified in
writing, from time to time, by the Administrator to the Participant pursuant to
which his/her benefit will be based at termination of employment with an
Employer; provided that the Accrual Amount at the time specified by the
Administrator shall not exceed the amount specified by the Committee for the
salary grade level of the Participant; provided, that if an individual becomes
eligible to participate after age 58 and declines to satisfy certain conditions
with the consent of the Administrator, the Administrator may take into
consideration in specifying the Accrual Amount that such conditions have not
been satisfied.
"Accrued Benefit" shall mean the amount calculated pursuant to Section
3.1(a) as of any determination date, as if the Participant had terminated
employment on such date. It shall not include actuarial factors, payment dates,
form of payment and other optional benefits hereunder.
<PAGE> 2
"Administrator" shall mean the individual holding the title Director of
Human Resources of the Corporation or the Bank, or any successor title.
"Bank" shall mean Chemical Bank, or any successor thereto, whether by
merger, consolidation, purchase of substantially all its assets, or otherwise.
"Board" shall mean the Board of Directors of the Corporation; provided
that any action taken by a duly authorized committee of the Board (including any
action pursuant to Article 6.1) within the scope of the authority designated to
it by the Board, shall be considered an action of the Board for purposes of this
Plan.
"Cause" shall mean either (i) any violation of the Code of Conduct of
the Corporation, including, but not limited to, an act or acts of personal
dishonesty resulting or intended to result in the personal enrichment of the
Participant to the detriment of his/her Employer and gross negligence or willful
misconduct in the performance of the Participant's duties, or (ii) the issuance
of an order by a United States or State bank regulatory authority, removing the
Participant from office pursuant to a disciplinary proceeding based on the
actions of the Participant.
"Corporation" shall mean Chemical Banking Corporation or any successor
thereto, whether by merger, consolidation, purchase of substantially all its
assets, or otherwise.
"Disability Plan" shall mean the Long-Term Disability Plan of Chemical
Bank and Certain Affiliated Companies.
"Disabled" or "Disability" shall mean a condition resulting in the
receipt of benefits by a Participant under the Long-Term Disability Plan.
2
<PAGE> 3
"Early Retirement" shall mean a termination of employment of an
Employee with an Employer or any Subsidiary on or after attaining age 55 and
with a Period of Service of at least 10 years.
"Effective Date" shall mean April 1, 1995.
"Employee" shall mean an individual who is a salaried employee of an
Employer.
"Employer" shall mean the Corporation or any Subsidiary which is
designated by the Administrator as an Employer.
"Initial Plan Participation Date" shall mean the date specified by the
Administrator in the notice referred to in Section 2.1, which shall not be
earlier than the date that the individual satisfies the criteria established by
the Board for participation, and in no event earlier than January 1, 1992.
"Normal Retirement" shall mean termination of employment of an Employee
with an Employer or any Subsidiary on or after attaining age 60 with a Period of
Service of at least 10 years.
"Participant" shall mean each Employee of the Employer who is eligible
to participate under Section 2.1 and elects to participate as provided for in
Section 2.2.
"Period of Service" shall have the meaning ascribed thereto by the
Retirement Plan of Chemical Bank and Certain Affiliated Companies, or its
successor plan; provided that a Period of Service shall exclude service prior to
the date of acquisition with respect to an entity acquired by an Employer after
January 1, 1995, unless the Administrator specifies to the contrary.
"Plan" shall mean this Executive Retirement Plan of Chemical Banking
Corporation and Certain Subsidiaries.
3
<PAGE> 4
"Retirement Plan" shall mean the Retirement Plan of Chemical Bank and
Certain Affiliated Companies, or its successor plan.
"Subsidiary" shall mean an entity in which an Employer owns directly,
or indirectly, fifty percent or more of the outstanding voting common stock or,
if not a corporation, fifty percent or more of the voting power of such entity.
"Surviving Spouse" shall have the meaning ascribed to the individual
entitled to the Final Salary Benefit of a Participant under the Retirement Plan
upon the death of a Participant.
ARTICLE II. PARTICIPATION.
2.1 Eligibility. The Administrator shall notify, in writing, each key
Employee who is eligible to participate in the Plan and shall specify in such
writing the Initial Plan Participation Date and Level of Participation of each
such Employee; provided that each such key Employee shall have satisfied the
criteria established by the Board for participation in this Plan, or shall be
listed on Schedule I hereto.
2.2 Participation. Each Employee shall elect within [sixty days]
after the date of notification by the Administrator of his/her eligibility to
participate in the Plan by completing such forms as the Administrator shall
require, including but not limited to, an agreement to participate in other
programs as the Administrator may specify and by providing, from time to time,
such information as may be specified by the Administrator. If any individual
does not elect to participate in the Plan when first eligible, the
Administrator, in his/her sole discretion, may extend on another date or dates
the opportunity to participate hereunder to such individual on such terms and
conditions as the Administrator may specify in writing.
2.3 (a) Discontinued Participation by Election of Employer.
Notwithstanding the continued employment of a Participant with an Employer, the
Administrator may in the exercise of his/her sole discretion, terminate the
participation of any Participant by written notice to the
4
<PAGE> 5
Participant. No additional benefits shall be accrued under Section 3.1(a) from
the date active participation ceases hereunder, as specified by the
Administrator. Such Accrued Benefit shall be subject to vesting under Section
4.1 and to the provisions of Section 3.1(c) or (d), if applicable, upon
termination of employment with an Employer or Subsidiary.
(b) Discontinued Participation by Election of Participant. A
Participant may voluntarily discontinue participation in the Plan at any time by
giving 30 days' advance written notice to the Administrator. No additional
benefits shall be accrued under Section 3.1(a) from the date active
participation ceases hereunder, as specified by the Administrator. Such Accrued
Benefit shall be forfeited unless the Participant is vested pursuant to Section
4.1 as of the date of receipt of the notice by the Administrator. In addition,
unless such Participant, as of the date of receipt of the notice by the
Administrator, has satisfied the criteria for Retirement or Early Retirement, as
the case may be, such Accrued Benefit (if vested) shall be treated in accordance
with Section 3.1(e).
ARTICLE III. BENEFITS.
3.1 (a) Annuity Benefits. Subject to Sections 3.1(b)-(f), each
Participant who is vested pursuant to Section 4.1, shall receive an annual
annuity, payable in 12 equal monthly installments, for life commencing at age
65, equal to the product of (i) his/her Period of Service from the Initial Plan
Participation Date to the date of termination of employment with an Employer (or
the date participation is discontinued, as specified pursuant to Section 2.3, if
applicable) multiplied by (ii) his/her Accrual Amount as specified by the
Administrator.
(b) Change in Participant Level. Notwithstanding Section 3.1(a), if a
Participant, within a 60 day period following written notice from the
Administrator that such Participant is eligible to participate at an increased
Accrual Amount, does not satisfy various criteria as specified by the
Administrator for participation at such increased Accrual Amount, the annuity
benefit described in Section 3.1(a) shall be based on the Accrual Amount for
which such criteria were satisfied.
5
<PAGE> 6
(c) Normal Retirement. Upon Normal Retirement, a Participant shall
receive the annual annuity benefit as calculated under Section 3.1(a) without
actuarial reduction.
