<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER 1-5805
THE CHASE MANHATTAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2624428
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
270 PARK AVENUE, NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 270-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [x] NO [ ]
COMMON STOCK, $1 PAR VALUE 421,456,551
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK ON OCTOBER 31, 1997.
<PAGE> 2
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PART I Page
- ------ ----
<S> <C>
Item 1 Financial Statements - The Chase Manhattan Corporation
and Subsidiaries:
Consolidated Balance Sheet at September 30, 1997 and
December 31, 1996. 3
Consolidated Statement of Income for the three months
ended September 30, 1997 and September 30, 1996. 4
Consolidated Statement of Income for the nine months
ended September 30, 1997 and September 30, 1996. 5
Consolidated Statement of Changes in Stockholders' Equity for the
nine months ended September 30, 1997 and September 30, 1996. 6
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996. 7
Notes to Financial Statements. 8-15
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations. 16-46
Glossary of Terms. 47
PART II
Item 1 Legal Proceedings. 48
Item 2 Sales of Unregistered Common Stock. 48
Item 6 Exhibits and Reports on Form 8-K. 48
</TABLE>
-2-
<PAGE> 3
Part I
Item 1.
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 14,367 $ 14,605
Deposits with Banks 4,152 8,344
Federal Funds Sold and Securities
Purchased Under Resale Agreements 38,958 28,966
Trading Assets:
Debt and Equity Instruments 42,456 30,377
Risk Management Instruments 33,296 29,579
Securities:
Available-for-Sale 43,987 44,691
Held-to-Maturity (Fair Value: $3,260 and $3,849) 3,254 3,855
Loans (Net of Allowance for Loan Losses of $3,462 and $3,549) 159,625 151,543
Premises and Equipment 3,733 3,642
Due from Customers on Acceptances 2,226 2,276
Accrued Interest Receivable 3,685 3,020
Other Assets 16,835 15,201
---------- -----------
TOTAL ASSETS $ 366,574 $ 336,099
========== ===========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 39,131 $ 42,726
Interest-Bearing 69,587 67,186
Foreign:
Noninterest-Bearing 3,777 4,331
Interest-Bearing 69,293 66,678
---------- -----------
Total Deposits 181,788 180,921
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 65,453 53,868
Commercial Paper 4,584 4,500
Other Borrowed Funds 7,085 9,231
Acceptances Outstanding 2,226 2,276
Trading Liabilities 53,498 38,136
Accounts Payable, Accrued Expenses and Other Liabilities 14,935 12,309
Long-Term Debt 13,899 12,714
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 1,390 600
---------- -----------
TOTAL LIABILITIES 344,858 314,555
---------- -----------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 6)
PREFERRED STOCK OF SUBSIDIARY 550 550
---------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 1,740 2,650
Common Stock (Issued 440,751,646 and 440,747,317 Shares) 441 441
Capital Surplus 10,357 10,459
Retained Earnings 10,526 8,627
Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Taxes 126 (288)
Treasury Stock, at Cost (20,197,319 and 9,936,716 Shares) (2,024) (895)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 21,166 20,994
---------- -----------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 366,574 $ 336,099
========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-3-
<PAGE> 4
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
INTEREST INCOME
Loans $ 3,271 $ 3,042
Securities 720 690
Trading Assets 732 482
Federal Funds Sold and Securities Purchased Under Resale Agreements 623 549
Deposits with Banks 149 112
--------- --------
Total Interest Income 5,495 4,875
--------- --------
INTEREST EXPENSE
Deposits 1,714 1,416
Short-Term and Other Borrowings 1,451 1,213
Long-Term Debt 284 220
--------- --------
Total Interest Expense 3,449 2,849
--------- --------
NET INTEREST INCOME 2,046 2,026
Provision for Credit Losses 190 220
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,856 1,806
--------- --------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 308 237
Trust, Custody and Investment Management Fees 338 295
Credit Card Revenue 304 277
Service Charges on Deposit Accounts 94 97
Fees for Other Financial Services 411 393
Trading Revenue 505 343
Securities Gains 58 34
Revenue from Equity-Related Investments 243 112
Other Revenue 102 111
--------- --------
Total Noninterest Revenue 2,363 1,899
--------- --------
NONINTEREST EXPENSE
Salaries 1,292 1,040
Employee Benefits 206 211
Occupancy Expense 194 204
Equipment Expense 192 179
Foreclosed Property Expense 6 2
Restructuring Charge and Expenses 71 32
Other Expense 700 652
--------- --------
Total Noninterest Expense 2,661 2,320
--------- --------
INCOME BEFORE INCOME TAX EXPENSE 1,558 1,385
Income Tax Expense 576 527
--------- --------
NET INCOME $ 982 $ 858
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 941 $ 803
========= ========
NET INCOME PER COMMON SHARE:
Primary $ 2.17 $ 1.80
========= ========
Assuming Full Dilution $ 2.16 $ 1.78
========= ========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-4-
<PAGE> 5
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
INTEREST INCOME
Loans $ 9,465 $ 9,311
Securities 2,177 2,095
Trading Assets 2,063 1,283
Federal Funds Sold and Securities Purchased Under Resale Agreements 1,879 1,564
Deposits with Banks 369 440
--------- --------
Total Interest Income 15,953 14,693
--------- --------
INTEREST EXPENSE
Deposits 4,797 4,518
Short-Term and Other Borrowings 4,263 3,326
Long-Term Debt 814 668
--------- --------
Total Interest Expense 9,874 8,512
--------- --------
NET INTEREST INCOME 6,079 6,181
Provision for Credit Losses 599 715
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,480 5,466
--------- --------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 767 731
Trust, Custody and Investment Management Fees 969 882
Credit Card Revenue 830 743
Service Charges on Deposit Accounts 280 296
Fees for Other Financial Services 1,186 1,152
Trading Revenue 1,401 1,085
Securities Gains 189 110
Revenue from Equity-Related Investments 586 554
Other Revenue 412 180
--------- --------
Total Noninterest Revenue 6,620 5,733
--------- --------
NONINTEREST EXPENSE
Salaries 3,526 3,162
Employee Benefits 647 741
Occupancy Expense 574 632
Equipment Expense 575 544
Foreclosed Property Expense 9 (15)
Restructuring Charge and Expenses 172 1,710
Other Expense 2,076 1,963
--------- --------
Total Noninterest Expense 7,579 8,737
--------- --------
INCOME BEFORE INCOME TAX EXPENSE 4,521 2,462
Income Tax Expense 1,687 837
--------- --------
NET INCOME $ 2,834 $ 1,625
========= ========
NET INCOME APPLICABLE TO COMMON STOCK $ 2,687 $ 1,461
========= ========
NET INCOME PER COMMON SHARE:
Primary $ 6.16 $ 3.28
========= ========
Assuming Full Dilution $ 6.08 $ 3.23
========= ========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-5-
<PAGE> 6
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
PREFERRED STOCK:
Balance at Beginning of Year $ 2,650 $ 2,650
Redemption of Stock (910) --
---------- ----------
Balance at End of Period $ 1,740 $ 2,650
--------- ----------
COMMON STOCK:
Balance at Beginning of Year $ 441 $ 458
Retirement of Treasury Stock -- (20)
Issuance of Common Stock -- 2
--------- ----------
Balance at End of Period $ 441 $ 440
--------- ----------
CAPITAL SURPLUS:
Balance at Beginning of Year $ 10,459 $ 11,075
Retirement of Treasury Stock -- (433)
Shares Issued for Employee Stock-Based Awards and
Certain Related Tax Benefits (102) (198)
---------- ----------
Balance at End of Period $ 10,357 $ 10,444
--------- ----------
RETAINED EARNINGS:
Balance at Beginning of Year $ 8,627 $ 7,997
Net Income 2,834 1,625
Retirement of Treasury Stock -- (557)
Cash Dividends Declared:
Preferred Stock (147) (164)
Common Stock (789) (818) (a)
Accumulated Translation Adjustment 1 8
--------- ----------
Balance at End of Period $ 10,526 $ 8,091
--------- ----------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE:
Balance at Beginning of Year $ (288) $ (237)
Net Change in Fair Value of Securities Available-for-Sale,
Net of Taxes 414 (243)
--------- ----------
Balance at End of Period $ 126 $ (480)
--------- ----------
COMMON STOCK IN TREASURY, AT COST:
Balance at Beginning of Year $ (895) $ (1,107)
Retirement of Treasury Stock -- 1,010
Purchase of Treasury Stock (2,036) (1,007)
Reissuance of Treasury Stock 907 1,099
--------- ----------
Balance at End of Period $ (2,024) $ (5)
--------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 21,166 $ 21,140
========= ==========
</TABLE>
(a) Includes fourth quarter 1995 common stock dividends of $80 million declared
and paid by heritage Chase in the 1996 first quarter.
The Notes to Financial Statements are an integral part of these Statements.
-6-
<PAGE> 7
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,834 $ 1,625
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Credit Losses 599 715
Restructuring Charge and Expenses 172 1,710
Depreciation and Amortization 712 631
Net Change In:
Trading-Related Assets (14,992) (11,286)
Accrued Interest Receivable (665) (287)
Other Assets (1,943) 1,515
Trading-Related Liabilities 15,563 (954)
Accrued Interest Payable 285 146
Other Liabilities 1,164 (220)
Other, Net (421) 475
-------- --------
Net Cash Provided (Used) by Operating Activities 3,308 (5,930)
-------- --------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks 4,192 4,035
Federal Funds Sold and Securities Purchased Under Resale Agreements (16,519) (8,237)
Loans Due to Sales and Securitizations 16,995 27,984
Other Loans, Net (25,415) (28,667)
Other, Net (478) (1,198)
Proceeds from the Maturity of Held-to-Maturity Securities 652 859
Purchases of Held-to-Maturity Securities (54) (187)
Proceeds from the Maturity of Available-for-Sale Securities 5,915 6,288
Proceeds from the Sale of Available-for-Sale Securities 60,348 32,792
Purchases of Available-for-Sale Securities (64,626) (45,323)
-------- --------
Net Cash Used by Investing Activities (18,990) (11,654)
-------- --------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (3,595) 399
Domestic Time and Savings Deposits 2,401 1,303
Foreign Deposits 2,061 (8,194)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 18,112 19,382
Other Borrowed Funds (2,062) 3,688
Other, Net (50) 921
Proceeds from the Issuance of Long-Term Debt and Capital Securities 3,425 866
Repayments of Long-Term Debt (1,446) (1,378)
Proceeds from the Issuance of Stock 805 914
Proceeds from the Issuance of Preferred Stock of Subsidiary -- 550
Redemption of Preferred Stock (910) --
Treasury Stock Purchased (2,453) (1,007)
Cash Dividends Paid (916) (886)
-------- --------
Net Cash Provided by Financing Activities 15,372 16,558
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks 72 (39)
-------- --------
Net Decrease in Cash and Due from Banks (238) (1,065)
Cash and Due from Banks at January 1, 14,605 14,794
-------- --------
Cash and Due from Banks at September 30, $ 14,367 $ 13,729
======== ========
Cash Interest Paid $ 9,589 $ 8,366
-------- --------
Taxes Paid $ 1,012 $ 1,296
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-7-
<PAGE> 8
Part I
Item 1. (continued)
See Glossary of Terms on page 47 for definition of terms used
throughout the Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of The Chase Manhattan Corporation and
Subsidiaries ("Chase") are prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented have
been included. In addition, certain amounts have been reclassified to conform to
the current presentation.
In December 1996, the FASB issued SFAS 127, which deferred the effective date of
SFAS 125 relating to securities lending, repurchase agreements and other secured
financing transactions. SFAS 127 will be effective for calendar year 1998. Chase
believes that the adoption of SFAS 127 will not have a material effect on its
earnings, liquidity or capital resources.
NOTE 2- EARNINGS PER SHARE
For a discussion of Chase's current earnings per share policy, see Note One of
the 1996 Annual Report.
In February 1997, the FASB issued SFAS 128, which will become effective for
financial statements issued for periods ending after December 15, 1997. SFAS 128
establishes standards for computing and presenting earnings per share (EPS) and
simplifies previously issued accounting standards related to EPS. SFAS 128 has
replaced the concept of "primary EPS" with "basic EPS" and the concept of
"fully-diluted EPS" with "diluted EPS".
Although SFAS 128 was not effective for the financial statements included in
this Form 10-Q, Chase believes that had SFAS 128 been applied to its 1997
financial results, basic EPS would have been approximately $0.05 higher than
primary EPS for the 1997 third quarter and approximately $0.14 higher for the
first nine months of 1997. The differences between fully-diluted EPS and diluted
EPS for these periods would have been immaterial.
-8-
<PAGE> 9
Part I
Item 1. (continued)
NOTE 3 - TRADING ACTIVITIES
For a discussion of Chase's trading revenue, see Management's Discussion and
Analysis ("MD&A") on page 21 of this Form 10-Q.
TRADING ASSETS AND LIABILITIES
Trading assets and trading liabilities are carried at estimated fair value,
after taking into account master netting agreements. They are presented in the
following table.
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(in millions) 1997 1996
------------- ------------
<S> <C> <C>
Trading Assets - Debt and Equity Instruments:
U.S. Government, Federal Agencies and Municipal Securities $ 10,116 $ 8,523
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 2,908 1,486
Debt Securities Issued by Foreign Governments 14,391 12,284
Debt Securities Issued by Foreign Financial Institutions 6,610 3,569
Corporate Securities 3,164 1,873
Loans and Other 5,267 2,642
------------ -----------
Total Trading Assets - Debt and Equity Instruments (a) $ 42,456 $ 30,377
============ ===========
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $ 16,194 $ 14,227
Foreign Exchange Contracts 15,747 13,760
Equity, Commodity and Other Contracts 1,430 1,667
Allowance for Credit Losses for Risk Management Instruments (75) (75)
------------- -----------
Total Trading Assets - Risk Management Instruments $ 33,296 $ 29,579
============ ===========
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $ 16,938 $ 14,622
Foreign Exchange Contracts 16,551 12,867
Equity, Commodity and Other Contracts 1,521 1,202
------------ -----------
Trading Liabilities - Risk Management Instruments 35,010 28,691
Securities Sold, Not Yet Purchased 15,805 7,242
Structured Notes 2,683 2,203
------------ -----------
Total Trading Liabilities $ 53,498 $ 38,136
============ ===========
</TABLE>
(a) Includes emerging markets instruments of $7,386 million at September 30,
1997 and $5,500 million at December 31, 1996.
NOTE 4 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note One
of Chase's 1996 Annual Report.
The valuation of available-for-sale securities under SFAS 115 resulted in a net
after-tax favorable impact of $126 million on Chase's stockholders' equity at
September 30, 1997. This is compared with a net after-tax unfavorable impact of
$288 million at December 31, 1996. The change from 1996 year-end was due to
decreases in U.S. dollar interest rates during 1997, which caused an increase in
the market value of the securities portfolio. Included in these amounts are
loans which are subject to SFAS 115.
-9-
<PAGE> 10
Part I
Item 1. (continued)
Net gains from available-for-sale securities sold in the third quarter of 1997
amounted to $58 million (gross gains of $132 million and gross losses of $74
million). For the first nine months of 1997, net gains were $189 million (gross
gains of $327 million and gross losses of $138 million). Net gains on these
sales for the same periods in 1996 amounted to $34 million (gross gains of $83
million and gross losses of $49 million) and $110 million (gross gains of $234
million and gross losses of $124 million), respectively.
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and estimated fair value of available-for-sale securities,
including the impact of related derivatives, are presented in the following
table.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (IN MILLIONS) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 21,010 $ 42 $ 13 $ 21,039
Collateralized Mortgage Obligations 2,196 3 8 2,191
Other, primarily U.S. Treasuries 10,615 11 141 10,485
Obligations of State and Political Subdivisions 251 1 -- 252
Debt Securities Issued by Foreign Governments 7,859 93 23 7,929
Corporate Debt Securities 569 14 1 582
Equity Securities 859 241 64 1,036
Other, primarily Asset-Backed Securities (a) 465 14 6 473
--------- ------ -------- ---------
Total Available-for-Sale Securities $ 43,824 $ 419 $ 256 $ 43,987
========= ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 20,961 $ 18 $ 285 $ 20,694
Collateralized Mortgage Obligations 2,293 1 2 2,292
Other, primarily U.S. Treasuries 12,250 3 193 12,060
Obligations of State and Political Subdivisions 325 2 -- 327
Debt Securities Issued by Foreign Governments 6,893 100 3 6,990
Corporate Debt Securities 923 43 14 952
Equity Securities 957 116 25 1,048
Other, primarily Asset-Backed Securities (a) 328 1 1 328
--------- ------ ------ ---------
Total Available-for-Sale Securities $ 44,930 $ 284 $ 523 $ 44,691
========= ====== ====== =========
</TABLE>
(a) Includes collateralized mortgage obligations of private issuers which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
-10-
<PAGE> 11
Part I
Item 1. (continued)
HELD-TO-MATURITY SECURITIES
The amortized cost and estimated fair value of held-to-maturity securities are
presented in the following table.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (IN MILLIONS) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 1,401 $ 8 $ 3 $ 1,406
Collateralized Mortgage Obligations 1,780 5 4 1,781
Other, primarily U.S. Treasuries 53 -- -- 53
Other, primarily Asset-Backed Securities (a) 20 -- -- 20
-------- ------ ------ ---------
Total Held-to-Maturity Securities $ 3,254 $ 13 $ 7 $ 3,260
======== ====== ====== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 1,584 $ 4 $ 8 $ 1,580
Collateralized Mortgage Obligations 2,075 6 9 2,072
Other, primarily U.S. Treasuries 73 -- -- 73
Other, primarily Asset-Backed Securities (a) 123 1 -- 124
--------- ------- ------- ---------
Total Held-to-Maturity Securities $ 3,855 $ 11 $ 17 $ 3,849
========= ======= ======= =========
</TABLE>
(a) Includes collateralized mortgage obligations of private issuers, which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
NOTE 5 - LOANS
For a discussion of the accounting policies relating to loans, see Notes One and
Four of Chase's 1996 Annual Report. The following table presents the amortized
cost and estimated fair value of loans measured under SFAS 115 (which are all
available-for-sale), including the impact of related derivatives.
