<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998 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 (IRS 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 856,457,308
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK ON
JULY 31, 1998.
<PAGE> 2
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PART I Page
<S> <C> <C>
Item 1 Financial Statements - The Chase Manhattan Corporation
and Subsidiaries:
Consolidated Balance Sheet at June 30, 1998 and
December 31, 1997. 3
Consolidated Statement of Income for the three and six months
ended June 30, 1998 and June 30, 1997. 4
Consolidated Statement of Changes in Stockholders' Equity for the
six months ended June 30, 1998 and June 30, 1997. 5
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and June 30, 1997. 6
Notes to Financial Statements. 7-11
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations. 12-37
Glossary of Terms. 38
PART II
Item 1 Legal Proceedings. 39
Item 2 Sales of Unregistered Common Stock. 39
Item 4 Submission of Matters to a Vote of Security Holders. 39
Item 6 Exhibits and Reports on Form 8-K. 40
</TABLE>
-2-
<PAGE> 3
Part I
Item 1.
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 15,691 $ 15,704
Deposits with Banks 5,970 2,886
Federal Funds Sold and Securities
Purchased Under Resale Agreements 25,128 30,928
Trading Assets:
Debt and Equity Instruments 33,651 34,641
Risk Management Instruments, Net of Allowance for Credit
Losses of $75 in 1998 and 1997 33,280 37,752
Securities 54,928 52,738
Loans 168,705 168,454
Allowance for Credit Losses (3,629) (3,624)
--------- ---------
Net Loans 165,076 164,830
Premises and Equipment 3,905 3,780
Due from Customers on Acceptances 1,260 1,719
Accrued Interest Receivable 2,867 3,359
Other Assets 25,239 17,184
--------- ---------
TOTAL ASSETS $ 366,995 $ 365,521
========= =========
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 47,966 $ 46,603
Interest-Bearing 75,418 71,576
Foreign:
Noninterest-Bearing 4,109 3,205
Interest-Bearing 79,598 72,304
--------- ---------
Total Deposits 207,091 193,688
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 45,672 56,126
Commercial Paper 5,299 4,744
Other Borrowed Funds 7,354 6,861
Acceptances Outstanding 1,260 1,719
Trading Liabilities 46,866 52,438
Accounts Payable, Accrued Expenses and Other Liabilities, Including
the Allowance for Credit Losses of $170 in 1998 and 1997 13,902 12,526
Long-Term Debt 14,451 13,387
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 1,940 1,740
--------- ---------
TOTAL LIABILITIES 343,835 343,229
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 6)
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 1,168 1,740
Common Stock (Issued 881,534,410 and 881,506,592 Shares) 882 441
Capital Surplus 9,738 10,360
Retained Earnings 12,211 11,086
Accumulated Other Comprehensive Income 113 112
Treasury Stock, at Cost (28,620,557 and 39,577,640 Shares) (1,502) (1,997)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 22,610 21,742
--------- ---------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 366,995 $ 365,521
========= =========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-3-
<PAGE> 4
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,316 $ 3,106 $ 6,721 $ 6,235
Securities 889 735 1,778 1,457
Trading Assets 716 705 1,392 1,331
Federal Funds Sold and Securities Purchased
Under Resale Agreements 554 697 1,225 1,256
Deposits with Banks 148 114 300 220
------- ------- ------- -------
Total Interest Income 5,623 5,357 11,416 10,499
------- ------- ------- -------
INTEREST EXPENSE
Deposits 1,784 1,568 3,599 3,083
Short-Term and Other Borrowings 1,478 1,510 2,987 2,812
Long-Term Debt 325 273 630 530
------- ------- ------- -------
Total Interest Expense 3,587 3,351 7,216 6,425
------- ------- ------- -------
NET INTEREST INCOME 2,036 2,006 4,200 4,074
Provision for Credit Losses 338 189 682 409
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 1,698 1,817 3,518 3,665
------- ------- ------- -------
NONINTEREST REVENUE
Investment Banking Fees 438 283 799 459
Trust, Custody and Investment Management Fees 383 321 731 631
Credit Card Revenue 365 224 665 485
Fees for Other Financial Services 509 487 1,019 961
Trading Revenue 333 491 813 896
Securities Gains 98 30 181 131
Revenue from Equity-Related Investments 370 192 663 356
Other Revenue 233 119 329 310
------- ------- ------- -------
Total Noninterest Revenue 2,729 2,147 5,200 4,229
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 1,270 1,110 2,524 2,234
Employee Benefits 215 219 439 441
Occupancy Expense 191 193 380 380
Equipment Expense 212 193 421 383
Restructuring Costs 8 71 529 101
Other Expense 826 698 1,570 1,392
------- ------- ------- -------
Total Noninterest Expense 2,722 2,484 5,863 4,931
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,705 1,480 2,855 2,963
Income Tax Expense 631 555 1,056 1,111
------- ------- ------- -------
NET INCOME $ 1,074 $ 925 $ 1,799 $ 1,852
======= ======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 1,050 $ 874 $ 1,741 $ 1,746
======= ======= ======= =======
NET INCOME PER COMMON SHARE:
Basic $ 1.24 $ 1.03 $ 2.06 $ 2.04
======= ======= ======= =======
Diluted $ 1.20 $ 1.00 $ 2.00 $ 1.99
======= ======= ======= =======
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-4-
<PAGE> 5
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
PREFERRED STOCK:
Balance at Beginning of Year $ 1,740 $ 2,650
Issuance of Stock 200 --
Redemption of Stock (772) (670)
-------- --------
Balance at End of Period $ 1,168 $ 1,980
-------- --------
COMMON STOCK:
Balance at Beginning of Year $ 441 $ 441
Issuance of Common Stock for a Two-for-One Stock Split 441 --
-------- --------
Balance at End of Period $ 882 $ 441
-------- --------
CAPITAL SURPLUS:
Balance at Beginning of Year $ 10,360 $ 10,459
Issuance of Common Stock for a Two-for-One Stock Split (441) --
Shares Issued and Commitments to Issue Common Stock
for Employee Stock-Based Awards and Related Tax Effects (181) (131)
-------- --------
Balance at End of Period $ 9,738 $ 10,328
-------- --------
RETAINED EARNINGS:
Balance at Beginning of Year $ 11,086 $ 8,610
Net Income 1,799 1,852
Cash Dividends Declared:
Preferred Stock (58) (106)
Common Stock (616) (528)
-------- --------
Balance at End of Period $ 12,211 $ 9,828
-------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at Beginning of Year $ 112 $ (271)
Other Comprehensive Income 1 134
-------- --------
Balance at End of Period $ 113 $ (137)
-------- --------
COMMON STOCK IN TREASURY, AT COST:
Balance at Beginning of Year $ (1,997) $ (895)
Purchase of Treasury Stock (268) (1,242)
Reissuance of Treasury Stock 763 490
-------- --------
Balance at End of Period $ (1,502) $ (1,647)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 22,610 $ 20,793
======== ========
COMPREHENSIVE INCOME:
Net Income $ 1,799 $ 1,852
Other Comprehensive Income 1 134
-------- --------
Comprehensive Income $ 1,800 $ 1,986
======== ========
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-5-
<PAGE> 6
Part I
Item 1. (continued)
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,799 $ 1,852
Adjustments to Reconcile Net Income to Net Cash Provided (Used)
by Operating Activities:
Provision for Credit Losses 682 409
Restructuring Costs 529 101
Depreciation and Amortization 558 471
Net Change In:
Trading-Related Assets 756 (7,702)
Accrued Interest Receivable 492 (425)
Other Assets (2,854) (232)
Trading-Related Liabilities (6,202) 8,711
Accrued Interest Payable 16 118
Other Liabilities 1,568 463
Other, Net (919) (47)
-------- --------
Net Cash Provided (Used) by Operating Activities (3,575) 3,719
-------- --------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks (3,084) 4,302
Federal Funds Sold and Securities Purchased Under Resale Agreements 894 (12,546)
Loans Due to Sales and Securitizations 21,787 10,525
Other Loans, Net (22,735) (15,532)
Other, Net (46) (123)
Proceeds from the Maturity of Held-to-Maturity Securities 706 420
Purchases of Held-to-Maturity Securities (54) (69)
Proceeds from the Maturity of Available-for-Sale Securities 12,727 4,130
Proceeds from the Sale of Available-for-Sale Securities 78,887 37,704
Purchases of Available-for-Sale Securities (94,334) (36,782)
-------- --------
Net Cash (Used) by Investing Activities (5,252) (7,971)
-------- --------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 1,363 2,670
Domestic Time and Savings Deposits 3,842 379
Foreign Deposits 8,198 (226)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements (5,548) 6,678
Other Borrowed Funds 1,048 (1,433)
Other, Net (461) (174)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 2,257 2,271
Repayments of Long-Term Debt (994) (1,069)
Proceeds from the Issuance of Stock 782 359
Redemption of Preferred Stock (772) (670)
Treasury Stock Purchased (268) (1,660)
Cash Dividends Paid (625) (613)
-------- --------
Net Cash Provided by Financing Activities 8,822 6,512
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks (8) 14
-------- --------
Net Decrease in Cash and Due from Banks (13) 2,274
Cash and Due from Banks at January 1, 15,704 14,605
-------- --------
Cash and Due from Banks at June 30, $ 15,691 $ 16,879
======== ========
Cash Interest Paid $ 7,200 $ 6,307
-------- --------
Taxes Paid $ 822 $ 916
-------- --------
</TABLE>
The Notes to Financial Statements are an integral part of these Statements.
-6-
<PAGE> 7
Part I
Item 1. (continued)
See Glossary of Terms on page 38 for definition of terms used throughout the
Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements of The Chase Manhattan Corporation and
Subsidiaries ("Chase") are prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all necessary adjustments have been included for a fair presentation
of this interim financial information. In addition, certain amounts have been
reclassified to conform to the current presentation.
Effective January 1, 1998, Chase implemented SFAS 127, which had deferred the
effective date of SFAS 125 relating to the accounting for securities lending,
repurchase agreements and other secured financing transactions. Under SFAS 125,
resale agreements and repurchase agreements are accounted for as secured lending
and secured borrowing transactions, respectively, when certain criteria are met.
The impact on Chase's earnings, liquidity and capital resources of adopting SFAS
127 is not material.
In March 1998, the AICPA issued SOP 98-1, which becomes effective for financial
statements for calendar year 1999. Chase elected early adoption beginning in the
first quarter of 1998. SOP 98-1 requires the capitalization of eligible costs of
specified activities related to computer software developed or obtained for
internal use. Chase capitalized $36 million of these costs during the first six
months of 1998, of which $19 million was capitalized during the second quarter.
NOTE 2 - STOCK SPLIT
On May 19, 1998, the stockholders approved a two-for-one stock split of Chase
common stock. The additional shares issued as a result of the split were
distributed on June 12, 1998 to stockholders of record at the close of business
on May 20, 1998. The split became effective as of the opening of business on
June 15, 1998. A total of 440,767,205 shares of common stock were issued in
connection with the split, including 14,176,530 shares held in treasury. As a
result of the stock split, $441 million was reclassified from capital surplus to
common stock and, as a result, the stock split did not cause any changes in the
$1.00 par value per share for the common stock or in total stockholders' equity.
All references to the number of common shares and per common share amounts have
been restated to reflect the effects of the stock split.
NOTE 3 - EARNINGS PER SHARE
For a discussion of Chase's current earnings per share policy, see Note Ten of
the 1997 Annual Report. For the calculation of basic and diluted EPS for the
second quarter and six months ended June 30, 1998 and 1997, see Exhibit 11 on
page 43.
NOTE 4 - COMPREHENSIVE INCOME
Effective with the first quarter 1998, Chase adopted SFAS 130, which defines and
establishes the standards for reporting comprehensive income. Comprehensive
income for Chase includes net income as well as the change in unrealized gains
and losses on available-for-sale securities and foreign currency translation,
each of which includes the impact of related derivatives. Chase has presented
these items net of tax in the Statement of Changes in Stockholders' Equity.
Six Months Ended June 30,
(in millions)
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- -----------------------------------------------
NET UNREALIZED ACCUMULATED Net Unrealized Accumulated
ACCUMULATED GAIN(LOSS) ON OTHER Accumulated Gain(Loss) on Other
TRANSLATION SECURITIES COMPREHENSIVE Translation Securities Comprehensive
ADJUSTMENT AVAILABLE-FOR-SALE INCOME Adjustment Available-for-Sale Income
---------- ------------------ ------ ---------- ------------------ ------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance $ 17 $ 95 $ 112 $ 17 $ (288) $ (271)
Change During Period -- 1 1 1 133 134
--------- ------- -------- --------- --------- ---------
Ending Balance $ 17 $ 96 (a) $ 113 $ 18 $(155) (a) $ (137)
========= ======= ======== ========= ========= ==========
</TABLE>
(a) Represents the after-tax difference between the fair value and amortized
cost of both the available-for-sale securities portfolio and securities
classified as loans, which are subject to the provisions of SFAS 115. See
Note Five.
-7-
<PAGE> 8
Part I
Item 1. (continued)
NOTE 5 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note One
of Chase's 1997 Annual Report.
The amortized cost and estimated fair value of Chase's securities, including the
impact of related derivatives, are presented in the following table.
<TABLE>
<CAPTION>
(in millions) JUNE 30, 1998 December 31, 1997
------------------------------ ----------------------------
AVAILABLE-FOR-SALE SECURITIES AMORTIZED FAIR Amortized Fair
COST VALUE (a) Cost Value (a)
---- --------- ---- ---------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 27,209 $ 27,272 $ 27,849 $ 27,943
Collateralized Mortgage Obligations 2,189 2,195 2,013 2,018
Other, primarily U.S. Treasuries 15,229 15,223 11,492 11,461
Obligations of State and Political Subdivisions 223 223 274 276
Debt Securities Issued by Foreign Governments 6,130 6,093 6,153 6,138
Corporate Debt Securities 265 268 606 622
Equity Securities 817 946 876 1,015
Other Securities (b) 387 382 308 282
---------- --------- ---------- ----------
Total Available-for-Sale Securities (c) $ 52,449 $ 52,602 $ 49,571 $ 49,755
========== ========= ========== ==========
HELD-TO-MATURITY SECURITIES
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 1,067 $ 1,080 $ 1,256 $ 1,267
Collateralized Mortgage Obligations 1,201 1,201 1,660 1,661
Other, primarily U.S. Treasuries 55 55 52 52
Other Securities (b) 3 4 15 15
---------- --------- ---------- ----------
Total Held-to-Maturity Securities $ 2,326 $ 2,340 $ 2,983 $ 2,995
========== ========= ========== ==========
</TABLE>
(a) Gross unrealized gains and losses on available-for-sale securities were
$320 million and $167 million, respectively, at June 30, 1998 and $386
million and $202 million, respectively, at December 31, 1997. Gross
unrealized gains and losses on held-to-maturity securities were $16
million and $2 million, respectively, at June 30, 1998 and $16 million and
$4 million, respectively, at December 31, 1997.
(b) Includes collateralized mortgage obligations of private issuers, which
generally have underlying collateral consisting of obligations of U.S.
Government and Federal agencies and corporations.
(c) Excludes securities classified as loans, which are subject to the
provisions of SFAS 115. The amortized cost and fair value of these loans,
including the impact of related derivatives, were $679 million and $675
million, respectively, at June 30, 1998. This compares with $1,005 million
and $982 million, respectively, at December 31, 1997.
Net gains from available-for-sale securities sold in the second quarter of 1998
amounted to $98 million (gross gains of $144 million and gross losses of $46
million) and for the first six months of 1998 amounted to $181 million (gross
gains of $278 million and gross losses of $97 million). Net gains on sales of
these types of securities for the same periods in 1997 amounted to $30 million
(gross gains of $79 million and gross losses of $49 million) and $131 million
(gross gains of $195 million and gross losses of $64 million), respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
-8-
<PAGE> 9
Part I
Item 1. (continued)
NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
For a discussion of these business trusts, see page 58 of Chase's 1997 Annual
Report.