(d) Early Retirement. Upon Early Retirement, a Participant shall
receive the annual annuity benefit as calculated under Section 3.1(a) reduced by
0.5% for each month prior to age 60 that such benefit commences.
(e) Vested Terminated Benefits. Upon a termination of employment with
an Employer or a Subsidiary after a Period of Service of at least 10 years but
before attaining age 55, a Participant shall receive the annual annuity benefit
as calculated under Section 3.1(a) commencing at age 65; provided that if the
benefit commences prior to age 65, it shall be reduced by .625% for each month
prior to age 65 that such benefit commences. (See Section 5.1(b) for payment
date.)
(f) Disability. If a Participant becomes Disabled and receives for an
18 month period disability benefits from the Disability Plan, the Accrual Amount
per one year Period of Service, as specified by written notice from
Administrator, shall be reduced by 50% for each one year Period of Service
commencing as of the first day of the month following the expiration of such 18
month period until the first to occur:
(i) the date of a Participant's return to active employment
with an Employer, or
(ii) the date of termination of employment, or
(iii) the date disability benefits cease under the Disability
Plan.
ARTICLE IV. VESTING DATE.
4.1 Vesting. A Participant shall vest in his/her annuity benefit
described in Section 3.1 after a Period of Service of at least 10 years. If
employment terminates with an Employer or Subsidiary at any time prior to the
satisfaction of such Period of Service, all
6
<PAGE> 7
benefits described in Article III of the Plan shall be forfeited and shall not
be restored upon rehire or recommencement of participation.
4.2 Forfeiture of Benefits. Notwithstanding Section 4.1 to the
contrary, Accrued Benefits (whether or not in pay status) shall be terminated
and forfeited in the following circumstances:
(i) a termination of employment for Cause;
(ii) within 2 years of a termination of employment, the
solicitation of the customers, or clients of the Employer
or any affiliate of the Employer by the Participant in
order to compete with his/her Employer or any affiliate of
the Employer;
(iii) within 2 years of termination of employment, the hiring
of, or the attempt to hire, the Employees of the Employer
or any affiliate of the Employer;
(iv) at any time after a termination of employment, a release
to any party unrelated to an Employer of secret or
confidential information obtained by the Participant in
the course of his/her employment, except as the case may
be required by law; or
(v) at any time, an attempt to assign, encumber or hypothecate
benefits as provided in Section 7.1.
ARTICLE V. PAYMENT.
5.1(a) Annuity Payments on Retirement. If employment terminates as a
result of Normal Retirement or Early Retirement, benefits shall commence on the
first day of the month following such Normal or Early Retirement in the form
specified in Section 3.1(a) and subject
7
<PAGE> 8
to the reduction specified in Section 3.1(d), if applicable. The Administrator
may, in his/her sole discretion, specify a form of annuity other than a single
life annuity. The Administrator shall specify such actuarial factors as he/she
deems reasonable or appropriate in converting the single life annuity under
Section 3.1(a) into such other annuity form.
(b) Other Annuity Payment. Except as otherwise provided in Section
5.1(a) above, payment of the annuity benefit under the Plan shall be made at the
same time, in the same form of payment as of the Participant's Final Salary
Benefit under the Retirement Plan. The Administrator may, however, in his/her
and absolute discretion, provide for a different form of payments. The
Administrator shall specify such actuarial factors as he/she deems reasonable or
appropriate in converting the single life annuity under Section 3.1(a) into such
other annuity form.
5.2 Survivor Benefit After Termination of Employment. In the event that
a Participant with a vested annuity benefit dies after his/her employment has
terminated but before the annuity commences, the Surviving Spouse of such
individual shall receive an amount equal to that provided to a surviving spouse
under a 50% joint and survivor annuity commencing on the first day of the month
following (i) the date of death if death occurs after age 55 or (ii) the date
that such Participant would have attained age 55 if death occurs before age 55.
The amount of such spousal annuity shall be based upon the assumption that the
Participant had received the benefit specified in Section 3.1(a) on the later of
the day preceding his date of death or age 55, in the form of a 50% joint and
survivor benefit, and immediately died. The Administrator may, specify such
actuarial factors as he/she deems reasonable or appropriate in converting the
single life annuity under Section 3.1(a) into a 50% joint and survivor annuity
benefit.
5.3 Small Benefits. If any annuity payment hereunder is $200.00 or less
per month, the Administrator shall, within a reasonable period of time following
the date that the first such payment is due, convert such amount into a lump sum
utilizing such actuarial factors as he/she deems appropriate or reasonable and
shall pay out the lump sum value as soon as practicable
8
<PAGE> 9
thereafter. Payment of such lump sum shall relieve and discharge the Plan of all
liability to make further payments.
5.4 Responsibility for Payment. Payment of annuity benefits under the
Plan shall be made by the Employer who last employed the Participant. In the
case benefits are payable with respect to a Participant whose service included
employment with more than one Employer, the Administrator, in his sole
discretion , shall determine any amounts to be reimbursed by the prior Employer
to the Employer paying benefits hereunder.
5.5 Withholding. The Employer shall withhold any amount required to be
withheld under applicable Federal, state and local laws, and any such payment
shall be reduced by the amount so withheld.
5.6 Participant's Rights Unsecured. All annuity payments under the Plan
shall be made from the general funds of the Employer. No assets of the Employer
shall be required to be segregated or earmarked to represent any liability for
the annuity benefits under Section 3.1, but the Employer shall have the right to
establish vehicles to assist it in meeting its obligations hereunder. The rights
of any person to receive benefits under the Plan shall be only those of a
general unsecured creditor; and such status shall not be enhanced by reason of
the establishment of any vehicles to assist the Employer in meeting its
obligations hereunder.
ARTICLE VI AMENDMENT AND TERMINATION.
6.1 Amendment. The Board may amend the Plan in any respect and at any
time; provided, however, that no amendment shall have the effect of reducing (i)
any benefit then being paid to any Participant or to any other person pursuant
to Articles III, or (ii) the Accrued Benefit under Section 3.1(a), theretofore
accrued on behalf of any Participant.
9
<PAGE> 10
6.2 Termination. The Board may terminate the Plan at any time. In the
event of termination, the Plan shall continue in force with respect to any
Participant, or other person entitled to an Accrued Benefit under Article III to
the extent accrued under the Plan prior to its termination, and shall be binding
upon any successor to substantially all the assets of the Corporation or any
other Employer. Notwithstanding the foregoing, the Board may determine that it
is in the best interests of the Corporation, the Employers or the Participants
to terminate the Plan in its entirety and distribute to each Participant (or
each person entitled to receive payments hereunder) the value of his/her
benefits hereunder, utilizing such actuarial factors, as the Administrator in
his/her sole discretion shall deem reasonable.
ARTICLE VII. GENERAL PROVISIONS.
7.1 Assignability. No right to receive payments hereunder shall be
transferable or assignable by a Participant, other than by will or by the laws
of descent and distribution or by a court of competent jurisdiction. Any other
attempted assignment or alienation of payments hereunder shall be void and of no
force or effect and shall result in forfeiture of benefits.