<TABLE>
<CAPTION>
(in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1997 $ 1,228 $ 121 $ 118 $ 1,231
========== ======= ======= =========
December 31, 1996 $ 1,869 $ 93 $ 369 $ 1,593
========== ======= ======= =========
</TABLE>
There were no net gains or losses during 1997 related to the disposition of
available-for-sale emerging market securities. For the first nine months of
1996, there was a net loss of $65 million, which was incurred in the first half
of 1996.
-11-
<PAGE> 12
Part I
Item 1. (continued)
The following table sets forth information about impaired loans in accordance
with SFAS 114. Chase uses the discounted cash flow method as its primary method
for valuing impaired loans.
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(in millions) 1997 1996
------------- ------------
<S> <C> <C>
Impaired Loans with an Allowance $ 460 $ 535
Impaired Loans without an Allowance (a) 93 182
----------- -----------
Total Impaired Loans $ 553 $ 717
=========== ===========
Allowance for Impaired Loans under
SFAS 114 (b) $ 167 $ 194
----------- -----------
Average Balance of Impaired Loans
during the year-to-date period ended: $ 651 $ 1,104
----------- -----------
Interest Income Recognized on Impaired
Loans during the year-to-date period ended: $ 7 $ 30
----------- -----------
</TABLE>
(a) When the discounted cash flow, collateral value or market price equals or
exceeds the carrying value of the loan, then the loan does not require an
allowance under SFAS 114.
(b) The Allowance for Impaired Loans under SFAS 114 is a part of Chase's
overall Allowance for Loan Losses.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
In late 1996 and early 1997, Chase established three separate wholly owned
statutory business trusts, which issued an aggregate $1,390 million in capital
securities, net of discount. The capital securities qualify as Tier 1 Capital
for Chase. The proceeds from each issuance were invested in a corresponding
series of junior subordinated deferrable interest debentures of Chase. The sole
assets of each statutory business trust are these debentures. Chase has fully
and unconditionally guaranteed each of the business trusts' obligations under
each trust's capital securities. Each trust's capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures at
their stated maturity or earlier redemption.
The following is a summary of Chase's outstanding capital securities, net of
discount, issued by each trust:
<TABLE>
<CAPTION>
Amount of
Capital Securities, Stated Maturity Interest Rate Interest
Name of Trust Net of Discount of Capital Securities of Capital Securities Payment Dates
(in millions)
- ------------- ------------------ --------------------- --------------------- -------------
<S> <C> <C> <C> <C>
Chase Capital I $ 600 12/1/2026 7.67% Semi-annual - commencing 6/1/97
Chase Capital II 494 2/1/2027 LIBOR + .50% Quarterly - commencing 5/1/97
Chase Capital III 296 3/1/2027 LIBOR + .55% Quarterly - commencing 6/1/97
---------
Total $ 1,390
=========
</TABLE>
-12-
<PAGE> 13
Part I
Item 1. (continued)
NOTE 8 - RISK-BASED CAPITAL
For a discussion of the calculation of risk-based capital ratios, the various
regulatory guidelines and significant banking subsidiaries, see Notes One and
Sixteen of Chase's 1996 Annual Report. During the 1997 third quarter, Chase
elected early adoption of the Federal Reserve Board's new guidelines for the
risk-based capital standards, which incorporate a measure for market risk
consistent with the principles adopted by the Basle Committee on Banking
Supervision under the Basle Capital Accord. The new guidelines require banks and
bank holding companies that have significant market risk exposure to measure
that risk utilizing a value-at-risk model, based on the parameters contained in
the guidelines, and to maintain a commensurate amount of capital. In addition,
the assets and off-balance sheet financial instruments, and related capital, of
Chase's securities subsidiary, Chase Securities Inc., are now included in the
calculation of these ratios, while the provisions of SFAS 115 continue to be
excluded.
The following table presents the capital ratios for Chase and its significant
banking subsidiaries. Assets and capital amounts for Chase's banking
subsidiaries reflect intercompany transactions, whereas the respective amounts
for Chase reflect the elimination of intercompany transactions.
<TABLE>
<CAPTION>
The Chase Texas
SEPTEMBER 30, 1997 ($ in millions) Chase Manhattan Bank Commerce (d) Chase USA (d)
- ---------------------------------- ----- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Tier 1 Capital Ratio (a)(c) 7.83% 7.36% 7.41% 9.78%
Total Capital Ratio (a)(c) 11.63% 10.73% 10.36% 12.48%
Tier 1 Leverage Ratio (b)(c) 6.03% 5.85% 6.57% 9.41%
Tier 1 Capital $ 21,644 $ 16,678 $ 1,349 $ 2,541
Total Qualifying Capital 32,170 24,330 1,884 3,242
Risk-Weighted Assets 276,583 226,718 18,194 25,989
Adjusted Average Assets 358,758 285,185 20,538 27,014
</TABLE>
(a) Tier 1 Capital or Total Capital, as applicable, divided by risk-weighted
assets. Risk-weighted assets include assets and off-balance sheet
positions, weighted by the type of instruments and the risk weight of the
counterparty, collateral or guarantor.
(b) Tier 1 Capital divided by adjusted average assets (net of allowance for
credit losses, goodwill and certain intangible assets).
(c) The provisions of SFAS 115 do not apply to the calculation of these ratios.
(d) Texas Commerce and Chase USA are not required to adopt the new guidelines
for market risk-adjusted capital, since their levels of trading activity do
not meet the required threshold stipulated in the guidelines.
NOTE 9 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
Chase utilizes various derivative and foreign exchange financial instruments for
trading purposes and for purposes other than trading, such as asset/liability
management ("ALM"). These financial instruments represent contracts with
counterparties where payments are made to or from the counterparty based upon
specific interest rates, currency levels, other market rates or on terms
predetermined by the contract. These derivative and foreign exchange
transactions involve, to varying degrees, credit risk and market risk. For a
discussion of these risks, see Note Seventeen of Chase's 1996 Annual Report.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR TRADING PURPOSES: The
financial instruments used for Chase's trading activities are disclosed in Note
3 of this Form 10-Q. The credit risk relating to trading activities is recorded
on the balance sheet, while the market risk of the trading activities is
reflected in trading revenue, as trading instruments are marked-to-market on a
daily basis.
DERIVATIVE AND FOREIGN EXCHANGE INSTRUMENTS USED FOR PURPOSES OTHER THAN
TRADING: A discussion of Chase's objectives and strategies for employing
derivative and foreign exchange instruments for ALM activities is included on
pages 55-58 of the 1996 Annual Report. A discussion of the accounting policies
relating to derivatives used for ALM activities is provided in Note One of
Chase's 1996 Annual Report.
-13-
<PAGE> 14
Part I
Item 1. (continued)
The following table summarizes the aggregate notional amounts of interest rate
and foreign exchange contracts as well as the credit exposure related to these
instruments. The credit exposure amounts include the effects of master netting
agreements. The table should be read in conjunction with the descriptions of
these products and their risks included in Note Seventeen of Chase's 1996 Annual
Report.
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS (a) CREDIT EXPOSURE
SEPTEMBER 30, December 31, SEPTEMBER 30, December 31,
(in billions) 1997 1996 1997 1996
- ------------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Futures, Forwards and Forward Rate Agreements
Trading $ 1,742.1 $ 1,209.6 $ 0.3 $ 0.5
Asset and Liability Management 55.7 30.8 --- ---
Interest Rate Swaps
Trading 3,225.3 2,300.3 12.3 11.4
Asset and Liability Management 99.7 96.4 0.5 0.7
Purchased Options
Trading 324.9 172.7 3.6 2.3
Asset and Liability Management 44.2 15.5 --- ---
Written Options
Trading 394.3 199.4 --- ---
Asset and Liability Management 18.4 1.4 --- ---
----------- ---------- ---------- --------
Total Interest Rate Contracts $ 5,904.6 $ 4,026.1 $ 16.7 $ 14.9
=========== ========== ========== ========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,516.0 $ 1,308.6 $ 10.2 $ 10.0
Asset and Liability Management 68.5 60.1 --- ---
Other Foreign Exchange Contracts (b)
Trading 343.8 267.4 5.5 3.8
Asset and Liability Management 4.5 4.2 --- ---
----------- ---------- ---------- --------
Total Foreign Exchange Contracts $ 1,932.8 $ 1,640.3 $ 15.7 $ 13.8
=========== ========== ========== ========
EQUITY, COMMODITY AND OTHER
CONTRACTS
Trading $ 59.5 $ 45.7 $ 1.4 $ 1.7
----------- ---------- ---------- --------
Total Equity, Commodity
and Other Contracts $ 59.5 $ 45.7 $ 1.4 $ 1.7
=========== ========== ========== ========
Total Credit Exposure Recorded on the Balance Sheet $ 33.8 $ 30.4
</TABLE>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and equity, commodity and other contracts were $904.5
billion, $7.3 billion and $3.5 billion, respectively, at September 30,
1997, compared with $521.5 billion, $9.5 billion and $6.4 billion,
respectively, at December 31, 1996. 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 $117.9 billion, $118.0 billion and
$112.4 billion, respectively, at September 30, 1997, compared with $89.6
billion, $94.2 billion and $87.8 billion, respectively, at December 31,
1996.
-14-
<PAGE> 15
Part I
Item 1. (continued)
NOTE 10 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
The following table summarizes the credit risk relating to lending-related
financial instruments. The table should be read in conjunction with the
description of these products and their risks included in Note Eighteen of
Chase's 1996 Annual Report.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(in millions) 1997 1996
- ------------- ------------- ------------
<S> <C> <C>
Credit Card Lines $ 59,831 $ 54,192
Other Commitments to Extend Credit 118,770 94,278
Standby Letters of Credit and Guarantees (Net of Risk
Participations of $5,555 and $5,205) 35,136 30,843
Other Letters of Credit 5,130 5,588
Customers' Securities Lent 49,871 38,715
</TABLE>
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of Chase's fair value methodologies, see Note Twenty of its
1996 Annual Report. The following table presents the financial assets and
liabilities valued under SFAS 107.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 December 31, 1996
------------------------------------------ --------------------------------------------
CARRYING ESTIMATED APPRECIATION/ Carrying Estimated Appreciation/
(in millions) VALUE FAIR VALUE (DEPRECIATION) Value Fair Value (Depreciation)
- -------------- -------- ------------ ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total Financial Assets $ 360,281 $ 362,997 $ 2,716 $ 328,504 $ 330,831 $ 2,327
========== =========== =========== ===========
Total Financial Liabilities $ 344,089 $ 344,645 (556) $ 314,144 $ 314,626 (482)
========== =========== ------- =========== =========== ----------
Estimated Fair Value in Excess
of Carrying Value $ 2,160 $ 1,845
========= ==========
</TABLE>
Derivative contracts used for ALM activities are included in the above amounts
and are valued using market prices or pricing models consistent with methods
used in valuing similar instruments used for trading purposes. The following
table presents the carrying value and estimated fair value of derivatives
contracts used for ALM activities.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 December 31, 1996
-------------------------------------------- -----------------------------------------
CARRYING ESTIMATED NET UNRECOGNIZED Carrying Estimated Net Unrecognized
(in millions) VALUE FAIR VALUE GAINS/(LOSSES) Value Fair Value Gains/(Losses)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Financial Assets $ 186 $ (109) $ (295) (a) $ 222 $ 135 $ (87)
Total Financial Liabilities $ 304 $ (24) $ (328) (a) $ 76 $ (67) $ (143)
</TABLE>
(a) Gross unrecognized gains and losses related to total financial assets were
$269 million and $564 million, respectively, at September 30, 1997. Gross
unrecognized gains and losses related to total financial liabilities were
$353 million and $681 million, respectively, at September 30, 1997.
-15-
<PAGE> 16
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
1997 1996 NINE MONTHS ENDED
----------------------- -------- SEPTEMBER 30,
THIRD SECOND THIRD --------------------
QUARTER QUARTER QUARTER 1997 1996
--------- ------- -------- --------------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Income Before Restructuring Costs $ 1,027 $ 969 $ 878 $ 2,942 $ 2,685 (e)
Restructuring Costs (After-Tax) (a) (45) (44) (20) (108) (1,060)
---------- -------- -------- ------- --------
Net Income $ 982 $ 925 $ 858 $ 2,834 $ 1,625
========= ======== ======== ======= ========
Net Income Applicable to Common Stock $ 941 $ 874 $ 803 $ 2,687 $ 1,461
========= ======== ======== ======= ========
INCOME PER COMMON SHARE:
Primary:
Income Before Restructuring Costs $ 2.27 $ 2.11 $ 1.85 $ 6.40 $ 5.66 (e)
Restructuring Costs (After-Tax) (a) (0.10) (0.11) (0.05) (0.24) (2.38)
-------- -------- -------- -------- --------
Net Income $ 2.17 $ 2.00 $ 1.80 $ 6.16 $ 3.28
======== ======== ======== ======== ========
Assuming Full Dilution:
Income Before Restructuring Costs $ 2.26 $ 2.11 $ 1.83 $ 6.32 $ 5.57 (e)
Restructuring Costs (After-Tax) (a) (0.10) (0.11) (0.05) (0.24) (2.34)
-------- -------- -------- -------- --------
Net Income $ 2.16 $ 2.00 $ 1.78 $ 6.08 $ 3.23
======== ======== ======== ======== ========
PER COMMON SHARE:
Book Value $ 46.19 $ 44.44 $ 42.03 $ 46.19 $ 42.03
Market Value $ 118.00 $ 97.06 $ 80.13 $ 118.00 $ 80.13
Common Stock Dividends Declared (b) $ 0.62 $ 0.62 $ 0.56 $ 1.86 $ 1.68
COMMON SHARES OUTSTANDING:
Average Common and Common Equivalent Shares 433.6 434.9 447.2 436.5 446.0
Average Common Shares Assuming Full Dilution 436.3 436.0 450.5 442.2 452.3
Common Shares at Period End 420.6 423.3 439.9 420.6 439.9
PERFORMANCE RATIOS: (AVERAGE BALANCES)
Income Before Restructuring Costs: (c)
Return on Assets 1.13% 1.11% 1.08% 1.13% 1.13%
Return on Common Stockholders' Equity 20.56% 20.20% 18.35% 20.11% 18.96% (e)
Return on Total Stockholders' Equity 19.40% 18.76% 17.04% 18.77% 17.57%
Net Income: (c)
Return on Assets 1.08% 1.06% 1.06% 1.08% 0.68%
Return on Common Stockholders' Equity 19.63% 19.23% 17.90% 19.33% 10.99%
Return on Total Stockholders' Equity 18.55% 17.91% 16.65% 18.08% 10.63%
Efficiency Ratio (d) 56.7% 58.0% 58.2% 57.3% 58.7%
Efficiency Ratio - Excluding Securitizations (d) 53.4% 54.4% 56.1% 54.0% 56.8%
</TABLE>
(a) Represents merger-related restructuring costs. See page 24 for further
discussion.
(b) Chase increased its quarterly common stock dividend from $0.56 per share
to $0.62 per share in the first quarter of 1997.
(c) Based on annualized income amounts.
(d) Excludes restructuring costs, foreclosed property expense, charges for
accelerated vesting of stock-based incentive awards, gain on the sale of a
non-strategic, partially-owned foriegn investment, and nonrecurring items.
(e) Includes nonrecurring items which had a $70 million net favorable impact on
net income. Excluding these items, net income was $2,615 million, primary
earnings per share was $5.50, fully-diluted earnings per share was $5.42
and return on common stockholders' equity was 18.43%.
-16-
<PAGE> 17
Certain forward-looking statements contained herein are subject to risks and
uncertainties. Chase's actual results may differ materially from those set forth
in such forward-looking statements. Reference is made to Chase's reports filed
with the Securities and Exchange Commission, in particular the Form 8-K dated
October 21, 1997, and the 1996 Annual Report for a discussion of factors that
may cause such differences to occur. See Glossary of Terms on page 47 for a
definition of terms used throughout the 10-Q.
OVERVIEW
Chase's net income before restructuring costs for the 1997 third quarter was
$1,027 million, an increase of 17%, when compared with the 1996 third quarter.
Primary earnings per share ("primary EPS") and fully diluted earnings per share
("fully-diluted EPS") in the third quarter of 1997 both rose 23% from the
comparable 1996 quarter. Reported net income in the 1997 third quarter was $982
million, up 14% from the 1996 third quarter. Primary and fully-diluted EPS on
reported net income were $2.17 and $2.16, respectively, in 1997, both up 21%
from the 1996 third quarter.
Net income before restructuring costs for the first nine months of 1997 was
$2,942 million, an increase of $257 million from the same 1996 period. Primary
and fully-diluted EPS for the first nine months of 1997 both increased 13% to
$6.40 and $6.32, respectively, compared with the same periods of 1996. Reported
net income for the first nine months of 1997 was $2,834 million compared with
$1,625 million for 1996. Primary and fully-diluted EPS increased for the first
nine months of 1997 to $6.16 and $6.08, respectively, from $3.28 and $3.23,
respectively, in 1996.