The following is a summary of the outstanding capital securities, net of
discount, issued by each trust and the junior subordinated deferrable interest
debentures issued by Chase to each trust (which debentures are the sole assets
of each trust) as of June 30, 1998:
<TABLE>
<CAPTION>
Amount of Principal
Capital Amount of Stated Maturity of Interest Rate of Interest
Name of Trust Securities, Chase Capital Securities Capital Securities Payment/Distribution
Net of Discount Debentures and Debentures and Debentures Dates
Issued by Trust Held by Trust
(in millions) (in millions)
(a) (b)
<S> <C> <C> <C> <C> <C>
Chase Capital I $ 600 $ 619 12/1/2026 7.67% Semi-annual-commencing 6/1/97
Chase Capital II 494 516 2/1/2027 LIBOR + .50% Quarterly-commencing 5/1/97
Chase Capital III 296 309 3/1/2027 LIBOR + .55% Quarterly-commencing 6/1/97
Chase Capital IV 350 361 12/6/2027 7.34% Quarterly-commencing 3/31/98
Chase Capital V 200 206 3/31/2028 7.03% Quarterly-commencing 3/31/98
--------- ---------
Total $ 1,940 $ 2,011
========= =========
</TABLE>
(a) Represents the amount of capital securities issued to the public by each
trust. These amounts are reflected as liabilities of Chase.
(b) Represents the amount of Chase debentures held as assets by each trust.
These amounts represent an intercompany transaction and are eliminated in
Chase's consolidated financial statements.
NOTE 8 - RESTRUCTURING COSTS
During the 1998 first quarter, Chase incurred a one-time pre-tax charge of $510
million in connection with initiatives to streamline support functions and
realign certain business activities. The majority of these costs relate to
anticipated staff reductions of approximately 4,500 existing positions
(approximately $338 million), costs in connection with planned dispositions of
certain premises and equipment (approximately $144 million) and other expenses
(approximately $28 million). As of June 30, 1998, the reserve balance was $471
million.
Residual merger-related expenses of $8 million and $71 million were incurred in
the second quarters of 1998 and 1997, respectively, relating to the merger of
The Chase Manhattan Corporation and Chemical Banking Corporation.
Cumulative-to-date merger-related expenses have amounted to $375 million, in
addition to the $1.65 billion restructuring charge taken at the March 31, 1996
merger date. No further residual merger-related expenses are expected to be
taken by Chase. For a further discussion of Chase's merger-related restructuring
costs, refer to Note Twelve and page 29 of Chase's 1997 Annual Report.
-9-
<PAGE> 10
Part I
Item 1. (continued)
NOTE 9 - RISK-BASED CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note
Seventeen of Chase's 1997 Annual Report.
The following table presents the capital ratios for Chase and its significant
banking subsidiaries. Assets and capital amounts for Chase's banking
subsidiaries reflect intercompany transactions, whereas the respective amounts
for Chase reflect the elimination of intercompany transactions.
<TABLE>
<CAPTION>
The Chase Chase
JUNE 30, 1998 Chase (a) Manhattan Bank Texas Chase USA
------------ -------------- ---------- -----------
($ in millions, except ratios)
<S> <C> <C> <C> <C>
Tier 1 Capital Ratio (b)(d) 8.21% 7.35% 7.59% 7.55%
Total Capital Ratio(b)(d) 11.94% 10.90% 10.49% 11.27%
Tier 1 Leverage Ratio (c)(d) 6.30% 5.61% 6.27% 7.51%
Tier 1 Capital $ 23,442 $ 17,031 $ 1,441 $ 2,291
Total Qualifying Capital 34,097 25,257 1,991 3,423
Risk-Weighted Assets 285,560 231,680 18,977 30,360
Adjusted Average Assets 372,354 303,710 22,980 30,494
</TABLE>
(a) The assets and off-balance sheet financial instruments, and related
capital, of Chase's securities subsidiary, Chase Securities Inc., are
included in the calculation of these ratios.
(b) 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.
(c) Tier 1 Capital divided by adjusted average assets (net of allowance for
credit losses, goodwill and certain intangible assets).
(d) The provisions of SFAS 115 do not apply to the calculation of these ratios.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of Chase's fair value methodologies, see Note Twenty-One of the
1997 Annual Report. The following table presents the financial assets and
liabilities valued under SFAS 107.
<TABLE>
<CAPTION>
JUNE 30, 1998 December 31, 1997
------------------------------------------- ------------------------------------------
CARRYING ESTIMATED APPRECIATION/ Carrying Estimated Appreciation/
(in millions) VALUE FAIR VALUE (DEPRECIATION) Value Fair Value (Depreciation)
---------- ----------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Financial Assets $ 358,008 $ 360,966 $ 2,958 $ 357,077 $ 359,975 $ 2,898
========== =========== =========== ===========
Total Financial Liabilities $ 343,004 $ 342,479 525 $ 342,501 $ 341,700 801
========== =========== --------- =========== =========== ----------
Estimated Fair Value in Excess
of Carrying Value $ 3,483 $ 3,699
========= ==========
</TABLE>
Derivative contracts used for ALM activities had an unrecognized net loss of
$134 million at June 30, 1998 and an unrecognized net loss of $489 million at
December 31, 1997, both of which are included in the above amounts. Derivative
contracts used by Chase to reduce its exposure to prepayment risks associated
with its mortgage servicing rights that are not required to be fair valued under
SFAS 107 are excluded from the above table. At June 30, 1998 and December 31,
1997, these derivative contracts had an unrecognized net gain of $127 million
and $100 million, respectively. Also not included in the above table are gross
unrecognized net losses from daily margin settlements on open future contracts
of $3 million at December 31, 1997. At June 30, 1998, gross unrecognized net
losses from daily margin settlements on open future contracts were
insignificant.
-10-
<PAGE> 11
Part I
Item 1. (continued)
NOTE 11 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
Chase utilizes various derivative and foreign exchange financial instruments for
trading purposes and for purposes other than trading, such as asset/liability
management ("ALM"). For a discussion of the various financial instruments used
and the credit and market risks involved, see Note Eighteen of Chase's 1997
Annual Report.
The following table summarizes the aggregate notional amounts of derivative 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).
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS CREDIT EXPOSURE
-------------------------------- ------------------------------------
JUNE 30, December 31, JUNE 30, December 31,
(in billions) 1998 1997 1998 1997
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Interest Rate Swaps
Trading $ 3,649.0 $ 3,206.0 $ 11.6 $ 14.0
ALM 103.4 98.2 0.3 0.6
Futures, Forwards and Forward Rate Agreements
Trading 1,639.0 1,643.7 0.3 0.3
ALM 50.5 42.6 -- --
Purchased Options
Trading 382.9 316.1 1.7 1.7
ALM 57.7 13.1 -- --
Written Options
Trading 473.1 395.7 -- --
ALM 38.6 0.2 -- --
----------- ---------- ----------- --------
Total Interest Rate Contracts $ 6,394.2 $ 5,715.6 $ 13.9 $ 16.6
=========== ========== ========== ========
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,527.5 $ 1,521.7 $ 9.7 $ 14.4
ALM 79.3 72.6 -- --
Other Foreign Exchange Contracts (a)
Trading 375.1 358.7 6.4 5.8
ALM 6.6 5.2 -- --
----------- ---------- ----------- --------
Total Foreign Exchange Contracts $ 1,988.5 $ 1,958.2 $ 16.1 $ 20.2
=========== ========== ========== ========
EQUITY, COMMODITY AND OTHER CONTRACTS
Trading $ 117.9 $ 64.4 $ 3.7 $ 1.6
----------- ---------- ---------- --------
Total Equity, Commodity and Other Contracts $ 117.9 $ 64.4 $ 3.7 $ 1.6
=========== ========== ========== ========
Total Credit Exposure Recorded on the Balance Sheet $ 33.7 $ 38.4
</TABLE>
(a) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $125.9 billion, $133.9 billion and
$121.9 billion, respectively, at June 30, 1998, compared with $123.9
billion, $126.6 billion and $113.4 billion, respectively, at December 31,
1997.
-11-
<PAGE> 12
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 DATA AND RATIOS)
<TABLE>
<CAPTION>
(As of or for the period ended) SECOND Second Six Months Ended
QUARTER Quarter % June 30, %
--------- --------- Inc/ ------------------------- Inc/
1998 1997 (Dec) 1998 1997 (Dec)
----------------------- ----- ------------------------- -----
<S> <C> <C> <C> <C> <C> <C>
AS REPORTED BASIS:
Total Revenues $ 4,765 $ 4,153 15% $ 9,400 $ 8,303 13%
Noninterest Expenses
(excluding Restructuring Costs) 2,714 2,413 12 5,334 4,830 10
Restructuring Costs 8 71 (89) 529 101 424
Provision for Credit Losses 338 189 79 682 409 67
Net Income $ 1,074 $ 925 16 $ 1,799 $ 1,852 (3)
Net Income Per Common Share:
Basic $ 1.24 $ 1.03 20 $ 2.06 $ 2.04 1
Diluted 1.20 1.00 20 2.00 1.99 1
Cash Dividends Declared 0.36 0.31 16 0.72 0.62 16
Book Value at Period End 25.14 22.22 13 25.14 22.22 13
Market Value at Period End 75.50 48.53 56 75.50 48.53 56
Performance Ratios:
Return on Average Common Equity (a) 20.1% 19.2% 17.0% 19.2%
Return on Average Total Assets (a) 1.15 1.06 0.97 1.09
OPERATING BASIS: (b)
Operating Revenues $ 5,051 $ 4,420 14 $ 9,966 $ 8,740 14
Operating Noninterest Expenses 2,712 2,413 12 5,328 4,777 12
Credit Costs (c) 626 456 37 1,254 893 40
Operating Net Income 1,079 969 11 2,132 1,918 11
Cash Operating Earnings (d) 1,143 1,010 13 2,257 2,000 13
Shareholder Value Added (SVA) 441 369 20 868 712 22
Operating Net Income Per Common Share:
Basic $ 1.24 $ 1.08 15 $ 2.45 $ 2.12 16
Diluted 1.21 1.06 14 2.38 2.06 16
Performance Ratios:
Return on Average Total Assets (a) 1.16% 1.11% 1.14% 1.12%
Operating Return on Average Common Equity (a) 20.2 20.2 20.3 19.9
Cash Return on Average Common Equity (a) 21.4 21.1 21.5 20.8
Common Dividend Payout Ratio 29 29 30 29
Efficiency Ratio 53 54 53 54
Selected Balance Sheet Items: (e)
Loans $186,924 $173,948 7 $186,924 $173,948 7
Total Assets 385,214 366,024 5 385,214 366,024 5
</TABLE>
(a) Based on annualized amounts.
(b) Excludes the impact of credit card securitizations, restructuring costs and
special items. See Glossary of Terms on page 38.
(c) Includes provision for credit losses, foreclosed property expenses and
charge-offs related to the securitized credit card portfolio.
(d) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain intangibles.
(e) Excludes the impact of credit card securitizations.
-12-
<PAGE> 13
Certain forward-looking statements contained herein are subject to risks and
uncertainties. Chase's actual results may differ materially from those set forth
in such forward-looking statements. Reference is made to Chase's reports filed
with the Securities and Exchange Commission, in particular the 1997 Annual
Report, for a discussion of factors that may cause such differences to occur.
See Glossary of Terms on page 38 for a definition of terms used throughout this
Form 10-Q.
OVERVIEW
Operating net income for the 1998 second quarter increased 11% to $1.08 billion
from the second quarter of 1997. Diluted operating earnings per share were $1.21
for the second quarter of 1998, a 14% increase when compared with $1.06 in the
same 1997 period.
Operating net income for the 1998 first six months increased to $2.13 billion
from $1.92 billion for the same 1997 period. Diluted operating earnings per
share were $2.38 for the first six months of 1998, a 16% increase when compared
with $2.06 in the same 1997 period. The results for the 1998 second quarter and
first six months reflected strong performances in Global Banking, Global
Services and National Consumer Services, all of which had double-digit increases
in revenues and cash operating earnings, benefiting from their exceptional
competitive positions and a corporate-wide focus on financial discipline.
For the second quarter of 1998, reported net income was $1.07 billion or $1.20
per share on a diluted basis, compared with $925 million or $1.00 per share on a
diluted basis for the 1997 second quarter. For the first six months of 1998,
reported net income was $1.80 billion or $2.00 per share on a diluted basis,
compared with $1.85 billion or $1.99 per share on a diluted basis for the same
1997 period. The results for the 1998 first six months reflected a
previously-announced, one-time charge of $510 million ($320 million after-tax)
taken in connection with initiatives to streamline support functions and realign
certain business functions. It is anticipated that annual savings from these
actions will amount to approximately $460 million, which will be reinvested in
Chase's high-growth businesses. For a reconciliation of operating earnings to
reported net income, see page 19.
Second quarter 1998 financial highlights included:
- Total operating revenues increased 14%.
- Operating earnings rose 11%.
- Return on common stockholders' equity was 20.2%.
- Shareholder Value Added increased by 20% to $441 million.
- Asia's impact contained.
Total nonperforming assets at June 30, 1998 were $1.37 billion compared with
$1.02 billion at December 31, 1997. Nonperforming assets related to Asia
(including derivatives) increased to $286 million at June 30, 1998, while Asian
commercial net charge-offs for the 1998 second quarter were $122 million. Total
exposure to Indonesia, Korea and Thailand was reduced by 17% to $6.2 billion at
June 30, 1998 from $7.5 billion at March 31, 1998. Total exposure to these
countries has been reduced by 39% since December 31, 1997.
On May 19, 1998, the stockholders approved a two-for-one stock split of Chase
common stock. The additional shares issued as a result of the split were
distributed at the close of business on June 12, 1998 to stockholders of record
at the close of business on May 20, 1998.
At June 30, 1998, Chase's Tier 1 Capital and Total Capital ratios were 8.2% and
11.9%, respectively, and at this date, Chase and each of its depository
institutions was "well capitalized."
-13-
<PAGE> 14
LINES OF BUSINESS RESULTS
As of January 1, 1998, Chase adopted Shareholder Value Added (SVA) as its
primary measure of business unit performance. SVA represents operating earnings
excluding the amortization of goodwill and certain intangibles (i.e., cash
operating earnings) less an explicit charge for allocated capital. Additional
refinements have been made to the methodology for the allocation of capital to
the various lines of business during the 1998 second quarter. Prior periods have
been restated to reflect these changes. For a further discussion of Chase's line
of business franchises and its capital allocation method under SVA, reference is
made to pages 21 and 24-25 of the 1997 Annual Report.
LINES OF BUSINESS RESULTS
Management measures Chase's financial performance and that of its business units
based on operating earnings, which excludes the impact of credit card
securitizations, restructuring costs and special items.
