<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 March 31, 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 426,122,218
- -----------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common stock on
April 30, 1997.
<PAGE> 2
<TABLE>
<CAPTION>
FORM 10-Q INDEX
Part I Page
- ------ ----
Item 1 Financial Statements - The Chase Manhattan Corporation
and Subsidiaries:
<S> <C>
Consolidated Balance Sheet at March 31, 1997 and
December 31, 1996. 3
Consolidated Statement of Income for the three months
ended March 31, 1997 and March 31, 1996. 4
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 1997 and March 31, 1996. 5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1997 and March 31, 1996. 6
Notes to Financial Statements. 7-15
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. 16-44
Part II
- -------
Item 1 Legal Proceedings 45
Item 2 Sales of Unregistered Common Stock 45
Item 6 Exhibits and Reports on Form 8-K. 45
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Part I
Item 1.
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions, except share data)
March 31, December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 14,349 $ 14,605
Deposits with Banks 3,298 8,344
Federal Funds Sold and Securities
Purchased Under Resale Agreements 34,554 28,966
Trading Assets:
Debt and Equity Instruments 34,753 30,377
Risk Management Instruments 32,725 29,579
Securities:
Available-for-Sale 40,372 44,691
Held-to-Maturity (Fair Value: $3,561 and $3,849) 3,603 3,855
Loans (Net of Allowance for Loan Losses of $3,550 and $3,549) 152,332 151,543
Premises and Equipment 3,640 3,642
Due from Customers on Acceptances 2,280 2,276
Accrued Interest Receivable 3,215 3,020
Other Assets 15,217 15,201
---------- -----------
TOTAL ASSETS $ 340,338 $ 336,099
========== ===========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 39,932 $ 42,726
Interest-Bearing 66,685 67,186
Foreign:
Noninterest-Bearing 4,066 4,331
Interest-Bearing 65,347 66,678
------- -------
Total Deposits 176,030 180,921
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 55,939 53,868
Commercial Paper 3,780 4,500
Other Borrowed Funds 7,819 9,231
Acceptances Outstanding 2,280 2,276
Trading Liabilities 46,147 38,136
Accounts Payable, Accrued Expenses and Other Liabilities 13,242 12,309
Long-Term Debt 12,419 12,714
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 1,390 600
------- -------
TOTAL LIABILITIES 319,046 314,555
------- -------
COMMITMENTS AND CONTINGENCIES (See Note 7)
PREFERRED STOCK OF SUBSIDIARY 550 550
------- -------
STOCKHOLDERS' EQUITY
Preferred Stock 2,500 2,650
Common Stock (Issued 440,746,231 and 440,747,317 Shares) 441 441
Capital Surplus 10,299 10,459
Retained Earnings 9,235 8,627
Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (559) (288)
Treasury Stock, at Cost (12,397,918 and 9,936,716 Shares) (1,174) (895)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 20,742 20,994
---------- -----------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 340,338 $ 336,099
========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31,
(in millions, except per share data)
1997 1996
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $ 3,112 $ 3,241
Securities 722 720
Trading Assets 626 413
Federal Funds Sold and Securities
Purchased Under Resale Agreements 559 501
Deposits with Banks 106 172
--------- --------
Total Interest Income 5,125 5,047
--------- --------
INTEREST EXPENSE
Deposits 1,515 1,644
Short-Term and Other Borrowings 1,302 1,026
Long-Term Debt 257 227
--------- --------
Total Interest Expense 3,074 2,897
--------- --------
NET INTEREST INCOME 2,051 2,150
Provision for Credit Losses 220 245
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,831 1,905
--------- --------
NONINTEREST REVENUE
Corporate Finance and Syndication Fees 168 224
Trust, Custody and Investment Management Fees 310 285
Credit Card Revenue 278 233
Service Charges on Deposit Accounts 91 99
Fees for Other Financial Services 383 378
Trading Revenue 422 355
Securities Gains 101 52
Revenue from Equity-Related Investments 164 223
Other Revenue 182 36
--------- --------
Total Noninterest Revenue 2,099 1,885
--------- --------
NONINTEREST EXPENSE
Salaries 1,124 1,076
Employee Benefits 222 305
Occupancy Expense 187 221
Equipment Expense 190 184
Foreclosed Property Expense 3 (9)
Restructuring Charge and Expenses 30 1,656
Other Expense 691 660
--------- ---------
Total Noninterest Expense 2,447 4,093
--------- ---------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 1,483 (303)
Income Tax Expense (Benefit) 556 (214)
--------- --------
NET INCOME (LOSS) $ 927 $ (89)
========= ========
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 872 $ (143)
========= ========
NET INCOME (LOSS) PER COMMON SHARE:
Primary $ 1.98 $ (.32)
========= ========
Assuming Full Dilution $ 1.97 $ (.32)
========= ========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-4-
<PAGE> 5
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(in millions)
Three Months Ended
March 31,
----------------------------
1997 1996
--------- ----------
Preferred Stock:
<S> <C> <C>
Balance at Beginning of Year $ 2,650 $ 2,650
Redemption of Stock (150) --
--------- ----------
Balance at End of Period $ 2,500 $ 2,650
--------- ----------
Common Stock:
Balance at Beginning of Year $ 441 $ 458
Retirement of Treasury Stock -- (20)
--------- ----------
Balance at End of Period $ 441 $ 438
--------- ----------
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 (160) (84)
--------- ----------
Balance at End of Period $ 10,299 $ 10,558
--------- ----------
Retained Earnings:
Balance at Beginning of Year $ 8,627 $ 7,997
Net Income (Loss) 927 (89)
Retirement of Treasury Stock -- (557)
Cash Dividends Declared:
Preferred Stock (55) (54)
Common Stock (265) (328)(a)
Accumulated Translation Adjustment 1 --
--------- ----------
Balance at End of Period $ 9,235 $ 6,969
--------- ----------
Net Unrealized 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 (271) (373)
--------- ----------
Balance at End of Period $ (559) $ (610)
--------- ----------
Common Stock in Treasury, at Cost:
Balance at Beginning of Year $ (895) $ (1,107)
Retirement of Treasury Stock -- 1,010
Purchase of Treasury Stock (609) (708)
Reissuance of Treasury Stock 330 567
--------- ----------
Balance at End of Period $ (1,174) $ (238)
--------- ----------
Total Stockholders' Equity $ 20,742 $ 19,767
========= ==========
<FN>
(a) Includes fourth quarter 1995 common stock dividends of $80 million
declared and paid by old Chase in the 1996 first quarter.
</FN>
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-5-
<PAGE> 6
<TABLE>
<CAPTION>
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
(in millions)
1997 1996
---------- ----------
Operating Activities
- --------------------
<S> <C> <C>
Net Income (Loss) $ 927 $ (89)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Provision for Credit Losses 220 245
Restructuring Charge and Expenses 30 1,656
Depreciation and Amortization 235 208
Net Change In:
Trading-Related Assets (6,880) 847
Accrued Interest Receivable (195) 51
Other Assets (572) (1,504)
Trading-Related Liabilities 8,750 297
Accrued Interest Payable 166 (189)
Other Liabilities 671 (73)
Other, Net 95 262
-------- --------
Net Cash Provided by Operating Activities 3,447 1,711
-------- --------
Investing Activities
- --------------------
Net Change In:
Deposits with Banks 5,046 2,212
Federal Funds Sold and Securities Purchased Under Resale Agreements (5,802) (2,829)
Loans Due to Sales and Securitizations 5,948 10,433
Other Loans, Net (6,876) (10,051)
Other, Net (172) 228
Proceeds from the Maturity of Held-to-Maturity Securities 229 300
Purchases of Held-to-Maturity Securities (18) (69)
Proceeds from the Maturity of Available-for-Sale Securities 1,820 3,032
Proceeds from the Sale of Available-for-Sale Securities 16,323 10,433
Purchases of Available-for-Sale Securities (14,635) (16,132)
-------- --------
Net Cash Provided (Used) by Investing Activities 1,863 (2,443)
-------- --------
Financing Activities
- --------------------
Net Change In:
Noninterest-Bearing Domestic Demand Deposits (2,794) (6,896)
Domestic Time and Savings Deposits (501) 3,445
Foreign Deposits (1,596) 851
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 2,285 1,104
Other Borrowed Funds (2,132) (1,190)
Other, Net (37) (206)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 1,121 725
Repayments of Long-Term Debt (625) (571)
Proceeds from the Issuance of Stock 170 513
Redemption of Preferred Stock (150) --
Treasury Stock Purchased (1,031) (708)
Cash Dividends Paid (296) (284)
-------- --------
Net Cash Used by Financing Activities (5,586) (3,217)
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks 20 1
-------- --------
Net Decrease in Cash and Due from Banks (256) (3,948)
Cash and Due from Banks at January 1, 14,605 14,794
-------- --------
Cash and Due from Banks at March 31, $ 14,349 $ 10,846
======== ========
Cash Interest Paid $ 2,908 $ 3,091
-------- --------
Taxes Paid $ 160 $ 335
-------- --------
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-6-
<PAGE> 7
Part I
Item 1. (continued)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - BASIS OF PRESENTATION
- --------------------------------
The unaudited financial statements of The Chase Manhattan Corporation and
subsidiaries (the "Corporation") are prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and the results of
operations for the interim periods presented have been included. In addition,
certain amounts have been reclassified to conform to the current presentation.
The Corporation adopted, commencing January 1, 1997, the requirements of
Statement of Financial Accounting Standards No. 125 entitled, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125") for the following types of transactions:
securitizations, recognitions of servicing assets and liabilities, transfers of
receivables with recourse, loan participations, and extinguishments of
liabilities. The adoption of SFAS 125 did not have a material effect on the
Corporation's earnings, liquidity, or capital resources.
In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 127 entitled "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127"),
which deferred for one year, the effective date of SFAS 125 as applied to
securities lending, repurchase agreements and other secured financing
transactions. The Corporation believes that the adoption of SFAS 127 will
not have a material effect on the Corporation's earnings, liquidity or
capital resources.
NOTE 2- EARNINGS PER SHARE
- --------------------------
For a discussion of the Corporation's current earnings per share
policy, reference is made to Note One of the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1996 ("1996 Annual Report").
For a discussion of the FASB's Statement of Financial Accounting
Standards No. 128 "Earnings per Share", see the Accounting
Developments Section on page 42 of this Form 10-Q.
-7-
<PAGE> 8
Part I
Item 1. (continued)
NOTE 3 - TRADING ACTIVITIES
- ---------------------------
For a discussion of the Corporation's trading revenue for the 1997 first
quarter, 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 (which are carried at estimated fair
value, after taking into account the effects of legally enforceable master
netting agreements relating to risk management instruments) are presented in the
following table for the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
(in millions) 1997 1996
- ------------- ------------- -------------
Trading Assets - Debt and Equity Instruments:
<S> <C> <C>
U.S. Government, Federal Agencies and Municipal Securities $ 11,301 $ 8,523
Certificates of Deposit, Bankers' Acceptances,
and Commercial Paper 1,792 1,486
Debt Securities Issued by Foreign Governments 11,028 12,284
Debt Securities Issued by Foreign Financial Institutions 4,357 3,569
Loans 1,412 876
Corporate Securities 2,680 1,873
Other 2,183 1,766
------------ -----------
Total Trading Assets - Debt and Equity Instruments (a) $ 34,753 $ 30,377
============ ===========
Trading Assets - Risk Management Instruments:
Interest Rate Contracts $ 13,812 $ 14,227
Foreign Exchange Contracts 18,109 13,760
Equity, Commodity and Other Contracts 879 1,667
Allowance for Credit Losses for Risk Management
Instruments (75) (75)
------------ -----------
Total Trading Assets - Risk Management Instruments $ 32,725 $ 29,579
============ ===========
Trading Liabilities - Risk Management Instruments:
Interest Rate Contracts $ 13,580 $ 14,622
Foreign Exchange Contracts 17,712 12,867
Equity, Commodity and Other Contracts 1,106 1,202
------------ -----------
Trading Liabilities - Risk Management Instruments $ 32,398 $ 28,691
------------ -----------
Securities Sold, Not Yet Purchased $ 11,584 $ 7,242
------------ -----------
Structured Notes $ 2,165 $ 2,203
------------ -----------
Total Trading Liabilities $ 46,147 $ 38,136
============ ===========
<FN>
(a) Includes emerging markets instruments of $5,272 million at March 31, 1997
and $5,500 million at December 31, 1996.
</FN>
</TABLE>
NOTE 4 - SECURITIES
- -------------------
For a discussion of the accounting policies relating to securities, see Note One
of the Corporation's 1996 Annual Report.
The valuation of available-for-sale securities (including securities classified
as loans which are subject to the provisions of SFAS 115) resulted in a net
after-tax unfavorable impact of $559 million on the Corporation's stockholders'
equity at March 31, 1997, compared with a net after-tax unfavorable impact of
$288 million at December 31, 1996. The change from the 1996 year-end was the
result of an increase in U.S. dollar interest rates during the 1997 first
quarter, thereby causing a decline in the market value of the securities
portfolio.
-8-
<PAGE> 9
Part I
Item 1. (continued)
Net gains from available-for-sale securities sold in the first quarter of 1997
amounted to $101 million (gross gains of $116 million and gross losses of $15
million). Net gains on such sales for the same period in 1996 amounted to $52
million (gross gains of $74 million and gross losses of $22 million).
AVAILABLE-FOR-SALE SECURITIES
- -----------------------------
The amortized cost and estimated fair value of available-for-sale securities,
including the impact of related derivatives, were as follows for the dates
indicated:
<TABLE>
<CAPTION>
March 31, 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 $ 20,572 $ 22 $ 557 $ 20,037
Collateralized Mortgage Obligations 2,238 -- 5 2,233
Other, primarily U.S. Treasuries 9,353 -- 349 9,004
Obligations of State and Political Subdivisions 352 1 1 352
Debt Securities Issued by Foreign Governments 6,765 24 55 6,734
Corporate Debt Securities 624 35 5 654
Equity Securities 919 137 47 1,009
Other, primarily Asset-Backed Securities (a) 345 10 6 349
--------- ------ -------- ---------
Total Available-for-Sale Securities $ 41,168 $ 229 $ 1,025 $ 40,372
========= ====== ======== =========
December 31, 1996 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ---------
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
========= ====== ====== =========
<FN>
(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.
</FN>
</TABLE>
-9-
<PAGE> 10
Part I
Item 1. (continued)
HELD-TO-MATURITY SECURITIES
- ---------------------------
The amortized cost and estimated fair value of held-to-maturity securities for
the dates indicated were as follows:
<TABLE>
<CAPTION>
March 31, 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 $ 1,503 $ 1 $ 28 $ 1,476
Collateralized Mortgage Obligations 1,986 3 18 1,971
Other, primarily U.S. Treasuries 54 -- -- 54
Other, primarily Asset-Backed Securities (a) 60 -- -- 60
-------- ------ ------ ---------
Total Held-to-Maturity Securities $ 3,603 $ 4 $ 46 $ 3,561
======== ====== ====== =========
December 31, 1996 (in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ---------
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
========= ======= ======= =========
<FN>
(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.