Chase's total operating revenue for the 1997 third quarter was $4,409 million,
an increase of 12% from the same 1996 period. For the first nine months of
1997, total operating revenue increased to $12,655 million, or 6%, from the
comparable 1996 period. On a managed basis, which excludes the impact of credit
card securitizations, total operating revenue for the 1997 third quarter
increased 15% to $4,677 million and for the 1997 first nine months increased 9%
to $13,425 million. The increases for both periods were due to growth in
various businesses including consumer credit, asset management and private
banking, operating services, trading and investment banking.
The 1997 third quarter included incremental merger savings of $130 million,
which were offset by investment spending and increased incentive costs related
to higher revenues. The 1997 third quarter also included $85 million of expenses
due to the accelerated vesting of stock-based incentive awards and restructuring
expenses of $71 million. Total noninterest expenses, before merger-related
restructuring costs, and excluding the aforementioned $85 million charge, rose
9% in the 1997 third quarter.
Chase's efficiency ratio improved to 56.7% for the third quarter of 1997
(excluding the aforementioned $85 million charge), compared with 58.2% for the
comparable 1996 period. Excluding the impact of credit card securitizations, the
efficiency ratio for the third quarters of 1997 and 1996 was 53.4% and 56.1%,
respectively.
During the 1997 third quarter, Chase purchased approximately 7.0 million common
shares as part of a stock repurchase plan announced in October of 1996 and also
reissued approximately 4.3 million treasury shares under its employee benefit
plans, resulting in a net repurchase of 2.7 million shares. From the inception
of the program through September 30, 1997, Chase has repurchased 31.4 million
common shares ($3.0 billion) and reissued approximately 11.3 million treasury
shares under its benefit plans, resulting in a net repurchase of 20.1 million
shares ($2.1 billion).
During the third quarter, Chase elected early adoption of the Federal Reserve
Board's new guidelines for calculating market risk-adjusted capital. These
guidelines incorporate the use of internal models to measure market risk. In
addition, the capital and assets of Chase Securities Inc. are included in the
calculation of risk-based capital ratios. Giving effect to the adoption of these
guidelines, Chase's Tier 1 and total risk-based capital ratios were 7.8% and
11.6%, respectively, and its leverage ratio was 6.0% at September 30, 1997.
MARKET DEVELOPMENTS SINCE SEPTEMBER 30, 1997
In the latter part of October, trading markets became difficult and unusually
volatile. There were sharp declines and a loss of liquidity for certain
securities, particularly emerging markets securities.
As a result of these market developments, Chase's trading revenue (including
trading-related net interest income) for the month of October amounted to a loss
of approximately $160 million before tax.
The October trading results and the ongoing uncertain market environment present
some risk that Chase will be unable to achieve its previously announced 1997
target of 15% annual growth in operating earnings per share.
Chase's other previously announced 1997 financial goals are: managed revenue
growth of 6% to 8%; return on common stockholders' equity of 19%; an efficiency
ratio of between 54% and 55%; and incremental merger savings of $635 million to
$680 million.
-17-
<PAGE> 18
RESULTS OF OPERATIONS
NET INTEREST INCOME
Reported net interest income for the 1997 third quarter was $2,046 million, an
increase of $20 million from the 1996 third quarter. For the first nine months,
net interest income was $6,079 million in 1997, a decrease of $48 million from
the 1996 level (excluding $54 million of interest income, in 1996, related to
Federal and State tax audit settlements). Excluding the impact of
securitizations and the 1996 tax audit settlements, net interest income on a
managed basis increased 4% in the 1997 third quarter and 3% for the first nine
months of 1997, reflecting a higher level of liquid interest-earning assets to
support Chase's trading businesses.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
--------------------------------------- ---------------------------------
1997 1996 % Change 1997 1996 % Change
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(in millions)
NET INTEREST INCOME
Managed Basis $ 2,365 $ 2,270 4.2% $ 6,992 $ 6,766 (a) 3.3 %
Impact of Securitizations (319) (244) -- (913) (639) --
--------- --------- --------- ---------
Reported $ 2,046 $ 2,026 1.0% $ 6,079 $ 6,127 (a) (0.8)%
========= ========= ========= =========
(in billions)
AVERAGE INTEREST-EARNING ASSETS
Managed Basis $ 304.4 $ 275.3 10.6% $ 295.2 $ 268.4 10.0%
Impact of Securitizations (14.8) (11.9) -- (14.1) (10.0) --
--------- --------- --------- ---------
Reported $ 289.6 $ 263.4 9.9% $ 281.1 $ 258.4 8.8%
========= ========= ========= =========
NET YIELD ON INTEREST-EARNING ASSETS (b)
Managed Basis 3.09% 3.29% -- 3.18% 3.37% (a) --
Impact of Securitizations (.28) (.22) -- (.28) (.19) --
---- ---- ---- ----
Reported 2.81% 3.07% -- 2.90% 3.18% (a) --
==== ==== ==== ====
</TABLE>
(a) Excludes $54 million of interest income related to tax audit settlements
which was considered a nonrecurring item.
(b) Reflected on a taxable equivalent basis in order to permit comparison of
yields on tax-exempt and taxable assets. For net interest income on a
taxable equivalent basis, and additional information on average balances
and rates, see the Average Balance Sheets on pages 44 and 45.
The reported and managed net yields on average interest-earning assets decreased
in the 1997 third quarter and first nine months compared with the same 1996
periods. The declines in net yield are primarily due to a higher level of
lower-yielding liquid assets, driven by Chase's trading businesses, and
generally narrower spreads on interest-earning assets.
-18-
<PAGE> 19
Average interest-earning assets retained on the balance sheet increased by 10%
in the third quarter of 1997 and 9% in the first nine months of 1997,
principally as a result of the increase in liquid interest-earning assets.
Liquid interest-earning assets (in particular trading-related assets) increased
in the 1997 third quarter and first nine months by 18% and 22%, respectively.
Average total loans (both commercial and consumer) and securities also increased
in both 1997 periods, but decreased slightly as a percentage of total
interest-earning assets. The growth in interest-earning assets in both 1997
periods was funded by an increase in Federal funds purchased and securities sold
under repurchase agreements, which provide short-term funding for
trading-related positions. Additionally, higher deposit levels and other
borrowings also contributed to funding the growth in interest-earning assets.
AVERAGE INTEREST-EARNING ASSETS
<TABLE>
<CAPTION>
THIRD QUARTER
-------------
(in billions) 1997 1996
--------------------------- -----------------------
<S> <C> <C> <C> <C>
Loans $ 161.2 56% $ 150.1 57%
Securities 45.0 15 42.5 16
Liquid Assets 83.4 29 70.8 27
---------- ------ -------- -----
Total $ 289.6 100% $ 263.4 100%
========== ====== ======== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
-----------
1997 1996
--------------------------- ------------------------
<S> <C> <C> <C> <C>
Loans $ 156.9 56% $ 150.1 58%
Securities 44.3 16 42.6 17
Liquid Assets 79.9 28 65.7 25
---------- ------ -------- -----
Total $ 281.1 100% $ 258.4 100%
========== ====== ======== =====
</TABLE>
Management anticipates that, given its current expectations for interest rate
movements for the remainder of 1997, Chase's managed net interest income in 1997
will be approximately 3% higher than in 1996 (excluding the impact of tax audit
settlements in 1996).
PROVISION FOR CREDIT LOSSES
Chase's provision for credit losses, which has equaled net charge-offs, amounted
to $190 million in the 1997 third quarter and $599 million for the first nine
months of 1997. These results compare with $220 million and $715 million,
respectively, for the prior year's periods. The decreases in the provision were
the result of lower consumer net charge-offs on a retained basis as well as
lower domestic commercial net charge-offs. Commercial net charge-offs remained
at historically low levels, consistent with the prior year.
Management currently expects that the provision for credit losses for full-year
1997 (which is anticipated to continue to equal net charge-offs) will be equal
to or lower than the full-year 1996 provision. This is primarily a result of the
continued strong performance in the commercial and industrial loan portfolio.
For a discussion of Chase's net charge-offs, see the Credit Risk Management
Section on pages 30-36.
-19-
<PAGE> 20
NONINTEREST REVENUE
Noninterest revenue rose 24% and 15% for the 1997 third quarter and nine month
periods, respectively, reflecting a broad spectrum of fee-based and, in
particular, market sensitive increases. The 1997 third quarter was particularly
strong with record results in several key areas (notably trading, corporate
finance and equity-related revenues, which are market sensitive categories, and
trust fees). Chase continues to generate overall fee growth by offering clients
integrated financing and advisory solutions and new products and by generating
new business. Noninterest revenue in the first nine months of 1997 included a
$44 million gain on the sale of a partially-owned foreign investment and in 1996
included a $60 million loss on the sale of a building in Japan.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
----------------------------- ----------------------------
(in millions) 1997 1996 1997 1996
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Corporate Finance and Syndication Fees $ 308 $ 237 $ 767 $ 731
Trust, Custody and Investment Management Fees 338 295 969 882
Credit Card Revenue 304 277 830 743
Service Charges on Deposit Accounts 94 97 280 296
Fees for Other Financial Services 411 393 1,186 1,152
--------- --------- --------- --------
Total Fees and Commissions 1,455 1,299 4,032 3,804
Trading Revenue 505 343 1,401 1,085
Securities Gains 58 34 189 110
Revenue from Equity-Related Investments 243 112 586 554
Other Revenue 102 111 412 180
--------- --------- --------- --------
Total $ 2,363 $ 1,899 $ 6,620 $ 5,733
========= ========= ========= ========
</TABLE>
FEES AND COMMISSIONS
Corporate finance and syndication fees of $308 million in the 1997 third
quarter increased by $71 million, or 30%, over the 1996 third quarter and
exceeded the record second quarter 1997 levels by 9%. These results are due to
strong investment banking deal flow, reflecting market share gains in high-yield
and investment-grade debt underwriting. Corporate finance and syndication fees
for the first nine months of 1997 rose $36 million reflecting strong growth in
fees from debt securities underwriting and higher levels of corporate finance
activity outside the United States.
Trust, custody and investment management fees rose 15% to a record $338 million
in the 1997 third quarter and rose 10% to $969 million in the first nine months
of 1997. These favorable results were largely attributable to growth in domestic
and foreign assets under custody, expanded securities lending activity, and a
higher level of assets under management, including Chase's proprietary Vista
mutual funds.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------------------- -------------------------
(in millions) 1997 1996 1997 1996
-------- -------- ---------- -------
<S> <C> <C> <C> <C>
Product Diversification:
Institutional (a) $ 173 $ 146 $ 504 $ 433
Personal (b) 108 97 311 298
Mutual Fund Fees (c) 28 20 75 62
Other Trust Fees 29 32 79 89
------- -------- -------- -------
Total Trust, Custody and Investment Management Fees $ 338 $ 295 $ 969 $ 882
======= ======== ======== =======
</TABLE>
(a) Represents fees for trustee, agency, registrar, securities lending, broker
clearings, safekeeping and maintenance of securities.
(b) Represents fees for trustee, estate services, custody, advisory and
investment management.
(c) Represents administrative, custody, trustee and other fees in connection
with Chase's proprietary mutual funds.
-20-
<PAGE> 21
Credit card revenue rose 10% in the 1997 third quarter and increased 12% for the
first nine months of 1997, as a result of growth in managed outstandings,
including the Wal-Mart co-branded product. The increases in revenue for both
1997 periods was partially offset by a rise in net charge-offs on the
securitized portfolio, which reduced the excess servicing fees Chase received
from the securitizations. Average managed credit card receivables grew to $27.1
billion in the third quarter of 1997, compared with $23.9 billion for the prior
year's third quarter. For a further discussion of the credit card portfolio and
related securitization activity, see page 33 of this Form 10-Q.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -----------
(in millions) 1997 1996 1997 1996
-------- -------- ---------- -------
<S> <C> <C> <C> <C>
FEES FOR OTHER FINANCIAL SERVICES:
Commissions on Letters of Credit and Acceptances $ 78 $ 81 $ 224 $ 252
Fees in Lieu of Compensating Balances 81 75 236 223
Mortgage Servicing Fees 59 55 177 159
Loan Commitment Fees 30 32 86 92
Other Fees 163 150 463 426
------- -------- -------- -------
Total $ 411 $ 393 $ 1,186 $ 1,152
======= ======== ======== =======
</TABLE>
The higher levels of mortgage servicing fees for the 1997 periods reflect an
increase in mortgage servicing volume largely resulting from the acquisition of
the portfolio of Source One Mortgage Services Corporation ("Source One") in
February 1997.
Higher fees related to insurance products, brokerage commissions, investment
services and cash management services contributed to the increase in other fees.
TRADING REVENUE
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -----------
(in millions) 1997 1996 1997 1996
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Trading Revenue $ 505 $ 343 $ 1,401 $ 1,085
Net Interest Income Impact (a) 173 132 510 417
------- -------- -------- --------
Total Trading-Related Revenue $ 678 $ 475 $ 1,911 $ 1,502
======= ======== ======== ========
Product Diversification:
Interest Rate Contracts (b) $ 159 $ 124 $ 559 $ 450
Foreign Exchange Contracts (c) 228 108 572 341
Debt Instruments and Other (d) 291 243 780 711
------- -------- -------- --------
Total Trading-Related Revenue $ 678 $ 475 $ 1,911 $ 1,502
======= ======== ======== ========
</TABLE>
(a) Trading-related net interest income includes interest recognized on
interest-earning and interest-bearing trading-related positions as well as
management allocations reflecting the funding cost or benefit associated
with trading positions. This amount is included in the net interest income
caption on the Consolidated Statement of Income.
(b) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures, and forward rate
agreements and related hedges.
(c) Includes foreign exchange spot and option contracts.
(d) Includes U.S. and foreign government and government agency securities,
corporate debt securities, emerging markets debt instruments, debt-related
derivatives, equity securities, equity derivatives, and commodity
derivatives.
Trading-related revenues of $678 million for the 1997 third quarter represents
the second consecutive record quarter, and are 43% above last year's third
quarter results. Revenues from foreign exchange, emerging market activities and
derivatives were particularly strong during the 1997 third quarter.
-21-
<PAGE> 22
The increase in revenue from interest rate contracts was primarily due to higher
volume as a result of volatility exhibited in the overseas markets, in
particular, Europe and Asia. The rise in foreign exchange revenue reflected
strong earnings across a broad spectrum of currencies. This was the result of
recent volatility in the Asian markets and an increase in cross-currency trading
activity in the European markets caused by uncertainty as to the integration of
the European Monetary System. Debt instruments and other revenue remained at
high levels, primarily as a result of strong performances in both emerging
markets in Latin America and Eastern Europe and the U.S. securities business.
Also contributing to the debt instruments and other category is growth in
specialty derivative products.
Trading revenues are affected by many factors, including volatility of
currencies and interest rates, the volume of transactions executed by Chase on
behalf of its customers, Chase's success in proprietary positioning, the credit
standing of Chase, and the steps taken by central banks and governments which
affect financial markets. Chase expects its trading revenues will fluctuate as
these factors will vary from period to period. On November 13, 1997, Chase
announced that total trading revenues (including trading-related net interest
income) for the month of October amounted to a loss of approximately $160
million before tax. The loss was the result of unusually volatile and
adverse trading markets in the latter part of October, characterized by sharp
declines and a loss of liquidity for certain securities, particularly emerging
markets securities. See "Market Developments Since September 30, 1997".
OTHER NONINTEREST REVENUE
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -----------
(in millions) 1997 1996 1997 1996
-------- -------- ---------- -------
<S> <C> <C> <C> <C>
Securities Gains $ 58 $ 34 $ 189 $ 110
Revenue from Equity-Related Investments 243 112 586 554
Other Revenue:
Residential Mortgage Origination/Sales Activities $ 37 $ 15 $ 98 $ 41
Gain on Sale of a Partially-Owned Foreign Investment -- -- 44 --
Loss on Sale of a Building in Japan -- -- -- (60)
Net Losses on Emerging Markets Securities Sales -- -- -- (65)
All Other Revenue 65 96 270 264
-------- -------- -------- -------
Total Other Revenue $ 102 $ 111 $ 412 $ 180
======== ======== ======== =======
</TABLE>
Securities gains resulted from sales from the available-for-sale portfolio made
in connection with Chase's asset/liability management activities. The higher
gains in 1997 were primarily the result of sales of U.S. Government and agency
securities in the 1997 third and second quarters and sales of securities
overseas in the 1997 first quarter.
Revenue from equity-related investments includes income from domestic and
international venture capital activities. The 1997 third quarter results of $243
million were a record for Chase and were significantly higher than the prior
year's quarter and the quarterly average of approximately $180 million for the
previous eight quarters. During the 1997 third quarter, gains in Chase's
portfolio reflected market conditions which continued to favor corporate mergers
and small-cap stocks. For the first nine months of 1997, revenue from
equity-related investments was $586 million, an increase of 6% compared with
1996. At September 30, 1997, the carrying value of Chase's equity-related
investments approximated $3.2 billion. Chase believes that equity-related
investments will continue to make contributions to its earnings although the
timing of the recognition of gains is unpredictable and revenues could vary
significantly from period to period.
Other revenue declined $9 million in the 1997 third quarter, but rose $232
million for the first nine months, when compared with the prior year's periods.
The 1997 results included higher residential mortgage origination and sales
revenue resulting from favorable secondary market conditions and higher gains on
portfolio sales.
All other revenue also includes Chase's investment in CIT Group Holdings, Inc.