7.2 Administration. Except as otherwise provided herein, the Plan shall
be administered by the Administrator, who shall have the authority to adopt
rules and regulations for carrying out the provisions of the Plan, and who shall
interpret, construe and implement the provisions of the Plan, including
eligibility to participate, Initial Plan Participation Date, Accrual Amount, the
entitlement to benefits, the amount of benefits and actuarial factors.
7.3 Legal Opinions. The Administrator may consult with legal counsel,
who may be counsel for the Bank or other counsel, with respect to his
obligations or duties hereunder, or with respect to any action proceeding or any
question of law, and shall not be liable with respect to any action taken, or
omitted, by him in good faith pursuant to the advice of such counsel.
7.4 Liability. Any decision made or action taken by the Board, the
board of directors (or governing body) of an Employer, Committee, the
Administrator or any employee of the
10
<PAGE> 11
Corporation or of any Employer, arising out of, or in connection with, the
construction, administration, interpretation and effect of the Plan, shall be
within absolute discretion of such person, and will be conclusive and binding on
all parties. Neither the Administrator nor a member of the Board or the board of
directors (or governing body) of an Employer or the Committee and no Employee
shall be liable for any act or action hereunder, whether of omission or
commission, by any other member or employee or by any agent to whom duties in
connection with the administration of the Plan have been delegated or for
anything done or omitted to be done in connection with this Plan, except in
circumstances involving bad faith.
7.5 Corporate Reorganization. In the event that a corporation or
unincorporated entity ceases to meet the definition of an Employer, such
corporation or entity shall cease to be an Employer under the Plan and its
employees shall cease to be Participants under the Plan. Benefits shall be
frozen as specified in Article II.
7.6 Construction. The masculine gender, where appearing in this Plan,
shall be deemed to also include the feminine gender. The singular shall also
include the plural, where appropriate.
7.7 Claims and Appeals. The Administrator shall establish a claims and
appeals procedure that satisfies the requirements of Part 5 of Title I of ERISA.
7.8 Governing Law. The Plan shall be construed and administered in
accordance with the laws of the State of New York.
7.9 Not an Employment Contract. Nothing herein shall be construed to
confer upon any person any legal right to continued employment with the
Corporation or any Subsidiary.
11
<PAGE> 1
Exhibit 10.9
SUPPLEMENTAL RETIREMENT PLAN
OF CHEMICAL BANK AND CERTAIN AFFILIATED COMPANIES
RESTATED EFFECTIVE JANUARY 1, 1993
(AS AMENDED THROUGH JANUARY 1, 1995)
PURPOSE
This Plan is the successor to, and continuation of, the
Executive Cash Plan for Retirement of Chemical Banking Corporation and Certain
Subsidiaries and of the Supplemental Retirement Benefits of Manufacturers
Hanover Trust Company and Certain Affiliated Companies. The purpose of this Plan
is to provide an alternate means of paying benefits to certain designated
executives participating in the Retirement Plan of Chemical Bank and Certain
Affiliated Companies (the "Retirement Plan") which are otherwise precluded under
the terms of the Plan.
Article I. Definitions
The following are defined terms wherever they appear in the
Plan:
1.1 "Account" shall have the meaning ascribed thereto under the
Retirement Plan.
1.2 "Administrator" shall mean the individual holding the title
of Senior Vice President of Compensation and Employee Benefits of Chemical
Banking Corporation or the Bank, or successor title, who shall be responsible
for those functions assigned to him under the Plan.
1.3 "Affiliated Company" shall have the meaning ascribed
thereto under the Retirement Plan.
<PAGE> 2
2
1.4 "Bank" shall mean Chemical Bank.
1.5 "Beneficiary" shall have the meaning ascribed thereto under
the Retirement Plan.
1.6 "Board" shall mean the Board of Directors of the Bank;
provided that any action taken by a duly authorized committee of the Board
(including any action pursuant to Article VII) within the scope of authority
delegated to it by the Board shall be considered an action of the Board for
purposes of this Plan.
1.7 "Code" shall mean the Internal Revenue Code of 1986. Except
as otherwise provided, all references to any section of the Code shall be deemed
to refer only to such section, as in effect January 1, 1993.
1.8 "Committee" shall mean the Compensation and Benefits
Committee of the Board of Directors of the Bank.
1.9 "Compensation Limit" shall mean the dollar limitation
imposed by Section 401(a)(17) of the Code on the amount of Salary taken into
account in computing benefits under the Retirement Plan.
1.10 "Credit Balance" shall have the meaning ascribed thereto
under the Retirement Plan.
1.11 "Effective Date" shall mean January 1, 1993.
1.12 "Employee" shall mean an individual who is an employee of
an Employer and a participant in the Retirement Plan.
1.13 "Employer" shall have the meaning ascribed thereto under
the Retirement Plan; provided that such entity adopts the Plan by act of its
board of directors and which adoption is approved by the Committee or
Administrator; provided, however, that any entity
<PAGE> 3
3
participating in the MHT Plan or the Prior Plan on December 31, 1992 shall be an
Employer under the Plan.
1.14 "Executive Retirement Plan" shall mean the Executive
Retirement Plan of Chemical Banking Corporation.
1.15 "Final Average Salary" shall have the meaning ascribed
thereto under the Retirement Plan.
1.16 "Final Salary Benefit" shall have the meaning ascribed
thereto under the Retirement Plan.
1.17 "Interest Credit" shall have the meaning ascribed thereto
under the Retirement Plan.
1.18 "MHT Plan" shall mean the Supplemental Retirement Benefits
Plan of Manufacturers Hanover Trust Company and Certain Affiliated Companies as
in effect immediately prior to January 1, 1993.
1.19 "Participant" shall mean each Employee of an Employer who
participates in the Plan in accordance with the terms and conditions set forth
herein.
1.20 "Period of Service" shall have the meaning ascribed
thereto under the Retirement Plan.
1.21 "Plan" shall mean the Supplemental Retirement Plan of
Chemical Bank and Certain Affiliated Companies, as in effect at any time.
1.22 "Prior Plan" shall mean the Executive Cash Plan for
Retirement of Chemical Banking Corporation and Affiliated Companies.
1.23 "Retirement Benefits" shall mean the Credit Balance and
Final Salary Benefit under the Retirement Plan.
<PAGE> 4
4
1.24 "Retirement Plan" shall mean the Retirement Plan of
Chemical Bank and Certain Affiliated Companies, as in effect at any time and as
amended from time to time.
1.25 "Salary" has the meaning ascribed thereto by the
Retirement Plan.
1.26 "Transition Credit" has the meaning ascribed thereto by
the Retirement Plan.
Article II. Participation
2.1 Eligibility for Credit Balance and Final Average
Salary. Commencing as of January 1, 1993, each Employee whose Salary exceeds
the Compensation Limit during any calendar year shall be a Participant as of
such date with respect to the benefits described in Sections 3.1 and 3.2.