<TABLE>
<CAPTION>
For Three Months Ended Global National Global Services
June 30, Banking (a) Consumer Services (a) (Within CTS) (a) Total (b)
------------------ -------------------- -------------------- -------------------
(in millions, except ratios) 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income-Operating (c) $ 736 $ 798 $ 1,347 $ 1,277 $ 269 $ 249 $ 2,223 $ 2,162
Noninterest Revenue-Operating (c) 1,795 1,406 656 513 373 316 2,828 2,258
Noninterest Expense 1,167 1,012 1,040 952 466 406 2,712 2,413
-------- -------- -------- -------- -------- -------- -------- --------
Operating Margin 1,364 1,192 963 838 176 159 2,339 2,007
Credit Costs 104 102 550 457 1 1 626 456
-------- -------- -------- -------- -------- -------- -------- --------
Operating Income Before Taxes 1,260 1,090 413 381 175 158 1,713 1,551
Income Taxes 486 392 159 149 64 61 634 582
-------- -------- -------- -------- -------- -------- -------- --------
Operating Earnings $ 774 $ 698 $ 254 $ 232 $ 111 $ 97 $ 1,079 $ 969
======== ======== ======== ======== ======== ======== ======== ========
Cash Operating Earnings (d) $ 785 $ 707 $ 298 $ 254 $ 116 $ 100 $ 1,143 $ 1,010
======== ======== ======== ======== ======== ======== ======== ========
Average Common Equity $ 14,034 $ 13,158 $ 6,578 $ 5,094 $ 1,726 $ 1,679 $ 20,954 $ 18,227
Average Assets - Operating $269,679 $261,557 $106,375 $ 92,846 $ 9,834 $ 8,257 $392,274 $362,974
Shareholder Value Added $ 315 $ 247 $ 78 $ 77 $ 59 $ 42 $ 441 $ 369
Cash Return on Common Equity 22.0% 20.5% 17.7% 19.0% 26.6% 23.0% 21.4% 21.1%
Efficiency Ratio - Operating 46% 46% 52% 53% 73% 72% 53% 54%
</TABLE>
<TABLE>
<CAPTION>
For Six Months Ended Global National Global Services
June 30, Banking (a) Consumer Services (a) (Within CTS) (a) Total (b)
-------------------- -------------------- ------------------- --------------------
(in millions, except ratios) 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income-Operating (c) $ 1,522 $ 1,630 $ 2,707 $ 2,552 $ 553 $ 491 $ 4,523 $ 4,372
Noninterest Revenue-Operating (c) 3,490 2,714 1,228 1,009 719 632 5,443 4,368
Noninterest Expense 2,327 2,026 2,015 1,891 911 813 5,328 4,777
-------- -------- -------- -------- -------- -------- -------- --------
Operating Margin 2,685 2,318 1,920 1,670 361 310 4,638 3,963
Credit Costs 199 213 1,093 883 2 1 1,254 893
-------- -------- -------- -------- -------- -------- -------- --------
Operating Income Before Taxes 2,486 2,105 827 787 359 309 3,384 3,070
Income Taxes 945 771 317 307 133 118 1,252 1,152
-------- -------- -------- -------- -------- -------- -------- --------
Operating Earnings $ 1,541 $ 1,334 $ 510 $ 480 $ 226 $ 191 $ 2,132 $ 1,918
======== ======== ======== ======== ======== ======== ======== ========
Cash Operating Earnings (d) $ 1,562 $ 1,352 $ 593 $ 525 $ 235 $ 197 $ 2,257 $ 2,000
======== ======== ======== ======== ======== ======== ======== ========
Average Common Equity $ 14,020 $ 13,035 $ 6,522 $ 5,113 $ 1,731 $ 1,682 $ 20,652 $ 18,359
Average Assets - Operating $272,581 $255,827 $105,654 $ 92,104 $ 9,491 $ 8,541 $393,560 $357,872
Shareholder Value Added $ 622 $ 444 $ 156 $ 170 $ 119 $ 80 $ 868 $ 712
Cash Return on Common Equity 22.0% 19.9% 17.8% 19.7% 26.9% 22.6% 21.5% 20.8%
Efficiency Ratio - Operating 46% 47% 51% 53% 72% 72% 53% 54%
</TABLE>
(a) Only the global banking portion of Chase Texas is reported in the total
Global Banking line of business results. The consumer- and global
services-related results for Chase Texas are reported as part of National
Consumer Services ("NCS") and Chase Technology Solutions ("CTS") lines of
business results, respectively.
(b) Total column includes the non-Global Services portion of CTS and Corporate
results. See description of CTS and Corporate on page 18.
(c) Trading-related net interest income is reflected in Noninterest Revenue -
Operating.
(d) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain intangibles.
-14-
<PAGE> 15
Chase's financial performance goals over the next several years include an
average return on common equity of 18% or higher, growth in operating revenues
accelerating to 10% per year and double-digit growth in operating earnings per
share.
GLOBAL BANKING
Global Banking operating revenues rose 15% in both the 1998 second quarter and
for the first six months, with cash operating earnings rising 11% and 16%,
respectively. SVA increased by 28% to $315 million in the 1998 second quarter
and by 40% to $622 million for the first six months of 1998. These favorable
results were driven by higher investment banking fees and revenue from
equity-related investments.
The following table sets forth certain key financial performance measures of the
businesses within Global Banking for the periods indicated.
GLOBAL BANKING:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- --------------------------------------
THREE MONTHS ENDED CASH Cash
JUNE 30, OPERATING OPERATING EFFICIENCY Operating Operating Efficiency
(in millions, except ratios) REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Global Markets $ 820 $ 246 50% $ 866 $ 301 47%
Global Investment Banking 392 94 59 254 79 48
Corporate Lending 388 122 32 367 112 33
Chase Capital Partners 344 201 8 181 99 13
Global Asset Management
and Private Banking 211 45 64 178 33 68
Middle Market 193 43 55 211 53 49
Chase Texas (consolidated) 399 112 55 335 86 60
SIX MONTHS ENDED JUNE 30,
(in millions, except ratios)
Global Markets $1,792 $ 585 48% $1,775 $ 628 45%
Global Investment Banking 738 203 53 391 85 63
Corporate Lending 753 236 32 768 251 31
Chase Capital Partners 614 350 10 317 170 15
Global Asset Management
and Private Banking 412 80 67 354 66 69
Middle Market 388 86 54 416 106 48
Chase Texas (consolidated) 776 210 57 666 167 61
</TABLE>
GLOBAL MARKETS
Global Markets' activities encompass the trading and sales of foreign exchange,
derivatives, fixed-income securities and commodities. As a leader in capital
markets, Chase operates 24 hours a day covering the major international
cross-border financial markets, as well as many local markets, in both developed
and emerging countries. Global Markets is a recognized world leader in such key
activities as foreign exchange, interest rate swaps and emerging markets debt.
Trading-related revenue for the second quarter of 1998 was $517 million, a
decrease of 18% from 1997 second quarter's results, as strong growth in
client-driven business and foreign exchange trading was offset by lower
fixed-income results, primarily related to emerging markets. For the first six
months of 1998, trading-related revenue was up slightly due to an attractive
foreign exchange environment. The 1998 six-month results reflect higher
incentive costs. Also included within Global Markets are Chase's domestic and
international treasury units, which have the primary responsibility for Chase's
asset/liability management activities ("ALM"). ALM activities in the treasury
units are managed on a total-return basis with one of the primary objectives
being the creation of economic value over time. Total return combines the
reported revenues (net interest income and securities gains/losses) and the
change in the net unrealized appreciation/depreciation of all financial
instruments and underlying balance sheet items. In the second quarter and first
six months of 1998, the total return (pre-tax before expenses) from ALM
activities amounted to $167 million and $252 million, respectively. The 1997
second quarter and first six months amounts were $222 million and $423 million,
respectively.
-15-
<PAGE> 16
GLOBAL INVESTMENT BANKING
Global Investment Banking finances and advises corporations, financial
institutions, financial sponsors and governments by providing integrated
one-stop financial solutions and industry expertise to clients globally. Client
industry groups include chemicals, financial institutions, healthcare,
insurance, media and telecommunications, multinationals, natural resources, oil
and gas, power and environmental, real estate, retail, transportation and
broker/dealers. The product offerings encompass syndicated finance, high-yield
securities, mergers and acquisitions advisory, project finance, real estate
advisory and placement, restructuring and private placements. Chase continues to
maintain its lead position in loan syndications and in leveraged finance. Cash
operating earnings in the second quarter of 1998 rose 19% to $94 million, and
for the first six months of 1998 increased by $118 million to $203 million, when
compared with the same 1997 periods. The 1998 results reflect strong revenue
growth in a favorable market for all major business lines, including high-yield
bond underwriting, loan syndications and mergers and acquisitions advisory
activity.
CORPORATE LENDING
Corporate Lending provides credit and lending services to clients globally. The
product offerings encompass global corporate lending, credit analysis and agent
bank services for all industry groups. An active portfolio management effort is
an integral part of corporate lending activities. Cash operating earnings in the
second quarter of 1998 rose $10 million when compared with the 1997 second
quarter due to a 6% increase in revenue from higher loan volume. For the first
six months of 1998, cash operating earnings decreased 6% due to the sale of an
investment in the 1998 first quarter, which had contributed revenues during
1997.
CHASE CAPITAL PARTNERS
Chase Capital Partners ("CCP") is a global private equity organization with
approximately $6.1 billion under management, including $4.6 billion in
equity-related investments. CCP provides equity and mezzanine financing in the
United States and abroad. During the first half of 1998, CCP's direct
investments approximated $870 million in 62 venture capital, management buyout,
recapitalization, growth equity and mezzanine transactions, compared with
approximately $250 million in 30 direct investments during the same period in
1997. CCP cash operating earnings rose by $102 million for the 1998 second
quarter and by $180 million for the 1998 first six months, reflecting CCP's
accelerated pace of investment activities over the last several years, as well
as favorable market conditions thus far in 1998.
GLOBAL ASSET MANAGEMENT AND PRIVATE BANKING The Global Asset Management and
Private Banking Group serves a global client base of high net worth individuals
and families, and institutional, mutual fund and self-directed investors.
Services include investment management for institutional investors globally,
Chase Vista Mutual Funds (at June 30, 1998, the third largest bank-managed
mutual fund family in the U.S.) and a full range of integrated private banking
capabilities, investment management and advisory services, trust and estate
planning, global custody, global mutual funds, credit and banking, and
philanthropic advisory services. Total assets under management amounted to $177
billion at June 30, 1998. Earnings for the first half of 1998 were driven by a
16% growth in revenue, benefiting from increased fee income, particularly
related to investment management, advisory and trust services, and the
accelerating growth of Chase's asset management and mutual fund businesses.
MIDDLE MARKET
Chase is the premier provider of financial services to middle-market companies
(companies with sales ranging from $10 million to $500 million) regionally, with
a national focus in selected industries. It is also the market leader in the New
York metropolitan tri-state area where it has relationships with 53% of middle
market companies and is lead bank for 25% of these companies. Cash operating
earnings decreased in the second quarter and first six months of 1998 when
compared with the 1997 results reflecting lower spreads, an increase in expenses
and lower securities gains.
CHASE TEXAS
Chase Texas is the primary bank for more large corporations and middle market
companies than any other bank in Texas. Chase Texas also maintains a strong
consumer banking presence through its 123 locations. Additionally, Chase Texas
is the largest bank for personal and corporate trust services in the Southwest.
Operating revenues increased 19% for the 1998 second quarter and 17% for the
first six months of 1998 when compared with the same periods in 1997, reflecting
increased overall business volume, record corporate finance fees in the second
quarter, higher loan and deposit volumes, and securities gains.
NATIONAL CONSUMER SERVICES (NCS)
For the 1998 second quarter and first six months, NCS's cash operating earnings
increased $44 million and $68 million, respectively, over the same 1997 periods.
The six month increase in cash operating earnings is attributable to an 11%
increase in revenue due primarily to the acquisition of The Bank of New York's
("BONY") credit card portfolio in November 1997. NCS's expenses increased in the
first six months of 1998, primarily as a result of higher credit costs for
credit cards and auto loans. SVA for the 1998 second quarter was consistent with
the 1997 second quarter. SVA was down $14 million for the 1998 first six months
from the 1997 comparable period. The decline in SVA was due to increased capital
allocation to NCS as a result of recent acquisitions.
-16-
<PAGE> 17
The following table sets forth certain key financial performance measures of the
businesses within NCS for the periods indicated.
NATIONAL CONSUMER SERVICES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 1997
--------------------------------------- ----------------------------------------
(in millions, except ratios) CASH Cash
OPERATING OPERATING EFFICIENCY Operating Operating Efficiency
REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Cardmember Services $ 976 $ 123 37% $ 788 $ 70 40%
Regional Consumer Banking 576 89 72 573 93 71
Chase Home Finance 247 61 55 246 66 50
Diversified Consumer Services (a) 192 23 59 170 22 56
SIX MONTHS ENDED JUNE 30,
(in millions, except ratios)
Cardmember Services $1,907 $ 244 36% $1,587 $ 157 40%
Regional Consumer Banking 1,136 171 72 1,123 182 71
Chase Home Finance 489 125 54 486 124 52
Diversified Consumer Services (a) 378 48 58 337 50 55
</TABLE>
(a) Insurance products, which are managed within Diversified Consumer Services,
but included for reporting purposes in Cardmember Services, Regional
Consumer Banking, and Chase Home Finance, generated revenues of $29 million
and $26 million in the second quarter of 1998 and 1997, respectively, and
$58 million and $51 million for the first six months of 1998 and 1997,
respectively.
CARDMEMBER SERVICES
Chase Cardmember Services ("CCS") ranks as the fourth largest bank card issuer
in the United States. CCS also reflects the results of Chase's international
consumer business, which includes The Manhattan Card Company Limited, the
third-largest credit card issuer in Hong Kong (which became wholly owned in
1998), and includes consumer banking activities in Hong Kong, Panama and the
Eastern Caribbean. At June 30, 1998, CCS has a $32 billion managed worldwide
credit card portfolio. CCS's cash operating earnings for the second quarter of
1998 were $123 million, a $53 million or 76% increase, over 1997. Earnings for
the first six months of 1998 rose 55% to $244 million. Revenues increased 24%
for the second quarter (20% for the first half of 1998) as Chase's domestic
portfolio continued to benefit from acquisitions and increased co-branding
activities. These positive results were partially offset by increased
charge-offs and the effect of the economic environment in Asia on Chase's
international consumer businesses.
REGIONAL CONSUMER BANKING
At June 30, 1998, Regional Consumer Banking has a leading share of primary bank
relationships among consumers and small businesses in the New York metropolitan
tri-state area. It is also a leading retail institution in key Texas markets.
Regional Consumer Banking offers customers convenient access to financial
services through the largest branch and proprietary ATM networks in the NY
metropolitan region plus state-of-the-art telephone, PC and Internet services.
Cash operating earnings for the second quarter and first half of 1998 were lower
when compared with 1997, reflecting higher expenses related to systems
integration and enhancements, particularly within Chase Texas' retail
businesses.
CHASE HOME FINANCE
At June 30, 1998, Chase Home Finance is the third-largest originator and
servicer of residential mortgage loans in the U.S., serving more than 2 million
customers nationwide. It is also a leading provider of home-equity secured
lending and manufactured housing financing. At June 30, 1998, Chase's
residential first mortgage servicing portfolio totaled $178 billion. During the
first six months of 1998, $34 billion in residential first mortgage loans were
originated which was a 110% increase over the same period last year. Chase Home
Finance's operating revenues improved in 1998 reflecting strong mortgage banking
activity offset by the impact of lower interest rates and prepayments on Chase's
mortgage and home equity portfolios. Cash operating earnings declined $5 million
in the 1998 second quarter to $61 million, and were flat for the first six
months of 1998 when compared with comparable periods in 1997. Included in the
1997 results are revenues from certain divested businesses (recreational
vehicles and marine). Cash operating earnings would have risen 4% excluding the
impact from the discontinued product lines.
DIVERSIFIED CONSUMER SERVICES
Diversified Consumer Services ("DCS") is a leading provider of automobile
financing, student lending, and unsecured consumer lending. At June 30, 1998,
Chase Auto Finance had $13 billion in retained outstandings with $6 billion in
new originations for the first half of 1998. In addition to its financing
activities, DCS offers brokerage services, insurance and investment products
nationwide. DCS's operating revenues increased 13% in the 1998 second quarter
and 12% for the first six months from comparable 1997 periods as a result of
strong growth in Chase's auto finance and investment businesses. However, cash
operating earnings for both 1998 periods remained relatively flat with 1997, as
a result of higher expenses and an increase in the credit provision associated
with loan volume growth.