("CIT"), which contributed revenue of $16 million in the third quarter and $48
million for the first nine months of 1997, compared with $12 million and $37
million in the respective 1996 periods.
-22-
<PAGE> 23
NONINTEREST EXPENSE
Noninterest expense, excluding restructuring costs, was $2,590 million in the
1997 third quarter, an increase of 13% from the prior year's quarter, and was
$7,407 million for the first nine months of 1997, an increase of 5% from the
same 1996 period. The 1997 results for both periods included investment spending
on new product offerings and technology, higher incentive costs and the
accelerated vesting of stock based incentive awards. Partially offsetting these
expenses were incremental merger savings of $130 million and $520 million,
respectively, in the 1997 third quarter and first nine months.
For the 1997 third quarter and first nine months, underlying operating
noninterest expense growth was 14% and 10%, respectively (see Glossary of Terms
on page 47). Management believes that underlying operating noninterest expense
growth for the full year of 1997 will exceed 6% due to investment spending in
targeted growth businesses.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -----------
(in millions) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries $ 1,292 $ 1,040 $ 3,526 $ 3,162
Employee Benefits 206 211 647 741
Occupancy Expense 194 204 574 632
Equipment Expense 192 179 575 544
Foreclosed Property Expense 6 2 9 (15)
Other Expense 700 652 2,076 1,963
---------- --------- ---------- ---------
Total Before Restructuring Costs 2,590 2,288 7,407 7,027
Restructuring Costs 71 32 172 1,710
---------- --------- ---------- ---------
Total $ 2,661 $ 2,320 $ 7,579 $ 8,737
========== ========= ========== =========
Efficiency Ratio 56.7% 58.2% 57.3% 58.7%
Efficiency Ratio Excluding Securitizations 53.4% 56.1% 54.0% 56.8%
</TABLE>
SALARIES AND EMPLOYEE BENEFITS
The increase in salaries for the 1997 third quarter and first nine months was
primarily due to higher incentive costs as a result of higher earnings,
particularly trading results, investments in a number of growth businesses, as
well as competitive market pressures across many segments of the Global
Wholesale franchise. Also, the increase in salaries for both 1997 periods
reflected the accelerated vesting of stock-based incentive awards which resulted
in a charge of $85 million in the 1997 third quarter and $50 million in the 1997
first quarter.
The following table presents Chase's full-time equivalent employees.
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
1997 1996 1996
------------- ------------ -------------
<S> <C> <C> <C>
Domestic Offices 58,164 57,592 57,629
Foreign Offices 10,232 10,193 10,199
------ ------ ------
Total Full-Time Equivalent Employees 68,396 67,785 67,828
====== ====== ======
</TABLE>
The slight increase in full-time equivalent employees since December 31, and
September 30, 1996 reflects planned growth in selected businesses.
Employee benefits were down slightly in the 1997 third quarter, and decreased
$94 million for the nine month period. Included in the results for 1996 was a
$40 million charge related to conforming retirement benefits provided to foreign
employees. Contributing to the decline in employee benefits during 1997 was
lower pension expense.
-23-
<PAGE> 24
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense in the 1997 third quarter and first nine months decreased by
$10 million and $58 million, respectively. These decreases were largely a result
of the consolidation of operations and branch facilities from merger integration
efforts. The higher level of equipment expense was primarily the result of
increased software expenses to enhance processing systems throughout Chase, and
technology expenditures necessary to support targeted growth businesses.
RESTRUCTURING COSTS
In connection with the merger of The Chase Manhattan Corporation ("heritage
Chase") and Chemical Banking Corporation ("heritage Chemical"), $1.9 billion of
one-time merger-related costs were identified, of which $1.65 billion was taken
as a restructuring charge on March 31, 1996. The remaining merger-related
expenses originally estimated at $250 million did not qualify for immediate
recognition under an existing accounting pronouncement and were not included in
the $1.65 billion charge. Merger-related expenses of $71 million were incurred
in the third quarter 1997, resulting in cumulative-to-date merger-related
expenses of $336 million.
Chase currently expects that merger-related expenses will rise by $100 million
to $125 million from its previous estimate of $250 million. These additional
costs primarily relate to technology and systems integration costs.
At September 30, 1997, the reserve balance associated with the $1.65 billion
merger-related restructuring charge was approximately $550 million, the
majority of which is related to the disposition of certain facilities, premises
and equipment.
OTHER EXPENSE
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -----------
(in millions) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OTHER EXPENSE:
Professional Services $ 139 $ 127 $ 408 $ 397
Marketing Expense 90 73 300 236
Telecommunications 77 82 225 249
Amortization of Intangibles 41 42 123 127
Minority Interest 19 16 58 36
All Other 334 312 962 918
---------- --------- --------- ---------
Total $ 700 $ 652 $ 2,076 $ 1,963
========== ========= ========= =========
</TABLE>
Other expense for the 1997 third quarter and first nine months increased by $48
million and $113 million, respectively. The increase includes expenses related
to marketing and other costs for the co-branding of the Wal-Mart MasterCard
which began in the fourth quarter of 1996. Also contributing to the increase in
marketing expense is the promotion of PC Banking, and Better Banking products
and services. In addition, there is approximately $11 million per quarter of
minority interest expense associated with the REIT, which commenced in the 1996
fourth quarter. Partially offsetting these increases were lower
telecommunications expenses for both 1997 periods, due to Chase's sourcing and
other expense-reduction initiatives.
INCOME TAXES
Chase recognized income tax expense of $576 million in the third quarter of
1997, compared with $527 million in the third quarter of 1996. For the first
nine months, Chase recorded income tax expense of $1,687 million in 1997,
compared with $837 million in 1996. The 1996 amount includes tax benefits
related to the restructuring charge as well as aggregate tax benefits and
refunds of $132 million. Chase's effective tax rate was 37.0% for the third
quarter and 37.3% for the first nine months of 1997, compared with 38.0%
(excluding the aforementioned tax benefits and refunds) for both 1996 periods.
-24-
<PAGE> 25
LINES OF BUSINESS RESULTS
Chase is managed using an economic-based risk-adjusted management information
system ("MIS"). Chase's businesses are organized into two major business
franchises, Global Wholesale Banking and Regional and Nationwide Consumer
Banking ("RNCB"). Within each of these franchises, key businesses are measured
independently on a profit and loss and rate of return basis, as well as by other
key performance measures. Highlights of key business performance measures
follow, reflecting MIS results.
LINES OF BUSINESS RESULTS
<TABLE>
<CAPTION>
Global Wholesale Regional and Nationwide
For Three Months Ended Banking Consumer Banking Total (a)
September 30, ---------------------- --------------------------- -------------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 894 $ 814 $ 1,575 $ 1,503 $ 2,046 $ 2,026
Noninterest Revenue 1,601 1,222 679 566 2,363 1,899
Noninterest Expense 1,244 1,170 1,154 1,136 2,584 2,286
----------- ---------- ----------- ---------- ---------- ----------
Operating Margin 1,251 866 1,100 933 1,825 1,639
Credit Costs 78 81 472 371 196 222
----------- ---------- ----------- ---------- ---------- ----------
Income Before Taxes 1,173 785 628 562 1,629 1,417
Income Taxes 437 294 241 215 602 539
----------- ---------- ----------- ---------- ---------- ----------
Operating Net Income 736 491 387 347 1,027 878
Restructuring Costs (25) (13) (14) (9) (45) (20)
----------- ---------- ----------- ---------- ---------- ----------
Net Income $ 711 $ 478 $ 373 $ 338 $ 982 $ 858
=========== ========== =========== ========== ========== ==========
Average Common Equity $ 9,884 $ 9,535 $ 6,601 $ 6,483 $ 19,023 $ 17,845
Average Assets $ 248,181 $ 217,921 $ 122,241 $ 114,417 $ 360,314 $ 322,913
Return on Common Equity 28.7% 19.3% 22.4% 20.0% 20.6% 18.4%
Efficiency Ratio 50% 57% 51% 55% 59% 58%
</TABLE>
<TABLE>
<CAPTION>
For Nine Months Ended Global Wholesale Regional and Nationwide
Banking Consumer Banking Total (a)
September 30, ---------------------- --------------------------- -------------------------
(in millions, except ratios) 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 2,644 $ 2,534 $ 4,660 $ 4,425 $ 6,079 $ 6,127
Noninterest Revenue 4,489 3,854 1,930 1,687 6,620 5,793
Noninterest Expense 3,621 3,502 3,467 3,392 7,398 7,002
----------- ---------- ----------- ---------- ---------- ----------
Operating Margin 3,512 2,886 3,123 2,720 5,301 4,918
Credit Costs 230 233 1,396 1,057 608 700
----------- ---------- ----------- ---------- ---------- ----------
Income Before Taxes 3,282 2,653 1,727 1,663 4,693 4,218
Income Taxes 1,204 997 673 644 1,751 1,603
----------- ---------- ----------- ---------- ---------- ----------
Operating Net Income 2,078 1,656 1,054 1,019 2,942 2,615
Restructuring Costs (58) (20) (33) (14) (108) (1,060)
Nonrecurring Items (b) -- -- -- -- -- 70
----------- ---------- ----------- ---------- ---------- ----------
Net Income $ 2,020 $ 1,636 $ 1,021 $ 1,005 $ 2,834 $ 1,625
=========== ========== =========== ========== ========== ==========
Average Common Equity $ 9,539 $ 9,619 $ 6,582 $ 6,452 $ 18,583 $ 17,762
Average Assets $ 240,882 $ 215,931 $ 119,968 $ 112,266 $ 349,569 $ 317,824
Return on Common Equity 28.1% 21.8% 20.4% 19.9% 20.1% 18.4%
Efficiency Ratio 51% 55% 53% 56% 58% 59%
</TABLE>
(a) Total column includes Corporate results. See description of Corporate on
page 30.
(b) Nonrecurring items for 1996 include the loss on the sale of a building in
Japan, costs incurred in combining Chase's foreign retirement plans and
aggregate tax benefits and refunds.
-25-
<PAGE> 26
GLOBAL WHOLESALE BANKING
Global Wholesale Banking provides financing, advisory, sales and trading, trade
finance, asset management, private banking and operating services. Clients
include corporations, institutions, governments and wealthy individuals located
around the world. Through its Global Wholesale Banking businesses, Chase is
driving towards a new model for the delivery of global financial services,
integrating product expertise, industry knowledge and geographic reach to effect
superior customer solutions. Global Wholesale Banking operates in more than 50
countries, including major operations in all key international financial
centers. Terminal Businesses, representing discontinued portfolios (primarily
the remaining refinancing country debt and commercial real estate problem asset
and nonperforming portfolios), are also included in Global Wholesale Banking.
Global Wholesale Banking's operating net income for the third quarter of 1997
was $736 million, an increase of $245 million over the 1996 third quarter.
Operating return on equity in the third quarter of 1997 was 28.7% compared with
19.3% in 1996. Global Wholesale Banking's operating net income of $2,078 million
and operating return on equity of 28.1% for the first nine months of 1997
increased from last year's results of $1,656 million and 21.8%, respectively.
These favorable results were due to significant revenue growth
throughout Chase's wholesale businesses, primarily higher trading-related
revenue due to increases in foreign exchange and interest rate activities,
strong growth in specialty derivative products and continued high levels of
securities trading and underwriting.
The following table sets forth certain key financial performance measures of the
businesses within Global Wholesale Banking for the periods indicated.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- ----------------------------------------------
Three Months Ended NET EFFICIENCY Net Efficiency
September 30, REVENUES INCOME ROCE RATIO Revenues Income ROCE Ratio
(in millions, except ratios) -------- ------ ---- ---------- -------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Global Wholesale Banking:
Global Investment Banking
and Corporate Lending $ 577 $ 177 19.5% 40% $ 577 $ 181 20.2% 38%
Global Markets 869 287 44.9 48 684 217 37.7 51
Chase Capital Partners 220 123 35.1 12 69 33 10.5 24
Global Asset Management
and Private Banking 199 43 42.5 64 163 27 22.1 71
Global Services 558 103 42.0 70 496 64 22.9 79
Terminal Businesses 25 -- NM NM 1 (20) NM NM
1997 1996
-------------------------------------------- ----------------------------------------------
Nine Months Ended NET EFFICIENCY Net Efficiency
September 30, REVENUES INCOME ROCE RATIO Revenues Income ROCE Ratio
(in millions, except ratios)
Global Wholesale Banking:
Global Investment Banking
and Corporate Lending $ 1,614 $ 491 18.2% 39% $ 1,676 $ 535 19.9% 37%
Global Markets 2,590 898 52.5 46 1,985 595 33.6 54
Chase Capital Partners 532 292 33.2 13 529 300 36.6 9
Global Asset Management
and Private Banking 552 110 32.9 67 499 87 24.1 69
Global Services 1,593 262 33.0 73 1,459 189 22.6 79
Terminal Businesses 51 (20) NM NM 30 (40) NM NM
NM - Not meaningful.
</TABLE>
-26-
<PAGE> 27
GLOBAL INVESTMENT BANKING AND CORPORATE LENDING
Global Investment Banking and Corporate Lending finances and advises
corporations, financial sponsors and governments by providing integrated
one-stop financial solutions and industry expertise to clients globally. Client
industries include broker/dealers, chemicals, healthcare, insurance, media and
telecommunications, multinationals, natural resources, oil and gas, power and
environmental, real estate, retail and transportation. Product offerings
encompass syndicated finance, high-yield securities, merger and acquisitions,
project finance, restructuring, private placements, lease financing and lending.
Chase continues to maintain its lead position in loan syndication and in
leveraged finance. Net income for the third quarter of 1997 was $177 million,
relatively flat when compared to the third quarter of 1996 reflecting higher
corporate finance and syndication fees due to market share gains in high-yield
underwriting and higher levels of corporate finance activities outside the
United States. These increases were offset by the favorable impact of a large
transaction gain during the 1996 third quarter. For the first nine months of
1997, net income of $491 million decreased $44 million compared with the same
period in 1996 due to a decline in net interest income coupled with the
favorable impact on the 1996 nine month results of several large transactions.
GLOBAL MARKETS
Global Markets' activities encompass the trading and sales of foreign exchange,
derivatives, fixed income securities and commodities, including related
origination functions. A leader in capital markets, Chase operates 24 hours a
day covering the major international cross-border financial markets, as well as
many local markets in both developed and developing countries. Global Markets is
a recognized world leader in such key activities as foreign exchange, interest
rate swaps and emerging markets debt. The strong growth in trading-related
revenue contributed to the favorable 1997 results. For the third quarter of
1997, net income was $287 million with a return on common equity of 45%,
compared with 1996's third quarter results of $217 million and 38%,
respectively. For the first nine months of 1997, net income was $898 million
with a return on common equity of 53% representing a substantial increase from
the first nine months results of 1996 of $595 million and 34%, respectively.
Trading-related revenue of $638 million for the 1997 third quarter reflected
record trading results and is an increase of 30% from last year's third quarter
results. These results reflect the benefits during the first nine months of
1997 of increasing demand and a positive trading environment. For the first
nine months of 1997, trading-related revenue was $1,868 million, an increase of
27% from last year's results driven by higher foreign exchange, derivatives, and
securities results worldwide. Also, included within Global Markets are the
domestic and international treasury units which have the primary responsibility
of managing Chase's asset/liability and investment securities activities. ALM
activities in the treasury units are managed on a total return basis with one
of the major objectives being the creation of economic value over time. The
gross total return from ALM activities for the 1997 third quarter was $134
million and for the first nine months of 1997 was $557 million.
CHASE CAPITAL PARTNERS
Chase Capital Partners ("CCP") is a global private equity organization with
approximately $4.6 billion under management, including $3.2 billion in
equity-related investments. CCP provides equity and mezzanine financing and
employs professionals focused on investing in the United States, Europe, Asia
and Latin America, for a wide variety of investment opportunities. During the
first nine months of 1997, CCP's direct investments totaled $433 million in over
73 venture capital, management buyout, recapitalization, growth equity and
mezzanine transactions. Net income for the third quarter of 1997 was $123
million, a $90 million increase from the 1996 third quarter, reflecting
significant equity-related gains as market conditions continued to favor
corporate mergers and small-cap stocks. For the first nine months of 1997, net
income was $292 million, an $8 million decrease from last year's nine month
results, reflecting a lower number of large transaction gains in 1997 when
compared with the same period in 1996.
GLOBAL ASSET MANAGEMENT AND PRIVATE BANKING
The Global Asset Management and Private Banking group serves a global client
base of wealthy individuals, institutional investors and mutual fund investors.
Services include asset management for institutional investors, Vista Mutual
Funds (at September 30, 1997, the fourth largest bank-managed fund family in the
U.S.), and a full range of private banking capabilities, including investment
management, trust and estates, custody, and advisory services for wealthy
individuals around the world. Total assets under management amounted to $152
billion at September 30, 1997. Net income was $43 million in the 1997 third
quarter, a $16 million increase from the third quarter of 1996, reflecting an
increased volume of global banking transactions for private banking clients and
higher levels of client assets. For the first nine months of 1997, net income
grew 26% to $110 million, with a return on common equity of 33%, due to a higher
level of assets under management and increased investment advisory activities.
The 1996 nine month results included a $23 million pre-tax gain on the sale of
certain deposits.
GLOBAL SERVICES
Global Services is a leading provider of information and transaction services
globally. As the world's largest provider of global custody and a leader in
trust and agency services, Global Services was custodian for over $4.0 trillion
in assets at September 30, 1997 and serviced over $1.6 trillion in outstanding
debt. Global Services also operates the largest U.S. dollar funds transfer
business in the world and is a market leader in FedWire, ACH and CHIPS volume.