</FN>
</TABLE>
NOTE 5 - LOANS
- --------------
For a discussion of the accounting policies relating to loans, including
securities classified as loans which are subject to the provisions of SFAS 115,
reference is made to Notes One and Four of the Corporation's 1996 Annual Report.
The following table reflects the amortized cost and estimated fair value of
loans measured pursuant to SFAS 115 (which are all available-for-sale),
including the impact of related derivatives, for the dates indicated.
<TABLE>
<CAPTION>
(in millions) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
March 31, 1997 $ 1,703 $ 161 $ 341 $ 1,523
========== ======= ======= =========
December 31, 1996 $ 1,869 $ 93 $ 369 $ 1,593
========== ======= ======= =========
</TABLE>
There were no net gains or losses in the first quarter of 1997 related to the
disposition of available-for-sale emerging market securities, compared with a
net loss of $35 million in the same 1996 period.
-10-
<PAGE> 11
Part I
Item 1. (continued)
The following table sets forth information about the Corporation's impaired
loans. The Corporation uses the discounted cash flow method as its primary
method for valuing impaired loans.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(in millions) 1997 1996 1996
- ------------- ---------- ------------ ---------
<S> <C> <C> <C>
Impaired Loans with an Allowance $ 520 $ 535 $ 514
Impaired Loans without an Allowance (a) 152 182 714
---------- ----------- ---------
Total Impaired Loans $ 672 $ 717 $ 1,228
========== =========== =========
Allowance for Impaired Loans under
SFAS 114 (b) $ 171 $ 194 $ 153
---------- ----------- ---------
Average Balance of Impaired Loans
during the year-to-date period ended: $ 704 $ 1,104 $ 1,212
---------- ----------- ---------
Interest Income Recognized on Impaired
Loans during the year-to-date period ended: $ 3 $ 30 $ 8
---------- ----------- ---------
<FN>
(a) Impaired loans for which the discounted cash flows, collateral value or
market price equals or exceeds the carrying value of the loan. Such loans
do not require an allowance under SFAS 114.
(b) The Allowance for Impaired Loans under SFAS 114 is a part of the
Corporation's overall Allowance for Loan Losses.
</FN>
</TABLE>
NOTE 6 - RESTRUCTURING CHARGE AND EXPENSES
- ------------------------------------------
In connection with the merger of The Chase Manhattan Corporation ("Chase") and
Chemical Banking Corporation ("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. An additional $194 million of
merger-related expenses, from an expected additional $250 million of
merger-related expenses, were incurred since the merger and were included in the
Restructuring Charge and Expenses caption of the income statement. Of this
amount, $30 million was incurred during the 1997 first quarter. The remaining
merger-related expenses are expected to be substantially incurred over the next
year as these costs do not qualify for immediate recognition under an existing
accounting pronouncement and were not included in the $1.65 billion charge taken
on March 31, 1996. The $1.9 billion of merger-related costs reflect severance
and other termination-related costs to be incurred in connection with
anticipated staff reductions (approximately $600 million), costs in connection
with planned dispositions of certain facilities, premises and equipment
(approximately $700 million), and other merger-related expenses, including costs
to eliminate redundant back office and other operations and other expenses
related directly to the merger (approximately $600 million).
At March 31, 1997, the reserve balance associated with the above $1.65 billion
restructuring charge was approximately $809 million, of which $235 million
related to severance and other termination-related costs, $483 million related
to the disposition of certain facilities, premises and equipment, and $91
million related to other merger costs, including costs to eliminate redundant
back office and other operations.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
-11-
<PAGE> 12
Part I
Item 1. (continued)
NOTE 8 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
- --------------------------------------------------------------------------------
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
- ------------------------------------------------
In the fourth quarter of 1996 and first quarter of 1997, the Corporation
established three separate statutory business trusts, which issued an aggregate
$1,390 million in capital securities. The capital securities qualify as Tier 1
capital for the Corporation. The proceeds from each issuance by a trust of its
capital securities were invested in a corresponding series of junior
subordinated deferrable interest debentures of the Corporation. The sole assets
of each statutory business trust is these debentures. The Corporation has fully
and unconditionally guaranteed all 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 the Corporation's outstanding debentures:
<TABLE>
<CAPTION>
Amount of
Debentures Stated Maturity Interest Rate Interest
Name of Trust (in millions) of Debentures of Debentures Payment Dates
- ------------- ------------- ------------- ------------- -------------
<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>
NOTE 9 - PREFERRED STOCK OF SUBSIDIARY
- --------------------------------------
Chase Preferred Capital Corporation ("CPCC"), a real estate investment trust
established for the purpose of acquiring, holding and managing real estate
mortgage assets, is a wholly-owned subsidiary of The Chase Manhattan Bank. On
September 18, 1996, CPCC issued 22 million shares of 8.10% Cumulative Preferred
Stock, Series A with a liquidation preference of $25 per share. Dividends are
cumulative, are payable quarterly and are recorded as minority interest expense
by the Corporation.
The Series A Preferred Shares are generally not redeemable prior to September
18, 2001. On and after September 18, 2001, the Series A Preferred Shares may be
redeemed for cash at the option of CPCC, in whole or in part, at a redemption
price of $25 per share, plus accrued and unpaid dividends, if any, thereon. The
Series A Preferred Shares are treated as Tier 1 capital for the Corporation. The
Series A Preferred Shares are not subject to any sinking fund or mandatory
redemption and are not convertible into any other securities of CPCC or the
Corporation and any of its subsidiaries.
NOTE 10 - COMMON STOCK
- ----------------------
In October 1996, the Corporation announced a common stock purchase program in
which the Corporation is authorized until December 31, 1998 to purchase up to
$2.5 billion of its common stock, in addition to such other number of common
shares as may be necessary to provide for expected issuances under its dividend
reinvestment plan and its various stock-based director and employee benefit
plans. During the period from the inception of the program through March 31,
1997, the Corporation has repurchased 17.6 million common shares ($1.6 billion)
and reissued approximately 5.2 million treasury shares under the Corporation's
benefit plans, resulting in a net repurchase of 12.4 million shares ($1.2
billion) of its common stock.
-12-
<PAGE> 13
Part I
Item 1. (continued)
NOTE 11 - CAPITAL
- -----------------
For a discussion of the calculation of the Corporation's capital ratios, as well
as the various regulatory guidelines which are applicable to the Corporation,
reference is made to Note Sixteen of the Corporation's 1996 Annual Report.
The following table presents capital ratios for the Corporation and its
significant banking subsidiaries. Assets and capital amounts for the
Corporation's banking subsidiaries reflect intercompany transactions, whereas
the respective amounts for the Corporation reflect the elimination of
intercompany transactions.
<TABLE>
<CAPTION>
The Chase Texas
March 31, 1997 ($ in millions) Corporation Manhattan Bank Commerce Chase USA
- -------------- ----------- -------------- -------- ---------
<S> <C> <C> <C> <C>
Tier 1 Capital Ratio (a)(c) 8.36% (d) 7.81% 7.94% 10.61%
Total Capital Ratio (a)(c) 12.04% (d) 11.59% 11.12% 13.46%
Tier 1 Leverage Ratio (b)(c) 6.90% (d) 6.07% 6.80% 10.26%
Tier 1 Capital $ 21,199 $ 16,175 $ 1,422 $ 2,501
Total Qualifying Capital 30,509 23,996 1,991 3,172
Risk-Weighted Assets 253,441 207,087 17,900 23,571
Adjusted Average Assets 307,349 266,619 20,920 24,371
<FN>
(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) Excludes the assets and off-balance sheet financial instruments of the
Corporation's securities subsidiary, Chase Securities Inc., as well as the
Corporation's investment in such subsidiary. Including the Corporation's
securities subsidiary, Chase Securities Inc., the March 31, 1997, Tier 1
Capital, Total Capital and Tier 1 Leverage ratios were 8.56%, 12.49% and
6.48%, respectively.
</FN>
</TABLE>
NOTE 12 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
- ---------------------------------------------------------------
The Corporation utilizes various derivative and foreign exchange financial
instruments for trading purposes and for purposes other than trading, such as
asset/liability management ("ALM"). These financial instruments represent
contracts with counterparties where payments are made to or from the
counterparty based upon specific interest rates, currency levels, other market
rates or on terms predetermined by the contract. 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 the Corporation's 1996
Annual Report.
Derivative and Foreign Exchange Instruments Used for Trading Purposes:
- ----------------------------------------------------------------------
The financial instruments used for the Corporation's trading activities are
disclosed in Note 3 of this Form 10-Q. The credit risk relating to the
Corporation's trading activities is recorded on the balance sheet. The effects
of market risk (gains or losses) on the Corporation's trading activities have
been reflected in trading revenue, as the trading instruments are
marked-to-market on a daily basis.
Derivative and Foreign Exchange Instruments Used for Purposes Other Than Trading
(such as ALM activities):
- --------------------------------------------------------------------------------
A discussion of the Corporation's objectives and strategies for employing
derivative and foreign exchange instruments for ALM activities is included on
pages 55-58 of the Corporation's 1996 Annual Report.
At March 31, 1997, gross deferred gains and gross deferred losses relating to
closed derivative contracts used in ALM activities were $571 million and $585
million, respectively. For a discussion of the accounting method used for closed
contracts, see Note One of the Corporation's 1996 Annual Report and see page
39 of this Form 10-Q for the Amortization of Net Deferred Gains (Losses) on
Closed ALM Contracts.
The Corporation also uses selected derivative financial instruments to manage
the sensitivity to changes in market interest rates on anticipated transactions;
however, such transactions are not significant. Accordingly, at March 31, 1997,
deferred gains and losses associated with such transactions were immaterial.
-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 (after taking into account the effects of legally enforceable master
netting agreements) for the dates indicated below. The table should be read in
conjunction with the descriptions of these products and their risks included in
Note Seventeen of the Corporation's 1996 Annual Report.
<TABLE>
<CAPTION>
Notional Amounts (a) Credit Exposure
------------------------------ --------------------------
March 31, December 31, March 31, December 31,
(in billions) 1997 1996 1997 1996
- ------------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Futures, Forwards and Forward Rate Agreements
Trading $ 1,401.7 $ 1,209.6 $ 0.4 $ 0.5
Asset and Liability Management 68.7 30.8 --- ---
Interest Rate Swaps
Trading 2,448.1 2,300.3 10.6 11.4
Asset and Liability Management 99.8 96.4 0.6 0.7
Purchased Options
Trading 274.0 172.7 2.8 2.3
Asset and Liability Management 20.3 15.5 --- ---
Written Options
Trading 326.1 199.4 --- ---
Asset and Liability Management 6.3 1.4 --- ---
--------- ---------- -------- --------
Total Interest Rate Contracts $ 4,645.0 $ 4,026.1 $ 14.4 $ 14.9
========= ========== ======== ========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,492.2 $ 1,308.6 $ 13.9 $ 10.0
Asset and Liability Management 67.6 60.1 --- ---
Other Foreign Exchange Contracts (b)
Trading 295.5 267.4 4.2 3.8
Asset and Liability Management 4.4 4.2 --- ---
--------- ---------- -------- --------
Total Foreign Exchange Contracts $ 1,859.7 $ 1,640.3 $ 18.1 $ 13.8
========= ========== ======== ========
EQUITY, COMMODITY AND OTHER CONTRACTS
Trading $ 50.9 $ 45.7 $ 0.9 $ 1.7
--------- ---------- -------- --------
Total Equity, Commodity and Other Contracts $ 50.9 $ 45.7 $ 0.9 $ 1.7
========= ========== ======== ========
Total Credit Exposure Recorded on the Balance Sheet $ 33.4 $ 30.4
<FN>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and equity, commodity and other contracts were $699.3
billion, $10.8 billion and $7.0 billion, respectively, at March 31, 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 $94.8 billion, $101.3 billion and
$103.8 billion, respectively, at March 31, 1997, compared with $89.6
billion, $94.2 billion and $87.8 billion, respectively, at December 31,
1996.
</FN>
</TABLE>
-14-
<PAGE> 15
Part I
Item 1. (continued)
NOTE 13 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
- -----------------------------------------------------------------
The following table summarizes the Corporation's credit risk which is
represented by contract amounts relating to lending-related financial
instruments at March 31, 1997 and December 31, 1996. The table should be read in
conjunction with the description of these products and their risks included in
Note Eighteen of the Corporation's 1996 Annual Report.
<TABLE>
<CAPTION>
Off-Balance Sheet Lending-Related Financial Instruments
March 31, December 31,
(in millions) 1997 1996
- ------------- ---------- ------------
<S> <C> <C>
Credit Card Lines $ 56,098 $ 54,192
Other Commitments to Extend Credit 96,449 94,278
Standby Letters of Credit and Guarantees (Net of Risk
Participations of $5,139 and $5,205) 30,947 30,843
Other Letters of Credit 5,848 5,588
Customers' Securities Lent 41,199 38,715
</TABLE>
<TABLE>
<CAPTION>
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------------
For a discussion of the Corporation's fair value methodologies, see Note Twenty
of the Corporation's 1996 Annual Report. The following table presents the
carrying value and estimated fair value at March 31, 1997 and December 31, 1996
of the Corporation's financial assets and liabilities valued under SFAS 107.
March 31, 1997 December 31, 1996
------------------------------------------- -----------------------------------------
Carrying Estimated Appreciation/ Carrying Estimated Appreciation/
(in millions) Value (a) Fair Value (a) (Depreciation) Value Fair Value (Depreciation)
<S> <C> <C> <C> <C> <C> <C>
Total Financial Assets $ 332,983 $ 335,131 $ 2,148 $ 328,504 $ 330,831 $ 2,327
========== =========== =========== ===========
Total Financial Liabilities $ 318,647 $ 319,009 (362) $ 314,144 $ 314,626 (482)
========== =========== --------- =========== =========== ----------
Estimated Fair Value in Excess
of Carrying Value $ 1,786 $ 1,845
========= ==========
<FN>
(a) Gross unrecognized gains and losses from daily margin settlements on open
futures contracts were $20 million and $2 million, respectively, at
March 31, 1997.
</FN>
</TABLE>
Derivative contracts used for ALM activities are included in the above amounts
and are valued using market prices or pricing models consistent with methods
used by the Corporation in valuing similar instruments used for trading
purposes. The following table presents the carrying value and estimated fair
value of derivatives contracts used for ALM activities.