-17-
<PAGE> 18
CHASE TECHNOLOGY SOLUTIONS
Chase Technology Solutions ("CTS") combines Chase's global services businesses,
information technology and operations, and electronic commerce initiatives into
a single group. Global Services is a leading provider of information and
transaction services globally and includes custody, cash management, trust and
other fiduciary services. As the world's largest provider of global custody and
a leader in trust and agency services, Global Services was custodian for over $4
trillion in assets and serviced over $3 trillion in outstanding debt at June 30,
1998. Global Services also operates the largest U.S. dollar funds transfer
business in the world and is a market leader in FedWire, ACH and CHIPS volume.
Cash operating earnings for Global Services in the second quarter of 1998 were
$116 million, an increase of $16 million or 16% from second quarter 1997. For
the first six months of 1998, cash operating earnings increased $38 million or
19% from the same 1997 period. SVA for Global Services in the 1998 second
quarter and first six months increased 40% and 49%, respectively, when compared
with the same 1997 periods. These improvements resulted from revenue growth
across all three businesses within Global Services (Chase Treasury Solutions,
global investor services and global trust), reflecting increased balances, new
business initiatives, market appreciation, as well as higher fees resulting from
an acquisition in the fourth quarter of 1997. Earnings also benefited from
continued productivity gains, tempered by technology investments related to
preparations for Year 2000 and European Monetary Union ("EMU").
CORPORATE
Corporate includes the effects remaining at the Corporate level after the
implementation of management accounting policies, including residual credit
provision and tax expense. Corporate also includes unallocated special items.
For the second quarter of 1998, Corporate had a cash operating loss (including
the nonglobal services portion of CTS) of $56 million compared with a cash
operating loss of $51 million in 1997. For the first six months of 1998,
Corporate had a cash operating loss of $133 million compared with a cash
operating loss of $74 million in 1997.
-18-
<PAGE> 19
RECONCILIATION OF REPORTED RESULTS TO OPERATING RESULTS
The following supplemental information provides a reconciliation between Chase's
reported results and Chase's results on an operating basis.
<TABLE>
<CAPTION>
SECOND QUARTER 1998 Second Quarter 1997
------------------------------------------------ ------------------------------------------------
(in millions, except REPORTED CREDIT CARD SPECIAL OPERATING Reported Credit Card Special Operating
per share data) RESULTS SECURITIZATIONS ITEMS BASIS Results Securitizations Items Basis
Revenue: (a) (b) (c) (a) (b) (d)
-------- ------------- ------- --------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-market-Sensitive $ 3,342 $ 286 $ -- $ 3,628 $ 3,017 $ 267 $ -- $ 3,284
Market-Sensitive 1,423 -- -- 1,423 1,136 -- -- 1,136
-------- -------- ------ -------- ------- ------- ------- --------
Total Revenue 4,765 286 -- 5,051 4,153 267 -- 4,420
Noninterest Expense 2,712 -- -- 2,712 2,413 -- -- 2,413
-------- -------- ------ -------- ------- ------- ------- --------
Operating Margin 2,053 286 -- 2,339 1,740 267 -- 2,007
Credit Costs 340 286 -- 626 189 267 -- 456
-------- -------- ------ -------- ------- ------- ------- --------
Income Before
Restructuring Costs 1,713 -- -- 1,713 1,551 -- -- 1,551
Restructuring Costs 8 -- (8) -- 71 -- (71) --
-------- -------- ------- -------- ------- ------- -------- --------
Income Before Taxes 1,705 -- 8 1,713 1,480 -- 71 1,551
Tax Expense 631 -- 3 634 555 -- 27 582
-------- -------- ------ -------- ------- ------- ------- --------
Net Income $ 1,074 $ -- $ 5 $ 1,079 $ 925 $ -- $ 44 $ 969
======== ======== ====== ======== ======= ======= ======= ========
NET INCOME PER
COMMON SHARE
Basic $ 1.24 $ 1.24 $ 1.03 $ 1.08
Diluted $ 1.20 $ 1.21 $ 1.00 $ 1.06
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS 1998 Six Months 1997
------------------------------------------------ ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Non-market-Sensitive $ 6,548 $ 566 $ -- $ 7,114 $ 6,164 $ 481 $ (44) $ 6,601
Market-Sensitive 2,852 -- -- 2,852 2,139 -- -- 2,139
-------- -------- ------ -------- ------- ------- ------- --------
Total Revenue 9,400 566 -- 9,966 8,303 481 (44) 8,740
Noninterest Expense 5,328 -- -- 5,328 4,827 -- (50) 4,777
-------- -------- ------ -------- ------- ------- ------- --------
Operating Margin 4,072 566 -- 4,638 3,476 481 6 3,963
Credit Costs 688 566 -- 1,254 412 481 -- 893
-------- -------- ------ -------- ------- ------- ------- --------
Income Before
Restructuring Costs 3,384 -- -- 3,384 3,064 -- 6 3,070
Restructuring Costs 529 -- (529) -- 101 -- (101) --
-------- -------- ------ -------- ------- ------- -------- --------
Income Before Taxes 2,855 -- 529 3,384 2,963 -- 107 3,070
Tax Expense 1,056 -- 196 1,252 1,111 -- 41 1,152
-------- -------- ------ -------- ------- ------- ------- --------
Net Income $ 1,799 $ -- $ 333 $ 2,132 $ 1,852 $ -- $ 66 $ 1,918
======== ======== ====== ======== ======= ======= ======= ========
NET INCOME PER
COMMON SHARE
Basic $ 2.06 $ 2.45 $ 2.04 $ 2.12
Diluted $ 2.00 $ 2.38 $ 1.99 $ 2.06
</TABLE>
(a) Represents results as reported in Chase's financial statements, except
restructuring costs have been separately displayed and foreclosed property
expense is included in credit costs.
(b) Represents the impact of credit card securitizations. For the second
quarter, the line items on the income statement impacted are net interest
income ($371 million in 1998 and $296 million in 1997), provision for
credit losses ($286 million in 1998 and $267 million in 1997), credit card
revenue ($87 million in 1998 and $26 million in 1997) and other revenue
(($2) million in 1998 and $3 million in 1997). For the first six months,
the line items on the income statement impacted are net interest income
($719 million in 1998 and $594 million in 1997), provision for credit
losses ($566 million in 1998 and $481 million in 1997), credit card revenue
($153 million in 1998 and $94 million in 1997) and other revenue (no impact
in 1998 and $19 million in 1997).
(c) Includes restructuring costs and special items.Restructuring costs for the
first six months of 1998 reflect the $510 million pre-tax charge ($320
million after-tax) taken in connection with initiatives to streamline
support functions, and residual costs of $19 million pre-tax ($13 million
after-tax) related to the merger restructuring charge.
(d) Includes restructuring costs and special items. Special items for the
first six months of 1997 reflect a $44 million pre-tax gain from the sale
of a partially-owned foreign investment, a $50 million pre-tax charge for
the accelerated vesting of stock-based incentive awards, and
merger-related restructuring costs.
-19-
<PAGE> 20
To facilitate analysis of Chase's financial results, management categorizes the
revenue components of the operating income statement as either market-sensitive
or non-market-sensitive revenues. Chase's market-sensitive revenues include
trading revenues (including trading-related net interest income), investment
banking fees, securities gains and revenue from equity-related investments.
Non-market-sensitive revenues, which are subject to less market volatility,
include all the remaining revenue components on the income statement.
Market-sensitive revenues are affected by many factors, including Chase's credit
standing and its success in proprietary positioning, as well as general economic
conditions (both domestic and international), the fiscal policies of central
banks and governments which affect the financial markets (including domestic and
foreign interest rates), the volatility of interest rates, equity and debt
markets and currencies (including volatility associated with the introduction of
the euro), and other political, social and diplomatic developments. Accordingly,
Chase expects its market-sensitive revenue will fluctuate as these factors vary
from period to period.
Although Chase's market-sensitive revenues will experience volatility from time
to time, over the past ten years Chase's market- sensitive revenues have
increased at a compound annual growth rate ("CAGR") of 14%. Growth in
market-sensitive revenues for both the 1998 second quarter and first half
exceeded the trend line, benefiting from the good market environment and actions
taken by Chase in offering a new array of products to customers.
Non-market-sensitive revenues increased by 10% in the 1998 second quarter and 8%
for the 1998 first six months, when compared with the same 1997 periods. The
increases were the result of higher trust, custody and investment management
fees and credit card revenue.
REPORTED RESULTS OF OPERATIONS
The section below discusses Chase's reported results of operations. Reported
results include the impact of credit card securitizations, restructuring costs
and special items.
NET INTEREST INCOME
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------------- ------------------------------------
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
NET INTEREST INCOME (in millions)
Excluding Impact of Securitizations $ 2,407 $ 2,302 5% $ 4,919 $ 4,668 5%
Impact of Securitizations (371) (296) (719) (594)
---------- ---------- ---------- ----------
Reported $ 2,036 $ 2,006 1% $ 4,200 $ 4,074 3%
========== ========= ========= =========
AVERAGE INTEREST-EARNING ASSETS
(in billions)
Excluding Impact of Securitizations $ 317.5 $ 298.2 6% $ 318.1 $ 290.5 10%
Impact of Securitizations (18.2) (14.1) (17.7) (13.7)
--------- --------- -------- ---------
Reported $ 299.3 $ 284.1 5% $ 300.4 $ 276.8 9%
========= ========= ========= =========
NET YIELD ON INTEREST-EARNING ASSETS
ON A TAXABLE EQUIVALENT BASIS
Excluding Impact of Securitizations 3.05% 3.10% (5)bp 3.13% 3.25% (12)bp
Impact of Securitizations (.31) (.26) (5)bp (.30) (.27) (3)bp
--------- --------- --------- ---------
Reported 2.74% 2.84% (10) bp 2.83% 2.98% (15)bp
========= ========= ========= =========
</TABLE>
bp - Denotes basis points
Reported net interest income for the 1998 second quarter was $2,036 million, an
increase of $30 million from the 1997 second quarter. For the first six months,
reported net interest income was $4,200 million in 1998, an increase of $126
million from 1997. Both 1998 periods reflect a higher level of average
interest-earning assets, primarily loans (both consumer and commercial) and
securities. Net yield on interest-earning assets declined 10 basis points during
the 1998 second quarter and 15 basis points during the first six months of 1998
from comparable 1997 periods, primarily due to generally narrower spreads on
commercial and consumer loans and a higher level of lower-yielding earning
assets.
-20-
<PAGE> 21
<TABLE>
<CAPTION>
AVERAGE INTEREST-EARNING ASSETS
(in billions) Second Quarter
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C> <C> <C>
Loans $ 167.8 56% $ 156.4 55%
Securities 57.0 19 44.4 16
Liquid Assets 74.5 25 83.3 29
-------- --- -------- ---
Reported Average Interest-Earning Assets $ 299.3 100% $ 284.1 100%
======== === ======== ===
</TABLE>
<TABLE>
<CAPTION>
Six Months
----------------------------------------------
1998 1997
------------------- --------------------
<S> <C> <C> <C> <C>
Loans $ 169.1 56% $ 154.8 56%
Securities 56.3 19 44.0 16
Liquid Assets 75.0 25 78.0 28
-------- --- -------- ---
Reported Average Interest-Earning Assets $ 300.4 100% $ 276.8 100%
======== === ======== ===
</TABLE>
Average interest-earning assets retained on the balance sheet increased by 5% in
the second quarter of 1998 and 9% in the first six months of 1998 when compared
with the same 1997 periods, principally as a result of the increase in loan
volume and securities. Average loans retained increased $11.4 billion in the
1998 second quarter and $14.3 billion in the first six months of 1998, when
compared with the same periods in 1997. The increase in average loans retained
was divided between the consumer and commercial portfolios, while the increase
in securities was principally in the domestic available-for-sale portfolio. The
growth in interest-earning assets in both 1998 periods was funded by higher
deposit levels and, in the first six months of 1998, by higher levels of Federal
funds purchased and securities sold under repurchase agreements, which provided
short-term funding for trading-related positions.
PROVISION FOR CREDIT LOSSES
Chase's provision for credit losses, which equaled net charge-offs, amounted to
$338 million in the 1998 second quarter and $682 million for the first six
months of 1998, compared with $189 million and $409 million, respectively, for
the prior-year periods. For a discussion of Chase's net charge-offs, see the
Credit Risk Management Section on pages 26-29.
Management expects that the provision for credit losses for full-year 1998 will
be higher than the full-year 1997 provision as a result of a higher volume of
credit card outstandings as well as increased charge-offs from the Asian
commercial portfolio.
NONINTEREST REVENUE
The 1998 second quarter and the 1998 first six months continued Chase's strong
revenue trend with quarterly record results in several areas (notably investment
banking and equity-related revenues as well as trust fees and credit card
revenue).
<TABLE>
<CAPTION>
NONINTEREST REVENUE Second Quarter Six Months
-------------------- --------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Investment Banking Fees $ 438 $ 283 $ 799 $ 459
Trust, Custody and Investment Management Fees 383 321 731 631
Credit Card Revenue 365 224 665 485
Fees for Other Financial Services 509 487 1,019 961
------ ------ ------ ------
Total Fees and Commissions 1,695 1,315 3,214 2,536
Trading Revenue 333 491 813 896
Securities Gains 98 30 181 131
Revenue from Equity-Related Investments 370 192 663 356
Other Revenue 233 119 329 310
------ ------ ------ ------
Total $2,729 $2,147 $5,200 $4,229
====== ====== ====== ======
</TABLE>
Investment banking fees of $438 million (a record high) in the 1998 second
quarter and $799 million for the 1998 first six months were higher by 55% and
74%, respectively, than the same 1997 periods. These results reflect strong
revenue growth in a favorable market for all major business lines, including
high-yield and investment-grade bond underwriting, loan syndications, and
mergers and acquisitions advisory activity.
-21-
<PAGE> 22
<TABLE>
<CAPTION>
TRUST, CUSTODY AND INVESTMENT MANAGEMENT FEES Second Quarter Six Months
----------------------- ---------------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Institutional (a) $ 204 $ 170 $ 386 $ 330
Personal (a) 121 102 235 203
Mutual Fund Fees (a) 33 24 64 47
Other Trust Fees 25 25 46 51
------- ------- --------- -------
Total Trust, Custody and Investment Management Fees $ 383 $ 321 $ 731 $ 631
======= ======= ========= =======
</TABLE>
(a) For the definitions of the above captions, see page 26 of Chase's 1997
Annual Report.
Trust, custody and investment management fees continued the record setting pace
of 1997 and first quarter 1998 by rising 19% to a new record of $383 million in
the 1998 second quarter, and increasing 16% to $731 million in the first six
months. These favorable results were largely attributable to growth in assets
under custody, expanded securities lending activity, and a higher level of
assets under management (including at Chase Vista mutual funds).
Credit card revenue rose $141 million, or 63%, in the 1998 second quarter and
$180 million, or 37%, in the 1998 first half as a result of continued growth in
managed credit card receivables, including the acquisition of BONY's credit card
portfolio in late 1997, and increased co-branded activities. The increases in
revenue were partially offset by a rise in net charge-offs on the securitized
portfolio, which reduced the excess servicing fees Chase received from the
securitizations. Average managed worldwide credit card receivables grew to $31.9
billion in the second quarter of 1998, compared with $26.1 billion for the prior
year's second quarter. For a further discussion of the credit card portfolio,
see page 27 of this Form 10-Q.
<TABLE>
<CAPTION>
FEES FOR OTHER FINANCIAL SERVICES Second Quarter Six Months
------------------------- --------------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Charges on Deposit Accounts $ 92 $ 95 $ 183 $ 186
Fees in Lieu of Compensating Balances 91 74 171 155
Commissions on Letters of Credit and Acceptances 72 74 146 146
Mortgage Servicing Fees 49 62 106 118
Loan Commitment Fees 32 29 70 56
Other Fees 173 153 343 300
------- -------- -------- -------
Total $ 509 $ 487 $ 1,019 $ 961
======= ======== ======== =======
</TABLE>
The rise in fees in lieu of compensating balances reflects, in part, higher fees
for services paid by customers, rather than customers maintaining a higher level
of compensating balances in the current lower interest-rate environment.