Net income in the third quarter of 1997 was $103 million, an increase of $39
million or 61% from 1996 third quarter. For the first nine months of 1997, net
income increased 39% from last year's results to $262 million. Return on common
equity for the 1997 third quarter was 42% and for the first nine months of 1997,
it was 33%; excluding the impact of goodwill, the return on tangible common
equity was 56% and 44%, respectively. These favorable results are due to strong
revenue growth primarily in global investor services and global trust,
reflecting an increase in assets under custody and new business initiatives, as
well as continued productivity gains.
-27-
<PAGE> 28
REGIONAL AND NATIONWIDE CONSUMER BANKING (RNCB)
The Regional and Nationwide Consumer Banking franchise, as of September 30,
1997, included the fourth-largest bank credit card issuer in the U.S., the
third-largest originator and the second-largest servicer of residential
mortgages and a leading provider of auto financing and other consumer lending
products. Chase maintains a leading market share position in the New York
metropolitan tri-state area in serving the financial needs of consumers, middle
market commercial enterprises and small businesses. It offers customers
convenient access to financial services by telephone, PC, and the Internet, and
has the most branches and ATMs in the New York metropolitan tri-state area.
Additionally, included in RNCB is Texas Commerce Bank, which is the
second-largest bank in Texas and a leader in providing financial products and
services to businesses and individuals throughout Texas. RNCB also includes a
small international consumer presence which is highly profitable.
RNCB's operating net income for the third quarter of 1997 was $387 million, a
$40 million increase from the 1996 third quarter. For the first nine months of
1997, RNCB's operating net income was $1,054 million, a $35 million increase
when compared with last year's results. The favorable impacts from higher
revenue (which was driven by higher loan volume in credit cards and mortgage
banking products) and from the benefit of merger-related savings were partially
offset by higher credit provisions for credit cards and auto loans and higher
expenses related to marketing initiatives and new product offerings.
The following table sets forth certain key financial performance measures of the
businesses within RNCB for the periods indicated.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ -------------------------------------------
Three Months Ended NET EFFICIENCY Net Efficiency
September 30, REVENUES (a) INCOME ROCE RATIO Revenues Income ROCE Ratio
-------- ------ ---- ----- -------- ------ ---- -----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regional and Nationwide
Consumer Banking:
Credit Cards $ 778 $ 86 18.5% 34% $ 674 $ 81 21.7% 37%
Retail Payments and
Investments 519 82 30.0 72 509 68 24.5 76
Middle Market 209 52 23.8 49 204 46 16.7 53
Mortgage Banking 194 51 19.2 (b) 53 168 35 10.6 60
National Consumer Finance 163 32 27.8 40 144 31 26.1 43
International Consumer 65 12 61.2 67 64 15 77.6 58
Texas Commerce 348 84 22.6 59 314 72 20.3 62
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ ----------------------------------------------
Nine Months Ended NET EFFICIENCY Net Efficiency
September 30, REVENUES (a) INCOME ROCE RATIO Revenues Income ROCE Ratio
-------- ------ ---- ----- -------- ------ ---- -----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regional and Nationwide
Consumer Banking:
Credit Cards $2,228 $ 180 14.7% 37% $ 1,949 $ 224 19.9% 39%
Retail Payments and
Investments 1,548 241 29.2 73 1,514 212 25.9 75
Middle Market 632 162 21.6 48 620 142 17.6 52
Mortgage Banking 566 143 16.1 (b) 54 492 84 8.5 66
National Consumer Finance 480 87 25.3 41 447 101 29.4 42
International Consumer 195 41 71.4 62 188 44 76.9 59
Texas Commerce 993 222 19.9 61 925 204 19.2 63
</TABLE>
(a) Insurance products are managed within Retail Payments and Investments but
are included for reporting purposes in Credit Cards, Mortgage Banking, and
National Consumer Finance. These insurance products, in the aggregate,
generated revenues of $24 million and $20 million for the third quarter
of 1997 and 1996, respectively, and $74 million and $55 million for the
first nine months of 1997 and 1996, respectively.
(b) Excluding the impact of goodwill, the return on tangible common equity was
28% for the third quarter of 1997 and 23% for the first nine months of
1997.
-28-
<PAGE> 29
CREDIT CARDS
Chase Cardmember Services ranked as the fourth largest bank card issuer in the
United States as of September 30, 1997, with a $27.4 billion managed portfolio.
Included in the portfolio is $4.7 billion in outstandings related to the
co-branded Shell MasterCard. For the third quarter of 1997, net income
(reflected on a managed basis) was $86 million, a $5 million increase from the
1996 third quarter. For the first nine months of 1997, net income was $180
million, a $44 million decrease from the same period in 1996. Earnings for the
first nine months of 1997 were driven by a 14% revenue increase generated from
growth in both the core portfolio and from co-branded initiatives and the
effects of higher fees and risk-based pricing initiatives. However, net income
declined as a result of higher credit card charge-offs and expenses related to
the launch of the Wal-Mart co-branded credit card.
RETAIL PAYMENTS & INVESTMENTS
At September 30, 1997, Retail Payments and Investments has the leading share of
primary bank relationships among consumers and small businesses in the New York
metropolitan tri-state area. In addition to its tri-state businesses, Retail
Payments and Investments includes discount brokerage services and Chase's
nationwide insurance and investment products. Retail Payments and Investments
allows customers to choose the way they handle their financial relationships,
offering telephone, PC and Internet banking in addition to branches and ATMs.
Net income in the third quarter of 1997 was $82 million, an increase of $14
million when compared to 1996's third quarter. For the first nine months, net
income was $241 million in 1997, an increase of $29 million from 1996. The
improvement in net income is due primarily to lower noninterest expense,
reflecting staff reductions and branch consolidations, coupled with the impact
of higher deposit volumes and higher fees from insurance products.
MIDDLE MARKET
Chase is the premier provider of financial services to middle-market companies
(companies with sales ranging from $10 to $500 million) regionally, with a
national focus in selected industries. Also, it is the market leader in the New
York metropolitan tri-state area where it has relationships with 53% of middle
market companies and is the lead bank for 25% of such companies. Net income for
the 1997 third quarter was $52 million, a $6 million increase when compared with
the 1996 third quarter, due primarily to higher corporate finance fees. For the
first nine months of 1997, net income was $162 million, a 14% increase from last
year's nine month results, due to higher deposit volume and staff reductions.
MORTGAGE BANKING
At September 30, 1997, Mortgage Banking is the third-largest originator and
second largest servicer of residential mortgage loans in the U.S., serving more
than 1.8 million customers nationwide. In 1997, Chase completed the acquisition
of Source One's $17 billion portfolio of mortgage servicing rights and at
September 30, 1997, Chase's servicing portfolio totaled $166.2 billion. In the
first nine months of 1997, $25.0 billion in loans were originated. Net income in
the third quarter of 1997 was $51 million, a $16 million increase from the 1996
third quarter. The increase is attributable to higher gains from mortgage
warehouse and sub-prime loan sales and from an increase in origination fees. For
the first nine months of 1997, net income was $143 million, a $59 million
increase from last year's nine month results, reflecting a 15% increase in
revenue. The increase is the result of a higher level of servicing assets, an
increase in net interest income due to loan growth, and a 6% decrease in
expenses due to merger saves and the productivity gains resulting from the
reengineering of the mortgage origination business. Return on common equity for
the 1997 third quarter is 19% and for the first nine months of 1997 is 16%;
however, excluding the impact of goodwill, the return on tangible common equity
is 28% and 23% for both periods, respectively.
NATIONAL CONSUMER FINANCE
National Consumer Finance is a leading provider of auto financing, home equity
secured lending, student lending, unsecured consumer lending (Chase Advantage
Credit) and manufactured housing financing. At September 30, 1997, Chase Auto
Finance had $11.6 billion in outstandings with $7.5 billion in new originations
for the first nine months of 1997. Net income in the third quarter of 1997 was
$32 million which was flat when compared with the 1996 third quarter. For the
first nine months of 1997, net income was $87 million, a $14 million decrease
from last year's nine month results. The results for both periods in 1997
include revenue growth due to an increase in loan volume, which was offset by a
higher credit provision. The growth in revenue for the first nine months of 1997
when compared to the same 1996 period, was partially offset by the impact of a
joint venture formed with Sallie Mae in the 1996 fourth quarter, which is
accounted for on the equity basis. Excluding the effects of this joint venture,
year-to-date revenue grew by 16%.
INTERNATIONAL CONSUMER
International Consumer provides loan, deposit, investment and insurance products
for individuals in Hong Kong. Also, included is The Manhattan Card Company
Limited (Chase's 54% owned subsidiary) which is the third-largest credit card
issuer in Hong Kong. Additionally, Chase has a leading full-service banking
presence in Panama and the Eastern Caribbean, providing deposit, investment and
asset products for individuals, small businesses, large corporations and
government entities. Net income for the third quarter of 1997 is $12 million and
for the first nine months of 1997 is $41 million, which is a $3 million decrease
in both periods when compared to the same 1996 periods. The 1997 nine month
results were driven by a 4% growth in revenue, reflecting higher loan volumes,
offset by higher expenses, primarily due to investment spending, and higher
credit costs.
-29-
<PAGE> 30
TEXAS COMMERCE
Texas Commerce is the primary bank for more large corporations and middle market
companies than any other bank in Texas. Texas Commerce also maintains a strong
consumer banking presence through its 125 locations. Additionally, Texas
Commerce was the largest bank for personal and corporate trust services in the
Southwest. As of September 30, 1997, Texas Commerce had $22.5 billion in total
assets. Net income for the third quarter of 1997 was $84 million, a $12 million
increase when compared with the 1996 third quarter. For the first nine months of
1997, net income was $222 million, an $18 million increase from last year's nine
month results. Texas Commerce continues to produce solid revenue growth,
reflecting an increase in fee-based activities and higher loan and deposit
volumes. This is partially offset by higher expenses and credit costs. Return on
common equity for the 1997 third quarter is 23% and for the first nine months of
1997 is 20%; however, excluding the impact of goodwill, the return on tangible
common equity is 29% and 26%, respectively.
CORPORATE
Corporate includes the management results attributed to Chase'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. The securitized portion of the credit card portfolio is included in
Corporate. Corporate also includes one-time unallocated special items such as
merger-related restructuring charges and expenses as well as tax refunds. For
the third quarter of 1997, Corporate had an operating net loss of $96 million
compared with operating net income of $40 million in the 1996 third quarter. For
the first nine months of 1997, Corporate had an operating net loss of $190
million compared to a $60 million operating net loss in the first nine months of
1996. Included in the 1997 results were $135 million of expenses related to the
accelerated vesting of stock-based incentive awards ($85 million after-tax).
Chase's economic risk-based methodology for capital is allocated on a business
unit level basis for credit, market and operating risk, with the unallocated
portion of capital included in Corporate. In 1997, Corporate had unallocated
equity of $2,538 million in the third quarter and $2,462 million in the first
nine months, compared with $1,827 million in the 1996 third quarter and $1,691
million in the first nine months of 1996. The increases in unallocated capital
reflects the continued improvement of the overall risk profile of Chase and the
generation of retained earnings.
Lines-of-business results are subject to restatement as appropriate whenever
there are refinements in management reporting policies or changes to the
management organization. The current presentation of the lines-of-business
results have been restated to reflect a single, uniform post-merger set of
management accounting policies.
Guidelines exist for assigning expenses that are not directly incurred by the
businesses, such as overhead and taxes, as well as for allocating shareholders'
equity and the provision for credit losses, utilizing a risk-based methodology.
Also, incorporated in the guidelines is a process for matching assets and
liabilities with similar maturity, liquidity and interest characteristics within
each business. Noninterest expenses of Chase are fully allocated to the business
units except for special corporate one-time charges. The provision for credit
losses is allocated to the wholesale bank and commercial businesses based on a
consistently applied credit risk methodology and a risk-grading system
appropriate for a business unit's portfolio. For the retail consumer businesses,
provision for credit losses are assigned utilizing a net charge-off methodology.
Long-term expected tax rates are assigned in evaluating Chase's businesses.
CREDIT RISK MANAGEMENT
The following discussion of Chase's credit risk management focuses primarily on
developments since December 31, 1996 and should be read in conjunction with
pages 48-54 of Chase's 1996 Annual Report. A description of Chase's accounting
policies for its nonperforming assets is provided in Note One of Chase's 1996
Annual Report.
LOAN PORTFOLIO
Chase's loans outstanding totaled $163.1 billion at September 30, 1997, compared
with $155.1 billion at the 1996 year-end. The increase reflects higher demand
for consumer and commercial loans, partially offset by the impact of credit
card, auto loan, residential and commercial mortgage securitizations.
Chase's nonperforming assets at September 30, 1997 were $1,036 million, a
decrease of $115 million from the 1996 year-end level. The reduction reflects
the ongoing improvement in Chase's credit profile as a result of a lower level
of loans being placed on nonperforming status, repayments, charge-offs, and
continuing loan workout and collection activities.
Total net charge-offs were $190 million in the third quarter of 1997, compared
with $220 million for the comparable period in 1996. For the first nine months,
net charge-offs were $599 million in 1997, compared with $715 million in 1996.
The amount for the first nine months of 1996 excludes a charge of $102 million
related to conforming the credit card charge-off policies of the two predecessor
banks. Total net charge-offs (on a managed basis, which excludes the impact of
credit card securitizations) were $436 million in the 1997 third quarter,
compared with $364 million in the third quarter of 1996. For the first nine
months, total net charge-offs (on a managed basis) were $1,315 million in 1997,
compared with $1,098 million in 1996 (excluding the aforementioned charge of
$102 million). The increases in managed net charge-offs for both 1997 periods
reflect growth in average managed credit card outstandings and higher levels of
personal bankruptcies and delinquencies.
-30-
<PAGE> 31
The following table presents Chase's loan-related information for the dates
indicated.
<TABLE>
<CAPTION>
PAST DUE 90 DAYS AND OVER
LOANS NONPERFORMING ASSETS & STILL ACCRUING
------------------------ -------------------- -------------------------
SEPT 30, Dec 31, SEPT 30, Dec 31, SEPT 30, Dec 31,
(in millions) 1997 1996 1997 1996 1997 1996
-------- -------- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC CONSUMER:
Residential Mortgage(a) $ 38,730 $ 36,621 $324 $ 249 $ 2 $ 7
Credit Card 11,618 12,157 -- -- 180 267
Auto Financings 13,437 11,121 22 28 16 6
Other Consumer(b) 8,275 9,185 10 7 115 115
-------- -------- ---- ------ ---- ----
Total Domestic Consumer 72,060 69,084 356 284 313 395
-------- -------- ---- ------ ---- ----
DOMESTIC COMMERCIAL:
Commercial and Industrial 38,846 34,742 308 444 20 19
Commercial Real Estate(c) 6,555 5,934 119 156 10 8
Financial Institutions 5,062 5,540 2 2 -- --
-------- -------- ---- ------ ---- ----
Total Domestic Commercial 50,463 46,216 429 602 30 27
-------- -------- ---- ------ ---- ----
Total Domestic 122,523 115,300 785 886 343 422
-------- -------- ---- ------ ---- ----
FOREIGN:
Commercial and Industrial 25,455 23,109 96 79 -- 6
Commercial Real Estate 772 800 -- 1 -- --
Financial Institutions & Foreign Gov't 10,645 12,597 29 38 -- --
Consumer 3,692 3,286 21 17 6 6
-------- -------- ---- ------ ---- ----
Total Foreign 40,564 39,792 146 135 6 12
-------- -------- ---- ------ ---- ----
TOTAL LOANS $163,087 $155,092 931 1,021 $349 $434
======== ======== ---- ------ ==== ====
Assets Acquired as Loan Satisfactions 105 130
---- ------
TOTAL NONPERFORMING ASSETS $ 1,036 $ 1,151
======== ========
</TABLE>
<TABLE>
<CAPTION>
NET CHARGE-OFFS
-----------------------------------------------
NINE MONTHS ENDED
THIRD QUARTER SEPTEMBER 30,
(in millions) 1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
DOMESTIC CONSUMER:
Residential Mortgage(a) $ 8 $ 7 $ 21 $ 22
Credit Card 132 152 403 462
Auto Financings 15 11 42 25
Other Consumer(b) 41 40 129 103
----- ----- ----- -----
Total Domestic Consumer 196 210 595 612
----- ----- ----- -----
DOMESTIC COMMERCIAL:
Commercial and Industrial 15 (4) 33 90
Commercial Real Estate(c) (13) 6 (23) 32
Financial Institutions (1) -- (1) --
----- ----- ----- -----
Total Domestic Commercial 1 2 9 122
----- ----- ----- -----
Total Domestic 197 212 604 734
----- ----- ----- -----
FOREIGN:
Commercial and Industrial (4) 5 (7) (15)
Commercial Real Estate -- -- -- (2)
Financial Institutions & Foreign Gov't (6) -- (7) (8)
Consumer 3 3 9 6
----- ----- ----- -----
Total Foreign (7) 8 (5) (19)
----- ----- ----- -----
TOTAL LOANS 190 220 599 715
----- ----- ----- -----
Charge Related to Conforming
Credit Card Charge-off Policies -- -- -- 102
----- ----- ----- -----
TOTAL $ 190 $ 220 $ 599 $ 817
===== ===== ===== =====
</TABLE>
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured revolving lines of credit. There are
essentially no credit losses in the student loan portfolio due to the
existence of Federal and State government agency guarantees. Student loans
which were past due 90 days and over and still accruing were approximately
$38 million and $54 million at September 30, 1997 and December 31, 1996,
respectively.