2.2 Eligibility for Special Salary Credit Based Upon
Bonus. Effective as of January 1, 1993, each Employee who participated in
the Prior Plan and received Salary Credit based upon a Bonus as of December 31,
1992 shall be a Participant to the extent described in Section 3.4
2.3 Section 415 Limits. Commencing on or after January 1, 1993,
if an Employee's distribution of Retirement Benefits is subject to the
limitations of Section 415 of the Code, such Employee shall be a Participant as
of the date of such distribution and shall be eligible for the benefits
described in Section 3.3. Article III. Benefits
3.1 Salary Credits. (a) Effective as of January 1,
1993, each Participant described in Section 2.1 whose Salary in any calendar
year exceeds the Compensation Limit shall have an amount credited to an Account
under the Plan equal to the excess of (i) the Salary-Based Credit that would
have been accrued under the Retirement Plan but for such
<PAGE> 5
5
Compensation Limit for such calendar year over (ii) the amount actually credited
under the Retirement Plan for such calendar year.
(b) Interest Credits. Salary credits hereunder shall be made on
a quarterly basis as provided in the Retirement Plan. Accounts shall be credited
with the Interest Credits that would have been provided under the Retirement
Plan but for the Compensation Limit's application to the Salary-Based Credits.
3.2 Final Average Salary Benefit. Effective as of
January 1, 1993, each Participant described in Section 2.1, whose Final Average
Salary under the Retirement Plan is reduced by the application of the
Compensation Limit in calculating benefits under the Retirement Plan, shall
receive a benefit hereunder based upon an annuity for his/her life in an amount
equal to the excess of the (i) Final Salary Benefit that would have been payable
under the Retirement Plan (including any minimum benefit) without taking into
account such Compensation Limit over (ii) Final Salary Benefit actually payable
under the Retirement Plan.
3.3 Excess Benefits. Upon any distribution of
Retirement Benefits, each Employee whose Retirement Benefits are reduced in any
calendar year by application of the limitations of Section 415 of the Code shall
receive an amount equal to the excess of the (i) Retirement Benefits payable
under the Retirement Plan without application of Section 415 of the Code over
(ii) amount actually payable under the Retirement Plan for such calendar year.
3.4 (a) Bonus. The Account of each Participant, whose
employment has not terminated by the date that a Bonus is awarded, shall receive
a Salary-Based Credit based upon the amount of Bonus specified in this
subsection. For any Bonus paid in respect of calendar year 1993, an amount equal
to twenty-five percent of the Bonus (unless the Prior Plan specified a higher
amount for the Participant) shall be treated as if it were Salary (as
<PAGE> 6
6
defined in the Retirement Plan). For any Bonus paid in respect of calendar year
1994, an amount equal to twenty-five percent of the Bonus but only with respect
to those individuals who would not be eligible to participate in the Executive
Retirement Plan; provided that if Participant would not be eligible to
participate in the Executive Retirement Plan and is an Employee on March 31,
1995, the percentage of Bonus treated as Salary shall be seventy-five percent
rather than twenty-five percent; provided, further, that after
the accrual on account of the 1994 Bonus, there shall be no additional accruals
with respect to a Bonus.
(b) Interest Credits. The account described in Section 3.4(a)
shall receive Interest Credits as set forth in the Retirement Plan.
(c) Deferred Compensation. For purposes of Section 3.4(a), the
amount of a Bonus includes any amounts deferred under the Deferred Compensation
Plan.
(d) Date of Credit. For purposes of Section 3.4(a), the
Bonus payable on account as of a calendar year, but payable in the next
succeeding year shall be credited to an Account as of each December 31.
(e) Payment. The Committee shall specify the form and timing of
the payment of this benefit.
3.5 Aggregate. Except with respect to the benefits described in
Section 3.4 and Section 6.1, the total value of the benefits to be received
under the Plan when combined with the Retirement Benefits shall never exceed the
value of the Retirement Benefits that would have been payable under the
Retirement Plan but for the application of Section 415 of the Code and the
Compensation Limit. Such value shall be determined each time that Retirement
Benefits are to be paid and the amount payable hereunder shall be appropriately
adjusted.
<PAGE> 7
7
Article IV. Vesting
4.1 Account and Final Salary Benefit. The benefits described in
Sections 3.1, 3.2, 3.3 and 3.4 shall vest upon the date that the benefits under
the Retirement Plan vest. Benefits hereunder shall be forfeited upon a
termination employment with an Employer or Affiliated Company if such
Participant is not then vested in his/her Retirement Benefits.
Article V. Payment
5.1 Payment. Except as otherwise provided herein, payment of
any amount under the Plan shall be made at the same time, in the same forms of
payment, and to the same person or persons as payment of the Participant's
Retirement Benefits. The Committee may, however, in its discretion, provide for
a different form of payments; provided that if any benefit payable hereunder has
a present lump sum value of less than $10,000, such amount may be paid to such
Participant in a lump sum in complete discharge of any obligation hereunder.
5.2 Employer Responsible for Payment. Payment of benefits under
the Plan shall be made by the Employer who employed the Participant with respect
to whom such benefits are payable. In case such benefits are payable with
respect to a Participant whose service included employment with more than one
Employer, the Administrator shall determine the proportion of such benefit to be
paid by each Employer.
5.3 Withholding. The Employer making a payment under this Plan
shall withhold any amount required to be withheld under applicable Federal,
state and local income tax laws, and any such payment shall be reduced by the
amount so withheld.
<PAGE> 8
8
5.4 Participant's Rights Unsecured. All payments under the Plan
shall be made from the general funds of the Employer making the payment. No
assets of the Employer shall be required to be segregated or earmarked to
represent any liability for supplemental benefits hereunder, but the Corporation
shall have the right to establish vehicles to assist it and the other Employers
in meeting their obligations hereunder. The rights of any person to receive
benefits under the Plan shall be only those of a general unsecured creditor; and
such status shall not be enhanced by reason of the establishment of any funding
vehicles to assist the Employers in meeting their obligations hereunder.
5.5 Beneficiary. Upon the death of a Participant who has vested
benefits payable under this Plan, the Beneficiary of such Participant under the
Retirement Plan shall receive a benefit equal to the amount in excess of the
Compensation Limit and Section 415 limitation which a Beneficiary of a
Participant would have been entitled to receive under the Retirement Plan.
Article VI. Prior Plan and MHT Plan
6.1 Prior Plan. (a) Any individual who was a Participant in the
Prior Plan and whose benefit has not been distributed as of January 1, 1993,
shall have an Account under the Plan. To the extent provided under Prior Plan,
Interest Credits and/or Transition Credits shall be added to the Account, as if
such account were an Account under the Retirement Plan.
(b) An individual shall vest in the balance of such Account
under the Prior Plan as provided in Section 4.1. Benefits are forfeited upon a
termination of employment with an Employer or an Affiliated Company if the
individual has not satisfied such criteria.
<PAGE> 9
9
(c) Distribution of such Account shall be paid in the manner
set forth in Section 5.1.
(d) Benefits in pay status or deferred under the Prior Plan
shall continue to be paid or deferred under the election in effect.
6.2 MHT Plan. (a) Individuals receiving benefits from the MHT
Plan shall continue to receive such benefits under the Plan.
(b) Individuals who terminated employment on or before January
1, 1993, having satisfied the age and service criteria for a benefit under the
MHT Plan and whose benefit under the Retirement Plan is limited by Section 415
of the Code and/or the Compensation Limit shall receive a benefit hereunder as
provided for the MHT Plan, provided that such benefit shall not be paid in the
form of a lump sum.