Mortgage servicing fees declined in both the 1998 second quarter and first six
months largely due to the impact of prepayments as a result of a lower
interest-rate environment; however, lower interest rates benefited mortgage
originations and sales revenues, which are reported in other revenues, as
discussed on page 23 of this Form 10-Q. The higher level of loan commitment fees
for both 1998 periods was largely a reflection of increased activity in Chase's
acquisition financing business. Higher fees related to insurance products,
investment services and loans securitized contributed to the increase in other
fees.
<TABLE>
<CAPTION>
TRADING REVENUE Second Quarter Six Months
------------------------- ---------------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trading Revenue $ 333 $ 491 $ 813 $ 896
Net Interest Income Impact (a) 184 140 396 297
------- -------- --------- --------
Total Trading-Related Revenue $ 517 $ 631 $ 1,209 $ 1,193
======= ======== ========= ========
Product Diversification:
Interest Rate Contracts (b) $ 95 $ 217 $ 236 $ 382
Foreign Exchange Contracts (b) 270 171 556 336
Debt Instruments and Other (b) 152 243 417 475
------- -------- --------- --------
Total Trading-Related Revenue $ 517 $ 631 $ 1,209 $ 1,193
======= ======== ========= ========
</TABLE>
(a) For a definition of trading-related net interest income, see Note Two of
Chase's 1997 Annual Report.
(b) For the classes of financial instruments included, see Note Two of Chase's
1997 Annual Report.
-22-
<PAGE> 23
Total trading revenues were $517 million for the 1998 second quarter, a decline
from the second quarter of 1997, as strong growth in client-driven business and
foreign exchange trading was offset by lower fixed income results, primarily
related to emerging markets. Total trading revenues for the 1998 first six
months were up slightly from the same 1997 period, due to strong 1998 first
quarter results, primarily reflecting a favorable foreign exchange environment.
Interest rate contract revenues declined for both periods, mainly due to weaker
results in the U.S., especially in several structured products. The rise in
foreign exchange revenue reflected strong earnings across a broad spectrum of
currencies, with particular emphasis on Asian markets where volatility continued
to remain high. The decline in debt instruments and other revenue was
attributable to weak markets in Eastern European and Latin American debt
instruments partially offset by strong performances from various non-interest
rate derivative product lines.
Securities gains of $98 million in the 1998 second quarter (more than triple the
1997 second quarter's results) and $181 million in the 1998 first half (an
increase of 38% from the same 1997 period) were realized in connection with
Chase's asset/liability management activities. The higher gains in the 1998
periods were largely from sales of U.S. Government and agency securities in the
available-for-sale portfolio.
Revenue from equity-related investments includes income from a wide variety of
investments both in the United States and abroad. The 1998 second quarter
results of $370 million were again a record for Chase and were significantly
higher than the prior year's quarter (increasing 93%) and the quarterly average
of approximately $206 million for the previous eight quarters. First half 1998
results increased 86% to $663 million. The higher revenues in both periods
reflect the continued benefit of Chase's accelerated pace of investment
activities over the last several years as well as the favorable market
conditions during 1998. At June 30, 1998, the carrying value of Chase's
equity-related investments approximated $4.6 billion.
<TABLE>
<CAPTION>
OTHER NONINTEREST REVENUE Second Quarter Six Months
------------------------ ---------------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Residential Mortgage Origination/Sales Activities $ 84 $ 30 $ 136 $ 61
Gain on Sale of a Partially-Owned Foreign Investment -- -- -- 44
All Other Revenue 149 89 193 205
-------- ------- --------- --------
Total Other Noninterest Revenue $ 233 $ 119 $ 329 $ 310
======== ======= ========= ========
</TABLE>
Other revenue, which includes gains and losses from the sale of nonstrategic
assets and from securitizations, amounted to $233 million for the second quarter
of 1998, a rise of $114 million from the prior year's second quarter, and was
$329 million for the first half of 1998. The 1998 second quarter and first six
months results included higher revenue from residential mortgage originations
and portfolio sales activities, a reflection of a favorable interest-rate
environment. Also contributing to the improvement in other revenue in both 1998
periods were gains on a variety of nonstrategic assets and the reclassification
of income (from net interest income to other revenue) from a loan and securities
portfolio that was transferred into a trust, the shares of which are being sold
to private banking and institutional investors. The 1997 first half results
included a $44 million gain on the sale of a partially-owned foreign investment.
The 1997 second quarter and first half also included $18 million and $32
million, respectively, of equity income from Chase's investment in CIT Group
Holdings, Inc. (Chase's remaining 20% interest in CIT was sold in the fourth
quarter of 1997).
NONINTEREST EXPENSE
Noninterest expense, excluding restructuring costs, was $2,714 million in the
1998 second quarter, an increase of 12% from the prior year's quarter, and was
$5,334 million for the first half of 1998, an increase of 10% from the same 1997
period. Increased revenues across a spectrum of Global Banking businesses
contributed to an increase in incentive costs. The balance of the increase for
both 1998 periods reflects operating costs related to portfolio acquisitions,
investment spending on new product offerings and Year 2000, EMU integration and
other technology spending. Noninterest expense including restructuring costs was
$2,722 million in the 1998 second quarter and $5,863 million for the first six
months of 1998, an increase of 10% and 19%, respectively, from the 1997 second
quarter and first six months, respectively.
-23-
<PAGE> 24
<TABLE>
<CAPTION>
NONINTEREST EXPENSE Second Quarter Six Months
------------------------- -----------------------------
(in millions, except ratios) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries $ 1,270 $ 1,110 $ 2,524 $ 2,234
Employee Benefits 215 219 439 441
Occupancy Expense 191 193 380 380
Equipment Expense 212 193 421 383
Other Expense 826 698 1,570 1,392
---------- --------- ---------- ---------
Total Before Restructuring Costs 2,714 2,413 5,334 4,830
Restructuring Costs 8 71 529 101
---------- --------- ---------- ---------
Total $ 2,722 $ 2,484 $ 5,863 $ 4,931
========== ========= ========== =========
Efficiency Ratio (a) 57% 58% 56% 58%
Efficiency Ratio - Operating (a) (b) 53% 54% 53% 54%
</TABLE>
(a) Excludes the REIT.
(b) Excludes the impact of credit card securitizations.
The increase in salaries for the 1998 second quarter and first six months was
primarily due to higher incentive costs as a result of higher earnings across a
number of businesses and competitive market pressures across many segments of
Global Banking. Included in the 1997 six month period was a charge of $50
million reflecting the accelerated vesting of stock-based incentive awards.
<TABLE>
<CAPTION>
FULL-TIME EQUIVALENT EMPLOYEES JUNE 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Domestic Offices 60,074 57,984
Foreign Offices 10,619 10,148
------ ------
Total Full-Time Equivalent Employees 70,693 68,132
====== ======
</TABLE>
The increased staff levels during the 1998 second quarter were primarily in NCS,
reflecting increased staffing demands as a result of portfolio acquisitions and
volume growth.
The higher level of equipment expense during the 1998 second quarter and first
six months was primarily the result of increased software expense related to
Year 2000 and EMU efforts as well as the integration of processing systems
throughout Chase and technology expenditures necessary to support targeted
growth businesses.
<TABLE>
<CAPTION>
OTHER EXPENSE Second Quarter Six Months
------------------------------- --------------------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Professional Services $ 161 $ 136 $ 303 $ 269
Marketing Expense 108 107 198 210
Telecommunications 91 73 168 148
Travel and Entertainment 67 61 119 112
Amortization of Intangibles 64 41 125 82
Minority Interest 12 20 24 39
Foreclosed Property Expense 2 -- 6 3
All Other 321 260 627 529
--------- ------- ---------- ---------
Total $ 826 $ 698 $ 1,570 $ 1,392
========= ======= ========== =========
</TABLE>
-24-
<PAGE> 25
Other expense for the 1998 second quarter and first six months increased $128
million and $178 million, respectively, when compared with the second quarter
and first six months of 1997. Professional services costs for both 1998 periods
reflected higher levels of contract computer professionals associated with
planned Year 2000 and the EMU efforts. The $18 million rise in
telecommunications costs in the 1998 second quarter and $20 million increase for
the first half of 1998, primarily reflects the growth in business volume at all
of Chase's major business franchises, covering both installation and usage.
Travel and entertainment expense increased 10% in the 1998 second quarter and 6%
for the first six months of 1998 due, in part, to increased staff levels. The
purchase of the BONY credit card portfolio in late 1997 contributed to the
increase in amortization of intangibles expense, while the increased servicing
costs for the portfolio contributed to the increase in all other expense. These
increases were partially offset by a decline in minority interest expense due to
the acquisition of minority interest in a foreign investment in the 1998 first
quarter.
For a discussion of Chase's restructuring costs, see Note Eight on page 9 of
this Form 10-Q.
Year 2000 and EMU: For a discussion of Chase's Year 2000 and the EMU efforts,
see pages 28-29 of Chase's 1997 Annual Report. The information below updates
Chase's Year 2000 and EMU disclosures:
Chase continues to work actively on its Year 2000 computer readiness. During the
first half of 1998, Chase made substantial progress in remediating and testing
its internal systems, as well as in working with external parties (vendors,
outside service providers, infrastructure suppliers (e.g., telecom providers),
customers, industry groups, clearing houses and regulatory agencies) to
determine their Year 2000 readiness.
Chase tracks its Year 2000 progress against a set of detailed milestones.
During the second quarter of 1998, Chase reached a major project milestone: Year
2000 compliance of its technical infrastructure (e.g., data center equipment,
LAN servers) and systems software. This internal milestone was met with 97% of
Chase's identified technical components being made Year 2000 compliant. In
addition, by June 30, 1998, over half of Chase's software applications had been
remediated for the Year 2000. The balance of this remediation work remains on
schedule for completion.
Third party vendor-supplied software packages are being closely tracked, with
approximately 70% of the total number of packages identified as needing upgrade
having been delivered to-date. Year 2000 internal and external test schedules
have been established, and a significant portion of testing is in progress.
External testing has begun for securities clearance and electronic payments, and
schedules are being coordinated with financial markets infrastructure
organizations, such as the New York Clearing House, Depository Trust Company,
Federal Reserve, and Securities Industry Association. Testing with third parties
is critical since a failure of a major external interface could have a material
adverse effect on the operations of Chase.
During the remainder of 1998, Chase will be completing the major internal
systems work. Efforts will continue to evolve from a focus on remediation and
testing to identifying and assessing areas of additional business risk
(including any business risks that could occur upon the failure of an external
party) and adjusting or creating contingency plans as appropriate.
As a worldwide provider of foreign exchange, custody, cash management, and
funds transfer services, and because Chase has an extensive international
branch and subsidiary network, Chase has also been actively preparing for the
introduction of the "euro", currently scheduled to occur on January 1, 1999. A
dedicated EMU project team has been in place since November 1996 so that Chase
products, technology, business operations and customer service functions
worldwide will be appropriately modified and "euro-capable" by January 1, 1999.
Risk assessment reviews are made regularly to track progress against a detailed
timeline. Remediation of all critical operating systems is intended to be
completed by August 31, 1998 with the testing of all systems, involving Chase
locations worldwide that will be impacted by the euro conversion, scheduled over
the remaining four months of the year. As part of its preparations, Chase has
been working closely with its customers, counterparties and regulatory agencies
in order to mitigate the payment and settlement risks resulting from the euro's
introduction. Chase has also been actively developing contingency plans to deal
with any liquidity issues that may result from misrouted funds because of
these changes in payment or settlement procedures.
INCOME TAXES
Chase recognized income tax expense of $631 million in the second quarter of
1998 compared with $555 million in the second quarter of 1997. The effective tax
rate for each period was 37.0% and 37.5%, respectively. For the first six
months, Chase recorded income tax expense of $1.06 billion in 1998, compared
with $1.11 billion in 1997, at an effective tax rate of 37.0% and 37.5%,
respectively.
-25-
<PAGE> 26
CREDIT RISK MANAGEMENT
The following discussion of Chase's credit risk management focuses primarily on
developments since December 31, 1997 and should be read in conjunction with
pages 29-37 and 52 of Chase's 1997 Annual Report.
The following table presents Chase's credit-related information for the dates
indicated.
<TABLE>
<CAPTION>
PAST DUE 90 DAYS OR MORE
CREDIT-RELATED ASSETS NONPERFORMING ASSETS & STILL ACCRUING
------------------------- -------------------------- ------------------------
JUNE 30, Dec 31, JUNE 30, Dec 31, JUNE 30, Dec 31,
(in millions) 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consumer:
Domestic Consumer:
1-4 Family Residential Mortgages $ 41,218 $ 38,680 $ 374 $ 340 $ 2 $ 2
Credit Card 13,034 15,631 -- -- 267 256
Auto Financings 13,080 13,243 42 31 13 20
Other Consumer 8,355 8,543 8 7 115 142
----------- ----------- --------- -------- -------- --------
Total Domestic Consumer 75,687 76,097 424 378 397 420
Foreign Consumer 3,882 3,976 20 21 9 7
----------- ----------- --------- -------- -------- --------
TOTAL CONSUMER 79,569 80,073 444 399 406 427
----------- ----------- --------- -------- -------- --------
COMMERCIAL:
Domestic Commercial:
Commercial and Industrial 40,790 37,931 342 258 23 18
Commercial Real Estate(a) 4,552 5,030 67 75 7 14
Financial Institutions 7,604 6,652 -- 1 -- --
----------- ----------- --------- -------- -------- --------
Total Domestic Commercial 52,946 49,613 409 334 30 32
Total Foreign Commercial 36,190 38,768 369 175 57 --
----------- ----------- --------- -------- -------- --------
TOTAL COMMERCIAL 89,136 88,381 778 509 87 32
----------- ----------- --------- -------- -------- --------
TOTAL LOANS (b) $ 168,705 $ 168,454 1,222 908 $ 493 $ 459
=========== =========== --------- -------- ======== ========
Derivative and FX Contracts $ 33,654 $ 38,476 28 -- $ 4 $ 1
=========== =========== ======== ========
Assets Acquired as Loan Satisfactions 115 110
--------- --------
TOTAL NONPERFORMING ASSETS $ 1,365 $ 1,018
========= ========
</TABLE>
<TABLE>
<CAPTION>
NET CHARGE-OFFS
-------------------------------------------------------------
Second Quarter Six Months
----------------------- ---------------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONSUMER:
Domestic Consumer:
1-4 Family Residential Mortgages $ 6 $ 6 $ 16 $ 13
Credit Card 184 121 363 271
Auto Financings 18 15 41 27
Other Consumer 43 48 84 88
--------- --------- ---------- ---------
Total Domestic Consumer 251 190 504 399
Foreign Consumer 5 3 8 6
--------- --------- ---------- ---------
TOTAL CONSUMER 256 193 512 405
--------- --------- ---------- ---------
COMMERCIAL:
Domestic Commercial:
Commercial and Industrial (27) 4 (18) 18
Commercial Real Estate(a) (3) (6) (6) (10)
---------- --------- ---------- ---------
Total Domestic Commercial (30) (2) (24) 8
Total Foreign Commercial 102 (2) 172 (4)
--------- --------- ---------- ---------
TOTAL COMMERCIAL 72 (4) 148 4
DERIVATIVE AND FX CONTRACTS 10 -- 22 --
--------- --------- ---------- ---------
TOTAL NET CHARGE-OFFS $ 338 $ 189 $ 682 $ 409
========= ========= ========== =========
</TABLE>
(a) Represents loans secured primarily by real property, other than loans
secured by mortgages on 1-4 family residential properties.
(b) Total loans, excluding the impact of credit card securitizations, at June
30, 1998 and December 31, 1997 were $186,924 million and $185,306 million,
respectively.
-26-
<PAGE> 27
LOAN SUMMARY
The slight increase in retained loans outstanding is the result of an increase
in commercial loans. Based upon industry classifications utilized by Chase,
there were no commercial and industrial industry segments which exceeded 5% of
total commercial and industrial loans outstanding. During the 1998 second
quarter, exposures to Asia continued to decrease and Asian charge-offs were
partially offset by recoveries in the rest of the commercial portfolio.