(c) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
-31-
<PAGE> 32
DOMESTIC CONSUMER PORTFOLIO
Residential Mortgage Loans: Residential mortgage loans were $38.7 billion at
September 30, 1997, reflecting a $2.1 billion increase during 1997 largely due
to a higher level of adjustable-rate loan outstandings. At September 30, 1997,
nonperforming domestic residential mortgage loans as a percentage of the
portfolio was 0.84%, compared with 0.68% at the 1996 year-end.
The following table presents the residential mortgage servicing portfolio
activity for the periods indicated. A discussion of Chase's mortgage servicing
and loan origination activities is included on pages 49-50 of Chase's 1996
Annual Report.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------------ -------------------
(in billions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 162.9 $ 133.3 $ 140.7 $ 132.1
Originations 9.8 6.7 25.0 22.3
Acquisitions -- -- 16.8 (a) 1.1
Repayments and Sales (6.5) (5.1) (16.3) (20.6)
------- ------- -------- -------
Balance at September 30, $ 166.2 $ 134.9 $ 166.2 $ 134.9
======= ======= ======== =======
</TABLE>
(a)Represents acquisition of Source One servicing portfolio in February 1997.
Mortgage servicing rights ("MSRs"), which are included in other assets, amounted
to $1,861 million at September 30, 1997, compared with $1,404 million at
December 31, 1996. The higher level of MSRs reflects the corresponding increase
in Chase's residential mortgage servicing portfolio partly due to the
acquisition of the Source One servicing portfolio. The Source One acquisition
added $246 million of MSRs at September 30, 1997. Chase continually evaluates
prepayment exposure of the servicing portfolio, adjusting the balance and
remaining life of the servicing rights as a result of prepayments, and utilizes
derivative contracts (interest rate swaps and purchased option contracts) to
reduce its exposure to such prepayment risks. At September 30, 1997, the
carrying value of these derivative contracts was $113 million, and gross
unrecognized gains and losses were $51 million and $35 million, respectively,
resulting in an estimated positive fair value of $129 million.
Credit Card Loans: Chase analyzes its credit card portfolio on a "managed
basis", which includes credit card receivables on the balance sheet as well as
credit card receivables that have been securitized. During the third quarter of
1997, Chase securitized $2.0 billion of credit card receivables. No credit card
receivables were securitized during the third quarter of 1996. During the first
nine months of 1997, Chase securitized $3.4 billion of credit card receivables,
compared with $5.8 billion in the same 1996 period. For the third quarter of
1997, average managed receivables were $27.1 billion, compared with $23.9
billion in the 1996 third quarter, reflecting the continued growth in credit
card outstandings.
-32-
<PAGE> 33
The following table presents credit-related information for Chase's managed
credit card receivables.
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
(in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average Managed Credit Card Receivables $27,089 $23,936 $25,996 $23,457
Past Due 90 Days & Over and Accruing $ 523 $ 469 $ 523 $ 469
As a Percentage of Average Credit Card Receivables 1.93% 1.96% 2.01% 2.00%
Net Charge-offs (a) $ 378 $ 296 $ 1,119 $ 845
As a Percentage of Average Credit Card Receivables 5.57% 4.95% 5.74% 4.80%
</TABLE>
(a) Excludes charge related to conforming the credit card charge-off policies of
heritage Chase and heritage Chemical.
The increase in net charge-offs on managed credit card receivables for both the
three-month and nine-month periods ending September 30, 1997, when compared with
the same 1996 periods, reflects growth in average managed credit card
outstandings and higher levels of personal bankruptcies and delinquencies. Net
charge-offs for the 1997 third quarter have decreased when compared with the
1997 second quarter. This decrease is due to the slight improvement in the
levels of personal bankruptcies and delinquencies during the 1997 third quarter.
Management currently believes that credit card net charge-offs peaked in the
second quarter of 1997. Additionally, management expects that Chase's credit
card net charge-offs, as a percentage of average managed credit card
receivables, will be approximately 5.6% to 5.7% for the full year 1997.
During October 1997 Chase agreed to purchase substantially all of The Bank of
New York's credit card portfolio, totaling approximately 3.5 million accounts
and approximately $4.0 billion in outstandings. The acquisition is expected to
be completed by year-end 1997.
Credit Card Securitizations: For a discussion of Chase's credit card
securitizations, see page 51 of Chase's 1996 Annual Report.
The following table outlines the impact of the securitizations of credit card
receivables by showing the favorable (unfavorable) change in the reported
Consolidated Statement of Income line items for the periods indicated.
<TABLE>
<CAPTION>
Favorable (Unfavorable) Impact THIRD QUARTER NINE MONTHS
-------------------- --------------------
(in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Interest Income $(319) $(244) $(913) $(639)
Provision for Credit Losses 249 148 730 409
Credit Card Revenue 58 95 152 217
Other Revenue (7) -- (9) 11
----- ----- ----- -----
Pre-tax Income (Loss) Impact of Securitizations $ (19) $ (1) $ (40) $ (2)
===== ===== ===== =====
</TABLE>
The pre-tax loss on securitizations for both 1997 periods is due to the impact
of upfront losses arising at the time of the securitizations in 1997 (as a
result of the implementation of SFAS 125), which will be subsequently recovered
as higher credit card revenue over the life of the securitizations. In addition,
the amortization of gains from prior years' securitizations reduced the 1997
pre-tax amounts. Credit card securitizations have no net pre-tax impact on
Chase's income statement over the life of a securitization. Therefore, the
amounts in the above table reflect the timing of gain/loss recognition
associated with these securitizations.
Auto Financings: The auto financing portfolio, which consists of auto loans and
leases, was $13.4 billion at September 30, 1997 and $11.1 billion at December
31, 1996. The increase reflected continued strong consumer demand due to
favorable pricing programs, partially offset by the impact of auto loan
securitizations. Total originations were $8.2 billion in the first nine months
of 1997, compared with $9.3 billion in the same 1996 period. Chase securitized
approximately $2.1 billion of auto loans during the first nine months of 1997,
compared with $3.0 billion during the first nine months of 1996. Net charge-offs
related to auto financings were $15 million in the 1997 third quarter, compared
with $11 million in the same period in 1996. For the first nine months, net
charge-offs of auto financings were $42 million in 1997, compared with $25
million in 1996. The increased level of net charge-offs related to auto
financings in both 1997 periods primarily reflects growth in the portfolio and
unfavorable performance in a discontinued product line.
-33-
<PAGE> 34
Other Consumer Loans: Other consumer loans, which includes student loans,
unsecured revolving lines of credit, and secured installment loans, decreased by
$.9 billion at September 30, 1997. This decrease was due to the sale of
recreational vehicle and marine loan portfolios in the 1997 third quarter. The
increase in net charge-offs for the 1997 first nine months reflects higher
personal bankruptcies related to unsecured revolving lines of credit.
DOMESTIC COMMERCIAL PORTFOLIO
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $38.8 billion at September 30, 1997, an increase
from $34.7 billion at December 31, 1996. The portfolio consists primarily of
loans made to large corporate and middle market customers and is broadly
diversified geographically and by industry.
Nonperforming domestic commercial and industrial loans were $308 million at
September 30, 1997, compared with $444 million at December 31, 1996. In the
third quarter of 1997, Chase had net charge-offs of $15 million compared with
net recoveries of $4 million in the third quarter of 1996. For the first nine
months, net charge-offs were $33 million in 1997 compared with $90 million in
1996.
Management expects commercial and industrial loan net charge-offs for full-year
1997 to be equal to or lower than the 1996 full-year level, primarily as a
result of the continued strong performance in the commercial and industrial
loan portfolio.
Domestic Commercial Real Estate Portfolio: The domestic commercial real estate
portfolio represents loans secured primarily by real property, other than loans
secured by one-to-four family residential properties (which are included in the
consumer loan portfolio). The domestic commercial real estate loan portfolio
totaled $6.6 billion at September 30, 1997, an increase of 10% from December 31,
1996, reflecting increased loan originations during the 1997 third quarter. A
substantial portion of the loans originated during the 1997 third quarter are in
the process of being syndicated or securitized.
The table below sets forth the major components of the domestic commercial real
estate loan portfolio.
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(in millions) 1997 1996
------------- -------------
<S> <C> <C>
Commercial Mortgages $ 5,594 $ 5,040
Construction 961 894
------- --------
Total Domestic Commercial Real Estate Loans $ 6,555 $ 5,934
======= ========
</TABLE>
Nonperforming domestic commercial real estate loans were $119 million at
September 30, 1997, a $37 million decrease from the December 31, 1996 level.
Domestic Financial Institutions Portfolio: The domestic financial institutions
portfolio includes loans to commercial banks and companies whose businesses
primarily involve lending, financing, investing, underwriting, or insurance.
Loans to domestic financial institutions were $5.1 billion, or 3% of total loans
outstanding, at September 30, 1997, compared with $5.5 billion at December 31,
1996. The portfolio continued to maintain its strong credit quality during the
first nine months of 1997.
FOREIGN PORTFOLIO
Foreign portfolio includes commercial and industrial loans, loans to financial
institutions, commercial real estate, loans to foreign governments and official
institutions, and consumer loans. At September 30, 1997, Chase's total foreign
loans were $40.6 billion, compared with $39.8 billion at December 31, 1996. The
portfolio included foreign commercial and industrial loans of $25.5 billion at
September 30, 1997, an increase of $2.3 billion from the 1996 year-end.
Foreign nonperforming loans at September 30, 1997 were $146 million, an $11
million increase from December 31, 1996. Net recoveries of foreign loans were $7
million in the 1997 third quarter, compared with net charge-offs of $8 million
in the 1996 third quarter. For the first nine months, foreign loan net
recoveries were $5 million in 1997, compared with net recoveries of $19 million
in 1996.
INDUSTRY DIVERSIFICATION
Based upon the industry classifications utilized by Chase at September 30, 1997,
there were no industry segments which exceeded 5% of total Commercial and
Industrial loans outstanding.
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<PAGE> 35
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
In the normal course of its business, Chase utilizes various derivative and
foreign exchange financial instruments to meet the financial needs of its
customers, to generate revenues through its trading activities, and to manage
its exposure to fluctuations in interest and currency rates. For a discussion of
the derivative and foreign exchange financial instruments utilized in connection
with Chase's trading activities and asset/liability management activities,
including the notional amounts and credit exposure outstandings as well as the
credit and market risks involved, see Notes 3 and 9 of this Form 10-Q and pages
52-58 and Notes One and Seventeen of Chase's 1996 Annual Report.
Many of Chase's derivative and foreign exchange contracts are short-term, which
mitigates credit risk as transactions settle quickly. The following table
provides the remaining maturities of derivative and foreign exchange contracts
outstanding at September 30, 1997 and December 31, 1996. Percentages are based
upon remaining contract life of mark-to-market exposure amounts. 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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
------------------------------------------- -----------------------------------------------
INTEREST FOREIGN EQUITY, INTEREST FOREIGN EQUITY,
RATE EXCHANGE COMMODITY AND RATE EXCHANGE COMMODITY AND
CONTRACTS CONTRACTS OTHER CONTRACTS TOTAL CONTRACTS CONTRACTS OTHER CONTRACTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 3 months 15% 53% 15% 29% 15% 59% 26% 31%
3 to 6 months 6 23 14 13 5 21 5 11
6 to 12 months 7 19 20 12 8 15 28 10
1 to 5 years 48 5 50 32 52 5 40 35
Over 5 years 24 -- 1 14 20 -- 1 13
--- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
</TABLE>
Chase routinely enters into derivative and foreign exchange transactions with
regulated financial institutions, which Chase believes have relatively low
credit risk. At September 30, 1997, approximately 86% of the mark-to-market
exposure of these transactions was with commercial bank and financial
institution counterparties, most of which are dealers in these products.
Nonfinancial institutions accounted for approximately 14% of Chase's derivative
and foreign exchange mark-to-market exposure. Additionally, at September 30,
1997 and December 31, 1996, nonperforming derivatives contracts were immaterial.
Chase does not deal, to any significant extent, in derivatives, which dealers of
derivatives (such as other banks and financial institutions) consider to be
"leveraged". As a result, the mark-to-market exposure as well as the notional
amount of such derivatives were insignificant at September 30, 1997.
-35-
<PAGE> 36
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
contracts, letters of credit, guarantees and undrawn legal commitments. As of
September 30, 1997, the allowance for credit losses has been allocated into
three components: a $3,462 million allowance for loan losses, which is reported
net in Loans; a $75 million allowance for credit losses on derivative and
foreign exchange financial instruments, which is reported net in Trading
Assets-Risk Management Instruments; and a $170 million allowance for credit
losses on letters of credit, guarantees, and undrawn legal commitments, which is
reported in Other Liabilities. During the first nine months of 1997, there were
no provisions or charge-offs made to the latter two components. However, there
was a transfer of $100 million from the allowance for loan losses to the
allowance for credit losses on letters of credit, guarantees and undrawn legal
commitments during the 1997 second quarter as a result of the inclusion in the
evaluation of the allowance of undrawn legal commitments. The 1996 amounts have
not been reclassified due to immateriality.
Chase deems its allowance for credit losses at September 30, 1997 to be adequate
(i.e., sufficient to absorb losses that may currently exist in the portfolio,
but are not yet identifiable). Estimating potential future losses is inherently
uncertain and depends on many factors, including general macroeconomic and
political conditions, rating migration, structural changes within industries
which alter competitive positions, event risk, unexpected correlations within
the portfolio, and other external factors such as legal and regulatory
requirements. Chase periodically reviews such factors and reassesses the
adequacy of the allowance for credit losses.
The accompanying table reflects the activity in Chase's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------------ ------------------
(in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total Allowance at Beginning of Period $3,446 $3,692 $3,549 $3,784
Provision for Credit Losses 190 220 599 715
Charge-Offs (277) (295) (808) (925)
Recoveries 87 75 209 210
------ ------ ------ ------
Subtotal Net Charge-Offs (190) (220) (599) (715)
Charge Related to Conforming Credit
Card Charge-off Policies -- -- -- (102)
------ ------ ------ -------
Total Net Charge-offs (190) (220) (599) (817)
Transfer to Allowance for Credit Losses on
Letters of Credit, Guarantees and
Undrawn Legal Commitments -- -- (100) --
Other 16 5 13 15
------ ------ ------ ------
Total Allowance at End of Period $3,462 $3,697 $3,462 $3,697
====== ====== ====== ======
</TABLE>
The following table presents Chase's allowance for loan losses coverage ratios.
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
For the Period Ended: 1997 1996
------------- ------------
<S> <C> <C>
Allowance for Loan Losses to:
Loans at Period-End 2.12% 2.29%
Average Loans 2.21 2.37
Nonperforming Loans 371.86 347.60
</TABLE>
-36-
<PAGE> 37
MARKET RISK MANAGEMENT
The following discussion of Chase's market risk management focuses primarily on
developments since December 31, 1996 and should be read in conjunction with
pages 54-58 and Notes One and Seventeen of Chase's 1996 Annual Report.
TRADING ACTIVITIES
Measuring Market Risk: Market risk is measured and monitored on a daily basis
through a value-at-risk ("VAR") methodology, which captures the potential
overnight dollar loss from adverse market movements. The quantification of
market risk through a VAR methodology requires a number of key assumptions
including confidence level for losses, number of days of price history, holding
period, measurement of inter-business correlation, and the treatment of risks
outside the VAR methodology, such as event risk and liquidity risk.
[GRAPHIC OF DAILY MARKET RISK-RELATED REVENUES]
The preceding chart contains a histogram of Chase's daily market risk-related
revenue. Market risk-related revenue is defined as the daily change in value in
marked-to-market trading portfolios plus any trading-related net interest income
or other revenue. Net interest income related to funding and investment activity
is excluded. Based on actual trading results for the twelve months ended
September 30, 1997, which captures the historical correlation among business
units, 95% of the variation in Chase's daily trading results fell within a $30
million band centered on the daily average amount of $11 million. For the twelve
months ended September 30, 1997, Chase posted positive daily market risk-related
revenue for 244 out of 259 business trading days for international and domestic
units. For 228 of the 259 days, Chase's daily market risk-related revenue or
losses occurred within the negative $5 million through positive $20 million
range, which is representative of Chase's emphasis on market-making, sales and
arbitrage activities. In the latter part of October, trading markets became
difficult and unusually volatile. There were sharp declines and a loss of
liquidity for certain securities, particularly emerging markets securities.
During the period from October 1, 1997 through October 31, 1997, there were
6 days with negative market risk-related revenue, including 5 days where
the daily loss exceeded $10 million. See "Market Developments Since September
30, 1997".
ASSET/LIABILITY MANAGEMENT ACTIVITIES
Chase's interest rate risk profile is generally managed with consideration for
both total return and reported earnings. Interest rate risk arises from a
variety of factors, including differences in the timing between the contractual
maturity or repricing (the "repricing") of Chase's assets and liabilities and
derivative financial instruments, as the repricing characteristics of its loans
and other assets do not necessarily match those of its deposits, other
borrowings and capital. Chase, as part of its ALM process, employs a variety of
cash (primarily securities) and derivative instruments in managing its exposure
to fluctuations in market interest rates.
Measuring Interest Rate Sensitivity:
In managing exposure, Chase uses quantifications of net gap exposure, and
earnings and valuation sensitivity measures. An example of aggregate net gap
analysis is presented below. Assets, liabilities and derivative instruments are
placed in gap intervals based on their repricing dates. Assets and liabilities
for which no specific contractual repricing or maturity dates exist or whose
contractual maturities do not reflect their expected maturities are placed in
gap intervals based on management's judgment and statistical analysis concerning
their most likely repricing behaviors.