<TABLE>
<CAPTION>
March 31, 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 $ 304 $ 356 $ 52 (a) $ 222 $ 135 $ (87)
Total Financial Liabilities $ 252 $ (34) $ (286) (a) $ 76 $ (67) $ (143)
<FN>
(a) Unrecognized gains and losses related to total financial assets were $552
million and $500 million, respectively, at March 31, 1997. Unrecognized
gains and losses related to total financial liabilities were $187 million
and $473 million, respectively, at March 31, 1997.
</FN>
</TABLE>
The above table excludes derivatives contracts used by the Corporation to manage
the risks associated with its mortgage servicing rights that are not required to
be fair valued under SFAS 107. At March 31, 1997, the carrying value of these
derivative contracts was $82 million, and gross unrecognized gains and losses
were $12 million and $136 million, respectively, resulting in an estimated
negative fair value of $42 million. The unrecognized losses above do not include
the favorable impact from the mortgage servicing rights being hedged by these
derivative contracts.
-15-
<PAGE> 16
<TABLE>
<CAPTION>
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(in millions, except per share and ratio data)
1997 1996
---------- ----------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
-------- ------- ------- ------- -------
EARNINGS:
<S> <C> <C> <C> <C> <C>
Income Before Restructuring Costs $ 946 $ 901 $ 878 $ 870 $ 937 (e)
Restructuring Costs (After-Tax) (a) (19) (65) (20) (14) (1,026)
-------- ------- ------- ------- --------
Net Income (Loss) $ 927 $ 836 $ 858 $ 856 $ (89)
======== ======= ======= ======= ========
Net Income (Loss) Applicable to Common Stock $ 872 $ 781 $ 803 $ 801 $ (143)
======== ======= ======= ======= ========
INCOME PER COMMON SHARE:
Primary:
Income Before Restructuring Costs $ 2.02 $ 1.89 $ 1.85 $ 1.83 $ 1.98 (e)
Restructuring Costs (After-Tax) (a) (0.04) (0.15) (0.05) (0.03) (2.30)
-------- ------- ------- -------- --------
Net Income (Loss) $ 1.98 $ 1.74 $ 1.80 $ 1.80 $ (0.32)
======== ======= ======= ======== ========
Assuming Full Dilution:
Income Before Restructuring Costs $ 2.01 $ 1.88 $ 1.83 $ 1.82 $ 1.97 (e)
Restructuring Costs (After-Tax) (a) (0.04) (0.14) (0.05) (0.03) (2.29)
-------- ------- ------- -------- --------
Net Income (Loss) $ 1.97 $ 1.74 $ 1.78 $ 1.79 $ (0.32)
======== ======= ======= ======== ========
PER COMMON SHARE:
Book Value $ 42.59 $ 42.58 $ 42.03 $ 40.47 $ 39.41
Market Value $ 93.88 $ 89.38 $ 80.13 $ 70.63 $ 70.50
Common Stock Dividends Declared (b) $ 0.62 $ 0.56 $ 0.56 $ 0.56 $ 0.56
COMMON SHARES OUTSTANDING:
Average Common and Common Equivalent Shares 441.0 447.7 447.2 444.8 446.1
Average Common Shares Assuming Full Dilution 442.6 448.8 450.5 458.4 449.1
Common Shares at Period End 428.3 430.8 439.9 437.1 434.3
PERFORMANCE RATIOS: (Average Balances)
Income Before Restructuring Costs: (c)
Return on Assets 1.13% 1.08% 1.08% 1.10% 1.20%
Return on Common Stockholders' Equity 19.54% 18.12% 18.35% 19.00% 19.53% (e)
Return on Total Stockholders' Equity 18.15% 16.89% 17.04% 17.58% 18.09%
Net Income: (c)
Return on Assets 1.11% 1.00% 1.06% 1.08% NM
Return on Common Stockholders' Equity 19.12% 16.73% 17.90% 18.67% NM
Return on Total Stockholders' Equity 17.78% 15.67% 16.65% 17.30% NM
Efficiency Ratio (d) 57.6% 58.5% 58.2% 58.4% 59.5%
Efficiency Ratio - Excluding Securitizations (d) 54.5% 56.2% 56.1% 56.2% 58.0%
<FN>
(a) Reflects merger-related restructuring charge of $1,022 million, after-tax,
which was recorded on March 31, 1996. In addition, under an existing
accounting pronouncement, $19 million of after-tax merger-related expenses
were incurred and recognized in the first quarter of 1997. During 1996, $103
million of after-tax merger-related expenses were incurred ($4 million in
the first quarter, $14 million in the second quarter, $20 million in the
third quarter, and $65 million in the fourth quarter).
(b) The Corporation increased its quarterly common stock dividend from $0.56 per
share to $0.62 per share in the first quarter of 1997.
(c) Performance ratios are based on annualized income amounts.
(d) Excludes restructuring costs, foreclosed property expense, and
nonrecurring items.
(e) Includes nonrecurring items which had a $70 million net favorable impact
on net income. Excluding these items, net income was $867 million, primary
earnings per share was $1.82, fully-diluted earnings per share was $1.81 and
return on common stockholders' equity was 17.98%.
NM Not meaningful.
</FN>
</TABLE>
-16-
<PAGE> 17
Certain forward-looking statements contained herein are subject to risks and
uncertainties. The Corporation's actual results may differ materially from those
set forth in such forward-looking statements. Reference is made to the
Corporation's reports filed with the Securities and Exchange Commission, in
particular the Form 8-K dated April 18, 1997, and the Corporation's Annual
Report to Stockholders on Form 10-K for the year ended December 31, 1996 (the
"1996 Annual Report") for a discussion of factors that may cause such
differences to occur.
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
The Chase Manhattan Corporation (the "Corporation") reported first quarter 1997
operating net income of $946 million, a nine percent increase from first quarter
1996 comparable results of $867 million. Primary earnings per share in the first
quarter of 1997 were $2.02, compared with $1.82 in the same 1996 period. Fully
diluted earnings per share in the first quarter of 1997 were $2.01, an eleven
percent increase from $1.81 for the comparable 1996 quarter. Operating net
income excludes merger-related restructuring costs in both periods and the net
effect of favorable special items totaling $70 million in the first quarter of
1996. Reported net income in the 1997 first quarter was $927 million, compared
with a loss of $89 million in the prior-year first quarter.
The Corporation's first quarter 1997 results reflected the benefits of the
Corporation's balanced business portfolio, with key wholesale and retail areas
contributing solid results, as well as an overall strong financial performance
as demonstrated by the significant improvement in the efficiency ratio and a
higher return on common equity. Incremental merger savings were $205 million in
the 1997 first quarter, compared with $40 million in the 1996 first quarter.
The return on common stockholders' equity on an operating basis was 19.5% for
the first quarter of 1997 versus 18.0% for the comparable period of 1996. The
Corporation's efficiency ratio improved to 57.6% for the first quarter of 1997,
compared with 59.5% for the comparable 1996 period. Excluding the impact of
credit card securitizations (see further discussion on pages 31 and 32), the
efficiency ratio for the first quarters of 1997 and 1996 was 54.5% and 58.0%,
respectively.
In connection with reporting its 1997 first quarter results, management of the
Corporation reaffirmed its operating performance targets for 1997. These
include: (i) annual growth in operating earnings per share of 15%; (ii) return
on average common equity of 19%; (iii) an efficiency ratio of 54%-55% (excluding
the impact of securitizations); (iv) annual operating revenue growth of 6%-8%;
(v) annual growth in underlying operating noninterest expense (that is,
operating noninterest expense before giving effect to any merger-related cost
savings) of 5%-6%; (vi) incremental merger savings of approximately $635-$680
million; and (vii) substantial completion of its previously announced common
stock buy-back program.
During the 1997 first quarter, the Corporation purchased approximately 6.1
million common shares ($609 million) as part of a stock repurchase plan
announced in October of 1996. The Corporation also reissued approximately 3.6
million treasury shares under the Corporation's employee benefit plans,
resulting in a net repurchase of 2.5 million shares ($279 million) of its common
stock.
At March 31, 1997, the Corporation's Tier 1 Capital and Total Capital ratios
were 8.36% and 12.04%, respectively (excluding the assets and off-balance sheet
financial instruments of the Corporation's securities subsidiary, as well as the
Corporation's investment in this subsidiary). These risk-based capital ratios
were well in excess of the minimum ratios specified by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") and at March 31, 1997, the
Corporation and all of its depository institutions were "well capitalized" as
defined by the Federal Reserve Board.
The Corporation's nonperforming assets at March 31, 1997 were $1,126 million, a
decline of $25 million compared with $1,151 million on December 31, 1996, and a
decline of $560 million from $1,686 million at March 31, 1996. Nonperforming
assets have declined by over $10 billion, or 90%, from their peak level of $11.5
billion in 1991.
-17-
<PAGE> 18
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net Interest Income
- -------------------
Reported net interest income for the 1997 first quarter was $2,051 million
compared with $2,150 million for the 1996 first quarter. The level of reported
net interest income in both quarters was reduced by the impact of credit card
securitizations. Additionally, the 1996 first quarter included $54 million of
interest related to Federal and State tax audit settlements. Excluding the
impact of securitizations and the tax audit settlements, net interest income on
a managed basis increased 3% in the 1997 first quarter to $2,349 million,
reflecting a higher level of interest-earning assets (notably liquid assets due
to the Corporation's trading businesses and managed consumer receivables).
<TABLE>
<CAPTION>
First Quarter
--------------------------------------------
1997 1996 % Change
------ ------ ---------
<S> <C> <C> <C>
Net Interest Income (in millions)
Managed Basis $ 2,349 $ 2,337 (a) 0.5%
Impact of Securitizations (298) (187) --
-------- --------
Reported $ 2,051 $ 2,150 (a) (4.6)%
======== ========
Average Interest-Earning Assets (in billions)
Managed Basis $ 282.8 $ 263.0 7.5%
Impact of Securitizations (13.4) (8.3) --
-------- --------
Reported $ 269.4 $ 254.7 5.8%
======== ========
Net Yield on Interest-Earning Assets (b)
Managed Basis 3.38% 3.59% (a) --
Impact of Securitizations (.28) (.18) --
-------- --------
Reported 3.10% 3.41% (a) --
======== ========
<FN>
(a) Includes $54 million of interest related to tax audit settlements.
(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 Sheet on page 43.
</FN>
</TABLE>
The reported net yield on average interest-earning assets was 3.10% in the 1997
first quarter versus 3.41% in the prior year's first quarter. Adjusting for
securitizations, the net yield on a managed basis was 3.38%, compared with 3.59%
in the 1996 first quarter (3.51% excluding the 1996 tax audit settlements),
primarily reflecting a shift in the composition of interest-earning assets from
higher-yielding loans to lower-yielding liquid assets and narrower loan spreads.
The following table reflects the composition of average interest-earning assets
as a percentage of total earning assets for the periods indicated.
<TABLE>
<CAPTION>
Average Interest-Earning Assets
- -------------------------------
First Quarter
---------------------------------------------------------
(in billions) 1997 1996
------------------------- -----------------------
<S> <C> <C> <C> <C>
Loans $ 153.0 57% $ 149.6 58%
Securities 43.5 16 42.7 17
Liquid Assets 72.9 27 62.4 25
-------- --- -------- ---
Total $ 269.4 100% $ 254.7 100%
======== === ======== ===
</TABLE>
-18-
<PAGE> 19
Average interest-earning assets retained on the balance sheet increased by $14.7
billion in the first quarter of 1997, when compared with the respective 1996
period, principally as a result of an increase in liquid interest-earning
assets. The Corporation has continued to increase its liquid interest-earning
assets through its trading and Section 20 activities. Average total loans
increased by $3.4 billion in the 1997 first quarter, when compared with the
comparable 1996 period, reflecting growth in commercial lending and, to a lesser
extent, consumer loans, despite the impact of a higher level of credit card
securitizations. Average credit card securitizations increased by approximately
$5 billion in the 1997 first quarter compared with the same 1996 period.
The growth in interest-earning assets in the 1997 first quarter was largely
funded by a $14.5 billion increase in Federal funds purchased and securities
sold under repurchase agreements, which provide short-term funding for
trading-related positions.
Management anticipates that, given its current expectations for interest rate
movements in 1997, the Corporation's managed net interest income in 1997 will be
higher than in 1996.
Provision for Credit Losses
- ---------------------------
The Corporation's provision for credit losses was $220 million for the 1997
first quarter, compared with $182 million in the 1996 fourth quarter, and $245
million in the 1996 first quarter. The decrease in the provision, when compared
with the same 1996 period, was the result of lower commercial net charge-offs,
while consumer net charge-offs on a retained basis remained the same. The
increase in the provision, when compared with the 1996 fourth quarter, was the
result of a higher level of commercial net charge-offs as a result of a lower
level of recoveries.
Management believes that the credit quality of the Corporation's overall
commercial and industrial portfolio will remain strong during 1997. Management
expects the provision for credit losses in 1997 (which is anticipated to equal
net charge-offs) to be modestly higher than in 1996, primarily as a result of
growth in retained consumer loans, higher losses on credit card loans, and lower
recoveries on commercial loans. For a discussion of the Corporation's net
charge-offs, see the Credit Risk Management Section on pages 29-35.
Noninterest Revenue
- -------------------
Noninterest revenue totaled $2,099 million in the 1997 first quarter, an
increase of $214 million, or 11%, when compared with the corresponding 1996
period, reflecting strong trading results, higher credit card revenue, increased
securities gains, as well as higher trust, custody and investment management
fees and other revenue. The Corporation continued to generate fee growth by
offering clients integrated financing and advisory solutions. Noninterest
revenue in the first quarter of 1997 included a $44 million gain on the sale of
a partially-owned foreign investment and the 1996 amount included a $60 million
loss on the sale of a building in Japan.
The following table presents the components of noninterest revenue for the
periods indicated.
<TABLE>
<CAPTION>
First Quarter
----------------------------
(in millions) 1997 1996
---- ----
<S> <C> <C>
Corporate Finance and Syndication Fees $ 168 $ 224
Trust, Custody and Investment Management Fees 310 285
Credit Card Revenue 278 233
Service Charges on Deposit Accounts 91 99
Fees for Other Financial Services 383 378
-------- -------
Total Fees and Commissions 1,230 1,219
Trading Revenue 422 355
Securities Gains 101 52
Revenue from Equity-Related Investments 164 223
Other Revenue 182 36
-------- -------
Total $ 2,099 $ 1,885
======== =======
</TABLE>
-19-
<PAGE> 20
Fees and Commissions
- --------------------
Corporate finance and syndication fees were $168 million in the 1997 first
quarter, a decrease of $56 million from the prior-year period. During the 1997
first quarter, the strength of the equity financing market reduced the need for
debt financing by companies, and lower deal volume led to more competitive
pricing. Additionally, the 1996 first quarter results were favorably impacted by
two large transactions.