Chase's nonperforming assets at June 30, 1998 increased $347 million from the
1997 year-end level primarily due to an increase in nonperforming Asian assets
and, to a lesser extent, domestic commercial loans. Management expects that
during the remainder of 1998, there will be an increase in nonperforming assets
from the June 30, 1998 level, primarily as a result of continuing uncertainty in
the financial conditions of certain Asian countries.
Total net charge-offs on a retained basis increased by $149 million during the
1998 second quarter and by $273 million for the first six months, when compared
to the same 1997 periods. Total net charge-offs on a managed basis were $624
million in the 1998 second quarter, compared with $456 million in the second
quarter of 1997. For the first six months of 1998, total net charge-offs on a
managed basis were $1,248 million, compared with $890 million in 1997. The
increase in net charge-offs on both a managed and retained basis is due to the
generally lower credit quality of a recently acquired credit card portfolio, a
factor which was anticipated at the time of its acquisition, and increased
foreign commercial charge-offs, primarily as a result of conditions in Asia.
CONSUMER PORTFOLIO
Residential Mortgage Loans: Residential mortgage loans were $41.2 billion at
June 30, 1998, a $2.5 billion increase from year-end, reflecting higher activity
due to lower interest rates. At June 30, 1998, nonperforming domestic
residential mortgage loans, as a percentage of the domestic residential mortgage
loan portfolio, was 0.91%, slightly up from the 1997 year-end level.
Credit Card Loans: Chase analyzes its credit card portfolio on a managed basis,
which includes credit card receivables on the balance sheet as well as credit
card receivables that have been securitized.
The following table presents credit-related information for Chase's domestic
managed credit card receivables.
<TABLE>
<CAPTION>
As of or for the As of or for the
Three Months Ended Six months Ended
June 30, (a) June 30, (a)
------------------------------- --------------------------
(in millions, except ratios) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Managed Domestic Credit Card Receivables $ 31,326 $ 25,567 $ 31,581 $ 25,443
Past Due 90 Days or More and Accruing $ 649 $ 520 $ 649 $ 520
As a Percentage of Average Credit Card Receivables 2.07% 2.03% 2.06% 2.04%
Net Charge-offs $ 471 $ 383 $ 930 $ 741
As a Percentage of Average Credit Card Receivables 6.01% 5.99% 5.89% 5.83%
</TABLE>
(a) For the three months ended June 30, 1998, and 1997 and for the six months
ended June 30, 1998 and 1997, Chase's average aggregate domestic and
international managed credit card receivables were $31.9 billion, $26.1
billion, $32.2 billion and $25.9 billion, respectively. Net charge-offs as
a percentage of average aggregate domestic and international managed credit
card receivables for each of these periods were 5.94%, 5.92%, 5.82% and
5.75%, respectively.
The increases in domestic average managed credit card receivables for both the
three and six month periods ended June 30, 1998, when compared with the same
periods in 1997, were largely the result of the purchase of a credit card
portfolio in late 1997, totaling approximately $4.0 billion in outstandings. The
increase in net charge-off percentage for both 1998 periods is due to the
generally lower credit quality of that acquired portfolio, partially offset by a
lower charge-off percentage in the core portfolio. Management expects that
domestic credit card net charge-offs, as a percentage of average domestic
managed credit card receivables, will increase modestly in 1998 when compared
with 1997.
Auto Financings: Auto financings outstanding remained relatively stable and
reflected continued strong consumer demand due to favorable pricing programs,
partially offset by the impact of auto loan securitizations. Total originations
were $5.9 billion in the first half of 1998, compared with $5.0 billion in the
same 1997 period. Net charge-offs related to auto financings increased in the
1998 second quarter and in the first six months, compared with the same 1997
periods. The increased level of net charge-offs for both 1998 periods primarily
reflects growth in the portfolio and the unfavorable performance in a
discontinued product line.
-27-
<PAGE> 28
COMMERCIAL PORTFOLIO
Domestic Commercial: Net charge-off levels in the domestic commercial portfolio
remained low during the 1998 second quarter and the portfolio continued to
maintain its strong credit quality.
Foreign Commercial: The foreign commercial portfolio totaled $36.2 billion at
June 30, 1998, a decrease of $2.6 billion from the 1997 year-end. Nonperforming
loan levels at June 30, 1998, as well as net charge-off levels for the 1998
second quarter and first six months, increased in comparison with the respective
prior year periods, due to financial conditions in Asia.
Total nonperforming assets in Asia, including derivatives, increased by $204
million from year-end levels and by $43 million from March 31, 1998 to $286
million at June 30, 1998. Asian commercial net charge-offs, including
derivatives, for the 1998 second quarter were $122 million and for the first
half of 1998 were $214 million, compared with $3 million and $2 million,
respectively, in the same 1997 periods.
DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS
For a discussion of the derivative and foreign exchange financial instruments
utilized in connection with Chase's trading and ALM activities, see pages 35-36
and Notes One and Eighteen of Chase's 1997 Annual Report. At June 30, 1998, the
majority of these transactions were with commercial bank and financial
institution counterparties, most of which are dealers in these products. The
following table provides the remaining maturities of derivative and foreign
exchange contracts outstanding at June 30, 1998 and December 31, 1997. The
lengthening of the maturity profile since year-end is the result of the improved
creditworthiness of Chase over the last several years (as evidenced by credit
rating upgrades) and the maturation of the derivatives market where longer
maturities are becoming more commonplace.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 At December 31, 1997
--------------------------------------------------- ---------------------------------------------------
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 1 year 19% 91% 43% 43% 27% 95% 51% 54%
1 to 5 years 49 6 54 35 47 5 48 32
Over 5 years 32 3 3 22 26 -- 1 14
--- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
</TABLE>
Chase's net charge-offs arising from derivative and foreign exchange
transactions were $10 million in the 1998 second quarter and $22 million for the
first six months of 1998. There were no net charge-offs on these types of
transactions during the second quarter and first six months of 1997. At June 30,
1998, nonperforming derivative contracts were $28 million, compared with none in
1997. The increases in both net charge-offs and nonperforming derivative
contracts were due to the financial conditions in Asia.
CROSS-BORDER EXPOSURE
Credits denominated in a currency other than that of the country in which a
borrower is located, such as dollar-denominated loans made overseas, are called
"cross-border" credits. The Asian financial turmoil, which started in July 1997,
affected many countries where Chase has had long-standing banking relationships.
The following table presents Chase's cross-border exposure to selected Asian
countries. For a further discussion of Chase's cross-border exposure to Asian
countries, see pages 34-35 of Chase's 1997 Annual Report.
<TABLE>
<CAPTION>
JUNE 30,1998 December 31, 1997
----------------------------------------------- -----------------------------------------------
LENDING- FOREIGN TOTAL Lending- Foreign Total
SELECTED ASIAN COUNTRIES RELATED EXCHANGE & CROSS-BORDER Related Exchange & Cross-Border
(in billions) AND OTHER (a) DERIVATIVES (b) EXPOSURE and Other (a) Derivatives (b) Exposure
--------- ----------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Korea $ 2.6 $ 0.6 $ 3.2 $ 3.4 $ 2.0 $ 5.4
Hong Kong 2.0 0.4 2.4 3.1 0.5 3.6
Indonesia 1.1 0.5 1.6 1.8 0.8 2.6
Thailand 1.2 0.2 1.4 1.5 0.6 2.1
Singapore 1.1 0.2 1.3 1.2 0.6 1.8
Philippines 0.7 -- 0.7 1.1 -- 1.1
Malaysia 0.8 0.1 0.9 0.9 0.2 1.1
China 0.6 0.2 0.8 0.7 0.1 0.8
Taiwan 0.8 -- 0.8 0.8 -- 0.8
India 0.1 -- 0.1 0.2 -- 0.2
------- -------- ------- --------- ------- ---------
Total Selected Countries $ 11.0 $ 2.2 $ 13.2 $ 14.7 $ 4.8 $ 19.5
======= ======== ======= ========= ======= =========
</TABLE>
(a) Includes loans and accrued interest, interest-bearing deposits with banks,
trading debt and equity instruments, acceptances, other monetary assets,
issued letters of credit, undrawn commitments to extend credit and local
currency assets, net of local currency liabilities.
(b) Foreign exchange largely represents the mark-to-market exposure of spot and
forward contracts. Derivatives largely represent the mark-to-market
exposure of risk management instruments. Mark-to-market exposure is a
measure, at a point in time, of the value of a foreign exchange or
derivative contract in the open market. The impact of legally enforceable
master netting agreements on these foreign exchange and derivative
contracts reduced exposure by $0.7 billion at both June 30, 1998 and
December 31, 1997.
-28-
<PAGE> 29
ALLOWANCE FOR CREDIT LOSSES
The following discussion of Chase's allowance for credit losses focuses
primarily on developments since December 31, 1997 and should be read in
conjunction with pages 36-37 and Note Five of Chase's 1997 Annual Report.
The accompanying tables reflect the activity in and composition of Chase's
allowance for credit losses and certain coverage ratios related to the allowance
for credit losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Second Quarter Six Months
----------------------------- -------------------------------
(in millions, except ratios) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Aggregate Allowance at Beginning of Period $ 3,867 $ 3,695 $ 3,869 $ 3,694
Provision for Credit Losses 338 189 682 409
Charge-Offs (437) (258) (856) (531)
Recoveries 99 69 174 122
--------- -------- --------- ---------
Net Charge-Offs (338) (189) (682) (409)
Other, Primarily Allowance Related to
Purchased Portfolio 7 (4) 5 (3)
--------- -------- --------- ---------
Aggregate Allowance at End of Period $ 3,874(a) $ 3,691 $ 3,874(a) $ 3,691
========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Composition of Allowance for Credit Losses:
Loans $ 3,629 $ 3,446
Derivative and Foreign Exchange Contracts 75 75
Lending-Related Commitments 170 170
---------- -----------
Aggregate Allowance $ 3,874 $ 3,691
========== ===========
Allowance for Credit Losses on Loans to:
Nonperforming Loans 297% 356%
Loans at Period-End 2.15 2.15
Average Loans (Six Months) 2.15 2.23
</TABLE>
(a) The increases in the aggregate allowance from the June 30, 1997 levels is
due in large part to the acquisition of the Bank of New York credit card
portfolio in late 1997.
The allowance for credit losses provides for risks of losses inherent in the
credit extension process for loans, derivative and foreign exchange financial
instruments and lending-related commitments. Chase deems its allowance for
credit losses at June 30, 1998 to be adequate (i.e., sufficient to absorb losses
that may currently exist for all credit activities, but are not yet
identifiable). Estimating potential future losses is inherently uncertain and
depends on many factors, including general macroeconomic and political
conditions, rating migration, structural changes within industries which alter
competitive positions, event risk, unexpected correlations within the portfolio,
and other external factors such as legal and regulatory requirements. Chase
periodically reviews such factors and reassesses the adequacy of the allowance
for credit losses.
-29-
<PAGE> 30
MARKET RISK MANAGEMENT
The following discussion of Chase's market risk management focuses primarily on
developments since December 31, 1997 and should be read in conjunction with
pages 37-41 and Notes One and Eighteen of Chase's 1997 Annual Report.
Chase uses both historic simulation and Monte Carlo statistical techniques to
estimate a daily value-at-risk ("VAR"). The VAR calculation is performed for all
material trading portfolios and market risk-related ALM portfolios, with results
reported by business unit and in the aggregate. The total VAR for Chase's
trading portfolio and market risk-related ALM portfolio as of or for the
twelve-month period ended June 30, 1998 was as follows:
<TABLE>
<CAPTION>
Marked-to-Market Trading Portfolio Market Risk-Related ALM Activities
----------------------------------------------- ---------------------------------------------
Twelve-Month Period Twelve-Month Period
Ending June 30, 1998 At Ending June 30, 1998 At
------------------------------------ -----------------------------------
June 30, June 30,
Average Minimum Maximum 1998 Average Minimum Maximum 1998
(in millions) VAR VAR VAR VAR VAR VAR VAR VAR
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate VAR $ 22.6 $ 15.1 $ 51.4 $ 27.3 $ 47.0 $ 36.6 $ 67.3 $ 45.0
Foreign Exchange VAR 7.4 2.9 17.7 6.8 --- --- --- ---
Commodities VAR 2.8 1.1 4.9 3.7 --- --- --- ---
Equities VAR 4.1 2.1 9.4 4.9 --- --- --- ---
Less:
Portfolio Diversification (12.6) NM NM (13.8) --- --- --- ---
-------- ---------- -------- ------- --------- -------- -------- --------
Total VAR $ 24.3 $ 15.6 $ 51.5 $ 28.9 $ 47.0 $ 36.6 $ 67.3 $ 45.0
======== ========== ======== ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Twelve-Month Period At
Ending June 30, 1998 June 30, 1998
Average VAR VAR
----------- ---
<S> <C> <C>
Marked-to-Market Trading Portfolio $ 24.3 $ 28.9
Market Risk-Related ALM Activities 47.0 45.0
Less: Portfolio Diversification (17.5) (23.2)
------------ -------------
Aggregate VAR $ 53.8 $ 50.7
============ =============
</TABLE>
NM: Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect.
Chase's average aggregate VAR (VAR for both trading and ALM activities), for the
twelve-month period ended June 30, 1998, was $53.8 million. Chase's aggregate
VAR at June 30, 1998 was $50.7 million. Chase's aggregate average and period end
VAR are less than the sum of the respective trading and ALM VARs shown in the
above table (by $17.5 million and $23.2 million, respectively) due to
risk-offsets resulting from portfolio diversification which occur across the
trading and ALM portfolios.
Chase was among the earliest adopters of the Basle Committee on Banking
Supervision market risk capital rules. Both for regulatory compliance with the
Basle rules and for internal evaluation of VAR, Chase conducts daily backtesting
of its VAR against trading revenues. For mark-to-market activities, there were
no days in the second quarter of 1998 in which VAR was exceeded by a daily
trading loss.
Management believes stress tests are an essential complement to VAR. At Chase,
stress tests are an integral part of an effective risk management process, and
have assumed an equal standing to VAR as a risk measurement and control
technique for market risk. As of June 30, 1998, Chase's corporate monthly stress
tests consist of five historical and three hypothetical scenarios for all
material trading portfolios and market risk-related ALM portfolios. Since
December 31, 1997, stress test results have been incorporated into Chase's
internal capital allocation methodology, which provides a significant incentive
for active management of aggregate exposures to difficult market environments.
-30-
<PAGE> 31
TRADING ACTIVITIES
The following chart contains a histogram of Chase's daily market risk-related
revenue, which is defined as the daily change in value of marked-to-market
trading portfolios plus any trading-related net interest income.
[Graphic of Daily Changes in Market Risk-Related Trading Revenue
- See Appendix 1]
Based on actual trading results for the twelve months ended June 30, 1998, Chase
posted positive daily market risk-related revenue for 220 out of 259 business
trading days with 84 days exceeding positive $15 million over the past twelve
months. This compares with 53 days exceeding positive $15 million for the twelve
months ended June 30, 1997. The large increase in days exceeding positive $15
million reflected continued efforts to build key trading activities. Chase
incurred six daily trading losses in excess of negative $15 million over the
past twelve months. Four of these six days of losses resulted from sharp price
declines and a loss of liquidity for certain securities, particularly emerging
market debt instruments, during the difficult and unusually volatile trading
markets in late October 1997.
ASSET/LIABILITY MANAGEMENT
Measuring Interest Rate Sensitivity: Chase, as part of its ALM process, employs
a variety of cash (primarily securities) and derivatives instruments in managing
its exposure to fluctuations in market interest rates. In managing exposure,
Chase uses quantifications of net gap exposure and measurements of earnings at
risk (the risk to earnings from adverse movements in interest rates) based on
earnings simulations. An example of aggregate net gap analysis is presented
below.