Article VII. Amendment and Termination
7.1 Amendment. The Board may amend the Plan in any respect and
at any time; provided, however, that no amendment shall have the effect of
reducing (i) any benefit then being paid to any Participant or to any other
person pursuant to Articles III or VI, or (ii) the vested amount of any benefit
under Sections 3.1, 3.2, 3.3 and 3.4 theretofore accrued on behalf of any
Participant.
7.2 Termination. The Board may terminate the Plan at any time.
In the event of termination, the Plan shall continue in force with respect to
any Participant, or other person entitled to receive a benefit under Sections
3.1, 3.2, 3.3 and 3.4 to the extent accrued and vested under the Plan prior to
its termination, and shall be binding upon any successor to substantially all
the assets of the Corporation or any other Employer. Notwithstanding the
foregoing, the Board may determine that it is in the best interests of the
Corporation, the
<PAGE> 10
10
Employers or the Participants to terminate the Plan in its entirety and
distribute to each Participant (or other person entitled to receive payments
hereunder) the benefit of such Participant thereunder.
Article VIII. General Provisions
8.1 Assignability. No right to receive payments hereunder shall
be transferable or assignable by a Participant except as provided by Article III
of the Plan, or by will or by the laws of descent and distribution or by a court
of competent jurisdiction. Any other attempted assignment or alienation of
payments hereunder shall be void and of no force or effect.
8.2 Administration. Except as otherwise provided herein, the
Plan shall be administered by the Administrator, who shall have the authority to
adopt rules and regulations for carrying out the provisions of the Plan, and who
shall interpret, construe and implement the provisions of the Plan, including
eligibility to participate, the entitlement to benefits and the amount of such
benefits.
8.3 Legal Opinions. The Administrator may consult with legal
counsel, who may be counsel for the Bank or other counsel, with respect to his
obligations or duties hereunder, or with respect to any action proceeding or any
question of law, and shall not be liable with respect to any action taken, or
omitted, by him in good faith pursuant to the advice of such counsel.
8.4 Liability. Any decision made or action taken by the Board,
the board of directors (or governing body) of an Employer, Committee, the
Administrator or any employee of the Bank or of any Employer, arising out of, or
in connection with, the construction, administration, interpretation and effect
of the Plan shall be within its absolute discretion, and
<PAGE> 11
11
will be conclusive and binding on all parties. Neither the Administrator nor a
member of the Board or the board of directors (or governing body) of an Employer
or the Committee and no Employee shall be liable for any act or action
hereunder, whether of omission or commission, by any other member or employee or
by any agent to whom duties in connection with the administration of the Plan
have been delegated or, except in circumstances involving bad faith, for
anything done or omitted to be done in connection with this Plan.
8.5 Corporate Reorganization. In the event that a corporation
or unincorporated entity ceases to meet the definition of an Employer under
Section 1.13, such corporation or entity shall cease to be an Employer under the
plan and its employees shall cease to be Participants under the Plan, and the
Plan shall be treated as though a separate plan for the benefit of its employees
who were Participants in the plan to govern the accrued benefits of each such
Participant (or any person entitled to benefits in respect of such a
Participant).
8.6 Construction. The masculine gender, where appearing in this
Plan, shall be deemed to also include the feminine gender. The singular shall
also include the plural, where appropriate.
8.7 Governing Law. The Plan shall be construed and administered
in accordance with the laws of the State of New York.
8.8 Not an Employment Contract. Nothing herein shall be
construed to confer upon any person any legal right to continued employment with
the Bank or any Affiliated Company.
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 11.1
CHEMICAL BANKING CORPORATION
AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
In the 1995 second quarter, the Corporation changed its reporting of earnings
per share ("EPS") from reporting simple EPS (which is based solely on the
average number of common shares outstanding) to reporting primary and
fully-diluted EPS (which are based on the average number of common and common
equivalent shares outstanding). Previously, the Corporation reported simple
EPS, since the difference between simple EPS and primary EPS or simple EPS and
fully-diluted EPS were not material (less than 3%). Primary and fully-diluted
EPS are now being reported for all periods presented.
For a further discussion on the computation of primary and fully-diluted EPS,
see Note One on page 51.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions, except per share amounts) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS PER SHARE
PRIMARY
Earnings:
Income Before Effect of Accounting Changes $1,816 $1,294 $1,569
Net Effect of Changes in Accounting Principles (11) -- 35
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $1,805 $1,294 $1,604
Less: Preferred Stock Dividend Requirements 105 138 155
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $1,700 $1,156 $1,449
- ------------------------------------------------------------------------------------------------------------------------------
Shares:
Average Common and Common Equivalent Shares Outstanding 252.6 251.3 253.9
- ------------------------------------------------------------------------------------------------------------------------------
Primary Earnings Per Share:
Income Before Effect of Accounting Changes $ 6.77 $ 4.60 $ 5.57
Net Effect of Changes in Accounting Principles (0.04) -- 0.14
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6.73 $ 4.60 $ 5.71
- ------------------------------------------------------------------------------------------------------------------------------
ASSUMING FULL DILUTION
Earnings:
Net Income Applicable to Common Stock $1,700 $1,156 $1,449
Add: Applicable Dividend on Convertible Preferred Stock 7 20 20
- ------------------------------------------------------------------------------------------------------------------------------
Adjusted Net Income $1,707 $1,176 $1,469
- ------------------------------------------------------------------------------------------------------------------------------
Shares:
Average Common and Common Equivalent Shares Outstanding 252.6 251.3 253.9
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect and Conversion of Preferred Stock(a) 11.2 7.6 7.7
- ------------------------------------------------------------------------------------------------------------------------------
Adjusted Shares of Common and Common Equivalent Shares Outstanding 263.8 258.9 261.6
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Assuming Full Dilution:
Income Before Effect of Accounting Changes $ 6.51 $ 4.54 $ 5.48
Net Effect of Changes in Accounting Principles (0.04) -- 0.14
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6.47 $ 4.54 $ 5.62
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 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.
91
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 12.0
CHEMICAL BANKING CORPORATION
AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31, 1995 (in millions, except ratios)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes and effect of accounting change $2,976
- -----------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense 2,772
One third of rents, net of income from subleases(a) 90
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed charges 2,862
- -----------------------------------------------------------------------------------------------------------------------------
Less: Equity in undistributed income of affiliates (110)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest $5,728
- -----------------------------------------------------------------------------------------------------------------------------
Fixed charges, as above $2,862
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 2.00
- -----------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $2,862
Add: Interest on deposits 3,657
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed charges and interest on deposits $6,519
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest, as above $5,728
Add: Interest on deposits 3,657
- -----------------------------------------------------------------------------------------------------------------------------
Total earnings before taxes, fixed charges, effect of accounting change and interest on deposits $9,385
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.44
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The proportion deemed representative of the interest factor.