Trust, custody and investment management fees rose 9% to $310 million in the
1997 first quarter when compared with the first quarter of 1996. These favorable
results were largely the result of new business in Global Services and Global
Asset Management and Private Banking, as well as market appreciation resulting
in a higher level of assets under management, including the Vista mutual funds.
<TABLE>
<CAPTION>
First Quarter
-------------------------
(in millions) 1997 1996
----- ------
Product Diversification:
<S> <C> <C>
Trust, Custody and Investment Management Fees (a) $ 225 $ 215
Mutual Fund Fees (b) 30 20
Other Trust Fees (c) 55 50
------- ------
Total Trust, Custody and Investment Management Fees $ 310 $ 285
======= ======
<FN>
(a) Represents fees for trustee, agency, registrar, estate services, safekeeping
and maintenance of securities, as well as providing advisory and investment
management services for asset holdings, for domestic and global customers.
(b) Represents administrative, custody, trustee and other fees in connection
with the Corporation's proprietary mutual funds.
(c) Includes securities lending and broker-clearing.
</FN>
</TABLE>
Credit card revenue increased $45 million, or 19%, from the 1996 first quarter
as a result of growth in managed outstandings. Average managed credit card
receivables (credit card receivables on the balance sheet plus securitized
credit card receivables) grew to $25.3 billion in the first quarter of 1997,
when compared with $23.2 billion for the prior-year's comparable period. For a
further discussion of the credit card portfolio and related securitization
activity, see pages 31-32 of this Form 10-Q.
The following table sets forth the components of fees for other financial
services for the periods indicated.
<TABLE>
<CAPTION>
First Quarter
-------------------------
(in millions) 1997 1996
----- ------
<S> <C> <C>
Fees for Other Financial Services:
Commissions on Letters of Credit and Acceptances $ 72 $ 89
Fees in Lieu of Compensating Balances 81 74
Mortgage Servicing Fees 56 50
Loan Commitment Fees 27 30
Other Fees 147 135
------ ------
Total $ 383 $ 378
====== ======
</TABLE>
-20-
<PAGE> 21
Trading Revenue
- ---------------
The following table sets forth the components of trading revenue for the first
quarters of 1997 and 1996.
<TABLE>
<CAPTION>
First Quarter
--------------------------
(in millions) 1997 1996
------ ------
<S> <C> <C>
Trading Revenue $ 422 $ 355
Net Interest Income Impact (a) 173 161
------- -------
Total Trading-Related Revenue $ 595 $ 516
======= =======
Product Diversification:
Interest Rate Contracts (b) $ 183 $ 146
Foreign Exchange Contracts (c) 169 140
Debt Instruments and Other (d) 243 230
------- -------
Total Trading-Related Revenue $ 595 $ 516
======= =======
<FN>
(a) Net interest income attributable to trading activities 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.
</FN>
</TABLE>
Trading revenues for the 1997 first quarter were at a record level for the
Corporation, up 15% from the first quarter a year ago. The increase in revenue
from interest rate contracts was primarily due to increased activity as a result
of volatility in the interest rate markets caused by the expectation of rising
interest rates. Also contributing to the increase was strong customer demand for
derivatives used for risk management purposes. The increase in foreign exchange
revenue was primarily due to the continuation of a strong U.S. dollar and an
increase in the level of cross-currency trading activity in the European markets
caused by the possibility of a delay in the integration of the European Monetary
System. Debt instrument and other revenue remained at high levels, primarily as
a result of strong performances of emerging markets in Latin America and
Eastern Europe as well as the U.S. securities business.
Trading revenues are affected by many factors, including volatility of
currencies and interest rates, the volume of transactions executed by the
Corporation on behalf of its customers, the Corporation's success in proprietary
positioning, the credit standing of the Corporation, and the steps taken by
central banks and governments which affect financial markets. The Corporation
expects its trading revenues will fluctuate as these factors will vary from
period to period.
<TABLE>
<CAPTION>
Other Noninterest Revenue
- -------------------------
The following table presents securities gains, revenue from equity-related
investments and the composition of other revenue for the first quarters of 1997
and 1996.
First Quarter
------------------------
(in millions) 1997 1996
- ------------- ------- ------
<S> <C> <C>
Securities Gains $ 101 $ 52
Revenue from Equity-Related Investments 164 223
- -----------------------------------------------------------------------------------------------------------------------------------
Other Revenue:
Residential Mortgage Origination/Sales Activities $ 31 $ 28
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 -- (35)
All Other Revenue 107 103
------- -------
Total Other Revenue $ 182 $ 36
======= =======
</TABLE>
-21-
<PAGE> 22
The securities gains, all of which resulted from sales from the
available-for-sale portfolio, were made in connection with the Corporation's
asset/liability management activities. The increase in gains in the 1997 first
quarter were primarily the result of the sales of securities overseas that were
made in anticipation of a rising interest rate environment.
Revenue from equity-related investments, which includes income from venture
capital activities and emerging markets investments, was $164 million in the
1997 first quarter, $59 million lower than the comparable 1996 quarter. This
decrease was the result of a lower number of large deals in the 1997 first
quarter when compared with the same period in 1996. At March 31, 1997, the
Corporation had equity-related investments with a carrying value of
approximately $2.8 billion. The Corporation believes that equity-related
investments will continue to make contributions to the Corporation's earnings
(averaging approximately $167 million per quarter for the previous eight
quarters), although the timing of the recognition of gains from these activities
is unpredictable and revenues from such activities could vary significantly from
period to period.
Other revenue increased $146 million in the 1997 first quarter, when compared
with the prior year period. The increase is due to a $44 million gain on the
sale of a non-strategic, partially-owned foreign investment, while the 1996
first quarter results include a $60 million loss on the sale of a building in
Japan and a $35 million net loss resulting from the disposition of
available-for-sale emerging markets securities.
All other revenue includes the Corporation's investment in CIT Group Holdings,
Inc., which contributed $14 million in revenue in the 1997 first quarter
compared with $11 million in the 1996 first quarter.
Noninterest Expense
- -------------------
Noninterest expense, excluding restructuring costs, was $2,417 million in the
1997 first quarter, a decrease of $20 million when compared with the first
quarter of 1996. The decrease reflects incremental merger savings of $205
million, primarily reflecting lower staff-related expenses and occupancy
expenses as a result of personnel reductions and other merger integration
efforts. This was partially offset by higher outsourcing and marketing costs.
The 1997 first quarter results included $50 million of costs due to the
accelerated vesting of stock-based incentive awards. The 1996 results included a
charge of $40 million to conform retirement benefits provided to foreign
employees.
On an operating basis (which excludes restructuring costs, foreclosed property
expense, nonrecurring items and $11 million of expenses associated with
preferred stock dividends issued by a real estate investment trust ("REIT")
subsidiary of the Corporation), noninterest expense was $2,353 million, a
decrease of 2% from the same 1996 period. Underlying operating noninterest
expense growth before giving effect to the merger-related cost savings was 6% in
the 1997 first quarter.
First Quarter
----------------------
(in millions) 1997 1996
------- ------
Salaries $ 1,124 $ 1,076
Employee Benefits 222 305
Occupancy Expense 187 221
Equipment Expense 190 184
Foreclosed Property Expense 3 (9)
Other Expense 691 660
-------- -------
Total Before Restructuring Charge 2,417 2,437
Restructuring Charge and Expenses 30 1,656
-------- -------
Total $ 2,447 $ 4,093
======== =======
Efficiency Ratio (a) 57.6% 59.5%
Efficiency Ratio Excluding Securitizations (a) 54.5% 58.0%
(a) The computation of the efficiency ratio (noninterest expense as a percentage
of the total of net interest income and noninterest revenue) excludes
restructuring costs, foreclosed property expense, and nonrecurring items.
Nonrecurring items in the 1997 first quarter included the gain on a sale of
a non-strategic, partially-owned foreign investment and costs due to the
accelerated vesting of stock-based incentive awards. Nonrecurring items in
the first quarter of 1996 included aggregate tax benefits and refunds, loss
on a sale of a building in Japan and costs incurred in combining the
Corporation's foreign retirement plans.
-22-
<PAGE> 23
Salaries and Employee Benefits
- ------------------------------
The increase in salaries for the 1997 first quarter was primarily due to $50
million of costs for the accelerated vesting of stock-based incentive awards due
to the improvement in the Corporation's stock price and, to a lesser extent, a
competitive recruiting environment for specialized skills in targeted growth
businesses. Partially offsetting these increases was the reduction in full-time
equivalent employees since March 31, 1996 as a result of the merger. The slight
increase in full-time equivalent employees during the first quarter of 1997
reflects planned growth in selected businesses.
The following table presents the Corporation's full-time equivalent employees at
the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
---------- ----------- ---------
<S> <C> <C> <C>
Domestic Offices 57,953 57,592 59,818
Foreign Offices 9,924 10,193 11,493
------ ------ ------
Total Full-Time Equivalent Employees 67,877 67,785 71,311
====== ====== ======
</TABLE>
Employee benefits in the 1997 first quarter decreased $83 million from the prior
year's first quarter. Included in the 1996 first quarter was a $40 million
charge related to conforming retirement benefits provided to foreign employees.
Also impacting the decline in employee benefits during the first quarter of 1997
were lower social security expenses associated with a lower volume of
employee stock options that were exercised during the 1997 first
quarter, as well as the impact of staff reductions since the first quarter of
1996.
Occupancy and Equipment Expense
- -------------------------------
Occupancy expense in the 1997 first quarter decreased by $34 million from the
prior year's first quarter largely as a result of the consolidation of
operations and branch facilities from merger integration efforts as well as from
pre-merger expense reduction programs. The higher level in equipment expense was
primarily the result of increased software expenses to enhance processing
systems throughout the Corporation.
Restructuring Charge and Expenses
- ---------------------------------
In connection with the merger, $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. In addition, merger-related expenses of $30 million and $6
million were incurred in the first quarters of 1997 and 1996, respectively, and
were included in the restructuring charge and expenses caption on the income
statement. For a further discussion of the restructuring charge, see Note 6 on
page 11. Because of the inherent uncertainties associated with merging two large
corporations, there can be no assurance that the $1.9 billion of merger-related
costs (or the composition between restructuring charge and merger-related
expenses) will reflect the actual costs ultimately incurred by the Corporation
in implementing the merger or that the Corporation would not deem it appropriate
to take additional charges, as the merger implementation process continues.
-23-
<PAGE> 24
Other Expense
- -------------
The following table presents the components of other expense for the periods
indicated.
First Quarter
---------------------------
(in millions) 1997 1996
------ ------
Other Expense:
Professional Services $ 133 $ 129
Marketing Expense 103 90
Telecommunications 75 85
Amortization of Intangibles 41 43
Minority Interest 19 9
All Other 320 304
------- -------
Total $ 691 $ 660
======= =======
Other expense for the 1997 first quarter increased by $31 million when compared
with the first quarter of 1996. The increase reflected expenses of $23 million
related to the co-branded Wal-Mart MasterCard (including $14 million of
marketing expense), and $11 million of minority interest expense associated with
the REIT, both of which commenced in the 1996 fourth quarter. Reflected in All
Other expense for the first quarter of 1997 were higher outsourcing costs and
other expenses related to the Wal-Mart MasterCard program. Partially offsetting
these increases was lower telecommunications expense of $10 million due to the
Corporation's sourcing and other expense-reduction initiatives.
Income Taxes
- ------------
The Corporation recognized income tax expense of $556 million in the first
quarter of 1997, compared with income tax benefits of $214 million in the first
quarter of 1996. The 1996 amount includes tax benefits related to the
restructuring charge as well as aggregate tax benefits and refunds of $132
million. The Corporation's effective tax rate was 37.5% in the 1997 first
quarter compared with 38.0% in the first quarter of 1996 (excluding the
aforementioned tax benefits and refunds).
- --------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
- --------------------------------------------------------------------------------
The Corporation manages itself using an economic-based risk-adjusted management
information system ("MIS"). This system includes many key lines of business
which 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 the risk-adjusted MIS
line-of-business results.
-24-
<PAGE> 25
<TABLE>
<CAPTION>
Lines of Business Results
- -------------------------
Global Wholesale Regional and Nationwide
For Three Months Ended March 31, Banking Consumer Banking Total (a)
--------------------- ----------------------- --------------------
(in millions, except ratios) 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income $ 906 $ 919 $ 1,529 $ 1,441 $ 2,050 $ 2,096
Noninterest Revenue 1,423 1,306 600 564 2,100 1,945
Noninterest Expense 1,188 1,163 1,136 1,141 2,415 2,406
--------- -------- -------- --------- --------- -------
Operating Margin 1,141 1,062 993 864 1,735 1,635
Credit Costs 78 73 448 344 223 236
--------- -------- -------- --------- --------- -------
Income Before Taxes 1,063 989 545 520 1,512 1,399
Income Taxes 406 366 214 203 566 532
--------- -------- -------- --------- --------- -------
Operating Net Income 657 623 331 317 946 867
Restructuring Costs (11) -- (4) (1) (19) (1,026)
Nonrecurring Items (b) -- -- -- -- -- 70
--------- --------- --------- --------- --------- --------
Net Income $ 646 $ 623 $ 327 $ 316 $ 927 $ (89)
========= ========= ========= ========= ========= ========
Average Common Equity $ 9,527 $ 9,769 $ 6,555 $ 6,353 $ 18,494 $ 18,188
Average Assets $ 233,449 $ 211,279 $ 116,766 $ 109,357 $ 339,269 $ 312,925
Return on Common Equity 26.8% 24.4% 19.3% 18.9% 19.5% 18.0%
Efficiency Ratio 51% 52% 53% 57% 58% 60%
<FN>
(a) Total column includes Corporate results. See description of Corporate on
page 28.
(b) Nonrecurring items for 1996 include the loss on the sale of a building in
Japan, costs incurred in combining the Corporation's foreign retirement
plans and aggregate tax benefits and refunds.
</FN>
</TABLE>
Global Wholesale Banking
- ------------------------
Global Wholesale Banking provides financing, advisory, sales and trading, trade
finance, asset management, private banking and operating services to clients
worldwide, including corporations, institutions, governments and wealthy
individuals. Through these businesses, the Corporation 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.
Global Wholesale Banking encompasses investment banking and corporate lending,
global markets activities, equity investing, private banking, asset management
and information and transaction services. Terminal Businesses, representing
discontinued portfolios (primarily the remaining refinancing country debt and
commercial real estate problem asset and nonperforming portfolio), are also
included in Global Wholesale Banking.
Global Wholesale Banking's operating net income for the first quarter of 1997
was $657 million, an increase of $34 million over the first quarter of 1996.