CONDENSED INTEREST-RATE SENSITIVITY TABLE
<TABLE>
<CAPTION>
(in millions) 1-3 4-6 7-12 1-5 OVER
AT JUNE 30, 1998 MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
------ ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $ (22,486) $ 4,470 $ 2,627 $ 34,177 $ (18,788) $ --
Derivative Instruments Affecting
Interest-Rate Sensitivity 13,456 (8,923) (5,567) (2,872) 3,906 --
Interest-Rate Sensitivity Gap (9,030) (4,453) (2,940) 31,305 (14,882) --
Cumulative Interest-Rate
Sensitivity Gap (9,030) (13,483) (16,423) 14,882 -- --
% of Total Assets (2%) (4%) (4%) 4% -- --
</TABLE>
-31-
<PAGE> 32
At June 30, 1998, Chase had $16.4 billion more liabilities than assets repricing
within one year (including the net repricing effects of derivative positions),
or 4% of total assets. This compares with $17.8 billion more liabilities than
assets repricing within one year, or 5% of total assets, at December 31, 1997.
This negative gap (more liabilities repricing than assets), will benefit
earnings in a declining interest rate environment and will detract from earnings
in a rising interest rate environment.
At June 30, 1998, based on Chase's simulation model and applying immediate
increases in various market interest rates (100 bp increase for US
dollar-denominated positions and a range from 100 bp to 1500 bp increases for
non-US dollar-denominated positions), earnings at risk over the next twelve
months are estimated to be approximately 2.8% of projected 1998 after-tax income
(before restructuring costs). Chase's earnings at risk to an immediate rise in
interest rates was estimated to be approximately 3.5% of after-tax net income at
December 31, 1997 and 5.5% of after-tax net income at March 31, 1998. The lower
earnings at risk at June 30, 1998, when compared with the March 31, 1998 amount,
reflects a lower level of fixed-rate securities funded by floating-rate
liabilities. The hypothetical rate shocks are used to calibrate risk that Chase
believes to be reasonably possible of occurring in the near-term, but these
scenarios do not necessarily represent management's current view of future
market developments.
Impact of ALM Derivative Activity:
The following table reflects the deferred gains/losses on closed derivative
contracts and unrecognized gains/losses on open derivative contracts utilized in
Chase's ALM activities at June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
JUNE 30, December 31,
(in millions) 1998 1997 Change
---- ---- ------
<S> <C> <C> <C>
ALM Derivative Contracts:
Net Deferred Gains (Losses) $ 44 $ - $ 44
Net Unrecognized Gains (Losses) (a) (7) (392) 385
----- ------ -------
Net ALM Derivative Gains (Losses) $ 37 $ (392) $ 429
===== ====== =======
</TABLE>
(a) These net unrecognized losses do not include the net favorable impact from
the assets/liabilities being hedged by these derivative contracts.
OPERATING RISK MANAGEMENT
For a discussion of Chase's management of its operating risk, see page 41 of
Chase's 1997 Annual Report.
CAPITAL AND LIQUIDITY RISK MANAGEMENT
The following capital and liquidity discussion should be read in conjunction
with the Capital and Liquidity Risk Management section on pages 41-43 and Note
Seventeen of Chase's 1997 Annual Report.
CAPITAL
Chase's capital levels at June 30, 1998 remained well in excess of regulatory
guidelines. At June 30, 1998, Tier 1 and Total Capital ratios were 8.2% and
11.9%, respectively, and the Tier 1 leverage ratio was 6.3%. At June 30, 1998,
the total capitalization of Chase (the sum of Tier 1 and Tier 2 Capital) was
$34.1 billion, an increase of $.8 billion from December 31, 1997. This increase
for the first half of 1998 reflects retained earnings (net income less common
and preferred dividends) generated during the period together with the issuance
of $200 million (net of discount) of capital securities issued by certain Chase
subsidiaries (see Note Seven of this Form 10-Q) and the issuance of $200 million
of fixed/adjustable rate noncumulative preferred stock. The increase was
partially offset by the redemption of $772 million of preferred stock bearing
higher dividend rates.
-32-
<PAGE> 33
In the first quarter of 1998, Chase raised the cash dividend on its Common Stock
to $.36 per share from $.31 per share. (See Note 2 for a discussion of Chase's
two-for-one stock split.) Chase has over the past several years been paying a
common stock dividend that has generally been equal to approximately 25% to 35%
of Chase's operating net income, less the amount of preferred stock dividends.
Chase's future dividend policies will be determined by its Board of Directors
taking into consideration Chase's earnings and financial condition and
applicable governmental regulation and policies.
From inception of a stock buy-back program authorized by Chase's Board of
Directors in October 1996 through June 30, 1998, Chase repurchased 69.3 million
shares of its Common Stock ($3.5 billion) and reissued from treasury
approximately 40.8 million shares of its Common Stock ($2.0 billion) under its
benefit plans, resulting in a net repurchase of 28.5 million shares.
Management is committed to maintaining a disciplined capital policy for Chase.
That policy is intended to increase SVA, to employ capital to support growth,
including through acquisitions or other investment opportunities, and to return
excess capital to stockholders. In light of this policy, management utilized
capital during the first six months of 1998 to increase Chase's regulatory
capital ratios to within management's target range of 8% - 8.25%. For the
remainder of the year, management intends that capital generated in excess of
target capital ratios will be used to support pending acquisitions and to
repurchase additional shares of common stock under the buyback program, although
the exact amount of common stock that will be purchased by Chase during the
remainder of the year will depend on Chase's future earnings, internal asset
growth and future investment and acquisition opportunities.
LIQUIDITY
Chase manages its liquidity in order to ensure the availability of sufficient
cash flows to meet all of Chase's financial commitments and to capitalize on
opportunities for Chase's business expansion. Chase is an active participant in
the capital markets and issues commercial paper, medium-term notes, long-term
debt, and common and preferred stock. At June 30, 1998, Chase's long-term debt
was $14.5 billion. Chase issued $2.1 billion of long-term debt during the first
six months of 1998; during the same period, $566 million of long-term debt
matured and $428 million was redeemed. During the second quarter of 1998, Chase
issued $200 million of fixed/adjustable rate preferred stock and redeemed $200
million of its 7.58% cumulative preferred stock and $200 million of its 7.50%
cumulative preferred stock. An additional $140 million of Chase's fixed-rate
preferred stock becomes callable during the remainder of 1998. Chase constantly
evaluates the opportunities to redeem its outstanding debt and preferred stock
and to issue new debt and preferred stock in light of current market conditions.
SUPERVISION AND REGULATION
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 1-5 of Chase's 1997 Annual Report.
DIVIDENDS
Chase's bank subsidiaries could, without the approval of their relevant banking
regulators, pay dividends to their respective bank holding companies in amounts
up to the limitations imposed upon such banks by regulatory restrictions. These
dividend limitations, in the aggregate, totaled approximately $2.1 billion at
June 30, 1998.
-33-
<PAGE> 34
ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS 133, which establishes accounting and
reporting standards for all derivative instruments, including certain derivative
instruments embedded in other financial instruments (collectively referred to as
derivatives), and for hedging activities. SFAS 133 requires that an entity
measure all derivatives at fair value and recognize those derivatives as either
assets or liabilities in the balance sheet. The change in a derivative's fair
value is generally recognized in current period earnings. However, if certain
conditions are met, a derivative may be specifically designated as a hedge of an
exposure to changes in fair value, variability of cash flows, or certain foreign
currency exposures. Based on the hedge designation, special hedge accounting
rules allow the derivative's change in value to be recognized either in current
period earnings together with the offsetting change in value of the risk being
hedged, or, to the extent the hedge is effective, in comprehensive income and
subsequently reclassified into earnings when the hedged item affects earnings.
SFAS 133 is effective for all fiscal years beginning after June 15, 1999, with
early adoption permitted. Chase already recognizes the derivatives used in its
trading activities on its balance sheet at fair value with changes in the fair
values of such derivatives included in earnings. This represents the substantial
majority of the derivatives utilized by Chase. With respect to those other
derivatives used as hedges of its assets, liabilities and commitments, Chase is
beginning to assess the impact of the adoption of SFAS 133 on its hedging
activities and its effect on its financial condition and operating performance.
OTHER EVENTS
On May 7, 1998, Chase and Morgan Stanley Dean Witter & Co. ("Morgan Stanley")
reached a definitive agreement under which Chase will acquire the global custody
business of Morgan Stanley, which has more than $400 billion of assets under
custody. The acquisition is expected to be completed during the latter part of
1998. The clients and staff joining Chase will be integrated into Chase Global
Investor Services, which is part of Chase's Global Services Business included in
CTS.
-34-
<PAGE> 35
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
JUNE 30, 1998 June 30, 1997
------------------------------------ --------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 4,611 $ 148 12.88% $ 4,185 $ 114 10.91%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 35,409 554 6.27% 42,715 697 6.54%
Trading Assets-Debt and Equity
Instruments 34,442 716 8.34% 36,358 705 7.78%
Securities:
Available-for-Sale 54,515 855 6.29% (b) 40,850 679 6.67%(b)
Held-to-Maturity 2,518 40 6.37% 3,535 60 6.78%
Loans 167,807 3,319 7.93% 156,459 3,108 7.97%
-------- ------ -------- ------
Total Interest-Earning Assets 299,302 5,632 7.55% 284,102 5,363 7.57%
Allowance for Credit Losses on Loans (3,548) (3,437)
Cash and Due from Banks 14,907 13,334
Risk Management Instruments 33,288 31,991
Other Assets 30,102 22,905
-------- --------
Total Assets $374,051 $348,895
======== ========
LIABILITIES
Domestic Retail Deposits $ 59,554 596 4.01% $ 57,369 529 3.70%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 16,780 179 4.30% 8,750 153 7.01%
Deposits in Foreign Offices 75,294 1,009 5.37% 68,588 886 5.18%
-------- ------ -------- ------
Total Time and Savings
Deposits 151,628 1,784 4.72% 134,707 1,568 4.67%
-------- ------ -------- ------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 66,835 886 5.32% 66,149 924 5.60%
Commercial Paper 4,568 60 5.25% 4,035 55 5.42%
Other Borrowings (c) 16,610 532 12.84% 21,993 531 9.69%
-------- ------ -------- ------
Total Short-Term and
Other Borrowings 88,013 1,478 6.74% 92,177 1,510 6.57%
Long-Term Debt 16,492 325 7.89% 14,035 273 7.81%
-------- ------ -------- ------
Total Interest-Bearing Liabilities 256,133 3,587 5.62% 240,919 3,351 5.58%
-------- ------ -------- ------
Noninterest-Bearing Deposits 45,757 41,064
Risk Management Instruments 35,032 32,189
Other Liabilities 14,370 13,452
-------- --------
Total Liabilities 351,292 327,624
-------- --------
PREFERRED STOCK OF SUBSIDIARY 550 550
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 1,255 2,494
Common Stockholders' Equity 20,954 18,227
-------- --------
Total Stockholders' Equity 22,209 20,721
-------- --------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $374,051 $348,895
======== ========
INTEREST RATE SPREAD 1.93% 1.99%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $2,045(a) 2.74% $2,012 (a) 2.84%
====== ==== ====== ====
</TABLE>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the three months ended June 30, 1998 and June 30, 1997, the annualized
rate for available-for-sale securities based on historical cost was 6.31%
and 6.58%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-35-
<PAGE> 36
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED Six Months Ended
JUNE 30, 1998 June 30, 1997
----------------------------------------- ------------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 4,397 $ 300 13.78% $ 4,834 $ 220 9.19%
Federal Funds Sold and
Securities Purchased Under
Resale Agreements 36,639 1,225 6.74% 39,427 1,256 6.42%
Trading Assets-Debt and Equity
Instruments 33,879 1,392 8.29% 33,786 1,331 7.95%
Securities:
Available-for-Sale 53,637 1,703 6.40%(b) 40,337 1,343 6.72%(b)
Held-to-Maturity 2,676 86 6.47% 3,631 122 6.77%
Loans 169,142 6,724 8.02% 154,754 6,239 8.13%
---------- ------- -------- -------
Total Interest-Earning Assets 300,370 11,430 7.67% 276,769 10,511 7.66%
Allowance for Credit Losses on Loans (3,553) (3,444)
Cash and Due from Banks 14,542 12,703
Risk Management Instruments 36,312 34,317
Other Assets 28,141 23,763
---------- --------
Total Assets $ 375,812 $344,108
========== ========
LIABILITIES
Domestic Retail Deposits $ 59,244 1,168 3.98% $ 57,511 1,058 3.71%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 16,115 366 4.58% 8,991 303 6.79%
Deposits in Foreign Offices 76,110 2,065 5.47% 66,919 1,722 5.19%
---------- ------- -------- -------
Total Time and Savings
Deposits 151,469 3,599 4.79% 133,421 3,083 4.66%
---------- ------- -------- -------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 67,543 1,833 5.47% 62,828 1,709 5.48%
Commercial Paper 4,352 114 5.27% 4,164 110 5.31%
Other Borrowings (c) 17,044 1,040 12.30% 19,695 993 10.17%
---------- ------- -------- -------
Total Short-Term and
Other Borrowings 88,939 2,987 6.77% 86,687 2,812 6.54%
Long-Term Debt 16,102 630 7.89% 13,780 530 7.75%
---------- ------- -------- -------
Total Interest-Bearing Liabilities 256,510 7,216 5.67% 233,888 6,425 5.54%
---------- ------- -------- -------
Noninterest-Bearing Deposits 45,165 40,981
Risk Management Instruments 37,043 34,262
Other Liabilities 14,425 13,497
---------- --------
Total Liabilities 353,143 322,628
---------- --------
PREFERRED STOCK OF SUBSIDIARY 550 550
---------- --------
STOCKHOLDERS' EQUITY
Preferred Stock 1,467 2,571
Common Stockholders' Equity 20,652 18,359
---------- --------
Total Stockholders' Equity 22,119 20,930
---------- --------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 375,812 $344,108
========== ========
INTEREST RATE SPREAD 2.00% 2.12%
==== ====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 4,214(a) 2.83% $ 4,086(a) 2.98%
======= ==== =-===== ====
</TABLE>
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Statement of Income to permit comparisons of yields on tax-exempt
and taxable assets.