92
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 12.1
CHEMICAL BANKING CORPORATION
AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 (in millions, except ratios)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes and effect of accounting change $2,976
- -----------------------------------------------------------------------------------------------------------------------------
Fixed charges:
Interest expense 2,772
One third of rents, net of income from subleases(a) 90
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed charges 2,862
- -----------------------------------------------------------------------------------------------------------------------------
Less: Equity in undistributed income of affiliates (110)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest $5,728
- -----------------------------------------------------------------------------------------------------------------------------
Fixed charges, as above $2,862
- -----------------------------------------------------------------------------------------------------------------------------
Preferred stock dividends 105
- -----------------------------------------------------------------------------------------------------------------------------
Fixed charges including preferred stock dividends $2,967
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and preferred stock dividend requirements 1.93
- -----------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends, as above $2,967
Add: Interest on deposits 3,657
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed charges including preferred stock dividends and interest on deposits $6,624
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest, as above $5,728
Add: Interest on deposits 3,657
- -----------------------------------------------------------------------------------------------------------------------------
Total earnings before taxes, fixed charges, effect of accounting change and interest on deposits $9,385
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and preferred stock dividend requirements 1.42
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The proportion deemed representative of the interest factor.
93
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 21.1
CHEMICAL BANKING CORPORATION
LIST OF SUBSIDIARIES
The Corporation has the following subsidiaries, all of which are included in
the Corporation's Consolidated Financial Statements:
<TABLE>
<CAPTION>
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Chemical Bank New York 100%
CB Capital Investors Inc. Delaware 100
ChemLease Worldwide, Inc. New York 100
Chemco International, Inc. United States 100
Chemical International Finance, Ltd. United States 100
CB Beteiligungs und Verwaltungs GmbH Germany 100
Chemical Bank A.G. Germany 100
Chemical Bank (Guernsey) Limited Channel Islands 100
Chemical Bank (U.K.) Holdings Limited United Kingdom 100
Chemical Investment Bank Limited United Kingdom 100
Chemical Bank & Trust (Bahamas) Limited Bahamas 100
Chemical Bank - France France 100
Chemical Bank Mexico, S.A. Mexico 100
Chemical Ireland Limited Ireland 100
Chemical Trust and Banking Company Limited Japan 100
Banco Chemical (Portugal) S.A. Portugal 73
Chemical Bank of Canada Canada 30
Chemical Bank of Canada Canada 70
Chemical Mortgage Company Ohio 100
ChemCredit, Inc. New York 100
Chemical Acceptance Corporation Delaware 100
Chemical Acceptance Corporation I Delaware 100
Chemical Mortgage Acceptance Corp. Delaware 100
Chemical Community Development Inc. Delaware 100
Chemical Investment Services Corp. New York 100
Manufacturers Hanover Leasing Corporation Delaware 100
Texas Commerce Equity Holdings, Inc. Delaware 100
Texas Commerce Bank, N.A. United States 100
Texas Commerce Operating Services, Inc. Delaware 100
Chemical Bank New Jersey, N.A. United States 100
Chemical Investor Services, Inc. Delaware 100
Chemical Bank, National Association United States 100
Chemical Financial Services Corporation Ltd. Delaware 100
Chemical Financial Management Corporation Ohio 100
Margaretten Financial Corporation Delaware 100
Chemical Residential Mortgage Corporation New Jersey 100
</TABLE>
94
<PAGE> 2
- --------------------------------------------------------------------------------
LIST OF SUBSIDIARIES
(CONTINUED)
<TABLE>
<CAPTION>
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Brown & Company Securities Corporation Massachusetts 100%
CBC-USA, Inc. Delaware 100
CBC Capital Partners, Inc. Delaware 100
CBC Holding (Delaware) Inc. Delaware 100
Chemical Bank Delaware Delaware 100
Chemical Insurance Agency, Inc. Delaware 100
Chemical Synthetic Leasing, Inc. Delaware 100
The CIT Group Holdings, Inc. Delaware 20
Chatham Ventures, Inc. New York 100
Chemical Venture Capital Associates California 80
Chemical Equity Associates California 80
Chemical European Equity Associates L.P. Delaware 80
Chemical Business Credit Corp. Delaware 100
Chemical Capital Corporation New York 100
Chemical Connecticut Corporation Connecticut 100
Chemical Holding Delaware, Inc. Delaware 100
Chemical Thrift Holdings Inc. Delaware 100
Chemical Bank FSB United States 100
Chemical Trust Company of California California 100
CBC Holding (California) Inc. California 100
Van Deventer & Hoch California 50
Chemical Educational Services Corporation Delaware 100
Chemical Equity Incorporated New York 100
Chemical Futures & Options, Inc. Delaware 100
Chemical Investments, Inc. Delaware 100
Chemical Markets Transactions, Inc. Delaware 100
Chemical Mellon Shareholder Services, L.L.C. Delaware 50
Chemical Mortgage Securities, Inc. New York 100
Chemical New England Corporation Delaware 100
Chemical New York, N.V. Netherlands Antilles 100
Chemical Realty Corporation New York 100
Chemical Securities Inc. Delaware 100
CHL High Yield, Inc Delaware 100
Manufacturers Hanover Wheelease, Inc. Delaware 100
Offshore Equities, Inc. New York 100
The Portfolio Group, Inc. New York 100
</TABLE>
The names of certain other direct and indirect subsidiaries of the Corporation
have been omitted from the list above because such unnamed subsidiaries
considered in the aggregate as a single subsidiary would not constitute a
significant subsidiary.
95
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-18640,
33-21488, 33-24224, 33-24654, 33-33220, 33-45228, 33-47105, 33-53306, 33-57104,
33-58634, 33-49965, 33-67742 and 33-68724) and in the Registration
Statements on Form S-8 (Nos. 33-01776, 33-13457, 33-14997, 33-19852, 33-26523,
33-40675, 33-40272, 33-45017, 33-45018, 33-49909, 33-49911, 33-49913, 33-54547,
33-54549, 33-59543 and 33-62453) of Chemical Banking Corporation of our report
dated January 16, 1996 appearing on page 42 of this Form 10-K.
PRICE WATERHOUSE LLP
New York, New York
March 20, 1996
96
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 99.0
CHEMICAL BANKING CORPORATION
AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN MILLIONS)
The following unaudited pro forma combined balance sheet combines the historical
consolidated balance sheets of Chemical Banking Corporation (the "Corporation")
and The Chase Manhattan Corporation ("Chase") giving effect to the merger of the
Corporation and Chase (the "Merger"), which will occur on March 31, 1996 and
will be accounted for as a pooling of interests, as if the Merger had been
effective on December 31, 1995. Certain previously reported balance sheet
amounts for the Corporation and Chase have been reclassified to conform with the
current presentation. The information set forth below should be read in
conjunction with the notes to the pro forma combined financial statements which
describe the pro forma adjustments. The effect of the estimated $1.5 billion
restructuring charge ($925 million net of tax) initially expected to be taken in
connection with the Merger, as well as the effect of anticipated cost savings in
connection with the Merger, have not been reflected in the pro forma combined
balance sheet and statements of income. Since the date of the Merger
announcement, the Corporation has continued to evaluate the costs anticipated to
be incurred in connection with the Merger, as well as the cost savings from the
Merger, and currently anticipates that the merger-related restructuring charge,
as well as the cost savings, will each be higher than originally announced. The
pro forma financial data are not necessarily indicative of the actual financial
position that would have occurred had the Merger been consummated on December
31, 1995 or that may be obtained in the future.