A net gap for each time period is calculated by subtracting the liabilities
repricing in that interval from the assets repricing. A negative gap - more
liabilities repricing than assets - will benefit net interest income in a
declining interest rate environment and will detract from net interest income in
a rising interest rate environment. Conversely, a positive gap - more assets
repricing than liabilities - will benefit net interest income if rates are
rising and will detract from net interest income in a falling rate environment.
-37-
<PAGE> 38
CONDENSED INTEREST-RATE SENSITIVITY TABLE
<TABLE>
<CAPTION>
(IN MILLIONS) 1-3 4-6 7-12 1-5 OVER
AT SEPTEMBER 30, 1997 MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
-------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $(14,060) $ (2,145) $ 3,049 $ 35,191 $(22,035) $ --
Derivative Instruments Affecting
Interest-Rate Sensitivity 5,522 (1,315) (2,891) (5,640) 4,324 --
Interest-Rate Sensitivity Gap (8,538) (3,460) 158 29,551 (17,711) --
Cumulative Interest-Rate
Sensitivity Gap (8,538) (11,998) (11,840) 17,711 -- --
% of Total Assets (2)% (3)% (3)% 5% -- --
</TABLE>
At September 30, 1997, Chase had $11,840 million more liabilities than assets
repricing within one year (including the net repricing effects of derivative
positions). This compares with $7,945 million more liabilities than assets
repricing within one year, or 2% of total assets, at December 31, 1996.
As of September 30, 1997, Chase's earnings at risk to an immediate 100 basis
point rise in interest rates is estimated to be approximately 2.5% of Chase's
projected after-tax net income for the next twelve months. An immediate 100
basis point rise in interest rates is a hypothetical rate scenario, used to
measure risk, and does not necessarily represent management's current view of
future market developments. At December 31, 1996, Chase's earnings at risk to a
similar increase in market rates was estimated to be approximately 3.5% of
projected 1997 after-tax net income.
Interest Rate Swaps: Interest rate swaps are one of the various financial
instruments used in Chase's ALM activities. The following table summarizes the
outstanding ALM interest rate swap notional amounts at September 30, 1997, by
twelve-month intervals (i.e., October 1, 1997 through September 30, 1998). The
decrease in notional amounts from one period to the next period represents
maturities of the underlying contracts. The weighted-average fixed interest
rates to be received and paid on such swaps are presented for each twelve-month
interval. The three-month London Interbank Offered Rate (LIBOR), provided for
reference in the following table, reflects the average implied forward yield
curve for that index as of September 30, 1997. However, actual repricings will
be based on the applicable rates in effect at the actual repricing date. To the
extent rates change, the variable rates paid or received will change. Chase
expects the impact of any interest rate changes on these swaps to be largely
mitigated by corresponding changes in the interest rates and values associated
with the linked assets and liabilities.
-38-
<PAGE> 39
OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY
INTERVALS
<TABLE>
<CAPTION>
For the twelve-month period beginning October 1,
(in millions) 1997 1998 1999 2000 2001 Thereafter
------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Receive fixed swaps
Notional amount $36,368 $24,624 $20,633 $15,266 $12,043 $ 8,390
Weighted-average fixed rate 6.21% 6.35% 6.33% 6.45% 6.52% 6.48%
Pay fixed swaps
Notional amount $39,042 $23,347 $13,571 $10,100 $ 6,702 $ 2,919
Weighted-average fixed rate 6.29% 6.55% 6.85% 7.07% 7.12% 7.17%
Basis Swaps
Notional amount $24,292 $16,675 $ 4,379 $ 2,243 $ 1,307 $ 1,208
- ----------------------------------------------------------------------------------------------------------------------------
Average Three-Month Implied
Forward LIBOR Rates 5.97% 6.15% 6.70% 6.42% 6.49% 6.64%
- ----------------------------------------------------------------------------------------------------------------------------
Total Notional Amount $99,702 $64,646 $38,583 $27,609 $20,052 $12,517
============================================================================================================================
</TABLE>
The following table summarizes Chase's assets and liabilities at September 30,
1997, with the notional amount of related derivatives used for ALM purposes.
<TABLE>
<CAPTION>
DERIVATIVE CONTRACTS AND RELATED BALANCE SHEET POSITIONS Notional Amount (a)
-------------------------
Balance Interest Other ALM
(in millions) Sheet Amount Rate Swaps Contracts(b)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deposits with Banks $ 4,152 $ 4,547 $ 14,167
Securities - Available-for-Sale 43,987 2,706 6,923
Loans 159,625 44,223 58,504
Other Assets 16,835 4,100 8,903
Deposits 181,788 32,907 33,006
Other Borrowed Funds 7,085 822 --
Long-Term Debt 13,899 6,224 1,241
- -----------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, notional amounts of approximately $4 billion for
interest rate swaps, which are used in place of cash market instruments,
have been excluded from the above table. See Note One of the 1996 Annual
Report for a discussion of Chase's accounting policy relative to derivatives
used in place of cash market instruments.
(b) Includes futures, forwards, forward rate agreements and options.
-39-
<PAGE> 40
The unfavorable impact on net interest income from Chase's ALM derivative
activities was $79 million in the third quarter and $128 million for the first
nine months of 1997, compared with an unfavorable impact of $20 million for the
third quarter and $55 million for the first nine months of 1996. Chase also has
derivatives that affect noninterest revenue (such as derivatives linked to
mortgage servicing rights).
The following table reflects the deferred gains/losses on closed derivative
contracts and unrecognized gains/losses on open derivative contracts utilized in
Chase's ALM activities at September 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(in millions) 1997 1996 Change
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALM Derivative Contracts:
Net Deferred Gains (Losses) $ (43) $ (42) $ (1)
Net Unrecognized Gains (Losses) (610) (243) (367)
------- ----- ------
Net ALM Derivative Gains (Losses) $ (653) $(285) $(368)
====== ===== =====
</TABLE>
The net deferred losses at September 30, 1997 are expected to be amortized as
yield adjustments in net interest income or noninterest revenue, as applicable,
over the periods reflected in the following table. Chase also uses selected
derivative financial instruments to manage the sensitivity to changes in market
interest rates on anticipated transactions; however, such transactions are not
significant. Accordingly, at September 30, 1997, deferred gains and losses
associated with these transactions were not material.
Included in the table above are gross unrecognized losses from daily margin
settlements on open futures contracts, which were $3 million at September 30,
1997. The net unrecognized losses shown above do not include the net favorable
impact from the assets/liabilities being hedged by these derivative contracts.
For a further discussion, see Note 11 on page 15.
The Consolidated Balance Sheet includes unamortized premiums on open ALM option
contracts which will be amortized as a reduction to net interest income or
noninterest revenue over the periods indicated in the following table.
AMORTIZATION OF NET DEFERRED GAINS (LOSSES) ON CLOSED ALM CONTRACTS AND
OF PREMIUMS ON OPEN ALM OPTION CONTRACTS
<TABLE>
<CAPTION>
Deferred
(in millions) Gains/(Losses) Premiums
-------------- --------
<S> <C> <C>
1997 $(16) $ 10
1998 (9) 30
1999 (27) 50
2000 (13) 38
2001 and After 22 54
---- ----
Total $(43) $182
==== ====
</TABLE>
-40-
<PAGE> 41
OPERATING RISK MANAGEMENT
Chase, 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. Chase maintains a system of controls that is
designed to keep operating risk at appropriate levels in view of the financial
strength of Chase, the characteristics of the businesses and markets in which
Chase operates, competitive circumstances and regulatory considerations.
However, from time to time in the past, Chase has suffered losses from operating
risk and there can be no assurance that Chase will not suffer such losses in the
future.
CAPITAL AND LIQUIDITY RISK MANAGEMENT
The following capital and liquidity discussion should be read in conjunction
with the Capital and Liquidity Risk Management section on pages 58-59 and Note
Sixteen of Chase's 1996 Annual Report.
CAPITAL
During the 1997 third quarter, Chase elected early adoption of the Federal
Reserve Board's new guidelines for the risk-based capital standards, which
incorporate a measure for market risk consistent with the principles adopted by
the Basle Committee on Banking Supervision under the Basle Capital Accord. The
new guidelines require banks and bank holding companies that have significant
market risk exposure to measure that risk utilizing a value-at-risk model, based
on the parameters contained in the guidelines, and to maintain a commensurate
amount of capital. In addition, the assets and off-balance sheet financial
instruments, and related capital, of Chase's securities subsidiary, Chase
Securities Inc., are now included in the calculation of these ratios, while the
provisions of SFAS 115 continue to be excluded. Prior periods have not been
restated.
Chase's level of capital at September 30, 1997 remained well in excess of
regulatory guidelines. At September 30, 1997, Tier 1 and Total Capital ratios
were 7.83% and 11.63%, respectively, and the Tier 1 leverage ratio was 6.03%.
Chase is committed to maintaining a disciplined capital policy. As part of this
policy, Chase intends to maintain its capital at levels that will allow it to
support its growth and make investments, including acquisitions in its core
businesses. It has also, as part of this policy, targeted a Tier 1 Capital ratio
of 8% to 8.25%.
During the first nine months of 1997, the total capitalization of Chase (the sum
of Tier 1 and Tier 2 Capital) increased by $2.8 billion to $32.2 billion. The
increase was primarily due to the inclusion of Chase Securities Inc., as
mentioned above, and the issuance of $790 million of capital securities (net of
discount) by certain Chase subsidiaries (See Note 7 of this Form 10-Q).
Partially offsetting these amounts was the redemption of $910 million of
preferred stock.
In October 1996, Chase announced a common stock purchase program. The program
authorizes Chase to purchase through December 31, 1998 up to $2.5 billion of its
common stock, plus such amount of its common stock as may be necessary to
provide for expected issuances under Chase's dividend reinvestment plans and its
various stock-based director and employee benefit plans. From inception through
September 30, 1997, Chase repurchased 31.4 million common shares ($3.1 billion)
and reissued from treasury approximately 11.3 million common shares ($1.0
billion) under its benefit plans, resulting in a net repurchase of 20.1 million
common shares ($2.1 billion). Management currently intends to complete its
stock buy-back program in early 1998.
In the first quarter of 1997, Chase raised the cash dividend on its common stock
to $.62 per share, from $.56 per share. Management currently expects that
Chase's dividend policy will generally be to pay a common stock dividend equal
to approximately 25% to 35% of Chase's net income (excluding restructuring
charges) less preferred stock dividends. Chase's future dividend policies will
be determined by its Board of Directors, taking into consideration Chase's
earnings and financial condition and applicable governmental regulations and
policies.
-41-
<PAGE> 42
The following table sets forth the components of capital for Chase.
COMPONENTS OF CAPITAL
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(in millions) 1997 1996
<S> <C> <C>
TIER 1 CAPITAL
Common Stockholders' Equity $ 19,300 $ 18,632
Nonredeemable Preferred Stock 1,740 2,650
Minority Interest (a) 2,132 1,294
Less: Goodwill 1,302 1,353
Non-Qualifying Intangible Assets 226 128
50% Investment in Securities Subsidiary -- 780
--------- --------
Tier 1 Capital $ 21,644 $ 20,315
--------- --------
TIER 2 CAPITAL
Long-Term Debt Qualifying as Tier 2 $ 7,066 $ 6,709
Qualifying Allowance for Credit Losses 3,460 3,121
Less: 50% Investment in Securities Subsidiary -- 780
--------- --------
Tier 2 Capital $ 10,526 $ 9,050
--------- --------
TOTAL QUALIFYING CAPITAL $ 32,170 $ 29,365
========= ========
RISK-WEIGHTED ASSETS (b) $ 276,583 $249,215
========= ========
</TABLE>
(a) Minority interest includes the Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable Interest Debentures and the
Preferred Stock of the REIT Subsidiary. For a further discussion, see Note 7
of this Form 10-Q.
(b) Includes off-balance sheet risk-weighted assets in the amount of $94,899
million and $79,099 million, respectively, at September 30, 1997 and
December 31, 1996.
LIQUIDITY
Chase is an active participant in the capital markets. It raises funds from time
to time through the issuance of commercial paper, medium-term notes, long-term
debt, and common and preferred stock. At September 30, 1997, Chase's long-term
debt was $13,899 million. Chase issued $2,635 million of long-term debt during
the first nine months of 1997; during the same period, $1,181 million of
long-term debt matured and $265 million was redeemed. Chase constantly evaluates
the opportunities to redeem its outstanding debt and preferred stock in light of
current market conditions.
-42-
<PAGE> 43
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 2-5 of Chase's 1996 Annual Report.
DIVIDENDS
Chase's bank subsidiaries could, without the approval of their relevant banking
regulators, pay dividends to their respective bank holding companies in amounts
up to the limitations imposed upon such banks by regulatory restrictions. These
dividend limitations, in the aggregate, totaled approximately $2.3 billion at
September 30, 1997.
In addition to the dividend restrictions set forth in statutes and regulations,
the Federal Reserve Board, the Office of the Comptroller of the Currency and the
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 Chase and its
subsidiaries that are banks or bank holding companies, if, in the banking
regulator's opinion, payment of a dividend would constitute an unsafe or unsound
practice in light of the financial condition of the banking organization.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the FDIC to establish a risk-based assessment system for FDIC deposit
insurance. FDICIA also contained provisions limiting certain activities and
business methods of depository institutions. Finally, FDICIA provided for
expanded regulation of depository institutions and their affiliates, including
parent holding companies, by such institutions' appropriate Federal banking
regulator. Each of Chase's banking institutions were "well capitalized" as that
term is defined under the various regulations promulgated under FDICIA.
Therefore, Chase does not expect such regulations to have a material adverse
impact on its business operations.
ACCOUNTING AND REPORTING DEVELOPMENTS
DERIVATIVE AND MARKET RISK DISCLOSURES
The Securities and Exchange Commission issued a Release in January 1997 that
will require Chase, commencing with the Annual Report for the year ended
December 31, 1997, to supplement in certain respects its current disclosures
relating to derivatives and certain other financial instruments. Chase expects
its 1997 Annual Report will conform to the new disclosure requirements.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS 130. SFAS 130 will become effective for
financial statements beginning in the first quarter of 1998. SFAS 130 defines
the concept of "comprehensive income" and establishes the standards for
reporting "comprehensive income". Comprehensive income is defined to include net
income, as currently reported, as well as unrealized gains and losses in
available-for-sale securities, foreign currency translation adjustments and
certain other items not included in the income statement. SFAS 130 also sets
forth requirements on how comprehensive income should be presented as part of an
issuer's financial statements. Chase is currently assessing how it will disclose
comprehensive income in its financial statements. The adoption of SFAS 130 will
not affect Chase's earnings, liquidity or capital resources.
SEGMENTS
In June 1997, the FASB issued SFAS 131. SFAS 131 will become effective for
financial statements for the year ended 1998. SFAS 131 defines the criteria by
which an issuer is to determine the number and nature of its "operating
segments" and sets forth the financial information that is required to be
disclosed about such operating segments. Chase is currently assessing the manner
in which it will disclose the required information.
-43-
<PAGE> 44
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------------------------- --------------------------------------
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (ANNUALIZED) BALANCE INTEREST (ANNUALIZED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 5,424 $ 149 10.88% $ 5,519 $ 113 8.11%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 39,862 623 6.20% 33,756 548 6.46%
Trading Assets-Debt and Equity
Instruments 38,045 732 7.63% 31,590 481 6.06%
Securities:
Available-for-Sale 41,691 670 6.37% (b) 38,429 619 6.41% (b)
Held-to-Maturity 3,348 55 6.52% 4,048 75 7.41%
Loans 161,247 3,273 (c) 8.06% 150,076 3,046 (c) 8.07%
--------- --------- -------- ------
Total Interest-Earning Assets 289,617 5,502 7.54% 263,418 4,882 7.37%
Allowance for Credit Losses (3,394) (3,654)
Cash and Due from Banks 14,206 11,503
Risk Management Instruments 33,983 25,299
Other Assets 25,902 26,347
--------- --------
Total Assets $ 360,314 $322,913
========= ========
LIABILITIES
Domestic Retail Deposits $ 57,300 583 4.03% $ 54,319 494 3.63%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 11,963 190 6.31% 9,516 129 5.39%
Deposits in Foreign Offices 69,828 941 5.35% 61,344 792 5.13%
--------- --------- -------- ------
Total Time and Savings
Deposits 139,091 1,714 4.89% 125,179 1,415 4.50%
--------- --------- -------- ------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 66,308 871 5.21% 61,244 778 5.06%
Commercial Paper 4,445 60 5.39% 5,461 73 5.26%
Other Borrowings (d) 22,940 520 8.98% 17,212 363 8.39%
--------- --------- -------- ------
Total Short-Term and
Other Borrowings 93,693 1,451 6.14% 83,917 1,214 5.75%
Long-Term Debt 14,552 284 7.75% 12,454 220 7.05%
--------- --------- -------- ------
Total Interest-Bearing Liabilities 247,336 3,449 5.53% 221,550 2,849 5.12%
--------- --------- -------- ------
Noninterest-Bearing Deposits 41,935 41,628
Risk Management Instruments 35,730 25,010
Other Liabilities 13,763 14,152
--------- --------
Total Liabilities 338,764 302,340
--------- --------
PREFERRED STOCK OF SUBSIDIARY 550 78
--------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 1,977 2,650
Common Stockholders' Equity 19,023 17,845
--------- --------
Total Stockholders' Equity 21,000 20,495
--------- --------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 360,314 $322,913
========= ========
INTEREST RATE SPREAD 2.01% 2.25%
===== =====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $2,053 (a) 2.81% $2,033 (a) 3.07%
====== ===== ====== =====
</TABLE>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt and
taxable assets.