(b) For the six months ended June 30, 1998 and June 30, 1997, the annualized
rate for available-for-sale securities based on historical cost was 6.43%
and 6.63%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-36-
<PAGE> 37
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
------------------- --------------------------------------------
SECOND First Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,316 $ 3,405 $ 3,392 $ 3,294 $ 3,106 $ 3,129
Securities 889 889 851 720 735 722
Trading Assets 716 676 707 732 705 626
Federal Funds Sold and Securities
Purchased Under Resale Agreements 554 671 728 623 697 559
Deposits with Banks 148 152 156 149 114 106
------- ------- ------- ------- ------- -------
Total Interest Income 5,623 5,793 5,834 5,518 5,357 5,142
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits 1,784 1,815 1,764 1,714 1,568 1,515
Short-Term and Other Borrowings 1,478 1,509 1,640 1,451 1,510 1,302
Long-Term Debt 325 305 320 284 273 257
------- ------- ------- ------- ------- -------
Total Interest Expense 3,587 3,629 3,724 3,449 3,351 3,074
------- ------- ------- ------- ------- -------
NET INTEREST INCOME 2,036 2,164 2,110 2,069 2,006 2,068
Provision for Credit Losses 338 344 205 190 189 220
------- ------- ------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,698 1,820 1,905 1,879 1,817 1,848
------- ------- ------- ------- ------- -------
NONINTEREST REVENUE
Investment Banking Fees 438 361 369 308 283 176
Trust, Custody and Investment
Management Fees 383 348 338 338 321 310
Credit Card Revenue 365 300 322 281 224 261
Fees for Other Financial Services 509 510 517 505 487 474
Trading Revenue 333 480 (78) 505 491 405
Securities Gains 98 83 123 58 30 101
Revenue from Equity-Related Investments 370 293 226 249 192 164
Other Revenue 233 96 163 102 119 191
------- ------- ------- ------- ------- -------
Total Noninterest Revenue 2,729 2,471 1,980 2,346 2,147 2,082
------- ------- ------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 1,270 1,254 1,072 1,292 1,110 1,124
Employee Benefits 215 224 192 206 219 222
Occupancy Expense 191 189 193 194 193 187
Equipment Expense 212 209 217 192 193 190
Restructuring Costs 8 521 20 71 71 30
Other Expense 826 744 802 712 698 694
------- ------- ------- ------- ------- -------
Total Noninterest Expense 2,722 3,141 2,496 2,667 2,484 2,447
------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,705 1,150 1,389 1,558 1,480 1,483
Income Tax Expense 631 425 515 576 555 556
------- ------- ------- ------- ------- -------
NET INCOME $ 1,074 $ 725 $ 874 $ 982 $ 925 $ 927
======= ======= ======= ======= ======= =======
NET INCOME APPLICABLE TO
COMMON STOCK $ 1,050 $ 691 $ 839 $ 941 $ 874 $ 872
======= ======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE:
Basic $ 1.24 $ 0.82 $ 1.00 $ 1.11 $ 1.03 $ 1.01
======= ======= ======= ======= ======= =======
Diluted $ 1.20 $ 0.80 $ 0.97 $ 1.08 $ 1.00 $ 0.99
======= ======= ======= ======= ======= =======
</TABLE>
-37-
<PAGE> 38
GLOSSARY OF TERMS
The page numbers included after each definition represents the pages in the 10-Q
where the term is primarily used.
1997 Annual Report: Annual Report on Form 10-K for the year ended December 31,
1997. (Pages 7-11, 13-14, 22, 25-26, 28-30, 32-33, 39, 43)
AICPA: "American Institute of Certified Public Accountants." (Page 7)
Asset/Liability Management ("ALM"): The management and control of the
sensitivity of Chase's income to changes in market interest rates and other
market risks. (Page 31)
Derivative and Foreign Exchange ("FX") Instruments: Interest rate swaps, forward
rate agreements, futures, forwards, options, equity, commodity and other
contracts used for asset and liability management or trading purposes. The
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. (Pages 11, 28)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding restructuring costs,
foreclosed property expense, special items and costs associated with the REIT).
(Pages 12, 24)
FASB: Financial Accounting Standards Board. (Page 34)
Managed Credit Card Receivables or Managed Basis: Consistent with industry
practice, Chase uses this terminology to define its credit card receivables on
the balance sheet plus securitized credit card receivables. (Page 27)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Page 20)
Operating Basis or Operating Earnings: Reported results excluding the impact of
credit card securitizations, restructuring costs and special items. (Pages 12,
19)
Operating Net Income: Reported net income excluding restructuring costs and
special items. (Pages 12-13)
REIT: A real estate investment trust subsidiary of Chase. (Page 24)
SFAS 107: Statement of Financial Accounting Standards No. 107, entitled,
"Disclosures About Fair Value of Financial Instruments." (Page 10)
SFAS 115: Statement of Financial Accounting Standards No. 115, entitled,
"Accounting for Certain Investments in Debt and Equity Securities." (Pages 7-8,
10)
SFAS 125: Statement of Financial Accounting Standards No. 125, entitled,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." (Page 7)
SFAS 127: Statement of Financial Accounting Standards No. 127, entitled,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." (Page 7)
SFAS 130: Statement of Financial Accounting Standards No. 130, entitled,
"Reporting Comprehensive Income." (Page 7)
SFAS 133: Statement of Financial Accounting Standards No 133, entitled
"Accounting for Derivative Instruments and Hedging Activities." (Page 34)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
amortization of goodwill and certain intangibles (i.e., cash operating earnings)
less an explicit charge for allocated capital. (Page 14)
Special Items: There were no special items in either the 1998 or 1997 second
quarters. Special items in the 1997 first six months included a gain on the sale
of a partially owned foreign investment and costs incurred for accelerated
vesting of stock- based incentive awards. (Page 12, 19)
Statement of Position ("SOP") 98-1: "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." (Page 7)
Value-at-Risk ("VAR"): The potential overnight loss from adverse market
movements. (Page 30)
-38-
<PAGE> 39
APPENDIX 1
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
GRAPHIC
NUMBER PAGE DESCRIPTION
1 31 Bar Graph entitled "Histogram of Daily Changes in
Market Risk-Related Trading Revenue for the twelve
months ended June 30, 1998" presenting the
following information:
Millions of Dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30
------------------- ----- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of trading
days revenue was
within the above
prescribed positive
range 32 54 50 34 26 12
</TABLE>
<TABLE>
<CAPTION>
30 - 35 Over 35
------- -------
<S> <C> <C>
6 6
</TABLE>
<TABLE>
<CAPTION>
Millions of Dollars 0 - (5) (5) - (10) (10) - (15) (15) - (20) (20) - (25)
------------------- ------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Number of trading
days revenue was
within the above
prescribed negative
range 18 10 5 1 1
</TABLE>
<TABLE>
<CAPTION>
(25) - (30) Over (30)
----------- ---------
<S> <C> <C>
2 2
</TABLE>
<PAGE> 40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of Legal Proceedings, see Chase's 1997 Annual
Report on page 6.
Item 2. Sales of Unregistered Common Stock
During the second quarter of 1998, shares of common stock of
Chase were issued in transactions exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2)
thereof, as follows: On April 1, 1998, 155 shares of common
stock were issued to retired directors who had deferred
receipt of such common stock pursuant to the Deferred
Compensation Plan for Non-Employee Directors.
Item 4. Submission of Matters to a Vote of Security Holders
The following is a summary of matters submitted to vote at the
Annual Meeting of Stockholders of Chase. The Annual Meeting of
Stockholders was held on May 19, 1998. A total of 369,827,777
shares, or 86.9% of the 425,699,980 shares entitled to vote at
the Annual Meeting, were represented at the meeting.
(A) Election of Directors
The following seventeen (17) directors were elected to hold
office until the 1999 Annual Meeting or until their successors
are elected and have qualified.
<TABLE>
<CAPTION>
Votes Received Votes Withheld
-------------- --------------
<S> <C> <C> <C>
Hans W. Becherer 368,437,911 1,389,866
Frank A. Bennack Jr. 368,402,230 1,425,547
Susan V. Berresford 368,350,846 1,476,931
M. Anthony Burns 368,499,235 1,328,542
H. Laurance Fuller 368,434,100 1,393,677
Melvin R. Goodes 368,448,837 1,378,940
William H. Gray III 368,152,240 1,675,537
George V. Grune 368,320,811 1,506,966
William B. Harrison Jr. 368,405,105 1,422,672
Harold S. Hook 367,749,982 2,077,795
Helene L. Kaplan 368,391,816 1,435,961
Thomas G. Labrecque 368,377,787 1,449,990
Henry B. Schacht 368,442,683 1,385,094
Walter V. Shipley 368,336,286 1,491,491
Andrew C. Sigler 368,360,265 1,467,512
John R. Stafford 368,444,064 1,383,713
Marina v.N. Whitman 368,365,477 1,462,300
</TABLE>
(B) (1) Ratifying Independent Accountants
A proposal to ratify PricewaterhouseCoopers LLP (formerly
known as Price Waterhouse LLP) as independent accountants was
approved by 99.86% of the votes cast. The proposal received a
"for" vote of 368,699,139 and an "against" vote of 518,229.
The number of votes abstaining was 610,409. There were no
broker non-votes.
-39-
<PAGE> 41
PART II - OTHER INFORMATION
Item 4 continued
(2) Approving the Amendment to the Certificate of
Incorporation and the Stock Split
A proposal to amend the Certificate of Incorporation to
increase the authorized common stock and effect the
two-for-one stock split was approved by 99.74% of the votes
cast. The proposal received a "for" vote of 366,966,089 and an
"against" vote of 949,736. The number of votes abstaining was
1,911,952. There were no broker non-votes.
(3) Stockholder Proposal Re: Location of Annual Meeting
A proposal by Evelyn Y. Davis that the Board of Directors take
the necessary steps to rotate the location of the annual
meetings was rejected by 97.63% of the votes cast. The vote
"for" was 7,407,624 and the vote "against" was 305,172,026.
The number of votes abstaining was 15,103,744 and there were
42,144,383 broker non-votes.
(4) Stockholder Proposal Re: Cumulative Voting
A proposal by John J. and Margaret R. Gilbert that the Board
of Directors take the steps necessary to provide for
cumulative voting in the election of directors was rejected by
63.77% of the votes cast. The vote "for" was 112,393,367 and
the vote "against" was 197,793,061. The number of votes
abstaining was 17,496,966 and there were 42,144,383 broker
non-votes.
(5) Stockholder Proposal Re: Executive Compensation and
Dividends
A proposal by Edward S. George recommending that if a dividend
were cut, executive salaries would not be increased or
executive stock options awarded until the dividend was
restored, was rejected by 95.76% of the votes cast. The vote
"for" was 13,341,485 and the vote "against" was 301,058,811.
The number of votes abstaining was 13,283,098 and there were
42,144,383 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
11 - Computation of net income per share.
12(a) - Computation of ratio of earnings to fixed
charges.
12(b) - Computation of ratio of earnings to fixed
charges and preferred stock dividend
requirements.
27 - Financial Data Schedule
(B) Reports on Form 8-K:
Chase filed three reports on Form 8-K during the quarter ended
June 30, 1998, as follows:
Form 8-K dated April 21, 1998: Chase announced the results of
operations for the first quarter of 1998.
Form 8-K dated May 20, 1998: Chase announced shareholder
approval of a two-for-one common stock split.
Form 8-K dated June 15, 1998: Chase filed financial
information restated for the two-for-one common stock split.
-40-
<PAGE> 42
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
(Registrant)
Date August 14, 1998 By /s/ Joseph L. Sclafani
--------------- -----------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-41-
<PAGE> 43
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
- ----------- -------- ---------------------
<S> <C> <C>
11 Computation of net income 43
per share
12(a) Computation of ratio of 44
earnings to fixed charges
12(b) Computation of ratio of 45
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 46
</TABLE>
-42-
<PAGE> 1
EXHIBIT 11
THE CHASE MANHATTAN CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
Net income for basic and diluted EPS is computed by subtracting from the
applicable earnings the dividend requirements on preferred stock to arrive at
earnings applicable to common stock. Basic EPS is computed by dividing net
income available to common shares outstanding by the weighted-average number of
common shares outstanding for the period. Diluted EPS is computed using the same
method as basic EPS, but reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For a further discussion of Chase's earnings per share
computation, see Note Ten of Chase's 1997 Annual Report.
<TABLE>
<CAPTION>
(in millions, except per share amounts) Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
EARNINGS PER SHARE 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Earnings:
Net Income $1,074 $ 925 $1,799 $1,852
Less: Preferred Stock Dividend Requirements 24 51 58 106
------ ------ ------ ------
Net Income Applicable to Common Stock $1,050 $ 874 $1,741 $1,746
====== ====== ------ ------
Shares:
Weighted-Average Basic Shares Outstanding 848.8 848.6 846.8 854.8
Basic Earnings Per Share:
Net Income $ 1.24 $ 1.03 $ 2.06 $ 2.04
====== ====== ====== ======
DILUTED
Earnings:
Net Income Applicable to Common Stock $1,050 $ 874 $1,741 $1,746
Shares:
Weighted-Average Basic Shares Outstanding 848.8 848.6 846.8 854.8
Additional Shares Issuable Upon Exercise of Stock Options
for Dilutive Effect 26.7 20.2 24.7 24.7
------ ------ ------ ------
Weighted-Average Diluted Shares Outstanding 875.5 868.8 871.5 879.5
Diluted Earnings Per Share:
Net Income $ 1.20 $ 1.00 $ 2.00 $ 1.99
====== ====== ====== ======
</TABLE>
-43-
<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>
Six Months Ended
June 30, 1998
-------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 2,855
--------
Fixed charges:
Interest expense 3,617
One third of rents, net of income from subleases (a) 53
--------
Total fixed charges 3,670
Less: Equity in undistributed income of affiliates (10)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 6,515
========
Fixed charges, as above $ 3,670
========
Ratio of earnings to fixed charges 1.78
========
INCLUDING INTEREST ON DEPOSITS
Fixed charges, as above $ 3,670
Add: Interest on deposits 3,599
Total fixed charges and interest on deposits $ 7,269
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 6,515
Add: Interest on deposits 3,599
Total earnings before taxes, fixed charges, and interest on deposits $ 10,114
========
Ratio of earnings to fixed charges 1.39
========
</TABLE>
(a) The proportion deemed representative of the interest factor.
-44-
<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>
Six Months Ended
June 30, 1998
-------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Income before income taxes $ 2,855
--------
Fixed charges:
Interest expense 3,617
One third of rents, net of income from subleases (a) 53
--------
Total fixed charges 3,670
Less: Equity in undistributed income of affiliates (10)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 6,515
========
Fixed charges, as above $ 3,670
Preferred stock dividends 58
Fixed charges including preferred stock dividends $ 3,728
========
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.75
INCLUDING INTEREST ON DEPOSITS
Fixed charges including preferred stock dividends, as above $ 3,728
Add: Interest on deposits 3,599
Total fixed charges including preferred stock
dividends and interest on deposits $ 7,327
========
Earnings before taxes and fixed charges, excluding capitalized interest,
as above $ 6,515
Add: Interest on deposits 3,599
Total earnings before taxes, fixed charges, and interest on deposits $ 10,114
========
Ratio of earnings to fixed charges
and preferred stock dividend requirements 1.38
</TABLE>
(a) The proportion deemed representative of the interest factor.
-45-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains selected summary financial information extracted from the
Consolidated Balance Sheet at June 30, 1998, Consolidated Statement of Income
for the six months ended June 30, 1998 as well as other financial information
contained in the report on Form 10-Q for the quarter ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements and
accompanying disclosures in such Form 10-Q.
</LEGEND>
<CIK> 0000019617
<NAME> THE CHASE MANHATTAN CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 15,691
<INT-BEARING-DEPOSITS> 5,970
<FED-FUNDS-SOLD> 25,128
<TRADING-ASSETS> 66,931
<INVESTMENTS-HELD-FOR-SALE> 52,602
<INVESTMENTS-CARRYING> 2,326
<INVESTMENTS-MARKET> 2,340
<LOANS> 168,705
<ALLOWANCE> 3,629
<TOTAL-ASSETS> 366,995
<DEPOSITS> 207,091
<SHORT-TERM> 58,325
<LIABILITIES-OTHER> 60,768
<LONG-TERM> 14,451
0
1,168
<COMMON> 882
<OTHER-SE> 20,560
<TOTAL-LIABILITIES-AND-EQUITY> 366,995
<INTEREST-LOAN> 6,721
<INTEREST-INVEST> 1,778
<INTEREST-OTHER> 1,525
<INTEREST-TOTAL> 11,416
<INTEREST-DEPOSIT> 3,599
<INTEREST-EXPENSE> 7,216
<INTEREST-INCOME-NET> 4,200
<LOAN-LOSSES> 682
<SECURITIES-GAINS> 181
<EXPENSE-OTHER> 5,863
<INCOME-PRETAX> 2,855
<INCOME-PRE-EXTRAORDINARY> 1,799
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,799
<EPS-PRIMARY> 2.06<F1>
<EPS-DILUTED> 2.00<F1>
<YIELD-ACTUAL> 2.83
<LOANS-NON> 1,222
<LOANS-PAST> 493
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,624
<CHARGE-OFFS> 856
<RECOVERIES> 174
<ALLOWANCE-CLOSE> 3,629
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>On May 19, 1998, stockholders of Chase approved a 2 for 1 common stock
split, effective June 15, 1998. Prior Financial Data schedules have not been
restated for the stock split.
</FN>
</TABLE>