These favorable results were due primarily to the Corporation's global markets
businesses, reflecting higher foreign exchange, derivatives and securities
results worldwide partly offset by lower corporate finance fees and lower equity
investment gains, both of which had very strong first quarters in 1996.
-25-
<PAGE> 26
<TABLE>
<CAPTION>
The following table sets forth certain key financial performance measures of the
businesses within Global Wholesale Banking for the periods indicated.
1997 1996
------------------------------------------- ---------------------------------------------
Three Months Ended March 31, Net Efficiency Net Efficiency
(in millions, except ratios) Revenues Income ROCE Ratio Revenues Income ROCE Ratio
-------- ------ ---- ----- -------- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Global Wholesale Banking:
Global Investment Banking
and Corporate Lending $ 448 $ 115 12.5% 45% $ 531 $ 175 19.5% 35%
Global Markets 904 317 58.4 44 622 175 28.4 58
Chase Capital Partners 135 73 25.6 13 248 146 57.1 6
Global Asset Management
and Private Banking 202 41 32.2 65 192 38 28.9 64
Global Services 509 76 27.7 76 480 63 22.7 78
Terminal Businesses 3 (17) NM NM 10 (9) NM NM
</TABLE>
NM - Not meaningful.
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. The product offerings
encompass syndicated finance, high-yield securities, mergers and acquisitions,
project finance, restructuring, private placements, lease financing and lending.
The Corporation continues to maintain its lead position in loan syndication and
in leveraged financing. Net income for the first quarter of 1997 was $115
million, a decrease of $60 million from the first quarter of 1996 due to lower
deal volume which led to lower transaction fees. Additionally, the 1996 first
quarter results were favorably impacted by two 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, the Corporation 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. Also, included within Global
Markets are the domestic and international treasury units which have the primary
responsibility of managing the Corporation's asset/liability and investment
securities activities. The strong growth in trading-related revenue contributed
to net income for the first quarter of 1997 of $317 million with a return on
common equity of 58%, a significant increase from 1996's first quarter results
of $175 million and 28%, respectively. Trading-related revenue for the first
quarter of 1997 was $580 million, an increase of 22% from last year's first
quarter results driven by higher foreign exchange, derivatives, and securities
results worldwide. Global Markets manages treasury revenues on a total return
basis and benefited from treasury revenues in the 1997 first quarter of
$201 million.
Chase Capital Partners
- ----------------------
Chase Capital Partners ("CCP") is a global private equity organization with
approximately $4.0 billion under management, including $2.8 billion in
equity-related investments. Through professionals focused on investing in the
United States, Europe, Asia and Latin America, CCP provides equity and mezzanine
financing for a wide variety of investment opportunities. During the first
quarter of 1997, CCP's direct investments totaled $124 million in over 13
venture capital, management buyout, recapitalization, growth equity and
mezzanine transactions. Net income for the first quarter of 1997 was $73
million, a decrease from last year's first quarter results of $146 million
primarily as a result of a lower number of large deals in the 1997 first quarter
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 and institutional mutual fund and self-directed
investors. Services include a full range of private banking capabilities,
including trust and estates, custody, investment management for individuals and
institutional investors globally; Vista Family of Mutual Funds (at March 31,
1997, the fourth largest bank-managed mutual fund family in the U.S.) and
discount brokerage. Total assets under management amounted to $131 billion at
March 31, 1997. Net income grew 8% to $41 million in the 1997 first quarter,
with a return on common equity of 32%, due to a higher level of assets under
management and increased client activity.
-26-
<PAGE> 27
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 $3.8 trillion
in assets at March 31, 1997 and serviced over $1.4 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, Automated Clearing House (ACH) and
CHIPS volume. Net income in the first quarter of 1997 was $76 million, an
increase of $13 million or 21% from 1996 first quarter. Return on common equity
for 1997 first quarter was 28%; excluding the impact of goodwill, the return on
tangible common equity was 35%. These favorable results are due to strong
revenue growth within global investor services and global trust reflecting new
business as well as higher volumes in the global payment business.
Regional and Nationwide Consumer Banking
- ----------------------------------------
The Regional and Nationwide Consumer Banking franchise as of March 31, 1997,
includes the third largest bank credit card issuer in the U.S., the third
largest originator and second largest servicer of residential mortgages and a
leading provider of auto financing and other consumer lending products. The
Corporation 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 first quarter of 1997 was $331 million and
operating return on common equity was 19%. These improved results were driven
mainly by strong growth in loan volume, mortgage banking products and the
benefit of merger-related savings, partially offset by higher credit provision
for credit cards and auto loans.
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 March 31, Net Efficiency Net Efficiency
(in millions, except ratios) Revenues (a) Income ROCE Ratio Revenues Income ROCE Ratio
------------ ------ ---- ----- -------- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regional and Nationwide
Consumer Banking:
Credit Cards $ 730 $ 56 14.8% 39% $ 635 $ 72 19.4% 40%
Retail Payments and Investments 477 69 26.0 74 476 55 21.0 79
Middle Market 230 62 23.9 46 237 59 22.6 50
Mortgage Banking 186 46 14.6 (b) 56 165 22 6.6 72
National Consumer Finance 155 27 23.1 43 150 34 30.1 42
International Consumer 65 15 80.6 58 61 15 76.2 60
Texas Commerce 320 66 17.5 63 308 68 19.3 62
<FN>
(a) Insurance products managed within Retail Payments and Investments but
included for reporting purposes in Credit Cards, Mortgage Banking, and
National Consumer Finance, generated revenues of $24 million and $19 million
in 1997 and 1996, respectively.
(b) Excluding the impact of goodwill, the return on tangible common equity was
20% for the first quarter of 1997.
</FN>
</TABLE>
Credit Cards
- ------------
Chase Cardmember Services ranks as the third largest bank card issuer in the
United States as of March 31, 1997, with a $25.3 billion managed portfolio,
inclusive of the co-branded Shell MasterCard which now totals $4.5 billion in
outstandings. For the first quarter of 1997, net income (reflected on a managed
basis) was $56 million, a $16 million decrease from 1996's first quarter results
of $72 million. Earnings were driven by a 15% revenue increase generated from
growth in average managed receivables and the effect of higher fees and
risk-based pricing initiatives offset by higher credit card net charge-offs and
increased spending related to the launch of the Wal-Mart co-branded credit card.
-27-
<PAGE> 28
Retail Payments & Investments
- -----------------------------
At March 31, 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, the
Corporation makes available insurance and investment products nationwide.
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 first quarter of 1997 was $69
million, an increase of $14 million from the 1996 first quarter. The improvement
in net income is due primarily to lower noninterest expense, reflecting staff
reductions and branch consolidations, coupled with an increase in deposit volume
and higher insurance fees.
Middle Market
- -------------
The Corporation was the number one middle market bank in the New York
metropolitan tri-state area at March 31, 1997, where it has relationships with
52% of regional companies with sales ranging from $10 million to $500 million.
Net income for the 1997 first quarter was $62 million, a $3 million increase
when compared with 1996 first quarter results of $59 million. The increase in
the 1997 first quarter results is due to higher deposit volume and staff
reductions.
Mortgage Banking
- ----------------
At March 31, 1997, Mortgage Banking is the third-largest originator and second
largest servicer of residential mortgage loans in the U.S., serving more than
1.9 million customers nationwide. In the first quarter of 1997, $7 billion in
loans were originated and the Corporation's servicing portfolio totaled $160
billion. Net income in the first quarter of 1997 was $46 million, a $24 million
increase from the 1996 first quarter. Return on common equity rose to 15%;
however, excluding the impact of goodwill, the return on tangible common equity
was 20%. The 1997 first quarter results were favorably affected by a 13%
increase in revenue reflecting higher levels of servicing assets and higher net
interest margin on mortgage loans and 14% lower expenses due to merger saves
and the re-engineering of the mortgage origination business.
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 March 31, 1997, Chase Auto
Finance ($11 billion in outstandings) was ranked number one among noncaptive
finance companies in new originations ($3 billion in 1997 originations ). Net
income in the first quarter of 1997 was $27 million, a decrease of $7 million
from the 1996 first quarter. The 1997 first quarter results includes solid
revenue growth due to higher managed receivables which was offset by a
higher credit provision reflecting a 23% increase in loan volume
and lower securitization gains in the 1997 first quarter when compared with
the same 1996 period. Additionally, the 1997 first quarter reflected lower
revenue compared with 1996 due to the joint venture formed with Sallie
Mae in the 1996 fourth quarter, which is accounted for on the equity basis.
International Consumer
- ----------------------
International Consumer provides loan, deposit, investment and insurance products
for individuals in Hong Kong. Also, included is The Manhattan Card Company
Limited (the Corporation's 54% owned subsidiary) which is the third-largest
credit card issuer in Hong Kong. Additionally, the Corporation 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 first quarter of 1997
was $15 million, flat when compared with the 1996 first quarter results. The
1997 first quarter results were driven by a 7% growth in revenue reflecting
higher loan volumes offset by higher expenses and credit costs.
Texas Commerce
- --------------
Texas Commerce is the primary bank for more large corporations and middle market
companies than any other bank in Texas and also maintains a strong consumer
banking presence through its 124 locations. Additionally, at March 31, 1997,
Texas Commerce was the largest bank for personal and corporate trust services in
the Southwest. At March 31, 1997, total assets were $21 billion. Net income for
the first quarter of 1997 was $66 million, relatively flat when compared with
last year's first quarter results of $68 million. Return on common equity in the
first quarter of 1997 is 18%; excluding the impact of goodwill, the return on
tangible common equity was 22%. Texas Commerce continues to contribute solid
revenue growth reflecting higher corporate finance fees.
Corporate
- ---------
Corporate includes the management results from the Corporation's investment in
CIT and some effects remaining at the Corporate level after the implementation
of management accounting policies, including residual credit provision and tax
expense. 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 tax refunds in the first quarter of
1996. For the first quarter of 1997, Corporate had a net loss of $42 million
compared to a $73 million net loss in the 1996 first quarter. The economic
risk-based methodology for capital is allocated on a business unit level basis
based on credit, market and operating risk, with the unallocated portion
included in Corporate. In the 1997 first quarter, Corporate had unallocated
equity of $2,412 million compared with $2,066 million in the first
quarter of 1996, reflecting a continued improvement of the overall risk
profile of the Corporation.
-28-
<PAGE> 29
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 the Corporation are fully allocated to
the business units except for special corporate one-time charges. Management has
developed a risk-adjusted capital methodology that quantifies different types of
risk -- credit, market, and operating -- within various businesses and assigns
capital accordingly. The provision for credit losses is allocated to business
units utilizing a credit risk methodology applied consistently across the
Corporation and a risk grading system appropriate for a business unit's
portfolio. The difference between the risk-based provision and the Corporation's
provision is included in the Corporate results. Long-term expected tax rates are
assigned in evaluating the Corporation's businesses and the difference between
the risk-based tax rate and the Corporation's tax rate is included in the
Corporate results.
- --------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following discussion of the Corporation's credit risk management focuses
primarily on developments since December 31, 1996. A discussion of the
Corporation's management of its credit risk is provided on pages 48-54 of the
Corporation's 1996 Annual Report. A description of the Corporation's accounting
policies for its nonperforming loans and assets acquired as loan satisfactions
is provided in Note One of the Corporation's 1996 Annual Report.
Loan Portfolio
- --------------
The Corporation's loans outstanding totaled $155.9 billion at March 31, 1997,
compared with $155.1 billion at the 1996 year-end, and $149.3 billion at March
31, 1996, reflecting increased demand for consumer and commercial loans
(excluding commercial real estate), partially offset by the impact of credit
card, auto loan and residential and commercial mortgage securitizations.
The Corporation's nonperforming assets at March 31, 1997 were $1,126 million, a
decrease of $25 million from the 1996 year-end level and a decrease of $560
million, or 33%, from last year's comparable period-end. The reduction in
nonperforming assets reflects the ongoing improvement in the Corporation's
credit profile as a result of a lower level of loans being placed on
nonperforming status, repayments, charge-offs, and continuing loan workout and
collection activities.
Total net charge-offs were $220 million in the first quarter of 1997, compared
with $245 million for the comparable period in 1996. The 1996 first quarter
amount excludes a charge of $102 million, related to conforming the credit card
charge-off policies of Chase and Chemical. Total net charge-offs (on a managed
basis) were $433 million in the 1997 first quarter, compared with $351 million
in the first quarter of 1996.
The following table presents the Corporation's loan-related information for the
dates indicated.
-29-
<PAGE> 30
<TABLE>
<CAPTION>
Loans Nonperforming Assets
---------------------------------------- ------------------------------------
March 31, Dec 31, March 31, March 31, Dec 31, March 31,
(in millions) 1997 1996 1996 1997 1996 1996
--------- ------- --------- -------- ------- ---------
Domestic Consumer:
<S> <C> <C> <C> <C> <C> <C>
Residential Mortgage(a) $ 36,586 $ 36,621 $ 35,908 $ 267 $ 249 $ 246
Credit Card 11,145 12,157 13,704 -- -- --
Auto Financings 11,609 11,121 9,281 26 28 23
Other Consumer(b) 9,411 9,185 10,168 10 7 14
----------- ---------- ---------- -------- -------- --------
Total Domestic Consumer 68,751 69,084 69,061 303 284 283
----------- ---------- ---------- -------- -------- --------
Domestic Commercial:
Commercial and Industrial 36,204 34,742 31,833 367 444 474
Commercial Real Estate(c) 5,751 5,934 6,514 206 156 442
Financial Institutions 6,280 5,540 6,268 1 2 2
----------- --------- ---------- -------- -------- --------
Total Domestic Commercial 48,235 46,216 44,615 574 602 918
----------- --------- ---------- -------- -------- --------
Total Domestic 116,986 115,300 113,676 877 886 1,201
----------- --------- ---------- -------- -------- --------
Foreign:
Commercial and Industrial 24,036 23,109 21,951 69 79 128
Commercial Real Estate 578 800 759 1 1 27
Financial Institutions & Foreign Gov't 10,996 12,597 9,772 33 38 155
Consumer 3,286 3,286 3,173 18 17 26
----------- --------- ---------- -------- -------- --------
Total Foreign 38,896 39,792 35,655 121 135 336
----------- ---------- ----------- -------- -------- --------
Total Loans $ 155,882 $ 155,092 $ 149,331 998 1,021 1,537
=========== ========== =========== -------- -------- --------
Assets Acquired as Loan Satisfactions 128 130 149
-------- --------- --------
Total Nonperforming Assets $ 1,126 $ 1,151 $ 1,686
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Past Due 90 Days and Over
Net Charge-offs & Still Accruing
------------------------- ----------------------------------
First Quarter March 31, Dec 31, March 31,
(in millions) 1997 1996 1997 1996 1996
---------- -------- ---------- ------- ---------
Domestic Consumer:
<S> <C> <C> <C> <C> <C>
Residential Mortgage(a) $ 7 $ 8 $ 8 $ 7 $ 13
Credit Card 150 165 246 267 283
Auto Financings 12 8 12 6 15
Other Consumer(b) 40 29 100 115 161
------- ------- ------- ------- ------
Total Domestic Consumer 209 210 366 395 472
------- ------- ------- ------- ------
Domestic Commercial:
Commercial and Industrial 14 48 53 19 25
Commercial Real Estate(c) (4) (4) 4 8 9
Financial Institutions -- -- -- -- --
------- ------- ------- ------- ------
Total Domestic Commercial 10 44 57 27 34
------- ------- ------- ------- ------
Total Domestic 219 254 423 422 506
------- ------- ------- ------- ------
Foreign:
Commercial and Industrial (2) (9) 8 6 2
Commercial Real Estate -- -- -- -- --
Financial Institutions & Foreign Gov't -- (2) -- -- --
Consumer 3 2 10 6 10
------- ------- ------- ------- ------
Total Foreign 1 (9) 18 12 12
------- ------- ------- ------- ------
Total Loans 220 245 $ 441 $ 434 $ 518
------- ------- ======= ======= ======
Charge Related to Conforming
Credit Card Charge-off Policies -- 102
------- -------
Total $ 220 $ 347
======= =======
<FN>
(a) Consists of 1-4 family residential mortgages.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured revolving lines of credit. There are
essentially no credit losses in the student loan portfolio due to the
existence of Federal and State government agency guarantees. Student loans
which were past due 90 days and over and still accruing were approximately
$30 million, $54 million, and $106 million at March 31, 1997, December 31,
1996 and March 31, 1996, respectively.