97
<PAGE> 2
CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
(in millions) At December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
Chemical Chase Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
(a, b, c)
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 9,077 $ 5,717 $ -- $ 14,794
Deposits with Banks 2,666 5,802 -- 8,468
Federal Funds Sold and Securities
Purchased Under Resale Agreements 8,033 9,428 -- 17,461
Trading Assets:
Debt and Equity Instruments 18,317 7,895 -- 26,212
Risk Management Instruments 17,703 8,122 -- 25,825
Securities:(d)
Available-for-Sale 30,157 6,984 -- 37,141
Held-to-Maturity 4,628 -- -- 4,628
Loans 82,143 68,064 -- 150,207
Allowance for Credit Losses (2,379) (1,405) -- (3,784)
Premises and Equipment 2,038 1,829 (110)(e) 3,757
Due from Customers on Acceptances 1,179 717 -- 1,896
Accrued Interest Receivable 1,328 1,213 -- 2,541
Other Assets 8,036 6,807 -- 14,843
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $182,926 $121,173 $(110) $303,989
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic Noninterest-Bearing $ 21,673 $ 13,741 $ -- $ 35,414
Domestic Interest-Bearing 44,491 20,149 -- 64,640
Foreign 32,253 39,227 -- 71,480
- ------------------------------------------------------------------------------------------------------------------------------
Total Deposits 98,417 73,117 -- 171,534
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 25,675 11,588 -- 37,263
Other Borrowed Funds 9,238 4,698 -- 13,936
Acceptances Outstanding 1,193 722 -- 1,915
Trading Liabilities 24,270 10,071 -- 34,341
Accounts Payable, Accrued Expenses and Other Liabilities 4,892 6,347 (42)(e) 11,339
142(f)
Long-Term Debt 7,329 5,496 -- 12,825
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 171,014 112,039 100 283,153
- ------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 1,250 1,400 -- 2,650
Common Stock 255 390 (206)(g) 439
Capital Surplus 6,479 4,409 (263)(g) 10,625
Retained Earnings 4,493 3,714 (68)(e) 7,621
(142)(f)
(376)(g)
Net Unrealized Gain (Loss) on Securities
Available-for-Sale, Net of Taxes (303) 66 -- (237)
Treasury Stock, at Cost (262) (845) 845(g) (262)
- ------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 11,912 9,134 (210) 20,836
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $182,926 $121,173 $(110) $303,989
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
98
<PAGE> 3
- --------------------------------------------------------------------------------
CHEMICAL BANKING CORPORATION
AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
The following unaudited pro forma combined statements of income, for the years
ended December 31, 1995, 1994 and 1993 combine the historical consolidated
statements of income of the Corporation and Chase giving effect to the Merger,
which will occur on March 31, 1996 and will be accounted for as a pooling of
interests, as if the Merger had been effective as of the beginning of the
periods indicated after giving effect to the pro forma adjustments described in
the notes to the pro forma combined financial statements. Certain previously
reported income statement amounts for the Corporation and Chase have been
reclassified to conform to the new presentation. The effect of the estimated
$1.5 billion restructuring charge ($925 million net of tax) initially expected
to be taken in connection with the Merger, as well as the effect of anticipated
cost savings in connection with the Merger, have not been reflected in the pro
forma combined balance sheet and statements of income. Since the date of the
Merger announcement, the Corporation has continued to evaluate the costs
anticipated to be incurred in connection with the Merger, as well as the cost
savings from the Merger, and currently anticipates that the merger-related
restructuring charge, as well as the cost savings, will each be higher than
originally announced. The pro forma financial data are not necessarily
indicative of the results that actually would have occurred had the Merger
been consummated on the dates indicated or that may be obtained in the future.
99
<PAGE> 4
CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in millions, except per share data) For the Year Ended December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Chemical Chase Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
(a, b)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 7,024 $5,883 $ -- $12,907
Securities 2,162 429 -- 2,591
Trading Assets 878 586 -- 1,464
Federal Funds Sold and Securities
Purchased Under Resale Agreements 785 1,104 -- 1,889
Deposits With Banks 269 555 -- 824
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Income 11,118 8,557 -- 19,675
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 3,657 2,634 -- 6,291
Short-Term and Other Borrowings 2,226 1,949 -- 4,175
Long-Term Debt 546 396 -- 942
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 6,429 4,979 -- 11,408
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 4,689 3,578 -- 8,267
Provision for Credit Losses 478 280 -- 758
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses 4,211 3,298 -- 7,509
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 531 309 -- 840
Trust and Investment Management Fees 379 575 -- 954
Credit Card Revenue 378 391 -- 769
Service Charges on Deposit Accounts 297 120 -- 417
Fees for Other Financial Services 850 603 -- 1,453
Trading Revenue 624 412 -- 1,036
Securities Gains 119 13 -- 132
Other Revenue 588 504 -- 1,092
- ----------------------------------------------------------------------------------------------------------------------------
Total Noninterest Revenue 3,766 2,927 -- 6,693
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,332 1,876 -- 4,208
Employee Benefits 434 535 (14)(f) 955
Occupancy Expense 520 377 -- 897
Equipment Expense 395 328 32(e) 755
Foreclosed Property Expense (23) (52) -- (75)
Restructuring Charge -- 15 -- 15
Other Expense 1,343 1,292 -- 2,635
- ----------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,001 4,371 18 9,390
- ----------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Effect
of Accounting Change 2,976 1,854 (18) 4,812
Income Tax Expense 1,160 689 (7) 1,842
- ----------------------------------------------------------------------------------------------------------------------------
Income Before Effect of Accounting Change $ 1,816 $1,165 $(11) $ 2,970
- ----------------------------------------------------------------------------------------------------------------------------
Income Applicable to Common Stock $ 1,711 $1,043 $(11) $ 2,743
- ----------------------------------------------------------------------------------------------------------------------------
Income Per Share (Before Accounting Change):
Primary $ 6.77 $ 5.76 $ 6.23
Assuming Full Dilution $ 6.51 $ 5.72 $ 6.07
- ----------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Primary 252.6 181.0 440.8(g)
Assuming Full Dilution 263.8 182.4 453.5(g)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
100
<PAGE> 5
CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in millions, except per share data) For the Year Ended December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
Chemical Chase Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
(a, b)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $5,730 $5,325 $ -- $11,055
Securities 1,715 614 -- 2,329
Trading Assets 722 560 -- 1,282
Federal Funds Sold and Securities
Purchased Under Resale Agreements 550 1,277 -- 1,827
Deposits With Banks 371 498 -- 869
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 9,088 8,274 -- 17,362
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,378 2,326 -- 4,704
Short-Term and Other Borrowings 1,500 1,947 -- 3,447
Long-Term Debt 536 312 -- 848
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 4,414 4,585 -- 8,999
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 4,674 3,689 -- 8,363
Provision for Credit Losses 550 500 -- 1,050
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses 4,124 3,189 -- 7,313
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 405 233 -- 638
Trust and Investment Management Fees 421 567 -- 988
Credit Card Revenue 315 388 -- 703
Service Charges on Deposit Accounts 300 108 -- 408
Fees for Other Financial Services 833 580 -- 1,413
Trading Revenue 645 551 -- 1,196
Securities Gains 66 (1) -- 65
Other Revenue 612 627 -- 1,239
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Revenue 3,597 3,053 -- 6,650
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,205 1,773 -- 3,978
Employee Benefits 439 504 (14)(f) 929