(b) For the three months ended September 30, 1997 and September 30, 1996, the
annualized rate for available-for-sale securities based on historical cost
was 6.37% and 6.30%, respectively.
(c) For the three months ended September 30, 1997 and September 30, 1996, the
negative impact from nonperforming loans on net interest income was $16
million and $9 million, respectively.
(d) Includes securities sold but not yet purchased and structured notes.
-44-
<PAGE> 45
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------------------------ --------------------------------------
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (ANNUALIZED) BALANCE INTEREST (ANNUALIZED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 5,033 $ 369 9.80% $ 7,016 $ 440 8.38%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 39,574 1,879 6.35% 29,982 1,564 6.97%
Trading Assets-Debt and Equity
Instruments 35,221 2,063 7.83% 28,735 1,283 5.96%
Securities:
Available-for-Sale 40,793 2,013 6.60% (b) 38,306 1,874 6.53% (b)
Held-to-Maturity 3,536 177 6.69% 4,268 236 7.39%
Loans 156,942 9,471 (c) 8.07% 150,107 9,320(c) 8.29%
--------- ------- -------- -------
Total Interest-Earning Assets 281,099 15,972 7.60% 258,414 14,717 7.61%
Allowance for Credit Losses (3,427) (3,703)
Cash and Due from Banks 13,209 12,132
Risk Management Instruments 34,205 25,714
Other Assets 24,483 25,267
--------- --------
Total Assets $ 349,569 $317,824
========= ========
LIABILITIES
Domestic Retail Deposits $ 57,440 1,641 3.82% $ 53,352 1,462 3.66%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 9,992 493 6.60% 10,329 344 4.46%
Deposits in Foreign Offices 67,900 2,663 5.24% 66,197 2,712 5.47%
--------- ------- -------- -------
Total Time and Savings
Deposits 135,332 4,797 4.74% 129,878 4,518 4.65%
--------- ------- -------- -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 64,001 2,580 5.39% 52,837 2,064 5.24%
Commercial Paper 4,258 170 5.34% 5,251 207 5.22%
Other Borrowings (d) 20,789 1,513 9.73% 16,622 1,055 8.49%
--------- ------- -------- -------
Total Short-Term and
Other Borrowings 89,048 4,263 6.40% 74,710 3,326 5.97%
Long-Term Debt 14,040 814 7.75% 12,781 668 6.98%
--------- ------- -------- -------
Total Interest-Bearing Liabilities 238,420 9,874 5.54% 217,369 8,512 5.23%
--------- ------- -------- -------
Noninterest-Bearing Deposits 41,302 39,150
Risk Management Instruments 34,756 27,020
Other Liabilities 13,587 13,847
--------- --------
Total Liabilities 328,065 297,386
--------- --------
PREFERRED STOCK OF SUBSIDIARY 550 26
--------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 2,371 2,650
Common Stockholders' Equity 18,583 17,762
--------- --------
Total Stockholders' Equity 20,954 20,412
--------- --------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 349,569 $317,824
========= ========
INTEREST RATE SPREAD 2.06% 2.38%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $6,098 (a) 2.90% $6,205 (a) 3.21%
====== ==== ======= ====
</TABLE>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt and
taxable assets.
(b) For the nine months ended September 30, 1997 and September 30, 1996, the
annualized rate for available-for-sale securities based on historical cost
was 6.65% and 6.46%, respectively.
(c) For the nine months ended September 30, 1997 and September 30, 1996, the
negative impact from nonperforming loans on net interest income was $51
million and $58 million, respectively.
(d) Includes securities sold but not yet purchased and structured notes.
-45-
<PAGE> 46
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ---------------------------------------------------
THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $3,271 $3,082 $ 3,112 $3,048 $ 3,042 $3,028 $3,241
Securities 720 735 722 767 690 685 720
Trading Assets 732 705 626 615 482 388 413
Federal Funds Sold and Securities
Purchased Under Resale Agreements 623 697 559 571 549 514 501
Deposits with Banks 149 114 106 97 112 156 172
------ ------ ------ ------- ------ ------- -------
Total Interest Income 5,495 5,333 5,125 5,098 4,875 4,771 5,047
------ ------ ------ ------- ------ ------- -------
INTEREST EXPENSE
Deposits 1,714 1,568 1,515 1,520 1,416 1,458 1,644
Short-Term and Other Borrowings 1,451 1,510 1,302 1,304 1,213 1,087 1,026
Long-Term Debt 284 273 257 233 220 221 227
------ ------ ------ ------- ------ ------- -------
Total Interest Expense 3,449 3,351 3,074 3,057 2,849 2,766 2,897
------ ------ ------ ------- ------ ------- -------
NET INTEREST INCOME 2,046 1,982 2,051 2,041 2,026 2,005 2,150
Provision for Credit Losses 190 189 220 182 220 250 245
------ ------ ------ ------- ------ ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,856 1,793 1,831 1,859 1,806 1,755 1,905
------ ------ ------ ------- ------ ------- -------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 308 283 176 219 237 263 231
Trust, Custody and Investment
Management Fees 338 321 310 294 295 302 285
Credit Card Revenue 304 248 278 320 277 233 233
Service Charges on Deposit Accounts 94 95 91 98 97 100 99
Fees for Other Financial Services 411 392 383 377 393 381 378
Trading Revenue 505 491 405 286 343 394 348
Securities Gains 58 30 101 25 34 24 52
Revenue From Equity-Related
Investments 243 179 164 172 112 219 223
Other Revenue 102 119 191 106 111 33 36
------ ------ ------ ------- ------ ------- -------
Total Noninterest Revenue 2,363 2,158 2,099 1,897 1,899 1,949 1,885
------ ------ ------ ------- ------ ------- -------
NONINTEREST EXPENSE
Salaries 1,292 1,110 1,124 1,070 1,040 1,046 1,076
Employee Benefits 206 219 222 185 211 225 305
Occupancy Expense 194 193 187 192 204 207 221
Equipment Expense 192 193 190 180 179 181 184
Foreclosed Property Expense 6 -- 3 (1) 2 (8) (9)
Restructuring Charge and Expenses 71 71 30 104 32 22 1,656
Other Expense 700 685 691 677 652 651 660
------ ------ ------ ------- ------ ------- -------
Total Noninterest Expense 2,661 2,471 2,447 2,407 2,320 2,324 4,093
------ ------ ------ ------- ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 1,558 1,480 1,483 1,349 1,385 1,380 (303)
Income Tax Expense (Benefit) 576 555 556 513 527 524 (214)
------ ------ ------ ------- ------ ------- -------
NET INCOME (LOSS) $ 982 $ 925 $ 927 $ 836 $ 858 $ 856 $ (89)
====== ====== ====== ======= ====== ======= =======
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 941 $ 874 $ 872 $ 781 $ 803 $ 801 $ (143)
====== ====== ====== ======= ====== ======= =======
NET INCOME (LOSS) PER COMMON
SHARE:
Primary $ 2.17 $ 2.00 $ 1.98 $ 1.74 $ 1.80 $ 1.80 $ (0.32)
====== ====== ====== ======= ====== ======= =======
Assuming Full Dilution $ 2.16 $ 2.00 $ 1.97 $ 1.74 $ 1.78 $ 1.79 $ (0.32)
====== ====== ====== ======= ====== ======= =======
</TABLE>
-46-
<PAGE> 47
GLOSSARY OF TERMS
The page numbers included after each definition below represents the pages in
the MD&A and Notes to Consolidated Financial Statements where the term is
primarily used.
Asset/Liability Management ("ALM"): The management and control of the
sensitivity of Chase's income to changes in market interest rates. (Pages 13,
22, 37 and 38)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding merger-related costs,
foreclosed property expense, charges for accelerated vesting of stock-based
incentive awards, gain on the sale of a non-strategic, partially-owned foreign
investment, and nonrecurring items). (Pages 16, 17, and 23)
FASB: Financial Accounting Standards Board. (Pages 8 and 43)
FDICIA: Federal Deposit Insurance Corporation Improvement Act of 1991 pursuant
to which each Federal banking regulator was required to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risk of nontraditional
activities. (Page 43)
Managed Credit Card receivables: Credit card receivables on the balance sheet
plus securitized credit card receivables. (Page 21)
1996 Annual Report: Annual Report on Form 10-K for the year ended December 31,
1996. (Pages 8, 9, 11, 13, 15, 17, 30, 37, 39 and 41)
Nonrecurring Items: Nonrecurring items in the first nine months of 1996
included aggregate tax benefits and refunds, loss on a sale of a building in
Japan and costs incurred in combining Chase's foreign retirement plans. (Pages
16 and 18)
Operating Revenue: Net Interest Income combined with Noninterest Revenue
excluding gain on the sale of a non-strategic, partially-owned foreign
investment and nonrecurring items. (Page 17)
REIT: Real Estate Investment Trust Subsidiary of Chase. (Page 24)
SFAS 107: Statement of Financial Accounting Standards No. 107, entitled,
"Disclosures About Fair Value of Financial Instruments." (Page 15)
SFAS 114: Statement of Financial Accounting Standards No. 114, entitled,
"Accounting by Creditors for Impairment of a Loan." (Page 12)
SFAS 115: Statement of Financial Accounting Standards No. 115, entitled,
"Accounting for Certain Investments in Debt and Equity Securities." (Page 9)
SFAS 125: Statement of Financial Accounting Standards No. 125, entitled,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." (Page 8)
SFAS 127: Statement of Financial Accounting Standards No. 127, entitled,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." (Page 8)
SFAS 128: Statement of Financial Accounting Standards No. 128, entitled,
"Earnings per Share." (Page 8)
SFAS 130: Statement of Financial Accounting Standards No. 130, entitled,
"Reporting Comprehensive Income." (Page 43)
SFAS 131: Statement of Financial Accounting Standards No. 131, entitled,
"Disclosure About Segments of an Enterprise and Related Information." (Page 43)
Underlying Operating Noninterest Expense: Noninterest expense excluding
merger-related costs, foreclosed property expense, costs due to the accelerated
vesting of stock-based incentive awards, costs associated with the REIT and
nonrecurring items before the effects of any merger-related cost savings. (Page
23)
-47-
<PAGE> 48
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Chase and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all actions and
proceedings pending against or involving Chase 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 Chase.
Item 2. Sales of Unregistered Common Stock
During the third quarter of 1997, shares of common stock of Chase
were issued in transactions exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof. On July
1, 1997, 280 shares of common stock were issued to retired
executive officers who had deferred receipt of such common stock
pursuant to the Corporate Performance Incentive Plan.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
11 -Computation of net income per share.
12(a) -Computation of ratio of earnings to fixed charges.
12(b) -Computation of ratio of earnings to fixed charges and
preferred stock dividend requirements.
27 -Financial Data Schedule.
(B) Reports on Form 8-K:
Chase filed one report on Form 8-K during the quarter ended
September 30, 1997, as follows:
Form 8-K dated July 17, 1997: Chase announced the results of
operations for the second quarter of 1997.
-48-
<PAGE> 49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
(Registrant)
Date November 14, 1997 By /s/ Joseph L. Sclafani
---------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-49-
<PAGE> 50
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
11 Computation of net income 51
per share
12 (a) Computation of ratio of 52
earnings to fixed charges
12 (b) Computation of ratio of 53
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 54
-50-
<PAGE> 51
APPENDIX 1
----------
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
-----------------------------------------------
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
GRAPHIC
NUMBER PAGE DESCRIPTION
-------- -------- -----------------------------------------------------------------------
<S> <C> <C>
1 37 Bar Graph entitled "Histogram of Daily Market Risk-Related Revenue
for the twelve months ended September 30, 1997" presenting the
following information:
Millions of Dollars 0 -5 5 - 10 10 -15 15 - 20 20 -25 25 -30 30 -35
------------------- ---- ------ ------ ------- ------ ------- -------
Number of trading days
revenue was within the
above prescribed positive
range 48 54 71 43 20 7 1
Millions of Dollars 0 -(5) (5)-(10) (10)-(15)
------------------- ------ --------- ---------
Number of trading days
revenue was within the
above prescribed negative
range 12 2 1
The Histogram includes all business trading days for international
and domestic units.
</TABLE>
<PAGE> 1
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
Net income for primary and fully-diluted EPS are computed by subtracting from
the applicable earnings the dividend requirements on preferred stock to arrive
at earnings applicable to common stock and dividing this amount by the
weighted-average number of common and common equivalent shares outstanding
during the period. For a further discussion of Chase's earnings per share
computation, see Note One of Chase's 1996 Annual Report.
<TABLE>
<CAPTION>
(in millions, except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
EARNINGS PER SHARE 1997 1996 1997 1996
<S> <C> <C> <C> <C>
PRIMARY
Earnings:
Net Income $ 982 $ 858 $ 2,834 $ 1,625
Less: Preferred Stock Dividend Requirements 41 55 147 164
--------- --------- --------- ---------
Net Income Applicable to Common Stock $ 941 $ 803 $ 2,687 $ 1,461
========= ========= ========= =========
Shares:
Average Common and Common Equivalent Shares Outstanding 433.6 447.2 436.5 446.0
Primary Earnings Per Share:
Net Income $ 2.17 $ 1.80 $ 6.16 $ 3.28
========= ========= ========= =========
ASSUMING FULL DILUTION
Earnings:
Net Income Applicable to Common Stock $ 941 $ 803 $ 2,687 $ 1,461
Shares:
Average Common and Common Equivalent Shares Outstanding 433.6 447.2 436.5 446.0
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect 2.7 3.3 5.7 6.3
--------- --------- --------- ---------
Adjusted Shares of Common and Equivalent Shares Outstanding 436.3 450.5 442.2 452.3
Earnings Per Share Assuming Full Dilution:
Net Income $ 2.16 $ 1.78 $ 6.08 $ 3.23
========= ========= ========= =========
</TABLE>
-51-
<PAGE> 1
EXHIBIT 12(a)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
------------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
Income before income taxes $ 4,521
-------
Fixed charges:
Interest expense 5,077
One third of rents, net of income from subleases (a) 83
-------
Total fixed charges 5,160
-------
Less: Equity in undistributed income of affiliates (58)
-------
Earnings before taxes and fixed charges, excluding capitalized interest $ 9,623
=======
Fixed charges, as above $ 5,160
=======
Ratio of earnings to fixed charges 1.86
=======
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 5,160
Add: Interest on deposits 4,797
-------
Total fixed charges and interest on deposits $ 9,957
=======
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 9,623
Add: Interest on deposits 4,797
-------
Total earnings before taxes, fixed charges, and interest on deposits $14,420
=======
Ratio of earnings to fixed charges 1.45
=======
</TABLE>
(a) The proportion deemed representative of the interest factor.
-52-
<PAGE> 1
EXHIBIT 12(b)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(IN MILLIONS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
------------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
Income before income taxes $ 4,521
-------
Fixed charges:
Interest expense 5,077
One third of rents, net of income from subleases (a) 83
-------
Total fixed charges 5,160
-------
Less: Equity in undistributed income of affiliates (58)
-------
Earnings before taxes and fixed charges, excluding capitalized interest $ 9,623
=======
Fixed charges, as above $ 5,160
Preferred stock dividends 147
-------
Fixed charges including preferred stock dividends $ 5,307
=======
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.81
=======
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends, as above $ 5,307
Add: Interest on deposits 4,797
-------
Total fixed charges including preferred stock
dividends and interest on deposits $10,104
=======
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 9,623
Add: Interest on deposits 4,797
-------
Total earnings before taxes, fixed charges, and interest on deposits $14,420
=======
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.43
=======
</TABLE>
(a) The proportion deemed representative of the interest factor.
-53-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000019617
<NAME> THE CHASE MANHATTAN CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 14,367
<INT-BEARING-DEPOSITS> 4,152
<FED-FUNDS-SOLD> 38,958
<TRADING-ASSETS> 75,752
<INVESTMENTS-HELD-FOR-SALE> 43,987
<INVESTMENTS-CARRYING> 2,254
<INVESTMENTS-MARKET> 3,260
<LOANS> 163,087
<ALLOWANCE> 3,462
<TOTAL-ASSETS> 366,574
<DEPOSITS> 181,788
<SHORT-TERM> 77,122
<LIABILITIES-OTHER> 68,433
<LONG-TERM> 13,899
0
1,740
<COMMON> 441
<OTHER-SE> 18,985
<TOTAL-LIABILITIES-AND-EQUITY> 366,574
<INTEREST-LOAN> 9,466
<INTEREST-INVEST> 2,177
<INTEREST-OTHER> 3,348
<INTEREST-TOTAL> 15,953
<INTEREST-DEPOSIT> 4,797
<INTEREST-EXPENSE> 9,874
<INTEREST-INCOME-NET> 6,079
<LOAN-LOSSES> 599
<SECURITIES-GAINS> 189
<EXPENSE-OTHER> 7,579
<INCOME-PRETAX> 4,521
<INCOME-PRE-EXTRAORDINARY> 2,834
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,834
<EPS-PRIMARY> 6.16
<EPS-DILUTED> 6.08
<YIELD-ACTUAL> 2.90
<LOANS-NON> 931
<LOANS-PAST> 349
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,549
<CHARGE-OFFS> 809
<RECOVERIES> 209
<ALLOWANCE-CLOSE> 3,462
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