(c) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
</FN>
</TABLE>
-30-
<PAGE> 31
Domestic Consumer Portfolio
- ---------------------------
The domestic consumer loan portfolio consists of one-to-four family residential
mortgages, credit cards, auto financings and other consumer loans. The domestic
consumer loan portfolio totaled $68.8 billion at March 31, 1997, a decrease of
$333 million from the 1996 year-end, reflecting strong loan growth offset by the
impact of credit card, auto loan and residential mortgage securitizations during
the 1997 first quarter.
Residential Mortgage Loans: Residential mortgage loans were $36.6 billion at
March 31, 1997 and December 31, 1996, an increase from $35.9 billion at March
31, 1996, primarily reflecting a higher level of adjustable-rate loan
outstandings.
At March 31, 1997, nonperforming domestic residential mortgage loans as a
percentage of the portfolio was 0.73%, compared with 0.68% at the 1996 year-end
and 0.69% at March 31, 1996.
The following table presents the residential mortgage servicing portfolio
activity for the periods indicated. A discussion of the Corporation's mortgage
servicing and loan origination activities is included on pages 49-50 of the
Corporation's 1996 Annual Report.
First Quarter
---------------------------------
(in billions) 1997 1996
---- ----
Balance at Beginning of Period $ 140.6 $ 132.1
Originations 7.1 7.5
Acquisitions 16.8 (a) 1.1
Repayments and Sales (4.2) (7.6)
--------- ----------
Balance at March 31, $ 160.3 $ 133.1
========= ==========
(a) Represents acquisition of Source One Mortgage Services Corporation ("Source
One") servicing portfolio in February 1997.
Mortgage servicing rights (included in other assets) amounted to $1,703 million
at March 31, 1997, compared with $1,203 million at March 31, 1996, reflecting
the corresponding increase in the Corporation's residential mortgage servicing
portfolio due to the acquisition of Source-One servicing portfolio in February
1997. The Corporation 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.
Credit Card Loans: The Corporation analyzes its credit card portfolio on a
"managed basis" which includes credit card receivables on the balance sheet as
well as credit card receivables which have been securitized. During the 1997
first quarter, the Corporation securitized $1.4 billion of credit card
receivables compared with $2.9 billion in the 1996 first quarter. For the first
quarter of 1997, average managed receivables were $25.3 billion, compared with
$24.4 billion in the 1996 fourth quarter and $23.2 billion in the 1996 first
quarter, reflecting the continued growth in credit card outstandings.
-31-
<PAGE> 32
<TABLE>
<CAPTION>
The following table presents credit-related information for the Corporation's
managed credit card receivables.
As of or for the Three Months Ended March 31,
(in millions) 1997 1996
----------- -----------
<S> <C> <C>
Average Managed Credit Card Receivables $ 25,318 $ 23,183
Past Due 90 Days & Over and Accruing $ 622 $ 495
As a Percentage of Average Credit Card Receivables 2.46% 2.15%
Net Charge-offs $ 358 (a) $ 270 (a)
As a Percentage of Average Credit Card Receivables 5.66% 4.66%
<FN>
(a) Excludes charge related to conforming the credit card charge-off policies of
Chase and Chemical.
</FN>
</TABLE>
The increase in net charge-offs on managed credit card receivables for the
three-month period ending March 31, 1997, when compared with the same 1996
period, reflects growth in average managed credit card outstandings and higher
levels of personal bankruptcies and delinquencies. Management currently expects
that credit card net charge-offs will increase in the second quarter of 1997 and
will decline thereafter. Additionally, management expects that the Corporation's
credit card net charge-offs, as a percentage of average managed credit card
receivables, will be approximately 5.6% for the full year 1997.
Credit Card Securitizations: For a discussion of the Corporation's credit card
securitizations, see page 51 of the Corporation'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.
Favorable (Unfavorable) Impact First Quarter
-----------------------
(in millions) 1997 1996
----- -----
Net Interest Income $ (298) $ (187)
Provision for Credit Losses 214 105
Credit Card Revenue 68 75
Other Revenue (2) 3
Pre-tax Income (Loss) Impact of Securitizations $ (18) $ (4)
Auto Financings: The auto financings portfolio, which consists of auto loans and
leases, was $11.6 billion at March 31, 1997, an increase from $11.1 billion at
December 31, 1996 and $9.3 billion at March 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 $2.8
billion in the first 1997 quarter, compared with $3.1 billion in the same 1996
period. The Corporation securitized approximately $1.2 billion of auto loans
during the first 1997 quarter, compared with $1.4 billion during the same 1996
period. Net charge-offs related to auto financings were $12 million in the 1997
first quarter, compared with $8 million in the same period in 1996, primarily
reflecting growth in the portfolio and unfavorable performance in a discontinued
product line.
On a managed basis, the auto financings portfolio was $17.1 billion at March 31,
1997, compared with $16.0 billion at December 31, 1996 and $13.1 billion at
March 31,1996. Net charge-offs on a managed basis were $17 million in the 1997
first quarter, compared with $8 million in first quarter 1996.
Other Consumer Loans: Other consumer loans, which includes secured installment
loans (primarily loans related to recreational vehicles and manufactured housing
financing), student loans and unsecured revolving lines of credit, were $9.4
billion at March 31, 1997, compared with $9.2 billion at December 31, 1996, and
$10.2 billion at March 31, 1996. The decrease from March 31, 1996 primarily
reflected the sale of approximately $1.5 billion of student loans during the
fourth quarter of 1996 in conjunction with the formation of the Corporation's
joint venture with Sallie Mae (which is accounted for on the equity basis),
partly offset by increased demand for installment loans. The increase in net
charge-offs for the 1997 period reflects higher personal bankruptcies related to
unsecured revolving lines of credit.
-32-
<PAGE> 33
Domestic Commercial Portfolio
- -----------------------------
Domestic Commercial and Industrial Portfolio: The domestic commercial and
industrial portfolio totaled $36.2 billion at March 31, 1997, an increase from
$34.7 billion at December 31, 1996 and $31.8 billion at March 31, 1996. The
portfolio consists primarily of loans made to large corporate and middle market
customers and is diversified geographically and by industry.
Nonperforming domestic commercial and industrial loans were $367 million at
March 31, 1997, compared with $474 million at March 31, 1996. In the first
quarter of 1997, the Corporation had net charge-offs of $14 million, compared
with $48 million in the first quarter of 1996.
Management believes that the credit quality of the Corporation's commercial and
industrial loan portfolio will remain relatively stable in 1997, although it
expects net charge-offs in 1997 to be modestly higher than in 1996, as a result
of an anticipated reduction in recoveries from the high level achieved during
1996.
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 $5.8 billion at March 31, 1997, essentially flat with $5.9 billion at
December 31, 1996 and a decrease from $6.5 billion at March 31, 1996. The
decrease is principally attributable to securitizations, repayments from
borrowers, transfers, collections and sales primarily in the terminal commercial
real estate portfolio.
The table below sets forth the major components of the domestic commercial real
estate loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(in millions) 1997 1996 1996
--------- ------------ ---------
<S> <C> <C> <C>
Commercial Mortgages $ 4,838 $ 5,040 $ 5,308
Construction 913 894 1,206
--------- ---------- -----------
Total Domestic Commercial Real Estate Loans $ 5,751 $ 5,934 $ 6,514
========= ========== ===========
</TABLE>
Nonperforming domestic commercial real estate loans were $206 million at March
31, 1997, a $50 million increase from the December 31, 1996 level, but a
decrease of $236 million, or 53%, from March 31, 1996. The improvement in
nonperforming asset levels since March 31, 1996 reflects the transfer of $145
million of nonperforming loans to the Assets Held for Accelerated Disposition
portfolio in the fourth quarter of 1996.
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 $6.3 billion, or 4% of total loans
outstanding, at March 31, 1997, compared with $5.5 billion at December 31, 1996
and $6.3 billion at March 31, 1996. The portfolio continued to maintain its
strong credit quality during the first quarter of 1997, with no net charge-offs.
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 March 31, 1997, the Corporation's total
foreign loans were $38.9 billion, compared with $39.8 billion at December 31,
1996 and $35.7 billion at March 31, 1996. The portfolio included foreign
commercial and industrial loans of $24.0 billion at March 31, 1997, an increase
of $.9 billion from the 1996 year-end and an increase of $2.1 billion from
March 31, 1996.
-33-
<PAGE> 34
Foreign nonperforming loans at March 31, 1997 were $121 million, a decrease of
$14 million from December 31, 1996 and a decrease of $215 million from March 31,
1996. Net charge-offs of foreign loans were $1 million in the 1997 first
quarter, compared with net recoveries of $9 million in the 1996 first quarter.
Industry Diversification
- ------------------------
Based upon the industry classifications utilized by the Corporation at March 31,
1997, there were no industry segments which exceeded 5% of total Commercial and
Industrial loans outstanding.
Derivative and Foreign Exchange Financial Instruments
- -----------------------------------------------------
In the normal course of its business, the Corporation utilizes various
derivative and foreign exchange financial instruments to meet the financial
needs of its customers, to generate revenues through its trading activities, and
to manage its exposure to fluctuations in interest and currency rates. For a
discussion of the derivative and foreign exchange financial instruments utilized
in connection with the Corporation's trading activities and asset/liability
management activities, including the notional amounts and credit exposure
outstandings as well as the credit and market risks involved, see Notes 3 and 12
of this Form 10-Q and pages 52-58 and Notes One and Seventeen of the
Corporation's 1996 Annual Report.
Many of the Corporation's derivative and foreign exchange contracts are
short-term, which mitigates credit risk as transactions settle quickly. The
following table provides the remaining maturities of derivative and foreign
exchange contracts outstanding at March 31, 1997 and December 31, 1996.
Percentages are based upon remaining contract life of mark-to-market exposure
amounts.
<TABLE>
<CAPTION>
At March 31, 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 14% 54% 11% 33% 15% 59% 26% 31%
3 to 6 months 6 23 5 14 5 21 5 11
6 to 12 months 7 18 30 12 8 15 28 10
1 to 5 years 52 5 53 30 52 5 40 35
Over 5 years 21 -- 1 11 20 -- 1 13
--- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
</TABLE>
The Corporation routinely enters into derivative and foreign exchange
transactions with regulated financial institutions, which the Corporation
believes have relatively low credit risk. At March 31, 1997, approximately 87%
of the mark-to-market exposure of such transactions was with commercial bank and
financial institution counterparties, most of which are dealers in these
products. Nonfinancial institutions accounted for approximately 13% of the
Corporation's derivative and foreign exchange mark-to-market exposure.
Additionally, at March 31, 1997 and 1996, nonperforming derivatives contracts
were immaterial.
The Corporation does not deal, to any significant extent, in derivatives, which
dealers of derivatives (such as other banks and financial institutions) consider
to be "leveraged". As a result, the mark-to-market exposure as well as the
notional amount of such derivatives were insignificant at March 31, 1997.
-34-
<PAGE> 35
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 and guarantees. As of March 31, 1997, the allowance
for credit losses has been allocated into three components: a $3,550 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 $70 million allowance for credit losses on letters of credit
and guarantees, which is reported in Other Liabilities. During the 1997 first
quarter, there were no provisions or charge-offs made to the
allowance for credit losses on derivatives and foreign exchange financial
instruments or on letters of credit and guarantees.The first quarter 1996
amounts have not been reclassified due to immateriality.
The Corporation deems its allowance for credit losses at March 31, 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. The Corporation periodically reviews such factors and
reassesses the adequacy of the allowance for credit losses.
The accompanying table reflects the activity in the Corporation's allowance for
loan losses for the periods indicated.
First Quarter
---------------------------
(in millions) 1997 1996
-------- --------
Total Allowance at Beginning of Period $ 3,549 $ 3,784
Provision for Credit Losses 220 245
Charge-Offs (273) (312)
Recoveries 53 67
-------- --------
Subtotal Net Charge-Offs (220) (245)
Charge Related to Conforming Credit
Card Charge-off Policies --- (102)
-------- --------
Total Net Charge-offs (220) (347)
Other 1 1
-------- --------
Total Allowance at End of Period $ 3,550 $ 3,683
======== ========
The following table presents the Corporation's allowance for loan losses
coverage ratios.
March 31, December 31, March 31,
For the Period Ended: 1997 1996 1996
---------- ------------ ---------
Allowance for Loan Losses to:
Loans at Period-End 2.28% 2.29% 2.47%
Average Loans 2.32 2.37 2.46
Nonperforming Loans 355.71 347.60 239.62
-35-
<PAGE> 36
- --------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
- --------------------------------------------------------------------------------
Trading Activities
- ------------------
Measuring Market Risk: Market risk is measured and monitored on a daily basis
through a value-at-risk ("VAR") methodology, 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.