Occupancy Expense 573 395 -- 968
Equipment Expense 382 307 35(e) 724
Foreclosed Property Expense 41 9 -- 50
Restructuring Charge 308 157 -- 465
Other Expense 1,561 1,327 -- 2,888
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,509 4,472 21 10,002
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 2,212 1,770 (21) 3,961
Income Tax Expense 918 565 (8) 1,475
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $1,294 $1,205 $(13) $ 2,486
- ---------------------------------------------------------------------------------------------------------------------------
Income Applicable to Common Stock $1,156 $1,078 $(13) $ 2,221
- ---------------------------------------------------------------------------------------------------------------------------
Income Per Share :
Primary $ 4.60 $ 5.87 $ 5.02
Assuming Full Dilution $ 4.54 $ 5.84 $ 4.97
- ---------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Primary 251.3 183.6 442.2(g)
Assuming Full Dilution 258.9 184.6 450.9(g)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
101
<PAGE> 6
CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in millions, except per share data) For the Year Ended December 31, 1993
- ----------------------------------------------------------------------------------------------------------------------------
Chemical Chase Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
(a, b)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $5,620 $5,632 $ -- $11,252
Securities 1,727 685 -- 2,412
Trading Assets 449 313 -- 762
Federal Funds Sold and Securities
Purchased Under Resale Agreements 339 1,029 -- 1,368
Deposits With Banks 268 717 -- 985
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 8,403 8,376 -- 16,779
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,241 2,014 -- 4,255
Short-Term and Other Borrowings 992 2,171 -- 3,163
Long-Term Debt 534 491 -- 1,025
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 3,767 4,676 -- 8,443
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 4,636 3,700 -- 8,336
Provision for Credit Losses 1,259 995 -- 2,254
Provision for Loans Held for Accelerated Disposition -- 566 -- 566
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses and
Provision for Loans Held for Accelerated Disposition 3,377 2,139 -- 5,516
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 338 194 -- 532
Trust and Investment Management Fees 406 465 -- 871
Credit Card Revenue 238 427 -- 665
Service Charges on Deposit Accounts 288 109 -- 397
Fees for Other Financial Services 829 514 -- 1,343
Trading Revenue 1,073 716 -- 1,789
Securities Gains 142 47 -- 189
Other Revenue 710 640 -- 1,350
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Revenue 4,024 3,112 -- 7,136
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,070 1,590 -- 3,660
Employee Benefits 396 487 (14)(f) 869
Occupancy Expense 587 404 -- 991
Equipment Expense 337 298 29(e) 664
Foreclosed Property Expense 287 222 -- 509
Provision for Other Real Estate Held for Accelerated Disposition -- 318 -- 318
Restructuring Charge 158 45 -- 203
Other Expense 1,458 1,156 -- 2,614
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,293 4,520 15 9,828
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Effect
of Accounting Changes 2,108 731 (15) 2,824
Income Tax Expense 539 265 (6) 798
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Effect of Accounting Changes $1,569 $ 466 $ (9) $ 2,026
- ---------------------------------------------------------------------------------------------------------------------------
Income Applicable to Common Stock $1,414 $ 326 $ (9) $ 1,731
- ---------------------------------------------------------------------------------------------------------------------------
Income Per Share (Before Accounting Changes):
Primary $ 5.57 $ 1.89 $ 4.00
Assuming Full Dilution $ 5.48 $ 1.88 $ 3.96
- ---------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding:
Primary 253.9 172.3 433.1(g)
Assuming Full Dilution 261.6 173.2 441.7(g)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
102
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) The Corporation and Chase are reviewing their accounting policies and as a
result of this review, it may be necessary to restate either the
Corporation's or Chase's financial statements to conform to those
accounting policies that are determined to be most appropriate by the
combined company. While certain restatements of prior periods have been
included in the pro forma combined financial statements included herein,
further restatements may be necessary upon the completion of this review
process.
(b) Transactions between the Corporation and Chase are not material in relation
to the pro forma combined financial statements and therefore intercompany
balances have not been eliminated from the pro forma combined amounts.
(c) The pro forma financial information presented does not give effect to the
planned net repurchase of the Corporation's Common Stock and of Chase's
Common Stock (after giving effect to the issuance of shares by both the
Corporation and Chase under various employee benefit plans) prior to the
consummation of the Merger pursuant to their respective previously
announced buyback programs.
(d) The Corporation and Chase intend to review their combined securities
portfolio to determine the classification of such securities as either
available-for-sale or held-to-maturity in connection with the combined
company's anticipated interest rate risk position. As a result of this
review, certain reclassifications of the combined company's securities
might take place. Any such reclassifications will be accounted for in
accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
(e) Chase's historical financial data reflect the capitalization of computer
software costs. To conform to the Corporation's accounting policy, Chase's
historical financial data have been adjusted on a pro forma basis to
recognize immediately as expense those computer software costs that are
capitalized.
The pro forma adjustment to the balance sheet reflects the unamortized
capitalized computer software costs of $110 million ($68 million net of
tax) as of December 31, 1995. The pro forma adjustment to the statement of
income for each period reflects the net impact of (i) charging to expense
computer software costs that were capitalized during each respective period
less (ii) the elimination of the previously recorded amortization of
capitalized computer software costs.
(f) Chase elected at the time of its adoption of SFAS No. 106 (effective January
1, 1993) to amortize the transition liability for accumulated postretirement
benefits over 20 years, while the Corporation upon its adoption of SFAS No.
106 (effective January 1, 1993) elected to expense its entire transition
liability. To conform with the Corporation's adoption of SFAS No. 106,
Chase's historical financial data have been adjusted on a pro forma basis to
reverse the amortization of Chase's transition liability reflected as a
component of OPEB expense under SFAS 106. Chase's transition liability of
approximately $270 million ($167 million after-tax), net of the $41 million
($25 million after-tax) reversal of amortization expense, has been reflected
in retained earnings on the pro forma consolidated balance sheet. Both the
pre-tax and tax effect are included in the caption "Accounts Payable,
Accrued Expenses and Other Liabilities" on the pro forma balance sheet.
(g) The Merger will be accounted for on a pooling of interests accounting basis
and, accordingly, the related pro forma adjustments to the common stock,
capital surplus and retained earnings accounts at December 31, 1995 reflect
(i) an exchange of 184.5 million shares of the Corporation's common stock
(using the exchange ratio of 1.04) for the 177.4 million shares of Chase
common stock outstanding at December 31, 1995; (ii) the exchange of each
outstanding share of Chase preferred stock into one share of the
Corporation's preferred stock; and (iii) the cancellation and retirement of
all remaining shares of Chase common stock held in Chase's treasury.
Reference is made to the Form 8-K, which the Corporation has filed with the
Securities and Exchange Commission on October 26, 1995, for more
information regarding the Merger.
For the income per share calculations, the pro forma combined average
common shares outstanding (primary and assuming full dilution) reflects the
exchange of the Corporation's common stock (using the exchange ratio of
1.04) for the outstanding shares of Chase common stock.
103
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