[See Graph Number 1 at Appendix 1]
The preceding chart contains a histogram of the Corporation's daily market
risk-related revenue. Market risk-related revenue is defined as the daily change
in value in marked-to-market trading portfolios plus any trading-related net
interest income or other revenue. Net interest income related to funding and
investment activity is excluded. Based on actual trading results for the twelve
months ended March 31, 1997, which captures the historical correlation among
business units, 95% of the variation in the Corporation's daily trading results
fell within a $26 million band centered on the daily average amount of $9
million. For the twelve months ended March 31, 1997, the Corporation posted
positive daily market risk-related revenue for 245 out of 259 business trading
days for international and domestic units. For 215 of the 259 days, the
Corporation's daily market risk-related revenue or losses occurred within the
negative $5 million through positive $15 million range, which is representative
of the Corporation's emphasis on market-making, sales and arbitrage activities.
For a further discussion of measuring market risk, see pages 54-55 of the
Corporation's 1996 Annual Report.
Asset/Liability Management Activities
- -------------------------------------
The Corporation'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 the Corporation'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. The Corporation, 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.
For a further discussion of the Corporation's ALM process and the derivative
instruments used in its ALM activities, see pages 55-58 and Note Seventeen of
the Corporation's 1996 Annual Report. A discussion of the accounting policies
relating to derivatives used for ALM activities is provided in Note One of the
Corporation's 1996 Annual Report.
Measuring Interest Rate Sensitivity:
- ------------------------------------
In managing exposure, the Corporation uses quantifications of net gap exposure,
measurements of earnings at risk based on net interest income simulations, 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. Derivatives used in interest rate
sensitivity management are also included in the applicable gap intervals.
A net gap for each time period is calculated by subtracting the liabilities
repricing in that interval from the assets repricing. A negative gap - more
liabilities repricing than assets - will benefit net interest income in a
declining interest rate environment and will detract from net interest income in
a rising interest rate environment. Conversely, a positive gap - more assets
repricing than liabilities - will benefit net interest income if rates are
rising and will detract from net interest income in a falling rate environment.
-36-
<PAGE> 37
<TABLE>
<CAPTION>
Condensed Interest Sensitivity Table
- ------------------------------------
(in millions) 1-3 4-6 7-12 1-5 Over
At March 31, 1997 Months Months Months Years 5 Years Total
------ ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $ (10,587) $ (3,696) $ 5,974 $ 29,873 $ (21,564) $ ---
Derivative Instruments Affecting
Interest-Rate Sensitivity (a) (1,901) 17,916 (8,932) (11,407) 4,324 ---
Interest-Rate Sensitivity Gap (12,488) 14,220 (2,958) 18,466 (17,240) ---
Cumulative Interest-Rate
Sensitivity Gap (12,488) 1,732 (1,226) 17,240 --- ---
% of Total Assets (4)% 1% -- 5% --- ---
<FN>
(a) Represents net repricing effect of derivative positions, which include
interest rate swaps, futures, forwards, forward rate agreements and options,
that are used as part of the Corporation's overall asset/liability
management activities.
</FN>
</TABLE>
At March 31, 1997, the Corporation had $1,226 million more liabilities than
assets repricing within one year (including net repricing effect of derivative
positions). This compares with $7,945 million, or 2% of total assets, at
December 31, 1996.
During the first quarter of 1997, management took actions to reduce the
Corporation's interest rate sensitivity, and as of March 31, 1997, the
Corporation's earnings at risk to an immediate 100 basis point rise in interest
rates for the next twelve months is estimated to be approximately 2% of the
Corporation's projected after-tax net income. An immediate 100 basis point
rise in interest rates is an hypothetical rate scenario, used to measure risk,
and does not necessarily represent management's current view of future market
developments. At December 31, 1996, the Corporation'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 the Corporation's ALM activities. The following table
summarizes the outstanding ALM interest rate swap notional amounts at March 31,
1997, by twelve-month intervals (i.e., April 1, 1997 through March 31, 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 March 31, 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. The
Corporation 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.
-37-
<PAGE> 38
<TABLE>
<CAPTION>
OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY
INTERVALS
For the twelve-month period beginning April 1,
(in millions) 1997 1998 1999 2000 2001 Thereafter
--------- --------- --------- --------- ------- ----------
Receive fixed swaps
<S> <C> <C> <C> <C> <C> <C>
Notional amount $ 32,724 $ 22,635 $ 17,941 $ 13,938 $ 12,021 $ 7,845
Weighted-average Fixed rate 6.46% 6.33% 6.45% 6.48% 6.61% 6.55%
Pay fixed swaps
Notional amount $ 39,737 $ 28,528 $ 14,526 $ 10,374 $ 8,574 $ 2,932
Weighted-average Fixed rate 6.64% 6.64% 7.23% 7.10% 7.22% 7.46%
Basis Swaps
Notional amount $ 27,309 $ 21,220 $ 8,934 $ 2,371 $ 2,082 $ 1,278
- -----------------------------------------------------------------------------------------------------------------------------------
Average Three-Month Implied
Forward LIBOR Rates 6.15% 6.71% 6.96% 6.98% 7.13% 7.24%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Notional Amount $ 99,770 $ 72,383 $ 41,401 $ 26,683 $ 22,677 $ 12,055
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the Corporation's assets and liabilities at March
31, 1997 with the notional amount of related derivatives used for ALM purposes.
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 $ 3,298 $ 2,060 $ 1,451
Securities - Available-for-Sale 40,372 4,098 7,534
Loans 152,332 49,416 40,211
Other Assets 15,217 4,500 4,649
Deposits 176,030 26,298 44,318
Other Borrowed Funds 7,819 1,272 ---
Long-Term Debt 12,419 6,140 1,380
<FN>
(a) At March 31, 1997, notional amounts of approximately $6 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 the Corporation's accounting policy relative to derivatives
used in place of cash market instruments.
(b) Includes futures, forwards, forward rate agreements and options.
</FN>
</TABLE>
-38-
<PAGE> 39
The unfavorable impact on net interest income from the Corporation's ALM
derivative activities was $24 million in the first quarter of 1997, compared
with a favorable impact of $11 million for the first quarter of 1996. The
Corporation 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
the Corporation's ALM activities for March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
March 31, December 31,
(in millions) 1997 1996 Change
---------- ------------ -------
ALM Derivative Contracts:
<S> <C> <C> <C>
Net Deferred Gains (Losses) $ (14) $ (42) $ 28
Net Unrecognized Gains (Losses) (340) (243) (97)
-------- --------- -------
Net ALM Derivative Gains (Losses) $ (354) $ (285) $ (69)
======== ========= =======
</TABLE>
The net deferred losses at March 31, 1997 are expected to be amortized as yield
adjustments in interest income, interest expense or noninterest revenue, as
applicable, over the periods reflected in the following table. The net
unrecognized losses do not include the net favorable impact from the
assets/liabilities being hedged by these derivative contracts. For a further
discussion of unrecognized gains/losses on open derivative contracts, see Note
14 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
- -----------------------------------------
Deferred
(in millions) Gains/(Losses) Premiums
-------------- --------
1997 $ 35 $ 15
1998 (1) 19
1999 (19) 37
2000 (13) 30
2001 and After (16) 51
----- -----
Total $ (14) $ 152
===== =====
- --------------------------------------------------------------------------------
OPERATING RISK MANAGEMENT
- --------------------------------------------------------------------------------
The Corporation, like all large financial institutions, is exposed to many types
of operating risk, including the risk of fraud by employees or outsiders,
unauthorized transactions by employees, and errors relating to computer and
telecommunications systems. The Corporation maintains a system of controls that
is designed to keep operating risk at appropriate levels in view of the
financial strength of the Corporation, the characteristics of the businesses and
markets in which the Corporation operates, competitive circumstances and
regulatory considerations. However, from time to time in the past, the
Corporation has suffered losses from operating risk and there can be no
assurance that the Corporation will not suffer such losses in the future.
-39-
<PAGE> 40
- --------------------------------------------------------------------------------
CAPITAL AND LIQUIDITY RISK MANAGEMENT
- --------------------------------------------------------------------------------
The following capital and liquidity discussion focuses primarily on developments
since December 31, 1996. Accordingly, it should be read in conjunction with the
Capital and Liquidity Risk Management section on pages 58-59 and Note Sixteen of
the Corporation's 1996 Annual Report.
Capital
- -------
The Corporation's level of capital at March 31, 1997 remained strong, with
capital ratios well in excess of regulatory guidelines. At March 31, 1997, the
Corporation's Tier 1 and Total Capital ratios were 8.36% and 12.04%,
respectively. These ratios, as well as the leverage ratio, exclude the assets
and off-balance sheet financial instruments of the Corporation's securities
subsidiary as well as the Corporation's investment in such subsidiary. In
addition, the provisions of SFAS 115 do not apply to the calculation of these
ratios. The Corporation manages its capital to execute its strategic business
plans and support its growth and investments, including acquisition strategies
in its core businesses. As part of the Corporation's commitment to a disciplined
capital policy, management has targeted a Tier 1 capital ratio for the
Corporation of 8 to 8.25%.
Total capitalization (the sum of Tier 1 Capital and Tier 2 Capital) increased by
$1,144 million during the first quarter of 1997 to $30.5 billion reflecting, in
part, $790 million of capital securities issued by subsidiary trusts of the
Corporation (see Note 8 of this Form 10-Q), partially offset by the redemption
of $150 million of preferred stock.
In October 1996, the Corporation announced a common stock purchase program in
which the Corporation is authorized until December 31, 1998 to purchase up to
$2.5 billion of its common stock, in addition to such other number of common
shares as may be necessary to provide for expected issuances under its dividend
reinvestment plan and its various stock-based director and employee benefit
plans. During the period from the inception of the program through March 31,
1997, the Corporation has repurchased 17.6 million common shares ($1.6 billion)
and reissued approximately 5.2 million treasury shares under the Corporation's
benefit plans, resulting in a net repurchase of 12.4 million shares ($1.2
billion) of its common stock. Management intends to purchase equity on a more
accelerated time schedule than originally announced and believes it is likely
that the buy-back program will be completed in late 1997 or early 1998.
The Corporation raised the cash dividend on its common stock to $.62 per share,
an increase from $.56 per share, in the first quarter of 1997. Management's
current expectation is that the dividend policy of the Corporation will
generally be to pay a common stock dividend equal to approximately 25-35% of the
Corporation's net income (excluding restructuring charges) less preferred stock
dividends. Future dividend policies will be determined by the Board of Directors
in light of the earnings and financial condition of the Corporation and its
subsidiaries and other factors, including applicable governmental regulations
and policies.
-40-
<PAGE> 41
<TABLE>
<CAPTION>
The following table sets forth the components of capital for the Corporation.
Components of Capital
- ---------------------
March 31, December 31,
(in millions) 1997 1996
-------- -----------
Tier 1 Capital
<S> <C> <C>
Common Stockholders' Equity $ 18,801 $ 18,632
Nonredeemable Preferred Stock 2,500 2,650
Minority Interest (a) 2,088 1,294
Less: Goodwill 1,340 1,353
Non-Qualifying Intangible Assets 134 128
50% Investment in Securities Subsidiary 716 780
--------- ----------
Tier 1 Capital $ 21,199 $ 20,315
--------- ----------
Tier 2 Capital
Long-Term Debt Qualifying as Tier 2 $ 6,853 $ 6,709
Qualifying Allowance for Credit Losses 3,173 3,121
Less: 50% Investment in Securities Subsidiary 716 780
--------- ----------
Tier 2 Capital $ 9,310 $ 9,050
--------- ---------
Total Qualifying Capital $ 30,509 $ 29,365
========= =========
Risk-Weighted Assets (b) $ 253,441 $ 249,215
========= =========
<FN>
(a) Minority interest includes Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable Interest Debentures and
Preferred Stock of Subsidiary. For a further discussion see Notes 8 and 9 of
this Form 10-Q.
(b) Includes off-balance sheet risk-weighted assets in the amount of $81,804
million and $79,099 million, respectively, at March 31, 1997 and December
31, 1996.
</FN>
</TABLE>
Liquidity
- ---------
The primary source of liquidity for the bank subsidiaries of the Corporation
derives from their ability to generate core deposits (which includes all
deposits except noninterest-bearing time deposits, foreign deposits and
certificates of deposit of $100,000 or more). The Corporation considers funds
from such sources to comprise its subsidiary banks' "core" deposit base because
of the historical stability of such sources of funds. These deposits fund a
portion of the Corporation's asset base, thereby reducing the Corporation's
reliance on other, more volatile, sources of funds. The Corporation's average
core deposits for the first three months of 1997 were $81 billion and
represented 53% of average loans for the period.
The Corporation is an active participant in the capital markets. In addition to
issuing commercial paper and medium-term notes, the Corporation raises funds
through the issuance of long-term debt, common stock and preferred stock. The
Corporation's long-term debt at March 31, 1997 was $12,419 million, a decrease
of $295 million from the 1996 year-end. The decrease resulted largely from
maturities of the Corporation's long-term debt of $625 million, partially offset
by issuances of $331 million of long-term debt. The Corporation will continue to
evaluate the opportunity for future redemptions of its outstanding debt and
preferred stock in light of current market conditions. The Corporation has
approximately $960 million of fixed-rate preferred stock which becomes callable
in 1997 and management intends to redeem certain series of these preferred stock
in 1997
-41-
<PAGE> 42
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION
- --------------------------------------------------------------------------------
The following supervision and regulation discussion focuses primarily on
developments since December 31, 1996; accordingly, it should be read in
conjunction with the Supervision and Regulation section on pages 2-5 of the
Corporation's 1996 Annual Report.
Dividends
- ---------
At March 31, 1997, in accordance with the dividend restrictions applicable to
them, the Corporation's bank subsidiaries could, during 1997, without the
approval of their relevant banking regulators, pay dividends in an aggregate
amount of approximately $1.8 billion to their respective bank holding companies,
plus an additional amount equal to their net income from April 1, 1997 through
the date in 1997 of any such dividend payment.
In addition to the dividend restrictions set forth in statutes and regulations,
the Federal Reserve Board, the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation ("FDIC") have authority under the
Financial Institutions Supervisory Act to prohibit or to limit the payment of
dividends by the banking organizations they supervise, including the Corporation
and its subsidiaries that are banks or bank holding companies, if, in the
banking regulator's opinion, payment of a dividend would constitute an unsafe or
unsound practice in light of the financial condition of the banking
organization.
FDICIA
- ------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required the FDIC to establish a risk-based assessment system for FDIC deposit
insurance. FDICIA also contained provisions limiting certain activities and
business methods of depository institutions. Finally, FDICIA provided for
expanded regulation of depository institutions and their affiliates, including
parent holding companies, by such institutions' appropriate Federal banking
regulator. Each of the Corporation's banking institutions were "well
capitalized" as that term is defined under the various regulations promulgated
under FDICIA and, therefore, the Corporation does not expect such regulations to
have a material adverse impact on its business operations.
- --------------------------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
- --------------------------------------------------------------------------------
Derivative and Market Risk Disclosures
- --------------------------------------
In January 1997, the Securities and Exchange Commission ("SEC") issued a Release
(Nos. 33-7386 and 34-38223) which requires (i) quantitative and qualitative
disclosures outside the financial statements about the market risk inherent in
derivatives and other financial instruments and (ii) enhanced descriptions of
accounting policies for derivatives in the footnotes to the financial
statements.
The market risk disclosure requirements of this release will be applicable
commencing with the Corporation's 1997 annual report. The Corporation is
currently evaluating this release and expects to comply with the requirements of
the release in its 1997 annual report.
Earnings Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share". This statement establishes standards for computing and presenting
earnings per share (EPS) and simplifies the previously issued accounting
standards for computing earnings per share. It replaces the computation and
presentation of "primary EPS" with a computation and presentation of "basic
EPS". It revises the computation and presentation of "fully-diluted EPS" with a
computation and presentation of "diluted EPS". It also requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997.
While SFAS 128 is not yet effective, the Corporation believes
that the adoption of SFAS 128 will not have a significant impact on the
Corporation's EPS computations.
-42-
<PAGE> 43
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
March 31, 1997 March 31, 1996
----------------------------------------- ---------------------------------------
Average Rate Average Rate
Balance Interest (Annualized) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 5,491 $ 106 7.86% $ 8,238 $ 172 8.39%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 36,102 559 6.28% 26,793 501 7.52%
Trading Assets-Debt and Equity
Instruments 31,185 626 8.14% 27,290 413 6.09%
Securities:
Available-for-Sale 39,818 664 6.76%(b) 38,191 645 6.79% (b)
Held-to-Maturity 3,729 62 6.76% 4,515 80 7.16%
Loans 153,030 3,114 (c) 8.25% 149,634 3,241 8.71%
------- ----- --------- -----
Total Interest-Earning Assets 269,355 5,131 7.73% 254,661 5,052 7.98%
Allowance for Credit Losses (3,452) (3,776)
Cash and Due from Banks 12,065 13,051
Risk Management Instruments 36,669 25,570
Other Assets 24,632 23,419
--------- ----------
Total Assets $ 339,269 $ 312,925
========= ==========
LIABILITIES
Domestic Retail Deposits $ 57,654 529 3.72% $ 56,080 486 3.48%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 9,236 150 6.59% 7,867 76 3.84%
Deposits in Foreign Offices 65,231 836 5.20% 69,831 1,082 6.23%
--------- ------- --------- -------
Total Time and Savings
Deposits 132,121 1,515 4.65% 133,778 1,644 4.94%
--------- ------- --------- -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 59,470 785 5.35% 44,953 621 5.57%
Commercial Paper 4,293 55 5.21% 5,578 75 5.40%
Other Borrowings (d) 17,372 462 10.79% 16,211 330 8.21%
--------- ------- --------- -------
Total Short-Term and
Other Borrowings 81,135 1,302 6.51% 66,742 1,026 6.20%
Long-Term Debt 13,523 257 7.70% 12,976 227 7.05%
--------- ------- --------- -------
Total Interest-Bearing Liabilities 226,779 3,074 5.50% 213,496 2,897 5.46%
--------- ------- --------- -------
Noninterest-Bearing Deposits 40,897 38,747
Risk Management Instruments 36,357 27,554
Other Liabilities 13,544 12,290
--------- ---------
Total Liabilities 317,577 292,087
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 --
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 2,648 2,650
Common Stockholders' Equity 18,494 18,188
--------- ---------
Total Stockholders' Equity 21,142 20,838
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 339,269 $ 312,925
========= ==========
INTEREST RATE SPREAD 2.23% 2.52%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $2,057(a) 3.10% $2,155 (a) 3.41%
====== ==== ====== ====
<FN>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt and
taxable assets.
(b) For the three months ended March 31, 1997 and March 31, 1996, the annualized
rate for available-for-sale securities based on historical cost was 6.69%
and 6.82%, respectively.
(c) For the three months ended March 31, 1997 and March 31, 1996, the negative
impact from nonperforming loans on net interest income was $17 million and
$29 million, respectively.
(d) Includes securities sold but not yet purchased and structured notes.
</FN>
</TABLE>
-43-
<PAGE> 44
THE CHASE MANHATTAN CORPORATION and Subsidiaries
QUARTERLY FINANCIAL INFORMATION
(in millions, except per share data)
<TABLE>
<CAPTION>
1997 1996
---------- ----------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
Interest Income
<S> <C> <C> <C> <C> <C>
Loans $ 3,112 $ 3,048 $ 3,042 $ 3,028 $ 3,241
Securities 722 767 690 685 720
Trading Assets 626 615 482 388 413
Federal Funds Sold and Securities
Purchased Under Resale Agreements 559 571 549 514 501
Deposits with Banks 106 97 112 156 172
-------- -------- -------- -------- --------
Total Interest Income 5,125 5,098 4,875 4,771 5,047
-------- -------- -------- -------- --------
Interest Expense
Deposits 1,515 1,520 1,416 1,458 1,644
Short-Term and Other Borrowings 1,302 1,304 1,213 1,087 1,026
Long-Term Debt 257 233 220 221 227
-------- -------- -------- -------- --------
Total Interest Expense 3,074 3,057 2,849 2,766 2,897
-------- -------- -------- -------- --------
Net Interest Income 2,051 2,041 2,026 2,005 2,150
Provision for Credit Losses 220 182 220 250 245
-------- -------- -------- -------- --------
Net Interest Income After Provision For Credit Losses 1,831 1,859 1,806 1,755 1,905
-------- -------- -------- -------- --------
Noninterest Revenue
Corporate Finance and Syndication Fees 168 213 234 258 224
Trust, Custody and Investment Management Fees 310 294 295 302 285
Credit Card Revenue 278 320 277 233 233
Service Charges on Deposit Accounts 91 98 97 100 99
Fees for Other Financial Services 383 377 393 381 378
Trading Revenue 422 289 347 397 355
Securities Gains 101 25 34 24 52
Revenue From Equity-Related Investments 164 172 112 219 223
Other Revenue 182 109 110 35 36
-------- -------- -------- -------- --------
Total Noninterest Revenue 2,099 1,897 1,899 1,949 1,885
-------- -------- -------- -------- --------
Noninterest Expense
Salaries 1,124 1,070 1,040 1,046 1,076
Employee Benefits 222 185 211 225 305
Occupancy Expense 187 192 204 207 221
Equipment Expense 190 180 179 181 184
Foreclosed Property Expense 3 (1) 2 (8) (9)
Restructuring Charge and Expenses 30 104 32 22 1,656
Other Expense 691 677 652 651 660
-------- -------- -------- -------- --------
Total Noninterest Expense 2,447 2,407 2,320 2,324 4,093
-------- -------- -------- -------- --------
Income (Loss) Before Income Tax
Expense (Benefit) 1,483 1,349 1,385 1,380 (303)
Income Tax Expense (Benefit) 556 513 527 524 (214)
-------- -------- -------- -------- -------
Net Income (Loss) $ 927 $ 836 $ 858 $ 856 $ (89)
======== ======== ======== ======== =======
Net Income (Loss) Applicable To Common Stock $ 872 $ 781 $ 803 $ 801 $ (143)
======== ======== ======== ======== =======
Net Income (Loss) Per Common Share:
Primary $ 1.98 $ 1.74 $ 1.80 $ 1.80 $ (0.32)
======== ======== ======== ======== =======
Assuming Full Dilution $ 1.97 $ 1.74 $ 1.78 $ 1.79 $ (0.32)
======== ======== ======== ======== =======
</TABLE>
-44-
<PAGE> 45
Part II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
The Corporation and its subsidiaries are defendants in a number of
legal proceedings. After reviewing with counsel all actions and
proceedings pending against or involving the Corporation and its
subsidiaries, management does not expect the aggregate liability
or loss, if any, resulting therefrom to have a material adverse
effect on the consolidated financial condition of the
Corporation.
Item 2. Sales of Unregistered Common Stock
----------------------------------
During the first quarter of 1997, shares of common stock of
the Corporation were issued in transactions exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) thereof.
On January 6, 1997, 18,297 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. On
January 22, 1997, 2,945 shares of common stock were issued to
retired directors who had deferred receipt of such common stock
pursuant to the Directors' Deferred Compensation 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:
The Corporation filed three reports on Form 8-K during
the quarter ended March 31, 1997, as follows:
Form 8-K dated January 23, 1997: The Corporation announced
the results of operations for the fourth quarter of 1996 and
the pending retirement of Edward D. Miller.
Form 8-K dated March 18, 1997: The Corporation discussed
Lines of Business Results for Global Wholesale Banking and
Regional and Nationwide Consumer Banking, as well as the
status of the Corporation's common stock buy-back program
announced October 1996.
Form 8-K dated March 18, 1997: The Corporation announced a
quarterly dividend increase from $.56 per share to $.62 per
share, payable April 30, 1997 to shareholders of record at
close of business on April 4, 1997.
-45-
<PAGE> 46
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 May 15, 1997 By /s/Joseph L. Sclafani
------------ ---------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-46-
<PAGE> 47
APPENDIX 1
----------
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
-----------------------------------------------
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition.
<TABLE>
<CAPTION>
GRAPHIC
NUMBER PAGE DESCRIPTION
-------- -------- -----------------------------------------------------------------------
<S> <C> <C>
1 36 Bar Graph entitled "Histogram of Daily Market Risk-Related Revenue
For the twelve months ended March 31, 1997" presenting the
following information:
Millions of Dollars 0 -5 5 - 10 10 -15 15 - 20 20 -25 25 -30
------------------- ---- ------ ------ ------- ------ ------
Number of trading days
revenue was within the
above prescribed posi-
tive range 64 78 61 32 6 4
Millions of Dollars 0 -(5) (5)-(10) (10)-(15)
------------------- ------ --------- ---------
Number of trading days
revenue was within the
above prescribed
negative range 12 1 1
</TABLE>
<PAGE> 48
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
- ----------- -------- ---------------------
11 Computation of net income 48
per share
12 (a) Computation of ratio of 49
earnings to fixed charges
12 (b) Computation of ratio of 50
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 51
-47-
<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 the Corporation's earnings per
share computation, see Note One of the Corporation's 1996 Annual Report.
<TABLE>
<CAPTION>
(in millions, except per share amounts) Three Months Ended
March 31,
---------------------
EARNINGS PER SHARE 1997 1996
---- ----
Primary
- -------
Earnings:
<S> <C> <C>
Net Income (Loss) $ 927 $ (89)
Less: Preferred Stock Dividend Requirements 55 54
------- -------
Net Income (Loss) Applicable to Common Stock $ 872 $ (143)
======= =======
Shares:
Average Common and Common Equivalent Shares Outstanding 441.0 446.1
Primary Earnings Per Share:
Net Income (Loss) $ 1.98 $ (0.32)
======= =======
Assuming Full Dilution
- ----------------------
Earnings:
Net Income (Loss) Applicable to Common Stock $ 872 $ (143)
Shares:
Average Common and Common Equivalent Shares Outstanding 441.0 446.1
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect 1.6 3.0
------- -------
Adjusted Shares of Common and Equivalent Shares Outstanding 442.6 449.1
Earnings Per Share Assuming Full Dilution:
Net Income (Loss) $ 1.97 $ (0.32)
======= =======
</TABLE>
-48-
<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>
Three Months Ended
March 31, 1997
------------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes $ 1,483
--------
Fixed charges:
Interest expense 1,559
One third of rents, net of income from subleases (a) 28
--------
Total fixed charges 1,587
--------
Less: Equity in undistributed income of affiliates (23)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 3,047
========
Fixed charges, as above $ 1,587
========
Ratio of earnings to fixed charges 1.92
========
INCLUDING INTEREST ON DEPOSITS
- ------------------------------
Fixed charges, as above $ 1,587
Add: Interest on deposits 1,515
--------
Total fixed charges and interest on deposits $ 3,102
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 3,047
Add: Interest on deposits 1,515
--------
Total earnings before taxes, fixed charges, and interest on deposits $ 4,562
========
Ratio of earnings to fixed charges 1.47
========
<FN>
(a) The proportion deemed representative of the interest factor.
</FN>
</TABLE>
-49-
<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>
Three Months Ended
March 31, 1997
--------------
EXCLUDING INTEREST ON DEPOSITS
- ------------------------------
<S> <C>
Income before Income Taxes $ 1,483
--------
Fixed charges:
Interest expense 1,559
One third of rents, net of income from subleases (a) 28
--------
Total fixed charges 1,587
--------
Less: Equity in undistributed income of affiliates (23)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 3,047
========
Fixed charges, as above $ 1,587
Preferred stock dividends 55
--------
Fixed charges including preferred stock dividends $ 1,642
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.86
========
INCLUDING INTEREST ON DEPOSITS
- ------------------------------
Fixed charges including preferred stock dividends, as above $ 1,642
Add: Interest on deposits 1,515
--------
Total fixed charges including preferred stock
dividends and interest on deposits $ 3,157
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 3,047
Add: Interest on deposits 1,515
--------
Total earnings before taxes, fixed charges, and interest on deposits $ 4,562
========
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.45
========
<FN>
(a) The proportion deemed representative of the interest factor.
</FN>
</TABLE>
-50-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000019617
<NAME> THE CHASE MANHATTAN CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,349
<INT-BEARING-DEPOSITS> 3,298
<FED-FUNDS-SOLD> 34,554
<TRADING-ASSETS> 67,478
<INVESTMENTS-HELD-FOR-SALE> 40,372
<INVESTMENTS-CARRYING> 3,603
<INVESTMENTS-MARKET> 3,561
<LOANS> 155,882
<ALLOWANCE> 3,550
<TOTAL-ASSETS> 340,338
<DEPOSITS> 176,030
<SHORT-TERM> 67,538
<LIABILITIES-OTHER> 59,389
<LONG-TERM> 12,419
0
2,500
<COMMON> 441
<OTHER-SE> 17,801
<TOTAL-LIABILITIES-AND-EQUITY> 340,338
<INTEREST-LOAN> 3,112
<INTEREST-INVEST> 722
<INTEREST-OTHER> 665
<INTEREST-TOTAL> 5,125
<INTEREST-DEPOSIT> 1,515
<INTEREST-EXPENSE> 3,074
<INTEREST-INCOME-NET> 2,051
<LOAN-LOSSES> 220
<SECURITIES-GAINS> 101
<EXPENSE-OTHER> 2,447
<INCOME-PRETAX> 1,483
<INCOME-PRE-EXTRAORDINARY> 927
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 927
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.97
<YIELD-ACTUAL> 3.10
<LOANS-NON> 998
<LOANS-PAST> 441
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,549
<CHARGE-OFFS> 273
<RECOVERIES> 53
<ALLOWANCE-CLOSE> 3,550
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
